As filed with the Securities and Exchange Commission on October 10, 1996
Securities Act File No. 33-_________
Investment Company Act File No. 811-7686
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[ ] Post-Effective Amendment No.
and/or
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 1
THE EMERGING MARKETS
INCOME FUND II INC
Exact name of Registrant as specified in charter
----------
Seven World Trade Center
New York, New York 10048
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(212) 783-7000
Registrant's Telephone Number, including Area Code
----------
Michael S. Hyland
President
Salomon Brothers Asset Management Inc
Seven World Trade Center
New York, New York 10048
Name and address (Number, Street, City, State, Zip Code) of Agent for Service
----------
with copies to:
Gary S. Schpero, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3909
(212) 455-2000
----------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with a dividend
reinvestment plan, check the following box. [X]
It is proposed that this filing will become effective (check appropriate
box):
[X] when declared effective pursuant to Section 8(c)
This registration statement relates to the registration of an indeterminate
number of shares solely for market-making transactions. A fee of $100 is being
paid at this time. Pursuant to Rule 429, this Registration Statement relates to
shares previously registered on Form N-2 (File No. 33-61796).
<PAGE>
THE EMERGING MARKETS INCOME FUND II INC
CROSS-REFERENCE SHEET
Parts A and B of Prospectus*
<TABLE>
<CAPTION>
Items in Parts A and B of Form N-2 Location in Prospectus
- ---------------------------------- ----------------------
<S> <C>
1. Outside Front Cover.............................. Cover of Prospectus
2. Inside Front and Outside Back Cover Page......... Inside Front and Outside Back
Cover of Prospectus
3. Fee Table and Synopsis........................... Prospectus Summary;
Summary of Expenses
4. Financial Highlights............................. Financial Highlights
5. Plan of Distribution............................. Cover of Prospectus
6. Selling Shareholders............................. Not Applicable
7. Use of Proceeds.................................. Use of Proceeds; Investment Objective and Policies;
Additional Investment Activities
8. General Description of the Registrant............ Cover of Prospectus; Prospectus
Summary; The Fund; Investment Objective and Policies;
Additional Investment Activities; Investment
Restrictions; Description of Capital Stock
9. Management....................................... Management of the Fund;
Custodian, Transfer Agent, Dividend Paying Agent
and Registrar; Description of Capital Stock
10. Capital Stock, Long-Term Debt
and Other Securities.......................... Description of Capital Stock; Dividends and Distributions;
Dividend Reinvestment and Cash Purchase Plan; Taxation
11. Defaults and Arrears on Senior Securities........ Not Applicable
12. Legal Proceedings................................ Not Applicable
13. Table of Contents of the Statement
of Additional Information................... Not Applicable
14. Cover Page....................................... Not Applicable
15. Table of Contents................................ Not Applicable
16. General Information and History.................. Not Applicable
17. Investment Objective and Policy.................. Investment Objective and Policies; Additional
Investment Activities; Investment Restrictions;
Portfolio Transactions
18. Management....................................... Management of the Fund;
Custodian, Transfer Agent,
Dividend Paying Agent and Registrar
19. Control Persons and Principal
Holders of Securities......................... Description of Capital Stock
20. Investment Advisory and Other Services........... Management of the Fund
21. Brokerage Allocation and Other Practices......... Portfolio Transactions
22. Tax Status....................................... Dividends and Distributions; Dividend Reinvestment and
Cash Purchase Plan; Taxation
23. Financial Statements............................. Experts; Report of Independent
Accountants; Statement of Assets
and Liabilities
</TABLE>
- ----------
* Pursuant to General Instruction H of Form N-2, all information required to
be set forth in Part B: Statement of Additional Information has been
included in Part A: The Prospectus. All Items required to be set forth in
Part C are set forth in Part C.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements
Parts A & B The Emerging Markets Income Fund II Inc
(i) Report of Independent Auditors*
(ii) Statement of Investments as of May 31, 1996*
(iii) Statement of Assets and Liabilities as of May 31, 1996*
(iv) Statement of Operations for the fiscal year ended May 31, 1996*
(v) Statement of Changes in Net Assets for the fiscal years ended May
31, 1996 and May 31, 1995*
(vi) Statement of Cash Flows for the fiscal year ended May 31, 1996*
(vii) Notes to Audited Financial Statements*
(viii) Financial Highlights
- -------------
* Incorporated by reference to the Fund's Annual Report to Shareholders for
the fiscal year ended May 31, 1996, filed with the Securities and Exchange
Commission. [Accession Number 0000902978 96-000002]
Part II None.
(2) Exhibits
(a) Articles of Incorporation(1)
(b) By-Laws(2)
(c) Not applicable
(d) Not applicable
(e) Dividend Reinvestment and Cash Purchase Plan(3)
(f) Not applicable
(g)(A) Management Agreement between the Fund and Advantage Advisers, Inc.(4)
(g)(B) Advisory and Administration Agreement among the Fund (with respect
to certain provisions), Salomon Brothers Asset Management Inc. and
Advantage Advisors, Inc. (5)
- ----------
(1) Incorporated by reference to exhibit (a) to Pre-Effective Amendment No. 1
to the Registrant's Registration Statement on Form N-2, filed May 20, 1993
(File No. 33-61796).
(2) Incorporated by reference to exhibit (b) to Pre-Effective Amendment No. 2
to the Registrant's Registration Statement on Form N-2, filed June 18, 1993
(File No. 33-61796).
(3) Incorporated by reference to the Fund's Annual Report to Stockholders for
the fiscal year ended May 31, 1996
(4) Incorporated by reference to exhibit (g)(A) to Pre-Effective Amendment No.
2 to the Registrant's Registration Statement on Form N-2, filed June 18,
1993 (File No. 33-61796).
(5) Incorporated by reference to exhibit (g)(B) to Pre-Effective Amendment No.
2 to the Registrant's Registration Statement on Form N-2, filed June 18,
1993 (File No. 33-61796).
C-1
<PAGE>
(h)(A) Form of Underwriting Agreement(6)
(h)(B) Master Agreement Among Underwriters(7)
(h)(C) Master Selected Dealer Agreement(8)
(i) Not applicable
(j) Custodian Contract between the Fund and Brown Brothers Harriman &
Co.(9)
(k)(A) Registrar, Transfer Agency and Service Agreement between the Fund
and American Stock & Trust Co.(10)
(k)(B) Loan Agreement with Morgan Guaranty Trust Company (to be filed by
amendment)
(l)(A) Opinion and Consent of Simpson Thacher & Bartlett (to be filed by
amendment)
(l)(B) Opinion and Consent of Piper & Maybury (to be filed by amendment)
(m) Not applicable
(n) Consent of Price Waterhouse LLP (to be filed by amendment)
(o) Not applicable
(p) Form of Share Purchase Agreement among the Fund, Salomon Brothers
Asset Management Inc. and Oppenheimer & Co., Inc.(11)
(q) Not applicable
(r) Financial Data Schedules (to be filed by amendment)
(s) Powers of Attorney (to be filed by amendment)
- ----------
(6) The Shares offered by the Prospectus will be offered in order to effect
over-the-counter secondary market transactions by Oppenheimer & Co., Inc.,
("Oppenheimer") in its capacity as a dealer and secondary market maker and
not pursuant to any agreement with the Fund. Shares were originally issued
in a public offering pursuant to an Underwriting Agreement, incorporated by
reference to exhibit (h)(A) to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2, filed May 20, 1993, (File
No. 33-61796).
(7) Incorporated by reference to exhibit (h)(B) to Pre-Effective Amendment No.
1 to the Registrant's Registration Statement on Form N-2, filed May 20,
1993 (File No. 33-61796).
(8) Incorporated by reference to exhibit (h)(C) to Pre-Effective Amendment No.
1 to the Registrant's Registration Statement on Form N-2, filed May 20,
1993 (File No. 33-61796).
(9) Incorporated by reference to exhibit (j) to Pre-Effective Amendment No. 1
to the Registrant's Registration Statement on Form N-2, filed May 20, 1993
(File No. 33-61796).
(10) Incorporated by reference to exhibit (k) to Pre-Effective Amendment No. 1
to the Registrant's Registration Statement on Form N-2, filed May 20, 1993
(File No. 33-61796).
(11) Incorporated by reference to exhibit (p) to Pre-Effective Amendment No. 1
to the Registrant's Registration Statement on Form N-2, filed May 20, 1993
(File No. 33-61796).
C-2
<PAGE>
Item 25. Marketing Arrangements
Inapplicable. See note accompanying Item 24(h)(A).
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement:
Registration fees .......................................... $100
Printing ................................................... *
Accounting fees and expenses ............................... *
Legal fees and expenses .................................... *
Miscellaneous .............................................. *
----
Total ...................................................... $ *
====
* To be completed by amendment.
Item 27. Persons Controlled by or under Common Control with Registrant
None.
Item 28. Number of Holders of Securities
As of September 24, 1996:
(2)
(1) Number of
Title of Class Record Holders
-------------- --------------
Common Stock, par value $0.001 21,507
Item 29. Indemnification
Incorporated by reference to Item 29 of Part C to Pre-Effective Amendment
No. 2 to the Registration Statement on Form N-2, filed June 18, 1993 (File No.
33-61796).
C-3
<PAGE>
Item 30. Business and Other Connections of the Investment Adviser
Incorporated herein by reference to Item 30 of Part C to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2, filed June 18, 1993
(File No. 33-61796).
Item 31. Location of Accounts and Records
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules promulgated thereunder are
maintained by Advantage Advisers, Inc. (the "Investment Manager"), Oppenheimer
Tower, World Financial Center, New York, New York 10281, and Salomon Brothers
Asset Management Inc (the "Investment Adviser"), 7 World Trade Center, New York,
New York 10048. Records relating to the duties of the Registrant's custodian are
maintained by Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, and the Registrant's transfer agent by American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
The Undertakings of the Registrant as set forth in the Fund's Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2, filed June 18, 1993,
(File No. 33-61796) are hereby revised as follows.
The Registrant hereby undertakes:
a. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
A. To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
B. To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and
C. To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
b. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
c. That, for the purpose of determining any liability under the Act, each
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
d. To send by first class mail or other means designed to ensure equally
prompt delivery, within two business days of receipt of a written or
oral request, any Statement of Additional Information.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement and Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 9th day
of October, 1996.
THE EMERGING MARKETS
INCOME FUND II INC
(Registrant)
by: /s/ Alan Rappaport
----------------------
Alan Rappaport
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Alan Rappaport Chairman of the Board and Director October 10, 1996
- ------------------------ (Principal Executive Officer)
Alan Rappaport
/s/ Alan Mandel Treasurer (Principal Financial October 10, 1996
- ------------------------ and Accounting Officer)
Alan Mandel
/s/ Michael S. Hyland President and Director October 10, 1996
- ------------------------
Michael S. Hyland
/s/ Charles F. Barber Director October 10, 1996
- ------------------------
Charles F. Barber
/s/ Leslie H. Gelb Director October 10, 1996
- ------------------------
Leslie H. Gelb
/s/ Jeswald W. Salacuse Director October 10, 1996
- ------------------------
Jeswald W. Salacuse
/s/ Riordan Roett Director October 10, 1996
- ------------------------
Riordan Roett
</TABLE>
C-5
<PAGE>
<PAGE>
The Emerging Markets
Income Fund II Inc
Common Stock
------------
The Emerging Markets Income Fund II Inc (the "Fund") is a non-diversified,
closed-end management investment company. The Fund's primary investment
objective is to seek high current income. As a secondary objective, the Fund
seeks capital appreciation. Under normal market conditions, the Fund invests at
least 65% of its total assets in debt securities of government and government
related issuers located in emerging market countries (including participations
in loans between governments and financial institutions), and of entities
organized to restructure outstanding debt of such issuers. In addition, up to
35% of the Fund's total assets may be invested in debt securities of corporate
issuers located in emerging market countries. Under normal market conditions, at
least 65% of the Fund's total assets are invested in U.S. dollar-denominated
securities. There can be no assurance that the Fund's investment objectives will
be achieved.
Investment in emerging markets involves certain special considerations,
which are not typically associated with investments in the United States. The
Fund has the flexibility to invest without limitation in illiquid securities,
and substantially all the Fund's assets at any one time may be invested in debt
instruments that are low rated or unrated and predominantly speculative. See
"Risk Factors and Special Considerations."
The address of the Fund is Seven World Trade Center, New York, New York
10048. Periodically updated information regarding the markets in which the Fund
invests and the Fund's investments is available by calling 1-800-421-4777 or
1-800-725-6666. Investors are advised to read this Prospectus, which sets forth
information about the Fund that investors should know before investing, and to
retain it for future reference.
Advantage Advisers, Inc., a subsidiary of Oppenheimer & Co., Inc., acts as
Investment Manager to the Fund. Salomon Brothers Asset Management Inc serves as
Investment Adviser and administrator to the Fund.
The Fund's Common Stock is listed and traded on the New York Stock Exchange
(the "NYSE") under the symbol "EDF." The Common Stock may be offered pursuant to
this Prospectus from time to time in order to effect over-the-counter ("OTC")
secondary market sales by Oppenheimer & Co., Inc. in its capacity as a dealer
and secondary-market maker at negotiated prices related to prevailing market
prices on the NYSE at the time of sale. The closing price for the Common Stock
on the NYSE on October 4, 1996, was $15.59. See "Trading History." The Fund will
not receive any proceeds from the sale of the Common Stock offered pursuant to
this Prospectus.
The Fund has utilized and expects to continue to utilize leverage through
borrowing or, alternatively, by issuing shares of preferred stock or short-term
debt securities, in an amount up to 33 1/3% of the Fund's total assets including
the amount obtained from leverage. Through these leveraging techniques, the Fund
seeks to obtain a higher return for holders of Common Stock than if the Fund did
not leverage. There are special risks and costs associated with leveraging. See
"Additional Investment Activities--Leverage."
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------
Oppenheimer & Co., Inc.
The date of this Prospectus is October 10, 1996
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
The Fund ...................... The Fund is a non-diversified, closed-end
management investment company developed for
investors seeking high current income. The
Fund is designed to take advantage of
attractive yields on securities issued by
entities in emerging market countries with
improving credit fundamentals. See "The
Fund."
Investment Objectives
and Policies ................. The Fund's primary investment objective is to
seek high current income. As a secondary
objective, the Fund seeks capital
appreciation. Under normal market
conditions, the Fund invests at least 65%
of its total assets in debt securities of
government and government related issuers
located in emerging market countries, and
of entities organized to restructure
outstanding debt of such issuers. In
addition, up to 35% of the Fund's total
assets may be invested in debt securities
of corporate issuers located in emerging
market countries. As used in this
Prospectus, an "emerging market country" is
any country that is considered to be an
emerging or developing country by the
International Bank for Reconstruction and
Development (the "World Bank"). Under
normal market conditions, at least 65% of
the Fund's total assets are invested in
U.S. dollar-denominated securities. See
"Investment Objectives and Policies."
The Fund's investments in government and
government related and restructured debt
securities consist of (i) debt securities
or obligations issued or guaranteed by
governments, governmental agencies or
instrumentalities and political
subdivisions located in emerging market
countries (including participations in
loans between governments and financial
institutions), (ii) debt securities or
obligations issued by government owned,
controlled or sponsored entities located in
emerging market countries, and (iii)
interests in issuers organized and operated
for the purpose of restructuring the
investment characteristics of securities
issued by any of the entities described
above. The amount up to 35% of the Fund's
total assets which may be invested in
corporate issuers of emerging market
countries may include debt securities or
obligations issued by (i) banks located in
emerging market countries or by branches of
emerging market country banks located
outside the country or (ii) companies
organized under the laws of an emerging
market country.
The Fund has utilized and expects to continue
to utilize leverage by borrowing or,
alternatively, by issuing shares of
preferred stock or short-term debt
securities, in an amount up to 33 1/3% of
the Fund's total assets including the
amount obtained from leverage. Through
these leveraging techniques, the Fund seeks
to obtain a
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
higher return for holders of Common Stock
than if the Fund did not leverage.
Investors should note that there are
special risks and costs associated with
leveraging. See "Additional Investment
Activities--Leverage."
The Offering .................. Shares of the Fund's Common Stock (the
"Common Stock") may be offered pursuant to
this Prospectus from time to time in order
to effect over-the-counter ("OTC")
secondary market sales by Oppenheimer &
Co., Inc., in its capacity as a dealer and
secondary-market maker at negotiated prices
related to prevailing market prices on the
New York Stock Exchange, Inc. ("NYSE") at
the time of sale. See "The Offering" and
"Trading History."
Listing ....................... The Common Stock is listed and traded on the
NYSE under the symbol EDF.
Investment Manager and
Investment Adviser ............ The Investment Manager is Advantage Advisers,
Inc., a subsidiary of Oppenheimer & Co.,
Inc., and the Investment Adviser is Salomon
Brothers Asset Management Inc. Pursuant to
a management agreement (the "Management
Agreement"), the Investment Manager
supervises the Fund's investment program,
including advising and consulting with the
Investment Adviser regarding the Fund's
overall investment strategy and advising
the Fund and the Investment Adviser with
respect to all matters relating to the
Fund's use of leveraging techniques,
including the extent and timing of the
Fund's use of such techniques. In addition,
the Investment Manager consults with the
Investment Adviser on a regular basis
regarding the Investment Adviser's
decisions concerning the purchase, sale or
holding of particular securities. The
Investment Manager also provides the
Investment Adviser with access on a
continuous basis to economic, financial and
political information, research and
assistance concerning emerging market
countries and, as appropriate, is involved
in the process of emerging market country
selection.
Pursuant to an investment advisory and
administration agreement (the "Advisory
Agreement") among the Investment Manager,
the Investment Adviser and the Fund (but
only with respect to certain provisions),
the Investment Adviser acts as the Fund's
investment adviser and administrator and is
responsible on a day-to-day basis for
investing the Fund's portfolio in
accordance with its investment objectives
and policies. The Investment Adviser has
discretion over investment decisions for
the Fund and, in that connection, places
purchase and sale orders for the Fund's
portfolio securities. In addition, the
Investment Adviser makes available research
and statistical data to the Fund. The
Investment Adviser is also responsible for
day-to-day administration of the Fund,
assistance in matters related to the
corporate existence of the Fund, provision
of office space to the Fund and clerical
services relating to the Fund's operations,
maintenance
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
of the Fund's books and records and
preparation of reports.
Oppenheimer & Co. Inc., the Investment
Manager's parent company, has been engaged
directly or through its affiliates in the
management of investment funds for more
than 35 years. As of June 30, 1996, total
assets under management by Oppenheimer &
Co., Inc. and its affiliates were
approximately $50 billion for investment
company, corporate, pension, profit-sharing
and other accounts. The Investment Manager
serves as investment adviser for 12
registered investment companies. See
"Management of the Fund--Investment Manager
and Investment Adviser."
The Investment Adviser provides a broad range
of fixed income and equity investment
advisory services for its individual and
institutional clients located around the
world, and provides investment advisory
services for 15 registered investment
companies (including portfolios thereof).
At June 30, 1996, the Investment Adviser
had in excess of $15 billion of assets
under management. The Investment Adviser is
an affiliate of Salomon Brothers Inc
("SBI"). SBI is one of the largest
international investment houses in the
world.
The Fund pays the Investment Manager a
monthly fee at an annual rate of 1.20% of
the Fund's average weekly net assets for
its services, and the Investment Manager
pays the Investment Adviser a monthly fee
at an annual rate of 0.70% of the Fund's
average weekly net assets for its services.
See "Management of the Fund--Compensation
and Services." The management fees paid by
the Fund are higher than those paid by most
other U.S. investment companies investing
exclusively in the securities of U.S.
issuers, primarily because of the
additional time and expense required of the
Investment Manager and the Investment
Adviser in pursuing the Fund's objective of
investing in emerging market debt
securities.
Risk Factors and
Special Considerations ........ The value of the debt securities held by the
Fund, and thus the net asset value of the
Common Stock, generally fluctuate with (i)
changes in the perceived creditworthiness
of the issuers of those securities and (ii)
movements in interest rates. The extent of
the fluctuation depends on various other
factors, such as the average maturity of
the Fund's investments, the extent to which
the Fund engages in leveraging
transactions, the extent to which the Fund
holds instruments denominated in currencies
other than the dollar and the extent to
which the Fund hedges its interest rate and
currency exchange rate risks. The
Investment Adviser, with assistance from
the Investment Manager, makes independent
evaluations as to the creditworthiness of
issuers of debt securities that may differ
from those of internationally recognized
credit rating agency organizations. The
Fund's success in attaining its investment
objectives
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
depends largely on the Investment Adviser's
evaluation of the creditworthiness of
issuers.
At any one time, substantially all of the
Fund's assets may be invested in debt
securities that are low rated or unrated.
The Fund's investments in emerging market
country debt securities may generally be
considered to have credit quality below
investment grade as determined by
internationally recognized credit rating
agency organizations, such as Moody's
Investors Service, Inc., ("Moody's") and
Standard & Poor's Corporation ("S&P"). Debt
securities rated below investment grade
(commonly referred to as "junk bonds") are
considered to be speculative. Investment in
low rated securities typically involves
risks not associated with higher rated
securities, including, among others,
overall greater risk of timely and ultimate
payment of interest and principal,
potentially greater sensitivity to general
economic conditions and changes in interest
rates, greater market price volatility and
less liquid secondary market trading.
Certain of the Fund's investments may be
considered to have extremely poor prospects
of ever attaining an investment grade
rating, to have a current identifiable
vulnerability to default, to be unlikely to
have the capacity to pay interest and repay
principal when due in the event of adverse
business, financial or economic conditions,
and/or to be in default or not current in
the payment of interest or principal.
Investing in emerging market countries
involves certain considerations not
typically associated with investing in
securities of U.S. companies, including (a)
currency devaluations and other currency
exchange rate fluctuations, (b) political
uncertainty and instability, (c) more
substantial government involvement in the
economy, (d) higher rates of inflation, (e)
less government supervision and regulation
of the securities markets and participants
in those markets, (f) controls on foreign
investment and limitations on repatriation
of invested capital and on the Fund's
ability to exchange local currencies for
U.S. dollars, and (g) greater price
volatility, substantially less liquidity
and significantly smaller market
capitalization of securities markets.
The Fund's investments in government and
government related and restructured debt
instruments are subject to special risks,
including the inability or unwillingness to
repay principal and interest, requests to
reschedule or restructure outstanding debt
and requests to extend additional loan
amounts. The Fund may have limited recourse
in the event of default on such debt
instruments. The Fund may invest in loans,
assignments of loans and participations in
loans. Such investments are subject to
special risks, including the lack of a
liquid secondary market for such securities
and, in the case of loan participations,
assumption of the credit risk of both the
underlying borrower and the seller of the
participation. The Fund also may invest in
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
debt instruments of corporate issuers which
may have speculative characteristics,
involve significant risk and may not be
paying interest or may be in payment
default.
The Fund has utilized and expects to continue
to utilize leverage by borrowing or,
alternatively, by issuing shares of
preferred stock or short-term debt
securities, in an amount up to 33 1/3% of
the Fund's total assets including the
amount obtained from leverage. The use of
leverage poses certain risks for holders of
Common Stock including the possibility of
higher volatility of both the net asset
value and market value of the Common Stock.
There can be no assurance that the Fund
will be able to realize a higher return on
its investment portfolio than the then
current interest or dividend rate on any
leverage. In the event the Fund realizes a
return on its investment portfolio that is
less than the then-current interest or
dividend rate on any leverage, the Fund's
leveraged capital structure would result in
a lower yield to the holders of Common
Stock than if the Fund were not leveraged.
Moreover, any decline in the value of the
Fund's assets will be borne entirely by
holders of Common Stock in the form of
reductions in the Fund's net asset value,
and any requirement that the Fund sell
assets at a loss in order to redeem or
repay any leverage or for other reasons
would make it more difficult for the net
asset value to recover. Accordingly, the
effect of leverage in a declining market is
likely to be a greater decline in the net
asset value of Common Stock than if the
Fund were not leveraged, which may be
reflected in a greater decline in the
market price of the Common Stock.
The Fund's use of leverage is subject to the
provisions of the Investment Company Act of
1940, as amended (the "1940 Act"),
including asset coverage requirements and
restrictions on the declaration of
dividends and distributions to holders of
Common Stock or purchases of Common Stock
in the event such asset coverage
requirements are not met. In addition, the
Fund may seek to have Moody's and/or S&P
rate any preferred stock or short-term debt
which it issues. As a condition to
obtaining such ratings, the terms of any
preferred stock or short-term debt
securities issued will include asset
coverage maintenance provisions which will
require the redemption of shares of
preferred stock or the repayment of
short-term debt in the event of
non-compliance by the Fund and may also
prohibit dividends and other distributions
on the Common Stock in such circumstances.
In order to meet redemption or repayment
requirements, the Fund may have to
liquidate portfolio securities. Such
liquidations and redemptions would cause
the Fund to incur related transaction costs
and could result in capital losses to the
Fund. Prohibitions on dividends and other
distributions on the Common Stock could
impair the Fund's ability to qualify as a
regulated investment
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
company under the Internal Revenue Code of
1986, as amended (the "Code"). The 1940 Act
also requires that holders of preferred
stock, and in certain circumstances holders
of debt securities, have certain voting
rights. See "Additional Investment
Activities--Leverage", "Taxation" and
"Description of Capital Stock."
The Fund's investment in private placements,
convertible securities and warrants, as
well as in instruments issued by entities
organized and operated solely for the
purpose of restructuring the investment
characteristics of particular securities,
presents certain risks. In addition, the
Fund may use various other investment
practices that involve special
considerations, including purchasing and
selling options on securities, financial
futures, fixed income indices and other
financial instruments, entering into
financial futures contracts, entering into
interest rate transactions, entering into
currency transactions, entering into
securities transactions on a when-issued or
delayed delivery basis, entering into
repurchase agreements and lending portfolio
securities. See "Additional Investment
Activities."
The Fund is classified as a "non-diversified"
investment company under the 1940 Act,
which means that the Fund is not limited by
the 1940 Act in the proportion of its
assets that may be invested in the
securities of a single issuer. However, the
Fund has complied with and intends to
continue to comply with the diversification
requirements imposed by the Code, for
qualification as a regulated investment
company. As a non-diversified investment
company, the Fund may invest a greater
proportion of its assets in the securities
of a smaller number of issuers and, as a
result, will be subject to greater risk of
loss with respect to its portfolio
securities.
Income on securities held by the Fund may be
subject to withholding and other taxes
imposed by emerging market countries, which
would reduce the yield to the Fund on those
securities; this reduction may not be
recoverable by the Fund or its
shareholders. See "Taxation."
The Fund's Articles of Incorporation contain
certain anti-takeover provisions that may
have the effect of inhibiting the Fund's
possible conversion to open-end status and
limiting the ability of other persons to
acquire control of the Fund. In certain
circumstances, these provisions might also
inhibit the ability of holders of Common
Stock to sell their shares at a premium
over prevailing market prices. The Fund's
Board of Directors has determined that
these provisions are in the best interests
of shareholders generally.
Shares of closed-end investment companies
frequently trade at a discount from net
asset value. This
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
characteristic is a risk separate and
distinct from the risk that the Fund's net
asset value will decrease as a result of
its investment activities. See "Trading
History" for information regarding the
relative net asset value and share price of
the Fund's Common Stock since inception of
the Fund. The Fund cannot predict whether
its shares will trade at, above or below
net asset value in the future. The Fund is
intended primarily for long-term investors
and should not be considered as a vehicle
for trading purposes.
Investors should carefully consider their
ability to assume the foregoing risks
before making an investment in the Fund. An
investment in shares of Common Stock of the
Fund may not be appropriate for all
investors and should not be considered as a
complete investment program. See "Risk
Factors and Special Considerations."
Dividends and Distributions ..... The Fund distributes quarterly to holders of
Common Stock substantially all of its net
investment income, and distributes any net
realized capital gains at least annually.
At times when the Fund engages in
leveraging activities, quarterly
distributions to holders of Common Stock
consist of net investment income remaining
after the payment of interest or dividends
on any outstanding leverage. As a result of
the Fund's investment in certain Brady
Bonds and other debt obligations acquired
at a discount and certain provisions of the
Code, the Fund has made and expects to
continue making distributions of net
investment income in amounts greater than
the total amount of cash interest actually
received in order to satisfy certain
requirements under current federal income
tax law. See "Investment Objectives and
Policies."
Under the Fund's Amended and Restated
Dividend Reinvestment and Cash Purchase
Plan (as it may be further amended or
supplemented from time to time, the
"Plan"), all dividends and distributions
are automatically reinvested in additional
shares of Common Stock of the Fund
purchased in the open market or, under
certain circumstances, issued by the Fund
as newly issued shares, unless a
shareholder elects to receive cash.
Participants also have the option of making
additional monthly cash payments to be used
to acquire additional shares of Common
Stock of the Fund in the open market.
Shareholders whose shares are held in the
name of a broker or nominee should contact
such broker or nominee to confirm that they
may participate in the Fund's Plan. See
"Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan."
Share Repurchases and Conversion
to an Open-End Fund ............ If at any time shares of the Fund's Common
Stock publicly trade for a substantial
period of time at a substantial discount
from net asset value, the Fund's Board of
Directors will consider, at its next
regularly scheduled meeting, authorizing
various actions
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
designed to eliminate the discount, which
may include periodic repurchases of the
Fund's shares or recommending to
shareholders the conversion of the Fund to
an open-end investment company. No
assurance can be given that the Board of
Directors will undertake any such action or
that if repurchases are undertaken, the
Fund's shares will trade at a price that is
close to or equal to net asset value. The
Board of Directors would consider all
relevant factors in determining whether to
take any such actions, including the effect
of such actions on the Fund's status as a
regulated investment company under the Code
and the availability of cash to finance
share repurchases in view of the
restrictions on the Fund's ability to
borrow. Under certain circumstances,
shareholder vote may be required to
authorize periodic repurchases of the
Fund's shares of Common Stock. The ability
of the Fund to make repurchases may be
limited by the asset coverage requirements
of the 1940 Act and any additional asset
coverage requirements which may be imposed
by a rating agency in connection with any
rating of preferred stock or short-term
debt securities.
In considering whether to recommend to
shareholders the conversion of the Fund to
an open-end investment company, the Fund's
Board of Directors would consider a number
of factors, including whether the Fund's
ability to operate in accordance with its
investment policies, such as its authority
to invest in illiquid securities, may be
impaired as a result. Conversion to an
open-end investment company would require a
shareholder vote and would require the Fund
to redeem any preferred stock and/or repay
any short-term debt securities. See
"Description of Capital Stock--Future
Actions Relating to a Discount in the Price
of Shares of the Fund's Common Stock."
Taxation .................... The Fund has qualified and elected to be
treated as a regulated investment company
for U.S. federal income tax purposes. As
such, it will generally not be subject to
U.S. federal income tax on income and gains
that are distributed to shareholders. See
"Taxation."
Custodian, Transfer Agent,
Dividend Paying Agent
and Registrar ................. Brown Brothers Harriman & Co. acts as
custodian for the Fund's assets and employs
foreign sub-custodians approved by the
Fund's Board of Directors in accordance
with regulations of the Securities and
Exchange Commission (the "Commission ").
American Stock Transfer & Trust Company
acts as transfer agent, dividend paying
agent and registrar for the Fund's Common
Stock.
- --------------------------------------------------------------------------------
9
<PAGE>
SUMMARY OF EXPENSES
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) ................... None1
Annual Expenses (as a percentage of net assets attributable to common shares)
Management and Administrative Fees................................ 1.20%
Interest Payment on Borrowed Funds................................ 2.78%
Other Expenses.................................................... 0.23%
----
Total Annual Expenses............................................. 4.21%
1 Prices for shares of Common Stock traded in the OTC market will reflect
ordinary dealer markups.
2 "Other Expenses" are based upon expenses actually incurred for the fiscal year
ended May 31, 1996.
The purpose of this table is to assist the investor in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly.
Example
An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return, (2) reinvestment of all dividends and
distributions at net asset value, and (3) payment by the Fund of operating
expenses at the level set forth in the table above:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$44.00 $133.00 $224.00 $454.00
This example as well as the information set forth in the table above should
not be considered a representation of the future expenses of the Fund, and
actual expenses may be greater or less than those shown. Moreover, while the
example assumes a 5% annual return, the Fund's performance will vary and may
result in a return greater or less than 5%. In addition, while the example
assumes reinvestment of all dividends and distributions at net asset value,
participants in the Plan will receive shares purchased by the Plan Agent at the
market price in effect at that time which may be at, above or below net asset
value.
FINANCIAL HIGHLIGHTS
The table below sets forth selected per share data and ratios for a share of
Common Stock outstanding for the periods shown. This information is supplemented
by the financial statements and accompanying notes appearing in the Fund's
Annual Report to Shareholders for the fiscal year ended May 31, 1996, which are
incorporated by reference and can be obtained by stockholders upon request. The
financial statements and notes and the financial information in the table below
for the periods ending May 31, 1996, 1995 and 1994, have been audited by Price
Waterhouse LLP, the Fund's independent accountants, whose report thereon also is
included in the Annual Report to Shareholders.
10
<PAGE>
Data for a share of common stock outstanding throughout each period:
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
May 31, May 31, May 31,
1996 1995 1994(a)
---- ---- -------
<S> <C> <C> <C>
Net investment income ........................................ $1.92 $1.69 $1.22
Net realized gain (loss) and change in unrealized
appreciation (depreciation) on securities and foreign
currency translations ...................................... 2.50 (2.24) (1.03)
--------------- --------------- ---------------
Total from investment operations ............................. 4.42 (0.55) 0.19
--------------- --------------- ---------------
Dividends to shareholders from net investment income ......... (1.29) (1.36) (1.06)
Dividends to shareholders from net realized capital gains (0.36) (0.29) (0.14)
Offering costs on issuance of common stock ................... -- -- (0.04)
--------------- --------------- ---------------
Net increase (decrease) in net asset value ................... 2.77 (2.20) (1.05)
Net asset value, beginning of period ......................... 10.77 12.97 14.02
--------------- --------------- ---------------
Net asset value, end of period ............................... $13.54 $10.77 $12.97
=============== =============== ===============
Per share market value, end of period ........................ $13.88 $11.88 $14.00
Total investment return based on market price per share (c) . 32.72 -2.18% 8.29%(b)
Ratios/Supplemental data:
Net assets, end of period ............................... 295,948,997 235,371,902 283,481,270
Ratio of operating expenses to average net assets ....... 1.43% 1.45% 1.38%(d)
Ratio of interest expense to average net assets ......... 2.78% 2.96% 1.02%(d)
Ratio of total expenses to average net assets ........... 4.21% 4.41% 2.40%(d)
Ratio of net investment income to average net ..... 16.20% 15.42% 8.98%(d)
assets
Portfolio turnover rate ................................. 93.50% 58.16% 23.15%
</TABLE>
- ----------
(a) For the period June 25, 1993 (commencement of operations) through May 31,
1994.
(b) Return calculated based on beginning period price of $14.02 (initial
offering price of $15.00 less sales load of $0.98) and end of period market
value of $14.00 per share. This calculation is not annualized.
(c) For purposes of this calculation, dividends on common shares are assumed to
be reinvested at prices obtained under the Fund's dividend reinvestment
plan. The brokerage commissions paid to purchase or sell a share is
excluded.
(d) Annualized.
The following information relates to the Fund's "senior securities" as
defined under the 1940 Act.
Total Amount Asset Coverage Per
Outstanding $1,000 of Indebtedness
Type Period Ended at End of Period at End of Period
---- ------------ ---------------- ---------------------
Bank Loans May 31, 1996 $100,000,000 383.48%
Bank Loans May 31, 1995 $100,000,000 335.37%
Bank Loans May 31, 1994 $100,000,000 383.48%
11
<PAGE>
THE FUND
The Fund, incorporated in Maryland on April 27, 1993, is a closed-end,
non-diversified, management investment company registered under the 1940 Act.
The Fund commenced operations on June 25, 1993. The Fund's primary investment
objective is to seek high current income. As a secondary objective, the Fund
seeks capital appreciation. There can be no assurance that the Fund's investment
objectives will be achieved. Due to the risks inherent in the securities in
which the Fund may invest, the Fund should not be considered a complete
investment program. See "Risk Factors and Special Considerations."
The Fund's principal office is located at Seven World Trade Center, New
York, New York 10048. Periodically updated information regarding the markets in
which the Fund invests and the Fund's investments is available by calling
1-800-421-4777 or 1-800-725-6666.
THE OFFERING
The Common Stock may be offered pursuant to this Prospectus from time to
time in order to effect OTC secondary market sales by Oppenheimer & Co., Inc.,
in its capacity as a dealer and secondary market-maker at negotiated prices
related to prevailing market prices on the NYSE at the time of sale. Costs
incurred in connection with this offering will be paid by Oppenheimer & Co.,
Inc., whose principal offices are located at Oppenheimer Tower, One World
Financial Center, 200 Liberty Street, New York, New York 10281. Advantage
Advisers, Inc., the Fund's Investment Manager, is a wholly owned subsidiary of
Oppenheimer & Co., Inc.
USE OF PROCEEDS
The Fund will not receive any proceeds from the sale of any Common Stock
offered pursuant to this Prospectus. Proceeds received by Oppenheimer & Co.,
Inc., as a result of its OTC secondary market sales of the Common Stock will be
utilized by Oppenheimer & Co., Inc., in connection with its secondary market
operations and for general corporate purposes.
12
<PAGE>
TRADING HISTORY
The Common Stock is listed and traded on the NYSE under the symbol "EDF."
The following table sets forth for the Common Stock for each quarterly period
since commencement of the Fund's operations: (a) the per share high and low
sales prices as reported by the NYSE; (b) the per share net asset value, based
on the Fund's computation as of 4:00p.m. on the last NYSE business day for the
week corresponding to the dates on which the respective high and low sales
prices were recorded; and (c) the discount or premium to net asset value
represented by the high and low sales prices shown. The range of net asset
values and of premiums and discounts for the Common Stock during the periods
shown may be broader than shown in this table. On September 27, 1996, the
closing price per share of Common Stock was $14.75, the Fund's net asset value
per share was $15.07 and the discount to net asset value was (2.12)%.
<TABLE>
<CAPTION>
(Discount) or
Sales Prices Net Asset Values Premium to Net Asset Value
------------ ---------------- --------------------------
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
<C> <C> <C> <C> <C> <C> <C>
8/31/93* $16.00 $15.00 $15.00 $14.37 9.86% 7.07%
11/30/93 15.88 15.00 15.87 14.68 7.07 (3.91)
2/28/94 16.00 15.00 16.27 14.74 1.76 (6.21)
5/31/94 14.88 12.75 14.54 11.91 11.18 0.62
8/31/94 14.00 12.50 13.08 11.59 12.22 (0.08)
11/30/94 13.63 11.25 12.66 11.58 7.62 (3.10)
2/28/95 12.25 10.00 11.97 9.28 18.61 (3.93)
5/31/95 11.88 8.88 10.95 7.61 28.12 5.02
8/31/95 12.13 11.13 11.06 9.78 17.59 2.85
11/30/95 12.00 11.38 11.32 10.77 9.59 1.02
2/29/96 14.38 11.88 14.01 11.56 5.97 (0.51)
5/31/96 14.00 12.63 13.89 11.62 13.82 0.01
8/31/96 14.50 13.37 14.38 12.84 5.14 (1.77)
</TABLE>
*For the period June 25, 1993 (commencement of operations) to May 31, 1994.
See "Description of Capital Stock--Future Actions Relating to a Discount in the
Price of the Fund's Shares of Common Stock" as to methods that may be undertaken
by the Fund to reduce any discount.
13
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek high current income. As a
secondary objective, the Fund seeks capital appreciation. Under normal market
conditions, the Fund invests at least 65% of its total assets in debt securities
of government and government related issuers located in emerging market
countries, and of entities organized to restructure outstanding debt of such
issuers. In addition, up to 35% of the Fund's total assets are invested in debt
securities of corporate issuers located in emerging market countries. As used in
this Prospectus, an "emerging market country" is any country which is considered
to be an emerging country by the World Bank at the time of the Fund's
investment. The countries that will not be considered emerging market countries
include: Australia; Austria; Belgium; Canada; Denmark; Finland; France; Germany;
Ireland; Italy; Japan; Luxembourg; Netherlands; New Zealand; Norway; Spain;
Sweden; Switzerland; the United Kingdom; and the United States. The Fund intends
to invest primarily in some or all of the following emerging market countries:
Algeria Ivory Coast Portugal
Argentina Jamaica Russia
Brazil Jordan Slovakia
Bulgaria Lebanon Slovenia
Chile Malaysia South Africa
Colombia Mexico Thailand
Costa Rica Morocco Trinidad & Tobago
Dominican Republic Nicaragua Tunisia
Ecuador Nigeria Turkey
Egypt Panama Uruguay
Greece Paraguay Venezuela
Hungary Peru Vietnam
India Philippines Zaire
Indonesia Poland
The Fund's investments in government and government related and restructured
debt securities consist of (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging market countries (including
participations in loans between governments and financial institutions), (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging market countries (including
participations in loans between governments and financial institutions), and
(iii) interests in issuers organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of the
entities described above.
The amount up to 35% of the Fund's total assets that may be invested in
corporate issuers of emerging market countries may include debt securities or
obligations issued by (i) banks located in emerging market countries or by
branches of emerging market country banks located outside the country or (ii)
companies organized under the laws of an emerging market country.
Emerging market country debt securities held by the Fund take the form of
bonds, notes, bills, debentures, convertible securities, warrants, bank debt
obligations, short-term paper, loan participations, loan assignments and
interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by emerging
market country issuers. Dollar-denominated emerging market country debt
securities held by the Fund are generally listed but not traded on a securities
exchange, and non-dollar-denominated securities held by the Fund may or may not
be listed or traded on a securities exchange. The Fund is subject to no
restrictions on the maturities of the emerging market country debt securities it
holds; those maturities may range from overnight to 30 years.
A substantial portion of the Fund's total assets are invested from time to
time in certain Brady Bonds and other debt obligations acquired at a discount.
Pursuant to the Code, the Fund is required to accrue a portion of any original
issue discount with respect to such securities as income each year even though
the Fund does not receive interest payments in cash during the year that reflect
the discount so accrued. The Fund also elects similar treatment for any market
discount with respect to such securities. As a result, the Fund has made and
expects to continue to make distributions of net investment income in amounts
greater than the total amount of cash interest actually received. Such
distributions are made from the cash assets of the Fund, from borrowings or, if
necessary, by liquidation of portfolio securities. See "Additional Investment
Activities--Leverage", "Risk Factors and Special Considerations--Illiquid
Investments" and "Taxation--The Fund."
14
<PAGE>
Although the Fund's portfolio is actively managed to take into account
changes and anticipated changes occurring in emerging market countries, the Fund
invests with a long-term perspective, and is not intended to be a trading or
arbitrage vehicle. [The Fund's annual portfolio turnover rate generally does not
exceed 100%.] Portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities by the average monthly value of the
Fund's portfolio securities. For purposes of the calculation, portfolio
securities exclude all debt securities having a maturity when purchased of one
year or less. Higher portfolio turnover rates can result in corresponding
increases in securities transaction costs.
Under normal market conditions, at least 65% of the Fund's total assets are
invested in U.S. dollar-denominated securities. Non-dollar-denominated emerging
market country debt securities may be denominated in the local currency of an
emerging country, as well as in hard currencies such as the British Pound
Sterling, the Belgian Franc, the Canadian Dollar, the Deutsche Mark, the Dutch
Guilder, the European Currency Unit, the French Franc, the Italian Lira, the
Japanese Yen and the Swiss Franc. Although the Fund is permitted to engage in a
wide variety of investment practices designed to hedge against currency exchange
rate risks with respect to its holdings of non-dollar-denominated debt
securities, the Fund may be limited in its ability to hedge against these risks.
See "Additional Investment Activities--Derivatives."
Although the Fund generally does not concentrate its investments in any
industry, it is permitted under certain conditions to invest more than 25% of
its assets in the securities of issuers whose primary business activity is in
the oil or telecommunications industry. Prior to concentrating in the securities
of issuers in the oil or telecommunications industry, the Fund's Board of
Directors must determine, based on factors in existence at the time of the
decision, such as liquidity, availability of investments and anticipated
returns, that the Fund's ability to achieve its investment objectives would be
materially adversely affected if the Fund was not permitted to invest more than
25% of its total assets in those securities. Such circumstances could include
periods when returns on or market liquidity of investments in the oil and
telecommunications industry substantially exceed those available on investments
in other industries, periods of substantial default or price fluctuations in
emerging market country government debt securities, or periods of political,
social or economic instability affecting a number of emerging market countries.
To the extent the Fund invests more than 25% of its total assets in the oil or
telecommunications industry, the Fund's performance could be more significantly
influenced by events or conditions affecting those industries and the Fund's
investments may be subject to greater risk and market fluctuation than a fund
that has in its portfolio securities representing a broader range of investment
alternatives. The oil industry is subject, among other things, to product market
price volatility, competitive pressure and international political events
(including war). The telecommunications industry is subject to competitive
pressures, technological change, extensive governmental regulation and other
factors that could adversely affect the Fund's performance.
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in the securities of a single
issuer. The Fund, however, has complied with and intends to continue to comply
with the diversification requirements of the Code and otherwise to conduct its
operations so as to qualify as a "regulated investment company" for purposes of
the Code, which will relieve the Fund of any liability for U.S. federal income
tax to the extent that its earnings are distributed to shareholders. See
"Taxation."
Selection of Investments
Assets are allocated among various countries based upon the Investment
Manager's and Investment Adviser's analysis of credit risk of the universe of
emerging market country issuers. Emerging market country sovereign credit
analysis includes an evaluation of the issuing country's total debt levels,
currency reserve levels, net exports/imports, overall economic growth, level of
inflation, currency fluctuation, political and social climate and payment
history. In the Investment Manager's and Investment Adviser's view, the price of
an emerging market country's debt on the secondary markets generally reflects
the market's perception of the country's economic prospects. A significant
change in the country's fundamentals will usually be accompanied by
corresponding price movements in that country's debt. By improving economic and
repayment prospects, the obligor's credit standing increases, generally pushing
up the value of the debt.
Emerging market country debt securities are selected based upon credit risk
analysis of potential issuers, the characteristics of the security and interest
rate sensitivity of the various debt issues for a single issuer, currency risk
considerations, analysis of volatility and liquidity of these particular debt
instruments, and the tax implications of various instruments to the Fund. In
purchasing securities for the Fund, the Investment Adviser considers the
correlation among the securities represented in the Fund's portfolio in an
attempt to reduce the risk of exposure to market, industry and issuer
volatility. The Investment Adviser, with assistance from the Investment Manager,
makes
15
<PAGE>
independent evaluations as to the creditworthiness of issuers of debt securities
that may differ from those of internationally recognized credit rating agency
organizations. The Fund's success in attaining its investment objectives depends
largely on the Investment Adviser's evaluation of the creditworthiness of
issuers.
The following is a description of certain securities in which the Fund may
invest.
Brady Bonds
The Fund may invest in Brady Bonds and other sovereign debt securities of
countries that have restructured or are in the process of restructuring
sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities
issued under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external commercial bank indebtedness.
In restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary Fund (the
"IMF"). The Brady Plan framework, as it has developed, contemplates the exchange
of commercial bank debt for newly issued bonds (Brady Bonds). Brady Bonds may
also be issued in respect of new money being advanced by existing lenders in
connection with the debt restructuring. The World Bank and/or the IMF support
the restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount. Under these arrangements
with the World Bank and/or the IMF, debtor nations have been required to agree
to the implementation of certain domestic monetary and fiscal reforms. Such
reforms have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's ability to service its external obligations and promote its economic
growth and development. Investors should also recognize that the Brady Plan only
sets forth general guiding principles for economic reform and debt reduction,
emphasizing that solutions must be negotiated on a case-by-case basis between
debtor nations and their creditors. The Investment Manager and the Investment
Adviser believe that economic reforms undertaken by countries in connection with
the issuance of Brady Bonds make the debt of countries which have issued or have
announced plans to issue Brady Bonds an attractive opportunity for investment.
There can be no assurance, however, that the Investment Manager's and the
Investment Adviser's expectations with respect to Brady Bonds will be realized.
Investors should recognize that Brady Bonds have been issued only recently
and, accordingly, do not have a long payment history. Agreements implemented
under the Brady Plan to date are designed to achieve debt and debt service
reduction through specific options negotiated by a debtor nation with its
creditors. As a result, the financial packages offered by each country differ.
The types of options have included the exchange of outstanding commercial bank
debt for bonds issued at 100% of face value of such debt, which carry a
below-market stated rate of interest (generally known as par bonds); bonds
issued at a discount from the face value of such debt (generally known as
discount bonds); bonds bearing an interest rate which increases over time; and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of 1%
above the then-current six-month London Inter-Bank Offered Rate ("LIBOR").
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the Fund will purchase Brady Bonds in secondary markets,
as described below, in which the price and yield to the investor reflect market
conditions at the time of purchase. Brady Bonds issued to date have traded at a
deep discount to their face value. Certain sovereign bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments that generally are not collateralized. Certain
Brady Bonds have been collateralized as to principal due at maturity (typically
30 days from date of issue) by U.S. Treasury zero-coupon bonds with a maturity
equal to the final maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds. Collateral
purchases are financed by the IMF, the World Bank and the debtor nations'
reserves. In addition, interest payments on certain types of Brady Bonds may be
collateralized by cash or high-grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals being uncollateralized. The Fund may
purchase Brady Bonds with no or limited collateralization, and will be relying
for payment of interest and (except in the case of principal collateralized
Brady Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories. A substantial
portion of the Brady Bonds and other sovereign debt securities in which the Fund
invests are likely to be acquired at a discount. See "Taxation--The Fund."
16
<PAGE>
Loan Participations and Assignments
The Fund may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a foreign sovereign entity and one or more
financial institutions ("Lenders"). The Fund may invest in such Loans in the
form of participations ("Participations") in Loans and assignments
("Assignments") of all or a portion of Loans from third parties. Participations
typically will result in the Fund having a contractual relationship only with
the Lender, not with the borrower. The Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, the
Fund generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Fund may not benefit directly from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the Fund will assume the credit risk of both the borrower and the Lender that is
selling the Participation. In the event of the insolvency of the Lender selling
a Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Fund
will acquire Participations only if the Lender interpositioned between the Fund
and the borrower is determined by the Investment Adviser to be creditworthy.
When the Fund purchases Assignments from Lenders, the Fund will acquire direct
rights against the borrower on the Loan, except that under certain circumstances
such rights may be more limited than those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
Because the market for such instruments is not highly liquid, the Fund
anticipates that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market will have
an adverse impact on the value of such instruments and on the Fund's ability to
dispose of particular Assignments or Participations in response to a specific
economic event, such as deterioration in the creditworthiness of the borrower.
Structured Investments
Included among the issuers of emerging market country debt securities in
which the Fund may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchase by an entity, such as a corporation or trust, of specified instruments
(such as Brady Bonds) and the issuance by that entity of one or more classes of
securities ("Structured Investments") backed by, or representing interests in,
the underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to Structured Investments is dependent on the extent of the cash flow on
the underlying instruments. Because Structured Investments of the type in which
the Fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Investments typically have higher yields and present
greater risks than unsubordinated Structured Investments. Although the Fund's
purchase of subordinated Structured Investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be leverage for purposes of the limitations placed on the
extent of the Fund's assets that may be used for borrowing and other leveraging
activities. See "Additional Investment Activities--Leverage."
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Fund's investment in
these Structured Investments may be limited by the restrictions contained in the
1940 Act described below under "Additional Investment Activities--Investment
Funds." Structured Investments are typically sold in private placement
transactions, and there currently is no active
trading market for Structured Investments.
Temporary Investments
The Fund may hold and/or invest up to 10% of its total assets in cash and/or
Temporary Investments (as defined below) for cash management purposes, pending
investment in accordance with the Fund's investment objectives and policies and
to meet operating expenses. In addition, the Fund may take a temporary defensive
posture and invest without limitation in Temporary Investments. The Fund may
assume a temporary defensive posture when, due to
17
<PAGE>
political, market or other factors broadly affecting debt markets in one or more
emerging market countries, the Investment Adviser determines that either
opportunities for high current income in those markets may be significantly
limited or that significant diminution in value of the securities traded in
those markets is likely to occur. To the extent that the Fund invests in
Temporary Investments, it may not achieve its investment objectives.
Temporary Investments are debt securities denominated in dollars or in
another hard currency including: (1) short-term (less than 12 months to
maturity) and medium-term (not greater than five years to maturity) obligations
issued or guaranteed by (a) the U.S. government or the government of a
non-emerging market country, their agencies or instrumentalities or (b)
international organizations designated or supported by multiple foreign
governmental entities to promote economic reconstruction or development
("supranational entities"); (2) finance company obligations, corporate
commercial paper and other short-term commercial obligations, in each case rated
or issued by companies with similar securities outstanding that are rated
Prime-1 or A or better by Moody's or A-1 or A or better by S&P or, if unrated,
of comparable quality as determined by the Investment Adviser; (3) obligations
(including certificates of deposit, time deposits, demand deposits and bankers'
acceptances) of banks, subject to the restriction that the Fund may not invest
more than 25% of its total assets in bank securities; and (4) repurchase
agreements with respect to securities in which the Fund may invest. The banks
whose obligations may be purchased by the Fund and the banks and broker-dealers
with which the Fund may enter into repurchase agreements include any member bank
of the Federal Reserve System and any broker-dealer or any foreign bank that has
been determined by the Investment Adviser to be creditworthy.
Repurchase agreements are contracts pursuant to which the seller of a
security agrees at the time of sale to repurchase the security at an agreed upon
price and date. When the Fund enters into a repurchase agreement, the seller
will be required to maintain the value of the securities subject to the
repurchase agreement, marked to market daily, at not less than their repurchase
price. Repurchase agreements may involve risks in the event of insolvency or
other default by the seller, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities.
Other Investments
Private Placements. The Fund may invest in emerging market country debt
securities that are sold in private placement transactions between their issuers
and their purchasers and that are neither listed on an exchange nor traded
over-the-counter. In many cases, privately placed securities will be subject to
contractual or legal restrictions on transfer. As a result of the absence of a
public trading market, privately placed securities may in turn be less liquid
and more difficult to value than publicly traded securities. Although privately
placed securities may be resold in privately negotiated transactions, the prices
realized from the sales could, due to illiquidity, be less than those originally
paid by the Fund or less than their fair value. In addition, issuers whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements that may be applicable if their
securities were publicly traded. If any privately placed securities held by the
Fund are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the expenses
of registration.
Convertible Securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
several unique investment characteristics such as (1) higher yields than common
stocks, but lower yields than comparable nonconvertible securities, (2) a lesser
degree of fluctuation in value than the underlying stock since they have fixed
income characteristics, and (3) the potential for capital appreciation if the
market price of the underlying common stock increases.
The Fund has no current intention of converting any convertible securities
it may own into equity securities or holding them as an equity investment upon
conversion, although it may do so for temporary purposes. A convertible security
might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by the Fund is called for redemption, the Fund may be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
Warrants. The Fund may invest in warrants, which are securities permitting,
but not obligating, their holder to subscribe for other securities. The Fund may
invest in warrants for equity securities that are acquired as units with debt
instruments and warrants for debt securities. Warrants do not carry with them
the right to dividends or voting
18
<PAGE>
rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As a
result, an investment in warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to its expiration date. The
Fund does not intend to retain in its portfolio any common stock received upon
the exercise of a warrant and will sell the common stock as promptly as
practicable and in a manner that it believes will reduce its risk of a loss in
connection with the sale.
ADDITIONAL INVESTMENT ACTIVITIES
Leverage
The Fund has utilized and intends to continue utilizing leverage by
borrowing or by issuing shares of preferred stock or short-term debt securities.
The Fund intends to leverage in an amount up to 33 1/3% of its total assets
including the amount obtained from leverage. It is anticipated that the interest
payments on any borrowing or short-term debt securities or the dividends on any
preferred stock will reflect short-term rates, and that the net return on the
Fund's portfolio, including the proceeds of any leverage, will exceed the
interest or dividend rate applicable to the leverage. Whether to leverage and
the terms of, and the timing of leverage will be determined by the Fund's Board
of Directors. The extent to which the Fund is leveraged from time to time will
vary depending on the judgment of the Board of Directors, in consultation with
the Investment Manager and the Investment Adviser, regarding market conditions.
Through these leveraging techniques, the Fund will seek to obtain a higher
return for holders of Common Stock than if the Fund were not leveraged. There
can be no assurance, however, that the Fund will engage in any leveraging
techniques.
Utilization of leverage is a speculative investment technique and involves
certain risks to the holders of Common Stock. These include the possibility of
higher volatility of the net asset value of the Common Stock and potentially
more volatility in the market value of the Common Stock. So long as the Fund is
able to realize a higher net return on its investment portfolio than the then
current interest or dividend rate of any leverage together with other related
expenses, the effect of the leverage will be to cause holders of Common Stock to
realize a higher current net investment income than if the Fund were not so
leveraged. On the other hand, to the extent that the then current interest or
dividend rate on any leverage, together with other related expenses, approaches
the net return on the Fund's investment portfolio, the benefit of leverage to
holders of Common Stock will be reduced, and if the then current interest or
dividend rate on any leverage were to exceed the net return on the Fund's
portfolio, the Fund's leveraged capital structure would result in a lower rate
of return to holders of Common Stock than if the Fund were not so leveraged.
Similarly, since any decline in the net asset value of the Fund's investments
will be borne entirely by holders of the Common Stock, the effect of leverage in
a declining market would be a greater decrease in net asset value applicable to
the Common Stock than if the Fund were not leveraged. Any such decrease would
likely be reflected in a decline in the market price of the Common Stock. If the
Fund's current investment income were not sufficient to meet interest or
dividend requirements on any leverage, it could be necessary for the Fund to
liquidate certain of its investments, thereby reducing the net asset value
attributable to the Common Stock. Such liquidations might also cause the Fund to
realize gains on securities held for less than three months. Because not more
than 30% of the Fund's gross income may be derived from the sale or disposition
of securities held for less than three months to maintain the Fund's status as a
regulated investment company under the Code, such gains would limit the ability
of the Fund to sell other securities held for less than three months that the
Fund might wish to sell in the ordinary course of its portfolio management and
thus might adversely affect the Fund's yield.
The Fund's use of leverage is subject to the provisions of the 1940 Act,
including asset coverage requirements and restrictions on the declaration of
dividends and distributions to holders of Common Stock or purchases of Common
Stock in the event such asset coverage requirements are not met. The 1940 Act
also requires that holders of preferred stock, and in certain circumstances
holders of debt securities, have certain voting rights. See "Description of
Capital Stock."
In addition, the Fund may apply for a rating from Moody's and/or S&P on any
preferred stock or short-term debt which it issues; however, no minimum rating
is required for the issuance of preferred stock or short-term debt by the Fund.
The Fund believes that obtaining one or both of such ratings for its preferred
stock or short-term debt securities will enhance the marketability of the
preferred stock or short-term debt securities and thereby reduce the dividend
rate on the preferred stock or interest requirements on such short-term debt
securities from that which the Fund would be required to pay if the preferred
stock or short-term debt securities were not so rated. The rating
19
<PAGE>
agencies for any preferred stock or short-term debt securities may require asset
coverage maintenance ratios in addition to those imposed by the 1940 Act. The
ability of the Fund to comply with such asset coverage maintenance ratios may be
subject to circumstances beyond the control of the Fund such as market
conditions for its portfolio securities. The Fund expects that the terms of any
preferred stock or short-term debt securities will provide for mandatory
redemption of the preferred stock or repayment of short-term debt in the event
the Fund fails to meet such asset coverage maintenance ratios. In such
circumstances, the Fund may have to liquidate portfolio securities in order to
meet redemption or repayment requirements. This would have the effect of
reducing the net asset value to holders of the Common Stock and could reduce the
Fund's net income in the future.
The issuance of any leverage will entail certain initial costs and expenses
such as underwriting discounts or placement fees, fees associated with the
registration with the Commission, filings under state securities laws, rating
agency fees, legal and accounting fees, printing costs and certain other ongoing
expenses such as administrative and accounting fees. These costs and expenses
will be borne by the Fund and will reduce net assets available to holders of the
Common Stock.
To date, all of the Fund's borrowing has been made on a secured basis and
the Fund expects this to continue to be the case. The Fund's custodian either
segregates the assets securing the Fund's borrowing for the benefit of the
Fund's lenders or arranges with a suitable sub-custodian, which may include a
lender. If the assets used to secure the borrowing decrease in value, the Fund
may be required to pledge additional collateral to the lender in the form of
cash or securities to avoid liquidation of those assets. The rights of any
lenders to the Fund to receive payments of interest on and repayments of
principal of borrowings will be senior to the rights of the Fund's shareholders,
and the terms of the Fund's borrowings may contain provisions that limit certain
activities of the Fund and could result in precluding the purchase of
instruments that the Fund would otherwise purchase.
If the Fund leverages through preferred stock, under the requirements of the
1940 Act, the value of the Fund's total assets, less all liabilities and
indebtedness of the Fund not represented by senior securities, as defined in the
1940 Act, must be equal, immediately after any such issuance of preferred stock,
to at least 200% of the aggregate amount of senior securities representing
indebtedness plus the aggregate liquidation preference of any outstanding
preferred stock. Such percentage must also be met any time the Fund pays a
dividend or makes any other distribution on Common Stock (other than a
distribution in Common Stock) or any time the Fund repurchases Common Stock, in
each case after giving effect to such dividend, distribution or repurchase. The
liquidation value of preferred stock is expected to equal the aggregate original
purchase price plus any accrued and unpaid dividends thereon (whether or not
earned or declared). See "Description of Capital Stock."
If the Fund leverages through borrowing or issuing short-term debt
securities, under the requirements of the 1940 Act, the value of the Fund's
total assets, less all liabilities and indebtedness of the Fund not represented
by senior securities, as defined in the 1940 Act, must at least be equal,
immediately after the issuance of senior securities consisting of debt, to 300%
of the aggregate principal amount of all outstanding senior securities of the
Fund which are debt. If the Fund leverages through the issuance of senior
securities consisting of debt, the 300% asset coverage maintenance ratio
referred to above must also be met any time the Fund declares a dividend or
other distribution on Common Stock (other than a distribution in Common Stock)
or any time the Fund repurchases Common Stock, in each case after giving effect
to such dividend, distribution or repurchase.
The Fund may enter into reverse repurchase agreements with any member bank
of the Federal Reserve System and any broker-dealer or any foreign bank that has
been determined by the Investment Adviser to be creditworthy. Under a reverse
repurchase agreement, the Fund would sell securities and agree to repurchase
them at a mutually agreed date and price. At the time the Fund enters into a
reverse repurchase agreement, it may establish and maintain a segregated
account, with its custodian or a designated sub-custodian, containing cash,
securities issued or guaranteed by the U.S. Government or its agencies and
instrumentalities ("U.S. Government Securities") or other liquid, high grade
debt obligations, having a value not less than the repurchase price (including
accrued interest). Reverse repurchase agreements involve the risk that the
market value of the securities purchased with the proceeds of the sale of
securities received by the Fund may decline below the price of the securities
the Fund is obligated to repurchase. In the event the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Fund's obligations to repurchase the securities, and the
Fund's use of proceeds of the reverse repurchase agreement may effectively be
restricted pending the decision. Reverse repurchase agreements will be treated
as borrowings for purposes of calculating the Fund's borrowing limitation to the
extent the Fund does not establish and maintain a segregated account (as
described above).
20
<PAGE>
The Fund may, in addition to engaging in the transactions described above,
borrow money for temporary or emergency purposes (including, for example,
clearance of transactions, share repurchases or payments of dividends to
shareholders) in an amount not exceeding 5% of the value of the Fund's total
assets (including the amount borrowed).
Derivatives
The Fund is authorized to use various investment strategies described below
to hedge market risks (such as interest rates, currency exchange rates and broad
or specific market movements), to manage the effective maturity or duration of
debt instruments held by the Fund, or to seek to increase the Fund's income or
gain. Although these strategies are regularly used by some investment companies
and other institutional investors, these strategies cannot at the present time
be used to a significant extent by the Fund and may not become available for
extensive use in the future. Techniques and instruments may change, however,
over time as new instruments and strategies are developed or regulatory changes
occur. Limitations on the portion of the Fund's assets that may be used in
connection with the investment strategies described below are set out in
Appendix A to this Prospectus.
Subject to the constraints described above, the Fund may (if and to the
extent authorized) purchase and sell interest rate, currency, or stock or bond
index futures contracts and enter into currency forward contracts and currency
swaps; purchase and sell (or write) exchange listed and OTC put and call options
on securities, Loan Participations and Assignments, currencies, futures
contracts, indices and other financial instruments; and enter into interest rate
transactions, equity swaps and related transactions as well as other similar
transactions that may be developed to the extent the Investment Adviser
determines they are consistent with the Fund's investment objective and policies
and applicable regulatory requirements. Collectively, these transactions are
referred to in this Prospectus as "Derivatives." The Fund's interest rate
transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions may take the form of currency forward contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures contracts.
Derivatives may be used to attempt to protect against possible changes in
the market value of securities held or to be purchased for the Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect the Fund's unrealized gains in the value of its securities, to
facilitate the sale of those securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities or to seek to enhance the Fund's income or gain.
The Fund may use any or all types of Derivatives that it is authorized to use at
any time; no particular strategy will dictate the use of one type of transaction
rather than another, as use of any authorized Derivative will be a function of
numerous variables, including market conditions. The ability of the Fund to
utilize Derivatives successfully will depend on, in addition to the factors
described above, the Investment Adviser's ability to predict pertinent market
movements, which cannot be assured. These skills are different from those needed
to select the Fund's portfolio securities. The Fund is not a "commodity pool"
(i.e., a pooled investment vehicle that trades in commodity futures contracts
and options thereon and the operator of which is registered with the CFTC).
Derivatives involving futures contracts and options on futures contracts will be
purchased, sold or entered into only for bona fide hedging purposes, provided
that the Fund may enter into such transactions for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and losses on existing contracts; provided, further, that, in the case
of an option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation. The use of certain Derivatives in certain
circumstances will require that the Fund segregate cash or other liquid assets
to the extent the Fund's obligations are not otherwise "covered" through
ownership of the underlying security, financial instrument or currency.
Derivatives involve special risks, including possible default by the other
party to the transaction, illiquidity and, to the the extent the Investment
Adviser's view as to certain market movements is incorrect, the risk that the
use of Derivatives could result in significantly greater losses than if it had
not been used. Use of put and call options could result in losses to the Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher or lower than current market values, or cause the Fund to hold a
security it might otherwise sell. The use of currency transactions could result
in the Fund incurring losses as a result of the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency in addition to exchange rate fluctuations. The use of options and
futures transactions entails certain special risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of the Fund could create the
possibility that losses on the Derivative will be greater than gains in the
value of the Fund's position. In addition, futures and options markets could be
illiquid in some circumstances and certain OTC options could
21
<PAGE>
have no markets. The Fund might not be able to close out certain positions
without incurring substantial losses. To the extent the Fund utilizes futures
and options transactions for hedging, such transactions should tend to minimize
the risk of loss due to a decline in the value of the hedged position and, at
the same time, limit any potential gain to the Fund that might result from an
increase in value of the position. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium and transaction costs. Losses resulting from the
use of Derivatives will reduce the Fund's net asset value, and possibly income,
and the losses may be significantly greater than if Derivatives had not been
used.
A detailed discussion of Derivatives, including applicable requirements of
the Commodity Futures Trading Commission, the requirement to segregate assets
with respect to these transactions and special risks associated with such
strategies, appears as Appendix A to this Prospectus. See also "Risk Factors and
Special Considerations--Investment Practices."
The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxation."
When-Issued and Delayed Delivery Securities
The Fund may purchase securities on a when-issued or delayed delivery basis.
Securities purchased on a when-issued or delayed delivery basis are purchased
for delivery beyond the normal settlement date at a stated price and yield. No
income accrues to the purchaser of a security on a when-issued or delayed
delivery basis prior to delivery. Such securities are recorded as an asset and
are subject to changes in value based upon changes in the general level of
interest rates. Purchasing a security on a when-issued or delayed delivery basis
can involve a risk that the market price at the time of delivery may be lower
than the agreed-upon purchase price, in which case there could be an unrealized
loss at the time of delivery. The Fund will only make commitments to purchase
securities on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities but may sell them before the settlement date
if it is deemed advisable. The Fund generally will establish a segregated
account in which it will maintain liquid assets in an amount at least equal in
value to the Fund's commitments to purchase securities on a when-issued or
delayed delivery basis. If the value of these assets declines, the Fund will
place additional liquid assets in the account on a daily basis so that the value
of the assets in the account is equal to the amount of such commitments. As an
alternative, the Fund may elect to treat when-issued or delayed delivery
securities as senior securities representing indebtedness, which are subject to
asset coverage requirements under the 1940 Act. See "Investment Restrictions."
Loans of Portfolio Securities
The Fund may lend portfolio securities. By doing so, the Fund attempts to
increase its income through the receipt of interest on the loan. In the event of
the bankruptcy of the other party to a securities loan, the Fund could
experience delays in recovering the securities it lent. To the extent that, in
the meantime, the value of the securities the Fund lent has increased, the Fund
could experience a loss.
Any securities that the Fund may receive as collateral will not become a
part of its portfolio at the time of the loan and, in the event of a default by
the borrower, the Fund will, if permitted by law, dispose of such collateral
except for such part thereof that is a security in which the Fund is permitted
to invest. During the time securities are on loan, the borrower will pay the
Fund any accrued income on those securities, and the Fund may invest the cash
collateral and earn additional income or receive an agreed-upon fee from a
borrower that has delivered cash equivalent collateral. Cash collateral received
by the Fund will be invested in securities in which the Fund is permitted to
invest. The value of securities loaned will be marked to market daily. Portfolio
securities purchased with cash collateral are subject to possible depreciation.
Loans of securities by the Fund will be subject to termination at the Fund's or
the borrower's option. The Fund may pay reasonable negotiated fees in connection
with loaned securities, so long as such fees are set forth in a written contract
and approved by the Fund's Board of Directors. The Fund does not currently
intend to make loans of portfolio securities with a value in excess of 25% of
the value of its total assets.
Illiquid Securities
The Fund may invest without limitation in illiquid securities for which
there is a limited trading market and for which a low trading volume of a
particular security may result in abrupt and erratic price movements. The Fund
may be unable to dispose of
22
<PAGE>
its holdings in illiquid securities at then current market prices and may have
to dispose of such securities over extended periods of time. See "Risk Factors
and Special Considerations--Market Illiquidity" and "--Illiquid Investments."
Investment Funds
The Fund may invest in investment funds other than those for which the
Investment Manager or the Investment Adviser serves as investment adviser or
sponsor and which invest principally in securities in which the Fund is
authorized to invest. Under the 1940 Act, the Fund may invest a maximum of 10%
of its total assets in the securities of other investment companies. In
addition, under the 1940 Act, not more than 5% of the Fund's total assets may be
invested in the securities of any one investment company. To the extent the Fund
invests in other investment funds, the Fund's shareholders will incur certain
duplicative fees and expenses, including investment advisory fees. The Fund's
investment in certain investment funds will result in special U.S. federal
income tax consequences described below under "Taxation."
Short Sales
The Fund may from time to time sell securities short without limitation. A
short sale is a transaction in which the Fund would sell securities it does not
own (but has borrowed) in anticipation of a decline in the market price of the
securities. When the Fund makes a short sale, the proceeds it receives from the
sale will be held on behalf of a broker until the Fund replaces the borrowed
securities. To deliver the securities to the buyer, the Fund will need to
arrange through a broker to borrow the securities and, in so doing, the Fund
will become obligated to replace the securities borrowed at their market price
at the time of replacement, whatever that price may be. The Fund may have to pay
a premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid assets. In addition, the Fund will place in a
segregated account with its custodian or designated sub-custodian an amount of
cash or assets equal to the difference, if any, between (1) the market value of
the securities sold at the time they were sold short and (2) any cash or other
liquid assets deposited as collateral with the broker in connection with the
short sale (not including the proceeds of the short sale). Until it replaces the
borrowed securities, the Fund will maintain the segregated account daily at a
level so that the amount deposited in the account plus the amount deposited with
the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short.
Short sales by the Fund involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
INVESTMENT RESTRICTIONS
The following restrictions, along with the Fund's investment objectives, are
the Fund's only fundamental policies--that is, policies that cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. As used in this Prospectus, a "majority of the Fund's
outstanding voting securities" means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares. See "Description of
Capital Stock--Preferred Stock" and "Description of Capital Stock--Special
Voting Provisions" for additional information with respect to the voting rights
of holders of preferred stock, if any. The other policies and investment
restrictions referred to in this Prospectus are not fundamental policies of the
Fund and may be changed by the Fund's Board of Directors without shareholder
approval. If a percentage restriction set forth below is adhered to at the time
a transaction is effected, later changes in percentage resulting from any cause
other than actions by the Fund will not be considered a violation. Under its
fundamental restrictions, the Fund may not:
(1) purchase any securities which would cause more than 25% of the value of
its total assets at the time of such purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that there is no limitation with respect to (a) investment in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or (b) the purchase of securities of issuers whose primary
business activity is in the oil or telecommunications industry, so long as the
Fund's Board of Directors determines, on the basis of factors such as liquidity,
availability of investments and anticipated returns, that the Fund's ability to
achieve its investment objectives would be materially adversely affected if the
Fund were not permitted to invest more than 25% of its total assets in those
securities, and so long as the Fund notifies its shareholders of any decision
23
<PAGE>
by the Board of Directors to permit or cease to permit the Fund to invest more
than 25% of its total assets in those securities, such notice to include a
discussion of any increased investment risks to which the Fund may be subjected
as a result of the Board's determination;
(2) issue senior securities or borrow money, except for (a) preferred stock
and other senior securities (including borrowing money, including on margin if
margin securities are owned, entering into reverse repurchase agreements and
entering into similar transactions) not in excess of 33 1/3% of its total
assets, and (b) borrowings up to 5% of its total assets (including the amount
borrowed) for temporary or emergency purposes (including for clearance of
transactions, repurchase of its shares or payment of dividends), without regard
to the amount of senior securities outstanding under clause (a) above; provided,
however, that the Fund's obligations under when-issued and delayed delivery
transactions and similar transactions and reverse repurchase agreements are not
treated as senior securities if covering assets are appropriately segregated,
and the use of Derivatives shall not be deemed to involve the issuance of a
"senior security" or a "borrowing"; for purposes of clauses (a) and (b) above,
the term "total assets" shall be calculated after giving effect to the net
proceeds of senior securities issued by the Fund reduced by any liabilities and
indebtedness not constituting senior securities except for such liabilities and
indebtedness as are excluded from treatment as senior securities by this item
(2). The Fund's obligations under interest rate swaps are not treated as senior
securities;
(3) purchase or sell commodities or commodity contracts, including futures
contracts and options thereon, except that the Fund may use Derivatives;
(4) make loans, except that the Fund may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and certificates
of deposit, bankers' acceptances and fixed time deposits) in accordance with its
investment objectives and policies, (b) invest in loans through Participations
and Assignments, (c) enter into repurchase agreements with respect to portfolio
securities, and (d) make loans of portfolio securities, as described under
"Additional Investment Activities--Loans of Portfolio Securities" in this
Prospectus;
(5) underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, it may be deemed to
be an underwriter;
(6) purchase real estate, real estate mortgage loans or real estate limited
partnership interests (other than securities secured by real estate or interests
therein or securities issued by companies that invest in real estate or
interests therein);
(7) purchase securities on margin (except for delayed delivery or
when-issued transactions, such short-term credits as are necessary for the
clearance of transactions, and margin deposits in connection with transactions
in futures contracts, options on futures contracts, options on securities and
securities indices and currency transactions); or
(8) invest for the purpose of exercising control over management of any
company.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risk factors and special
considerations, including those described below:
Currency Devaluations and Fluctuations
The Fund may invest up to 35% of its total assets in non-dollar-denominated
investments. The Fund may be limited in its ability to hedge the value of its
non-dollar-denominated investments against currency fluctuations. As a result, a
decline in the value of currencies in which the Fund's investments are
denominated against the dollar will result in a corresponding decline in the
dollar value of the Fund's assets. These declines will in turn affect the Fund's
income and net asset value. The Fund will compute its income on the date of its
receipt by the Fund at the exchange rate in effect with respect to the relevant
currency on that date. If the value of the currency declines relative to the
dollar between the date income is accrued and the date the Fund makes a
distribution, the amount available for distribution to the Fund's shareholders
would be reduced. If the exchange rate against the dollar of a currency in which
a portfolio security of the Fund is denominated declines between the time the
Fund accrues expenses in dollars and the time expenses are paid, the amount of
the currency required to be converted into dollars in order to pay expenses in
dollars will be greater than the equivalent amount in the currency of the
expenses at the time they are
24
<PAGE>
incurred. A decline in the value of non-U.S. currencies relative to the dollar
may also result in foreign currency losses that will reduce distributable net
investment income.
Economic and Political Risks
The economies of individual emerging market countries may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries or
the value of the Fund's investments in those countries.
Investment Controls; Repatriation
Foreign investment in certain emerging market country debt securities is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging market country
debt securities and increase the costs and expenses of the Fund. Certain
emerging market countries require governmental approval prior to investments by
foreign persons, limit the amount of investment by foreign persons in a
particular issuer, limit the investment by foreign persons only to a specific
class of securities of an issuer that may have less advantageous rights than the
classes available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging market countries may
also restrict investment opportunities in issuers in industries deemed important
to national interests.
Emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market country's balance of payments, the country could impose
temporary restrictions on foreign capital remittances. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments. Investing in local markets in
emerging market countries may require the Fund to adopt special procedures, seek
local government approvals or take other actions, each of which may involve
additional costs to the Fund.
Market Illiquidity
No established secondary markets may exist for many of the emerging market
country debt securities in which the Fund will invest. Reduced secondary market
liquidity may have an adverse effect on market price and the Fund's ability to
dispose of particular instruments when necessary to meet its liquidity
requirements or in response to specific economic events such as a deterioration
in the creditworthiness of the issuer. Reduced secondary market liquidity for
certain emerging market country debt securities may also make it more difficult
for the Fund to obtain accurate market quotations for purposes of valuing its
portfolio and calculating its net asset value. Market quotations are generally
available on many emerging country debt securities only from a limited number of
dealers and may not necessarily represent firm bids of those dealers or prices
for actual sales.
Rated and Unrated Securities
At any one time, substantially all of the Fund's assets may be invested in
instruments that are low rated or unrated. Emerging market country debt
securities of the type in which the Fund will invest substantially all of its
assets are generally considered to have a credit quality rated below investment
grade by internationally recognized credit rating organizations such as Moody's
and S&P. Non-investment grade securities (that is, rated Ba1 or lower by Moody's
or BB+ or lower by S&P) are commonly referred to as "junk bonds" and are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligations
and involve major risk exposure to adverse conditions. Some of the emerging
market country debt securities held by the Fund, which may not be paying
interest currently or may be in payment default, may be comparable to securities
rated as low as C by Moody's or CCC or lower by S&P. These securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable
25
<PAGE>
vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or
economic conditions and/or to be in default or not current in the payment of
interest or principal.
Low rated and unrated debt instruments generally offer a higher current
yield than that available from higher grade issues, but typically involve
greater risk. Low rated and unrated securities are especially subject to adverse
changes in general economic conditions, to changes in the financial condition of
their issuers and to price fluctuation in response to changes in interest rates.
During periods of economic downturn or rising interest rates, issuers of low
rated and unrated instruments may experience financial stress that could
adversely affect their ability to make payments of principal and interest and
increase the possibility of default. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of low rated and unrated securities especially in a market
characterized by a low volume of trading.
Considerations Relating to Debt Securities
The Fund is subject to no restrictions on the maturities of the emerging
market country debt securities it holds; those maturities may range from
overnight to 30 years. Changes in interest rates generally will cause the value
of debt securities held by the Fund to vary inversely to changes in prevailing
interest rates. The Fund's investments in fixed-rated debt securities with
longer terms to maturity are subject to greater volatility than the Fund's
investments in shorter-term obligations. Brady Bonds and other debt obligations
acquired at a discount are subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturities which are not subject to such discount.
Investments in emerging market country government debt securities involve
special risks. Certain emerging market countries have historically experienced,
and may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, balance of payments
and trade difficulties and extreme poverty and unemployment. The issuer or
governmental authority that controls the repayment of an emerging market
country's debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A debtor's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, and, in the case of a
government debtor, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the government debtor's
policy towards the IMF and the political constraints to which a government
debtor may be subject. Government debtors may default on their debt and may also
be dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a debtor's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the government
debtor, which may further impair such debtor's ability or willingness to timely
service its debts. Holders of government debt, including the Fund, may be
requested to participate in the rescheduling of such debt and to extend further
loans to government debtors.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign government debt obligations in the event of default
under their commercial bank loan agreements.
Government obligors in developing and emerging market countries are among
the world's largest debtors to commercial banks, other governments,
international financial organizations and other financial institutions. The
issuers of the government debt securities in which the Fund invests have in the
past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign government debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign government debt securities in which the Fund may invest will not be
subject to similar restructuring
26
<PAGE>
arrangements or to requests for new credit which may adversely affect the Fund's
holdings. Furthermore, certain participants in the secondary market for such
debt may be directly involved in negotiating the terms of these arrangements and
may therefore have access to information not available to other market
participants.
Investment Practices
Risks and special considerations of certain investment practices in which
the Fund may engage are described above under "Investment Objectives and
Policies" and "Additional Investment Activities." Additional information
regarding the risks and special considerations associated with Derivatives
appears in Appendix A to this Prospectus.
Illiquid Investments
The Fund may invest without limitation in illiquid securities. Investment of
the Fund's assets in relatively illiquid securities and loans may restrict the
ability of the Fund to dispose of its investments in a timely fashion and for a
fair price as well as its ability to take advantage of market opportunities. The
risks associated with illiquidity will be particularly acute in situations in
which the Fund's operations require cash, such as when the Fund repurchases
shares or pays dividends or distributions, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
Financial Information and Standards
Issuers in emerging market countries generally are subject to accounting,
auditing and financial standards and requirements that differ, in some cases
significantly, from those applicable to U.S. issuers. In particular, the assets
and profits appearing on the financial statements of an emerging market country
issuer may not reflect its financial position or results of operations in the
way they would be reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation accounting
rules may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Substantially less
information may be publicly available about issuers in emerging market countries
than is available about U.S.
issuers.
Net Asset Value Discount; Non-Diversification
Shares of closed-end investment companies frequently trade at a discount
from net asset value. This characteristic of shares of a closed-end fund is a
risk separate and distinct from the risk that a fund's net asset value will
decrease. The Fund cannot predict whether its shares will trade at, below or
above net asset value in the future.
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. The Fund, however, has complied with, and intends to continue to comply
with, the diversification requirements imposed by the Code for qualification as
a regulated investment company. As a non-diversified investment company, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, will be subject to greater risk of
loss with respect to its portfolio securities. See "Taxation" and "Investment
Restrictions."
Operating Expenses
The Fund's annual operating expenses are higher than those of many other
investment companies investing exclusively in the securities of U.S. issuers.
The operating expenses, however, are comparable to expenses of other closed-end
management investment companies that invest primarily in the securities of
emerging market countries.
Additional Considerations
The Fund's Articles of Incorporation contain certain anti-takeover
provisions that may have the effect of inhibiting the Fund's possible conversion
to open-end status and limiting the ability of other persons to acquire control
of the Fund. In certain circumstances, these provisions might also inhibit the
ability of shareholders to sell their shares at a premium over prevailing market
prices. The Fund's Board of Directors has determined that these provisions are
in the best interests of shareholders generally.
27
<PAGE>
MANAGEMENT OF THE FUND
Directors and Officers
The names of the directors and principal officers of the Fund are set forth
below, together with their positions and their principal occupations during the
past five years and, in the case of the directors, their positions with certain
other international organizations and publicly held companies.
<TABLE>
<CAPTION>
Name and Address Position with the Fund Age Principal Occupation and Other Affiliations
---------------- ---------------------- --- -------------------------------------------
<S> <C> <C> <C>
*Alan Rappaport Chairman of the 43 Executive Vice President, Oppenheimer &
Advantage Advisers, Board of Directors Co., Inc. (1994-present); Managing
Inc. Director, Oppenheimer & Co., Inc.
Oppenheimer Tower (1986-1994); President and Director,
World Financial Center Advantage Advisers, Inc. (1993-present);
New York, NY 10281 Executive Vice President, Advantage
Advisers, Inc. (1990-1993); Chairman of
the Board, President and Director, The
India Fund, Inc., The Mexico Equity and
Income Fund, Inc., and The Asia Tigers
Fund, Inc.; Chairman of the Board and
Director, The Czech Republic Fund, Inc.,
and The Emerging Markets Floating Rate
Fund Inc.; President and Director, The
Emerging Markets Income Fund Inc and
Global Partners Income Fund Inc.;
Director, Xiosinvest Management Co.,
S.A.; Member, New York Stock Exchange
Advisory Committee on International
Capital Markets.
*Michael S. Hyland President and 50 President and Managing Director, Salomon
Salomon Brothers Asset Director Brothers Asset Management Inc ("SBAM")
Management Inc. and Managing Director, Salomon Brothers
Seven World Trade Inc ("SBI") (1989-present); Chairman of
Center the Board, Global Partners Income Fund
New York, NY 10048 Inc., The Emerging Markets Income Fund
Inc, Salomon Brothers High Income Fund
Inc., Salomon Brothers 2008 Worldwide
Dollar Government Term Trust and Salomon
Brothers Worldwide Income Fund Inc;
President and Director, The Emerging
Markets Floating Rate Fund Inc.,
Municipal Partners Fund Inc. and
Municipal Partners Fund II Inc.;
Managing Director, First Boston Asset
Management Corp. (1989); Managing
Director, The First Boston Corporation
(1985-1989).
Charles F. Barber Director 79 Consultant; former Chairman of the
66 Glenwood Drive Board, ASARCO Incorporated; Director,
Greenwich, CT 06830 Global Partners Income Fund Inc., The
Emerging Markets Income Fund Inc., The
Asia Tigers Fund, Inc., The Emerging
Markets Floating Rate Fund Inc., Salomon
Brothers High Income Fund Inc.,
Municipal Partners Fund Inc., Municipal
Partners Fund II Inc., The Salomon
Brothers Fund Inc., Salomon Brothers
Series Funds Inc, Salomon Brothers
Institutional Series Funds Inc., Salomon
Brothers Capital Fund Inc., Salomon
Brothers Investors Fund Inc, Salomon
Brothers 2008 Worldwide Dollar
Government Term Trust, Salomon Brothers
Worldwide
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with the Fund Age Principal Occupation and Other Affiliations
---------------- ---------------------- --- -------------------------------------------
<S> <C> <C> <C>
Income Fund Inc., Zenix Income Fund
Inc., Municipal High Income Fund Inc.,
Managed Municipals Portfolio Inc. and
Managed Municipals Portfolio II Inc.;
Director, MinVen Inc.; Trustee, Lehman
Brothers Institutional Funds Group
Trust; Member, Council on Foreign
Relations, Inc.; Director and Treasurer,
Americas Society.
Leslie H. Gelb Director 58 President, The Council on Foreign
The Council on Foreign Relations (1993-Present); Columnist
Relations (1991-1993), Deputy Editorial Page
58 East 68th Street Editor (1986-1990), and Editor, Op-Ed
New York, NY 10021 Page (1988-1990), The New York Times;
Assistant Secretary of State, Department
of State (1977-1979); Director of Policy
Planning and Arms Control, International
Security Affairs, Department of Defense
(1967-1969); Director, The Asia Tigers
Fund, Inc., The India Fund, Inc., The
Czech Republic Fund, Inc., The Emerging
Markets Income Fund Inc., The Emerging
Markets Floating Rate Fund Inc. and
Global Partners Income Fund Inc.;
Trustee, The Carnegie Endowment for
International Peace; Trustee, Tufts
University; Board Member, Columbia
University School of International and
Public Affairs; Member, International
Institute for Strategic Studies,
Advisory Board Member, Center on Press,
Politics and Public Policy, Harvard
University, John F. Kennedy School.
Dr. Riordan Roett Director 56 Professor and Director, Latin American
Johns Hopkins Studies Program, Paul H. Nitze School of
University Advanced International Studies, Johns
1740 Massachusetts Hopkins University; Director, The
Ave., Emerging Markets Income Fund Inc., The
N.W. Emerging Markets Floating Rate Fund
Washington, D.C. 20036 Inc., Global Partners Income Fund Inc.,
Salomon Brothers High Income Fund Inc.,
Salomon Brothers 2008 Worldwide Dollar
Government Term Trust and Salomon
Brothers Worldwide Income Fund Inc.;
Member, Council on Foreign Relations,
Inc.; author of numerous articles and
other publications on emerging market
country and international political and
economic affairs.
Jeswald W. Salacuse Director 57 Henry J. Braker Professor of Commercial
The Fletcher School of Law, and formerly Dean, The Fletcher
Law & Diplomacy School of Law & Diplomacy, Tufts
Packard Avenue University; Director, The Emerging
Medford, MA 02155 Markets Income Fund Inc, Global Partners
Income Fund Inc., The Emerging Markets
Floating Rate Fund Inc., The Asia Tigers
Fund, Inc., The India Fund, Inc.,
Salomon Brothers High Income Fund Inc.,
Salomon Brothers 2008 Worldwide Dollar
Government Term Trust, Salomon Brothers
Worldwide Income Fund Inc and Municipal
Advantage Fund, Inc.; Member, Council on
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with the Fund Age Principal Occupation and Other Affiliations
---------------- ---------------------- --- -------------------------------------------
<S> <C> <C> <C>
Foreign Relations, Inc.; author of
numerous articles and other publications
on law, international relations, and
multinational business.
Peter J. Wilby Executive Vice 37 Managing Director SBAM and SBI
Salomon Brothers Asset President (1996-present); Director and Portfolio
Management Inc. Manager, SBAM, and Director (1989-1996).
Seven World Trade
Center
New York, NY 10048
Thomas K. Flanagan Executive Vice 43 Director of SBAM and SBI
Salomon Brothers Asset President (1996-present); Former Vice President,
Management Inc. SBAM and SBI.
Seven World Trade
Center
New York, NY 10048
Lawrence H. Kaplan Executive Vice 39 Vice President and Chief Counsel, SBAM
Salomon Brothers Asset President and and Vice President, SBI
Management Inc. General Counsel (1995-present); Former Senior Vice
Seven World Trade President, Director and General
Center Counsel, Kidder Peabody Asset
New York, NY 10048 Management, Inc. and Kidder, Peabody &
Co.
Alan M. Mandel Treasurer 38 Vice President, SBAM and SBI
Salomon Brothers Asset (1995-present); Chief Financial
Management Inc. Officer, Hyperion Capital Management
Seven World Trade Inc. (1991-1994); Former Vice
Center President, Mitchell Hutchins Asset
New York, NY 10048 Management, Inc.
Tana E. Tselepis Secretary 60 Compliance Officer (1993-present),
Salomon Brothers Asset Senior Administrator (1989-1993), SBAM;
Management Inc. Administrator (1989-1993), SBAM;
Seven World Trade Senior Administrator, First Boston
Center Asset Management Corp. (1985-1989).
New York, NY 10048
- --------------
* Director who is an "interested person" of the Fund within the meaning of the 1940 Act.
</TABLE>
Directors who are not "interested persons" (as defined in the 1940 Act) of
the Investment Manager or the Investment Adviser are paid a fee of $5,000 per
year, plus $700 for every meeting of the Board attended, and are reimbursed for
travel and out-of-pocket expenses incurred in connection with meetings of the
Board of Directors.
The following table provides information concerning the compensation paid
during the fiscal year ended May 31, 1996, to each director of the Fund and
other Funds advised by the Investment Manager or the Investment Adviser. Each of
the directors listed below are members of the Audit Committee of the Fund and
audit and other committees of certain other investment companies advised by
Advantage and/or SBAM, and, accordingly, the amounts provided in the table
include compensation for service on such committees. The Fund does not provide
any pension or retirement benefits to directors. In addition, no remuneration is
paid by the Fund to Messrs. Rappaport and Hyland who, as officers of Advantage
Advisers and SBAM, respectively, are interested persons as defined under the
1940 Act.
30
<PAGE>
<TABLE>
<CAPTION>
Total
Compensation Total Total
from Other Compensation Compensation
Funds from Other from Other
-Advised by Funds Funds
Aggregate Advantage and Advised by Advised by Total
Compensation SBAM Advantage SBAM Compensation
Name of Nominee from Fund Directorships(A) Directorships(A) Directorships(A) Directorships(A)
- ----------------------- ----------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Charles F. Barber ..... $7,100 $38,500 (5) $20,650 (2) $61,030 (7) $127,280(15)
Leslie H. Gelb ........ $7,100 $20,300 (3) $25,250 (3) $ 0 $ 52,650 (7)
Jeswald W. Salacuse ... $7,800 $22,400 (3) $22,950 (3) $16,550 (3) $ 69,700(10)
Dr. Riodan Roett ...... $6,550 $18,650 (3) $ 0 $14,700 (3) $ 39,900 (7)
</TABLE>
- --------------
(A) The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
The officers of the Fund conduct and supervise the daily business operations
of the Fund, while the directors, in addition to their functions set forth
elsewhere under "Management of the Fund," review such actions and decide on
general policy.
The Fund's Board of Directors has an Executive Committee, which may exercise
the powers of the Board to conduct the current and ordinary business of the Fund
while the Board is not in session. The current members of the Executive
Committee are Messrs. Hyland and Rappaport and any one of the directors who is
not an interested person of the Fund. The Fund also has an Audit Committee
composed currently of Messrs. Barber, Gelb, Roett and Salacuse.
The Board of Directors is divided into three classes, having three-year
terms that expire at successive Annual Meetings of Stockholders. When the term
of each class of directors expires, directors are elected to a new three-year
term in that class. Under the Fund's Articles of Incorporation and the 1940 Act,
holders of shares of preferred stock (when and if issued) will be entitled to
elect two directors, and the remaining directors, subject to the provisions of
the 1940 Act and the Fund's Articles of Incorporation, will be elected by the
holders of Common Stock and preferred stock, if any, voting together as a single
class. When dividends are in arrears for two full years, such provisions permit
the holders of shares of preferred stock, if any, to elect the minimum number of
additional directors that when combined with the two directors elected by the
holders of shares of preferred stock would result in the election of a majority
of the directors by the holders of shares of preferred stock. Under the 1940
Act, the terms of senior securities consisting of debt may provide the right to
elect directors in certain circumstances.
The Articles of Incorporation and By-Laws of the Fund provide that the Fund
will indemnify its directors and officers and may indemnify employees or agents
of the Fund against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the Fund
to the fullest extent permitted by law. In addition, the Fund's Articles of
Incorporation provide that the Fund's directors and officers will not be liable
to shareholders for money damages, except in limited instances. However, nothing
in the Articles of Incorporation or By-Laws of the Fund protects or indemnifies
a director, officer, employee or agent against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
At August 31, 1996, directors and officers of the Fund as a group owned
beneficially less than 1% of the outstanding shares of the Fund. No person owned
of record, or to the knowledge of management owned beneficially, more than 5% of
the Fund's outstanding shares at that date, except that Cede & Co., a nominee
for participants in Depository Trust Company, held of record 20,311,880 shares,
equal to 93% of the outstanding shares of the Fund.
Investment Manager and Investment Adviser
The Investment Manager is Advantage Advisers, Inc., and the Investment
Adviser is Salomon Brothers Asset Management Inc. Pursuant to the Management
Agreement between the Fund and the Investment Manager, the Investment Manager
supervises the Fund's investment program, including advising and consulting with
the Investment Adviser regarding the Fund's overall investment strategy and
advising the Fund and the Investment Adviser with respect to all matters
relating to the Fund's use of leveraging techniques, including the extent and
timing of the Fund's use of such techniques. In addition, the Investment Manager
consults with the Investment Adviser on a regular basis regarding the Investment
Adviser's decisions concerning the purchase, sale or holding of particular
securities. The Investment Manager also provides the Investment Adviser with
access on a continuous
31
<PAGE>
basis to economic, financial and political information, research and assistance
concerning emerging market countries and, as appropriate, will be involved in
the process of emerging market country selection. The Investment Manager pays
the reasonable salaries and expenses of such of the Fund's officers and
employees and any fees and expenses of such of the Fund's directors who are
directors, officers or employees of the Investment Manager, except that the Fund
bears travel expenses or an appropriate portion thereof of directors and
officers of the Fund who are directors, officers or employees of the Investment
Manager to the extent that such expenses relate to attendance at meetings of the
Board of Directors or any committees thereof.
Pursuant to an investment advisory and administration agreement (the
"Advisory Agreement") among the Investment Manager, the Investment Adviser and
the Fund (but only with respect to certain provisions), the Investment Adviser
acts as the Fund's investment adviser and administrator and is responsible on a
day-to-day basis for investing the Fund's portfolio in accordance with its
investment objectives and policies. The Investment Adviser has discretion over
investment decisions for the Fund and, in that connection, places purchase and
sale orders for the Fund's portfolio securities. In addition, the Investment
Adviser makes available research and statistical data to the Fund. The
Investment Adviser is responsible for day-to-day administration of the Fund,
matters related to the corporate existence of the Fund, provision of office
space to the Fund and clerical services relating to the Fund's operations,
maintenance of the Fund's books and records and preparation of reports. The
Investment Adviser pays the reasonable salaries and expenses of such of the
Fund's officers and employees and any fees and expenses of such of the Fund's
directors who are directors, officers or employees of the Investment Adviser,
except that the Fund bears travel expenses or an appropriate portion thereof of
directors and officers of the Fund who are directors, officers or employees of
the Investment Adviser to the extent that such expenses relate to attendance at
meetings of the Board of Directors or any committees thereof. The Investment
Adviser has, at its own expense and with the Fund's consent, subcontracted the
performance of certain fund accounting services to Brown Brothers Harriman &
Co., which maintains certain financial data and accounting records of the Fund
and is responsible for calculation of the Fund's net asset value per share.
Peter J. Wilby, Executive Vice President of the Fund, is primarily
responsible for the day-to-day management of the Fund's portfolio. Mr. Wilby,
who joined SBAM in 1989, has been a Managing Director of SBAM and SBI since
January 1996. He is responsible for SBAM's investment company and institutional
portfolios that invest in high yield foreign sovereign debt securities and high
yield U.S. corporate debt securities. Mr. Wilby has managed the Fund's portfolio
since the inception of the Fund.
Investment Manager. The Investment Manager is a subsidiary of Oppenheimer &
Co., Inc. Oppenheimer & Co., Inc., has been engaged in the management of
investment funds for more than 35 years. As of June 30, 1996, total assets under
management by Oppenheimer & Co., Inc. and its affiliates were approximately $50
billion for investment company, corporate, pension, profit-sharing and other
accounts. The Investment Manager serves as investment adviser for 12 registered
investment companies. The Investment Manager is a registered investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). The
business address of the Investment Manager is Oppenheimer Tower, World Financial
Center, New York, New York 10281.
Investment Adviser. The Investment Adviser was incorporated in 1987 and is
an indirect, wholly-owned subsidiary of Salomon Inc, the parent of Salomon
Brothers Inc ("SBI"). SBI is one of the largest international investment houses
in the world, with offices and affiliates in 15 countries. The Investment
Adviser is a registered investment adviser under the Advisers Act. The business
address of the Investment Adviser is Seven World Trade Center, New York, New
York 10048.
The Investment Adviser's professional staff is comprised of individuals with
extensive experience in the securities and investment industry in both portfolio
and securities analysis. These individuals have been innovators in developing
and managing funds for U.S. and non-U.S. investors. In addition, the Investment
Adviser's staff has access to the quantitative tools and research capabilities
of SBI and its affiliates. The Investment Adviser provides a broad range of
fixed income and equity investment advisory services for its individual and
institutional clients located around the world, and provides investment advisory
services for 15 registered investment companies (including portfolios thereof).
The Investment Adviser is a wholly-owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn a wholly-owned subsidiary of Salomon Inc.
Compensation and Expenses
As compensation for its services, the Investment Manager receives from the
Fund monthly fees at an annual rate of 1.20% of the Fund's average weekly net
assets and the Investment Adviser receives from the Investment Manager monthly
fees at an annual rate of 0.70% of the Fund's average weekly net assets. For the
fiscal year, ended May 31,
32
<PAGE>
1996 and May 31, 1995, and for the fiscal period ended May 31, 1994, the
Investment Manager received $3,108,547, $2,866,176 and $3,550,499, respectively,
of which $1,813,526, $1,672,127 and $2,071,361 was remitted to the Investment
Adviser. The Fund pays or causes to be paid all of its expenses, except for the
expenses borne by the Investment Manager and the Investment Adviser pursuant to
the Management Agreement and the Advisory Agreement, respectively, including,
among other things: expenses for legal, accounting and auditing services; taxes
and governmental fees; dues and expenses incurred in connection with membership
in investment company organizations; fees and expenses incurred in connection
with listing the Fund's shares on any stock exchange; expenses of leverage;
costs of printing and distributing shareholder reports, proxy materials,
prospectuses, stock certificates and distributions of dividends; charges of the
Fund's custodians, sub-custodians, registrars, transfer agents, dividend
disbursing agents and dividend reinvestment plan agents; payment for portfolio
pricing services to a pricing agent, if any; registration and filing fees of the
Commission; expenses of registering or qualifying securities of the Fund for
sale in the various states; freight and other charges in connection with the
shipment of the Fund's portfolio securities; fees and expenses of non-interested
directors; salaries of shareholder relations personnel; costs of shareholders
meetings; the fees of any rating agencies retained to rate any preferred stock
or debt securities issued by the Fund; insurance; interest; brokerage costs; and
litigation and other extraordinary or non-recurring expenses.
For the fiscal years ended May 31, 1996 and 1995, and for the fiscal period
ended May 31, 1994, the Fund's total expenses, stated as a percentage of net
assets, were 4.21%, 4.41% and 2.40%, respectively.
Duration and Termination; Non-Exclusive Services
Unless earlier terminated as described below, each of the Management
Agreement and the Advisory Agreement remains in effect from year to year if
approved annually (i) by a majority of the non-interested directors of the Fund
and (ii) by the Board of Directors of the Fund or by a majority of the
outstanding voting securities of the Fund. The Management Agreement may be
terminated without penalty on 60 days' written notice by either party thereto or
by vote of a majority of the outstanding voting securities of the Fund and will
terminate in the event it is assigned (as defined in the 1940 Act). The Advisory
Agreement may be terminated without penalty on 60 days' written notice by the
Fund or the Investment Adviser or by vote of a majority of the outstanding
voting securities of the Fund and will terminate in the event it is assigned (as
defined in the 1940 Act).
The services of the Investment Manager and the Investment Adviser are not
deemed to be exclusive, and nothing in the relevant service agreements prevents
any of them or their affiliates from providing similar services to other
investment companies and other clients (whether or not their investment
objectives and policies are similar to those of the Fund) or from engaging in
other activities.
PORTFOLIO TRANSACTIONS
The Fund has no obligation to deal with any brokers or dealers in the
execution of transactions in portfolio securities. Subject to policy established
by the Fund's Board of Directors, the Investment Adviser is primarily
responsible for the Fund's portfolio decisions and the placing of the Fund's
portfolio transactions.
Debt securities are normally purchased or sold from or to issuers directly
or to dealers serving as market makers for the securities at a net price, which
may include dealer spreads and underwriting commissions. In placing orders, it
is the policy of the Fund to obtain the best results taking into account the
general execution and operational facilities of the broker or dealer, the type
of transaction involved and other factors such as the risk of the broker or
dealer in positioning the securities involved. The purchase by the Fund of
Participations or Assignments may be pursuant to privately negotiated
transactions pursuant to which the Fund may be required to pay fees to the
seller or forego a portion of payments in respect of the Participation or
Assignment. While the Investment Adviser generally seeks the best price in
placing its orders, the Fund may not necessarily pay the lowest price available.
Subject to seeking the best price and execution, securities firms which provide
supplemental research to the Investment Adviser may receive orders for
transactions by the Fund. Information so received will be in addition to and not
in lieu of the services required to be performed by the Investment Adviser under
the Advisory Agreement, and the expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information.
Affiliated persons (as such term is defined in the 1940 Act) of the Fund, or
affiliated persons of such persons, may from time to time be selected to perform
brokerage services for the Fund, subject to the considerations discussed above,
but are prohibited by the 1940 Act from dealing with the Fund as principal in
the purchase or sale of securities. In order for such an affiliated person to be
permitted to effect any portfolio transactions for the Fund, the commissions,
fees or other remuneration received by such affiliated person must be reasonable
and fair compared
33
<PAGE>
to the commissions, fees or other remuneration received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
This standard would allow such an affiliated person to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction. The Fund is prohibited by the 1940 Act
from purchasing securities in offerings in which Oppenheimer & Co., Inc. or
Salomon Brothers Inc or any of their respective affiliates acts as an
underwriter unless certain conditions established under the 1940 Act are
satisfied.
Investment decisions for the Fund are made independently from those for
other funds and accounts advised or managed by the Investment Adviser. Such
other funds and accounts may also invest in the same securities as the Fund. If
those funds or accounts are prepared to invest in, or desire to dispose of, the
same security at the same time as the Fund, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Fund or the price paid or received by the Fund. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security.
Although the Advisory Agreement contains no restrictions on portfolio
turnover, it is not the Fund's policy to engage in transactions with the
objective of seeking profits from short-term trading. It is expected that the
annual portfolio turnover rate of the Fund will not exceed 100%. The portfolio
turnover rate is calculated by dividing the lesser of sales or purchases of
portfolio securities by the average monthly value of the Fund's portfolio
securities. For purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less.
The Fund's portfolio turnover rates for the fiscal periods ended May 31,
1994, 1995, and 1996, were 23.15%, 58.16% and 93.50%, respectively. For the
fiscal periods ended May 31, 1994, 1995, and 1996, the Fund paid no brokerage
commissions for the execution of portfolio transactions.
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Fund distributes quarterly to shareholders substantially all of its net
investment income, and distributes any net realized capital gains at least
annually. Net investment income for this purpose is income other than net
realized long- and short-term capital gains net of expenses. From and after the
leveraging of the Fund, quarterly distributions to holders of Common Stock will
consist of net investment income remaining after the payment of dividends or
interest on any outstanding leverage. For information relating to the potential
impact of leverage on the distributions made by the Fund to holders of Common
Stock. See "Additional Investment Activities--Leverage."
Pursuant to the Plan, unless the Fund declares a dividend or distribution
payable only in cash, shareholders whose shares of Common Stock are registered
in their own names are deemed to have elected to have all distributions
automatically reinvested by American Stock Transfer & Trust Company (the "Plan
Agent") in Fund shares pursuant to the Plan, unless such shareholders elect to
receive distributions in cash. Shareholders who elect to receive distributions
in cash receive all distributions in cash paid by check in dollars mailed
directly to the shareholder by American Stock Transfer & Trust Company, as
dividend paying agent. Holders of Common Stock who do not wish to have
distributions automatically reinvested should notify the Plan Agent at the
address below. In the case of shareholders, such as banks, brokers or nominees,
that hold shares for others who are beneficial owners, the Plan Agent
administers the Plan on the basis of the number of shares certified from time to
time by the shareholders as representing the total amount registered in such
shareholders' names and held for the account of beneficial owners that have not
elected to receive distributions in cash. Investors that own shares registered
in the name of a bank, broker-dealer or other nominee should consult with such
nominee as to participation in the Plan through such nominee, and may be
required to have their shares registered in their own names in order to
participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Fund declares a dividend or determines to make a capital gain
distribution, the Plan Agent will, as agent for the participants, receive the
cash payment and use it to buy the Fund's Common Stock in the open market, on
the NYSE or elsewhere, for the participants' accounts.
34
<PAGE>
If, on the fourth NYSE trading day (a "Trading Day") preceding the payment
date for the dividend or distribution (the "Determination Date"), the market
price per share of Common Stock equals or exceeds the net asset value per share
of Common Stock on that date (such condition, a "Market Premium"), the Plan
Agent will receive the dividend or distribution in newly issued shares of Common
Stock (the "New Shares") of the Fund on behalf of Participants. If, on the
Determination Date, the net asset value per share of Common Stock exceeds the
market price per share of Common Stock (such condition, a "Market Discount"),
the Plan Agent will purchase shares of Common Stock in the open market.
Purchases made by the Plan Agent will be made as soon as practicable commencing
on the Trading Day following the Determination Date and terminating no later
than 30 days after the dividend or distribution payment date except where
temporary curtailment or suspension of purchase is necessary to comply with
applicable provisions of federal securities law; provided, however, that such
purchases will, in any event, terminate on the earlier of (a) 60 days after the
dividend or distribution payment date or (b) the Trading Day prior to the
"ex-dividend" date next succeeding the dividend or distribution payment date (in
either event, "Mandatory Termination"). If (i) the Plan Agent has not invested
the full dividend amount in open-market purchases by the Mandatory Termination
or (ii) a market discount shifts to a market premium during the purchase period,
then the Plan Agent will cease making open-market purchases and will receive the
uninvested portion of the dividend amount in New Shares (x) in the case of (i)
above, at the close of business on the date the Mandatory Termination date or
(y) in the case of (ii) above, at the close of business on the date such shift
occurs; but in no event prior to the payment date for the dividend or
distribution.
In the event that all or part of a dividend or distribution amount is to be
paid in New Shares, such New Shares will be issued to Participants in accordance
with the following formula: (i) if, on the valuation date, the net asset value
per share of Common Stock is less than or equal to the market price per share,
then the New Shares will be valued at net asset value per share of Common Stock
on the valuation date; provided, however, that if the net asset value is less
than 95% of the market price on the valuation date, then such New Shares will be
issued at 95% of the market price and (ii) if, on the valuation date, the net
asset value per share of Common Stock is greater than the market price per share
of Common Stock, then the New Shares will be issued at the market price on the
valuation date. The valuation date will be the dividend or distribution payment
date, except that with respect to New Shares issued pursuant to a Mandatory
Termination, the valuation date will be the date such New Shares are issued. If
a date that would otherwise be a valuation date is not a Trading Day, the
valuation date will be the next preceding Trading Day.
Participants have the option of making additional cash payments to the Plan
Agent, monthly, in a minimum amount of $250, for investment in the Fund's Common
Stock. The Plan Agent uses all such funds received from participants to purchase
Fund shares in the open market on or about the first business day of each month.
To avoid unnecessary cash accumulations, and also to allow ample time for
receipt and processing by the Plan Agent, participants should send in voluntary
cash payments to be received by the Plan Agent approximately ten days before an
applicable purchase date specified above. A participant may withdraw a voluntary
cash payment by written notice, if the notice is received by the Plan Agent not
less than 48 hours before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in the name of the
participant, and each shareholder's proxy will include those shares purchased
pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions or voluntary cash payments. The Plan Agent's fees for the
reinvestment of dividends and capital gains distributions and voluntary cash
payments are paid by the Fund. However, each participant pays a pro-rata share
of brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of dividends and distributions and
voluntary cash payments made by the participant. Brokerage charges for
purchasing small amounts of stock for individual accounts through the Plan are
generally less than the usual brokerage charges for such transactions because
the Plan Agent is purchasing stock for all participants in blocks and prorating
the lower commission thus attainable.
The receipt of dividends and distributions under the Plan does not relieve
participants of any income tax which may be payable on such dividends or
distributions. See "Taxation--Shareholders."
The Fund and the Plan Agent reserve the right to terminate the Plan as
applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the termination sent to members of the Plan at
least 30 days before the record date for such dividend or distribution. The Plan
also may be amended by the Fund or the Plan Agent, but (except when necessary or
appropriate to comply with applicable law, rules or policies of a
35
<PAGE>
regulatory authority) only by at least 30 days' written notice to participants
in the Plan. All correspondence concerning the Plan should be directed to the
Plan Agent at 40 Wall Street, 46th Floor, New York, New York 10005.
TAXATION
The following is a general summary of certain United States federal income
tax considerations affecting the Fund and United States and foreign shareholders
and, except as otherwise indicated, reflects provisions of the Code as of the
date of this Prospectus. No attempt is made to present a detailed explanation of
all federal, state, local and foreign income tax considerations, and this
discussion is not intended as a substitute for careful tax planning.
Accordingly, potential investors are urged to consult their own tax advisors
regarding an investment in the Fund.
The Fund
The Fund intends to qualify and elect to be treated as a regulated
investment company for federal income tax purposes under Subchapter M of the
Code. In order to so qualify, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to loans of securities, gains from the sale or other
disposition of stock or securities, or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
currencies (including, but not limited to, gains from options, futures or
forward contracts); (b) derive in each taxable year less than 30% of its gross
income from the sale or other disposition of any of the following that are held
for less than three months (the "30% limitation"): (i) stock or securities, (ii)
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies), or (iii) foreign currencies (or foreign
currency options, futures or forward contracts) that are not directly related to
its principal business of investing in stock or securities (or options and
futures with respect to stocks or securities); and (c) diversify its holdings so
that, at the end of each quarter of each taxable year, (i) at least 50% of the
value of the Fund's assets is represented by cash, cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities which, with respect to any one issuer, do not represent more than 5%
of the value of the Fund's assets nor more than 10% of the voting securities of
such issuer, and (ii) not more than 25% of the value of the Fund's assets is
invested in the securities of any issuer (other than U.S. Government securities
or the securities of other regulated investment companies) or of any two or more
issuers that the Fund controls and that are engaged in the same, similar or
related trades or businesses.
If the Fund qualifies as a regulated investment company and distributes to
its shareholders at least 90% of its net investment income (i.e., its investment
company taxable income, as that term is defined in the Code, determined without
regard to the deduction for dividends paid), then the Fund will not be subject
to federal income tax on the net investment income and "net capital gain" (the
excess of the Fund's net long-term capital gains over net short-term capital
losses) that it distributes. The Fund, however, would be subject to corporate
income tax (currently at a rate of 35%) on any undistributed net investment
income and net capital gain. The Fund currently expects to distribute any such
amounts annually. In the event the Fund retains amounts attributable to its net
capital gain, the Fund expects to designate such retained amounts as
undistributed capital gains in a notice to its shareholders who (i) will be
required to include in income for United States federal income tax purposes, as
long-term capital gains, their proportionate shares of the undistributed amount,
(ii) will be entitled to credit their proportionate shares of the tax paid by
the Fund on the undistributed amount against their United States federal income
tax liabilities and to claim refunds to the extent such credits exceed their
liabilities and (iii) will be entitled to increase their tax basis, for United
States federal income tax purposes, in their shares by an amount currently equal
to 65% of the amount of undistributed capital gains included in the
shareholder's income.
If in any year the Fund should fail to qualify as a regulated investment
company, the Fund would be subject to federal tax in the same manner as an
ordinary corporation, and distributions to shareholders would be taxable to such
holders as ordinary income to the extent of the earnings and profits of the
Fund. Distributions in excess of earnings and profits will be treated as a
tax-free return of capital, to the extent of a holder's basis in its shares, and
any excess, as a long or short-term capital gain. In addition, the Fund will be
subject to a nondeductible 4% excise tax on the amount by which the aggregate
income it distributes in any calendar year is less than the sum of: (a) 98% of
the Fund's ordinary income for such calendar year; (b) 98% of the excess of
capital gains over capital losses (both long- and short-term) for the one-year
period ending on October 31 of each year; and (c) 100% of the undistributed
ordinary income and gains from prior years. For this purpose, any income or gain
retained by the Fund subject to corporate income tax will be considered to have
been distributed by year-end.
The Internal Revenue Service ("IRS") has taken the position in a revenue
ruling that a regulated investment company that has two or more classes of
shares must designate distributions made to each class in any year as
36
<PAGE>
consisting of no more than such class's proportionate share of each type of
income for each tax year based on the total dividends distributed to each class
for such year, including income qualifying for the corporate dividends-received
deduction and net capital gains. Consequently, when both Common Stock and
preferred stock are outstanding, the Fund intends to allocate, to the fullest
extent practicable, income distributed to the classes as consisting of
particular types of income in accordance with the class's proportionate shares
of such income. Thus, the Fund will designate dividends qualifying for the
corporate dividends-received deduction, income not qualifying for the
dividends-received deduction and net capital gain income in a manner that
allocates such income between the holders of Common Stock and preferred stock in
proportion to the total distributions made to each class during the taxable
year, or otherwise as required by applicable law.
The Fund intends to distribute sufficient income so as to avoid both
corporate income tax and the excise tax.
If at any time when leverage is outstanding, the Fund does not meet the
asset coverage requirements of the 1940 Act or of any rating agency that has
rated such leverage, the Fund will be required to suspend distributions to
holders of Common Stock until the asset coverage is restored. See "Additional
Investment Activities--Leverage." This may prevent the Fund from distributing at
least 90% of its investment company taxable income, and may therefore jeopardize
the Fund's qualification for taxation as a regulated investment company or cause
the Fund to incur a tax liability or a non-deductible 4% excise tax on the
undistributed taxable income (including gain), or both. Upon any failure to meet
the asset coverage requirements of the 1940 Act, or imposed by a rating agency,
the Fund may, in its sole discretion, purchase or redeem any preferred stock or
short-term debt securities in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its shareholders of
failing to qualify as a regulated investment company. There can be no assurance,
however, that any such redemption would achieve such objectives.
In an attempt to reduce or eliminate the potential for a market value
discount from net asset value, the Fund may repurchase its shares. The Fund may
liquidate portfolio securities in order to purchase shares and the securities
sold may include securities held by the Fund for less than three months. Because
of the 30% limitation described above, any gains recognized on the sale of such
securities could limit the Fund's ability to sell at a gain other securities
held for less than three months.
The Fund may engage in various hedging transactions. See "Additional
Investment Activities--Derivatives." Such transactions will be subject to
special provisions of the Code that, among other things, may affect the
character of gains and losses realized by the Fund (that is, may affect whether
gains or losses are ordinary or capital), accelerate recognition of income to
the Fund and defer recognition of certain of the Fund's losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. In addition, these provisions (1) will require the Fund to
mark-to-market certain types of positions in its portfolio (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 extent to which the Fund may be able to use such hedging
techniques and continue to qualify as a regulated investment company may be
limited by the 30% limitation discussed above. The Fund intends to monitor its
transactions, make the appropriate tax elections and make the appropriate
entries in its books and records when it acquires any forward contracts, option,
futures contract, or hedged investment in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
The Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-kind
bonds, obligations such as certain Brady Bonds or other obligations having
original issue discount (i.e., an amount equal to the excess of the stated
redemption price of the security at maturity over its issue price), or market
discount (i.e., an amount equal to the excess of the stated redemption price of
the security over the basis of such bond immediately after it was acquired) if
the Fund elects to accrue market discount on a current basis. In addition,
income may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
the Fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding cash
distribution to the Fund, the Fund may be required to dispose of other
securities to be able to make distributions to its investors. The extent to
which the Fund may liquidate securities at a gain may be limited by the 30%
limitation discussed above.
The Fund will maintain accounts and calculate income by reference to the
U.S. dollar for U.S. federal income tax purposes. Investments generally will be
maintained and income therefrom calculated by reference to certain foreign
currencies and such calculations will not necessarily correspond to the Fund's
distributable income and capital gains for U.S. federal income tax purposes as a
result of fluctuations in currency exchange rates.
37
<PAGE>
Furthermore, exchange control regulations may restrict the ability of the
Fund to repatriate investment income or the proceeds of sales of securities.
These restrictions and limitations may limit the Fund's ability to make
sufficient distributions to satisfy the 90% distribution requirement and avoid
the 4% excise tax.
The Fund's taxable income will in most cases be determined on the basis of
reports made to the Fund by the issuer of the securities in which the Fund
invests. The tax treatment of certain securities in which the Fund may invest is
not free from doubt and it is possible that an IRS examination of the issuers of
such securities or of the Fund could result in adjustments to the income of the
Fund. An upward adjustment by the IRS to the income of the Fund may result in
the failure of the Fund to satisfy the 90% distribution requirement described in
the Prospectus necessary for the Fund to maintain its status as a regulated
investment company under the Code. In such event, the Fund may be able to make a
"deficiency dividend" distribution to its shareholders with respect to the year
under examination to satisfy this requirement. Such distribution will be taxable
as a dividend to the shareholders receiving the distribution (whether or not the
Fund has sufficient current or accumulated earnings and profits for the year in
which such distribution is made). A downward adjustment by the IRS to the income
of the Fund may cause a portion of the previously made distribution with respect
to the year under examination not to be treated as a dividend. In such event,
the portion of distributions to each shareholder not treated as a dividend would
be recharacterized as a return of capital and reduce the shareholder's basis in
the shares held at the time of the previously made distributions. Accordingly,
this reduction in basis could cause a shareholder to recognize additional gain
upon the sale of such shareholder's shares.
Certain of the Fund's investments in Structured Investments may, for federal
income tax purposes, constitute investments in shares of foreign corporations.
If the Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" ("PFICs"), the Fund may be subject to
U.S. federal income tax on a portion of any "excess distribution" or gain from
the disposition of the shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either the Fund or its shareholders with respect to
deferred taxes arising from the distributions or gains. If the Fund were to
invest in a PFIC and (if the Fund received the necessary information available
from the PFIC, which may be difficult to obtain) elected to treat the PFIC as a
"qualified electing fund" (a "QEF") under the Code, in lieu of the foregoing
requirements, the Fund might be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90% and
calendar year distribution requirements described above.
In the case of PFIC stock owned by a regulated investment company, proposed
Treasury regulations, not currently in effect, provide a mark-to-market election
for regulated investment companies that would permit a regulated investment
company to elect to mark-to-market stock in the PFIC annually and thereby avoid
the need for the company to make a QEF election. These proposed regulations
would be effective for taxable years ending after promulgation of the
regulations as final regulations.
Shareholders
Distributions. Distributions to shareholders of net investment income will
be taxable as ordinary income whether paid in cash or reinvested in additional
shares. It is not anticipated that such dividends, if any, will qualify for the
dividends received deduction generally available for corporate shareholders
under the Code. Shareholders receiving distributions from the Fund in the form
of additional shares pursuant to the Plan will be treated for federal income tax
purposes as receiving a distribution in an amount equal to the fair market value
of the additional shares on the date of such a distribution.
Distributions to shareholders of net capital gain that are designated by the
Fund as "capital gains dividends" will be taxable as long-term capital gains,
whether paid in cash or reinvested in additional shares, regardless of how long
the shares have been held by such shareholders. These distributions will not be
eligible for the dividends received deduction. The current maximum federal
income tax rate imposed on individuals with respect to long-term capital gains
is 28%, whereas the current maximum federal income tax rate imposed on
individuals with respect to ordinary income (and short-term capital gains, which
are taxed at the same rates as ordinary income) is 39.6%. With respect to
corporate taxpayers, long-term capital gains are currently taxed at the same
federal income tax rates as ordinary income and short-term capital gains.
Investors considering buying shares just prior to a dividend or capital gain
distribution should be aware that, although the price of shares purchased at
that time may reflect the amount of the forthcoming distribution, those who
purchase just prior to a distribution will receive a distribution that will be
taxable to them.
38
<PAGE>
Dividends and distributions by the Fund are generally taxable to the
shareholders at the time the dividend or distribution is made (even if paid or
reinvested in additional shares). Any dividend declared by the Fund in October,
November or December of any calendar year, however, which is payable to
shareholders of record on a specified date in such a month and which is not paid
on or before December 31 of such year will be treated as received by the
shareholders as of December 31 of such year, provided that the dividend is paid
during January of the following year. Any distribution in excess of the Fund's
net investment income and net capital gains would first reduce a shareholder's
basis in his shares and, after the shareholder's basis is reduced to zero, will
constitute capital gains to a shareholder who holds shares as capital assets.
A notice detailing the tax status of dividends and distributions paid by the
Fund will be mailed annually to the shareholders of the Fund.
Dispositions and Repurchases. Gain or loss, if any, recognized on the sale
or other disposition of shares of the Fund will be taxed as capital gain or loss
if the shares are capital assets in the shareholder's hands. Generally, a
shareholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. If a shareholder sells or otherwise disposes
of a share of the Fund before holding it for more than six months, any loss on
the sale or other disposition of such share shall be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder with respect to such share. A loss realized on a sale or exchange of
shares may be disallowed if other shares are acquired (whether under the Plan or
otherwise) within a 61-day period beginning 30 days before and ending 30 days
after the date that the shares are disposed of. If disallowed, the loss will be
reflected by an upward adjustment to the basis of the shares acquired.
A repurchase by the Fund of shares generally will be treated as a sale of
the shares by a shareholder provided that after the repurchase the shareholder
does not own, either directly or by attribution under Section 318 of the Code,
any shares. If after a repurchase a shareholder continues to own, directly or by
attribution, any shares, it is possible that any amounts received in the
repurchase by such shareholder will be taxable as a dividend to such
shareholder, and there is a risk that shareholders who do not have any of their
shares repurchased would be treated as having received a dividend distribution
as a result of their proportionate increase in the ownership of the Fund.
Foreign Taxes. The Fund may be subject to certain taxes imposed by foreign
countries with respect to dividends, capital gains and interest income. If the
Fund qualifies as a regulated investment company, if certain distribution
requirements are satisfied and if more than 50% in value of the Fund's total
assets at the close of any taxable year consists of stocks or securities of
foreign corporations, which for this purpose should include obligations issued
by foreign governmental issuers, the Fund may elect to treat any foreign income
taxes paid by it that can be treated as income taxes under U.S. income tax
regulations as paid by its shareholders. The Fund intends to make such an
election for taxable years in which it qualifies for the election. For any year
that the Fund makes such an election, an amount equal to the foreign income
taxes paid by the Fund that can be treated as income taxes under U.S. income tax
principles will be included in the income of its shareholders and each
shareholder will be entitled (subject to certain limitations) to credit the
amount included in his income against his U.S. tax liabilities, if any, or to
deduct such amount from his U.S. taxable income, if any. Shortly after any year
for which it makes such an election, the Fund will report to its shareholders,
in writing, the amount per share of such foreign income taxes that must be
included in each shareholder's gross income and the amount that will be
available for deductions or credit. In general, a shareholder may elect each
year whether to claim deductions or credits for foreign taxes. No deductions for
foreign taxes may be claimed, however, by non-corporate shareholders (including
certain foreign shareholders as described below) who do not itemize deductions.
If a shareholder elects to credit foreign taxes, the amount of credit that may
be claimed in any year may not exceed the same proportion of the U.S. tax
against which such credit is taken that the shareholder's taxable income from
foreign sources (but not in excess of the shareholder's entire taxable income)
bears to his entire taxable income. If the Fund makes this election, a
shareholder will be treated as receiving foreign source income in an amount
equal to the sum of his proportionate share of foreign income taxes paid by the
Fund and the portion of dividends paid by the Fund representing income earned
from foreign sources. This limitation must be applied separately to certain
categories of income and the related foreign taxes. However, legislation has
recently been proposed which would eliminate the separate limitation provisions
as they apply to individuals.
Backup Withholding. The Fund may be required to withhold federal income tax
at a rate of 31% ("backup withholding") from dividends and redemption proceeds
paid to non-corporate shareholders. This tax may be withheld from dividends if
(i) the shareholder fails to furnish the Fund with the shareholder's correct
taxpayer identification number, (ii) the IRS notifies the Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (iii) when required to
do so, the shareholder fails to certify that he or she is not subject to backup
withholding. Redemption proceeds may be subject
39
<PAGE>
to withholding under the circumstances described in (i) above. Backup
withholding is not an additional tax. Any amounts withheld under the backup
withholding rules from payments made to a shareholder may be credited against
such shareholder's federal income tax liability.
Foreign Shareholders. Taxation of a shareholder who, as to the United
States, is a non-resident alien individual, foreign trust or estate, foreign
corporation or foreign partnership ("foreign shareholder") depends, in part, on
whether the shareholder's income from the Fund is "effectively connected" with a
U.S. trade or business carried on by the shareholder. If a shareholder is a
resident alien or if dividends or distributions from the Fund are effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
then dividends of net investment income, distributions of net capital gains and
gain realized upon the sale of shares of the Fund will be subject to U.S. income
tax at the rates applicable to U.S. citizens or domestic corporations.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by the foreign shareholder, (i) dividends of net
investment income will be subject to a 30% (or lower treaty rate) U.S. federal
withholding tax, and (ii) distributions of net capital gains and gains realized
upon the sale of shares of the Fund will not be subject to U.S. federal tax as
long as such foreign shareholder is not a non-resident alien individual who was
physically present in the United States for more than 183 days or more during
the taxable year. However, certain foreign shareholders may nonetheless be
subject to 31% backup withholding on distributions of net capital gains and
gross proceeds paid to them upon the sale of their shares of the Fund. See
"Backup Withholding."
Foreign shareholders may be subject to an increased United States tax on
their income resulting from the Fund's election to "pass through" amounts of
foreign taxes paid by the Fund but may not be able to claim a credit or
deduction with respect to the foreign taxes treated as having been paid by them.
See "Foreign Taxes."
Transfer by gift of shares of the Fund by a foreign shareholder who is a
non-resident alien individual will not be subject to U.S. federal gift tax, but
the value of shares of the Fund held by such a shareholder at his death will be
includible in such shareholder's gross estate for U.S. federal estate tax
purposes.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described in this
section. Shareholders may be required to provide appropriate documentation to
establish their entitlement to the benefits of such a treaty. Foreign investors
are advised to consult their own tax advisers with respect to (a) whether their
income from the Fund is or is not effectively connected with a U.S. trade or
business carried on by them, (b) whether they may claim the benefits of an
applicable tax treaty and (c) any other tax consequences to them of an
investment in the Fund.
Investors should consult their own tax advisors regarding specific questions
as to the federal, state, local and foreign tax consequence of ownership of
shares in the Fund.
NET ASSET VALUE
Net asset value is determined no less frequently than weekly, on the last
business day of each week and at such other times as the Board of Directors may
determine, by dividing the value of the net assets of the Fund (the value of its
assets less its liabilities including borrowings, exclusive of capital stock and
surplus, and less the liquidation value of any outstanding shares of preferred
stock, which is expected to equal the original purchase price per share plus any
accrued and unpaid dividends thereon, whether or not earned or declared) by the
total number of shares of Common Stock outstanding. In valuing the Fund's
assets, all securities for which market quotations are readily available are
valued (i) at the last sale price prior to the time of determination if there
was a sale on the date of determination, (ii) at the mean between the last
current bid and asked prices if there was no sales price on such date and bid
and asked quotations are available, and (iii) at the bid price if there was no
sales price on such date and only bid quotations are available. Publicly traded
government debt securities are typically traded internationally on the OTC
market, are valued at the mean between the last current bid and asked price as
at the close of business of that market. In instances where a price determined
above is deemed not to represent fair market value, the price is determined in
such manner as the Board of Directors may prescribe. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term investments having a
maturity of 60 days or less are valued at amortized cost, unless the Board of
Directors determines that such valuation does not constitute fair value.
Securities for which reliable quotations or pricing services are not readily
available and all other securities and assets are valued at fair value as
determined in good faith by, or under procedures established by, the Board of
Directors.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Common Stock
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock ($0.001 par value). All shares of Common Stock are equal as to dividends,
distributions and voting privileges. There are no conversion, preemptive or
other subscription rights. In the event of liquidation, each share of Common
Stock is entitled to its proportion of the Fund's assets after debts and
expenses, and payment of the liquidation preference of any preferred stock.
There are no cumulative voting rights for the election of directors.
The Fund has no present intention of offering additional shares of its
Common Stock. Other offerings of its Common Stock, if made, will require
approval of the Fund's Board of Directors. Any additional offering will be
subject to the requirements of the 1940 Act that shares of Common Stock may not
be sold at a price below the then current net asset value (exclusive of
underwriting discounts and commissions) except in connection with an offering to
existing shareholders or with the consent of a majority of the Fund's
outstanding Common Stock. The Board of Directors has authorized the officers of
the Fund in their discretion, subject to compliance with the 1940 Act and other
applicable law, to purchase in the open market up to 5% of the outstanding
Common Stock in the event that the Common Stock trades at a discount to net
asset value. There is no assurance that any such open market purchases will be
made and such authorization may be terminated at any time.
The following chart indicates the shares of the Common Stock outstanding as
of August 31, 1996:
Amount
Outstanding
Exclusive
Amount Held of Amount
by Held by
Registrant Registrant
Registrant or or for its or for its
Amount Title of Class for Authorized Own Account Own Account
- --------------------- -------------- ----------- ------------
Common Stock 100,000,000 0 21,857,134
Preferred Stock
The Fund's Articles of Incorporation provide that the Board of Directors may
classify or reclassify any unissued shares of capital stock into one or more
additional or other classes or series, with rights as determined by the Board of
Directors, by action by the Board of Directors without the approval of the
holders of Common Stock. Holders of Common Stock have no preemptive right to
purchase any shares of preferred stock that might be issued. No shares of
preferred stock are currently issued or outstanding.
Although the terms of any preferred stock, including its dividend rate,
liquidation preference and redemption provisions will be determined by the Board
of Directors (subject to applicable law and the Fund's Articles of
Incorporation), it is likely that the preferred stock will be structured to
carry a relatively short-term dividend rate reflecting interest rates on
short-term debt securities, by providing for the periodic redetermination of the
dividend rate at relatively short intervals through an auction, remarketing or
other procedure. The Fund also believes that it is likely that the liquidation
preference, voting rights and redemption provisions of the preferred stock will
be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of preferred
stock will be entitled to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus accrued and unpaid
dividends, whether or not declared) before any distribution of assets is made to
holders of Common Stock. After payment of the full amount of the liquidating
distribution to which they are entitled, the preferred stockholders will not be
entitled to any further participation in any distribution of assets by the Fund.
41
<PAGE>
Voting Rights. The 1940 Act requires that the holders of any preferred
stock, voting separately as a single class, have the right to elect at least two
directors at all times and, subject to the prior rights, if any, of the holders
of any other class of senior securities outstanding, to elect a majority of the
directors at any time two years' dividends on any preferred shares are unpaid.
The 1940 Act also requires that, in addition to any approval by stockholders
that might otherwise be required, the approval of the holders of a majority of
any outstanding preferred shares, voting separately as a class, would be
required to (a) adopt any plan of reorganization that would adversely affect the
preferred shares and (b) take any action requiring a vote of security holders
pursuant to Section 13(a) of the 1940 Act, including, among other things,
changes in the Fund's subclassification as a closed-end investment company or
changes in its fundamental investment restrictions. See "Description of Capital
Stock--Special Voting Provisions" concerning voting requirements for conversion
of the Fund to an open-end investment company and other matters. In addition, in
the discretion of the Board of Directors, subject to the 1940 Act, the terms of
any preferred stock may also provide for the vote of up to 75% of the preferred
stock, voting separately as a class, regarding certain transactions involving a
merger or sale of assets or conversion of the Fund to open-end status and other
matters. The Board of Directors presently intends that, except for the matters
discussed in the previous sentence and except as otherwise indicated in this
Prospectus and as otherwise required by applicable law, holders of shares of
preferred stock will have equal voting rights with holders of Common Stock (one
vote per share, unless otherwise required by the 1940 Act), and will vote
together with holders of Common Stock as a single class.
It is presently intended that in connection with the election of the Fund's
directors, on and after issuance of any preferred stock the holders of all
outstanding shares of preferred stock, voting as a separate class, would be
entitled to elect two directors of the Fund, and the remaining directors would
be elected by holders of Common Stock and preferred stock, voting together as a
single class. The Fund's By-Laws provide that the Board of Directors shall
consist of not less than two nor more than 12 directors, as may be determined
from time to time by vote of a majority of directors then in office.
The affirmative vote of the holders of a majority of the outstanding shares
of preferred stock, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of shares of
preferred stock so as to affect materially and adversely such preferences,
rights, or powers, or increase or decrease the number of shares of preferred
stock. The class vote of holders of preferred stock described above will in each
case be in addition to any other vote required to authorize the action in
question.
Redemption, Purchase and Sale of Preferred Stock by the Fund. The terms of
any preferred stock that is issued are expected to provide that it is redeemable
by the Fund in whole or in part at the original purchase price per share plus
accrued dividends per share, that the Fund may tender for or purchase shares of
preferred stock and that the Fund may subsequently resell any shares so tendered
for or purchased. Any redemption or purchase of shares of preferred stock by the
Fund will reduce the leverage applicable to shares of Common Stock, while any
resale of shares of preferred stock by the Fund will increase such leverage. See
"Additional Investment Activities--Leverage."
The discussion above describes the present intention of the Board of
Directors with respect to an offering of preferred stock if the Board elects to
utilize preferred stock in order to leverage the Fund's Common Stock. If the
Board of Directors determines to proceed with such an offering, the terms of the
preferred stock may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Articles of Incorporation. The
Board of Directors, without the approval of the holders of Common Stock, may
authorize an offering of preferred stock or may determine not to authorize such
an offering, and may fix the terms of the preferred stock to be offered.
Future Actions Relating to a Discount in the Price of the Fund's Shares of
Common Stock
Shares of closed-end investment companies frequently trade at discounts from
net asset value. The Fund cannot predict whether its shares of Common Stock will
trade above, at or below net asset value in the future. The market price of the
Fund's shares of Common Stock will be determined by, among other things, the
supply and demand for the Fund's shares, the Fund's investment performance and
investor perception of the Fund's overall attractiveness as an investment as
compared with alternative investments. If, at any time, shares of the Fund's
Common Stock publicly trade for a substantial period of time at a substantial
discount from the Fund's then current net asset value per share, the Fund's
Board of Directors will consider, at its next regularly scheduled meeting,
authorizing various actions designed to eliminate the discount. The actions
considered by the Board of Directors may include periodic repurchases of shares
or recommending to shareholders amendments to the Fund's Articles of
Incorporation to convert the Fund to an open-end investment company. The Board
of Directors will consider all relevant factors in determining whether to take
any such actions, including the effect of such actions on the Fund's status as a
regulated investment company under the Code and the availability of cash to
finance these repurchases in view of the
42
<PAGE>
restrictions on the Fund's ability to borrow. No assurance can be given that the
Fund will convert to an open-end investment company or that share repurchases
will be made or that, if made, they will reduce or eliminate market discount.
Should any such repurchases be made in the future, it is expected that they
would be made at prices at or below the current net asset value per share. Any
such repurchases would cause the Fund's net assets to decrease, which may have
the effect of increasing the Fund's expense ratio. The Fund may borrow money to
finance the repurchase of shares subject to the limitations described in this
Prospectus. Any interest on the borrowings will reduce the Fund's net income.
In the event that the Fund engages in financial leveraging, the asset
coverage requirements of the 1940 Act may restrict the Fund's ability to engage
in repurchases of its shares of Common Stock. With respect to senior securities
consisting of debt, such requirements provide that no purchases of shares may be
made by the Fund unless, at the time of the purchase, the senior securities
consisting of debt have an asset coverage of at least 300% after deducting the
amount of the purchase price. With respect to preferred stock, the applicable
asset coverage percentage is 200%. See "Additional Investment
Activities--Leverage."
In considering whether to recommend to shareholders the conversion of the
Fund to an open-end investment company, the Fund's Board of Directors would
consider a number of factors including whether the Fund's ability to operate in
accordance with its investment policies, such as its authority to invest in
illiquid securities, may be impaired as a result. In light of the position of
the Commission that illiquid securities may not exceed 15% of the total assets
of a registered open-end investment company, an attempt to convert the Fund to
such a company would have to take into account the percentage of such securities
in the Fund's portfolio at the time, and other factors. The Fund cannot predict
whether on this basis it would be able to effect any such conversion or whether
relief from the Commission's position, if sought, could be obtained. Under
certain circumstances, a shareholder vote may be required to authorize periodic
repurchases of the Fund's shares of Common Stock. In considering whether to
recommend to shareholders such authorization, the Board of Directors similarly
would consider a number of factors including limitations that may be placed on
the Fund's investment policies as a consequence of such repurchase policy.
Any amendment to the Fund's Articles of Incorporation that would convert the
Fund to an open-end investment company would require the approval of the holders
of the outstanding Common Stock and preferred stock voting together as a single
class, and of the holders of the Fund's shares of preferred stock voting as a
separate class. See "Description of Capital Stock--Preferred Stock" and
"Description of Capital Stock--Special Voting Provisions" for a discussion of
voting requirements applicable to conversion of the Fund to an open-end
investment company. If the Fund is converted to an open-end investment company,
it would be required to redeem all shares of preferred stock then outstanding
and repay all outstanding short-term debt, thus removing the special risks and
possible advantages and disadvantages associated with the use of leverage. An
open-end investment company may, however, engage in bank borrowing. In addition,
if the Fund converted to an open-end investment company, it could be required to
liquidate its portfolio investments to meet requests for redemption, and the
Common Stock would no longer be listed on the NYSE. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at the
net asset value, less such redemption charge, if any, as might be in effect at
the time of redemption.
Special Voting Provisions
The Fund has provisions in its Articles of Incorporation and By-Laws that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund, to cause it to engage in certain transactions or to
modify its structure. The Fund's Board of Directors is divided into three
classes, each with a term of three years, with one class of directors standing
for election in any given year. This provision could delay for up to two years
the replacement of a majority of the Board of Directors. A director may be
removed from office only for cause and only by a vote of the holders of at least
75% of the shares of the Fund entitled to be cast on the matter. The written
request by the holders of at least 10% of the shares of the Fund entitled to be
cast on such matter is required to call a meeting for the purpose of removing a
director.
The affirmative vote of 75% of the entire Board of Directors is required to
authorize the conversion of the Fund from a closed-end to an open-end investment
company. The conversion also requires the affirmative vote of the holders of 75%
of the votes entitled to be cast thereon by the shareholders of the Fund unless
it is approved by a vote of 75% of the Continuing Directors (as defined below),
in which event such conversion requires the approval of the holders of a
majority of the votes entitled to be cast thereon by the shareholders of the
Fund. A "Continuing Director" is any member of the Board of Directors of the
Fund who (i) is not a person or affiliate of a person who enters or proposes to
enter into a Business Combination (as defined below) with the Fund (an
"Interested Party") and
43
<PAGE>
(ii) who has been a member of the Board of Directors of the Fund for a period of
at least 12 months or is a successor of a Continuing Director who is
unaffiliated with an Interested Party and is recommended to succeed a Continuing
Director by a majority of the Continuing Directors then on the Board of
Directors of the Fund.
The affirmative votes of 75% of the entire Board of Directors and the
holders of 75% of the votes entitled to be cast thereon by the shareholders of
the Fund are required to authorize any of the following transactions:
(i) merger, consolidation or statutory share exchange of the Fund with or
into any other person;
(ii) issuance or transfer by the Fund (in one or a series of transactions in
any 12 month period) of any securities of the Fund to any person or entity for
cash, securities or other property (or combination thereof) having an aggregate
fair market value of $1,000,000 or more, excluding issuances or transfers of
debt securities of the Fund, sales of securities of the Fund in connection with
a public offering, issuances of securities of the Fund pursuant to a dividend
reinvestment plan adopted by the Fund, issuances of securities of the Fund upon
the exercise of any stock subscription rights distributed by the Fund and
portfolio transactions effected by the Fund in the ordinary course of its
business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other disposition
by the Fund (in one or a series of transactions in any 12 month period) to or
with any person or entity of any assets of the Fund having an aggregate fair
market value of $1,000,000 or more, except for portfolio transactions (including
pledges of portfolio securities in connection with borrowings) effected by the
Fund in the ordinary course of its business (transactions within clauses (i),
(ii) and (iii) above being known individually as a "Business Combination");
(iv) any proposal as to the voluntary liquidation or dissolution of the Fund
or an amendment to the Fund's Articles of Incorporation to terminate the Fund's
existence; or
(v) unless the 1940 Act or federal law requires a lesser vote, any
shareholder proposal as to specific investment decisions made or to be made with
respect to the Fund's assets as to which shareholder approval is required under
federal or Maryland law.
However, a 75% shareholder vote will not be required with respect to the
foregoing transactions (other than those set forth in (v) above) if they are
approved by a vote of 75% of the Continuing Directors and, in that case, the
lesser state law voting requirements, if any, will apply. See "Description of
Capital Stock--Preferred Stock." In addition, in the discretion of the Board of
Directors subject to the 1940 Act, the terms of any preferred stock may also
provide for the vote of up to 75% of the preferred stock, voting separately as a
class, with respect to some or all of the foregoing transactions and/or with
respect to the conversion of the Fund from a closed-end to an open-end
investment company.
The Fund's By-Laws contain provisions the effect of which is to prevent
matters, including nominations of directors, from being considered at a
shareholders' meeting where the Fund has not received notice of the matters at
least 60 days prior to the meeting (or 10 days following the date notice of such
meeting is given by the Fund if less than 70 days' notice of such meeting is
given by the Fund).
The Board of Directors has determined that the foregoing voting
requirements, which are generally greater than the minimum requirements under
Maryland law and the 1940 Act, are in the best interests of shareholders
generally.
Reference is made to the Articles of Incorporation and By-Laws of the Fund,
on file with the Commission, for the full text of these provisions. See "Further
Information." These provisions could have the effect of depriving shareholders
of an opportunity to sell their shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain control of the Fund
in a tender offer or similar transaction. In the opinion of the Investment
Manager and the Investment Adviser, however, these provisions offer several
possible advantages. They may require persons seeking control of the Fund to
negotiate with its management regarding the price to be paid for the shares
required to obtain such control, they promote continuity and stability and they
enhance the Fund's ability to pursue long-term strategies that are consistent
with its investment objectives.
44
<PAGE>
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as custodian for the Fund's assets. American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005, acts as the transfer agent,
dividend paying agent and registrar for the Fund's Common Stock.
EXPERTS
The financial statements of the Fund included in the Fund's Annual Report to
Shareholders as of May 31, 1996, have been incorporated by reference in this
Prospectus in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
FURTHER INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information filed by the Fund can be inspected and copied at public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington D.C. 20549; Seven World Trade Center, 13th Floor, New York, New York
10048; and 500 West Madison Street, Chicago, Illinois 60661. The Fund's Common
Stock is listed on the New York Stock Exchange. Reports, proxy statements and
other information concerning the Fund can be inspected and copied at the Library
of the New York Stock Exchange at 20 Broad Street, New York, New York 10005.
45
<PAGE>
APPENDIX A
GENERAL CHARACTERISTICS AND RISKS OF DERIVATIVES
A detailed discussion of Derivatives (as defined below) that may be used by
the Investment Adviser follows below. The Fund is not obligated, however, to use
any Derivatives and makes no representation as to the availability of these
techniques at this time or at any time in the future. "Derivatives," as used in
this Appendix, refers to interest rate, currency or stock or bond index futures
contracts, currency forward contracts and currency swaps, the purchase and sale
(or writing) of exchange listed and over-the-counter ("OTC") put and call
options on debt and equity securities, currencies, interest rate, currency or
stock index futures and fixed income and stock indices and other financial
instruments, entering into various interest rate transactions such as swaps,
caps, floors, collars, entering into equity swaps, caps, floors or trading in
other similar types of instruments.
The Fund's ability to pursue certain of these strategies may be limited by
the Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ("CFTC") thereunder and the federal income tax
requirements applicable to regulated investment companies which are not operated
as commodity pools.
General Characteristics of Options
Put options and call options typically have structural characteristics and
operational mechanics regardless of the underlying instrument on which they are
purchased or sold. Thus, the following general discussion relates to each of the
particular types of options discussed in greater detail below. In addition, many
Derivatives involving options require segregation of Fund assets in special
accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer of the obligation to buy, the underlying
security, index, currency or other instrument at the exercise price. The Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercised
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial futures contract, index, currency or other instrument might
be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or (currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is "in-the-money" (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
A-1
<PAGE>
The hours of trading for listed options may coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as "Counterparties" and
individually referred to as a "Counterparty") through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium guaranties and security, are determined by negotiation of the parties.
The Fund will generally only enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, no central clearing or guaranty function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Investment Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be met. The Fund will enter into OTC option transactions only with
U.S. government securities dealers recognized by the Federal Reserve Bank of New
York as "primary dealers," or broker-dealers, domestic or foreign banks, or
other financial institutions that the Investment Adviser deems to be
creditworthy. In the absence of a change in the current position of the staff of
the SEC, OTC options purchased by the Fund and the amount of the Fund's
obligation pursuant to an OTC option sold by the Fund (the cost of the sell-back
plus the in-the-money amount, if any) or the value of the assets held to cover
such options will be deemed illiquid.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
gains for the Fund.
The Fund may purchase and sell call options on securities that are traded on
U.S. and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (that is, the Fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it or against loss, a call sold
by the Fund will expose the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
that it might otherwise have sold.
The Fund reserves the right to purchase or sell options on instruments and
indices, (whether or not it holds the securities in its portfolio) and on
securities indices, currencies and futures contracts. In selling put options,
the Fund faces the risk that it may be required to buy the underlying security
at a disadvantageous price above the market price.
The Fund may purchase and sell put options on securities (whether or not it
holds the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures Contracts and Options on Futures Contracts
The Fund may trade financial futures contracts or purchase or sell put and
call options on those contracts as a hedge against anticipated interest rate
currency or market changes, and for risk management purposes or the Fund may
seek to increase its income or gain. Futures contracts are generally bought and
sold on the commodities exchange on which they are listed with payment of
initial and variation margin as described below. The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to certain instruments, the
net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract and obligates the seller to deliver that position.
A-2
<PAGE>
The Fund's use of financial futures contracts and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC. Maintaining a futures contract
or selling an option on a futures contract will typically require the Fund to
deposit with a financial intermediary, as security for its obligations, an
amount of cash or other specified asset ("initial margin") that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potentially variation margin) for
the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
The Fund will not enter into a futures contract or option thereon if,
immediately thereafter, the sum of the amount of its initial margin and premiums
required to maintain permissible non-bona fide hedging positions in futures
contracts and options thereon would exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and losses on
existing contracts; however in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating the
5% limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. The segregation
requirements with respect to futures contracts and options thereon are described
below under "Use of Segregated and Other Special Accounts."
Options on Securities Indices and Other Financial Indices
The Fund may purchase and sell call and put options on securities indices
and other financial indices. In doing so, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, options on indices settle by cash settlement; that is, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
comprising the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
Currency Transactions
The Fund may engage in currency transactions with Counterparties to hedge
the value of portfolio securities denominated in particular currencies against
fluctuations in relative value or to generate income or gain. Currency
transactions include currency forward contracts, exchange-listed currency
futures contracts and options thereon, exchange-listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and operates similarly to
an interest rate swap, which is described below under "Swaps, Caps, Floors and
Collars." The Fund may enter into currency transactions only with Counterparties
that the Investment Adviser deems to be creditworthy.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. The Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A-3
<PAGE>
The Fund may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Fund has or in which the Fund
expects to have exposure. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of its securities, the Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
the Fund's holdings is exposed is difficult to hedge generally or difficult to
hedge against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency, the changes in the value of which are generally considered
to be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If the Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts."
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions,
instead of a single Derivative, as part of a single or combined strategy when,
in the judgment of the Investment Adviser, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions will normally be entered into by the Fund based on the Investment
Adviser's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the Fund's management objective.
Swaps, Caps, Floors and Collars
The Fund may enter into interest rate, currency and equity swap, the
purchase or sale of related caps, floors and collars and other similar
arrangements. The Fund will enter into these transactions primarily to seek to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique, to protect against any increase in the price of securities the Fund
anticipates purchasing or selling at a later date or to generate income or gain.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (for example, an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal). An equity swap is an agreement to exchange cash flows on a
national principal amount based on changes in the values of the reference index.
A currency swap is an agreement to exchange cash flows on a notional amount
based on changes in the values of the currency exchange rates. The purchase of a
cap entitles the purchaser to receive payments on a notional principal amount
from the party selling the cap to the extent that a specified interest rate,
currency exchange rate or index exceeds a predetermined rate or amount. The
purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
interest rate currency exchange rate or index falls below a predetermined rate
or amount. A collar is a combination of a cap and a floor that preserves a
certain return with a predetermined range of rates or values.
The Fund will usually enter into swaps on a net basis, that is, the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument with the Fund receiving or paying, as the case may
be, only the net amount of the two payments.
Inasmuch as these swaps, caps, floors, collars and other similar types of
instruments are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act, and,
thus, will not be treated as being subject to the Fund's applicable borrowing
restrictions. The Fund will not enter into any swap, cap, floor, collar or other
similar type of transaction unless the Investment Adviser deems the Counterparty
to be creditworthy. If a Counterparty defaults, the Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
A-4
<PAGE>
The liquidity of swap agreements will be determined by the Investment
Adviser based on various factors, including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features), and (5) the nature of the
marketplace for trades (including the ability to assign or offset the Fund's
rights and obligations relating to the investment). Such determination will
govern whether a swap will be deemed within the 10% restriction on investment in
securities that are not readily marketable.
The Fund will maintain cash and appropriate liquid assets (i.e., high grade
debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If the Fund enters into a swap agreement on a
net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If the
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Use of Segregated and Other Special Accounts" below.
Risk Factors
Derivatives have special risks associated with them, including possible
default by the Counterparty to the transaction, illiquidity and, to the extent
the Investment Adviser's view as to certain market movements is incorrect, the
risk that the use of the Derivatives could result in losses greater than if they
had not been used. Use of put and call options could result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices higher than (in the case of put options) or lower than (in the case
of call options) current market values, or cause the Fund to hold a security it
might otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gain in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses. Although the Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by the
Fund are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause the Fund's net asset value to be
subject to more frequent and wider fluctuation than would be the case if the
Fund did not invest in options.
As is the case with futures and options strategies, the effective use of
swaps and related transactions by the Fund may depend, among other things, on
the Fund's ability to terminate the transactions at times when the Investment
Adviser deems it desirable to do so. To the extent the Fund does not, or cannot,
terminate such a transaction in a timely manner, the Fund may suffer a loss in
excess of any amounts that it may have received, or expected to receive, as a
result of the Investment Adviser entering into the transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on
A-5
<PAGE>
these options is subject to the maintenance of a liquid market that may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Losses resulting from the use of Derivatives will reduce the Fund's net
asset value, and possibly income, and the losses can be greater than if
Derivatives had not been used.
Risk of Derivatives Outside the United States
When conducted outside the United States, Derivatives may not be regulated
as rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and will be subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. In addition, the price of any foreign futures or foreign options
contract and, therefore, the potential profit and loss thereon, may be affected
by any variance in the foreign exchange rate between the time an order is placed
and the time it is liquidated, offset or exercised. The value of positions taken
as part of non-U.S. Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors, (2) lesser availability
of dates on which to make trading decisions than in the United States, (3)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during nonbusiness hours in the United States, (4) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States and (5) lower trading volume and liquidity.
Use of Segregated and Other Special Accounts
Use of many Derivatives by the Fund will require, among other things, that
the Fund segregate cash or other liquid assets with its custodian, or a
designated sub-custodian, to the extent the Fund's obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian or
sub-custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. A call option on securities written by the Fund, for example,
will require the Fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate liquid assets sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities that correlate with the index or to segregate
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option on securities written by the Fund will require the
Fund to segregate liquid assets equal to the exercise price. Except when the
Fund enters into a forward contract in connection with the purchase or sale of a
security denominated in a foreign currency or for other non-speculative
purposes, which requires no segregation, a currency contract that obligates the
fund to buy or sell a foreign currency will generally require the Fund to hold
an amount of that currency or liquid securities denominated in that currency
equal to the Fund's obligations or to segregate liquid assets equal to the
amount of the Fund's obligations.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although the Fund will
not be required to do so. As a result, when the Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the Options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option on a futures contract, the
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets. The
Fund will accrue the net amount of the excess, if any, of its obligations
relating to swaps over its entitlements with respect to each swap on a daily
basis and will segregate with its custodian, or designated sub-custodian, an
amount of cash or liquid assets having an aggregate value equal to at least the
accrued excess. Caps, floors and collars require segregation of assets with a
value equal to the Fund's net obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. The Fund may also enter into
offsetting transactions so that its combined position, coupled with
<PAGE>
any segregated assets, equals its net outstanding obligation in related
Derivatives. The Fund could purchase a put option, for example, if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if it holds a futures
contract or forward contract, the Fund could purchase a put option on the same
futures contract or forward contract with a strike price as high or higher than
the price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representation in conection with this offering other than those contained in
this Prospectus, and, if given or made, such information or representation must
not be relied upon as having been authorized by the Fund, the Fund's investment
manager or adviser or Oppenheimer & Co., Inc. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
----------
TABLE OF CONTENTS
Page
----
Prospectus Summary ............................... 2
Summary of Expenses .............................. 10
The Fund ......................................... 12
Use of Proceeds .................................. 12
Investment Objectives and Policies ............... 14
Additional Investment Activities ................. 19
Investment Restrictions .......................... 23
Risk Factors and Special Considerations .......... 24
Management of the Fund ........................... 28
Portfolio Transactions ........................... 33
Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan ............. 34
Taxation ......................................... 36
Net Asset Value .................................. 40
Description of Capital Stock ..................... 41
Custodian, Transfer Agent, Dividend Paying
Agent and Registrar ............................. 45
Experts .......................................... 45
Further Information .............................. 45
Appendix A: General Characteristics
and Risks of Derivatives ........................ A-1
================================================================================
================================================================================
THE EMERGING
INCOME MARKETS
FUND II INC
Common Stock
-----------
PROSPECTUS
-----------
Oppenheimer & Co., Inc.
October 10, 1996
================================================================================
