HIGH INCOME OPPORTUNITY FUND INC. (the "Fund")
Supplement dated June 2, 2000
to Prospectus dated January 28, 2000
The information supplements certain information set forth in the
Prospectus under the section "Investment Objectives and
Management Policies"
The fund may invest up to 15% of its total assets in corporate
loans. The primary risk in an investment in corporate loans is
that borrowers may be unable to meet their interest and/or
principal payment obligations. The fund may acquire an interest
in corporate loans by purchasing both participations in and
assignments of portions of corporate loans from third parties.
Corporate loans in which the fund may invest may be
collateralized or uncollateralized and senior or subordinate.
Investments in uncollateralized and/or subordinate loans entail a
greater risk of nonpayment than do investments in corporate loans
which hold a more senior position in the borrower's capital
structure or that are secured with collateral. The fund's policy
limiting its illiquid securities will be applicable to corporate
loans which are also subject to the risks generally associated
with investments in illiquid securities.
FD _____________
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HIGH INCOME OPPORTUNITY FUND INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
High Income Opportunity Fund Inc. (fund) is a diversified,
closed-end management investment company whose investment
objective is to provide shareholders with high current income with
capital appreciation. This Statement of Additional Information
(SAI) is not a prospectus, but should be read in conjunction with
the Prospectus for the fund dated January 28, 2000 (Prospectus).
This SAI does not include all information that a prospective
investor should consider before purchasing the fund's shares of
common stock (common stock), and investors should obtain and read
the Prospectus prior to purchasing shares. A copy of the
Prospectus may be obtained without charge by calling (800) 331-
1710.
TABLE OF CONTENTS
Page
Investment Objectives and Policies
2
Investment Restrictions
11
Net Asset Value
12
Taxation
12
Officers and Directors
16
Portfolio Transactions
20
Management of the Fund
21
Repurchase of Shares, Conversion to Open-End Fund and Anti-Takeover
Provisions
22
Financial Statements
23
The Prospectus and this SAI omit certain of the information
contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. (SEC). These items may
be obtained from the SEC upon payment of the fee prescribed, or
inspected at the SEC's office at no charge.
This Statement of Additional Information is dated January 28, 2000
As Amended June 2, 2000
INVESTMENT OBJECTIVES AND POLICIES
Corporate Securities. The fund may invest in corporate
fixed-income securities of both domestic and foreign issuers, such
as bonds, debentures, notes, equipment lease certificates,
equipment trust certificates and preferred stock. Certain of the
corporate fixed-income securities in which the fund may invest may
involve equity characteristics. The fund may, for example, invest
in warrants for the acquisition of stock of the same or of a
different issuer, or in corporate fixed-income securities that
have conversion or exchange rights permitting the holder to
convert or exchange the securities at a stated price within a
specified period of time into a specified number of shares of
common stock. In addition, the fund may invest in participations
that are based on revenues, sales or profits of an issuer, or in
common stock offered as a unit with corporate fixed-income
securities.
Money Market Instruments. When SSB Citi Fund Management
LLC, successor to SSBC Fund Management Inc. (SSB Citi or the
Investment Manager) believes that economic circumstances warrant a
temporary defensive posture, the fund may invest without
limitation in short-term money market instruments. The fund may
also invest in money market instruments to help defray operating
expenses, to serve as collateral in connection with certain
investment techniques (see "Investment Practices" below) and to
hold as a reserve pending the payment of dividends to investors.
To the extent that the fund invests in short-term money market
instruments it may not be pursuing its investment objectives.
Money market instruments that the fund may acquire will be
securities rated in the two highest short-term rating categories
by Moody's Investors Service or Standard & Poor's Ratings Group or
the equivalent from another major rating service or comparable
unrated securities. Money market instruments in which the fund
typically expects to invest include: U.S. government securities,
bank obligations (including certificates of deposit, time deposits
and bankers' acceptances of U.S. or foreign banks), commercial
paper and repurchase agreements.
The fund may enter into repurchase agreement transactions
with certain member banks of the Federal Reserve System or with
certain dealers listed on the Federal Reserve Bank of New York's
list of reporting dealers. A repurchase agreement is a contract
under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed-upon price on an
agreed-upon date. Under the terms of a typical repurchase
agreement, the fund would acquire an underlying obligation for a
relatively short period (usually not more than seven days) subject
to an obligation of the seller to repurchase, and the fund to
resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the fund's holding period. This
arrangement results in a fixed rate of return that is not subject
to market fluctuations during the fund's holding period. Under
each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price.
Repurchase agreements could involve certain risks in the event of
default or insolvency of the seller, including possible delays or
restrictions on the fund's ability to dispose of the underlying
securities. In evaluating these potential risks, the Investment
Manager, acting under the supervision of the fund's Board of
Directors and on an ongoing basis, monitors (1) the value of the
collateral underlying each repurchase agreement of the fund to
ensure that the value is at least equal to the total amount of the
repurchase obligation, including interest, and (2) the
creditworthiness of the banks and dealers with which the fund
enters into repurchase agreements.
U.S. Government Securities. The fund may invest in direct
obligations of the United States and obligations issued by U.S.
government agencies and instrumentalities (U.S. government
securities). Included among direct obligations of the United
States are Treasury bills, Treasury notes and Treasury bonds,
which differ principally in terms of their maturities. Included
among the securities issued by U.S. government agencies and
instrumentalities are: securities that are supported by the full
faith and credit of the United States (such as Government National
Mortgage Association certificates); securities that are supported
by the right of the issuer to borrow from the U.S. Treasury (such
as securities of Federal Home Loan Banks); and securities that are
supported by the credit of the instrumentality (such as Federal
National Mortgage Association and Federal Home Loan Mortgage
Corporation bonds). See "Mortgage-Backed Securities" under
"Investment Practices," below.
Zero Coupon, Pay-In-Kind and Delayed Interest Securities.
The fund may invest in zero coupon, pay-in-kind and delayed
interest securities, as well as custodial receipts or certificates
underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both
on certain U.S. government securities. Zero coupon securities pay
no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held
to maturity, their entire return comes from the difference between
their purchase price and their maturity value. Pay-in-kind
securities pay interest through the issuance to the holders of
additional securities, and delayed interest securities are
securities which do not pay interest for a specified period.
Because interest on zero coupon, pay-in-kind and delayed interest
securities is not paid on a current basis, the values of
securities of this type are subject to greater fluctuations than
are the values of securities that distribute income regularly and
may be more speculative than such securities. Accordingly, the
values of these securities may be highly volatile as interest
rates rise or fall. In addition, the fund's investments in zero
coupon, pay-in-kind and delayed interest securities will result in
special tax consequences. Although these securities do not make
cash payments of interest on a current basis for all or some
portion of their term, for tax purposes a portion of the
difference between their maturity value (including deferred
interest) and their purchase price (or in some cases other amounts
treated as "original issue discount") is taxable income of the
fund each year, subject to tax distribution requirements.
Custodial receipts evidencing specific coupon or principal
payments have the same general attributes as zero coupon U.S.
government securities but are not considered to be U.S. government
securities for some purposes. Although under the terms of a
custodial receipt the fund is typically authorized to assert its
rights directly against the issuer of the underlying obligation,
the fund may be required to assert through the custodian bank such
rights as may exist against the underlying issuer. Thus, in the
event the underlying issuer fails to pay principal and/or interest
when due, the fund may be subject to delays, expenses and risks
that are greater than those that would have been involved if the
fund had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in
which the underlying security has been deposited is determined to
be an association taxable as a corporation instead of a non-
taxable entity, the yield on the underlying security would be
reduced in respect of any taxes paid.
Investment Practices
The fund may employ, among others, the investment techniques
described below:
Convertible Securities and Synthetic Convertible Securities.
Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality because
of the potential for capital appreciation. A convertible
security, in addition to providing fixed income, offers the
potential for capital appreciation through the conversion feature,
which enables the holder to benefit from increases in the market
price of the underlying common stock. However, there can be no
assurance of capital appreciation because securities prices
fluctuate.
Convertible securities generally are subordinated to other
similar but non-convertible securities of the same issuer,
although convertible bonds enjoy seniority in right of payment to
all equity securities, and convertible preferred stock is senior
to common stock of the same issuer. Because of the subordination
feature, however, convertible securities typically have lower
ratings than similar non-convertible securities.
Unlike a convertible security, which is a single security, a
synthetic convertible security is comprised of distinct securities
that together resemble convertible securities in certain respects.
Synthetic convertible securities are typically created by
combining non-convertible bonds or preferred stocks with warrants
or stock call options. The options that will form elements of
synthetic convertible securities may be listed on a securities
exchange or on Nasdaq, or may be privately traded. The components
of a synthetic convertible security generally are not offered as a
unit and may be purchased and sold by the fund at different times.
Synthetic convertible securities differ from convertible
securities in certain respects, including that each component of a
synthetic convertible security has a separate market value and
responds differently to market fluctuations. Investing in
synthetic convertible securities involves the risk normally
involved in holding the securities comprising the synthetic
convertible security.
Futures Contracts and Options on Futures Contracts. An
interest rate futures contract is a standardized contract for the
future delivery of a specified security (such as a Treasury bond
or Treasury note) or its equivalent at a future date at a price
set at the time of the contract. A currency futures contract is a
standardized contract for the future delivery of a specified
amount of currency at a future date at a price set at the time of
the contract. The fund may only enter into futures contracts
traded on regulated commodity exchanges.
The fund may either accept or make delivery of cash or the
underlying instrument specified at the expiration of a futures
contract or, prior to expiration, enter into a closing transaction
involving the purchase or sale of an offsetting contract. Closing
transactions with respect to futures contracts are effected on the
exchange on which the contract was entered into or on a linked
exchange.
The fund may purchase and write put and call options on
futures contracts in order to hedge all or a portion of its
investments and may enter into closing purchase transactions with
respect to options written by the fund in order to terminate
existing positions. There is no guarantee that such closing
transactions can be effected at any particular time or at all. In
addition, daily limits on price fluctuations on exchanges on which
the fund conducts its futures and options transactions may prevent
the prompt liquidation of positions at the optimal time, thus
subjecting the fund to the potential of greater losses.
An option on a futures contract, as contrasted with the
direct investment in such a contract, gives the purchaser of the
option the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at
any time on or before the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be
accomplished by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The
potential loss related to the purchase of an option on a futures
contract is limited to the premium paid for the option, plus
transaction costs. With respect to options purchased by the fund,
there are no daily cash payments made by the fund to reflect
changes in the value of the underlying contract; however, the
value of the option does change daily and that change would be
reflected in the net asset value of the fund.
While the fund may enter into futures contracts and options
on futures contracts for bona fide hedging and other appropriate
risk management purposes, the use of futures contracts and options
on futures contracts might result in a poorer overall performance
for the fund than if it had not engaged in any such transactions.
If, for example, the fund had insufficient cash, it may have to
sell a portion of its underlying portfolio of securities in order
to meet daily variation margin requirements on its futures
contracts or options on futures contracts at a time when it may be
disadvantageous to do so. There may be an imperfect correlation
between the fund's portfolio holdings and futures contracts or
options on futures contracts entered into by the fund, which may
prevent the fund from achieving the intended hedge or expose the
fund to risk of loss. Further, the fund's use of futures
contracts and options on futures contracts to reduce risk involves
cost and will be subject to the Investment Manager's ability to
predict correctly changes in interest rate relationships or other
factors. No assurance can be given that the Investment Manager's
judgment in this respect will be correct.
Foreign Securities. There are certain risks involved in
investing in securities of companies and governments of foreign
nations which are in addition to the usual risk inherent in
domestic investments. Securities of many foreign issuers and their
markets may be less liquid, and their prices more volatile, than
those of securities of comparable domestic issuers. In addition,
with respect to certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory
taxation and limitations on the use or removal of funds or other
assets of the fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the fund will
invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates
may adversely affect the value of portfolio securities and the
appreciation or depreciation of investments. Investments in
foreign securities also may result in higher expenses due to the
cost of converting foreign currency to U.S. dollars, the payment
of fixed brokerage commissions on foreign exchanges, the expense
of maintaining securities with foreign custodians and the
imposition of transfer taxes or transaction charges associated
with foreign exchanges.
Additional risks include those resulting from devaluation of
currencies, future adverse political and economic developments and
the relative lack of public information concerning issuers and the
lack of uniform accounting, auditing and financial reporting
standards or other regulatory practices and requirements
comparable to those applicable to domestic companies.
Currency Exchange Transactions. In order to protect against
uncertainty in the level of future exchange rates, the fund may
engage in currency exchange transactions and purchase exchange-
traded put and call options on foreign currencies. The fund will
conduct its currency exchange transactions either on a spot (i.e.,
cash) basis at the rate prevailing in the currency exchange market
or through entering into forward contracts to purchase or sell
currencies.
A forward currency contract involves an obligation to
purchase or sell a specific currency for an agreed-upon price at
an agreed-upon date, which may be any fixed number of days from
the date of the contract agreed upon by the parties. These
contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks)
and their customers. Although these contracts are intended to
minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential
gain that might result should the value of the currency increase.
The fund's dealings in forward currency exchange
transactions will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward currency contracts with respect to
specific receivables or payable to the fund generally arising in
connection with the purchase or sale of its securities. Position
hedging, generally, is the sale of forward currency contracts with
respect to portfolio security positions denominated or quoted in
the currency. The fund will not position hedge with respect to a
particular currency to an extent greater than the aggregate market
value at any time of the security or securities held in its
portfolio denominated or quoted in or currently convertible (such
as through exercise of an option or consummation of a forward
currency contract) in that particular currency. If the fund
enters into a transaction hedging or position hedging transaction,
it will cover the transaction through one or more of the following
methods: (a) ownership of the underlying currency or an option to
purchase such currency; (b) ownership of an option to enter into
an offsetting forward currency contract; (c) entering into a
forward contract to purchase currency being sold or to sell
currency being purchased, provided that such covering contract is
itself covered by any one of these methods unless the covering
contract closes out the first contract; or (d) depositing into a
segregated account with the custodian or a sub-custodian of the
fund cash or readily marketable securities in an amount equal to
the value of the fund's total assets committed to the consummation
of the forward currency contract and not otherwise covered. In
the case of transaction hedging, any securities placed in the
account must be liquid debt securities. In any case, if the value
of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so
that the value of the account will equal the above amount.
Hedging transactions may be made from any foreign currency into
dollars or into other appropriate currencies.
Although the foreign currency market may not necessarily be
more volatile than the market in other commodities, the foreign
currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in
currencies occurs on an exchange. Because a forward currency
contract is not guaranteed by an exchange or clearing-house,
default on the contract would deprive the fund of unrealized
profits or force the fund to cover its commitments for the
purchase or resale, if any, at the current market price. In
addition, if a devaluation is generally anticipated, the fund may
not be able to contract to sell the currency at a price above the
anticipated devaluation level.
Because transactions in currency exchange are usually
conducted on a principal basis, no fees or commissions are
involved. The use of forward currency contracts does not
eliminate fluctuations in the underlying prices of the securities,
but it does establish a rate of exchange that can be achieved in
the future. In addition, although forward currency contracts
limit the risk of loss due to a decline in the value of the hedged
currency, at the same time they limit any potential gain that
might result should the value of the currency increase.
Options on Foreign Currencies. The fund may purchase put
options on a foreign currency in which securities held by the fund
are denominated to protect against a decline in the value of the
currency in relation to the currency in which the exercise price
is denominated. The fund may purchase a call option on a foreign
currency to hedge against an adverse exchange rate of the currency
in which a security that it anticipates purchasing is denominated
in relation to the currency in which the exercise price is
denominated. Put options convey the right to sell the underlying
currency at a price which is anticipated to be higher than the
spot price of the currency at the time the option expires. Call
options convey the right to buy the underlying currency at a price
which is expected to be lower than the spot price of the currency
at the time that the option expires.
The fund may use foreign currency options under the same
circumstances that it could use forward currency exchange
transactions. A decline in the dollar value of a foreign currency
in which the fund's securities are denominated, for example, will
reduce the dollar value of the securities even if their value in
the foreign currency remains constant. In order to protect
against such diminution in the value of securities that it holds,
the fund may purchase put options on the foreign currency. If the
value of the currency does decline, the fund will have the right
to sell the currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its
securities that otherwise would have resulted. Conversely, if a
rise in the dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially
increasing the cost of the securities, the fund may purchase call
options on the particular currency. The purchase of these options
could offset, at least partially, the effects of the adverse
movements in exchange rates. The benefit to the fund derived from
purchase of foreign currency options, like the benefit derived
from other types of options, will be reduced by the amount of the
premium and related transaction costs. In addition, if currency
rates do not move in the direction or to the extent anticipated,
the fund could sustain losses on transactions in foreign currency
options that would require it to forego a portion or all of the
benefits of advantageous changes in the rates. Options on foreign
currencies purchased by the fund may be traded on domestic and
foreign exchanges or traded over-the-counter.
When-Issued and Delayed-delivery Securities. The fund will
not accrue income with respect to a when-issued or delayed-
delivery security prior to its stated delivery date. The fund
will establish with the PNC Bank, N.A. (PNC Bank), the fund's
Custodian, a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any
grade, in an amount equal to the amount of the fund's when-issued
and delayed-delivery purchase commitments, provided such
securities are liquid and unencumbered and are marked to market
daily pursuant to guidelines established by the Board of
Directors. Placing securities rather than cash in the segregated
account may have a leveraging effect on the fund's net asset value
per share; that is, to the extent that the fund remains
substantially fully invested in securities at the same time that
it has committed to purchase securities on a when-issued or
delayed-delivery basis, greater fluctuations in its net asset
value per share may occur than if it had set aside cash to satisfy
its purchase commitments. Securities purchased on a when-issued
or delayed-delivery basis may expose the fund to risk because the
securities may experience fluctuations in value prior to their
delivery.
Lending Securities. Loans of the fund's securities, if and
when made, may not exceed 20% of the fund's assets taken at value.
The fund's loans of securities will be collateralized by cash,
letters of credit or U.S. government securities that will be
maintained at all times in a segregated account with PNC Bank in
an amount equal to the current market value of the loaned
securities. From time to time, the fund may pay a part of the
interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is
unaffiliated with the fund and that is acting as a "finder."
By lending its securities, the fund can increase its income
by continuing to receive interest on the loaned securities, by
investing the cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the borrower when
U.S. government securities are used as collateral. The portfolio
will adhere to the following conditions whenever it lends its
securities: (1) the fund must receive at least 100% cash
collateral or equivalent securities from the borrower, which
amount of collateral will be maintained by daily marking to
market; (2) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the
collateral; (3) the fund must be able to terminate the loan at any
time; (4) the fund must receive reasonable interest on the loan,
as well as any dividends, interest or other distributions on the
loaned securities, and any increase in market value; (5) the fund
may pay only reasonable custodian fees in connection with the
loan; and (6) voting rights on the loaned securities may pass to
the borrower, except that, if a material event adversely affecting
the investment in the loaned securities occurs, the fund's Board
of Directors must terminate the loan and regain the fund's right
to vote the securities.
Short Sales Against the Box. The broker-dealer that
executes a short sale generally invests the cash proceeds of the
sale until they are paid to the fund. Arrangements may be made
with the broker-dealer to obtain a portion of the interest earned
by the broker on the investment of short sale proceeds. The fund
will segregate the securities against which short sales against
the box have been made in a special account with PNC Bank. Not
more than 10% of the fund's net assets (taken at current value)
may be held as collateral for such sales at any one time.
Mortgage-Backed Securities. The fund may invest in mortgage-
backed securities, which are securities representing interests in
"pools" of mortgage loans assembled for sale to investors by
various governmental agencies and government-related organizations,
such as Government National Mortgage Association (GNMA), Federal
National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC). Monthly payments of interest and principal by
the individual borrowers on mortgages are "passed through" to the
holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average lives of mortgage pass-
throughs are variable when issued because their average lives
depend on prepayment rates. The average life of these securities is
likely to be substantially shorter than their stated final maturity
as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and
all or part of a premium if any has been paid, and the actual yield
(or total return) to the fund may be different than the quoted
yield on the securities. Mortgage prepayments generally increase
with falling interest rates and decrease with rising interest
rates. Like other fixed-income securities, when interest rates rise
the value of mortgage pass-through securities generally will
decline; however, when interest rates are declining, the value of
mortgage pass-through securities with prepayment features may not
increase as much as that of other fixed-income securities.
Interests in pools of mortgage-related securities differ from
other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide
a monthly payment which consists of both interest and principal
payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of
principal resulting from the sale, refinancing or foreclosure of
the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association (GNMA) are
described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the
mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage pass-through
securities is the GNMA. GNMA is a wholly owned U.S. government
corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of
the U.S. government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as
savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages. These guarantees, however, do not apply to the market
value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not
backed by the full faith and credit of the U.S. government) include
the Federal National Mortgage Association (FNMA) and the Federal
Home Loan Mortgage Corporation (FHLMC). FNMA is a government-
sponsored corporation owned entirely by private shareholders. It is
subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases conventional residential mortgages
(i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include
state and federally-chartered savings and loan associations, mutual
savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA.
FHLMC is also a government-sponsored corporation owned by
private shareholders. FHLMC issues Participation Certificates (PCs)
which represent interests in conventional mortgages (i.e., not
federally insured or guaranteed) from FHLMC's national portfolio.
FHLMC guarantees timely payment of interest and ultimate collection
of principal regardless of the status of the underlying mortgage
loans. Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary
market issuers also create pass-through pools of mortgage loans.
Such issuers may also be the originators and/or servicers of the
underlying mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct
or indirect government or agency guarantees of payments in the
former pools. However, timely payment of interest and principal of
mortgage loans in these pools may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and
hazard insurance, and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers
and the mortgage poolers. There can be no assurance that the
private insurers or guarantors can meet their obligations under the
insurance policies or guarantee arrangements. The fund may also buy
mortgage-related securities without insurance or guarantees.
Prompt payment of principal and interest on GNMA mortgage
pass-through certificates is backed by the full faith and credit of
the United States. FNMA-guaranteed mortgage pass-through
certificates are solely the obligations of those entities but are
supported by the discretionary authority of the U.S. government to
purchase the agencies' obligations. Mortgage pools created by
private organizations generally offer a higher rate of interest
than governmental and government-related pools because there are no
direct or indirect guarantees of payments in the former pools.
Timely payment of interest and principal in these pools, however,
may be supported by various forms of private insurance or
guarantees, including individual loan, title, pool and hazard
insurance. There can be no assurance that the private insurers
will meet their obligations.
Mortgage-backed securities vary from traditional fixed-income
securities because of the potential for prepayment. These
instruments are backed by a real estate mortgage, and the mortgage
loan may be repaid at any time without penalty. While mortgage-
backed securities tend to rise in value when interest rates fall,
faster than expected prepayments of the mortgage loans will reduce
both the market value and yield to maturity of the mortgage-backed
securities. Thus, changes in interest rates may have a greater
effect on mortgage-backed securities than on traditional fixed
income securities. In a period of declining interest rates,
prepayments rise because mortgage holders are in a disadvantageous
economic position. Therefore, the amounts available for
reinvestment in new mortgages increase, but are likely to be
reinvested at lower interest rates. As a result, mortgage-backed
securities may benefit less from declining interest rates than
other fixed-income securities because of the risk of increased
prepayment.
Other Asset-Backed Securities. Corporate asset-backed
securities present certain risks. For instance, in the case of
credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivables. In addition,
because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee
for the holders of the automobile receivables may not have a proper
security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to
support payments on these securities.
Corporate asset-backed securities are often backed by pools
of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors to make
payments on underlying assets, the securities may contain elements
of credit support which fall into two categories: (i) liquidity
protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt
of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default ensures
payment through insurance policies or letters of credit obtained by
the issuer or sponsor from third parties. The fund will not pay any
additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on
historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in
excess of that anticipated, or failure of the credit support, could
adversely affect the return on an investment in such a security.
The estimated life of an asset-backed security varies with
the prepayment experience with respect to the underlying debt
instruments. The rate of such prepayments, and hence the life of
an asset-backed security, will primarily be a function of current
market interest rates, although other economic and demographic
factors may be involved. While rising interest rates generally
decrease the rate of prepayments, an acceleration in prepayments
in response to sharply falling interest rates will shorten the
security's average maturity and limit the potential appreciation
in the security's value relative to a conventional debt security.
Consequently, asset-backed securities are not as effective in
locking in high long-term yields.
Corporation Loans. The fund may invest up to 15% of its total
assets in corporate loans. Corporate loans are negotiated and
underwritten by a bank or syndicate of banks and other
institutional investors. The fund may acquire an interest in
corporate loans through the primary market by acting as one of a
group of lenders of a corporate loan. The primary risk in an
investment in corporate loans is that the borrower may be unable
to meet their interest and/or principal payment obligations. The
occurrence of such default with regard to a corporate loan in
which the fund had invested would have an adverse affect on the
fund's net asset value. Corporate loans in that the fund may
invest may be collateralized or uncollateralized and senior or
subordinate. Investments in uncollateralized and/or subordinate
loans entail a greater risk of nonpayment than do investments in
corporate loans which hold a more senior position in the
borrower's capital structure or that are secured with collateral.
The fund may also acquire an interest in corporate loans by
purchasing both participations ("Participations") in and
assignments ("Assignments") of portions of corporate loans from
third parties. By purchasing a Participation, the fund acquires
some or all of the interest of a bank or other leading institution
in a loan to a corporate borrower. The Participations typically
will result in the fund having a contractual relationship only
with the lender and not the borrower. The fund will have the
right to receive payments or 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 directly benefit 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. The fund will acquire
Participations only if the lender interpositioned between the fund
and the borrower is determined by management to be creditworthy.
When the fund purchases Assignments from lenders, the fund will
acquire direct rights against the borrower on the loan. However,
since Assignments are arranged through private negotiations
between potential assignees and assignors, the rights and
obligations acquired by the fund as the purchaser of an Assignment
may differ from, and be more limited than, those held by the
assigned lender.
In addition, the fund may have difficulty disposing of its
investments in corporate loans. The liquidity of such securities
is limited and the fund anticipates that such securities could be
sold only to a limited number of institutional investors. The
lack of liquid secondary market could have an adverse impact on
the value of such securities and on the fund's ability to dispose
of particular Assignments or Participations when necessary to meet
the fund's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the
borrower. The lack of liquid secondary market for corporate loans
also may make it more difficult for the fund to assign a value to
those securities for purposes of valuing the fund's investments
and calculating its net asset value. The fund's policy limiting
its illiquid securities will be applicable to investments in
corporate loans.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 12 below have
been adopted by the fund as fundamental policies. Under the
Investment Company Act of 1940, as amended (1940 Act), a
fundamental policy may not be changed without the vote of a
majority of the outstanding voting securities of the fund, as
defined in the 1940 Act. This is defined in the 1940 Act as the
lesser of (a) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the outstanding shares of the fund
are present or represented by proxy, or (b) more than 50% of the
outstanding shares.
The investment policies adopted by the fund prohibit the
fund from:
1. Purchasing the securities of any issuer (other than
U.S. government securities) if, as a result, more than
5% of the value of the fund's total assets would be
invested in the securities of the issuer, except that
up to 25% of the value of the fund's total assets may
be invested without regard to this 5% limitation.
2. Purchasing more than 10% of the voting securities of
any one issuer (other than U.S. government
securities), except that up to 25% of the value of the
fund's total assets may be invested without regard to
this 10% limitation.
3. Purchasing securities on margin, except that the fund
may obtain any short-term credits necessary for the
clearance of purchases and sales of securities. For
purposes of this restriction, the deposit or payment
of initial or variation margin in connection with
futures contracts or related options will not be
deemed to be a purchase of securities on margin.
4. Making short sales of securities, except that the fund
may engage in short sales "against the box."
5. Borrowing money, except that (a) the fund may borrow
from banks for temporary or emergency (not leveraging)
purposes in an amount not exceeding 10% of the value
of the fund's total assets (including the amount
borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the
borrowing is made and (b) the fund may enter into
futures contracts. Whenever borrowings described in
(a) exceed 5% of the value of the fund's total assets,
the fund will not make any additional investments.
6. Pledging, hypothecating, mortgaging or otherwise
encumbering the fund's assets except to secure
borrowings and as margin for commodities transactions.
7. Underwriting the securities of other issuers, except
insofar as the fund may be deemed an underwriter in
the course of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real
estate, except that the fund may purchase and sell
securities that are secured by real estate or
interests in real estate and may purchase securities
issued by companies that invest in or deal in real
estate.
9. Investing in commodities, except that the fund may
invest in futures contracts, options on futures
contracts and options on currencies.
10. Making loans to others, except through the purchase of
qualified debt obligations, the entry into repurchase
agreements and loans of portfolio securities
consistent with the fund's investment objectives and
policies.
11. Investing in securities of other investment companies
registered or required to be registered under the 1940
Act, except as they may be acquired as part of a
merger, consolidation, reorganization, acquisition of
assets or an offer of exchange, or to the extent
permitted by the 1940 Act.
12. Purchasing any securities which would cause more than
25% of the value of the fund's total assets at the
time of purchase to be invested in the securities of
issuers conducting their principal business activities
in the same industry; provided that there shall be no
limit on the purchase of U.S. government securities.
NET ASSET VALUE
The valuation of the fund's assets is made by the Investment
Manager after consultation with an independent pricing service
(Service) approved by the fund's Board of Directors. When, in the
judgment of the Service, quoted bid prices for investments are
readily available and are representative of the bid side of the
market, these investments are priced by the Service at the mean
between the quoted bid prices and asked prices. Investments for
which, in the judgment of the Service, no readily obtainable
market quotation is available are priced by the Service at its
determination at fair value, based on methods that include
consideration of: yields or prices of securities of comparable
quality, coupon, maturity and type; indication as to values from
dealers; and general market conditions. The Service may use
electronic data processing techniques and/or matrix system to
determine valuations. The Investment Manager reviews the
Service's price information and, unless the Investment Manager has
information which leads it to use a different valuation, it will
generally use the Service's prices in establishing net asset
value. The procedures of the Service are reviewed periodically by
the officers of the fund under the general supervision and
responsibility of the Board of Directors, which may replace the
Service at any time if it determines it to be in the best
interests of the fund to do so.
TAXATION
Taxation of the Fund
The fund intends to qualify each year and be treated as a
regulated investment company for federal income tax purposes. In
order to so qualify, the fund must, among other things: (a)
derive at least 90% of its gross income from dividends, interest,
payments with respect to loans of securities and gains from the
sale or other disposition of securities or certain other related
income; and (b) diversify its holdings so that at the end of each
fiscal quarter (i) at least 50% of the value of the fund's assets
is represented by cash or 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 one issuer (other than U.S. government
securities or the securities of other regulated investment
companies), or two or more issuers which the fund controls and
which are determined to be engaged in the same or similar trades
or businesses or related trades or businesses.
If the fund qualifies as a regulated investment company and
distributes to its shareholders at least 90% of the sum of its net
investment income and any excess of its net short-term capital
gain over its net long-term capital loss, then the fund will not
be subject to federal income tax on the income and gain so
distributed. However, the fund would be subject to corporate
income tax on any undistributed income and net long-term and
short-term capital gains. In addition, the fund will be subject
to a nondeductible 4% federal excise tax on the amount by which
the income and gain it distributes in any calendar year is less
than a required amount. For purposes of the excise tax, the
required distribution for any calendar year equals 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 for the one-
year period ending on October 31 of that year; and (c) 100% of the
undistributed ordinary income and capital gains from prior years.
For purposes of the excise tax, any ordinary income or capital
gains retained by the fund on which it paid federal income tax
will be treated as having been distributed.
If, in any taxable year, a fund fails to qualify as a
regulated investment company under the Code or fails to meet the
distribution requirement, it would be taxed in the same manner as
an ordinary corporation and distributions to its shareholders
would not be deductible by a fund in computing its taxable income.
In addition, in the event of a failure to qualify, a fund's
distributions, to the extent derived from a fund's current or
accumulated earnings and profits would constitute dividends
(eligible for the corporate dividends-received deduction) which
are taxable to shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been treated
in the shareholders' hands as long-term capital gains. If a fund
fails to qualify as a regulated investment company in any year, it
must pay out its earnings and profits accumulated in that year in
order to qualify again as a regulated investment company. In
addition, if a fund failed to qualify as a regulated investment
company for a period greater than one taxable year, a fund may be
required to recognize any net built-in gains (the excess of the
aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order
to qualify as a regulated investment company in a subsequent year.
The fund may elect to retain all or a portion of its net
capital gain, as described under "Taxation of Shareholders--
Distributions" in the prospectus.
Any capital losses resulting from the disposition of
securities can only be used to offset capital gains and cannot be
used to reduce the fund's ordinary income. Such capital losses
may be carried forward by the fund for eight years.
As of September 30, 1999, the fund had, for federal tax
purposes, approximately $65,210,000 of capital loss carryforwards
available to offset future realized capital gains. To the extent
that these capital loss carryforwards can be used to offset net
realized capital gains, such gains, if any, will not be
distributed. Expiration occurs on September 30 in the year
indicated. Carryforward amounts are $16,017,000, $38,118,000 and
$11,075,400 and expire in the years 2003, 2004 and 2007,
respectively.
If the fund owns shares in a foreign corporation that
constitutes a "passive foreign investment company" for federal
income tax purposes, and the fund does not elect to treat the
foreign corporation as a "qualified electing fund" within the
meaning of the Internal Revenue Code of 1986 (Code), the fund may
be subject to United States federal income taxation on a portion
of any "excess distribution" it receives from the foreign
corporation or any gain it derives from the disposition of such
shares, even if such income is distributed as a taxable dividend
by the fund to its shareholders. The fund may also be subject to
additional tax in the nature of an interest charge with respect to
deferred taxes arising from such distributions or gains. Any tax
paid by the fund as a result of its ownership of shares in a
"passive foreign investment company" will not give rise to any
deduction or credit to the fund or any shareholders. A "passive
foreign investment company" means any foreign corporation if, for
any taxable year during which its stock was held by the fund or a
prior taxable year, either (i) it derives at least 75% of its
gross income from "passive income" (including, but not limited to,
interest, dividends, certain royalties and rents, capital gains,
and annuities), or (ii) at least 50% of the value (or adjusted tax
basis, if elected) of its assets produce "passive income" or are
held for the production of "passive income." If the fund owns
shares in a "passive foreign investment company" and the fund does
elect to treat the foreign corporation as a "qualified electing
fund" under the Code, the fund may be required to include in its
income each year a portion of the ordinary income and net capital
gain of the foreign corporation, even if this income is not
distributed to the fund. Any such income would be subject to the
income and excise tax distribution requirements described above.
The fund should generally be able to avoid the adverse tax
consequences described in the previous paragraph by electing to
mark to market its stock in passive foreign investment companies
at the end of its taxable year. This election may result in the
recognition of gains, which will be treated as ordinary income
subject to the tax distribution requirements described above, or
losses, the deductibility of which will be subject to limitations
under the Code.
Hedging and Option Income Strategies and Foreign Currencies.
The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures contracts and
entering into forward contracts, involves complex rules that will
determine for income tax purposes the character and timing of
recognition of the income received in connection therewith by the
fund and therefore of its distributions.
Gains or losses attributable to fluctuations in exchange
rates that occur between the time the fund accrues receivables or
liabilities denominated in a foreign currency and the time the
fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of foreign currency or debt securities
denominated in foreign currency and on disposition of certain
futures, forward contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency
between the date of acquisition of the currency, security, or
contract and the date of disposition also are treated as ordinary
income or loss. Such income or losses may increase or decrease
the amount of the fund's investment company taxable income to be
distributed to its shareholders as ordinary income, rather than
the amount distributed as capital gain.
The hedging transactions undertaken by the fund may result
in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by
the fund. In addition, losses or deductions realized by the fund
on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such
losses are realized. The tax consequences of hedging transactions
to the fund are not entirely clear. The fund may make one or more
of the elections available under the Code which are applicable to
straddles. If the fund makes any of the elections, the amount,
character and timing of the recognition of gains, losses or
deductions from the affected straddle positions will be determined
under rules that vary according to the election(s) made. The
rules applicable under certain elections operate to accelerate the
recognition of gains, losses or deductions from the affected
straddle positions. Certain transactions may also be treated as
"constructive sales," resulting in the recognition of gain without
any corresponding receipt of cash. Because application of the
mark to market rules, constructive sales rules, or straddle rules
may affect the character and timing of gains, losses or deductions
from the affected straddle positions, the amount which must be
distributed to shareholders, and taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such
hedging transactions.
The fund's taxable income will in most cases be determined
on the basis of reports made to the fund by the issuers of the
securities in which the fund invests. The tax treatment of
certain securities in which the fund may invest is not free from
doubt and it is possible that an Internal Revenue Service
examination of the issuers of such securities or of the fund could
result in adjustments to the income of the fund.
Taxation of Shareholders
Distributions. In general, all distributions to
shareholders attributable to the fund's net investment income and
any excess of its net short-term capital gain over its net long-
term capital loss will be taxable as ordinary income whether paid
in cash or reinvested in additional shares of common stock
pursuant to the fund's dividend reinvestment plan.
Dividends distributed by the fund will not generally be
eligible for the dividends received deduction in the hands of
corporate shareholders, except to the extent that the fund's
taxable income consists of dividends received from domestic
corporations and certain holding period, designation and other
requirements are satisfied.
Dividends and other distributions by the fund are generally
taxable to the shareholders at the time the dividend or
distribution is made. However, any dividends declared by the fund
in October, November or December and made payable to shareholders
of record in such a month would be taxable to shareholders as if
received on December 31 if the dividend is paid in the following
January.
If a shareholder purchases shares of common stock at a cost
that reflects an anticipated dividend, such dividend will be
taxable even though it represents economically in whole or in part
a return of the purchase price. Investors should consider the tax
implications of buying shares shortly prior to a dividend
distribution.
Sales of Shares. In general, if a share of common stock is
sold, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale and the
seller's adjusted basis in the share. However, any loss
recognized by a shareholder on the sale of shares held six months
or less will be treated as a long-term capital loss to the extent
of any capital gain dividends received by the shareholder and the
shareholder's share of undistributed net capital gain, in each
case with respect to the shares that are sold. In addition, any
loss realized on a sale of shares of common stock will be
disallowed to the extent the shares disposed of are replaced with
shares of the fund within a 61-day period beginning 30 days before
and ending 30 days after the disposition of the shares. In such a
case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss. Any gain or loss realized upon a sale of
shares (other than to the fund, which sales are discussed below)
by a shareholder who is not a dealer in securities will be treated
as capital gain or loss. An amount received by a shareholder from
the fund in exchange for shares of the fund (pursuant to a
repurchase of shares or a tender offer or otherwise) may be
treated as a payment in exchange for the shares tendered, which
would result in taxable gain or loss as described above. However,
if the amount received by a shareholder from the fund exceeds the
fair market value of the shares tendered, or if a shareholder does
not sell to the fund all of the shares of the fund owned or deemed
to be owned by the shareholder, all or a portion of the amount
received may be treated as a dividend taxable as ordinary income
or as a return of capital. In addition, if a tender offer is
made, any shareholders who do not tender their shares could be
deemed, under certain circumstances, to have received a taxable
distribution of shares of the fund as a result of their increased
proportionate interest in the fund.
Backup Withholding. The fund may be required to withhold
federal income tax at the rate of 31% of any payments made to a
shareholder if the shareholder has not provided a correct taxpayer
identification number and certain required certifications to the
fund, or if the Secretary of the Treasury notifies the fund that
the number provided by a shareholder is not correct or that the
shareholder has not reported all interest and dividend income
required to be shown on the shareholder's federal income tax
return. Dividends to shareholders who are nonresident aliens or
foreign entities may be subject to a separate withholding of
federal income tax at a maximum rate of 30%, subject to possible
reduction under an applicable income tax treaty (if any). Other
distributions to these shareholders may be subject to backup
withholding unless their foreign status is properly certified in
the manner required under the Code. Nonresident aliens and
foreign entities should consult their own tax advisers regarding
these and other possible tax consequences of investing in the
fund.
The foregoing discussion is a summary of certain of the
current federal income tax laws regarding the fund and investors
in the shares of common stock, and does not deal with all of the
federal income tax consequences applicable to the fund, or to all
categories of investors, some of which may be subject to special
rules. Prospective investors should consult their own tax
advisers regarding the federal, state, local, foreign and other
tax consequences to them of investments in the fund.
OFFICERS AND DIRECTORS
The Officers and Directors of the fund and their principal
occupations for at least the last five years are set forth below.
Those Directors who are "interested persons" of the fund, as
defined in the 1940 Act, are indicated by asterisk. Each person
indicated below as a Director of the fund is also a director,
trustee and/or general partner of other investment companies
registered under the 1940 Act with which Salomon Smith Barney Inc.
(Salomon Smith Barney) or one or more of its affiliates is an
affiliated person.
Name, Address and Age
Positions Held
with the Fund
Principal Occupations During Past
Five Years
*Heath B. McLendon
7 World Trade Center
New York, NY 10048
Age 66
Chairman of the
Board, President
and Chief
Executive Officer
Managing Director Salomon Smith
Barney; Director of 64 investment
companies associated with
Citigroup Inc. (Citigroup);
Director and President of SSB
Citi and Travelers Investment
Adviser, Inc. (TIA).
Name, Address and Age
Positions Held
with the Fund
Principal Occupations During Past
Five Years
Lee Abraham
106 Barnes Road
Stamford, CT 06902
Age 72
Director
Retired; Director of 12
investment companies associated
with Citigroup. Director of R.G.
Barry Corp. a footwear
manufacturer, Signet Group plc, a
specialty retailer, eNote.com,
Inc., a computer hardware
company. Formerly Chairman and
Chief Executive Officer of
Associated Merchandising
Corporation, a major retail
merchandising and sourcing
organization and formerly
Director of Galey & Lord and Liz
Claibrone.
Allan J. Bloostein
27 West 67th Street
New York, NY 10023
Age 70
Director
President of Allan J. Bloostein
Associates, a consulting firm;
Director of 19 investment
companies associated with
Citigroup. Director of CVS
Corporation, a drugstore chain,
and Taubman Centers Inc., a real
estate development company;
Formerly Vice Chairman and
Director of The May Department
Stores Company.
Jane F. Dasher
283 Greenwich Avenue
Greenwich, CT 06830
Age 50
Director
Investment Officer; Korsant
Partners, a family investment
company; Director of 12
investment companies associated
with Citigroup. Prior to 1997,
Independent Financial
Consultant.
Donald R. Foley
3668 Freshwater Drive
Jupiter, FL 33477
Age 77
Director
Retired; Director of 12
investment companies associated
with Citigroup. Formerly, Vice
President of Edwin Bird Wilson,
Incorporated (advertising).
Richard E. Hanson, Jr.
58 Ivy Chase
Atlanta, GA 30342
Age 58
Director
Head of School, The New Atlanta
Jewish Community High School,
Atlanta Georgia; Director of 12
investment companies associated
with Citigroup. Formerly
Headmaster, The Peck School,
Morristown, New Jersey.
Paul Hardin
60134 Davie Street
Chapel Hill, NC 27599
Age 68
Director
Professor of Law at the
University of North Carolina at
Chapel Hill, Director of 14
investment companies associated
with Citigroup. Director of the
Summit Bancorporation. Formerly,
Chancellor of the University of
North Carolina at Chapel Hill.
Name, Address and Age
Positions Held
with the Fund
Principal Occupations During Past
Five Years
Roderick C. Rasmussen
9 Cadence Court
Morristown, NJ 07960
Age 73
Director
Investment Counselor; Director of
12 investment companies
associated with Citigroup.
Formerly, Vice President of
Dresdner and Company Inc.
(investment counselors).
John P. Toolan
13 Chadwell Place
Morristown, NJ 07960
Age 69
Director
Retired; Director of 12
investment companies associated
with Citigroup. Director of John
Hancock Funds. Formerly, Director
and Chairman of Smith Barney
Trust Company, Director of Smith
Barney Holdings Inc. and various
subsidiaries, Senior Executive
Vice President, Director and
Member of the Executive
Committee of Smith Barney.
Lewis E. Daidone
388 Greenwich Street
New York, NY 10013
Age 42
Senior Vice
President
and Treasurer
Managing Director of Salomon
Smith Barney; Senior Vice
President and Treasurer of 59
investment companies associated
with Citigroup; Director and
Senior Vice President of SSB Citi
and TIA.
Christina T. Sydor
388 Greenwich Street
New York, NY 10013
Age 48
Secretary
Managing Director of Salomon
Smith Barney and Secretary of 59
investment companies associated
with Citigroup; Secretary and
General Counsel of SSB Citi and
TIA.
John C. Bianchi
388 Greenwich Street
New York, NY 10013
Age 44
Vice President and
Investment Officer
Managing Director of Salomon
Smith Barney and investment
officer of six Smith Barney
Mutual Funds.
Paul Brook
388 Greenwich Street
New York, NY 10013
Age 45
Controller
Director of Salomon Smith Barney;
and Controller or Assistant
Treasurer of 43 investment
companies associated with
Citigroup since 1998; Prior to
1998, Managing Director of AMT
Capital Services Inc.; Prior to
1997, Partner with Ernst & Young
LLP.
Fees for directors who are not "interested persons" of the
fund, all of whom are board members of a group of funds sponsored
by Salomon Smith Barney, are set at $60,000 per annum and are
allocated based on relative net assets of each fund in the group.
In addition, these directors receive a per meeting fee of $2,500
and $100 for each telephone meeting, plus reimbursement for travel
and out-of-pocket expenses incurred in connection with board
meetings. For the fiscal year ended September 30, 1998, such
expenses totaled $16,595.
The following table shows the compensation paid by the fund
to each person who was a director during the fund's fiscal year
ended September 30, 1999.
Compensation Table
Name
Aggregate
Compensation
from Fund
For Fiscal
Year Ended
9/30/99
Pension or
Retirement
Benefits
Accrued as
part of Fund
Expenses
Compensatio
n from Fund
and Fund
Complex for
the
Calendar
Year Ended
12/31/98
Total Number
of Funds for
Which
Director
Serves
Within Fund
Complex
As of
1/28/00
Lee Abraham
$439
$0
$47,750
12
Allan J. Bloostein
339
0
90,500
19
Jane F. Dasher*
481
0
0
12
Donald R. Foley**
964
0
57,100
12
Richard E. Hanson,
Jr.
427
0
47,950
12
Paul Hardin
964
0
71,400
14
Heath B. McLendon+
0
0
0
64
Roderick C.
Rasmussen
964
0
57,100
12
John P. Toolan**
864
0
54,700
12
* Ms. Dasher was not a director of the Smith Barney Funds in
1998, therefore no compensation was paid by the Fund Complex.
** Pursuant to the fund's deferred compensation plan, the
indicated persons have elected to defer the payment of the
following amounts of their compensation from the fund: Donald
R. Foley: $221 and John P. Toolan: $864, and the following
amounts of their total compensation from the fund complex:
Donald R. Foley: $21,000, and John P. Toolan: $54,700.
+ Designates a director who is an "interested person" of the fund
as defined under the 1940 Act.
Upon attainment of age 72 the fund's current directors may
elect to change to emeritus status. Any directors elected or
appointed to the board of directors in the future will be
required to change to emeritus status upon attainment of age
80. Directors emeritus are entitled to serve in emeritus status
for a maximum of 10 years during which time they are paid 50%
of the annual retainer fee and meeting fees otherwise
applicable to the fund's directors, together with reasonable
out-of-pocket expenses for each meeting attended. During the
fund's last fiscal year, total compensation paid by the fund to
directors emeritus totaled $417.
At the close of business on January 7, 2000, 69,782,180.891
shares of common stock, equal to 98.04% of the fund's total shares
outstanding on that date, were held of record but not beneficially
owned by, CEDE & Co., c/o Depository Trust Company, Box 20,
Bowling Green Station, NY, NY 10004-9998. As of that date, the
officers and Directors of the fund beneficially owned less than 1%
of the outstanding shares of the fund.
PORTFOLIO TRANSACTIONS
General
The fund's securities ordinarily are purchased from and sold
to parties acting as either principal or agent. Newly issued
securities ordinarily are purchased directly from the issuer or
from an underwriter; other purchases and sales usually are placed
with those dealers from which the Investment Manager determines
that the best execution will be obtained. Usually no brokerage
commissions, as such, are paid by the fund for purchases and sales
of fixed-income securities, which are typically undertaken through
principal transactions, although the price paid usually includes
compensation to the dealer acting in the form of a spread or mark-
up. The prices paid to underwriters of newly issued securities
typically include a concession paid by the issuer to the
underwriter, and purchasers of after-market fixed-income
securities from dealers ordinarily are executed at a price between
the bid and asked price.
Transactions on behalf of the fund are allocated to various
broker-dealers by the Investment Manager in its best judgment.
The primary consideration is prompt and effective execution of
orders at the most favorable price. Subject to that primary
consideration, broker-dealers may be selected for research,
statistical or other services to enable the Investment Manager to
supplement its own research and analysis with the views and
information of other securities firms. The fund may utilize
Salomon Smith Barney or a Salomon Smith Barney-affiliated broker
in connection with a purchase or sale of securities when the
Investment Manager believes that the broker's charge for the
transactions does not exceed usual and customary levels. The same
standard applies to the use of Smith Barney as a commodities
broker in connection with entering into options and futures
contracts.
Research services furnished by broker-dealers through which
the fund effects securities transactions may be used by the
Investment Manager in managing other investment funds and,
conversely, research services furnished to the Investment Manager
by broker-dealers in connection with other funds the Investment
Manager advises may be used by the Investment Manager in advising
the fund. Although it is not possible to place a dollar value on
these services, the Investment Manager is of the view that the
receipt of the services should not reduce the overall costs of its
research services.
Investment decisions for the fund are made independently
from those of other investment companies managed by the Investment
Manager. If those investment companies are prepared to invest in,
or desire to dispose of, investments at the same time as the fund,
however, available investments or opportunities for sales will be
allocated equitably to each client of the Investment Manager. 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.
The fund's Board of Directors will review periodically the
commissions paid by the fund to determine if the commissions paid
over representative periods of time were reasonable in relation to
the benefits inuring to the fund.
Turnover
The fund cannot accurately predict its turnover rate, but
anticipates that its annual turnover rate will not exceed 150%.
The fund's turnover rate is calculated by dividing the lesser of
the fund's sales or purchases of securities during a year
(excluding any security the maturity of which at the time of
acquisition is one year or less) by the average monthly value of
the fund's securities for the year. Higher turnover rates can
result in transaction costs, and corresponding increases in the
fund's expense ratio. The fund will not consider turnover rate a
limiting factor in making investment decisions consistent with its
investment objectives and policies. For the fiscal years ended
September 30, 1997, 1998 and 1999 the portfolio turnover rate was
87%, 98% and 83%, respectively.
MANAGEMENT OF THE FUND
Investment Manager
SSB Citi, 388 Greenwich Street, New York, New York 10013, is
controlled by Salomon Smith Barney Holdings Inc., the parent
company of Salomon Smith Barney. Salomon Smith Barney Holdings
Inc. is a direct wholly owned subsidiary of Citigroup.
Subject to the supervision and direction of the fund's Board
of Directors, SSB Citi manages the securities held by the fund in
accordance with the fund's stated investment objectives and
policies, makes investment decisions for the fund, places orders
to purchase and sell securities on behalf of the fund and employs
managers and securities analysts who provide research services to
the fund. The fund pays SSB Citi a fee for services provided to
the fund that is computed daily and paid monthly at the annual
rate of 1.15% of the value of the fund's average daily net assets.
This fee is higher than the rates for similar services paid by
other publicly offered, closed-end management investment companies
that have investment objectives and policies similar to the fund.
For the years ended September 30, 1997, 1998 and 1999, the fund
paid $9,638,822, $10,065,212 and $9,153,937, respectively, in
management fees to SSB Citi.
Custodian and Transfer Agent
PNC Bank, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, acts as custodian of the fund's
investments. PFPC Global Fund Services (PFPC), 53 State Street,
Boston, Massachusetts, 02109, serves as the fund's transfer agent,
dividend-paying agent and registrar.
Independent Auditors
KPMG LLP, 345 Park Avenue, New York, New York 10154, has
been selected as independent auditors for the fund for its fiscal
year ending September 30, 2000 to examine and report on the
financial statements of the fund.
REPURCHASE OF SHARES, CONVERSION TO OPEN-END FUND AND
ANTI-TAKEOVER PROVISIONS
Repurchase Of Common Shares
The fund may repurchase shares of its common stock in the
open market or in privately negotiated transactions when the fund
can do so at prices below their then-current net asset value per
share on terms that the Board of Directors believes represent a
favorable investment opportunity, but has no obligation to do so.
No assurance can be given that repurchases and/or tenders
will result in the common stock's trading at a price that is close
or equal to net asset value. The market price of the common stock
will, among other things, be determined by the relative demand
for, and supply of, the common stock in the market, the fund's
investment performance, the fund's dividends and investor
perception of the fund's overall attractiveness as an investment
as compared with other investment alternatives. Any such
acquisition of common stock will decrease the total assets of the
fund and therefore have the effect of increasing the fund's
expense ratio. The fund may borrow money to finance the
repurchase of shares subject to certain limitations. See
"Investment Restrictions." Any interest on the borrowings will
reduce the fund's net income.
If the fund liquidates securities in order to repurchase
shares of common stock, the fund may realize gains and losses. The
fund's turnover rate may or may not be affected by the fund's
repurchases of shares of common stock pursuant to a tender offer.
Conversion To Open-End Fund
The fund's Articles of Incorporation require the favorable
vote of the holders of at least two-thirds of the shares of common
stock then entitled to be voted to authorize the conversion of the
fund from a closed-end to an open-end investment company as
defined in the 1940 Act, unless two-thirds of the Continuing
Directors (as defined below) approve such a conversion. In the
latter case, the affirmative vote of a majority of the shares
outstanding will be required to approve the amendment to the
fund's Articles of Incorporation providing for the conversion of
the fund.
Anti-Takeover Provisions
The fund's Articles of Incorporation include provisions that
could have the effect of limiting the ability of other entities or
persons to acquire control of the fund or to change the
composition of its Board of Directors and could have the effect of
depriving shareholders of an opportunity to sell their shares of
common stock at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the
fund. The Board of Directors is divided into three classes. At
the annual meeting of shareholders in each year, the term of one
class expires and each Director elected to the class holds office
for a term of three years. The classification of the Board of
Directors in this manner could delay for an additional year the
replacement of a majority of the Board. The Articles of
Incorporation provide that the maximum number of Directors that
may constitute the fund's entire board is 12. A Director may be
removed from office, or the maximum number of Directors increased,
only by vote of the holders of at least 75% of the shares of
common stock entitled to be voted on the matter.
The affirmative votes of at least 75% of the Directors and
the holders of at least 75% of the shares of the fund are required
to authorize any of the following transactions (referred to
individually as a "Business Combination"): (1) a merger,
consolidation or share exchange of the fund with or into any other
person (referred to individually as a "Reorganization
Transaction"); (2) the 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 other person or entity for cash, securities or
other property (or combination thereof) having an aggregate fair
market value of $1,000,000 or more, excluding sales of 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 and issuances of securities of the fund upon
the exercise of any stock subscription rights distributed by the
fund; (3) a 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 of any assets of the
fund having an aggregate fair market value of $1,000,000 or more,
except for transactions in securities effected by the fund in the
ordinary course of its business (each such sale, lease, exchange,
mortgage, pledge, transfer or other disposition being referred to
individually as a "Transfer Transaction"). The same affirmative
votes are required with respect to: any proposal as to the
voluntary liquidation or dissolution of the fund or any amendment
to the fund's Articles of Incorporation to terminate its existence
(referred to individually as a "Termination Transaction"), and any
shareholder proposal as to specific investment decisions made or
to be made with respect to the fund's assets.
A 75% shareholder vote will not be required with respect to
a Business Combination if the transaction is approved by a vote of
at least 75% of the Continuing Directors (as defined below) or if
certain conditions regarding the consideration paid by the person
entering into, or proposing to enter into, a Business Combination
with the fund and various other requirements are satisfied. In
such case, a majority of the votes entitled to be cast by
shareholders of the fund will be required to approve the
transaction if it is a Reorganization Transaction or a Transfer
Transaction that involves substantially all of the fund's assets
and no shareholder vote will be required to approve the
transaction if it is any other Business Combination. In addition,
a 75% shareholder vote will not be required with respect to a
Termination Transaction if it is approved by a vote of at least
75% of the Continuing Directors, in which case a majority of the
votes entitled to be cast by shareholders of the fund will be
required to approve the transaction.
The voting provisions described above could have the effect
of depriving shareholders of the fund of an opportunity to sell
their common stock 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 view of the
fund's Board of Directors, however, these provisions offer several
possible advantages, including: (1) requiring persons seeking
control of the fund to negotiate with its management regarding the
price to be paid for the amount of common stock required to obtain
control; (2) promoting continuity and stability; and (3) enhancing
the fund's ability to pursue long-term strategies that are
consistent with its investment objective and the management
policies. The Board of Directors has determined that the voting
requirements described above, which are generally greater than the
minimum requirements under Maryland law and the 1940 Act, are in
the best interests of shareholders generally.
A "Continuing Director," as used in the discussion above, is
any member of the fund's Board of Directors (1) who is not a
person or affiliate of a person who enters or proposes to enter
into a Business Combination with the fund (such a person or
affiliate being referred to individually as an "Interested Party")
and (2) who has been a member of the Board of Directors 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 members of the Board of Directors.
FINANCIAL STATEMENTS
The financial information contained under the following
headings is hereby incorporated by reference from the fund's
September 30, 1999 Annual Report to Shareholders, copies of which
are furnished with this SAI: Statement of Assets and Liabilities;
Statement of Changes in Net Assets; Statement of Operations; Notes
to Financial Statements; Financial Highlights and Independent
Auditors' Report.
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