-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gn3Qcdi5Yw+CXDnOiVhFNTI8tOuwvtM1fnAghC2Hp2iL1mIpRgm/yD1Hcw6Ijmrv jhy5Xn2fbg8IdoB78+phQw== 0000950130-98-002769.txt : 19980525 0000950130-98-002769.hdr.sgml : 19980525 ACCESSION NUMBER: 0000950130-98-002769 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980521 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALOMON BROTHERS HIGH INCOME FUND II INC CENTRAL INDEX KEY: 0001058239 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2/A SEC ACT: SEC FILE NUMBER: 333-48351 FILM NUMBER: 98630558 FILING VALUES: FORM TYPE: N-2/A SEC ACT: SEC FILE NUMBER: 811-08709 FILM NUMBER: 98630559 BUSINESS ADDRESS: STREET 1: 0 STREET 2: SEVEN WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 FORMER COMPANY: FORMER CONFORMED NAME: SALOMON BROTHERS HIGH YIELD BOND FUND IN DATE OF NAME CHANGE: 19980319 N-2/A 1 SALOMON BROTHERS HIGH INCOME FUND II INC AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1998 SECURITIES ACT FILE NO. 333-48351 INVESTMENT COMPANY ACT FILE NO. 811-08709 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM N-2 [X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] PRE-EFFECTIVE AMENDMENT NO. 2 [_] POST-EFFECTIVE AMENDMENT NO. AND/OR [X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] AMENDMENT NO. 2 (CHECK APPROPRIATE BOX OR BOXES) -------------- SALOMON BROTHERS HIGH 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (888) 777-0102 ROBERT A. VEGLIANTE, ESQ. SALOMON BROTHERS HIGH INCOME FUND II INC SEVEN WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (212) 783-7000 (NAME AND ADDRESS OF AGENT FOR SERVICE) -------------- COPIES TO: GARY S. SCHPERO, ESQ. THOMAS A. DECAPO, ESQ. SIMPSON THACHER & BARTLETT SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 425 LEXINGTON AVENUE ONE BEACON STREET NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02108 (212) 455-2000 (617) 573-4800 -------------- APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as amended, other than securities offered in connection with a dividend reinvestment plan, check the following box. [_] It is proposed that this filing will become effective (check appropriate box): [X] When declared effective pursuant to section 8(c). If appropriate, check the following box: [_] this [post-effective] amendment designates a new effective date for a previously filed [post-effective amendment] [registration statement]. [_] This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is . If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION TITLE OF SECURITIES BEING REGISTERED REGISTERED(1)(3)(4) PER SHARE(1) OFFERING PRICE(1)(3) FEE(2) - ---------------------------------------------------------------------------------------------------------- Common Stock, $.001 par value................... 66,666,667 Shares $15.00 $1,000,000,005 $295,000
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee. (2) $20,355 has previously been transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA. (3) Assuming exercise in full of the option granted by the Fund to the Underwriters to purchase up to an additional 8,695,652 shares of Common Stock to cover over-allotments. See "Underwriting." (4) Includes shares that may be reoffered and resold by Salomon Smith Barney in market-making transactions after trading in shares commences on the New York Stock Exchange, Inc. or other national securities exchange. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A)
N-2 ITEM NUMBER LOCATION IN PROSPECTUS (CAPTION) --------------- -------------------------------- PART A 1. Outside Front Cover......... Outside Front Cover Page 2. Inside Front and Outside Outside Front Cover Page; Inside Front Back Cover Page............ Cover Page; Outside Back Cover Page 3. Fee Table and Synopsis...... Prospectus Summary; Fee Table 4. Financial Highlights........ Not Applicable 5. Plan of Distribution........ Outside Front Cover Page; Prospectus Summary; Management of the Fund; Underwriting 6. Selling Shareholders........ Not Applicable 7. Use of Proceeds............. Use of Proceeds; Investment Objectives and Policies 8. General Description of the Outside Front Cover Page; Prospectus Registrant................. Summary; Risk Factors & Special Considerations; The Fund; Investment Objectives and Policies; Additional Investment Activities; Description of Capital Stock 9. Management.................. Outside Front Cover; Prospectus Summary; Management of the Fund; Custodian, Transfer Agent, Dividend Paying Agent and Registrar 10. Capital Stock, Long-Term Debt, and Other Outside Front Cover Page; Prospectus Securities................. Summary; Investment Objectives and Policies; Description of Capital Stock; Taxation 11. Defaults and Arrears on Senior Securities.......... Not Applicable 12. Legal Proceedings........... Not Applicable 13. Table of Contents of the Statement of Additional Information................ Not Applicable PART B 14. Cover Page.................. Outside Front Cover Page 15. Table of Contents........... Outside Back Cover Page 16. General Information and History.................... The Fund 17. Investment Objectives and Investment Objectives and Policies; Policies................... Investment Restrictions 18. Management.................. Management of the Fund 19. Control Persons and Principal Holders of Securities................. Not Applicable 20. Investment Advisory and Other Services............. Management of the Fund 21. Brokerage Allocation and Other Practices............ Portfolio Transactions 22. Tax Status.................. Taxation 23. Financial Statements........ Report of Independent Accountants; Statement of Assets and Liabilities
PART C Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement. PROSPECTUS SHARES SALOMON BROTHERS HIGH INCOME FUND II INC COMMON STOCK ($.001 PAR VALUE) ------------ Salomon Brothers High Income Fund II Inc (the "Fund") is a newly organized, closed-end management investment company that seeks to maximize current income by investing primarily in a diversified portfolio of high yield debt securities rated at the time of investment in medium or lower rating categories ("Baa" or lower by Moody's Investors Service, Inc. ("Moody's") or "BBB" or lower by Standard & Poor's Ratings Group ("S&P")) or in unrated fixed-income securities determined by the Fund's investment manager to be of comparable quality. As a secondary objective, the Fund will seek capital appreciation to the extent consistent with its objective of seeking to maximize current income. Under normal market conditions, the Fund will invest at least 65% of its total assets in high yield debt securities. The Fund may invest up to 35% of its total assets in foreign debt securities, which the Fund expects will primarily consist of debt securities of issuers located in emerging market countries. There can be no assurance that the Fund's investment objectives will be achieved. HIGH YIELD DEBT SECURITIES ARE CONSIDERED SPECULATIVE AND ARE SUBJECT TO CERTAIN RISKS, INCLUDING GREATER PRICE VOLATILITY AND A GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST. The Fund is designed for investors willing to assume additional risk in return primarily for the potential for high current income and secondarily for capital appreciation. An investment in the Fund should be considered speculative in that it involves a high degree of risk and should not constitute a complete investment program. Investors should carefully assess the risks associated with an investment in the Fund. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS" AND "INVESTMENT OBJECTIVES AND POLICIES." Because the Fund is newly organized, its shares have no history of public trading. Shares of closed-end investment companies frequently trade at a discount from their net asset value. This risk may be greater for initial investors expecting to sell their shares in a relatively short period after completion of the public offering. See "Risk Factors and Special Considerations." (Continued on next page) ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PRICE TO PUBLIC(1) SALES LOAD(1)(2) PROCEEDS TO FUND(3)(4) - --------------------------------------------------------------------- Per Share $15.00 none $15.00 - --------------------------------------------------------------------- Total(4) $ none $
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Footnotes on the following page) ------------ The shares of Common Stock are being offered by the Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that delivery of the shares of Common Stock will be made in book-entry form through the facilities of The Depository Trust Company on or about May 28, 1998. ------------ SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC. ADVEST, INC. EVEREN SECURITIES, INC. FAHNESTOCK & CO. INC. JANNEY MONTGOMERY SCOTT INC. LEGG MASON WOOD WALKER MCDONALD & COMPANY MORGAN KEEGAN & COMPANY, INC. INCORPORATED SECURITIES, INC. THE ROBINSON-HUMPHREY COMPANY TUCKER ANTHONY WEDBUSH MORGAN SECURITIES INCORPORATED May 21, 1998 (Continued from previous page) Salomon Brothers Asset Management Inc will serve as investment manager to the Fund. The Common Stock has been approved for listing on the New York Stock Exchange under the symbol "HIX" subject to official notice of issuance. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE FUND'S SHARES OF COMMON STOCK. At times, the Fund may utilize leverage through borrowing or by issuing shares of preferred stock or debt securities in an amount up to 33 1/3% of the Fund's total assets including the amount obtained from leverage. The Fund intends to utilize leverage in an initial amount equal to approximately 25% of its total assets including the amount obtained from leverage. Through these leveraging techniques, the Fund will seek to obtain a higher return for holders of Common Stock than if the Fund did not use leverage. Leverage is a speculative technique and there are special risks and costs associated with leveraging. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed. See "Risk Factors and Special Considerations--Leverage" and "Additional Investment Activities-- Leverage." The address of the Fund is Seven World Trade Center, New York, New York 10048, and the Fund's telephone number is (888) 777-0102. 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. The Securities and Exchange Commission (the "Commission") maintains a web site (http://www.sec.gov) that contains material incorporated by reference and other information regarding registrants that file electronically with the Commission. ------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK OF THE FUND, INCLUDING THE ENTRY OF STABILIZING BIDS, COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." ------------ (Footnotes from cover page) (1) The investment manager or an affiliate will pay the Underwriters a commission in the amount of 5.00% of the Price to Public per share in connection with the sale of shares of Common Stock offered hereby. See "Underwriting." (2) The Fund and the investment manager have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. (3) Before deducting organizational and offering expenses payable by the Fund (including $250,000 to be paid to the Underwriters as reimbursement of certain of their expenses in connection with the offering), estimated at $1,670,000. (4) The Fund has granted the Underwriters an option exercisable for 45 days after the date hereof to purchase up to an additional shares to cover over-allotments. If all such shares are purchased, the total Price to Public and Proceeds to Fund will be $ . See "Underwriting." 2 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 newly organized, closed-end management investment company which seeks to maximize current income. The investment manager believes that by investing in high yield U.S. debt securities supplemented by high yield foreign debt securities, the Fund can diversify its risk and enhance the overall credit quality of its portfolio while maintaining a high level of current income. See "The Fund." Investment Objectives and Policies........... The Fund's investment objective is to seek to maximize current income by investing primarily in a diversified portfolio of high yield debt securities rated at the time of investment in medium or lower rating categories ("Baa" or lower by Moody's or "BBB" or lower by S&P) or in unrated fixed-income securities determined by the Fund's investment manager to be of comparable quality. As a secondary objective, the Fund will seek capital appreciation to the extent consistent with its objective of seeking to maximize current income. Under normal market conditions, the Fund will invest at least 65% of its total assets in high yield debt securities. The Fund may invest up to 35% of its total assets in foreign debt securities, which the Fund expects will primarily consist of debt securities of issuers located in emerging market countries. The Fund initially intends to invest approximately 20% to 25% of its total assets in debt securities of issuers located in emerging market countries. Medium and low-rated and comparable unrated securities, commonly known as "junk bonds," offer yields that fluctuate over time but generally are superior to yields on higher- rated securities. However, such debt securities also involve greater risks than higher-rated securities. Certain of the debt securities purchased by the Fund may be rated as low as "C" by Moody's or "D" by S&P or may be comparable to securities so rated. For a description of the Moody's "C" rating and the S&P "D" rating, see "Investment Objectives and Policies--General" and Appendix A to this Prospectus. The Fund is designed for investors willing to assume additional risk in return primarily for the potential for high current income and secondarily for capital appreciation. The Fund is not intended to be a complete investment program and there is no assurance that the Fund will achieve its objectives. See "Investment Objectives and Policies." 3 The Fund may invest up to 30% of its total assets in zero coupon securities, pay-in-kind bonds and deferred payment securities, up to 20% of its total assets in equity securities (certain equity securities may be treated as debt securities for purposes of the Fund's policy to invest at least 65% of its total assets, under normal circumstances, in high yield debt securities) and may invest in loan participations and assignments. See "Investment Objectives and Policies--Other Investments--Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment Securities," "--Loan Participations and Assignments" and "--Equity Securities." At times, the Fund may utilize leverage through borrowing or by issuing shares of preferred stock or debt securities in an amount up to 33 1/3% of the Fund's total assets including the amount obtained from leverage. The Fund intends to utilize leverage in an initial amount equal to approximately 25% of its total assets including the amount obtained from leverage. Through these leveraging techniques, the Fund will seek to obtain a higher return for holders of Common Stock than if the Fund did not use leverage. Leverage is a speculative technique and there are special risks and costs associated with leveraging. The Fund will seek to limit certain risks associated with leverage by investing in certain floating rate debt securities. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed. See "Risk Factors and Special Considerations--Leverage" and "Additional Investment Activities--Leverage." The Offering............ shares of Common Stock, par value $.001 per share (the "Common Stock"), of the Fund are being offered for sale through the several underwriters (collectively, the "Underwriters") for whom Salomon Smith Barney is acting as representative. The initial public offering price of the Common Stock is $15.00 per share. The minimum purchase is 100 shares ($1,500.00). In addition, the Fund has granted the Underwriters an option to purchase up to additional shares to cover over-allotments. See "Underwriting." Listing................. Prior to this offering, there has been no public market for the shares of Common Stock of the Fund. The Common Stock has been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "HIX" subject to official notice of issuance. 4 Stock Symbol............ "HIX" Investment Manager...... Salomon Brothers Asset Management Inc ("SBAM") is the Fund's investment manager and will manage the Fund's investment portfolio in accordance with the Fund's investment objectives and policies. SBAM provides a full range of fixed income and equity investment advisory services for its individual and institutional clients throughout the world and provides investment advisory services to over 134 institutional accounts. As of March 31, 1998, SBAM and its worldwide investment advisory affiliates managed approximately $27.6 billion of assets. SBAM has access to hundreds of affiliated economists and bond, sovereign and equity analysts, including a staff dedicated to high yield credit research and to emerging markets sovereign credit research. Peter J. Wilby is primarily responsible for the day- to-day management of the Fund. Mr. Wilby, who joined SBAM in 1989, is a Managing Director and a Senior Portfolio Manager of SBAM, responsible for SBAM's investment company and institutional portfolios which invest in high yield U.S. and foreign corporate debt securities and high yield foreign sovereign debt securities. Mr. Wilby is portfolio manager for, among others, Salomon Brothers High Income Fund Inc; Salomon Brothers Worldwide Income Fund Inc; The Emerging Markets Income Fund Inc; The Emerging Markets Income Fund II Inc; the foreign sovereign debt component of Salomon Brothers 2008 Worldwide Dollar Government Term Trust Inc; The Emerging Markets Floating Rate Fund Inc.; Global Partners Income Fund Inc.; Salomon Brothers High Yield Bond Fund and the high yield and sovereign debt portions of Salomon Brothers Strategic Bond Fund, each a portfolio of Salomon Brothers Series Funds Inc; Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers Institutional Emerging Markets Debt Fund, each a portfolio of Salomon Brothers Institutional Series Funds Inc; and Salomon Brothers Variable High Yield Bond Fund and the high yield and sovereign debt portions of Salomon Brothers Variable Strategic Bond Fund, each a portfolio of Salomon Brothers Variable Series Funds Inc. See "Management of the Fund." Management and Administration Fees.... The Fund will pay SBAM for its investment management services a monthly fee at an annual rate of 1.00% of the value of the Fund's average weekly net assets (which includes any proceeds from the issuance of preferred stock) plus the proceeds of any outstanding 5 borrowings used for leverage. See "Management of the Fund--Investment Manager." This fee is higher than fees paid by other comparable investment companies. The Fund will also pay Mutual Management Corp. (the "Administrator") for its administrative services a monthly fee at an annual rate of .10% of the value of the Fund's average weekly net assets (which includes any proceeds from the issuance of preferred stock) plus the proceeds of any outstanding borrowings used for leverage. See "Management of the Fund--Administrator." During periods in which the Fund is utilizing financial leverage, the fees which are payable to SBAM and the Administrator as a percentage of the Fund's assets will be higher than if the Fund did not utilize a leveraged capital structure because the fees are calculated as a percentage of the Fund's assets, including those purchased with leverage. See "Risk Factors and Special Considerations-- Leverage" and "Additional Investment Activities-- Leverage." Dividends and Beginning with its initial distribution Distributions.......... approximately 60 days after completion of this offering, it is the Fund's present policy, which may be changed by the Board of Directors, to make regular monthly cash distributions to holders of Common Stock at a level rate that reflects the past and projected performance of the Fund, which over time will result in the distribution of all net investment income of the Fund, and to distribute any net realized capital gains at least annually. From and after the leveraging (if any) of the Common Stock, monthly distributions to holders of Common Stock will generally consist of net investment income remaining after the payment of interest or dividends on any outstanding leverage, subject to the Fund's present policy of making distributions at a level rate as described above. For tax purposes, the Fund is currently required to allocate net capital gains and other taxable income between shares of Common Stock and shares of preferred stock, if any. As a result of the Fund's anticipated investment in certain Brady Bonds and other sovereign debt obligations acquired at a discount as well as its ability to invest in zero coupon securities and pay-in-kind bonds, the Fund expects to make 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-- Other Investments--Zero Coupon Securities, Pay-in- Kind Bonds and Deferred Payment Securities." 6 Dividend Reinvestment Under the Fund's Dividend Reinvestment Plan (the Plan................... "Plan"), shareholders will have all dividends and distributions automatically reinvested in additional shares of Common Stock of the Fund unless the shareholder elects to receive cash or the Board of Directors of the Fund declares a dividend or distribution payable only in cash. Shareholders whose shares are held in the name of a broker or nominee should contact such broker or nominee to confirm that they may participate in the Plan. See "Dividends and Distributions; Dividend Reinvestment Plan." Taxation................ The Fund intends to elect and qualify to be treated as a regulated investment company for U.S. federal income tax purposes. As such, it will generally not be subject to U.S. federal income tax on income and gains that are distributed to shareholders. See "Taxation." Custodian, Transfer Agent, Dividend Paying Agent and Registrar.... PNC Bank, N.A. will act as custodian for the Fund's assets. First Data Investor Services Group, Inc. will act as transfer agent, dividend paying agent and registrar for the Fund's Common Stock. 7 RISK FACTORS AND SPECIAL CONSIDERATIONS General Considerations Relating to High Yield The net asset value of the Fund's shares will change Debt Securities........ with fluctuations in the value of its portfolio securities. The high yield corporate debt securities, commonly known as "junk bonds," and high yield foreign debt securities in which the Fund will invest generally will be rated, at the time of investment, in the categories "Baa" or lower by Moody's or "BBB" or lower by S&P, or will be of comparable quality. These lower-rated and comparable unrated securities involve greater risks than higher-rated securities. Under rating agency guidelines, lower-rated securities and comparable unrated securities will likely have some quality and protective characteristics that are outweighed by large uncertainties or major risk exposures to adverse conditions. Lower-rated securities may have poor prospects of ever attaining any real investment standing, may have a current identifiable vulnerability to default, may be unlikely to have the capacity to pay interest and repay principal when due in the event of adverse business, financial or economic conditions and/or may be in default or not current in the payment of interest or principal. Such securities are considered speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. Accordingly, it is possible that these types of factors could reduce the value and liquidity of securities held by the Fund, with a commensurate effect on the value of the Fund's shares. Because the Fund will invest primarily in fixed- income securities, the net asset value of the Fund's portfolio, and hence its shares, can be expected to change as general levels of interest rates fluctuate, although the market values of securities rated below investment grade and comparable unrated securities tend to react less to fluctuations in interest rate levels than do those of higher-rated securities. Except to the extent that values are affected independently by other factors such as developments relating to a specific issuer, when interest rates decline, the value of a fixed-income portfolio can generally be expected to rise. Conversely, when interest rates rise, the value of a fixed-income portfolio can generally be expected to decline. These fluctuations can be expected to be greater with respect to investments in fixed-income securities with longer maturities than investments in securities with shorter maturities. Although there is no limitation on the average maturity of the Fund's portfolio, SBAM currently expects 8 that the Fund's high yield debt portfolio will initially have an average maturity of 8 to 15 years. However, because many fixed-income securities contain redemption features, the actual average maturity of the Fund's portfolio may be considerably less. See "--Considerations Relating to High Yield Corporate Securities." The secondary markets for high yield debt securities are not as liquid as the secondary markets for higher-rated securities. The secondary markets for high yield debt securities are characterized by relatively few market makers, participants in the market being mostly institutional investors including insurance companies, banks, other financial institutions and mutual funds. In addition, the trading volume for high yield debt securities is generally lower than that for higher- rated securities, and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield securities, especially in a thinly-traded market. These factors may have an adverse effect on the Fund's ability to dispose of particular portfolio investments and may limit the ability of the Fund to obtain accurate market quotations for purposes of valuing securities and calculating net asset value. If the Fund is not able to obtain precise or accurate market quotations for a particular security, it will become more difficult for the Board of Directors or its delegate to value the Fund's portfolio securities and the Board or its delegate may have to use a greater degree of judgment in making such valuations. Less liquid secondary markets may also affect the Fund's ability to sell securities at their fair value. The Fund may invest without limitation in illiquid securities, which are more difficult to value and to sell at fair value. If the secondary markets for high yield debt securities contract due to adverse economic conditions or for other reasons, certain liquid securities in the Fund's portfolio may become illiquid and the proportion of the Fund's assets invested in illiquid securities may increase. Prices for high yield securities may be affected by legislative and regulatory developments which could adversely affect the Fund's net asset value and investment practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value of outstanding high yield securities. 9 Considerations Relating to High Yield While the market values of corporate debt securities Corporate Securities... rated below investment grade and comparable unrated securities tend to react less to fluctuations in interest rate levels than do those of higher-rated securities, the market values of the former also tend to be more sensitive to company-specific developments and changes in economic conditions than higher-rated securities. Issuers of corporate debt securities rated below investment grade and comparable unrated securities are often highly leveraged, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. In addition, such issuers may not have more traditional methods of financing available to them, and may be unable to repay debt at maturity by refinancing. The risk of loss due to default in payment of interest or principal by such issuers is significantly greater than with investment grade securities because lower-rated securities generally are unsecured and subordinated to the prior payment of senior indebtedness. The Fund may also incur additional expenses to the extent that it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. Many fixed-income securities, including corporate debt securities in which the Fund may invest, contain call or buy-back features which permit the issuer of the security to call or repurchase it. Such securities may present risks based on payment expectations. If an issuer exercises such a "call option" and redeems the security, the Fund may have to replace the called security with a lower yielding security, resulting in a decreased rate of return for the Fund. For additional risks relating to high yield foreign corporate debt securities, see "--Considerations Relating to High Yield Foreign Corporate Debt Securities." Considerations Relating to High Yield Foreign Sovereign Debt Securities............. Investments in foreign sovereign debt securities involve certain risks not typically associated with U.S. corporate investments. Investing in foreign sovereign debt securities, especially in emerging market countries, will expose the Fund to the direct or indirect consequences of political, social or economic changes in the countries that issue the securities or in which the issuers are located. The ability and willingness of sovereign obligors or the governmental authorities that control repayment of their external debt to pay principal and interest 10 on such debt when due may depend on general economic and political conditions within the relevant country. Certain countries in which the Fund may invest, especially emerging market countries, have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. Many of these countries are also characterized by political uncertainty or instability. Additional factors that may influence the ability or willingness to service debt include, but are not limited to, a country's cash flow situation, the availability of sufficient foreign exchange on the date a payment is due, the relative size of its debt service burden to the economy as a whole, and its government's policy towards the International Monetary Fund (the "IMF"), the International Bank for Reconstruction and Development (the "World Bank") and other international agencies to which a government debtor may be subject. A substantial portion of the Fund's foreign sovereign and foreign corporate debt securities portfolio is expected to be issued by issuers located in countries considered to be emerging markets, and investments in such securities are particularly speculative. The ability of a foreign sovereign obligor, especially an obligor in an emerging market country, to make timely and ultimate payments on its external debt obligations will also be strongly influenced by the obligor's balance of payments, including export performance, its access to international credits and investments, fluctuations of interest rates and the extent of its foreign reserves. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in international prices of these commodities or imports. To the extent that a country receives payment for its exports in currencies other than dollars, its ability to make debt payments denominated in dollars could be adversely affected. If a foreign sovereign obligor cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial banks, and multilateral organizations, as well as on inflows of foreign investment. The commitment on the part of these foreign governments, multilateral organizations and others to make such disbursements may be conditioned on the government's implementation of economic reforms and/or economic performance and the timely service of its obligations. Failure to implement such 11 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, which may further impair the obligor's ability or willingness to timely service its debts. The cost of servicing external debt will also generally be adversely affected by rising international interest rates because many external debt obligations bear interest at rates which are adjusted based upon international interest rates. The ability to service external debt will also depend on the level of the relevant government's international currency reserves and its access to foreign exchange. Currency devaluations may affect the ability of a sovereign obligor to obtain sufficient foreign exchange to service its external debt. The risks enumerated above generally are heightened with regard to issuers in emerging market countries. As a result of the foregoing, a governmental obligor, particularly in an emerging market country, 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 sovereign 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 sovereign debt obligations in the event of default under their commercial bank loan agreements. Sovereign obligors in developing and emerging countries are among the world's largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. Certain issuers of the sovereign debt securities in which the Fund expects to invest have in the past experienced substantial difficulties in servicing their external debt obligations, which have 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 (as described herein) and obtaining new credit to finance interest payments. Holders of certain foreign sovereign 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 12 Bonds and other foreign sovereign debt securities in which the Fund may invest will not be subject to similar defaults or restructuring arrangements which may adversely affect the value of such investments. 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. Payments to holders of the foreign sovereign debt securities in which the Fund may invest may be subject to withholding and other taxes imposed by a foreign government. Although the holders may be entitled to tax gross-up payments from the issuers of such instruments, there is no assurance that such payments will be made. Considerations Relating to High Yield Foreign Corporate Debt Securities............. In addition to the risks cited under "-- Considerations Relating to High Yield Foreign Sovereign Debt Securities," including political, social and economic risks relating to foreign issuers, investments in securities of foreign issuers may involve additional risks arising from differences between U.S. and foreign securities markets (including, among other things, less volume, much greater price volatility in and illiquidity of certain foreign securities markets, different trading and settlement practices and less governmental supervision and regulation), from changes in currency exchange rates, from high and volatile rates of inflation and, as with domestic multinational corporations, from fluctuating interest rates. These risks are generally heightened with respect to issuers in emerging market countries. Investment in certain foreign securities, especially those of issuers in certain emerging market countries, is restricted or controlled to varying degrees by government regulation which may at times limit or preclude investment in certain foreign securities and increase the costs and expenses of the Fund. Certain foreign countries require governmental approval prior to investments by foreign persons, limit the amount of investment by foreign persons in a particular issuer, limit investment by foreign persons to a specific class of securities of an issuer that may have less advantageous rights than other classes, restrict investment opportunities in issuers in industries deemed important to national interests and/or impose additional taxes on foreign investors. 13 Certain foreign countries, especially certain emerging market countries, may require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors which could adversely affect the Fund. In addition, if a deterioration occurs in the country's balance of payments, it could impose temporary restrictions on foreign capital remittances. Investing in local markets in foreign countries may require the Fund to adopt special procedures, seek local governmental approvals or take other actions, each of which may involve additional costs to the Fund. Other investment risks include the possible imposition of foreign withholding taxes on certain amounts of the Fund's income, the possible seizure or nationalization of foreign assets and the possible establishment of exchange controls, expropriation, confiscatory taxation, other foreign governmental laws or restrictions which might affect adversely payments due on securities held by the Fund, the lack of extensive operating experience of eligible foreign subcustodians and legal limitations on the ability of the Fund to recover assets held in custody by a foreign subcustodian in the event of the subcustodian's bankruptcy. Moreover, brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the United States. In addition, there may be less publicly available information about a foreign issuer, especially one located in an emerging market country, than about comparable U.S. issuers, and foreign issuers may not be subject to the same accounting, auditing and financial record-keeping standards and requirements as U.S. issuers. In particular, the assets and profits appearing on the financial statements of a foreign issuer may not reflect its financial position or results of operations in the way they would be reflected if the financial statements had 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. Finally, in the event of a default in any such foreign obligations, it may be more difficult for the Fund to obtain or enforce a judgment against the issuers of such obligations. 14 Considerations Relating to Foreign Currency Exchange Rates......... Since the Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the value of securities held by the Fund and the unrealized appreciation or depreciation of investments. Currencies of certain countries may be volatile and subject to risk of revaluation, which may affect the value of securities denominated in such currencies. Leverage................ At times, the Fund may utilize leverage by borrowing or by issuing shares of preferred stock or debt securities in an amount up to 33 1/3% of the Fund's total assets including the amount obtained from leverage. The Fund intends to utilize leverage in an initial amount equal to approximately 25% of its total assets including the amount obtained from leverage. The use of leverage will pose certain risks for holders of Common Stock including the possibility of higher volatility of both the net asset value and market value of the Common Stock. There can be no assurance that the Fund will be able to realize a higher return on 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 which is less than the then current interest or dividend rate on any leverage, the Fund's leveraged capital structure would result in a lower yield to the holders of Common Stock than if the Fund were not leveraged. Moreover, any decline in the value of the Fund's assets 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 the Common Stock than if the Fund were not leveraged, which may be reflected in a greater decline in the market price of the Common Stock. The Fund will seek to limit certain risks associated with leverage by investing in certain floating rate debt securities. See "Additional Investment Activities-- Leverage." The Fund's use of leverage will be subject to the provisions of the Investment Company Act of 1940, as amended (the "1940 Act"), including asset coverage requirements and restrictions on the declaration of dividends and distributions to holders of Common Stock or purchases of Common Stock in the event such asset coverage requirements are not met. In addition, the Fund may seek to have 15 Moody's, S&P and/or any other nationally recognized statistical rating organization rate any preferred stock or debt it issues. As a condition to obtaining such ratings, the terms of any preferred stock or debt securities issued will include asset coverage maintenance provisions which will require the redemption of shares of preferred stock or the repayment of debt in the event of non-compliance by the Fund and may also prohibit dividends and other distributions on the Common Stock in such circumstances. 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 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." During periods in which the Fund is utilizing financial leverage, the fees which are payable to SBAM and the Administrator as a percentage of the Fund's assets will be higher than if the Fund did not utilize a leveraged capital structure because the fees are calculated as a percentage of the Fund's assets, including those purchased with leverage. See "Management of the Fund." Additional Investment The Fund may employ various additional investment Strategies............. strategies that entail certain additional or different risks, such as entering into interest rate transactions and options and futures transactions, entering into repurchase agreements, purchasing securities on a when-issued or delayed delivery basis, lending portfolio securities and investing in zero coupon securities, pay-in-kind bonds and loan participations and assignments. See "Investment Objectives and Policies--Other Investments--Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment Securities" and "--Loan Participations and Assignments," "Additional Investment Activities" and Appendix B (General Characteristics and Risks of Hedging and Other Strategic Transactions) to this Prospectus. Trading Discount........ As a newly organized entity, the Fund has no operating history. Shares of closed-end investment companies frequently trade at a discount from net asset value. This 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 and may be greater for investors expecting to sell their shares in a relatively short period following completion of 16 this offering. It should be noted, however, that shares of some closed-end funds have traded at premiums to net asset value. The Fund cannot predict whether its shares will trade at, above or below net asset value. The Fund is intended primarily for long-term investors and should not be considered as a vehicle for trading purposes. Year 2000............... The investment management services provided to the Fund by SBAM depend in large part on the smooth functioning of SBAM's computer systems. Many computer software systems in use today cannot recognize the year 2000, but revert to 1900 or some other date, due to the manner in which dates were encoded or calculated. The capability of these systems to recognize the year 2000 could have a negative impact on SBAM's provision of investment advisory services, including the handling of securities trades, pricing and account services. SBAM has advised the Fund that it has been reviewing all of its computer systems and actively working on necessary changes to its systems to prepare for the year 2000 and expects that given the extensive testing which it is undertaking its systems will be year 2000 compliant before such date. In addition, SBAM has been advised by certain of the Fund's service providers that they are also in the process of modifying their systems with the same goal. There can, however, be no assurance that SBAM or any other service provider will be successful in achieving year 2000 compliance, or that interaction with other non-complying computer systems will not impair services to the Fund at that time. Anti-Takeover Provisions............. The Fund's Amended and Restated Articles of Incorporation (the "Articles of Incorporation") and Amended and Restated By-Laws (the "By-Laws") contain certain anti-takeover provisions that may have the effect of inhibiting the Fund's possible conversion to open-end status and limiting the ability of other persons to acquire control of the Fund. In certain circumstances, these provisions might also inhibit the ability of shareholders to sell their shares at a premium over prevailing market prices. The Fund's Board of Directors has determined that these provisions are in the best interests of shareholders generally. See "Description of Capital Stock--Special Voting Provisions." -------------------- Investors should carefully consider their ability to assume the foregoing risks before making an investment in the Fund. An investment in shares of the Fund may not be appropriate for all investors. Given the above-described investment risks inherent in the Fund, investment in shares of the Fund should be considered speculative and should not be considered a complete investment program. 17 FEE TABLE SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Load (as a percentage of offering price)................ None Dividend Reinvestment Plan Fees....................................... None ANNUAL EXPENSES (as a percentage of net assets attributable to Common Stock): Management and Administration Fees(a)(b).............................. 1.10% Interest Payments on Borrowed Funds(b)................................ None Other Expenses(b)..................................................... .10% ---- Total Annual Expenses(b)............................................ 1.20% ====
EXAMPLE:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- An investor would pay the following expenses on a $1,000 investment, assuming (1) total annual expenses of 1.20% (assuming no leverage) and 3.63% (assuming leverage of 25% of the Fund's total assets) and (2) a 5% annual return throughout the periods: Assuming No Leverage........................ $12 $ 38 $ 66 $145 Assuming 25% Leverage....................... $37 $111 $188 $389
(a) See "Management of the Fund." (b) In the event the Fund utilizes leverage by borrowing in an amount equal to approximately 25% of the Fund's total assets (including the amount obtained from leverage), it is estimated that, as a percentage of net assets attributable to Common Stock, the Management and Administration Fees would be 1.47%, Interest Payments on Borrowed Funds (assuming an interest rate of approximately 6.2%, which interest rate is subject to change based on prevailing market conditions) would be 2.06%, Other Expenses would be .10% and Total Annual Expenses would be 3.63%. The Fund may utilize leverage up to 33 1/3% of the Fund's total assets (including the amount obtained from leverage), depending on economic conditions. See "Risk Factors and Special Considerations--Leverage" and "Additional Investment Activities-- Leverage." The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund will bear directly or indirectly. The expenses set forth under "Other Expenses" are based on estimated amounts through the end of the Fund's first fiscal year on an annualized basis. The Example set forth above assumes reinvestment of all dividends and distributions and utilizes a 5% annual rate of return as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL EXPENSES, LEVERAGE AMOUNT OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. 18 THE FUND The Fund, incorporated in Maryland on March 19, 1998, is a closed-end management investment company registered under the 1940 Act. The Fund's investment objective is to seek to maximize current income by investing primarily in a diversified portfolio of high yield debt securities rated at the time of investment in medium or lower rating categories or determined by SBAM to be of comparable quality. As a secondary objective, the Fund will seek capital appreciation to the extent consistent with its objective of seeking to maximize current income. SBAM, the Fund's investment manager, believes that by investing in high yield U.S. debt securities supplemented by high yield foreign debt securities (which the Fund expects will primarily consist of debt securities of issuers located in emerging market countries), the Fund can diversify its risk and enhance the overall credit quality of its portfolio while maintaining a high level of current income. There can be no assurance that the Fund's investment objectives will be achieved. Due to the risks inherent in the securities in which the Fund may invest, the Fund should not be considered a complete investment program. See "Risk Factors and Special Considerations." USE OF PROCEEDS The net proceeds of this offering, estimated to be $ (or approximately $ assuming the Underwriters exercise the over-allotment option in full) after deducting offering and organizational expenses, will be invested in accordance with the policies set forth under "Investment Objectives and Policies" within three months from the date of this Prospectus. Initially, the proceeds will be invested in high quality short-term money market instruments as described under "Investment Objectives and Policies--Other Investments-- Higher Quality Debt Securities and Money Market Instruments." There will be no sales load or underwriting discount imposed on sales of shares of Common Stock in this offering. SBAM or an affiliate (not the Fund) will pay a commission to the Underwriters from its own assets in connection with sales of shares of Common Stock in this offering. See "Underwriting." 19 INVESTMENT OBJECTIVES AND POLICIES GENERAL The Fund's investment objective is to seek to maximize current income by investing primarily in a diversified portfolio of high yield debt securities rated at the time of investment in medium or lower rating categories ("Baa" or lower by Moody's or "BBB" or lower by S&P) or in unrated fixed-income securities determined by SBAM to be of comparable quality. As a secondary objective, the Fund will seek capital appreciation to the extent consistent with its objective of seeking to maximize current income. Under normal market conditions, the Fund will invest at least 65% of its total assets in high yield debt securities. The Fund may invest up to 35% of its total assets in foreign debt securities, which the Fund expects will primarily consist of debt securities of issuers located in emerging market countries. The Fund initially intends to invest approximately 20% to 25% of its total assets in debt securities of issuers located in emerging market countries. Certain of the debt securities purchased by the Fund may be rated as low as "C" by Moody's or "D" by S&P or may be comparable to securities so rated. Securities rated "C" by Moody's are the lowest rated class of securities and can be regarded as having extremely poor prospects of ever attaining any real investment standing. Securities rated "D" by S&P are in default on their interest and/or principal payments. Debt securities rated by both Moody's and S&P need only satisfy the foregoing ratings standards with respect to either the Moody's or the S&P rating. The Fund is not required to dispose of a debt security if its credit rating or credit quality declines. However, SBAM will continue to evaluate the appropriateness of maintaining such a debt security in the Fund's portfolio in accordance with the approach described below. Medium and low- rated and comparable unrated securities offer yields that fluctuate over time, but generally such yields are superior to the yields offered by higher-rated securities. However, such debt securities also involve greater risks than higher-rated securities. See "Risk Factors and Special Considerations." A description of the ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus. SBAM will be free to invest in high yield debt securities of any maturity and may adjust the average maturity of the Fund's portfolio from time to time, depending on SBAM's assessment of the relative yields available on securities of different maturities and its expectations of future changes in interest rates. Long-term debt securities generally provide a higher yield than short- term debt securities, and therefore SBAM expects that, based upon current market conditions and following the investment of the proceeds of this offering in accordance with the Fund's investment objectives and policies, the Fund's high yield debt securities will initially have an average maturity of 8 to 15 years. However, because many fixed-income securities contain redemption features, the actual average maturity of the Fund's portfolio may be considerably less. See "Risk Factors and Special Considerations-- Considerations Relating to High Yield Corporate Securities." In light of the risks associated with U.S. and foreign high yield debt securities, SBAM will take various factors into consideration in evaluating the creditworthiness of an issuer as well as the appropriateness of the securities for inclusion in the Fund's portfolio. For corporate debt securities, these will typically include the issuer's financial resources, its sensitivity to economic conditions and trends, the operating history of the issuer and the experience and track record of the issuer's management. For foreign debt instruments, these will typically include the economic and political conditions within the issuer's country, the issuer's overall and external debt levels and debt service ratios (if applicable), the issuer's access to capital markets and other sources of funding and the issuer's debt service payment history. SBAM will also review the ratings, if any, assigned to the security by any recognized 20 rating agencies, although SBAM's judgment as to the quality of a debt security may differ from that suggested by the rating published by a rating service. In addition to the foregoing credit analysis, SBAM will evaluate the relative value of an investment compared with its perceived credit risk. The Fund's ability to achieve its investment objectives may be more dependent on SBAM's credit analysis than would be the case if it invested in higher quality debt securities. HIGH YIELD CORPORATE DEBT SECURITIES The market for high yield U.S. corporate debt securities is more established than that for high yield foreign corporate debt securities, but has undergone significant changes in the past and may undergo significant changes in the future. See "Risk Factors and Special Considerations." High yield foreign and U.S. corporate securities in which the Fund may invest include bonds, debentures, notes, commercial paper and preferred stock and will generally be unsecured. Most of the corporate debt securities will bear interest at fixed rates. However, the Fund may also invest in corporate debt securities with variable rates of interest or which involve equity features, such as contingent interest or participations based on revenues, sales or profits (i.e., interest or other payments, often in addition to a fixed rate of return, that are based on the borrower's attainment of specified levels of revenues, sales or profits and thus enable the holder of the security to share in the potential success of the venture). It is the Fund's current intention to seek to limit the possibility that its cost of leverage will adversely affect its net income during a rising interest rate environment by investing a portion of its total assets in high yield debt securities with floating interest rates. See "Additional Investment Activities--Leverage." HIGH YIELD FOREIGN SOVEREIGN AND FOREIGN CORPORATE DEBT SECURITIES The Fund may invest up to 35% of its total assets in foreign fixed-income securities, which the Fund expects will primarily consist of debt securities of issuers located in emerging market countries. As used in this Prospectus, an "emerging market country" is any country considered to be an emerging market country by the World Bank at the time of investment. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most countries located in Western Europe. These securities may be U.S. dollar denominated or non-U.S. dollar denominated, including, among others, in hard currencies such as the British Pound Sterling, the Belgian Franc, the Canadian Dollar, the German Deutsche Mark, the Dutch Guilder, the European Currency Unit, the French Franc, the Italian Lira, the Japanese Yen or the Swiss Franc and include: (a) debt obligations issued or guaranteed by foreign national, provincial, state, municipal or other governments with taxing authority or by their agencies or instrumentalities, including Brady Bonds; (b) debt obligations of supranational entities; (c) debt obligations and other fixed-income securities of foreign corporate issuers; and (d) non-dollar denominated debt obligations of U.S. corporate issuers. The Fund may also invest in securities denominated in currencies of emerging market countries. There is no minimum rating criteria for the Fund's investments in such securities. A description of Brady Bonds is set forth below. The risks associated with these investments are described under the captions "Risk Factors and Special Considerations-- Considerations Relating to High Yield Foreign Sovereign Debt Securities," "-- Considerations Relating to High Yield Foreign Corporate Debt Securities" and "--Other Investments--Brady Bonds." Moreover, substantial investments in foreign securities may have adverse tax implications as described under "Taxation." STATISTICAL INFORMATION REGARDING HIGH YIELD SECURITIES The annualized compound total return since 1991 for emerging markets debt securities, represented by the J.P. Morgan EMBI Index, is 19.40%. The annualized compound total return since 1991 of high yield bonds, 21 represented by the Merrill Lynch High Yield Master Index, is 15.65%. The annualized compound total return since 1991 for long term treasuries, represented by the Merrill Lynch Governments, U.S. Treasury, Long Term Index (15+ Years), is 11.03%. The annualized compound total return since 1991 of corporate bonds, represented by the Merrill Lynch Corporate Master Index (All Maturities), is 9.97%. The annualized compound total return since 1991 for intermediate term treasuries, represented by the Merrill Lynch Governments, U.S. Treasury, Intermediate Term Index (1-9.99 Years), is 7.53%. The annualized compound total return since 1991 of 91-day treasury bills, represented by the Merrill Lynch U.S. Treasury, 91-Day Index, is 4.73%. The J.P. Morgan EMBI Index is an unmanaged index comprised of Brady Bonds issued by the following countries: Argentina, Brazil, Bulgaria, Ecuador, Mexico, Panama, Peru, Poland, Russia, and Venezuela. The Merrill Lynch High Yield Master Index is an unmanaged index of U.S. bonds and U.S. dollar denominated bonds of non-U.S. issuers, in each case with at least $100 million par amount outstanding, with a maturity equal to or greater than one year and rated by S&P in the categories ranging from "BB+" to "C" and rated by Moody's in the categories ranging from "Ba1" to "C." The Merrill Lynch Corporate Master Index (All Maturities) is an unmanaged index of fixed-coupon U.S. investment grade bonds with at least $100 million par amount outstanding with a quality range between BBB3 and AAA based on composite Moody's and S&P ratings. The calculation of composite ratings is based on an averaging that is biased to the lower of the two ratings. The Merrill Lynch Governments, U.S. Treasury, Long Term Index (15+ Years) is an unmanaged index of all U.S. treasury notes and bonds with at least $100 million par amount outstanding and with a maturity greater than or equal to fifteen years. The Merrill Lynch Governments, U.S. Treasury, Intermediate Term Index (1-9.99 Years) is an unmanaged index of all U.S. treasury notes and bonds with at least $100 million par amount outstanding and with a maturity greater than or equal to one year and less than ten years. The Merrill Lynch U.S. Treasury, 91-Day Index is an unmanaged index which, at the beginning of every month, is comprised of the U.S. Treasury Bill with a maturity closest to, but not longer than, 91 days from that date. It is assumed that this issue is held for one month, then sold with the net proceeds reinvested in the bill selected at the beginning of the next month. Differences exist between the securities that comprise the indices shown above, particularly the Merrill Lynch High Yield Master Index and the J.P. Morgan EMBI Index, and the securities in which the Fund will invest. The Fund will not seek to match the composition or performance of any such indices. The performance of the various indices should not be viewed as indicative of the performance of the Fund. Information for the J.P. Morgan EMBI Index is not available for periods prior to January 1991. In addition, past performance is no guarantee of future performance. The statistical information described above reflects a comparison of the annualized compound total return percentages of various asset classes as represented by their respective indices for the period from January 1991 through December 1997. The statistical information described above does not reflect the past or future performance of the Fund. An investor cannot invest directly in an index. High yield bonds and emerging markets debt are subject to greater risks and uncertainties than other securities set forth in the statistical information described above, including U.S. Treasury securities which are guaranteed as to the payment of principal and interest by the U.S. Government. SBAM believes that the credit quality of outstanding U.S. high yield debt has improved over the last decade. For example, the default loss rates (defined as the percentage of high yield bonds (based on par value) which missed any scheduled interest or principal payments (in that year, net of any recovery)) for U.S. high yield bonds were approximately 1.66%, 2.93%, 8.42%, 7.16%, 1.91%, 0.56%, 0.96%, 1.24%, 0.65% and 0.65% for calendar years 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively. The statistical information 22 with respect to historical default loss rates is based on information contained in Edward I. Altman and Vellore M. Kishore, Defaults and Returns on High Yield Bonds: Analysis through 1997, New York University Salomon Center (1998), and is intended to demonstrate default loss rate trends over the period indicated. It should not be viewed as a definitive indication of the relative magnitude of changes in credit quality from year to year. Although other methods of analyzing default experience, such as comparing default experience of seasoned issues, would produce different relative figures, SBAM believes that the foregoing default loss rate data evidences a general trend of improving credit quality. For the period January 1, 1989 through December 31, 1997, the cumulative gross default rate for high yield corporate bonds was 38.34%. This figure represents the probability that a high yield bond issued on January 1, 1989 would default by December 31, 1997. The rate is based on the ratio of the number of issuers that defaulted on high yield bonds outstanding on January 1, 1989 to the number of issuers at risk of defaulting on such bonds as of such date and is based only on bonds that have been rated by Moody's. The foregoing is derived from information obtained by the Fund from the February 1998 issue of a Moody's publication entitled "Historical Default Rates of Corporate Bond Issuers, 1920-1997." The market of outstanding high yield securities has generally increased since 1977. The aggregate outstanding principal amount of high yield securities was approximately $24.0 billion, $26.0 billion, $28.0 billion, $30.0 billion, $32.0 billion, $35.0 billion, $43.0 billion, $59.0 billion, $83.3 billion, $138.4 billion, $182.8 billion, $207.3 billion, $244.2 billion, $214.6 billion, $200.9 billion, $199.6 billion, $233.6 billion, $271.5 billion, $296.9 billion, $352.7 billion and $452.3 billion for calendar years 1977, 1978, 1979, 1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively. The statistical information with respect to historical outstanding principal amounts of high yield securities is based on information the Fund obtained from Chase Securities Inc. The market of outstanding emerging markets debt securities has increased since 1991. The aggregate outstanding principal amount of emerging markets debt securities was approximately $32.7 billion in 1991, $32.3 billion in 1992, $64.8 billion in 1993, $70.4 billion in 1994, $75.9 billion in 1995, $96.8 billion in 1996 and $96.1 billion in 1997. The statistical information with respect to historical outstanding principal amounts of emerging markets debt securities is based on information the Fund obtained from J.P. Morgan & Co. OTHER INVESTMENTS Brady Bonds. The Fund expects that a substantial portion of the Fund's sovereign debt securities will consist of Brady Bonds. Brady Bonds are debt securities issued under the framework of the Brady Plan, an initiative announced by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations (primarily emerging market countries) to restructure their outstanding external indebtedness (generally, commercial bank debt). In restructuring its external debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as well as multilateral institutions such as the World Bank and the IMF. The Brady Plan framework, as it has developed, contemplates the exchange of commercial bank debt for newly issued bonds (Brady Bonds). Brady Bonds may also be issued in respect of new money being advanced by existing lenders in connection with the debt restructuring. The World Bank and/or the IMF support the restructuring by providing funds pursuant to loan agreements or other arrangements which enable the debtor nation to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under these arrangements with the World Bank and/or the IMF, debtor nations have been required to agree to the 23 implementation of certain domestic monetary and fiscal reforms. Such reforms have included the liberalization of trade and foreign investment, the privatization of state-owned enterprises and the setting of targets for public spending and borrowing. These policies and programs seek to promote the debtor country's economic growth and development. Investors should recognize that the Brady Plan only sets forth general guiding principles for economic reform and debt reduction, emphasizing that solutions must be negotiated on a case-by- case basis between debtor nations and their creditors. SBAM believes that economic reforms undertaken by countries in connection with the issuance of Brady Bonds make the debt of countries that have issued or have announced plans to issue Brady Bonds an attractive opportunity for investment. Investors should recognize that Brady Bonds do not have a long payment history. Agreements implemented under the Brady Plan to date are designed to achieve debt and debt-service reduction through specific options negotiated by a debtor nation with its creditors. As a result, the financial packages offered by each country differ. The types of options have included the exchange of outstanding commercial bank debt for bonds issued at 100% of face value of such debt which carry a below-market stated rate of interest (generally known as par bonds), bonds issued at a discount of face value of such debt (generally known as discount bonds), bonds bearing an interest rate which increases over time and bonds issued in exchange for the advancement of new money by existing lenders. Regardless of the stated face amount and stated interest rate of the various types of Brady Bonds, the Fund will purchase Brady Bonds in secondary markets, as described below, in which the price and yield to the investor reflect market conditions at the time of purchase. Certain Brady Bonds have been collateralized as to principal due at maturity by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity of such Brady Bonds, although the collateral is not available to investors until the final maturity of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and the debtor nations' reserves. In addition, the first two or three interest payments on certain types of Brady Bonds may be collateralized by cash or securities agreed upon by creditors. Subsequent interest payments may be uncollateralized or may be collateralized over specified periods of time. A significant amount of the Brady Bonds that the Fund may purchase have no or limited collateralization, and the Fund will be relying for payment of interest and principal primarily on the willingness of the foreign government to make payment in accordance with the terms of the Brady Bonds. Brady Bonds issued to date are purchased and sold in secondary markets through U.S. securities dealers and are generally maintained through European transnational securities depositories. A substantial portion of the Brady Bonds and other sovereign debt securities in which the Fund will invest is likely to be acquired at a discount, which involves certain considerations discussed under "--Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment Securities." Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment Securities. The Fund may invest up to 30% of its total assets in zero coupon securities and pay-in-kind bonds. In addition, as indicated above, a substantial portion of the Fund's sovereign debt securities may be acquired at a discount, and such purchases shall not be included in the 30% limit referred to in the previous sentence. These investments involve special risk considerations. Zero coupon securities are debt securities that pay no cash income but are sold at substantial discounts from their value at maturity. When a zero coupon security is held to maturity, its entire return, which consists of the amortization of discount, comes from the difference between its purchase price and its maturity value. This difference is known at the time of purchase, so that investors holding zero coupon securities until maturity know at the time of their investment what the return on their investment will be. Zero coupon securities may have conversion features. The Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a 24 portion of their interest in the form of debt or equity securities. Any such equity securities received in payment of interest will be subject to the 20% limitation described under "--Equity Securities." Any such debt securities received in payment of interest will not be subject to the Fund's credit quality standards for new investments. Zero coupon securities and pay-in-kind bonds may be issued by a wide variety of corporate and governmental issuers. Deferred payment securities are securities that remain zero coupon securities until a predetermined date, at which time the stated coupon becomes effective and interest becomes payable at regular intervals. Zero coupon securities, pay-in-kind bonds and deferred payment securities tend to be subject to greater price fluctuations in response to changes in interest rates than are ordinary interest-paying debt securities with similar maturities. The value of zero coupon securities appreciates more during periods of declining interest rates and depreciates more during periods of rising interest rates than ordinary interest-paying securities with similar maturities. Although zero coupon securities, pay-in-kind bonds and deferred payment securities are generally not traded on a national securities exchange, they are widely traded by brokers and dealers. Current federal income tax law requires the holder of zero coupon securities, certain pay-in-kind bonds, deferred payment securities and certain other securities acquired at a discount (such as Brady Bonds) to accrue income with respect to these securities prior to the receipt of cash payments. Accordingly, to avoid liability for federal income and excise taxes the Fund may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy certain distribution requirements. See "Taxation--The Fund." Loan Participations and Assignments. The Fund may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between a corporate borrower or a foreign sovereign entity and one or more financial institutions ("Lenders"). The Fund may invest in such Loans in the form of participations in Loans ("Participations") and assignments of all or a portion of Loans from third parties ("Assignments"). The Fund considers these investments to be investments in debt securities for purposes of this Prospectus. Participations typically will result in the Fund having a contractual relationship only with the Lender, not with the borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, nor any rights of set-off against the borrower, and the Fund may not benefit directly from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund will assume the credit risk of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling a Participation, the Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. The Fund will acquire Participations only if the Lender interpositioned between the Fund and the borrower is determined by SBAM to be creditworthy. When the Fund purchases Assignments from Lenders, the Fund will acquire direct rights against the borrower on the Loan, except that under certain circumstances such rights may be more limited than those held by the assigning Lender. The Fund may have difficulty disposing of Assignments and Participations. In certain cases, the market for such instruments is not highly liquid, and therefore the Fund anticipates in such cases that such instruments could be sold only to a limited number of institutional investors. The lack of a highly liquid secondary market will have an adverse impact on the value of such instruments and on the Fund's ability to dispose of particular 25 Assignments or Participations in response to a specific economic event, such as deterioration in the creditworthiness of the borrower. Equity Securities. The Fund may invest up to 20% of its total assets in common stock, convertible securities, warrants, preferred stock or other equity securities of U.S. and foreign issuers when consistent with the Fund's objectives. The Fund will generally, but not exclusively, hold such investments as a result of purchases of unit offerings of debt securities which include such securities or in connection with an actual or proposed conversion or exchange of debt securities. The Fund will treat investments acquired in this manner, together with any holdings of convertible securities, as debt securities for purposes of its policy to invest at least 65% of its total assets, under normal circumstances, in high yield debt securities. The Fund may also purchase equity securities not associated with debt securities when, in the opinion of the investment manager, such purchase is appropriate. Higher Quality Debt Securities and Money Market Instruments. There may be times when, in the judgment of SBAM, conditions in the securities markets would make pursuing the Fund's basic investment strategy inconsistent with the best interests of the Fund's shareholders. At such times, SBAM may employ alternative strategies, including investment of a substantial portion of the Fund's assets in securities rated higher than "Baa" by Moody's or "BBB" by S&P, or in unrated securities of comparable quality. In addition, in order to maintain liquidity, the Fund may invest up to 35% of its total assets in high- quality short-term money market instruments. Such instruments may include obligations of the U.S. Government or its agencies or instrumentalities; commercial paper of issuers rated, at the time of purchase, A-2 or better by S&P or P-2 or better by Moody's or which, in the opinion of SBAM, are of comparable creditworthiness; certificates of deposit, banker's acceptances or time deposits of United States banks with total assets of at least $1 billion (including obligations of foreign branches of such banks) and of the 75 largest foreign commercial banks in terms of total assets (including domestic branches of such banks); and repurchase agreements with respect to the foregoing obligations. If at some future date, in the opinion of SBAM, adverse conditions prevail in the securities markets which makes the Fund's investment strategy inconsistent with the best interests of the Fund's shareholders, the Fund may invest its assets without limit in high-quality short-term money market instruments. --------------------- The Fund's investment objectives, together with the investment restrictions set forth under "Investment Restrictions," are fundamental policies that may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities. The other policies and investment restrictions referred to in this Prospectus are not fundamental and may be changed by the Board of Directors of the Fund without shareholder approval. As used in this Prospectus, a "majority of the Fund's outstanding voting securities" means the lesser of (i) 67% or more of the voting securities represented at a meeting at which more than 50% of the outstanding voting securities are represented or (ii) more than 50% of the outstanding voting securities. ADDITIONAL INVESTMENT ACTIVITIES LEVERAGE At times, the Fund intends to utilize leverage by borrowing (including borrowing through reverse repurchase agreements to the extent the Fund does not maintain a segregated account with respect to a reverse repurchase agreement as described below) or by issuing shares of preferred stock or debt securities. The Fund may leverage 26 in an amount up to 33 1/3% of its total assets including the amount obtained from leverage. The Fund intends to utilize leverage in an initial amount equal to approximately 25% of its total assets including the amount obtained from leverage. SBAM anticipates that the interest payments on any borrowing or debt securities or the dividends on any preferred stock will reflect short-term rates, and that the net return on the Fund's portfolio, including the proceeds of any leverage, will exceed the interest or dividend rate applicable to the leverage, although no assurance can be given to that effect. Whether to leverage and the terms and timing of such leverage will be determined by the Fund's Board of Directors in consultation with SBAM. The extent to which the Fund is leveraged from time to time will vary depending on the judgment of the Board of Directors, in consultation with SBAM, regarding market conditions. Through these leveraging techniques, the Fund will seek to obtain a higher return for holders of Common Stock than if the Fund were not leveraged. There can be no assurance, however, that the Fund will engage in any leveraging techniques. During periods in which the Fund is utilizing financial leverage, the fees which are payable to SBAM and the Administrator as a percentage of the Fund's assets will be higher than if the Fund did not utilize a leveraged capital structure because the fees are calculated as a percentage of the Fund's assets, including those purchased with leverage. See "Management of the Fund." Utilization of leverage is a speculative investment technique and involves certain risks to the holders of Common Stock. These include the possibility of higher volatility of the net asset value of the Common Stock and potentially more volatility in the market value of the Common Stock. So long as the Fund is able to realize a higher net return on its investment portfolio than the then current interest or dividend rate of any leverage together with other related expenses, the effect of the leverage will be to cause holders of Common Stock to realize a higher current net investment income than if the Fund were not so leveraged. On the other hand, to the extent that the then current interest or dividend rate on any leverage, together with other related expenses, approaches the net return on the Fund's investment portfolio, the benefit of leverage to holders of Common Stock will be reduced, and if the then current interest or dividend rate on any leverage were to exceed the net return on the Fund's portfolio, the Fund's leveraged capital structure would result in a lower rate of return to holders of Common Stock than if the Fund were not so leveraged. Similarly, since any decline in the net asset value of the Fund's investments will be borne entirely by holders of Common Stock, the effect of leverage in a declining market would be a greater decrease in net asset value applicable to the Common Stock than if the Fund were not leveraged. Any such decrease would likely be reflected in a decline in the market price of the Common Stock. If the Fund's current investment income were not sufficient to meet interest or dividend requirements on any leverage, it could be necessary for the Fund to liquidate certain of its investments, thereby reducing the net asset value attributable to the Common Stock. It is the Fund's current intention to seek to limit the possibility that its cost of leverage will adversely affect its net income during a rising interest rate environment by investing a portion of its total assets in high yield debt securities with floating interest rates determined with reference to the short-term London Inter-Bank Offer Rate. SBAM anticipates that the Fund's cost of borrowing or other leverage will similarly be tied to short-term interest rates. Under current market conditions, the Fund expects that the aggregate face amount of its investments in such floating rate securities will be approximately equal to the aggregate face amount of the Fund's borrowings or other proceeds of leverage. This strategy is commonly referred to as "matched book funding." SBAM therefore expects that the relationship between the interest income received by the Fund on the aforementioned floating rate securities and the interest or dividend expense of the Fund relating to borrowing or other leverage will generally remain stable and that changes in the Fund's cost of borrowing or other leverage 27 will be offset to a substantial degree by similar changes in the interest income received on such floating rate securities. However, there can be no assurance that such offsetting will occur or that SBAM will utilize a "matched book funding" strategy at all times. The utilization of a "matched book funding" strategy will also limit the ability of the Fund to lock in higher yields during a falling interest rate environment. The Fund's use of leverage will be subject to the provisions of the 1940 Act, including asset coverage requirements and restrictions on the declaration of dividends and distributions to holders of Common Stock or purchases of Common Stock in the event such asset coverage requirements are not met. The 1940 Act also requires that holders of preferred stock, and in certain circumstances holders of debt securities, have certain voting rights. See "Description of Capital Stock." The Fund may apply for a rating from Moody's, S&P and/or any other nationally recognized statistical rating organization on any preferred stock or debt which it issues; however, no minimum rating is required for the issuance of preferred stock or debt by the Fund. The Fund believes that obtaining one or more such ratings for its preferred stock or debt securities will enhance the marketability of the preferred stock or debt securities and thereby reduce the dividend rate on such preferred stock or interest requirements on such debt securities from that which the Fund would be required to pay if the preferred stock or debt securities were not so rated. The rating agencies for any preferred stock or debt securities may require asset coverage maintenance ratios in addition to those imposed by the 1940 Act. The ability of the Fund to comply with such asset coverage maintenance ratios may be subject to circumstances beyond the control of the Fund such as market conditions for its portfolio securities. The Fund expects that the terms of any preferred stock or debt securities will provide for mandatory redemption of the preferred stock or repayment of debt in the event the Fund fails to meet such asset coverage maintenance ratios. In such circumstances, the Fund may have to liquidate portfolio securities in order to meet redemption or repayment requirements. Such liquidations and redemptions would cause the Fund to incur transaction costs and could result in capital losses to the Fund. This would have the effect of reducing the net asset value to holders of Common Stock and could reduce the Fund's net income in the future. The issuance of preferred stock or debt will entail certain initial costs and expenses such as underwriting discounts or placement fees, fees associated with registration with the Commission, filings under state securities laws, rating agency fees, legal and accounting fees, printing costs and certain other ongoing expenses such as administrative and accounting fees. These costs and expenses will be borne by the Fund and will reduce net assets available to holders of the Common Stock. The Fund expects that all of its bank borrowing will be made on a secured basis. The Fund's custodian will either segregate the assets securing the Fund's borrowing for the benefit of the Fund's lenders or arrangements will be made with a suitable sub-custodian, which may include a lender. If the assets used to secure the borrowing decrease in value, the Fund may be required to pledge additional collateral to the lender in the form of cash or securities to avoid liquidation of those assets. The rights of any lenders to the Fund to receive payments of interest on and repayments of principal of borrowings (including debt securities) will be senior to the rights of the Fund's shareholders, and the terms of the Fund's borrowings (including debt securities) may contain provisions that limit certain activities of the Fund and could result in precluding the purchase of instruments that the Fund would otherwise purchase. 28 If the Fund leverages through preferred stock, under the requirements of the 1940 Act, the value of the Fund's total assets, less all liabilities and indebtedness of the Fund not represented by senior securities, as defined in the 1940 Act, must be equal, immediately after any such issuance of preferred stock, to at least 200% of the aggregate amount of senior securities representing indebtedness plus the aggregate liquidation preference of any outstanding preferred stock. Such percentage must also be met any time the Fund pays a dividend or makes any other distribution on Common Stock (other than a distribution in Common Stock) or any time the Fund repurchases Common Stock, in each case after giving effect to such dividend, distribution or repurchase. The liquidation value of preferred stock is expected to equal the aggregate original purchase price plus any accrued and unpaid dividends thereon (whether or not earned or declared). See "Description of Capital Stock." If the Fund leverages through borrowing or issuing debt securities, under the requirements of the 1940 Act, the value of the Fund's total assets, less all liabilities and indebtedness of the Fund not represented by senior securities, as defined in the 1940 Act, must at least be equal, immediately after the issuance of senior securities consisting of debt, to 300% of the aggregate principal amount of all outstanding senior securities of the Fund which are debt. If the Fund leverages through the issuance of senior securities consisting of debt, the 300% asset coverage maintenance ratio referred to above must also be met any time the Fund declares a dividend or other distribution on Common Stock (other than a distribution in Common Stock) or any time the Fund repurchases Common Stock, in each case after giving effect to such dividend, distribution or repurchase. The Fund may enter into reverse repurchase agreements with any member bank of the Federal Reserve System and any broker-dealer or any foreign bank that has been determined by SBAM to be creditworthy. Under a reverse repurchase agreement, the Fund would sell securities and agree to repurchase them at a mutually agreed date and price. At the time the Fund enters into a reverse repurchase agreement, it will establish and maintain a segregated account, with its custodian or a designated sub-custodian, containing liquid assets in an amount not less than the repurchase price marked to market daily (including accrued interest), and will subsequently review the account to ensure that such equivalent value is maintained, in accordance with procedures established by the Board of Directors. Reverse repurchase agreements involve the risk that the market value of the securities purchased with the proceeds of the sale of securities received by the Fund may decline below the price of the securities the Fund is obligated to repurchase. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund's obligations to repurchase the securities, and the Fund's use of proceeds of the reverse repurchase agreement effectively may be restricted pending the decision. Reverse repurchase agreements will be treated as borrowings for purposes of calculating the Fund's borrowing limitation to the extent the Fund does not establish and maintain a segregated account (as described above). Assuming the utilization of leverage in the amount of approximately 25% of the Fund's total assets, and an annual interest rate of 6.21% payable on such leverage based on market rates as of the date of this Prospectus, the annual return that the Fund's portfolio must experience (net of expenses) in order to cover such interest payments would be 2.07%. The Fund's actual cost of leverage will be based on market rates at the time the Fund undertakes a leveraging strategy, and such actual cost of leverage may be higher or lower than that assumed in the previous example. The following table is designed to illustrate the effect on the return to a holder of the Fund's Common Stock of leverage in the amount of approximately 25% of the Fund's total assets, assuming hypothetical annual returns of the Fund's portfolio of minus 10% to plus 10%. As the table shows, leverage generally increases the return to 29 shareholders when portfolio return is positive and greater than the cost of leverage and decreases the return when the portfolio return is negative or less than the cost of leverage. The figures appearing in the table are hypothetical and actual returns may be greater or less than those appearing in the table. Assumed Portfolio Return (net of expenses).............................. (10)% (5)% 0 % 5% 10% Corresponding Common Stock Return Assuming 25% Leverage.................. (15.40)% (8.74)% (2.07)% 4.60% 11.26%
Until the Fund borrows (including issuing debt securities) or issues shares of preferred stock, the Fund's Common Stock will not be leveraged, and the risks and special considerations related to leverage described in this Prospectus will not apply. Such leveraging of the Common Stock cannot be fully achieved until the proceeds resulting from the use of leverage have been invested in debt instruments in accordance with the Fund's investment objectives and policies. The Fund may, in addition to engaging in the transactions described above, borrow money for temporary or emergency purposes (including, for example, clearance of transactions, share repurchases or payments of dividends to shareholders) in an amount not exceeding 5% of the value of the Fund's total assets (including the amount borrowed). DERIVATIVE INSTRUMENTS The Fund may from time to time engage in certain strategies generally for hedging or other risk management purposes or in furtherance of the Fund's investment objectives and policies. The Fund may use these strategies to attempt to protect against possible changes in the market value of the Fund's portfolio resulting from fluctuations in the securities markets and changes in interest rates or in exchange rates, to protect the Fund's unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities, to seek to enhance income or gain or to attempt to achieve the economic equivalent of floating rate interest payments on fixed-rate debt securities it holds. The Fund will engage in such activities from time to time in SBAM's discretion, and may not necessarily be engaging in such activities when movements occur in interest rates or in the securities markets generally that could affect the value of the assets of the Fund. The Fund's ability to pursue certain of these strategies may be limited by applicable regulations of the Commodity Futures Trading Commission ("CFTC") and the federal income tax requirements applicable to regulated investment companies. As part of its strategies, the Fund may purchase and sell futures contracts, purchase and sell (or write) exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts, enter into the interest rate and currency transactions discussed below and enter into other similar transactions which may be developed in the future to the extent SBAM determines that they are consistent with the Fund's investment objectives and policies and applicable regulatory requirements (collectively, "Derivative Transactions"). The Fund may use any or all of these techniques at any time, and the use of any particular Derivative Transaction will depend on market conditions. The Derivative Transactions that the Fund may use are described below. Derivative Transactions present certain risks. In particular, the variable degree of correlation between price movements of instruments the Fund has purchased or sold and price movements in the position being hedged creates the possibility that losses on the hedge may be greater than gains in the value of the Fund's position. In 30 addition, certain derivative instruments and markets may not be liquid in all circumstances. As a result, in volatile markets, the Fund may not be able to close out a transaction without incurring losses substantially greater than the initial deposit. Although the contemplated use of these instruments should tend to minimize the risk of loss due to a decline in the value of the hedged position, at the same time they may tend to limit any potential gain which might result from an increase in the value of such position. Successful use of Derivative Transactions by the Fund is subject to the ability of SBAM to predict correctly movements in the direction of interest rates and other factors affecting markets for securities. These skills are different from those needed to select portfolio securities. If SBAM's expectations are not met, the Fund would be in a worse position than if a Derivative Transaction had not been pursued. For example, if the Fund hedged against the possibility of an increase in interest rates which would adversely affect the price of securities in its portfolio and the price of such securities increased instead, the Fund would lose part or all of the benefit of the increased value of its securities because it would have offsetting losses in its futures positions. Losses due to Derivative Transactions will reduce net asset value. A detailed discussion of Derivative Transactions, including applicable requirements of the CFTC, the requirement to segregate assets with respect to these transactions and special risks associated with such strategies appears as Appendix B to this Prospectus. Interest Rate Transactions. The Fund may enter into interest rate swaps and may purchase interest rate caps, floors and collars and may sell interest rate caps, floors and collars that it has purchased. The Fund would enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, to manage the duration of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. The Fund may enter into interest rate swaps, caps, floors and collars on either an asset-based or liability-based basis, depending on whether it is hedging its assets or liabilities. The Fund will not enter into any interest rate swap, cap, floor or collar transaction unless SBAM deems the counterparty to be creditworthy at the time of entering into such transaction. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. Futures Contracts and Options on Futures Contracts. The Fund may also enter into (a) contracts for the purchase or sale for future delivery ("futures contracts") of debt securities, aggregates of securities, indices based upon the prices thereof and other financial indices and (b) put or call options on such futures contracts. When the Fund enters into a futures contract, it must allocate cash or securities as a deposit of initial margin and thereafter will be required to pay or will be entitled to receive variation margin in an amount equal to any change in the value of the contract since the preceding day. If the value of a futures contract the Fund has entered into moves in an adverse direction from the Fund's position, the Fund could be obligated to make payments of variation margin at a disadvantageous time and might be required to liquidate portfolio securities in order to make such margin payments. Transactions in listed futures contracts and options on futures contracts are usually settled by entering into an offsetting transaction, and are subject to the risk that the position may not be able to 31 be closed if no offsetting transaction can be arranged. Except for transactions for which the sum of the premiums on options contracts and the initial margin for futures contracts does not exceed 5% of the net liquidation value of the Fund's assets, the Fund will engage in such transactions only for bona fide hedging purposes, in each case, in accordance with the rules and regulations of the CFTC. To the extent that the Fund engages in transactions in futures contracts or options thereon in order to attempt to achieve the economic equivalent of floating rate interest payments with respect to fixed rate interest payments on fixed rate debt securities it holds, such transactions will not be considered to be undertaken for bona fide hedging purposes. Put and Call Options on Securities and Indices of Securities. In order to reduce fluctuations in net asset value or to seek to enhance the Fund's income or gain, the Fund may purchase or sell exchange-traded or over-the-counter put or call options on securities and indices based upon the prices, yields or spreads of securities. A call option sold by the Fund exposes the Fund during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security or securities index and may require the Fund to hold an instrument which it might otherwise have sold. In selling put options, the Fund incurs the risk that it may be required to buy the underlying securities at a price higher than the current market price of the securities. In buying put or call options, the Fund is exposed to the risk that such options may expire worthless. Currency Transactions. The Fund may engage in currency transactions with counterparties to hedge the value of portfolio securities denominated in particular currencies against fluctuations in relative value or to generate income or gain. Currency transactions include currency forward contracts, exchange-listed currency futures contracts and options thereon, exchange- listed and OTC options on currencies, and currency swaps. A forward currency contract involves a privately negotiated obligation to purchase or sell (with delivery generally required) a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. A currency swap is an agreement to exchange cash flows based on the notional difference among two or more currencies and operates similarly to an interest rate swap, which is described under "--Interest Rate Transactions." The Fund may enter into currency transactions with counterparties that the investment manager deems to be creditworthy. Segregation and Cover Requirements. Futures contracts, interest rate swaps, caps, floors and collars, and options on securities, indices and futures contracts sold by the Fund are generally subject to segregation and coverage requirements of either the CFTC or the Commission. If the Fund does not hold the security or futures contract underlying the instrument, the Fund will be required to segregate on an ongoing basis with its custodian liquid assets in an amount at least equal to the current amount of the Fund's obligations with respect to such instruments in accordance with procedures established by the Board of Directors. Such amounts fluctuate as the obligations increase or decrease. The segregation requirement can result in the Fund maintaining securities positions it would otherwise liquidate or segregating assets at a time when it might be disadvantageous to do so. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements for cash management purposes. A repurchase agreement is a transaction in which the seller of a security commits itself at the time of the sale to repurchase that security from the buyer at a mutually agreed upon time and price. The Fund will enter into repurchase agreements only with dealers, domestic banks or recognized financial institutions which, in the opinion of SBAM based on guidelines established by the Fund's Board of Directors, are deemed creditworthy. SBAM will monitor the value 32 of the securities underlying the repurchase agreement at the time the transaction is entered into and at all times during the term of the repurchase agreement to ensure that the value of the securities always exceeds the repurchase price. In the event of default by the seller under the repurchase agreement, the Fund may incur losses and experience time delays in connection with the disposition of the underlying securities. To the extent that, in the meantime, the value of the securities that the Fund has purchased has decreased, the Fund could experience a loss. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES The Fund may purchase securities on a when-issued or delayed delivery basis. Securities purchased on a when-issued or delayed delivery basis are purchased for delivery beyond the normal settlement date at a stated price and yield. No income accrues to the purchaser of a security on a when-issued or delayed delivery basis prior to delivery. Such securities are recorded as an asset and are subject to changes in value based upon changes in the general level of interest rates. Purchasing a security on a when-issued or delayed delivery basis can involve a risk that the market price at the time of delivery may be lower than the agreed-upon purchase price, in which case there could be an unrealized loss at the time of delivery. The Fund will only make commitments to purchase securities on a when-issued or delayed delivery basis with the intention of actually acquiring the securities but may sell them before the settlement date if it is deemed advisable. The Fund will establish a segregated account in which it will maintain liquid assets in an amount at least equal in value to the Fund's commitments to purchase securities on a when-issued or delayed delivery basis. If the value of these assets declines, the Fund will place additional liquid assets in the account on a daily basis so that the value of the assets in the account is equal to the amount of such commitments. As an alternative, the Fund may elect to treat when-issued or delayed delivery securities as senior securities representing indebtedness, which are subject to asset coverage requirements under the 1940 Act. LOANS OF PORTFOLIO SECURITIES The Fund may lend portfolio securities. By doing so, the Fund will attempt to increase its income through the receipt of interest on the loan. In the event of the bankruptcy of the other party to either a securities loan or a repurchase agreement, the Fund could experience delays in recovering either the securities it lent or its cash. To the extent that, in the meantime, the value of the securities the Fund lent has increased or the value of the securities it purchased has decreased, the Fund could experience a loss. The Fund may lend securities from its portfolio if liquid assets in an amount at least equal to the current market value of the securities loaned (including accrued interest thereon) plus the interest payable to the Fund with respect to the loan is maintained by the Fund in a segregated account. Any securities that the Fund may receive as collateral will not become a part of its portfolio at the time of the loan and, in the event of a default by the borrower, the Fund will, if permitted by law, dispose of such collateral except for such part thereof that is a security in which the Fund is permitted to invest. During the time securities are on loan, the borrower will pay the Fund any accrued income on those securities, and the Fund may invest the cash collateral and earn additional income or receive an agreed-upon fee from a borrower that has delivered cash equivalent collateral. Cash collateral received by the Fund will be invested in securities in which the Fund is permitted to invest. The value of securities loaned will be marked to market daily. Portfolio securities purchased with cash collateral are subject to possible depreciation. Loans of securities by the Fund will be subject to termination at the Fund's or the 33 borrower's option. The Fund may pay reasonable negotiated fees in connection with loaned securities, so long as such fees are set forth in a written contract and approved by the Fund's Board of Directors. The Fund does not currently intend to make loans of portfolio securities with a value in excess of 33 1/3% of the value of its total assets. ILLIQUID OR RESTRICTED SECURITIES The Fund may invest without limitation in illiquid securities, for which there is a limited trading market and for which a low trading volume of a particular security may result in abrupt and erratic price movements. The Fund may be unable to dispose of its holdings in illiquid securities at then current market prices and may have to dispose of such securities over extended periods of time. Certain securities in which the Fund may invest are subject to legal or contractual restrictions as to resale ("Restricted Securities") and may therefore be illiquid by their terms. Restricted Securities may involve added expense to the Fund should the Fund be required to bear registration costs with respect to such securities. In the absence of registration, the Fund would have to dispose of its Restricted Securities pursuant to an exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), including a transaction in compliance with Rule 144 under the Securities Act, which permits only limited sales under specified conditions unless the Fund has held the securities for at least two years and is unaffiliated with the issuer. Companies whose securities are not publicly traded are also not subject to the same disclosure and other legal requirements as are applicable to companies with publicly traded securities. The Fund may purchase certain Restricted Securities ("Rule 144A securities") eligible for sale to qualified institutional buyers as contemplated by Rule 144A under the Securities Act. Rule 144A provides an exemption from the registration requirements of the Securities Act for the resale of certain restricted securities to certain qualified institutional buyers. One effect of Rule 144A is that certain restricted securities may be liquid, though no assurance can be given that a liquid market for Rule 144A securities will develop or be maintained. INVESTMENT RESTRICTIONS The following restrictions, along with the Fund's investment objectives, are the Fund's only fundamental policies--that is, policies that cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities. See "Description of Capital Stock--Preferred Stock" and "Description of Capital Stock--Special Voting Provisions" for additional information with respect to the voting rights of holders of preferred stock, if any. The other policies and investment restrictions referred to in this Prospectus are not fundamental policies of the Fund and may be changed by the Fund's Board of Directors without shareholder approval. The percentage restrictions set forth below, as well as those contained elsewhere in this Prospectus, apply at the time a transaction is effected, and a subsequent change in a percentage resulting from market fluctuations or any other cause other than an action by the Fund will not require the Fund to dispose of portfolio securities or take other action to satisfy the percentage restriction. Under its fundamental restrictions, the Fund may not: (1) purchase any securities which would cause more than 25% of the value of its total assets at the time of such purchase to be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that there is no limitation with respect to investment in obligations issued or 34 guaranteed by the U.S. Government, its agencies or instrumentalities or repurchase agreements collateralized by any of such obligations; (2) make any investment inconsistent with the Fund's classification as a diversified company under the 1940 Act; (3) issue senior securities or borrow money except as permitted by Section 18 of the 1940 Act; (4) purchase or sell commodities or commodity contracts, except that the Fund may engage in Derivative Transactions; (5) make loans, except that (1) the Fund may (a) purchase and hold debt instruments (including, without limitation, commercial paper notes, bonds, debentures or other secured or unsecured obligations and certificates of deposit, bankers' acceptances and fixed time deposits) in accordance with its investment objectives and policies; (b) invest in or purchase loans through Participations and Assignments; (c) enter into repurchase agreements with respect to portfolio securities; (d) make loans of portfolio securities, provided that collateral arrangements with respect to options, forward currency and futures transactions will not be deemed to involve loans; and (2) delays in the settlement of securities transactions shall not be considered loans; (6) underwrite the securities of other issuers, except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter; (7) purchase real estate, real estate mortgage loans or real estate limited partnership interests (other than securities secured by real estate or interests therein or securities issued by companies that invest in real estate or interests therein, including real estate investment trusts); or (8) invest for the purpose of exercising control over management of any company. Additional investment restrictions adopted by the Fund, which are deemed non-fundamental and which may be changed by the Board of Directors, provide that the Fund may not: (1) purchase shares of other investment companies in an amount exceeding the limits set forth in the 1940 Act and the rules thereunder; or (2) make short sales of securities or purchase securities on margin (except for delayed delivery or when-issued transactions, such short-term credits as are necessary for the clearance of transactions and margin deposits in connection with transactions in futures contracts, options on futures contracts and options on securities and securities indices). MANAGEMENT OF THE FUND INVESTMENT MANAGER The Fund retains SBAM, a wholly-owned subsidiary of Salomon Brothers Holding Company Inc, which is in turn wholly-owned by Salomon Smith Barney Holdings Inc., which is in turn wholly-owned by Travelers Group Inc. ("Travelers"), as its investment manager under an investment management agreement. SBAM was incorporated in 1987 and, together with affiliates in London, Frankfurt, Tokyo and Hong Kong, provides a broad 35 range of fixed-income and equity investment advisory services to various individuals and over 134 institutional accounts located throughout the world and serves as investment adviser to various investment companies. In providing advisory services, SBAM has access to hundreds of affiliated economists and bond, sovereign and equity analysts, including a staff dedicated to high yield credit research and to emerging markets sovereign credit research. As of March 31, 1998, SBAM and its worldwide investment advisory affiliates managed approximately $27.6 billion of assets. SBAM's business offices are located at 7 World Trade Center, New York, New York 10048. Under the terms of an investment management agreement between the Fund and SBAM (the "Advisory Agreement"), SBAM will manage the investment and reinvestment of the assets of the Fund, subject to the supervision of the Fund's Board of Directors. SBAM will make the investment decisions for the Fund and place purchase and sale orders for the Fund's portfolio securities pursuant to the Advisory Agreement. In addition, SBAM will make available research and statistical data to the Fund. Peter J. Wilby, Executive Vice President of the Fund, will be primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Wilby, who joined SBAM in 1989, is a Managing Director and Senior Portfolio Manager of SBAM and is responsible for SBAM's investment company and institutional portfolios which invest in high yield foreign sovereign debt securities and high yield foreign and U.S. corporate debt securities. Mr. Wilby is portfolio manager for, among others, Salomon Brothers High Income Fund Inc; Salomon Brothers Worldwide Income Fund Inc; The Emerging Markets Income Fund Inc; The Emerging Markets Income Fund II Inc; the foreign sovereign debt component of Salomon Brothers 2008 Worldwide Dollar Government Term Trust Inc; The Emerging Markets Floating Rate Fund Inc.; Global Partners Income Fund Inc.; Salomon Brothers High Yield Bond Fund and the high yield and sovereign debt portions of Salomon Brothers Strategic Bond Fund, each a portfolio of Salomon Brothers Series Funds Inc; Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers Institutional Emerging Markets Debt Fund, each a portfolio of Salomon Brothers Institutional Series Funds Inc; and Salomon Brothers Variable High Yield Bond Fund and the high yield and sovereign debt portions of Salomon Brothers Variable Strategic Bond Fund, each a portfolio of Salomon Brothers Variable Series Funds Inc. From 1984 to 1989, Mr. Wilby was employed by Prudential Capital Management Group ("PCMG"). He served as director of PCMG's credit research unit and as a corporate and sovereign credit analyst with PCMG. Mr. Wilby later managed high yield bonds and leveraged equities in mutual funds and institutional portfolios at PCMG. SBAM will pay the reasonable salaries and expenses of such of the Fund's officers and employees and any fees and expenses of such of the Fund's directors who are directors, officers or employees of SBAM or Salomon Smith Barney, except that the Fund shall bear travel expenses or an appropriate portion thereof of directors and officers of the Fund who are directors, officers or employees of SBAM to the extent that such expenses relate to the attendance at meetings of the Fund's Board of Directors or any committees thereof. The Advisory Agreement provides that SBAM may render similar investment management services to others. For its services, SBAM will receive from the Fund a monthly fee at an annual rate of 1.00% of the value of the Fund's average weekly net assets plus the proceeds of any outstanding borrowings used for leverage ("average weekly net assets" means the average weekly value of the total assets of the Fund, including any proceeds from the issuance of preferred stock, minus the sum of (i) accrued liabilities of the Fund, (ii) any accrued and unpaid interest on outstanding borrowings and (iii) accumulated dividends on shares of preferred stock). For purposes of this calculation, average weekly net assets is determined at the end of each month on the basis of the average net assets of the Fund for each week during the month. The assets for each weekly period are determined by averaging the net 36 assets at the last business day of a week with the net assets at the last business day of the prior week. The advisory fee is higher than fees paid by other comparable investment companies. During periods in which the Fund is utilizing financial leverage, the fee which is payable to SBAM as a percentage of the Fund's assets will be higher than if the Fund did not utilize a leveraged capital structure because the fee is calculated as a percentage of the Fund's assets, including those purchased with leverage. Unless earlier terminated as described below, the Advisory Agreement will remain in effect for two years from the date of this Prospectus and from year to year thereafter if it is approved annually (i) by a majority of the non- interested directors of the Fund and (ii) by the Board of Directors of the Fund or by a majority of the Fund's outstanding voting securities. The Advisory Agreement may be terminated without penalty on 60 days' written notice by either party thereto or by a vote of a majority of the Fund's outstanding voting securities and will terminate in the event of its assignment (as defined in the 1940 Act). In case of termination or failure to renew the Advisory Agreement, the Fund's Board of Directors will select a successor investment adviser. Any such successor will be a registered investment adviser under U.S. law. On April 6, 1998, Travelers announced that it had entered into a merger agreement with Citicorp. The transaction, which is expected to be completed during the third quarter of 1998, is subject to various regulatory approvals, including approval by the Federal Reserve Board. The transaction is also subject to approval by the stockholders of each of Travelers and Citicorp. Upon consummation of the merger, the surviving corporation would be a bank holding company subject to regulation under the Bank Holding Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain other laws and regulations. Although the effects of the merger of Travelers and Citicorp and compliance with the requirements of the BHCA and the Glass- Steagall Act are still under review, SBAM does not believe that its compliance with applicable law following the merger of Travelers and Citicorp will have a material adverse effect on its ability to provide the Fund with SBAM's customary level of investment advisory services. ADMINISTRATOR Mutual Management Corp., a wholly-owned subsidiary of Salomon Smith Barney Holdings Inc., will act as administrator for the Fund. Under the Administration Agreement with the Fund (the "Administration Agreement"), the Administrator administers the Fund's corporate affairs subject to the supervision of the Fund's Board of Directors and in connection therewith furnishes the Fund with office facilities together with such ordinary clerical and bookkeeping services (e.g., preparation of annual and other reports to shareholders and the Commission and filing of federal, state and local income tax returns) as are not being furnished by SBAM or the Fund's custodian. In connection with its administration of the corporate affairs of the Fund, the Administrator will bear the expenses of the salaries and expenses of all of its personnel and all expenses incurred by the Administrator or by the Fund in connection with administering the ordinary course of the Fund's business, other than those assumed by the Fund, as described below. The Administration Agreement provides that the Fund shall pay to the Administrator a monthly fee for its services and the facilities furnished by the Administrator at an annual rate of .10% of the value of the Fund's average weekly net assets (as defined and determined with respect to the Advisory Agreement) plus the proceeds of any outstanding borrowings used for leverage. The Administration Agreement will remain in effect for two years from the date of this Prospectus and from year to year thereafter if it is approved annually by the Board of Directors of the Fund. The Administration Agreement is terminable, without penalty, on 60 days' written notice by the Board of Directors or by a vote of holders of a 37 majority of the Fund's shares, or upon 90 days' written notice by the Administrator. During periods in which the Fund is utilizing financial leverage, the fee which is payable to the Administrator as a percentage of the Fund's assets will be higher than if the Fund did not utilize a leveraged capital structure because the fee is calculated as a percentage of the Fund's assets, including those purchased with leverage. EXPENSES OF THE FUND Except as indicated above, the Fund will pay all of its expenses, including, without limitation, organizational and offering expenses (which include out- of-pocket expenses, but not overhead or employee costs of SBAM); expenses for legal, accounting and auditing services; taxes and governmental fees; dues and expenses incurred in connection with membership in investment company organizations; fees and expenses incurred in connection with listing the Fund's shares on any stock exchange; costs of printing and distributing shareholder reports, proxy materials, prospectuses, stock certificates and distribution of dividends; charges of the Fund's custodians, sub-custodians, administrators and sub-administrators, registrars, transfer agents, dividend disbursing agents and dividend reinvestment plan agents; payment for portfolio pricing services to a pricing agent, if any; fees of the Commission; expenses of registering or qualifying securities of the Fund for sale; freight and other charges in connection with the shipment of the Fund's portfolio securities; fees and expenses of non-interested directors; travel expenses or an appropriate portion thereof of directors and officers of the Fund who are directors, officers or employees of SBAM to the extent that such expenses relate to attendance at meetings of the Board of Directors or any committee thereof; salaries of shareholder relations personnel; costs of shareholders meetings; insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses. DIRECTORS AND OFFICERS The names of the directors and principal officers of the Fund are set forth below, together with their positions and their principal occupations during the past five years.
PRINCIPAL OCCUPATION AND NAME, ADDRESS AND AGE POSITION WITH THE FUND OTHER AFFILIATIONS --------------------- ------------------------ ------------------------ *Heath B. McLendon.......... Chairman of the Board of Managing Director, Salomon Smith Barney Directors and President Salomon Smith Barney; 388 Greenwich Street, 22nd Director of 42 Fl. investment companies New York, NY 10013 associated with Salomon Age: 64 Smith Barney; Director and President of Mutual Management Corp. and Travelers Investment Adviser, Inc.; Chairman of Smith Barney Strategy Advisers Inc. Prior to July 1993, Senior Executive Vice President of Shearson Lehman Brothers, Inc. and Vice Chairman, Shearson Asset Management.
- ------------ * Director who is an "interested person" within the meaning of the 1940 Act. 38
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS --------------------- ------------------------- ------------------------------------------- Charles F. Barber............ Director Consultant, formerly Chairman 66 Glenwood Drive of the Board, ASARCO Greenwich, CT 06830 Incorporated. Age: 81 Daniel P. Cronin............. Director Vice President and General Pfizer Inc. Counsel, Pfizer International 235 East 42nd Street Inc.; Senior Assistant General New York, NY 10017 Counsel, Pfizer, Inc. Age: 52 Dr. Riordan Roett............ Director Professor and Director, Latin Johns Hopkins University American Studies Program, Paul 1740 Massachusetts H. Nitze School of Advanced Avenue, NW International Studies, Johns Washington D.C. 20036 Hopkins University. Age: 59 Jeswald W. Salacuse.......... Director Henry J. Braker Professor of 220 Stone Route Lane Commercial Law and formerly Concord, MA 01742 Dean, The Fletcher School of Age: 60 Law and Diplomacy, Tufts University. Peter J. Wilby............... Executive Vice President Managing Director and Senior Salomon Brothers Asset Portfolio Manager of SBAM since Management Inc 1989. Seven World Trade Center New York, NY 10048 Age: 38 Christina T. Sydor, Esq...... Executive Vice President, Managing Director of Smith Salomon Smith Barney General Counsel Barney Inc.; General Counsel 388 Greenwich Street and Secretary of Mutual New York, NY 10013 Management Corp.; Secretary of Age: 46 42 investment companies associated with Salomon Smith Barney. Robert A. Vegliante, Esq. ... Executive Vice President, Director of Smith Barney Inc.; Salomon Brothers Asset Associate General Counsel Deputy General Counsel of Management Inc Mutual Management Corp. Prior 7 World Trade Center to 1994, Associate General New York, NY 10048 Counsel of Connecticut Mutual Age: 36 Life Insurance Company.
39
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS --------------------- ------------------------ ------------------------------------------- Beth A. Semmel............... Executive Vice President Director of SBAM since January Salomon Brothers Asset 1996. From May 1993 to December Management Inc 1995, Vice President of SBAM. From 7 World Trade Center January 1989 to May 1993, Vice New York, NY 10048 President of Morgan Stanley Asset Age: 36 Management. Maureen O'Callaghan.......... Executive Vice President Director of SBAM since December Salomon Brothers Asset 1997. Vice President of SBAM from Management Inc October 1988 to December 1996. 7 World Trade Center New York, NY 10048 Age: 34 James E. Craige.............. Executive Vice President Director of SBAM since December Salomon Brothers Asset 1997. Vice President of SBAM from Management Inc 1992 to December 1997. 7 World Trade Center New York, NY 10048 Age: 30 Thomas K. Flanagan........... Executive Vice President Director of SBAM since 1991. Salomon Brothers Asset Management Inc 7 World Trade Center New York, NY 10048 Age: 44 Lewis E. Daidone............. Treasurer and Chief Managing Director of Smith Barney Salomon Smith Barney Financial Officer Inc.; Director and Senior Vice 388 Greenwich Street President of Mutual Management New York, NY 10013 Corp.; Senior Vice President and Age: 40 Treasurer of 42 investment companies associated with Salomon Smith Barney. Alan M. Mandel............... Controller Director of SBAM since 1995. Prior Salomon Smith Barney to 1995, Chief Financial Officer 388 Greenwich Street and Vice President of Hyperion New York, NY 10013 Capital Management Inc. Age: 40
40
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS --------------------- ---------------------- ------------------------------------------- Noel B. Daugherty........... Secretary Employee of SBAM since November 1996. Salomon Brothers Asset From August 1993 to October 1996, an Management Inc employee of Chancellor LGT Asset 7 World Trade Center Management. From October 1989 to August New York, NY 10048 1993, an employee of The Dreyfus Age: 31 Corporation. Anthony Pace................ Assistant Controller Assistant Controller of investment Salomon Brothers Asset companies associated with Salomon Smith Management Inc Barney, including SBAM. 7 World Trade Center New York, NY 10048 Age: 33
COMPENSATION TABLE The following table provides estimated information concerning the compensation expected to be paid during the current fiscal year ending April 30, 1999 to each director of the Fund and, for the calendar year ending December 31, 1997, the aggregate compensation paid by all investment companies advised by SBAM and its affiliates. The Fund does not provide any pension or retirement benefits to directors. In addition, no remuneration will be paid during the fiscal year ending April 30, 1999 by the Fund to officers of the Fund, including Mr. McLendon, who as an officer of Salomon Smith Barney is an "interested person," as defined in the 1940 Act.
ESTIMATED TOTAL COMPENSATION AGGREGATE FROM OTHER FUNDS COMPENSATION ADVISED BY SBAM NAME OF PERSON, POSITION FROM THE FUND AND AFFILIATES(A) - ------------------------ ------------- ------------------ Charles F. Barber Director..................................... $8,500 $139,437(22)* Daniel P. Cronin Director..................................... $8,500 $ 39,200(7) Dr. Riordan Roett Director..................................... $8,500 $ 68,100(10) Jeswald W. Salacuse Director..................................... $8,500 $ 58,800(8)
(A) The numbers in parentheses indicate the applicable number of investment company directorships held by that director. * Includes compensation from investment companies advised by affiliates of Salomon Smith Barney which are affiliates of SBAM. Directors who are not officers, directors or employees of SBAM or of any "interested person" thereof (as defined in the 1940 Act) will be paid a fee of $5,000 per year, plus $700 for every meeting of the Board of Directors or committee thereof. The officers of the Fund conduct and supervise the daily business operations of the Fund, while the directors, in addition to performing their functions set forth under "Management of the Fund," review such actions and determine general policy. 41 The Fund's Board of Directors may have an Executive Committee, which may exercise the powers of the Board to conduct the current and ordinary business of the Fund while the Board is not in session. Commencing with the first annual meeting of shareholders, the Board of Directors will be divided into three classes, having terms of one, two and three years, respectively. At the annual meeting of shareholders in each year thereafter, the term of one class will expire and directors will be elected to serve in that class for terms of three years. See "Description of Capital Stock." The Articles of Incorporation and By-Laws of the Fund provide that the Fund will indemnify, to the fullest extent permitted by law, its directors and officers and may indemnify employees or agents of the Fund against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Fund. In addition, the Fund's Articles of Incorporation provide that the Fund's directors and officers will not be liable to shareholders for money damages, except in limited instances. However, nothing in the Articles of Incorporation or By-Laws of the Fund protects or indemnifies a director, officer, employee or agent against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. PORTFOLIO TRANSACTIONS The Fund has no obligation to deal with any brokers or dealers in the execution of transactions in portfolio securities. Subject to policy established by the Fund's Board of Directors, SBAM is primarily responsible for the Fund's portfolio decisions and the placing of the Fund's portfolio transactions. Debt securities normally will be purchased from or sold to issuers directly or to dealers serving as market makers for the securities at a net price, which may include dealer spreads and underwriting commissions. Equity securities will normally be purchased through brokers to which commissions will be payable. In placing orders, it is the policy of the Fund to obtain the best results taking into account the general execution and operational facilities of the broker or dealer, the type of transaction involved and other factors such as the risk of the broker or dealer in positioning the securities involved. The purchase by the Fund of Participations or Assignments may be pursuant to privately negotiated transactions pursuant to which the Fund may be required to pay fees to the seller or forego a portion of payments in respect of the Participation or Assignment. While SBAM generally seeks the best price in placing its orders, the Fund may not necessarily be paying the lowest price available. Subject to obtaining the best price and execution, securities firms which provide supplemental research to SBAM may receive orders for transactions by the Fund. Information so received will be in addition to and not in lieu of the services required to be performed by SBAM under the Advisory Agreement, and the expenses of SBAM will not necessarily be reduced as a result of the receipt of such supplemental information. The Fund anticipates that, in connection with the execution of portfolio transactions on its behalf by SBAM, certain Underwriters may from time to time act as a broker or dealer. In addition, affiliated persons (as such term is defined in the 1940 Act) of the Fund, or affiliated persons of such persons, may from time to time be selected to perform brokerage services for the Fund, subject to the considerations discussed above, but are prohibited by 42 the 1940 Act from dealing with the Fund as principal in the purchase or sale of securities. In order for such an affiliated person to be permitted to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by such affiliated person must be reasonable and fair compared to the commissions, fees or other remuneration received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. This standard would allow such an affiliated person to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm's-length transaction. The Fund is prohibited by the 1940 Act from purchasing securities in primary offerings in which an affiliate acts as an underwriter unless certain conditions established under the 1940 Act are satisfied. Investment decisions for the Fund are made independently from those for other funds and accounts advised or managed by SBAM. Such other funds and accounts may also invest in the same securities as the Fund. If those funds or accounts are prepared to invest in, or desire to dispose of, the same security at the same time as the Fund, however, transactions in such securities will be made, insofar as feasible, for the respective funds and accounts in a manner deemed by SBAM to be equitable to all. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Fund or the price paid or received by the Fund. In addition, because of different investment objectives, a particular security may be purchased for one or more funds or accounts when one or more funds or accounts are selling the same security. Although the Advisory Agreement contains no restrictions on portfolio turnover, it is not the Fund's policy to engage in transactions with the objective of seeking profits from short-term trading. It is expected that the annual portfolio turnover rate of the Fund will not exceed 100%. The portfolio turnover rate is calculated by dividing the lesser of sales or purchases of portfolio securities by the average monthly value of the Fund's portfolio securities. For purposes of this calculation, portfolio securities exclude all securities having a maturity when purchased of one year or less. DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN Beginning with its initial distribution approximately 60 days after completion of this offering, it is the Fund's present policy, which may be changed by the Board of Directors, to make regular monthly cash distributions to holders of Common Stock at a level rate that reflects the past and projected performances of the Fund, which over time will result in the distribution of all net investment income of the Fund (i.e., net investment income remaining after the payment of any dividends on preferred stock if any such stock is outstanding) and to distribute any net realized long term and short term capital gain at least annually. The Fund's initial and subsequent distribution level will be determined by the Fund after giving consideration to a number of factors including the Fund's undistributed net investment income and historical and projected investment income and expenses. Net income consists of all interest and dividend income accrued on portfolio assets less all expenses of the Fund. Net investment income for this purpose is income other than net realized long term and short term capital gain. To permit the Fund to maintain a more stable monthly distribution, the Fund will from time to time distribute more or less than the entire amount of net investment income earned in a particular period. Any undistributed net investment income, to the extent permitted by income tax regulations, would be available to 43 supplement future distributions which might otherwise have been reduced by a decrease in the Fund's monthly net income due to fluctuation in investment income or expenses. Undistributed net investment income will be added to the Fund's net asset value and, correspondingly, distributions from undistributed net investment income will be deducted from the Fund's net asset value. Pursuant to the Plan, shareholders whose shares are registered in their own names will be deemed to have elected to have all distributions (net of any applicable U.S. withholding tax) reinvested automatically in additional shares of the Fund by First Data Investor Services Group, Inc. (the "Plan Agent") as agent under the Plan, unless such shareholders elect to receive distributions in cash. Shareholders who elect to receive distributions in cash will receive all distributions in cash paid by check in U.S. dollars mailed directly to the shareholder by First Data Investor Services Group, Inc., as dividend paying agent. In the case of shareholders such as banks, brokers or nominees, which hold shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of shares certified from time to time by the record shareholders as representing the total amount registered in the record shareholder's name and held for the account of beneficial owners that have not elected to receive distributions in cash. Investors that own shares registered in the name of a bank, broker or other nominee should consult with such nominee as to participation in the Plan through such nominee, and may be required to have their shares registered in their own names in order to participate in the Plan. The Plan Agent serves as agent for the shareholders in administering the Plan. Unless the Board of Directors of the Fund declares a dividend or capital gains distribution payable only in cash, non-participants in the Plan will receive cash and participants in the Plan will receive shares of the Fund, to be issued by the Fund or purchased by the Plan Agent in the open market as outlined below. Whenever market price per share is equal to or exceeds net asset value per share as of the determination date (defined as the fourth New York Stock Exchange trading day preceding the payment date for the dividend or distribution), participants will be issued new shares at a price per share equal to the greater of (a) the net asset value per share on the valuation date or (b) 95% of the market price per share on the valuation date. Except as noted below, the valuation date generally will be the dividend or distribution payment date. The Fund will not issue shares under the Plan at a price below net asset value. If net asset value exceeds the market price of the Fund's shares as of the determination date, the Plan Agent will, as agent for the participants, buy shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts as soon as practicable commencing on the trading day following the determination date and generally terminating no later than 30 days after the dividend or distribution payment date. If, before the Plan Agent has completed its purchases, the market price exceeds the net asset value of a share, the average per share purchase price paid by the Plan Agent may exceed the net asset value of the Fund's shares, resulting in the acquisition of fewer shares than if the dividend or capital gains distribution has been paid in shares issued by the Fund. Because of the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend amount in open-market purchases during the permissible purchase period or if the market discount shifts to a market premium during such purchase period, the Plan Agent will cease making open-market purchases and will receive the uninvested portion of the dividend amount in newly issued shares (in which case the valuation date will be the date such shares are issued) at a price per share equal to the greater of (a) the net asset value per share on the valuation date or (b) 95% of the market price per share on the valuation date. 44 A shareholder may elect to withdraw from the Plan at any time upon written notice to the Plan Agent or by calling the Plan Agent at 1-800-331-1710. When a participant withdraws from the Plan, or upon termination of the Plan as provided below, certificates for whole shares credited to his or her account under the Plan will be issued and a cash payment will be made for any fractional shares credited to such account. An election to withdraw from the Plan will, until such election is changed, be deemed to be an election by a shareholder to take all subsequent dividends and distributions in cash. Elections will be effective immediately if notice is received by the Plan Agent not less than ten days prior to any dividend or distribution record date; otherwise such termination will be effective after the investment of the then current dividend or distribution. If a withdrawing shareholder requests the Plan Agent to sell the shareholder's shares upon withdrawal from participation in the Plan, the withdrawing shareholder will be required to pay a $2.50 fee plus brokerage commissions. The Plan Agent maintains all shareholder accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for personal and tax records. Shares in the account of each Plan participant will be held by the Plan Agent in noncertificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. There is no charge to participants for reinvesting dividends or capital gains distributions. The Plan Agent's fee for the handling of reinvestment of dividends and distributions will be paid by the Fund. There will be no brokerage charges with respect to shares issued directly by the Fund as a result of dividends or capital gains distributions payable either in shares or in cash. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of dividends or capital gains distributions. The automatic reinvestment of dividends and distributions will not relieve participants of any U.S. federal income tax that may be payable on such dividends or distributions. To the extent dividends and distributions are reinvested in additional shares issued by the Fund, participants should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the fair market value, determined as of the valuation date, of the shares received (regardless of the net asset value of the shares on the valuation date), and should have a cost basis in such shares equal to such fair market value. Shareholders receiving a distribution in the form of shares purchased by the Plan Agent in the open market will be treated for U.S. federal income tax purposes as receiving a distribution of the cash distribution that such shareholder would have received had it not elected to have such distribution reinvested. Experience under the Plan may indicate that changes thereto may be desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan as applied to any dividend or distribution paid (i) subsequent to notice of the change sent to all participants at least 30 days before the record date for such dividend or distribution or (ii) otherwise in accordance with the terms of the Plan. The Plan also may be amended or terminated by the Plan Agent, with the Fund's prior written consent, on at least 30 days' prior written notice to all participants. All correspondence concerning the Plan should be directed to the Plan Agent at P.O. Box 8030, Boston, Massachusetts 02266-8030. 45 TAXATION The following is a general summary of certain United States federal income tax considerations affecting the Fund and United States and foreign shareholders and, except as otherwise indicated, is based upon federal income tax laws in effect on the date of this Prospectus. Such tax laws are subject to change by legislative, judicial or administrative action, possibly with retroactive effect. No attempt is made to present a detailed explanation of all federal, state, local and foreign income tax considerations, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers regarding an investment in the Fund. THE FUND The Fund intends to elect and qualify to be treated as a regulated investment company for federal income tax purposes under Subchapter M of the Code. In order to so qualify, the Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to loans of securities, gains from the sale or other disposition of stock or securities, or foreign currencies, or other income derived with respect to its business of investing in such stock, securities or currencies (including, but not limited to, gains from options, futures or forward contracts); and (b) diversify its holdings so that, at the end of each quarter of each taxable year, (i) at least 50% of the value of the Fund's 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 business. If the Fund qualifies as a regulated investment company and distributes to its holders of Common Stock at least 90% of its net investment income (i.e., the Fund's investment company taxable income, as that term is defined in the Code, without regard to the deduction for dividends paid), the Fund will not be subject to federal income tax on the portion of its net investment income and net capital gain (i.e., the excess of the Fund's net long-term capital gain over net short-term capital loss) that it distributes to shareholders. However, the Fund would be subject to corporate income tax (currently at a rate of 35%) on any undistributed income and gain. If the Fund retains amounts attributable to its net capital gain, it will designate such retained amounts as undistributed net capital gain in a notice to its shareholders who (i) will be required to include in income for United States federal income tax purposes, as long-term capital gain, their proportionate shares of the undistributed amount, (ii) will be entitled to credit their proportionate shares of the 35% tax paid by the Fund on the undistributed amount against their United States federal income tax liabilities and to claim refunds to the extent such credits exceed their liabilities and (iii) will be entitled to increase their tax basis, for United States federal income tax purposes, in their shares by an amount currently equal to the difference between the amount of includible gain and their proportionate shares of the 35% tax paid by the Fund. In addition, the Fund will be subject to a nondeductible 4% excise tax on the amount by which the aggregate income 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 Fund's capital gain net income for the one-year period generally ending on October 31 of each year; and (c) 100% of the undistributed ordinary income and capital gain net income from 46 prior years. For this purpose, any income or gain retained by the Fund subject to corporate income tax will be considered to have been distributed by year- end. The Fund intends to distribute sufficient income so as to avoid both the corporate income tax and the excise tax. The Internal Revenue Service ("IRS") has taken the position in a revenue ruling that a regulated investment company that has two or more classes of shares must designate distributions made to each class in any year as consisting of no more than such class's proportionate share of each type of income for each tax year based on the total dividends distributed to each class for such year, including dividends qualifying for the corporate dividends-received deduction and net capital gain. Consequently, if both Common Stock and preferred stock are outstanding, the Fund intends to allocate, to the fullest extent practicable, income distributed to the classes as consisting of particular types of income in accordance with each class's proportionate share of such income. Thus, the Fund will designate dividends qualifying for the corporate dividends-received deduction, 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. If at any time when leverage is outstanding the Fund does not meet the asset coverage requirements of the 1940 Act or of any rating agency that has rated such leverage, the Fund will be required to suspend distributions to holders of Common Stock until the asset coverage is restored. See "Additional Investment Activities--Leverage." This may prevent the Fund from distributing at least 90% of its net investment income, and may therefore jeopardize the Fund's qualification for taxation as a regulated investment company or cause the Fund to incur a corporate income tax or a non-deductible 4% excise tax on the undistributed taxable income (including gain). Upon any failure to meet the asset coverage requirements of the 1940 Act, or those imposed by a rating agency, the Fund may, in its sole discretion, purchase or redeem any preferred stock or short-term debt securities in order to maintain or restore the requisite asset coverage and avoid the adverse consequences to the Fund and its shareholders of failing to qualify as a regulated investment company. There can be no assurance, however, that any such redemption would achieve such objectives. Various transactions in which the Fund may engage, including Derivative Transactions, will be subject to special provisions of the Code that, among other things, may affect the character of gain and loss realized by the Fund (that is, may affect whether gain or loss is ordinary or capital), accelerate recognition of income to the Fund, affect the holding period of the Fund's assets and defer recognition of certain of the Fund's losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. In addition, these provisions (1) may require the Fund to mark to market certain types of positions in its portfolio (that is, treat them as if they were closed out at the end of each taxable year) and (2) may cause the Fund to recognize income or gain without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. The Fund intends to monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any forward contract, option, futures contract, or hedged investment in order to mitigate the effect of these rules and prevent disqualification of the Fund as a regulated investment company. The Fund may make investments that produce income that is not matched by a corresponding cash distribution to the Fund, such as investments in pay-in- kind bonds or in obligations such as certain Brady Bonds 47 or other obligations having original issue discount (i.e., an amount equal to the excess of the security's stated redemption price at maturity over its issue price), or market discount (i.e., an amount equal to the excess of the security's stated redemption price at maturity over its basis immediately after it was acquired) if the Fund elects, as it intends, to accrue market discount on a current basis. In addition, income may continue to accrue for federal income tax purposes with respect to a non-performing investment. Any of the foregoing income would be treated as income earned by the Fund and therefore would be subject to the distribution requirements of the Code. Because such income may not be matched by a corresponding cash distribution to the Fund, the Fund may be required to dispose of other securities to be able to make distributions to its shareholders. The Fund's taxable income will in most cases be determined on the basis of reports made to the Fund by the issuers of the securities in which the Fund invests. The tax treatment of certain securities in which the Fund may invest is not free from doubt and it is possible that an IRS examination of the issuers of such securities or of the Fund could result in adjustments to the income of the Fund. An upward adjustment by the IRS to the income of the Fund may result in the failure of the Fund to satisfy the 90% distribution requirement described in this Prospectus necessary for the Fund to maintain its status as a regulated investment company under the Code. In such event, the Fund may be able to make a "deficiency dividend" distribution to its shareholders with respect to the year under examination to satisfy this requirement. Such distribution will be taxable as a dividend to the shareholders receiving the distribution (whether or not the Fund has sufficient current or accumulated earnings and profits for the year in which such distribution is made). A downward adjustment by the IRS to the income of the Fund may cause a portion of the previously made distribution with respect to the year under examination not to be treated as a dividend. In such event, the portion of distributions to such shareholder not treated as a dividend would be recharacterized as a tax-free return of capital and reduce the shareholder's basis in the shares held at the time of the previously made distributions. Accordingly, this reduction in basis could cause a shareholder to recognize additional gain upon the sale of such shareholder's shares. 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 a significant portion of such dividends, if any, will qualify for the dividends received deduction generally available to 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 distribution. Distributions to shareholders of net capital gain that are designated by the Fund as "capital gain dividends" will be taxable as long-term capital gain, whether paid in cash or reinvested in additional shares, regardless of how long the shares have been held by such shareholders. These distributions will not be eligible for the dividends received deduction. The current maximum federal income tax rate imposed on long-term capital gain of individuals is 28% with respect to capital assets held for more than one year but less than 18 months and 20% with respect to capital assets held for more than 18 months. The current maximum federal income tax rate imposed on individuals with respect to ordinary income (and short-term capital gain, which is taxed at the same rates as ordinary income) is 39.6%. With respect to corporate taxpayers, long-term capital gain is taxed at the same federal income tax rates as ordinary income and short-term capital gain. Investors considering buying shares just prior to an ordinary income dividend or capital gain dividend should be aware that, although the price of shares purchased at that time may reflect the amount of the 48 forthcoming distribution, those who purchase just prior to a distribution will receive a distribution which will nevertheless be taxable to them. Dividends and distributions paid by the Fund are generally taxable to the shareholders at the time the dividend or distribution is made (even if paid or reinvested in additional shares). Any dividend declared by the Fund in October, November or December of any calendar year, however, which is payable to shareholders of record on a specified date in such a month will be treated as received by the shareholders as of December 31 of such year, provided that the dividend is paid during January of the following year. In general, any distribution in excess of the Fund's net investment income and net capital gain would first reduce a shareholder's basis in his shares and, after the shareholder's basis is reduced to zero, would constitute capital gain to a shareholder who holds his shares as capital assets. However, such excess would first be treated as an ordinary income dividend to the extent of the Fund's remaining current and accumulated earnings and profits. A notice detailing the amounts and tax status of dividends and distributions paid by the Fund, and the amount of undistributed net capital gain (if any), as well as the portions of the Fund's capital gain dividends and undistributed net capital gain that are subject to the 28% and 20% maximum tax rates, will be mailed annually to the shareholders of the Fund. Dispositions. Gain or loss, if any, recognized on the sale or other disposition of shares of the Fund 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 the shares are disposed of. If disallowed, the loss will be reflected by an upward adjustment to the basis of the shares acquired. Foreign Taxes. The Fund may be subject to certain taxes imposed by foreign countries with respect to dividends, capital gain and interest income. The United States has entered into tax treaties with many foreign countries which would entitle the Fund to a reduced rate of, or exemption from, such taxes. The Fund may invest up to 35% of its total assets in foreign debt securities. Accordingly, the Fund will not be eligible to elect to pass through to shareholders of the Fund the ability to use the foreign tax deduction or foreign tax credit for foreign taxes paid with respect to qualifying taxes. Foreign Shareholders. Taxation of a shareholder who, as to the United States, is a non-resident alien individual, foreign trust or estate, foreign corporation or foreign partnership ("foreign shareholder") depends, in part, on whether the shareholder's income from the Fund is "effectively connected" with a United States trade or business carried on by the shareholder. If a shareholder is a resident alien or if dividends or distributions from the Fund are effectively connected with a United States trade or business carried on by a foreign shareholder, then ordinary income dividends, capital gain dividends, undistributed net capital gain and gain realized upon the sale of shares of the Fund will be subject to United States federal income tax at the rates applicable to United States citizens or domestic corporations. Foreign shareholders that are corporations may also be subject to an additional "branch profits tax" with respect to income from the Fund that is effectively connected with a United States trade or business. 49 If the income from the Fund is not effectively connected with a United States trade or business carried on by the foreign shareholder, (i) ordinary income dividends will be subject to a 30% (or lower applicable treaty rate) United States federal withholding tax and (ii) distributions of net capital gain dividends, undistributed net capital gain and gain realized upon the sale of shares of the Fund will not be subject to United States federal income tax as long as such foreign shareholder is not a non-resident alien individual who was physically present in the United States for more than 182 days during the taxable year and, in the case of gains realized upon the sale of Fund shares, certain other conditions are met. However, certain foreign shareholders may nonetheless be subject to 31% backup withholding on distributions of net capital gain and gross proceeds paid to them upon the sale of their shares of the Fund. See "--Backup Withholding." The United States Treasury Department recently issued regulations generally effective for payments made after December 31, 1999 concerning the withholding of tax and reporting for certain amounts paid to nonresident aliens and foreign corporations (the "Final Withholding Regulations"). Among other things, the Final Withholding Regulations may require shareholders that are not United States persons within the meaning of the Code to furnish new certification of their foreign status after December 31, 1999. Prospective investors should consult their tax advisers concerning the applicability and effect of the Final Withholding Regulations on an investment in shares of the Fund. Transfer by gift of shares of the Fund by a foreign shareholder who is a non-resident alien individual will not be subject to United States federal gift tax, but the value of shares of the Fund held by such a shareholder at his death will be includible in such shareholder's gross estate for United States federal estate tax purposes. The tax consequences to a foreign shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described in this section. Shareholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Foreign investors are advised to consult their own tax advisers with respect to (a) whether their income from the Fund is or is not effectively connected with a U.S. trade or business carried on by them, (b) whether they may claim the benefits of an applicable tax treaty and (c) any other tax consequences to them of an investment in the Fund. Backup Withholding. The Fund may be required to withhold federal income tax at a rate of 31% ("backup withholding") from dividends 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 to withholding under the circumstances described in (i) above. The Fund must report annually to the IRS and to each foreign shareholder the amount of dividends paid to such shareholder and the amount, if any, of tax withheld pursuant to the backup withholding rules with respect to such dividends. This information may also be made available to the tax authorities in the foreign shareholder's country of residence. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from payments made to a shareholder may be refunded or credited against such shareholder's United States federal income tax liability, if any, provided that the required information is furnished to the IRS. --------------------- Investors should consult their own tax advisers regarding specific questions as to the federal, state, local and foreign tax consequences of the ownership and disposition of shares in the Fund. 50 NET ASSET VALUE Net asset value per share will be determined no less frequently than weekly, on the last business day of each week and at such other times as the Board of Directors may determine, by dividing the value of the securities held by the Fund plus any cash or other assets (including interest accrued but not yet received) minus all liabilities (including accrued expenses) and the aggregate liquidation value of any outstanding shares of preferred stock by the total number of shares of Common Stock outstanding. In valuing the Fund's assets, all securities for which market quotations are readily available are valued (except as described below) (i) at the last sale price prior to the time of determination if there was a sales price on the date of determination, (ii) at the mean between the last current bid and asked prices if there was no sales price on such date and bid and asked quotations are available, and (iii) at the bid price if there was no sales price on such date and only bid quotations are available. Publicly traded sovereign debt instruments are typically traded internationally on the over-the-counter market, and will be valued at the mean between the last current bid and asked price as at the close of business of that market. In instances where a price determined above is deemed not to represent fair market value, the price is determined in such manner as the Board of Directors may prescribe. Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. Short-term investments having a maturity of 60 days or less are valued at amortized cost, unless the Board of Directors determines that such valuation does not constitute fair value. Securities for which reliable quotations or pricing services are not readily available and all other securities and assets are valued at fair value as determined in good faith by, or under procedures established by, the Board of Directors. DESCRIPTION OF CAPITAL STOCK COMMON STOCK The authorized capital stock of the Fund is 100,000,000 shares of Common Stock ($.001 par value per share). The Common Stock of the Fund, when issued, will be fully paid and nonassessable. All shares of Common Stock are equal as to dividends, distributions and voting privileges. There are no conversion, preemptive or other subscription rights. In the event of liquidation, each share of Common Stock is entitled to its proportion of the Fund's assets after debts and expenses. There are no cumulative voting rights for the election of directors. Prior to the offering, SBAM will own 100% of the outstanding shares of Common Stock of the Fund and, consequently, will be a controlling person of the Fund until the shares offered hereby are issued and sold. The Fund will hold annual meetings of shareholders. The Fund has no present intention of offering additional shares of its Common Stock. Other offerings of its Common Stock, if made, will require approval of the Fund's Board of Directors. Any additional offering will be subject to the requirements of the 1940 Act that shares of Common Stock may not be sold at a price below the then current net asset value (exclusive of underwriting discounts and commissions) except in connection with an offering to existing shareholders or with the consent of a majority of the Fund's outstanding shares of Common Stock. 51 PREFERRED STOCK The Fund's Articles of Incorporation provides that the Board of Directors may classify or reclassify any unissued shares of capital stock into one or more additional or other classes or series, with rights as determined by the Board of Directors, by action by the Board of Directors without the approval of the holders of Common Stock. Holders of Common Stock have no preemptive right to purchase any shares of preferred stock that might be issued. The terms of any preferred stock, including its dividend rate, liquidation preference and redemption provisions will be determined by the Board of Directors (subject to applicable law and the Fund's Articles of Incorporation). The Fund believes that it is likely that the liquidation preference, voting rights and redemption provisions of any preferred stock will be similar to those stated below. Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Fund, the holders of preferred stock will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus accrued and unpaid dividends, whether or not declared) before any distribution of assets is made to holders of Common Stock. After payment of the full amount of the liquidating distribution to which they are entitled, the preferred shareholders will not be entitled to any further participation in any distribution of assets by the Fund. A consolidation or merger of the Fund with or into any corporation or corporations or a sale of all or substantially all assets of the Fund will not be deemed to be a liquidation, dissolution or winding upon of the Fund. Voting Rights. The 1940 Act requires that the holders of any preferred stock, voting separately as a single class, have the right to elect at least two directors at all times and, subject to the prior rights, if any, of the holders of any other class of senior securities outstanding, to elect a majority of the directors at any time dividends on any preferred shares are unpaid for a period of two years. The 1940 Act also requires that, in addition to any approval by shareholders that might otherwise be required, the approval of the holders of a majority of any outstanding preferred shares, voting separately as a class, would be required to (a) adopt any plan of reorganization that would adversely affect the preferred shares and (b) take any action requiring a vote of security holders pursuant to Section 13(a) of the 1940 Act, including, among other things, changes in the Fund's subclassification as a closed-end investment company to an open-end investment company or changes in its fundamental investment restrictions. See "--Special Voting Provisions" concerning voting requirements for conversion of the Fund to an open-end investment company and other matters. As a result of these voting rights, the Fund's ability to take any such actions may be impeded to the extent there is any preferred stock outstanding at such time. In addition, in the discretion of the Board of Directors, subject to the 1940 Act, the terms of any preferred stock may also require a vote of up to 75% of the preferred stock, voting separately as a class, regarding certain transactions involving a merger or sale of assets or conversion of the Fund to open-end status and other matters. The Board of Directors presently intends that, except for the matters discussed in this Prospectus and as otherwise required by applicable law, holders of shares of preferred stock will have equal voting rights with holders of Common Stock (one vote per share, unless otherwise required by the 1940 Act), and will vote together with holders of Common Stock as a single class. It is presently intended that in connection with the election of the Fund's directors, on and after issuance of any preferred stock, the holders of all outstanding shares of preferred stock, voting as a separate class, would be entitled to elect two directors of the Fund, and the remaining directors would be elected by holders of Common 52 Stock and preferred stock, voting together as a single class. The Fund's By- Laws provide that the Board of Directors shall consist of no more than 12 directors, as may be determined from time to time by vote of a majority of directors then in office. The affirmative vote of the holders of a majority of the outstanding shares of preferred stock, voting as a separate class, will be required to amend, alter or repeal any of the preferences, rights or powers of holders of shares of preferred stock so as to affect materially and adversely such preferences, rights, or powers, or increase or decrease the numbers of shares of preferred stock. The class vote of holders of preferred stock described above will in each case be in addition to any other vote required to authorize the action in question. Redemption, Purchase and Sale of Preferred Stock by the Fund. Any redemption or purchase of shares of preferred stock by the Fund will reduce the leverage applicable to shares of Common Stock, while any resale of such shares of preferred stock by the Fund will increase such leverage. See "Additional Investment Activities--Leverage." The discussion above describes the present intention of the Board of Directors with respect to an offering of preferred stock if the Board elects to utilize preferred stock in order to leverage the Fund's Common Stock. If the Board of Directors determines to proceed with such an offering, the terms of the preferred stock may be the same as, or different from, the terms described above, subject to applicable law and the Fund's Articles of Incorporation. The Board of Directors, without the approval of the holders of Common Stock, may authorize an offering of preferred stock or may determine not to authorize such an offering, and may fix the terms of the preferred stock to be offered. SPECIAL VOTING PROVISIONS The Fund has provisions in its Articles of Incorporation and By-Laws that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund, to cause it to engage in certain transactions or to modify its structure. Commencing with the first annual meeting of shareholders, the Board of Directors will be divided into three classes, having initial terms of one, two and three years, respectively. At the annual meeting of shareholders in each year thereafter, the term of one class will expire and directors will be elected to serve in that class for terms of three years. This provision could delay for up to two years the replacement of a majority of the Board of Directors. A director may be removed from office only for cause and only by a vote of the holders of at least 75% of the outstanding shares of the Fund entitled to be cast on the matter. The affirmative vote of at least 75% of the entire Board of Directors is required to authorize the conversion of the Fund from a closed-end to an open- end investment company. Such conversion also requires the affirmative vote of the holders of at least 75% of the votes entitled to be cast thereon by the shareholders of the Fund unless it is approved by a vote of at least 75% of the Continuing Directors (as defined below), in which event such conversion requires the approval of the holders of a majority of the votes entitled to be cast thereon by the shareholders of the Fund. A "Continuing Director" is any member of the Board of Directors of the Fund who (i) is not a person or affiliate of a person who enters or proposes to enter into a Business Combination (as defined below) with the Fund (an "Interested Party") and (ii) who has been a member of the Board of Directors of the Fund for a period of at least 12 months, or has been a member of the Board of Directors since April 24, 1998, or is a successor of a Continuing Director who is unaffiliated with an Interested Party and is recommended to succeed a Continuing Director by a majority of the Continuing Directors then on the Board of Directors of the 53 Fund. The affirmative vote of at least 75% of the votes entitled to be cast thereon by shareholders of the Fund will be required to amend the Articles of Incorporation to change any of the provisions in this paragraph and the preceding paragraph. The affirmative votes of at least 75% of the entire Board of Directors and the holders of at least (i) 80% of the votes entitled to be cast thereon by the shareholders of the Fund and (ii) in the case of a Business Combination (as defined below), 66 2/3% of the votes entitled to be cast thereon by the shareholders of the Fund other than votes held by an Interested Party who is (or whose affiliate is) a party to a Business Combination (as defined below) or an affiliate or associate of the Interested Party, are required to authorize any of the following transactions: (i) merger, consolidation or statutory share exchange of the Fund with or into any other person; (ii) issuance or transfer by the Fund (in one or a series of transactions in any 12-month period) of any securities of the Fund to any person or entity for cash, securities or other property (or combination thereof) having an aggregate fair market value of $1,000,000 or more, excluding issuances or transfers of debt securities of the Fund, sales of securities of the Fund in connection with a public offering, issuances of securities of the Fund pursuant to a dividend reinvestment plan adopted by the Fund, issuances of securities of the Fund upon the exercise of any stock subscription rights distributed by the Fund and portfolio transactions effected by the Fund in the ordinary course of business; (iii) sale, lease, exchange, mortgage, pledge, transfer or other disposition by the Fund (in one or a series of transactions in any 12 month period) to or with any person or entity of any assets of the Fund having an aggregate fair market value of $1,000,000 or more except for portfolio transactions (including pledges of portfolio securities in connection with borrowings) effected by the Fund in the ordinary course of its business (transactions within clauses (i), (ii) and (iii) above being known individually as a "Business Combination"); (iv) any voluntary liquidation or dissolution of the Fund or an amendment to the Fund's Articles of Incorporation to terminate the Fund's existence; or (v) unless the 1940 Act or federal law requires a lesser vote, any shareholder proposal as to specific investment decisions made or to be made with respect to the Fund's assets as to which shareholder approval is required under federal or Maryland law. However, the shareholder vote described above will not be required with respect to the foregoing transactions (other than those set forth in (v) above) if they are approved by a vote of at least 75% of the Continuing Directors. In that case, if Maryland law requires shareholder approval, the affirmative vote of a majority of votes entitled to be cast thereon shall be required. The Fund's By-Laws contain provisions the effect of which is to prevent matters, including nominations of directors, from being considered at a shareholders' meeting where the Fund has not received notice of the matters generally at least 60 but no more than 90 days prior to the first anniversary of the preceding year's annual meeting. 54 The Board of Directors has determined that the foregoing voting requirements, which are generally greater than the minimum requirements under Maryland law and the 1940 Act, are in the best interest of the Fund's shareholders generally. Reference is made to the Articles of Incorporation and By-Laws of the Fund, on file with the Commission, for the full text of these provisions. See "Further Information." These provisions could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. In the opinion of SBAM, however, these provisions offer several possible advantages. They may require persons seeking control of the Fund to negotiate with its management regarding the price to be paid for the shares required to obtain such control, they promote continuity and stability and they enhance the Fund's ability to pursue long-term strategies that are consistent with its investment objectives. CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR PNC Bank, N.A., Airport Business Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113, will act as custodian for the Fund's assets. First Data Investor Services Group, Inc., P.O. Box 5127, Westborough, Massachusetts 01581-5127, will act as the transfer agent, dividend paying agent and registrar for the Fund's Common Stock. 55 UNDERWRITING The Underwriters named herein, for whom Smith Barney Inc., 388 Greenwich Street, New York, New York 10013 is acting as Representative (the "Representative"), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement among the Fund, SBAM and the several Underwriters (the "Underwriting Agreement"), to purchase from the Fund the number of shares of Common Stock set forth below opposite their respective names.
NAME NUMBER OF SHARES ---- ---------------- Smith Barney Inc.......................................... A.G. Edwards & Sons, Inc.................................. Advest, Inc............................................... EVEREN Securities, Inc.................................... Fahnestock & Co. Inc...................................... Janney Montgomery Scott Inc............................... Legg Mason Wood Walker, Incorporated...................... McDonald & Company Securities, Inc........................ Morgan Keegan & Company, Inc.............................. The Robinson-Humphrey Company, LLC........................ Tucker Anthony Incorporated............................... Wedbush Morgan Securities................................. ---- Total................................................... ====
The Representative has informed the Fund that the Underwriters do not intend to confirm shares of Common Stock to any accounts over which they exercise discretionary authority. The Underwriters, through their Representative, have advised the Fund that they propose to offer the shares of Common Stock initially at the public offering price set forth on the cover page of this Prospectus. There is no sale charge or underwriting discount charged to investors on purchases of shares of Common Stock in the offering. SBAM or an affiliate has agreed to pay the Underwriters from its own assets a commission in connection with the sale of shares of Common Stock in the offering in the amount of $0.75 per share. Such payment is equal to 5.00% of the initial public offering price per share. From this amount, the Underwriters may allow to selected dealers a payment in the amount of $0.45 per share sold by such dealers and such dealers may reallow a payment of $.10 per share to certain other dealers. The Underwriters reserve the right to reject orders in whole or in part. After the initial offering of the Common Stock to the public, the offering price and other selling terms may be changed by the Representative. The Fund is obligated to sell, and the Underwriters are obligated to purchase, all of the shares of Common Stock offered hereby (other than shares covered by the over-allotment option described below) if any are sold. Investors must pay for any shares of Common Stock purchased on or before May 28, 1998. The Fund has granted to the Underwriters an option, exercisable within 45 days of this Prospectus, to purchase up to additional shares of Common Stock at the same price to public as set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, incurred in the sale of the shares of Common Stock offered hereby. To the extent the 56 Underwriters exercise such option, each of the Underwriters will be obligated, subject to certain conditions, to purchase the same proportion of such additional shares as the number of shares set forth opposite such Underwriter's name in the preceding table bears to the total number of shares set forth in such table. The Fund and SBAM have each agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act. The Fund has agreed to pay the Underwriters $250,000 as partial reimbursement of expenses incurred in connection with the offering. In connection with the requirements for listing the Fund's shares of Common Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares of Common Stock to a minimum of 2,000 beneficial owners in the United States. The minimum investment requirement is 100 shares of Common Stock. Prior to the offering, there has been no public market for the Common Stock. Consequently, the initial public offering price has been determined by negotiation between the Fund, SBAM and the Representative. The Common Stock has been approved for listing on the NYSE subject to official notice of issuance. Smith Barney Inc. intends to make a market in the Common Stock after trading in the Common Stock has commenced on the NYSE. Smith Barney Inc., however, is not obligated to conduct market-making activities and any such activities may be discontinued at any time without notice, at the sole discretion of Smith Barney Inc. No assurance can be given as to the liquidity of, or the trading market for, the Common Stock as a result of any market- making activities undertaken by Smith Barney Inc. This Prospectus is to be used by Smith Barney Inc. in connection with this offering and with offers and sales of the Common Stock in market-making transactions in the over-the- counter market at negotiated prices related to prevailing market prices at the time of the sale. The Underwriters have advised the Fund that, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in the offering may engage in transactions, including stabilizing bids, covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of an Underwriter for the purpose of fixing or maintaining the price of the Common Stock. A "covering transaction" is a bid for or purchase of the Common Stock on behalf of an Underwriter to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting an Underwriter to reclaim the selling concession otherwise accruing to the Underwriters in connection with the offering if any of the Common Stock originally sold by the Underwriters is purchased in a covering transaction and has therefore not been effectively placed by the Underwriters. The Underwriters have advised the Fund that such transactions may be effected on the NYSE or otherwise and, if commenced, may be discontinued at any time. The Underwriting Agreement provides that it may be terminated in the absolute discretion of the Representative without liability on the part of any Underwriter to the Fund or SBAM if, prior to delivery of and payment for the shares of Common Stock, (i) trading in the Fund's Common Stock shall have been suspended by the Commission or the NYSE or trading in securities generally on the NYSE shall have been suspended or limited or minimum prices shall have been established on the NYSE, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war or other calamity or 57 crisis the effect of which on financial markets is such as to make it, in the judgment of the Representative, impracticable or inadvisable to proceed with the offering or delivery of the securities as contemplated by this Prospectus (exclusive of any supplement thereto). The Underwriters have taken certain actions to discourage short-term trading of shares of Common Stock during a period of time following the initial offering date. Included in these actions is the withholding of payments to Underwriters and concessions to dealers in connection with shares of Common Stock which were sold by such Underwriters or dealers and which are repurchased for the account of the Underwriters during such period. The Fund anticipates that from time to time the Representative of the Underwriters and certain other Underwriters may act as brokers or dealers in connection with the execution of the Fund's portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as brokers while they are Underwriters. The Fund has agreed not to offer or sell any additional shares of Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of the Smith Barney Inc. SBAM and Smith Barney Inc. are each wholly-owned subsidiaries of Salomon Smith Barney Holdings Inc., which is in turn wholly-owned by Travelers Group Inc. EXPERTS The financial statement of the Fund included in this Prospectus has been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. LEGAL MATTERS The validity of the shares offered hereby will be passed on for the Fund by Simpson Thacher & Bartlett, New York, New York, and certain legal matters in connection with the offering of the shares will be passed on for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Counsel for the Fund and the Underwriters will rely, as to matters of Maryland law, on Piper & Marbury L.L.P., Baltimore, Maryland. FURTHER INFORMATION Prior to the registration statement becoming effective, the Underwriters or other appropriate party may have distributed advertising or other solicitation material which discusses (i) economic and market conditions and trends generally; (ii) historical and current conditions and trends in the high yield debt securities market and risk and reward potential in such market; (iii) comparative information, including statistical analysis and performance- related information, related to high yield securities generally and investing in high yield securities; (iv) the special considerations and potential benefits of investing in closed-end management investment companies and (v) information about SBAM and the Fund's portfolio managers, including honors or awards received and information and commentary on investment strategy or other matters of general interest to investors. Further information concerning these securities and their issuer may be found in the Registration Statement, of which this Prospectus constitutes a part, on file with the Commission. 58 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholder and Board of Directors of Salomon Brothers High Income Fund II Inc In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Salomon Brothers High Income Fund II Inc (the "Fund") at May 20, 1998, in conformity with generally accepted accounting principles. This financial statement is the responsibility of the Fund's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP New York, New York May 21, 1998 59 SALOMON BROTHERS HIGH INCOME FUND II INC (NOTE 1) STATEMENT OF ASSETS AND LIABILITIES MAY 20, 1998 Assets: Cash................................................................. $100,005 Deferred organization expenses (Note 2).............................. 125,000 -------- Total assets........................................................ 225,005 Liabilities: Accrued organization expenses (Note 2)............................... 125,000 Commitments (Note 2)................................................. -- -------- Net Assets (6,667 shares of $.001 par value shares of common stock issued and outstanding; 100,000,000 shares authorized)............... $100,005 ======== Net asset value per share............................................. $ 15.00 ========
NOTES TO FINANCIAL STATEMENT NOTE 1 The Salomon Brothers High Income Fund II Inc (the "Fund") was incorporated as a Maryland corporation on March 19, 1998, and has had no operations to date other than matters relating to its organization and registration as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, and the sale and issuance to Salomon Brothers Asset Management Inc ("SBAM") of 6,667 shares of its common stock for an aggregate purchase price of $100,005. The books and records of the Fund will be maintained in U.S. dollars. NOTE 2 Organization expenses relating to the Fund incurred and to be incurred by SBAM will be reimbursed by the Fund. Such expenses, estimated at $125,000, will be deferred and amortized on a straight-line basis for a five-year period beginning at the commencement of operations of the Fund. However, in accordance with the AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities", the Fund will be required to expense the unamortized amount of this asset on the first day of its second fiscal year which is expected to be May 1, 1999. Offering costs, estimated at $1,545,000, will be paid from the proceeds of the offering and will be charged to capital at the time of the issuance of such shares. NOTE 3 The Fund retains SBAM, a wholly-owned subsidiary of Salomon Brothers Holding Company Inc, which is in turn wholly-owned by Salomon Smith Barney Holdings Inc, which is in turn wholly-owned by Travelers Group Inc., as its investment manager under an investment management agreement (the "Advisory Agreement"). Under the terms of the Advisory Agreement, SBAM will manage the investment and reinvestment of the assets of the Fund, subject to the supervision of the Fund's Board of Directors. SBAM will make the investment decisions for the Fund and place purchase and sale orders for the Fund's portfolio securities pursuant 60 to the Advisory Agreement. For its services, SBAM will receive from the Fund a monthly fee at an annual rate of 1.00% of the value of the Fund's average weekly net assets plus the proceeds of any outstanding borrowings used for leverage. ("Average weekly net assets" means the average weekly value of the total assets of the Fund, including any proceeds from the issuance of preferred stock, minus the sum of (i) accrued liabilities of the Fund, (ii) any accrued and unpaid interest on outstanding borrowings and (iii) accrued accumulated dividends on shares of preferred stock.) Mutual Management Corp. (the "Administrator"), a wholly-owned subsidiary of Salomon Smith Barney Holdings Inc., will act as administrator for the Fund. Under the Administration Agreement with the Fund (the "Administration Agreement"), the Administrator administers the Fund's corporate affairs subject to the supervision of the Fund's Board of Directors and in connection therewith furnishes the Fund with office facilities together with such ordinary clerical and bookkeeping services (e.g., preparation of annual and other reports to shareholders and the Securities and Exchange Commission and filing of federal, state and local income tax returns) as are not being furnished by SBAM or the Fund's custodian. The Administration Agreement provides that the Fund shall pay to the Administrator a monthly fee for its services and the facilities furnished by the Administrator at an annual rate of .10% of the value of the Fund's average weekly net assets (as defined and determined with respect to the Advisory Agreement) plus the proceeds of any outstanding borrowings used for leverage. Certain officers and/or directors of the Fund are officers and/or directors of SBAM or the Administrator. 61 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX A DESCRIPTION OF RATINGS A DESCRIPTION OF THE RATING POLICIES OF MOODY'S AND S&P WITH RESPECT TO BONDS APPEARS BELOW. MOODY'S CORPORATE BOND RATINGS AAA--Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA--Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A--Bonds which are rated "A" possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. BAA--Bonds which are rated "Baa" are considered as medium-grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA--Bonds which are rated "Ba" are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA--Bonds which are rated "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C--Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies numerical modifiers "1", "2" and "3" in each generic rating classification from Aa to Caa. The modifier "1" indicates that the security ranks in the higher end of its generic rating category; the A-1 modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that the issue ranks in the lower end of its generic rating category. S&P'S CORPORATE BOND RATINGS AAA--This is the highest rating assigned by S&P to a debt obligation and indicates an extremely strong capacity to repay principal and pay interest. AA--Bonds rated "AA" also qualify as high quality debt obligations. Capacity to pay principal and interest is very strong, and differs from "AAA" issues only in small degree. A--Bonds rated "A" have a strong capacity to repay principal and pay interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB--Bonds rated "BBB" are regarded as having an adequate capacity to repay principal and pay interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to repay principal and pay interest for bonds in this category than for higher-rated categories. BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. CI--Bonds rated "CI" are income bonds on which no interest is being paid. D--Bonds rated "D" are in default. The "D" category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired unless S&P believes that such payments will be made during such grace period. The "D" rating is also used upon the filing of a bankruptcy petition if debt service payments are jeopardized. The ratings set forth above may be modified by the addition of a plus or minus to show relative standing within the major rating categories. MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a superior ability for repayment of short-term debt obligations. Prime-1 repayment ability will often be evidenced by leading market positions in well- established industries, high rates or return on funds employed, conservative capitalization structures with moderate reliance on debt and ample asset protection, broad margins in earnings coverage of fixed financial charges and high internal cash generation, and well-established access to a range of financial markets and assured sources of alternate liquidity. Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a strong ability for repayment of short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a A-2 lesser degree. Earning trends and coverage ratio, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained. Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an acceptable ability for repayment of short-term debt obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Not Prime--Issuers rated Not Prime do not fall within any of the Prime rating categories. STANDARD & POOR'S COMMERCIAL PAPER RATINGS An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from "A-1" for the highest quality obligations to "D" for the lowest. The categories are as follows: "A-1'--A short-term obligation rated "A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong. "A-2'--A short-term obligation rated "A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory. "A-3'--A short-term obligation rated "A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. "B'--A short-term obligation rated "B' is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. "C'--A short-term obligation rated "C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. "D'--A short-term obligation rated "D' is in payment default. The "D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. A-3 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B GENERAL CHARACTERISTICS AND RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS The Fund may engage in certain hedging and other strategic transactions. The Fund will engage in such activities from time to time in SBAM's discretion and may not necessarily be engaging in such activities when movements occur in interest rates that could affect the value of the assets of the Fund. The Fund's ability to pursue certain of these strategies may be limited by the Commodity Exchange Act, as amended, applicable regulations of the CFTC and the federal income tax requirements applicable to regulated investment companies which are not operated as commodity pools. INTEREST RATE TRANSACTIONS The Fund may enter into interest rate swaps and may purchase interest rate caps, floors and collars and may sell interest rate caps, floors and collars that it has purchased. The Fund would enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, to manage the duration of its portfolio, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date or to further the Fund's investment objectives and policies. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor. A collar is a combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates or values. The Fund may enter into interest rate swaps, caps, floors and collars on either an asset-based or liability-based basis, depending on whether it is hedging its assets or liabilities, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments on the payment date. To the extent these Derivative Transactions are entered into for good faith hedging purposes, SBAM believes such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. The Fund will accrue the net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid securities having an aggregate net asset value at least equal to the accrued excess. The Fund will not enter into any interest rate swap, cap, floor or collar transaction unless the other party thereto has been determined by SBAM to be creditworthy at the time of entering into such transaction. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps, floors and collars are less liquid than swaps. B-1 PUT AND CALL OPTIONS ON SECURITIES AND INDICES The Fund may purchase and sell put and call options on securities and indices based upon the prices of securities. A put option on a security gives the purchaser of the option the right to sell and the writer the obligation to buy the underlying security at the exercise price during the option period. The Fund may also purchase and sell options on indices based upon the prices of securities ("index options"). Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price upon exercise, an index option gives the holder the right to receive cash upon exercise of the option if the level of the index upon which the option is based is greater, in the case of a call, or less in the case of a put, than the exercise price of the option. The purchase of a put option on a security would be designed to protect against a decline in the market value of a security held by the Fund. A call option on a security gives the purchaser of the option the right to buy and the writer the obligation to sell the underlying security at the exercise price during the option period. The purchase of a call option on a security would be intended to protect the Fund against an increase in the price of a security that it intended to purchase in the future. In the case of either put or call options that it has purchased, if the option expires without being sold or exercised, the Fund will experience a loss in the amount of the option premium plus any related commissions. When the Fund sells put and call options, it receives a premium as the seller of the option. The premium that the Fund receives for writing the option will serve as a partial hedge, in the amount of the option premium, against changes in the value of the securities in its portfolio. During the term of the option, however, a covered call seller has, in return for the premium on the option, given up the opportunity for capital appreciation above the exercise price of the option if the value of the underlying security increases, but has retained the risk of loss should the price of the underlying security decline. Conversely, a secured put seller retains the risk of loss should the market value of the underlying security decline below the exercise price of the option, less the premium received on the sale of the option. The Fund is authorized to purchase and sell exchange listed options and over-the-counter options ("OTC Options") which are privately negotiated with the counterparty to such contract. Listed options are issued by the Options Clearing Corporation ("OCC"), which guarantees the performance of the obligations of the parties to such options. All such call options sold (written) by the Fund will be "covered" as long as the call is outstanding (i.e., the Fund will own the instrument subject to the call or other securities or assets acceptable under applicable segregation and coverage rules). All such put options sold (written) by the Fund will be secured by segregated assets consisting of cash or liquid assets having a value not less than the exercise price. The Fund's ability to close out its position as a purchaser or seller of an exchange listed put or call option is dependent upon the existence of a liquid secondary market. Among the possible reasons for the absence of a liquid secondary market on an exchange are: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities; (iv) interruption of the normal operations on an exchange; (v) inadequacy of the facilities of an exchange or OCC to handle current trading volume; or (vi) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been listed by the OCC as a result of trades on that exchange would generally continue to be exercisable in accordance with their terms. OTC Options are purchased from or sold to dealers, financial institutions or other counterparties which have entered into direct B-2 agreements with the Fund. With OTC Options, such variables as expiration date, exercise price and premium will be agreed upon between the Fund and the counterparty, without the intermediation of a third party such as the OCC. If the counterparty fails to make or take delivery of the securities underlying an option it has written, or otherwise fails to settle the transaction in accordance with the terms of that option as written, the Fund would lose the premium paid for the option as well as any anticipated benefit of the transaction. As the Fund must rely on the credit quality of the counterparty rather than the guarantee of the OCC, it will only enter into OTC options with counterparties with the highest long-term credit ratings, and with primary United States government securities dealers recognized by the Federal Reserve Bank of New York. The hours of trading for options on securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS Characteristics. The Fund may purchase and sell futures contracts on interest rates and securities indices and purchase and sell (write) put and call options on such futures contracts traded on recognized domestic exchanges as a hedge against anticipated interest rate changes or other market movements. The sale of a futures contract creates an obligation by the Fund, as seller, to deliver the specific type of financial instrument called for in the contract at a specified future time for a specified price. Options on futures contracts are similar to options on securities except that an option on a futures contract gives the purchaser the right in return for the premium paid to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put). Margin Requirements. At the time a futures contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment ("initial margin"). It is expected that the initial margin that the Fund will pay may range from approximately 1% to approximately 5% of the value of the instruments underlying the contract. In certain circumstances, however, such as during periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment. Additionally, initial margin requirements may be increased in the future pursuant to regulatory action. An outstanding futures contract is valued daily and the payment in cash of "variation margin" may be required, a process known as "marking to the market." Transactions in listed options and futures are usually settled by entering into an offsetting transaction, and are subject to the risk that the position may not be able to be closed if no offsetting transaction can be arranged. Limitations on Use of Futures Contracts and Options on Futures Contracts. The Fund's use of futures contracts and options on futures contracts will in all cases be consistent with applicable regulatory requirements and in particular, the rules and regulations of the CFTC. In addition, the Fund may not sell futures contracts if the value of such futures contracts exceeds the total market value of the Fund's portfolio securities. The Fund may engage in transactions in futures contracts or options thereon for speculative purposes or as a hedge against changes resulting from market conditions in the values of securities in its portfolio. The Fund may enter into futures contracts or options thereon for purposes other than bona fide hedging if, immediately thereafter, the sum of the amount of its initial margin and premiums on open contracts and options would not exceed 5% of the liquidation value of the Fund's portfolio; provided further that in the case of an option that is B-3 in-the-money at the time of the purchase, the in-the-money amount may be excluded in calculating the 5% limitation. Also, when required, a segregated account of cash or cash equivalents will be maintained and marked to market in an amount equal to the market value of the contract. SBAM reserves the right to comply with such different standards as may be established from time to time by CFTC rules and regulations with respect to the purchase and sale of futures contracts and options thereon. Segregation and Cover Requirements. Futures contracts, interest rate swaps, caps, floors and collars, and options on securities, indices and futures contracts sold by the Fund are generally subject to segregation and coverage requirements established by either the CFTC or the Commission, with the result that, if the Fund does not hold the instrument underlying the futures contract or option, the Fund will be required to segregate on an ongoing basis with its custodian, cash, U.S. government securities, or other liquid assets in an amount at least equal to the Fund's obligations with respect to such instruments. Such amounts will fluctuate as the market value of the obligations increases or decreases. The segregation requirement can result in the Fund maintaining positions it would otherwise liquidate and consequently segregating assets with respect thereto at a time when it might be disadvantageous to do so. In addition, with respect to futures contracts purchased by the Fund, the Fund will also be subject to the segregation requirements with respect to the value of the instruments underlying the futures contract. Derivative Transactions present certain risks. In particular, the variable degree of correlation between price movements of hedging instruments and price movements in the position being hedged creates the possibility that losses on the hedge may be greater than gains in the value of the Fund's positions. In addition, certain hedging instruments and markets may not be liquid in all circumstances. As a result, in volatile markets, the Fund may not be able to close out a transaction in certain of these instruments without incurring losses substantially greater than the initial deposit. Although the contemplated use of these instruments should tend to minimize the risk of loss due to a decline in the value of the hedged position, at the same time they tend to limit any potential gain which might result from an increase in the value of such position. The ability of the Fund to hedge successfully will depend on SBAM's ability to predict pertinent market movements, which cannot be assured. Finally, the daily variation margin deposit requirements in futures contracts that the Fund has sold create an ongoing greater potential financial risk than do transactions in which the Fund has purchased options where the exposure is limited to the cost of the initial premium and transaction costs paid by the Fund. While the Fund may enter into Derivative Transactions to hedge all or a portion of its portfolio, changes in the directions of markets that are the subject of a hedge and fluctuations in interest rates may result in a poorer overall performance for the Fund than if it had not engaged in any such transactions. Losses due to Derivative Transactions will reduce the Fund's net asset value. The Fund's investments in Derivative Transactions may be limited by certain provisions of the Internal Revenue Code of 1986, as amended. See "Taxation" in this Prospectus. CURRENCY TRANSACTIONS As discussed in the Prospectus, the Fund may engage in currency transactions with counterparties to hedge the value of portfolio securities denominated in particular currencies against fluctuations in relative value or to generate income or gain. The types of currency transactions the Fund may engage in are described in the Prospectus. Transaction hedging is entering into a currency transaction with respect to specific assets or liabilities of the Fund, which will generally arise in connection with the purchase or sale of the Fund's portfolio securities B-4 or the receipt of income from them. Position hedging is entering into a currency transaction with respect to portfolio securities positions denominated or generally quoted in that currency. The Fund will not enter into a transaction to hedge currency exposure to an extent greater, after netting all transactions intended wholly or partially to offset other transactions, than the aggregate market value (at the time of entering into the transaction) of the securities held by the Fund that are denominated or generally quoted in or currently convertible into the currency, other than with respect to proxy hedging as described below. The Fund may cross-hedge currencies by entering into transactions to purchase or sell one or more currencies that are expected to increase or decline in value relative to other currencies to which the Fund has or in which the Fund expects to have exposure. To reduce the effect of currency fluctuations on the value of existing or anticipated holdings of its securities, the Fund may also engage in proxy hedging. Proxy hedging is often used when the currency to which the Fund's holdings is exposed is difficult to hedge generally or difficult to hedge against the U.S. dollar. Proxy hedging entails entering into a forward contract to sell a currency, the changes in the value of which are generally considered to be linked to a currency or currencies in which some or all of the Fund's securities are or are expected to be denominated, and buying U.S. dollars. The amount of the contract would not exceed the market value of the Fund's securities denominated in linked currencies. Currency transactions are subject to risks different from those of other portfolio transactions. Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. Further, the risk exists that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Fund is engaging in proxy hedging. Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions on repatriation of currency, and manipulations or exchange restrictions imposed by governments. These forms of governmental actions can result in losses to the Fund if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as the incurrence of transaction costs. Buyers and sellers of currency futures contracts are subject to the same risks that apply to the use of futures contracts generally. Further, settlement of a currency futures contract for the purchase of most currencies must occur at a bank based in the issuing nation. Trading options on currency futures contracts is relatively new, and the ability to establish and close out positions on these options is subject to the maintenance of a liquid market that may not always be available. Currency exchange rates may fluctuate based on factors extrinsic to a country's economy. B-5 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE- SENTATIONS IN CONNECTION WITH THIS OFFERING, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, ITS INVESTMENT ADVISER OR THE UNDERWRIT- ERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMA- TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PRO- SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITA- TION IS UNLAWFUL. ----------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors and Special Considerations.................................. 8 Fee Table................................................................ 18 The Fund................................................................. 19 Use of Proceeds.......................................................... 19 Investment Objectives and Policies....................................... 20 Additional Investment Activities......................................... 26 Investment Restrictions.................................................. 34 Management of the Fund................................................... 35 Portfolio Transactions................................................... 42 Dividends and Distributions; Dividend Reinvestment Plan.................. 43 Taxation................................................................. 46 Net Asset Value.......................................................... 51 Description of Capital Stock............................................. 51 Custodian, Transfer Agent, Dividend Paying Agent and Registrar........... 55 Underwriting............................................................. 56 Experts.................................................................. 58 Legal Matters............................................................ 58 Further Information...................................................... 58 Report of Independent Accountants........................................ 59 Statement of Assets and Liabilities...................................... 60 Appendix A: Description of Ratings....................................... A-1 Appendix B: General Characteristics and Risks of Hedging and Other Strategic Transactions.................................................. B-1
----------- UNTIL JUNE 15, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SHARES SALOMON BROTHERS HIGH INCOME FUND II INC COMMON STOCK ($.001 PAR VALUE) ------- PROSPECTUS MAY 21, 1998 ------- SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC. ADVEST, INC. EVEREN SECURITIES, INC. FAHNESTOCK & CO. INC. JANNEY MONTGOMERY SCOTT INC. LEGG MASON WOOD WALKER INCORPORATED MCDONALD & COMPANY SECURITIES, INC. MORGAN KEEGAN & COMPANY, INC. THE ROBINSON-HUMPHREY COMPANY TUCKER ANTHONY INCORPORATED WEDBUSH MORGAN SECURITIES - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (1) Financial Statements Exhibits (2)(a) --Amended and Restated Articles of Incorporation (b) --Amended and Restated By-Laws (c) --Not Applicable (d)(1) --Specimen Stock Certificate is incorporated herein by reference to Exhibit 2(d)(1) of Registrant's Registration Statement on Form N-2 filed on April 29, 1998. (2) --Articles V and VIII of Registrant's Articles of Incorporation and Article II of Registrant's By-Laws are incorporated herein by reference to Exhibits 2(a) and 2(b) hereof, respectively. (e) --Form of Dividend Reinvestment Plan is incorporated herein by reference to Exhibit 2(e) of Registrant's Registration Statement on Form N-2 filed on April 29, 1998. (f) --Not Applicable (g) --Form of Investment Management Agreement is incorporated herein by reference to Exhibit 2(g) of Registrant's Registration Statement on Form N-2 filed on April 29, 1998. (h)(1) --Form of Underwriting Agreement (2) --Form of Master Agreement Among Underwriters is incorporated herein by reference to Exhibit 2(h)(2) of Registrant's Registration Statement on Form N-2 filed on April 29, 1998. (3) --Form of Selling Agreement is incorporated herein by reference to Exhibit 2(h)(3) of Registrant's Registration Statement on Form N-2 filed on April 29, 1998. (i) --Not Applicable (j) --Form of Custodian Agreement (k)(1) --Form of Administration Agreement is incorporated herein by reference to Exhibit 2(k)(1) of Registrant's Registration Statement on Form N-2 filed on April 29, 1998. (2) --Form of Transfer Agency and Services Agreement is incorporated herein by reference to Exhibit 2(k)(2) of Registrant's Registration Statement on Form N-2 filed on April 29, 1998. (l) --Opinion and Consent of Counsel (m) --Not Applicable (n) --Consent of Independent Accountants (o) --Not Applicable (p) --Form of Stock Purchase Agreement is incorporated herein by reference to Exhibit 2(p) of Registrant's Registration Statement on Form N-2 filed on April 29, 1998. (q) --Not Applicable (r) --Financial Data Schedule (s) --Power of Attorney of Heath B. McClendon, Charles F. Barber, Daniel P. Cronin, Riordan Roett and Jeswald W. Salacuse is incorporated by reference to Page C-4 of Registrant's Registration Statement on Form N-2 filed on April 29, 1998.
C-1 ITEM 25. MARKETING ARRANGEMENTS See Exhibits 2(h)(1), 2(h)(2) and 2(h)(3) to this Registration Statement. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement: SEC Registration fees............................................ $ 295,000 New York Stock Exchange listing fee.............................. 300,433 Printing and engraving expenses.................................. 341,300 Legal fees and expenses.......................................... 138,000 NASD Fees........................................................ 38,500 Miscellaneous.................................................... 431,767 ---------- Total.......................................................... $1,545,000 ==========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Not Applicable. ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF MAY 20, 1998)
TITLE OF CLASS NUMBER OF RECORD HOLDERS -------------- ------------------------ Common Stock, par value $.001 per share............. 1
ITEM 29. INDEMNIFICATION Under the Registrant's Amended and Restated Articles of Incorporation and Amended and Restated By-Laws, the directors and officers of the Registrant will be (and employees and agents of the Registrant may be) indemnified to the fullest extent allowed and in the manner provided by Maryland law and applicable provisions of the Investment Company Act of 1940, as amended, including advancing of expenses incurred in connection therewith. Indemnification shall not be provided, however, to any person against any liability to the Registrant or its security-holders to which he or she would otherwise be subject by reasons of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to the directors and officers, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Act and is therefore unenforceable. If a claim for indemnification against such liabilities under the Securities Act of 1933 (other than for expenses incurred in a successful defense) is asserted against the Registrant by the directors or officers in connection with the Common Stock, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue. Reference is made to Section Eight of the Underwriting Agreement, a form of which is filed as Exhibit 2(h)(1) hereto, for provisions relating to the indemnification of the Underwriters. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF ADVISER For information as to the business, profession, vocation or employment of a substantial nature of each of the officers and directors of Salomon Brothers Asset Management Inc ("SBAM"), reference is made to SBAM's current Form ADV filed under the Investment Advisers Act of 1940, incorporated herein by reference. ITEM 31. LOCATION OF ACCOUNTS AND RECORDS The accounts and records of the Registrant are maintained at the office of (i) SBAM at Seven World Trade Center, New York, New York 10048, (ii) at PNC Bank, N.A., the Registrant's custodian, at Airport Business Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113, (iii) First Data Investor Services C-2 Group, Inc., the Registrant's transfer agent, at P.O. Box 5127, Westborough, Massachusetts 01581-5127; and (iv) Mutual Management Corp., the Registrant's administrator, at 388 Greenwich Street, New York, New York 10013. ITEM 32. MANAGEMENT SERVICES Not Applicable ITEM 33. UNDERTAKINGS (1) Registrant undertakes to suspend the offering of Common Stock until the prospectus is amended, if subsequent to the effective date of this registration statement, its net asset value declines more than ten percent from its net asset value as of the effective date of the registration statement or its net asset value increases to an amount greater than its net proceeds as stated in the prospectus. (2) Not Applicable (3) Not Applicable (4) Not Applicable (5) Registrant undertakes that, for the purpose of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 497(h) will be deemed to be a part of the Registration Statement as of the time it was declared effective. Registrant undertakes that, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus will be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof. (6) Not Applicable C-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, HEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK ON THE 21ST DAY OF MAY, 1998. Salomon Brothers High Income Fund II Inc /s/ Heath B. McLendon By: _________________________________ HEATH B. MCLENDON PRESIDENT /s/ Lewis E. Daidone By: _________________________________ LEWIS E. DAIDONE TREASURER & CHIEF FINANCIAL OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ Heath B. McLendon Chairman of the - ------------------------------------- Board and President May 21, 1998 HEATH B. MCLENDON Director * Charles F. Barber May 21, 1998 - ------------------------------------- CHARLES F. BARBER Director * Daniel P. Cronin May 21, 1998 - ------------------------------------- DANIEL P. CRONIN Director * Riordan Roett May 21, 1998 - ------------------------------------- RIORDAN ROETT Director * Jeswald W. Salacuse May 21, 1998 - ------------------------------------- JESWALD W. SALACUSE /s/ Heath B. McLendon * By: __________________________ HEATH B. MCLENDON, ATTORNEY-IN-FACT C-4 SCHEDULE OF EXHIBITS TO FORM N-2
EXHIBIT NUMBER EXHIBIT ------- ------- Exhibit 2(a) Amended and Restated Articles of Incorporation Exhibit 2(b) Amended and Restated By-Laws Exhibit 2(h)(l) Form of Underwriting Agreement Exhibit 2(j) Form of Custodian Agreement Exhibit 2(l) Opinion and Consent of Counsel Exhibit 2(n) Consent of Independent Accountants Exhibit 2(r) Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
6 001 SALOMON BROTHERS HIGH INCOME FUND II INC 12-MOS DEC-31-1998 MAY-20-1998 0 0 0 225,005 0 225,005 0 0 125,000 125,000 0 0 6,667 0 0 0 0 0 0 100,005 0 0 0 0 0 0 0 0 0 0 0 0 6,667 0 0 0 0 0 0 0 0 0 0 0 15.00 0 0 0 0 0 0 0 0 0
EX-99.2A 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION EXHIBIT 99.2(a) SALOMON BROTHERS HIGH INCOME FUND II INC ARTICLES OF AMENDMENT AND RESTATEMENT Salomon Brothers High Income Fund II Inc, a Maryland corporation, having its principal office in Baltimore City, Maryland (which is hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Charter of the Corporation is hereby amended and restated in its entirety to read as follows: ARTICLE I THE UNDERSIGNED, David Wohl, whose post office address is 425 Lexington Avenue, New York, NY 10017-3909, being at least eighteen years of age, does hereby act as an incorporator and form a corporation under and by virtue of the Maryland General Corporation Law. ARTICLE II NAME ---- The name of the corporation (which is hereinafter called the "Corporation") is "Salomon Brothers High Income Fund II Inc". ARTICLE III PURPOSE AND POWER ----------------- The purpose for which the Corporation is formed is to conduct and carry on the business of a closed-end investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Corporation shall have all of the powers granted to corporations by the Maryland General Corporation Law now or hereafter in force. ARTICLE IV PRINCIPAL OFFICE AND RESIDENT AGENT ----------------------------------- The post office address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202. The name of the resident agent of the Corporation in the State of Maryland is The -1- Corporation Trust Incorporated, a Maryland corporation. The post office address of the resident agent is 32 South Street, Baltimore, Maryland 21202. ARTICLE V CAPITAL STOCK ------------- (1) The total number of shares of capital stock that the Corporation shall have authority to issue is one hundred million (100,000,000) shares, of the par value of one mill ($.001) per share and of the aggregate par value of one hundred thousand dollars ($100,000), all of which one hundred million (100,000,000) shares are initially classified as "Common Stock." (2) The Corporation may issue fractional shares. Any fractional share shall carry proportionately the rights of a whole share including, without limitation, the right to vote and the right to receive dividends. The holder of a fractional share shall not, however, have the right to receive a certificate evidencing it. (3) All persons who shall acquire shares of capital stock in the Corporation shall acquire the same subject to the provisions of these Articles of Incorporation and the By-Laws of the Corporation. (4) No holder of shares of capital stock of the Corporation by virtue of being such a holder shall have any preemptive or other right to purchase or subscribe for any shares of the Corporation's capital stock or any other security that the Corporation may issue or sell other than a right that the Board of Directors in its discretion may determine to grant. (5) The Board of Directors shall have authority by resolution to classify and reclassify any authorized but unissued shares of capital stock from time to time by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of the capital stock. (6) Notwithstanding any provision of law requiring any action to be taken or authorized by the affirmative vote of the holders of a greater proportion of the votes of all classes or of any class of stock of the Corporation, such action shall be effective and valid if taken or authorized by the affirmative vote of a majority of the total number of votes entitled to be cast thereon, except as otherwise provided in these Articles of Incorporation. -2- ARTICLE VI BOARD OF DIRECTORS ------------------ (1) The number of directors constituting the Board of Directors shall be five (5). This number may be changed pursuant to the By-Laws of the Corporation, but shall at no time be less than the minimum number required under the Maryland General Corporation Law nor more than twelve (12). (2) Beginning with the first annual meeting of stockholders of the Corporation (the "first annual meeting") and if at such time, the number of directors shall be three (3) or more, the Board of Directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. At the first annual meeting, directors of Class I shall be elected to the Board of Directors for a term expiring at the next succeeding annual meeting of stockholders, directors of Class II shall be elected to the Board of Directors for a term expiring at the second succeeding annual meeting of stockholders and directors of Class III shall be elected to the Board of Directors for a term expiring at the third succeeding annual meeting of stockholders. At each subsequent annual meeting of stockholders, the directors chosen to succeed those whose terms are expiring shall be identified as being of the same class as the directors whom they succeed and shall be elected for a term expiring at the time of the third succeeding annual meeting of stockholders subsequent to their election, or thereafter in each case when their respective successors are elected and qualified. If the number of directors is changed, any increase or decrease shall be apportioned among the classes by resolution of the Board of Directors so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. (3) A director of the Corporation may be removed from office only for cause and then only by vote of the holders of at least seventy-five percent (75%) of the votes entitled to be cast for the election of directors. (4) In furtherance, and not in limitation, of the powers conferred by the laws of the State of Maryland, the Board of Directors is expressly authorized: (i) To make, alter or repeal the By-Laws of the Corporation, except as otherwise required by the 1940 Act. (ii) From time to time to determine whether and to what extent and at what times and places and under what conditions and regulations the books and accounts of the Corporation, or any of them other than the stock ledger, shall be open to the inspection of the stockholders. No stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by law or authorized by resolution of the Board of Directors. -3- (iii) Without the assent or vote of the stockholders, to authorize the issuance from time to time of shares of the capital stock of any class of the Corporation, whether now or hereafter authorized, and securities convertible into shares of capital stock of the Corporation of any class or classes, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable. (iv) Without the assent or vote of the stockholders, to authorize and issue obligations of the Corporation, secured or unsecured, as the Board of Directors may determine, and to authorize and cause to be executed mortgages and liens upon the real or personal property of the Corporation. (v) To establish the basis or method for determining the value of the assets and the amount of the liabilities of the Corporation and the net asset value of each share of the Corporation's capital stock. (vi) To determine what accounting periods shall be used by the Corporation for any purpose; to set apart out of any funds of the Corporation reserves for such purposes as it shall determine and to abolish the same; to declare and pay any dividends and distributions in cash, securities or other property from any funds legally available therefor, at such intervals as it shall determine; to declare dividends or distributions by means of a formula or other method of determination, at meetings held less frequently than the frequency of the effectiveness of such declarations; and to establish payment dates for dividends or any other distributions on any basis, including dates occurring less frequently than the effectiveness of declarations thereof. (vii) In addition to the powers and authorities granted in these Articles of Incorporation and by statute expressly conferred upon it, the Board of Directors is authorized to exercise all powers and do all acts that may be exercised or done by the Corporation pursuant to the provisions of the laws of the State of Maryland, these Articles of Incorporation and the By-Laws of the Corporation. (5) Any determination made in good faith, and in accordance with these Articles of Incorporation, if applicable, by or pursuant to the direction of the Board of Directors, with respect to the amount of assets, obligations or liabilities of the Corporation, as to the amount of net income of the Corporation from dividends and interest for any period or amounts at any time legally available for the payment of dividends, as to the amount of any reserves or charges set up and the propriety thereof, as to the time of or purpose for creating reserves or as to the use, alteration or cancellation of any reserves or charges (whether or not any obligation or liability for which the reserves or charges have been created has been paid or discharged or is then or thereafter required to be paid or discharged), as to the value of any security owned by the Corporation, as to the determination of the net asset value of shares of any class of the Corporation's capital stock, or as to any other matters relating to the issuance, sale or other acquisition or disposition of securities or shares of capital stock of the Corporation, and any reasonable determination made in good faith by the Board of Directors whether any transaction constitutes a purchase of securities on "margin," a sale of securities -4- "short," or an underwriting or the sale of, or a participation in any underwriting or selling group in connection with the public distribution of, any securities, shall be final and conclusive, and shall be binding upon the Corporation and all holders of shares of its capital stock, past, present and future, and shares of the capital stock of the Corporation are issued and sold on the condition and understanding, evidenced by the purchase of shares of capital stock or acceptance of share certificates, that any and all such determinations shall be binding as aforesaid. No provision of these Articles of Incorporation shall be effective to require a waiver of compliance with any provision of the Securities Act of 1933, as amended, or the 1940 Act, or of any valid rule, regulation or order of the Securities and Exchange Commission under those Acts. ARTICLE VII LIABILITY AND INDEMNIFICATION ----------------------------- (1) To the fullest extent that limitations on the liability of directors and officers are permitted by the Maryland General Corporation Law, no director or officer of the Corporation shall have any personal liability to the Corporation or its stockholders for monetary damages. This limitation on liability applies to events occurring at the time a person serves as a director or officer of the Corporation whether or not such person is a director or officer at the time of any proceeding in which liability is asserted. (2) The Corporation shall indemnify and advance expenses to its currently acting and its former directors to the fullest extent that indemnification of directors is permitted by the Maryland General Corporation Law. The Corporation shall indemnify and advance expenses to its officers to the same extent as its directors and may do so to such further extent as is consistent with law. The Board of Directors may by By-Law, resolution or agreement make further provision for indemnification of directors, officers, employees and agents to the fullest extent permitted by the Maryland General Corporation Law. This indemnification applies to events occurring at the time a person serves as a director or officer of the Corporation whether or not such person is a director or officer at the time of any proceeding in which liability is asserted. (3) No provision of these Articles of Incorporation shall be effective to protect or purport to protect any director or officer of the Corporation against any liability to the Corporation or its security holders 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. (4) References to the Maryland General Corporation Law in this Article VII are to that law as from time to time amended. No amendment to the Corporation's Articles of Incorporation shall affect any right of any person under this Article VII based on any event, omission or proceeding prior to such amendment. -5- ARTICLE VIII SHAREHOLDER VOTE ---------------- (1) Notwithstanding any other provision of these Articles of Incorporation, the affirmative vote of the holders of (i) eighty percent (80%) of the votes entitled to be cast thereon by shareholders of the Corporation and (ii) in the case of a Business Combination (as defined below), 66-2/3% of the votes entitled to be cast thereon by shareholders of the Corporation other than votes entitled to be cast thereon by an Interested Party (as defined below) who is (or whose Affiliate (as defined below) is) a party to a Business Combination (as defined below) or an Affiliate or associate of the Interested Party, in addition to the affirmative vote of seventy-five percent (75%) of the entire Board of Directors, shall be required to advise, approve, adopt or authorize any of the following: (i) a merger, consolidation or statutory share exchange of the Corporation with or into another person; (ii) issuance or transfer by the Corporation (in one or a series of transactions in any 12 month period) of any securities of the Corporation 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 Corporation, sales of securities of the Corporation in connection with a public offering, issuances of securities of the Corporation pursuant to a dividend reinvestment plan adopted by the Corporation, issuances of securities of the Corporation upon the exercise of any stock subscription rights distributed by the Corporation and portfolio transactions effected by the Corporation in the ordinary course of business; (iii) sale, lease, exchange, mortgage, pledge, transfer or other disposition by the Corporation (in one or a series of transactions in any 12 month period) to or with any person or entity of any assets of the Corporation 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 Corporation in the ordinary course of its business (transactions within clauses (i), (ii) and (iii) above being known individually as a "Business Combination"); (iv) the voluntary liquidation or dissolution of the Corporation, or an amendment to these Articles of Incorporation to terminate the Corporation'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 Corporation's assets as to which stockholder approval is required under Federal or Maryland law. -6- However, the shareholder vote described in Paragraph (1) of this Article VIII 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 seventy-five percent (75%) of the Continuing Directors (as defined below). In that case, if Maryland law requires shareholder approval, the affirmative vote of a majority of the votes entitled to be cast shall be required. (i) "Continuing Director" means any member of the Board of Directors of the Corporation who is not an Interested Party or an Affiliate of an Interested Party and has been a member of the Board of Directors for a period of at least 12 months, or has been a member of the Board of Directors since April 24, 1998, or is a successor of a Continuing Director who is unaffiliated with an Interested Party and is recommended to succeed a Continuing Director by a majority of the Continuing Directors then on the Board of Directors . (ii) "Interested Party" shall mean any person, other than an investment company advised by the Corporation's initial investment manager or any of its Affiliates, which enters, or proposes to enter, into a Business Combination with the Corporation. (iii) "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. (2) Notwithstanding any other provision of these Articles of Incorporation, the affirmative vote of seventy-five percent (75%) of the entire Board of Directors shall be required to advise, approve, adopt or authorize the conversion of the Corporation from a closed-end company to an open-end company, and any amendments necessary to effect the conversion. Such conversion or any such amendment shall also require the approval of the holders of seventy-five percent (75%) of the votes entitled to be cast thereon by stockholders of the Corporation unless approved by a vote of seventy-five percent (75%) of the Continuing Directors, in which event such conversion shall require the approval of the holders of a majority of the votes entitled to be cast thereon by stockholders of the Corporation. ARTICLE IX AMENDMENTS ---------- (1) The Corporation reserves the right from time to time to make any amendment to these Articles of Incorporation, now or hereafter authorized by law, including any amendment that alters the contract rights, as expressly set forth in these Articles of Incorporation, of any outstanding capital stock of the Corporation. (2) In addition to the voting requirements imposed by law or by any other provision of these Articles of Incorporation, the provisions set forth in this Article IX, the -7- provisions of Article III hereof, the provisions of Sections (2) and (3) of Article VI hereof, the provisions of these Articles of Incorporation setting the maximum number of Directors at twelve (12), the provisions of Article VIII and the provisions of Article X (except as provided in Section (1) of Article VIII) hereof, may not be amended, altered or repealed in any respect, nor may any provision inconsistent with this Article IX, the provisions of Sections (2) and (3) of Article VI hereof, the provision setting the maximum number of Directors or the provisions of Article VIII hereof be adopted, unless such action is advised by seventy-five percent (75%) of the entire Board of Directors and approved by the affirmative vote of the holders of at least seventy-five percent (75%) of the votes entitled to be cast by stockholders of the Corporation. ARTICLE X PERPETUAL EXISTENCE ------------------- The duration of the Corporation shall be perpetual. SECOND: The amendment and restatement does not increase the authorized capital stock of the Corporation. THIRD: The foregoing amendment and restatement to the Charter of the Corporation has been declared advisable by the Board of Directors and approved by the sole stockholder of the Corporation. -8- IN WITNESS WHEREOF, Salomon Brothers High Income Fund II Inc has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on May 20, 1998. WITNESS: SALOMON BROTHERS HIGH INCOME FUND II INC /s/ Noel B. Daugherty By: /s/ Heath B. McLendon - --------------------- --------------------- Noel B. Daugherty Heath B. McLendon Secretary President THE UNDERSIGNED, President of Salomon Brothers High Income Fund II Inc, who executed on behalf of the Corporation the foregoing Articles of Amendment and Restatement of which this certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles of Amendment and Restatement to be the corporate act of said Corporation and hereby certifies that to the best of his knowledge, information, and belief the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. /s/ Heath B. McLendon --------------------- Heath B. McLendon President -9- EX-99.2B 4 AMENDED AND RESTATED BY-LAWS EXHIBIT 99.2(b) AMENDED AND RESTATED BY-LAWS OF SALOMON BROTHERS HIGH INCOME FUND II INC A Maryland Corporation ARTICLE I --------- OFFICES ------- SECTION 1. PRINCIPAL OFFICE IN MARYLAND. Salomon Brothers High ---------------------------- Income Fund II Inc (the "Corporation") shall have a principal office in the City of Baltimore, State of Maryland. SECTION 2. OTHER OFFICES. The Corporation may have offices also ------------- at such other places within and without the State of Maryland as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE II ---------- STOCKHOLDERS ------------ SECTION 1. ANNUAL MEETINGS. The annual meeting of the --------------- stockholders of the Corporation shall be held on a date not less than ninety (90) days nor more than one hundred twenty (120) days following the end of the Corporation's fiscal year fixed from time to time by the Board of Directors. An annual meeting may be held at any place in or out of the State of Maryland and at any time, each as may be determined by the Board of Directors and designated in the notice of the meeting. Any business of the Corporation may be transacted at an annual meeting without the purposes having been specified in the notice unless otherwise provided by statute, the Corporation's Articles of Incorporation, as amended from time to time (the "Charter"), or these By-Laws. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders ---------------- for any purpose or purposes, unless otherwise prescribed by statute or by the Corporation's Charter, may be held at any place within the United States, and may be called at any time by the Board of Directors or by the Chairman or the President, and shall be called by the Secretary (or in his absence, an Assistant Secretary) at the request in writing of stockholders entitled to 2 cast at least a majority of the votes entitled to be cast at the meeting upon payment by such stockholders to the Corporation of the reasonably estimated cost of preparing and mailing a notice of the meeting (which estimated cost shall be provided to such stockholders by the Secretary of the Corporation). A written request shall state the purpose or purposes of the proposed meeting. SECTION 3. NOTICE OF MEETINGS. Written or printed notice of the ------------------ purpose or purposes and of the time and place of every meeting of the stockholders shall be given by the Secretary of the Corporation to each stockholder of record entitled to vote at or to notice of the meeting, by placing the notice in the mail at least ten (10) days, but not more than ninety (90) days, prior to the date designated for the meeting addressed to each stockholder at his address appearing on the books of the Corporation or supplied by the stockholder to the Corporation for the purpose of notice. Notice of any meeting of stockholders shall be deemed waived by any stockholder who attends the meeting in person or by proxy, or who before or after the meeting submits a signed waiver of notice that is filed with the records of the meeting. SECTION 4. NOTICE OF STOCKHOLDER BUSINESS. ------------------------------ (a) At any annual or special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, the business must be (i) (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder in accordance with Section 4(b) below and (ii) a proper subject under applicable law for stockholder action. To be properly brought before a special meeting, the business must be (i) (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, or (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors and (ii) a proper subject under applicable law for stockholder action. (b) For any stockholder proposal to be presented in connection with an annual meeting of stockholders of the Corporation (other than proposals made under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including any proposal relating to the nomination of a director to be elected to the Board of Directors of the Corporation, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first 3 made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. For the 1999 annual meeting the previous year's meeting shall be deemed to have taken place on August 1, 1998; provided that this sentence shall cease to be a part of the By-Laws after the holding of the 1998 annual meeting and any adjournments thereof. (c) Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at any stockholder meeting except in accordance with the procedures set forth in this Section 4. The Chairman of the stockholder meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 4, and if he should so determine, he shall so declare to the meeting that any such business not properly brought before the meeting shall not be considered or transacted. SECTION 5. QUORUM; VOTING. Except as otherwise provided by -------------- statute or by the Corporation's Charter, the presence in person or by proxy of stockholders of the Corporation entitled to cast at least a majority of the votes entitled to be cast shall constitute a quorum at each meeting of the stockholders. A majority of the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of the votes cast at a meeting at which a quorum is present shall be sufficient to elect directors. In the absence of a quorum, the stockholders present in person or by proxy at the meeting, by majority vote and without notice other than by announcement at the meeting, may adjourn the meeting from time to time as provided in this Section 5 until a quorum shall attend. The stockholders present at any duly organized meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 6. ADJOURNMENT. Any meeting of the stockholders may be ----------- adjourned from time to time, without notice other than by announcement at the meeting at which the adjournment is taken. At any adjourned meeting at which a quorum shall be present any action may be taken that could have been taken at the meeting originally called. 4 A meeting of the stockholders may not be adjourned to a date more than one hundred twenty (120) days after the original record date. SECTION 7. ORGANIZATION. At every meeting of the stockholders, ------------ the Chairman of the Board, or in his absence or inability to act, the President, or in his absence or inability to act, a Vice President, or in the absence or inability to act of all the Vice Presidents, a chairman chosen by the stockholders, shall act as chairman of the meeting. The Secretary, or in his or her absence or inability to act, a person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes of the meeting. SECTION 8. ORDER OF BUSINESS. The order of business at all ----------------- meetings of the stockholders shall be as determined by the chairman of the meeting. SECTION 9. PROXIES. A stockholder may vote the stock he owns of ------- record either in person or by written proxy signed by the stockholder or by his duly authorized agent. Stockholders may authorize others to act as proxies by means of facsimile signatures, electronic transmissions, internet transmissions, telegrams, datagrams, proxygrams and other reasonable means authorized or accepted by the Corporation, subject to the reasonable satisfaction of the Corporation that the stockholder has authorized the creation of the proxy. No proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases in which the proxy states that it is irrevocable and in which an irrevocable proxy is permitted by law. SECTION 10. FIXING OF RECORD DATE FOR DETERMINING STOCKHOLDERS -------------------------------------------------- ENTITLED TO VOTE AT MEETING. The Board of Directors shall set a record date for - --------------------------- the purpose of determining stockholders entitled to vote at any meeting of the stockholders. The record date for a particular meeting shall be not more than ninety (90) nor fewer than ten (10) days before the date of the meeting. All persons who were holders of record of shares as of the record date of a meeting, and no others, shall be entitled to notice of and to vote at such meeting and any adjournment thereof. SECTION 11. INSPECTORS. The Board of Directors may, in advance of ---------- any meeting of stockholders, appoint one (1) or more inspectors to act at the meeting or at any adjournment of the meeting. If the inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may appoint inspectors. Each inspector, before entering upon the discharge of his duties, shall, if required by the chairman of the meeting, take and sign an oath to execute faithfully the duties of inspector at the meeting with strict impartiality and according to the best of his ability. The inspectors, if appointed, shall determine the number of shares outstanding and the voting power of each share, the number of shares represented at the meeting, the existence of a quorum and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do those acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting 5 or any stockholder entitled to vote at the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors need not be stockholders of the Corporation. SECTION 12. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Except as ------------------------------------------ otherwise provided by statute or the Corporation's Charter, any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if the following are filed with the records of stockholders' meetings: (a) a unanimous written consent that sets forth the action and is signed by each stockholder entitled to vote on the matter and (b) a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at the meeting. ARTICLE III ----------- BOARD OF DIRECTORS ------------------ SECTION 1. GENERAL POWERS. Except as otherwise provided in the -------------- Corporation's Charter, the business and affairs of the Corporation shall be managed under the direction of the Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors except as conferred on or reserved to the stockholders by law, by the Corporation's Charter or by these By-Laws. SECTION 2. NUMBER, ELECTION AND TERM OF DIRECTORS. The number of -------------------------------------- directors constituting the entire Board of Directors (which initially was fixed at one (1) in the Corporation's Charter) may be changed from time to time by a majority of the entire Board of Directors; provided, however, that the number of directors shall in no event be fewer than that required by law, nor more than twelve (12). Beginning with the first annual meeting of stockholders of the Corporation and if at such time, the number of directors shall be three (3) or more, (the "First Annual Meeting"), the Board of Directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. At the First Annual Meeting, directors of Class I shall be elected to the Board of Directors for a term expiring at the next succeeding annual meeting of stockholders, directors of Class II shall be elected to the Board of Directors for a term expiring at the second succeeding annual meeting of stockholders and directors of Class III shall be elected to the Board of Directors for a term expiring at the third succeeding annual meeting of stockholders. At each subsequent annual meeting of stockholders, the directors chosen to succeed those whose terms are expiring shall be identified as being of the same class as the directors whom they succeed and shall be elected for a term expiring at the time of the third succeeding annual meeting of stockholders subsequent to their election. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 5 of this Article III, and each director elected shall hold office for the term provided above and until his successor shall have been elected 6 and shall have qualified, or until his death, or until he shall have resigned or have been removed as provided in these By-Laws, or as otherwise provided by statute or the Corporation's Charter. Any vacancy created by an increase in directors may be filled in accordance with Section 5 of this Article III. No reduction in the number of directors shall have the effect of removing any director from office prior to the expiration of his term unless the director is specifically removed pursuant to Section 4 of this Article III at the time of the decrease. SECTION 3. RESIGNATION. A director of the Corporation may resign ----------- at any time by giving written notice of his resignation to the Board of Directors or the Chairman of the Board or to the Vice-Chairman of the Board or the President or the Secretary of the Corporation. Any resignation shall take effect at the time specified in it or, should the time when it is to become effective not be specified in it, immediately upon its receipt. Acceptance of a resignation shall not be necessary to make it effective unless the resignation states otherwise. SECTION 4. REMOVAL OF DIRECTORS. A director of the Corporation -------------------- may be removed from office only for cause and then only by vote of the holders of at least seventy-five percent (75%) of the votes entitled to be cast for the election of directors. SECTION 5. VACANCIES. Subject to the provisions of the Investment --------- Company Act of 1940 (the "1940 Act"), any vacancies in the Board of Directors, whether arising from death, resignation, removal or any other cause except an increase in the number of directors, shall be filled by a vote of the majority of the remaining Directors whether or not sufficient to constitute a quorum. A majority of the entire Board may fill a vacancy that results from an increase in the number of directors. Notwithstanding the foregoing, if the stockholders of any class of the Corporation's capital stock are entitled separately to elect one or more directors, a majority of the remaining directors elected by that class or the sole remaining director elected by that class may fill any vacancy among the number of directors elected by that class. Any director appointed by the Board of Directors to fill a vacancy shall hold office only until the next annual meeting of stockholders of the Corporation and until a successor has been elected and qualifies. Any director elected by the stockholders to fill a vacancy shall hold office for the balance of the term of the director he replaced. SECTION 6. PLACE OF MEETINGS. Meetings of the Board may be held ----------------- at any place that the Board of Directors may from time to time determine or that is specified in the notice of the meeting. SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of ---------------- Directors may be held without notice at the time and place determined by the Board of Directors. SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of ---------------- Directors may be called by two (2) or more directors of the Corporation or by the Chairman of the Board or the President. 7 SECTION 9. ANNUAL MEETING. The annual meeting of the newly -------------- elected and other directors shall be the first meeting after the meeting of the stockholders at which the newly elected directors were elected. No notice of such annual meeting shall be necessary if such meeting is held immediately after the adjournment, and at the site, of the meeting of stockholders. If not so held, notice shall be given as hereinafter provided for special meetings of the Board of Directors. SECTION 10. NOTICE OF SPECIAL MEETINGS. Notice of each special -------------------------- meeting of the Board of Directors shall be given by the Secretary as hereinafter provided. Each notice shall state the time and place of the meeting and shall be delivered to each director, either personally or by telephone or other standard form of telecommunication, at least twenty-four (24) hours before the time at which the meeting is to be held, or by first-class mail, postage prepaid, addressed to the director at his residence or usual place of business, and mailed at least three (3) days before the day on which the meeting is to be held. SECTION 11. WAIVER OF NOTICE OF MEETINGS. Notice of any special ---------------------------- meeting need not be given to any director who shall, either before or after the meeting, sign a written waiver of notice that is filed with the records of the meeting or who shall attend the meeting. SECTION 12. QUORUM AND VOTING. A majority of the entire Board of ----------------- Directors shall constitute a quorum for the transaction of business, and except as otherwise expressly required by statute, the Corporation's Charter or these By-Laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. SECTION 13. ORGANIZATION. The Chairman of the Board shall preside ------------ at each meeting of the Board. In the absence or inability of the Chairman of the Board to act, the President (if he is a director), or, in his absence or inability to act, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside at the meeting. The Secretary (or, in his or her absence or inability to act, any person appointed by the chairman) shall act as secretary of the meeting and keep the minutes of the meeting. SECTION 14. COMMITTEES. The Board of Directors may designate one ---------- (1) or more committees of the Board of Directors, including an executive committee, each consisting of one (1) or more directors. To the extent provided in the resolutions adopted by the Board of Directors, and permitted by law, the committee or committees shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. Any committee or committees shall have the name or names determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and provide those minutes to the Board of Directors when required. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. 8 SECTION 15. WRITTEN CONSENT OF DIRECTORS IN LIEU OF A MEETING. ------------------------------------------------- Subject to the provisions of the 1940 Act, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board or committee. SECTION 16. TELEPHONE CONFERENCE. Members of the Board of -------------------- Directors or any committee of the Board may participate in any Board or committee meeting by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at the meeting, provided, however, that such participation shall not constitute presence in person with respect to matters which the 1940 Act, and the rules thereunder require the approval of directors by vote cast in person at a meeting. SECTION 17. COMPENSATION. Each director shall be entitled to ------------ receive compensation, if any, as may from time to time be fixed by the Board of Directors, including a fee for each meeting of the Board or any committee thereof, regular or special, he attends. Directors may also be reimbursed by the Corporation for all reasonable expenses incurred in traveling to and from the place of a Board or committee meeting. ARTICLE IV ---------- OFFICERS, AGENTS AND EMPLOYEES ------------------------------ SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the ------------------------- Corporation shall be a Chairman, a President, a Secretary, a Treasurer, and an Assistant Secretary, each of whom shall be elected by the Board of Directors. The Board of Directors may elect or appoint a Chairman of the Board of Directors, and one (1) or more Vice Presidents and may also appoint any other officers, assistant officers, agents and employees it deems necessary or proper. Any two (2) or more offices may be held by the same person, except the offices of President and Vice President, but no officer shall execute, acknowledge or verify in more than one (1) capacity any instrument required by law to be executed, acknowledged or verified by more than one officer. Officers shall be elected by the Board of Directors each year at its first meeting held after the annual meeting of stockholders, each to hold office until the meeting of the Board following the next annual meeting of the stockholders and until his successor shall have been duly elected and shall have qualified, or until his death, or until he shall have resigned or have been removed, as provided in these By-Laws. The Board of Directors may from time to time elect such officers (including one or more Assistant Vice Presidents, one or more Assistant Treasurers and one or more Assistant Secretaries) and may appoint, or delegate to the President the power to appoint, such agents as may be necessary or desirable for the business of the Corporation. Such other officers and agents shall have such 9 duties and shall hold their offices for such terms as may be prescribed by the Board or by the appointing authority. SECTION 2. RESIGNATIONS. Any officer of the Corporation may ------------ resign at any time by giving written notice of his resignation to the Board of Directors, the Chairman of the Board, the President or the Secretary. Any resignation shall take effect at the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. SECTION 3. REMOVAL OF OFFICER, AGENT OR EMPLOYEE. Any officer, ------------------------------------- agent or employee of the Corporation may be removed by the Board of Directors with or without cause at any time, and the Board may delegate the power of removal as to agents and employees not elected or appointed by the Board of Directors. Removal shall be without prejudice to the person's contract rights, if any, but the appointment of any person as an officer, agent or employee of the Corporation shall not of itself create contract rights. SECTION 4. VACANCIES. A vacancy in any office, whether arising --------- from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of the office that shall be vacant, in the manner prescribed in these By-Laws for the regular election or appointment to the office. SECTION 5. COMPENSATION. The compensation of the officers of ------------ the Corporation shall be fixed by the Board of Directors, but this power may be delegated to any officer with respect to other officers under his control. SECTION 6. BONDS OR OTHER SECURITY. If required by the Board, any ----------------------- officer, agent or employee of the Corporation shall give a bond or other security for the faithful performance of his duties, in an amount and with any surety or sureties as the Board may require. SECTION 7. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of ---------------------------------- the Board of Directors shall be the chief executive officer of the Corporation and shall have, subject to the control of the Board of Directors, general and active management and supervision of the business, affairs, and property of the Corporation and its several officers and may employ and discharge employees and agents of the Corporation, except those elected or appointed by the Board, and he may delegate these powers. The Chairman shall preside at all meetings of the stockholders and of the Board of Directors. He shall execute on behalf of the Corporation all instruments requiring such execution except to the extent that signing and execution thereof shall be required by the President of the Corporation or shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. SECTION 8. VICE-CHAIRMAN OF THE BOARD OF DIRECTORS. The --------------------------------------- Vice-Chairman of the Board of Directors shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and directors. He shall have and exercise all the powers and 10 authority of the Chairman of the Board in the event of the Chairman's absence or inability to act or during a vacancy in the office of Chairman of the Board. He shall also have such other duties and responsibilities as shall be assigned to him by the Chairman or the Board of Directors. SECTION 9. PRESIDENT. The President shall, in the absence of the --------- Chairman and Vice-Chairman of the Board of Directors, preside at all meetings of the stockholders and directors. He shall have and exercise all the powers and authority of the Chairman of the Board in the event of the Chairman's and Vice-Chairman's absence or inability to act or during a vacancy in the offices of Chairman and Vice-Chairman of the Board. He shall sign and execute all instruments required to be signed and executed by the President of the Corporation. He shall also have such other duties and responsibilities as shall be assigned to him by the Chairman or the Board of Directors. SECTION 10. VICE PRESIDENT. Each Vice President shall have the -------------- powers and perform the duties that the Board of Directors or the Chairman of the Board may from time to time prescribe. SECTION 11. TREASURER. Subject to the provisions of any contract --------- that may be entered into with any custodian pursuant to authority granted by the Board of Directors, the Treasurer shall have charge of all receipts and disbursements of the Corporation and shall have or provide for the custody of the Corporation's funds and securities; he shall have full authority to receive and give receipts for all money due and payable to the Corporation, and to endorse checks, drafts, and warrants, in its name and on its behalf and to give full discharge for the same; he shall deposit all funds of the Corporation, except those that may be required for current use, in such banks or other places of deposit as the Board of Directors may from time to time designate; and, in general, he shall perform all duties incident to the office of Treasurer and such other duties as may from time to time be assigned to him by the Board of Directors or the Chairman of the Board. SECTION 12. ASSISTANT TREASURERS. The Assistant Treasurers in the -------------------- order of their seniority, unless otherwise determined by the Chairman of the Board or the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer. They shall perform such other duties and have such other powers as the Chairman or the Board of Directors may from time to time prescribe. SECTION 13. SECRETARY. The Secretary shall: --------- (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board of Directors, the committees of the Board and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; 11 (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board of Directors or the Chairman of the Board. SECTION 14. ASSISTANT SECRETARIES. The Assistant Secretaries in --------------------- the order of their seniority, unless otherwise determined by the Chairman of the Board or the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary. They shall perform such other duties and have such other powers as the President or the Board of Directors may from time to time prescribe. SECTION 15. DELEGATION OF DUTIES. In case of the absence of any -------------------- officer of the Corporation, or for any other reason that the Board of Directors may deem sufficient, the Board may confer for the time being the powers or duties, or any of them, of such officer upon any other officer or upon any director. ARTICLE V --------- STOCK ----- SECTION 1. STOCK CERTIFICATES. Unless otherwise provided by the ------------------ Board of Directors and permitted by law, each holder of stock of the Corporation shall be entitled upon specific written request to such person as may be designated by the Corporation to have a certificate or certificates, in a form approved by the Board, representing the number of shares of stock of the Corporation owned by him; provided, however, that certificates for fractional shares will not be delivered in any case. The certificates representing shares of stock shall be signed by or in the name of the Corporation by the Chairman of the Board, the Vice-Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and may be sealed with the seal of the Corporation. Any or all of the signatures or the seal on the certificate may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer, transfer agent or registrar was still in office at the date of issue. 12 SECTION 2. STOCK LEDGER. There shall be maintained a stock ledger ------------ containing the name and address of each stockholder and the number of shares of stock of each class the shareholder holds. The stock ledger may be in written form or any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the principal office of the Corporation or at any other office or agency specified by the Board of Directors. SECTION 3. TRANSFERS OF SHARES. Transfers of shares of stock of ------------------- the Corporation shall be made on the stock records of the Corporation only by the registered holder of the shares, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates, if issued, for the shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the record of stockholders as the owner of the share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions and to vote as the owner, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in any such share or shares on the part of any other person. SECTION 4. REGULATIONS. The Board of Directors may authorize the ----------- issuance of uncertificated securities if permitted by law. If stock certificates are issued, the Board of Directors may make any additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. SECTION 5. LOST, DESTROYED OR MUTILATED CERTIFICATES. The holder ----------------------------------------- of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of its loss, destruction or mutilation and the Corporation may issue a new certificate of stock in the place of any certificate issued by it that has been alleged to have been lost or destroyed or that shall have been mutilated. The Board may, in its discretion, require the owner (or his legal representative) of a lost, destroyed or mutilated certificate to give to the Corporation a bond in a sum, limited or unlimited, and in a form and with any surety or sureties, as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or issuance of a new certificate. Anything herein to the contrary notwithstanding, the Board of Directors, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of Maryland. SECTION 6. FIXING OF RECORD DATE FOR DIVIDENDS, DISTRIBUTIONS, -------------------------------------------------- ETC. The Board may fix, in advance, a date not more than ninety (90) days - --- preceding the date fixed for 13 the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of common stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests. ARTICLE VI ---------- INDEMNIFICATION AND INSURANCE ----------------------------- SECTION 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Any person ----------------------------------------- who was or is a party or is threatened to be made a party in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is a current or former director or officer of the Corporation, or is or was serving while a director or officer of the Corporation at the request of the Corporation as a director, officer, partner, trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, enterprise or employee benefit plan, shall be indemnified by the Corporation against judgments, penalties, fines, excise taxes, settlements and reasonable expenses (including attorneys' fees) actually incurred by such person in connection with such action, suit or proceeding to the full extent permissible under the Maryland General Corporation Law, the Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act, as those statutes are now or hereafter in force, except that such indemnity shall not protect any such person against any liability to the Corporation or any stockholder thereof to which such person 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 ("disabling conduct"). Any repeal or modification of the 1933 Act, the 1940 Act or these By-Laws shall not in any way diminish any rights to indemnification hereunder except as required by law. SECTION 2. ADVANCES. Any current or former director or officer of -------- the Corporation claiming indemnification within the scope of this Article VI shall be entitled to advances from the Corporation for payment of the reasonable expenses incurred by him in connection with proceedings to which he is a party in the manner and to the full extent permissible under the Maryland General Corporation Law, the 1933 Act, and the 1940 Act, as those statutes are now or hereafter in force; provided, however, that the person seeking indemnification shall provide to the Corporation a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met and a written undertaking to repay any such advance, if it should ultimately be determined that the standard of conduct has not been met, and provided further that at least one of the following additional conditions is met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Corporation for his undertaking; (b) the Corporation is insured against losses arising by reason of the advance; or (c) a majority of a 14 quorum of directors of the Corporation who are neither "interested persons" as defined in Section 2(a)(19) of the 1940 Act, nor parties to the proceeding ("disinterested non-party directors"), or independent legal counsel, in a written opinion, shall determine, based on a review of facts readily available to the Corporation at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. SECTION 3. PROCEDURE. At the request of any current or former --------- director or officer, or any employee or agent whom the Corporation proposes to indemnify, the Board of Directors shall determine, or cause to be determined, in a manner consistent with the Maryland General Corporation Law, the 1933 Act, and the 1940 Act, as those statutes are now or hereafter in force, whether the standards required by this Article VI have been met; provided, however, that indemnification shall be made only following: (a) a final decision on the merits by a court or other body before whom the proceeding was brought, finding that the person to be indemnified was not liable by reason of disabling conduct or (b) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the person to be indemnified was not liable by reason of disabling conduct, by (i) the vote of a majority of a quorum of disinterested non-party directors or (ii) an independent legal counsel in a written opinion. SECTION 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS. Employees and --------------------------------------- agents who are not officers or directors of the Corporation may be indemnified, and reasonable expenses may be advanced to such employees or agents, in accordance with the procedures set forth in this Article VI to the extent permissible under the Maryland General Corporation Law, the 1933 Act, and the 1940 Act, as those statutes are now or hereafter in force, and to such further extent, consistent with the foregoing, as may be provided by action of the Board of Directors or by contract. SECTION 5. OTHER RIGHTS. The indemnification provided by this ------------ Article VI shall not be deemed exclusive of any other right, with respect to indemnification or otherwise, to which those seeking such indemnification may be entitled under any insurance or other agreement, vote of stockholders or disinterested directors or otherwise, both as to action by a director or officer of the Corporation in his official capacity and as to action by such person in another capacity while holding such office or position, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 6. INSURANCE. The Corporation shall have the power to --------- purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or who, while a director, officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, enterprise or employee benefit plan, against any liability asserted against and incurred by him in any such capacity, or arising out of his status as such, provided that no insurance may be 15 obtained by the Corporation for liabilities against which it would not have the power to indemnify him under this Article VI or applicable law. ARTICLE VII ----------- SEAL ---- The seal of the Corporation shall be circular in form and shall bear the name of the Corporation, the year of its incorporation, the words "Corporate Seal" and "Maryland" and any emblem or device approved by the Board of Directors. The seal may be used by causing it or a facsimile to be impressed or affixed or in any other manner reproduced. In lieu of affixing the seal, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a corporate seal to place the word "(seal)" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation. ARTICLE VIII ------------ AMENDMENTS ---------- These By-Laws may be amended by the Board of Directors, subject to the requirements of the 1940 Act; provided, however, that no amendment of these By-Laws shall affect any right of any person under Article VI hereof based on any event, omission or proceeding prior to the amendment. These By-Laws may not be amended by the stockholders of the Corporation. EX-99.2H1 5 FORM OF UNDERWRITING AGREEMENT EXHIBIT 99.2(h)(1) Salomon Brothers High Income Fund II Inc Shares/*/ Common Stock UNDERWRITING ------------ AGREEMENT --------- New York, New York May 21, 1998 Salomon Smith Barney Smith Barney Inc. 388 Greenwich Street New York, New York 10013 As Representative of the several Underwriters listed in Schedule I hereto Ladies and Gentlemen: Salomon Brothers High Income Fund II Inc, a Maryland corporation (the "Fund"), and Salomon Brothers Asset Management Inc (the "Investment Manager") each confirms its agreement with you with respect to the sale by the Fund to the underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the "Representative") are acting as representative, of shares of Common Stock, par value $.001 per share, of the Fund ("Common Stock") (said shares to be issued and sold by the Fund being hereinafter called the "Underwritten Securities"). The Fund also proposes to grant to the Underwriters, upon the terms and subject to the conditions set forth in Section 2(b) hereof, an option to purchase up to additional shares of Common Stock (the "Option Securities" and together with the Underwritten Securities, the "Securities"). 1. Representations and Warranties. (a) Each of the Fund and the ------------------------------ Investment Manager, jointly and - ---------- /*/ Plus an option to purchase from Salomon Brothers High Income Fund II Inc up to additional shares to cover over-allotments. severally, represents and warrants to, and agrees with, each Underwriter as set forth below in this Section 1. Certain terms used in this Section 1 are defined in Section 1(iii) hereof. (i) The Fund meets the requirements for use of Form N-2 under the Securities Act of 1933 (the "Act") and the Investment Company Act of 1940 (the "Investment Company Act") and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under each of the Act and the Investment Company Act; the Fund has filed with the Commission a registration statement (file number 333-48351) on such Form, including a related preliminary prospectus and a notification of registration on Form N-8A under the Investment Company Act (file number 811-08709). The Fund may have filed one or more amendments thereto, including the related preliminary prospectus, each of which has previously been furnished to you. The Fund will next file with the Commission one of the following: (A) prior to effectiveness of such registration statement, a further amendment to such registration statement, including the form of final prospectus or (B) after effectiveness of such registration statement, a final prospectus in accordance with Rule 497(b) or Rules 430A and 497(h), as the case may be. In the case of clause (B), the Fund has included in such registration statement, as amended at the Effective Date, all information (other than Rule 430A Information) required by the Act and the Investment Company Act and the Rules and Regulations to be included in the Prospectus with respect to the Securities and the offering thereof. As filed, such amendment and form of final prospectus, or such final prospectus, shall contain all Rule 430A Information, together with all other such required information, with respect to the Securities and the offering thereof and, except to the extent the Representative shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the Execution Time or, to the extent not completed at the Execution Time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as 2 the Fund has advised you, prior to the Execution Time, will be included or made therein. (ii) On the Effective Date, the Registration Statement and the notification of registration on Form N-8A did or will, and when the Prospectus is first filed in accordance with Rule 497(b) or (h), as the case may be, and if subsequently filed pursuant to Rule 497(d), and on the Closing Date, the Prospectus (and any supplements thereto) will, comply in all material respects with the applicable requirements of the Act and the Investment Company Act and the Rules and Regulations; on the Effective Date, the Registration Statement and the notification of registration on Form N-8A did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date, the Prospectus, if not filed pursuant to Rule 497(b) or (h), as the case may be, did not or will not, and on the date of any filing pursuant to Rule 497(b) or (h), as the case may be, and on the date of any filing pursuant to Rule 497(d), and on the Closing Date, the Prospectus (together with any supplement thereto) will not, include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, -------- however, that the Fund makes no representations or warranties as to the ------- information contained in or omitted from the Registration Statement, the Prospectus (or any supplement thereto) or the notification of registration on Form N-8A, in reliance upon and in conformity with (A) information furnished in writing to the Fund by or on behalf of any Underwriter through the Representative specifically for inclusion in the Registration Statement, the Prospectus (or any supplement thereto) or the notification on Form N-8A or (B) information relating to the Investment Manager and furnished to the Fund by the Investment Manager specifically for inclusion in the Registration Statement, the Prospectus (or any supplement thereto) or the notification of registration on Form N-8A. 3 (iii) The terms which follow, when used in this Agreement, shall have the meanings indicated. The term "Effective Date" shall mean each date that the Registration Statement and any post-effective amendment or amendments thereto became or become effective. "Execution Time" shall mean the date and time that this Agreement is executed and delivered by the parties hereto. "Preliminary Prospectus" shall mean any preliminary prospectus referred to in Section 1(i) above and any preliminary prospectus included in the Registration Statement at the Effective Date that omits Rule 430A Information. "Prospectus" shall mean the prospectus relating to the Securities that is first filed pursuant to Rule 497(b) or (h), as the case may be, after the Execution Time, or as subsequently filed pursuant to Rule 497(d) under the Act or, if no filing pursuant to Rule 497 is required, shall mean the form of final prospectus relating to the Securities included in the Registration Statement at the Effective Date. "Registration Statement" shall mean the registration statement referred to in Section 1(i) above, including incorporated documents, exhibits and financial statements, as amended at the Execution Time (or, if not effective at the Execution Time, in the form in which it shall become effective) and, in the event any post-effective amendment thereto becomes effec tive prior to the Closing Date (as hereinafter defined), shall also mean such registration statement as so amended and such term shall include any Rule 430A Information deemed to be included therein at the Effective Date as provided by Rule 430A. "Rule 430A" and "Rule 497" refer to such rules under the Act. "Rule 430A Information" means information with respect to the Securities and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A. (iv) The Fund has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland, with full corporate power and authority to own its property and conduct its business as described in the Prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such 4 qualification wherein it owns or leases material properties or conducts material business; the Fund has no subsidiaries; and the Fund holds all licenses, certificates and permits from all governmental authorities necessary for the conduct of its business as described in the Prospectus (other than the order of the Commission declaring the Registration Statement effective under the Act and similar orders under the securities or blue sky laws of the various states of the United States). (v) The Fund has an authorized equity capitalization as set forth in the Prospectus; the capital stock of the Fund conforms to the description thereof contained in the Prospectus; there are no shares of Common Stock owned of record except 6,667 shares of Common Stock owned of record by the Investment Manager or an affiliate; the outstanding shares of Common Stock of the Fund have been duly and validly authorized and issued and are fully paid and nonassessable; the Securities have been duly and validly authorized and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be validly issued, fully paid and nonassessable; the Securities have been duly authorized for listing, subject to official notice of issuance, on the New York Stock Exchange; the certificates representing the Securities are in valid and sufficient form; and no holder of outstanding shares of capital stock of the Fund is entitled to preemptive or other rights to subscribe for the Securities. (vi) There is not pending or, to the best knowledge of the Fund, threatened, any action, suit or proceeding before any court or governmental agency, authority or body or any arbitrator involving the Fund of a character required to be disclosed in the Registration Statement by the Act, the Investment Company Act or the Rules and Regulations which is not disclosed in the Prospectus, and there is no franchise, contract, agreement or document of a character required to be described in the Registration Statement or Prospectus by the Act, the Investment Company Act or the Rules and Regulations, or to be filed as an exhibit, which is not described or filed as required. 5 (vii) Except as stated or contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (A) the Fund has not incurred any liabilities or obligations, direct or contingent, or entered into any transactions, not in the ordinary course of business, that are material to the Fund and (B) the Fund has not incurred any indebtedness for borrowed money. (viii) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Fund of the transactions contemplated herein, except such as may be required under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Investment Company Act, the Rules and Regulations, the rules and regulations of the Commission under the Exchange Act or state securities or blue sky laws of any jurisdiction in connection with the purchase and distribution of the Securities by the Underwriters. (ix) The Investment Management Agreement (the "Management Agreement") to be dated as of the Effective Date, between the Fund and the Investment Manager, the Custodian Agreement (the "Custodian Agreement") to be dated as of the Effective Date, between the Fund and PNC Bank, N.A. (the "Custodian"), and the Transfer Agency and Services Agreement (the "Transfer Agency Agreement") to be dated as of the Effective Date, between the Fund and First Data Investor Services Group, Inc., (this Agreement, the Management Agreement, the Custodian Agreement, and the Transfer Agency Agreement, collectively, the "Company Agreements") have been duly authorized, executed and delivered by the Fund; the Management Agreement, the Custodian Agreement and the Transfer Agency Agreement comply as to form with all applicable provisions of the Act and each constitutes a legal, valid and binding instrument enforceable against the Fund in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally from time to time in effect). 6 (x) The Fund is registered with the Commission under the Investment Company Act as a closed-end diversified management investment company and all required action has been taken under the Act and the Investment Company Act to make the public offering and consummate the sale of the Securities under this Agreement, and the provisions of the Fund's articles of incorporation and by-laws do not violate the Investment Company Act or the Rules and Regulations of the Commission thereunder. (xi) The Fund is not in violation of its articles of incorporation or by-laws or of any law, ordinance, administrative or governmental rule or regulation applicable to the Fund or of any decree of the Commission, the National Association of Securities Dealers, Inc. (the "NASD"), any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official having jurisdiction over the Fund or in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any mate rial agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties may be bound. (xii) Neither (A) the issuance and sale of the Securities, (B) the performance by the Fund of the Fund Agreements, nor (C) the consummation of the transactions contemplated herein or in the Prospec tus will conflict with, or result in a breach of or violation of any of the terms and provisions of, or constitute a default under, any statute, any agree ment or instrument to which the Fund is a party or by which it is bound or to which any of the property of the Fund is subject, the Fund's articles of incorporation or by-laws, or any order, rule or regulation of any court or governmental agency, authority or body having jurisdiction over the Fund or any of its properties. (xiii) Since the date as of which information is given in the Registration Statement and the 7 Prospectus (and any amendment or supplement to either of them), except as otherwise stated therein, (A) there has been no material, adverse change in the condition (financial or other), business, properties, net assets or results of operations of the Fund or business prospects of the Fund, whether or not arising in the ordinary course of business and (B) there has been no dividend or distribution of any kind declared, paid or made by the Fund on any class of its capital stock. (xiv) The accountants, Price Waterhouse LLP who have certified or shall certify the financial statements included in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), are an independent public accounting firm as required by the Act, the Investment Company Act and the Rules and Regulations. (xv) The Statement of Assets and Liabilities, together with related notes, included in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) presents fairly the financial position of the Fund on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such financial statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as disclosed therein. (xvi) The Fund has not distributed and, prior to the later to occur of (A) the Closing Date and (B) completion of the distribution of the Securities, will not distribute to the public any offering material in connection with the offering and sale of the Securities other than the Registration Statement, the prospectus included in Pre-Effective Amendment No. 1 to the Registration Statement, the Prospectus and the sales literature filed with the NASD on April 23, 1998 (the "NASD Sales Literature"). (xvii) The Fund believes that it maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions 8 are executed in accordance with the investment policies and restrictions of the Fund and the applicable requirements of the Investment Company Act, the Investment Company Act Rules and Regulations and the Internal Revenue Code of 1986, as amended; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles, to calculate net asset value and to maintain material compliance with the books and records requirements under the Investment Company Act and the Investment Company Act Rules and Regulations; and (C) the internal books and records of the Fund accurately reflect the Fund's actual assets in all material respects. (xviii) Except as stated in this Agreement and in the Prospectus (and any amendment or supplement thereto), the Fund has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in or which will constitute stabilization or manipulation of the price of shares of Common Stock and the Fund is not aware of any such action taken or to be taken by any affiliates of the Fund. (xix) The NASD Sales Literature complied and comply in all material respects with the applicable requirements of the Act, the Act Rules and Regulations and the rules and interpretations of the NASD, and neither the NASD Sales Literature nor any other advertising, sales literature or other promotional material (including "prospectus wrappers," "broker kits," "road show slides" and "road show scripts") authorized by or prepared by or on behalf of the Fund or the Investment Manager for use in connection with the offering and sale of the Securities contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (xx) No holder of any security of the Fund has any right to require registration of shares of Common Stock or any other security of the Fund because of the filing of the Registration Statement 9 or consummation of the transactions contemplated by this Agreement. (b) The Investment Manager represents and warrants to, and agrees with, each Underwriter that: (i) The Investment Manager is duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own its property and conduct its business as described in the Prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases material properties or conducts material business. (ii) The Investment Manager is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act") and is not prohibited by the Advisers Act or the Investment Company Act, or the rules and regulations under such Acts, from acting as investment adviser for the Fund under the Management Agreement and as contemplated by the Prospectus. (iii) This Agreement and the Management Agreement (collectively, the "Investment Manager Agreements"), have been duly authorized, executed and delivered by the Investment Manager; the Management Agreement complies as to form with all applicable provisions of the Act and the Investment Company Act and constitutes a legal, valid and binding instrument enforceable against the Investment Manager in accordance with its terms (subject, as to enforce ment of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally from time to time in effect). (iv) neither (A) the operations and activities of the Investment Manager as contemplated in the Prospectus, (B) the performance by the Investment Manager of the Investment Manager Agreements, nor (C) the consummation of the transactions contemplated herein or in the Prospectus will conflict 10 with, or result in a breach of or violation of any of the terms and provisions of, or constitute a default under, any statute, any agreement or instrument to which the Investment Manager is a party or by which it is bound or to which any of the property of the Investment Manager is subject, the Investment Manager's certificate of incorporation or by-laws, or any order, rule or regulation of any court or governmental agency, authority or body having jurisdiction over the Investment Manager or any of its properties; and no consent, approval, authorization or order of, or filing with, any court or governmental agency, authority or body is required for the consummation of the transactions contemplated by the Investment Manager Agreements in connection with the issuance or sale of the Securities by the Fund, except such as may be required under the Act, the Exchange Act, the Investment Company Act or state securities laws or blue sky laws. (v) On the Effective Date, the Registration Statement did not or will not contain any untrue statement of a material fact relating to the description of the Investment Manager or the Investment Manager Agreements or omit to state a material fact relating to the description of the Investment Manager or the Investment Manager Agreements required to be stated therein or necessary to make the statements therein not misleading; and on the Effective Date, the Prospectus, if not filed pursuant to Rule 497(b) or (h), as the case may be, did not or will not, and on the date of any filing pursuant to rule 497(b) or (h), as the case may be, and on the date of any filing pursuant to Rule 497(d), and on the Closing Date, the Prospectus (together with any supplements thereto) will not, include any untrue statement of a material fact relating to the description of the Investment Manager or the Invest ment Manager Agreements or omit to state a material fact relating to the description of the Investment Manager or the Investment Manager Agreements necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (vi) There has not been any material change in the management of the Investment Manager or any 11 material adverse change in the condition (financial or other) of the Investment Manager since the date of the Prospectus (or, if the Prospectus is not in existence, the Preliminary Prospectus). (vii) There is not pending, or to the best knowledge of the Investment Manager, threatened, any action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency, authority or body or any arbitration involving the Investment Manager (A) relating to any of the transactions contemplated by the Investment Manager Agreements or (B) which might, in the reasonable judgment of the Investment Manager, individually or in the aggregate, result in any material adverse change in the condition (financial or other), business, prospectus or net worth of the Investment Manager, or might materially and adversely affect the properties or assets thereof. (viii) Except as stated in this Agreement and in the Prospectus (and in any amendment or supplement thereto), the Investment Manager has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in or which will constitute, stabilization or manipulation of the price of shares of Common Stock and the Investment Manager is not aware of any such action taken or to be taken by any affiliates of the Investment Manager. 2. Purchase and Sale. (a) Subject to the terms and conditions and in ----------------- reliance upon the representations and warranties herein set forth, the Fund agrees to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Fund, at a purchase price of $15.00 per share, the amount of the Underwritten Securities set forth opposite such Underwriter's name in Schedule I hereto. (b) Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Fund hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to shares of Option Securities at the same purchase price per share as the Underwriters shall pay for the Underwritten Securities. Said option may be 12 exercised only to cover over-allotments in the sale of the Underwritten Securities by the Underwriters. Said option may be exercised in whole or from time to time in part at any time on or before the 45th day after the date of the Prospectus upon written or telegraphic notice by the Representative to the Fund setting forth the number of shares of the Option Securities as to which the several Underwriters are exercising the option and the settlement date. Delivery of certificates for the shares of Option Securities, and payment therefor, shall be made as provided in Section 3 hereof. The number of shares of the Option Securities to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Securities to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Securities, subject to such adjustments as you in your absolute discretion shall make to eliminate any fractional shares. 3. Delivery and Payment. Delivery of and payment for the -------------------- Underwritten Securities and the Option Securities (if the option provided for in Section 2(b) hereof shall have been exercised on or before the third business day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on May 28, 1998, or such later date (not later than June 4, 1998) as the Representative shall designate, which date and time may be postponed by agreement between the Representative and the Fund or as provided in Section 9 hereof (such date and time of delivery and payment for the Securities being herein called the "Closing Date"). Delivery of the Securities shall be made to the Representative for the respective accounts of the several Underwriters against payment by the several Underwriters through the Representative of the purchase price therefor in immediately available funds. Delivery of the Underwritten Securities and the Option Securities shall be made at such location as the Representative shall reasonably designate at least one business day in advance of the Closing Date and payment for such Securities shall be made at the office of Skadden, Arps, Slate, Meagher & Flom LLP in New York, New York. Certificates for the Securities shall be registered in such names and in such denominations as the Representative may request not less than three full business days in advance of the Closing Date. 13 The Fund agrees to have the Securities available for inspection, checking and packaging by the Representative in New York, New York, not later than 1:00 PM on the business day prior to the Closing Date. If the option provided for in Section 2(b) hereof is exercised after the third business day prior to the Closing Date, the Fund will deliver (at the expense of the Fund) to the Representative, at 388 Greenwich Street, New York, New York, on the date specified by the Representative (which shall in no event be earlier than three business days nor later than ten business days after exercise of said option), certificates for the Option Securities in such names and denominations as the Representative shall have requested against payment of the purchase price therefor in immediately available funds. If settlement for the Option Securities occurs after the Closing Date, the Fund will deliver to the Representative on the settlement date for the Option Securities, and the obligation of the Underwriters to purchase the Option Securities shall be conditioned upon receipt of, supplemental opinions, certificates and letters confirming as of such date the opinions, certificates and letters delivered on the Closing Date pursuant to Section 6 hereof. 4. Offering by Underwriters. It is understood that the several ------------------------ Underwriters propose to offer the Securities for sale to the public as set forth in the Prospectus. 5. Agreements. The Fund agrees with the several Underwriters that: ---------- (a) The Fund will use its best efforts to cause the Registration Statement, if not effective at the Execution Time, and any amendment thereof, to become effective. Prior to the termination of the offering of the Securities, the Fund will not file any amendment of the Registration Statement or supplement (whether pursuant to the Act, the Investment Company Act, or otherwise) to the Prospectus unless the Fund has furnished you a copy for your review prior to filing and will not file any such proposed amendment or supplement to which you reasonably object. Subject to the foregoing sentence, if the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectus 14 is otherwise required under Rule 497, the Fund will cause the Prospectus, properly completed, and any supplement thereto to be filed with the Commission pursuant to the applicable paragraph of Rule 497 within the time period prescribed and will provide evidence satisfactory to the Representative of such timely filing. The Fund will promptly advise the Representative (i) when the Registration Statement, if not effective at the Execution Time, and any amendment thereto, shall have become effective, (ii) when the Prospectus, and any supplement thereto, shall have been filed (if required) with the Commission pursuant to Rule 497, (iii) when, prior to termination of the offering of the Securities, any amendment to the Registration Statement shall have been filed or become effective, (iv) of any request by the Commission for any amendment of the Registration Statement or supplement to the Prospectus or for any additional information, (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or the issuance of any notice or order under Section 8(e) of the Investment Company Act or the institution or threatening of any proceeding for either such purpose and (vi) of the receipt by the Fund of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Fund will use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain as soon as possible the withdrawal thereof. (b) If, at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event occurs as a result of which the Prospectus as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act, the Investment Company Act or the Rules and Regulations, the Fund promptly will prepare and file with the Commission, subject to the second sentence of para graph (a) of this Section 5, an amendment or supplement which will correct such statement or omission or effect such compliance. 15 (c) As soon as practicable, the Fund will make generally available to its security holders and to the Representative an earnings statement or statements of the Fund and its subsidiaries which will satisfy the provisions of Section ll(a) of the Act and Rule 158 under the Act. (d) The Fund will furnish to the Representative and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including exhibits thereto) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Act, as many copies of each Preliminary Prospectus and the Prospectus and any supplement thereto as the Representative may reasonably request. (e) The Fund will arrange for the qualification of the Securities for sale under the laws of such jurisdictions as the Representative may designate, will maintain such qualifications in effect so long as required for the distribution of the Securities and will pay the fee of the National Association of Securities Dealers, Inc., in connection with its review of the offering. (f) The Fund will not, for a period of 180 days following the date of the Prospectus, without the prior written consent of the Representative, offer, sell or contract to sell, register with the Commission or otherwise dispose of, directly or indirectly, or announce the offering of, any shares of Common Stock other than the Securities or any securities convertible into, or exchangeable for, shares of Common Stock; provided, however, that the Fund may issue and sell -------- ------- Common Stock pursuant to any dividend reinvestment plan of the Fund in effect at the Execution Time. (g) The Fund will apply the net proceeds from the sale of the Underwritten Securities, and of the Option Securities, if any, for the purposes set forth in the Prospectus. (h) The Fund will use its best efforts to list, subject to notice of issuance, the Securities to be 16 sold by it on the New York Stock Exchange simultaneously with the effectiveness of the Registration Statement. 6. Conditions to the Obligations of the Underwriters. The ------------------------------------------------- obligations of the Underwriters to purchase the Underwritten Securities and the Option Securities, as the case may be, shall be subject to the accuracy of the representations and warranties on the part of the Fund and the Investment Manager contained herein as of the Execution Time, the Closing Date and any settlement date pursuant to Section 3 hereof, to the accuracy of the statements of the Fund and the Investment Manager made in any certificates pursuant to the provisions hereof, to the performance by the Fund and the Investment Manager of their respective obligations hereunder and to the following additional conditions: (a) If the Registration Statement has not become effective prior to the Execution Time, unless the Representative agree in writing to a later time, the Registration Statement will become effective not later than (i) 6:00 PM New York City time, on the date of determination of the public offering price, if such determination occurred at or prior to 3:00 PM New York City time on such date or (ii) 12:00 Noon on the business day following the day on which the public offering price was determined, if such determination occurred after 3:00 PM New York City time on such date; if filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 497(b), (d) or (h), the Prospectus, and any such supplement, will be filed in the manner and within the time period required by Rule 497(b), (d) or (h), as the case may be; and no stop order suspending the effectiveness of the Registration Statement under the Act and no notice or order under Section 8(e) of the Investment Company Act shall have been issued and no proceedings for either purpose shall have been instituted or threatened. (b) The Fund shall have furnished to the Representative the opinion of Simpson Thacher & Bartlett, counsel for the Fund, dated the Closing Date, to the effect that: (i) the Fund has been duly incorporated and is validly existing and in good standing as a corporation under the laws of the State of Maryland and has full corporate power and authority to conduct its 17 business as described in the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in the State of New York; (ii) all outstanding shares of the Fund's Common Stock, have been duly authorized, and are validly issued, fully paid and nonassessable; the Securities have been duly authorized and, upon payment and delivery in accordance with this Agreement, will be validly issued, fully paid and nonassessable. (iii) the statements made in the Prospectus under the caption "Description of Capital Stock - Common Stock," insofar as they purport to constitute summaries of the terms of the Fund's Common Stock (including the Securities), constitute accurate summaries of the terms of such Common Stock in all material respects; the Securities have been authorized for listing, subject to official notice of issuance and evidence of satisfactory distribution, on the New York Stock Exchange; the form of certificates for the Securities conforms to the require ments of the General Corporation Law of Maryland; there are no preemptive rights under federal or Maryland law to subscribe for or purchase shares of the Fund's capital stock and there are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any shares of the Fund's capital stock pursuant to the Fund's articles of incorporation or by-laws or any agreement or other instrument filed or incorporated by reference as an exhibit to the Registration Statement. (iv) to the knowledge of such counsel, there is no pending or threatened legal or governmental proceeding required to be described in the Prospectus which is not described as required, or any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement or incorporated by reference therein, which are not described and filed or incorporated by reference as required; 18 (v) the statements in the Prospectus under the captions "Management of the Fund - Investment Manager," "Management of the Fund - Directors and Officers" and "Description of Capital Stock - Common Stock," insofar as they purport to constitute summaries of the terms of Maryland or federal statutes, rules and regulations thereunder or contracts and other documents, constitute accurate summaries of the terms of such statutes, rules and regulations or contracts and other documents in all material re- spects; (vi) the statements in the Prospectus under the captions "Dividends and Distributions; Dividend Reinvestment Plan" and "Taxation," insofar as they purport to constitute summaries of matters of United States federal tax law and regulations or legal conclusions with respect thereto, constitute accurate summaries of the matters described therein in all material respects; (vii) the Registration Statement has become effective under the Act (such counsel may, to the extent necessary, rely on oral confirmation from the Commission to this effect in rendering such opinion); any required filing of the Prospectus, and any supplements thereto, pursuant to Rule 497(b), (d) or (h) has been made in the manner and within the time period required by Rule 497(b), (d) or (h) under the Act; and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registra tion Statement has been issued; and, to the knowledge of such counsel, no proceeding for that purpose has been instituted or threatened by the Commission; (viii) this Agreement has been duly authorized, executed and delivered by the Fund; (ix) no consent, approval, authorization, order, registration or qualification of or with any federal, Maryland or New York governmental agency or body is required for the issue and sale of the Securities by the Fund and the compliance by the Fund with all of the provisions of this Agreement, except for the registration under the Act, the Exchange Act and the Investment Company Act of the Securities, and such consents, approvals, authoriza- 19 tions, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by the Underwriters. (x) the issue and sale of the Securities by the Fund and the compliance by the Fund with all of the provisions of this Agreement will not breach or result in a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument filed or incorporated by reference as an exhibit to the Registration Statement, nor will such action violate the articles of incorporation or by-laws of the Fund or any federal, Maryland or New York statute or any rule or regulation that has been issued pursuant to any federal, Maryland or New York statute or any order known to such counsel issued pursuant to any federal, Maryland or New York stat ute by any court or governmental agency or body or court having jurisdiction over the Fund or any of its properties; (xi) the Management Agreement, the Custodian Agreement and the Transfer Agency Agreement have been duly authorized, executed and delivered by the Fund, comply as to form with all applicable provisions of the Investment Company Act and are legal, valid, binding and enforceable obligations of the Fund, subject, to the effects of bankruptcy, insol- vency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing; and (xii) the Fund is registered with the Commission under the Investment Company Act as a closed-end diversified management investment company, and the provisions of the articles of incorporation and by-laws of the Fund do not violate the Investment Company Act or the Rules and Regulations of the Commission thereunder; In rendering such opinion, such counsel may limit such opinion to matters involving the application of the laws of the State of New York, the State of Maryland and the 20 United States and may rely (A) as to matters involving the application of laws of the State of Maryland, to the extent they deem proper and specified in such opinion, upon the opinion of Piper & Marbury L.L.P. or other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Fund, the Investment Manager and public officials. References to the Prospectus in this Section 6(b) include any supplements thereto at the Closing Date. Such counsel has not independently verified the accuracy, completeness or fairness of the statements made or included in the Registration Statement or the Prospectus and takes no responsibility therefor, except as and to the extent set forth in Sections 6(b)(iii), 6(b)(v) and 6(b)(vi) above. In the course of the preparation by the Fund of the Registration Statement and the Prospectus, such counsel has participated in conferences with certain officers and emp1oyees of the Fund and the Investment Manager, with representatives of Price Waterhouse LLP and with counsel to the Investment Manager. Based upon such counse1's examination of the Registration Statement and the Prospectus, such counse1's investigations made in connection with the preparation of the Registration Statement and the Prospectus and such counsel's participation in the conferences referred to above, (i) such counsel is of the opinion that the Registration Statement, as of its effective date, and the Prospectus, as of May 21, 1998, complied as to form in all material respects with the requirements of the Act and the Investment Company Act and the applicable rules and regulations of the Commission thereunder, except that in each case such counsel expresses no opinion with respect to the financial statements or other financial or statistical data contained in the Registration Statement or the Prospectus, and (ii) such counsel has no reason to believe that the Registration Statement, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or that the Prospectus contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that in each case such counsel 21 expresses no belief with respect to the financial state ments or other financial or statistical data contained in the Registration Statement or the Prospectus. (c) The Investment Manager shall have furnished to the Representative the opinion of internal counsel for the Investment Manager reasonably acceptable to the Representative, dated the Closing Date, to the effect that: (i) the Investment Manager is duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own its property and conduct its business as described in the Prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases material properties or conducts material business; (ii) the Investment Manager is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act or the Investment Company Act, or the rules and regulations under either, from acting as Investment Manager for the Fund under the Management Agreement and as contemplated in the Prospectus; (iii) this Agreement and the Management Agreement have each been duly authorized, executed and delivered by the Investment Manager, and the Management Agreement constitutes a legal, valid and binding instrument enforceable against the Investment Manager in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors' rights generally from time to time in effect); (iv) neither (A) the operations and activities of the Investment Manager as contemplated in the Prospectus, (B) the performance by the Investment Manager of its obligations under the Investment Management Agreements, nor (C) the consummation of the transactions contemplated herein or in the 22 Prospectus will conflict with, or result in a breach of, or constitute a default under the certificate of incorporation or by-laws of the Investment Manager or the terms of any indenture or other agreement or instrument known to such counsel to which the Investment Manager or any of its affiliates is a party or by which it is bound, or any law, order or regu lation known to such counsel to be applicable to the Investment Manager of any court, regulatory body, administrative agency, governmental body, stock exchange or securities association or any other authority or arbitrator having jurisdiction over the Investment Manager or any of its affiliates. Although such counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof and nothing has come to the attention of such counsel that has caused it to believe that the Registration Statement, at the time the Registration Statement became effective or the Prospectus, as of its date and as of the Closing Date, as the case may be, or the date of any closing of the sale of any Option Securities, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of the Closing Date or the date of any closing of the sale of any Option Securities, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). (d) The Representative shall have received from Skadden, Arps, Slate, Meagher & Flom LLP counsel for the Underwriters, such opinion or opinions, dated the Closing Date, with respect to the issuance and sale of the Securities, the Registration Statement, the Prospec- 23 tus (together with any supplement thereto) and other related matters as the Representative may reasonably require, and the Fund shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (e) The Fund shall have furnished to the Representative a certificate of the Fund, signed by the Chairman of the Board or the President and the principal financial or accounting officer of the Fund, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Registration Statement, the Prospectus, any supplement to the Prospectus and this Agreement and that: (i) the representations and warranties of the Fund in this Agreement are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date and the Fund has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement under the Act and no notice or order under Section 8(e) of the Invest ment Company Act has been issued and no proceedings for either purpose have been instituted or, to the Fund's knowledge, threatened; and (iii) since the date of the most recent financial statements included in the Prospectus (exclusive of any supplement thereto), there has been no material adverse change in the condition (financial or other), earnings, business or properties of the Fund, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). (f) The Investment Manager shall have furnished to the Representative a certificate of the Investment Manager, signed by the Chairman of the Board, the President or any Vice President and the principal financial or accounting officer of the Investment Manager, dated the Closing Date, to the effect that the signers of 24 such certificate have carefully examined the Registration Statement, the Prospectus, any supplement to the Prospectus and this Agreement and that the representations and warranties of the Investment Manager in this Agreement are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date and the Investment Manager has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; (g) At the Execution Time and at the Closing Date, Price Waterhouse LLP shall have furnished to the Representative a letter or letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Representative, confirming that they are independent accountants within the meaning of the Act and the respective applicable published rules and regulations thereunder and stating in effect that: (i) in their opinion the statement of assets and liabilities and related notes included in the Registration Statement and the Prospectus and reported on by them comply in form in all material respects with the applicable accounting requirements of the Act and the Investment Company Act and the Rules and Regulations; (ii) on the basis of carrying out certain specified procedures (but not an examination in accordance with generally accepted auditing stan- dards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the stockholders, directors and committees thereof of the Fund, and inquiries of certain officials of the Fund who have responsibility for financial and accounting matters of the Fund, nothing came to their attention which caused them to believe that at a specified date no more than five business days prior to the date of the letter there was any change in the shares of Common Stock or net assets or shareholders' equity of the Fund as compared with the amounts shown on the statement of assets and liabilities included in the Prospectus, except in all instances for changes or decreases set 25 forth in such letter, in which case the letter shall be accompanied by an explanation by the Fund as to the significance thereof unless said explanation is not deemed necessary by the Representative. References to the Prospectus in this paragraph (g) include any supplement thereto at the date of the letter. (h) Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (g) of this Section 6 or (ii) any change, or any development involving a prospective change, in or affecting the business or properties of the Fund the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Representative, so material and adverse as to make it impractical or inadvisable to proceed with the offering or the delivery of the Securities as contemplated by the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto). (i) Prior to the Closing Date, the Fund shall have furnished to the Representative such further information, certificates and documents as the Representative may reasonably request. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Representative and counsel for the Underwriters, this Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, the Closing Date by the Representative. Notice of such cancellation shall be given to the Fund in writing or by telephone or telegraph confirmed in writing. 26 7. Reimbursement of Underwriters' Expenses. --------------------------------------- The Fund will pay all costs, expenses, fees and taxes incident to the performance of its obligations under this Agreement, including, but not limited to, expenses relating to (i) the preparation, printing and filing of the Registration Statement as originally filed and of each amendment thereto, of the Preliminary Prospectuses, and of the Prospectus and any amendments or supplements thereto, (ii) the preparation of the Fund Agreements, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including stock transfer taxes, if any, payable upon the sale, issuance and delivery of the Securities, (iv) the fees and disbursements of the Fund's counsel and accountants, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 5(e) of this Agreement, including filing fees and any fees or disbursements of counsel for the Under writers in connection therewith and in connection with the preparation of a Blue Sky Survey, (vi) the reproduction and delivery to the Underwriters of copies of the Registration Statement as originally filed and of each amendment thereto, of the Preliminary Prospectuses, and of the Prospectus and any amendments or supplements thereto, (vii) the reproduction and delivery to the Underwriters of copies of the Blue Sky Survey, (viii) the fees and expenses incurred with respect to filings with the National Association of Securities Dealers, Inc., (ix) the preparation and delivery to the Underwriters of any marketing brochure (excluding any brochures distributed to brokers) and any tombstone advertisement placed by the Fund or placed by the Underwriters at the request of the Fund, (x) the fees and expenses incurred with respect to the listing of the Securities on the New York Stock Exchange and the registration thereof under the Exchange Act, and (xi) an amount of $250,000 payable on the Closing Date to the Underwriters in partial reimbursement of their expenses in connection with the offering. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 6 hereof is not satisfied, because of any termination pursuant to Section 10 hereof or because of any refusal, inability or failure on the part of the Fund to perform 27 any agreement herein or comply with any provision hereof other than by reason of a default by any of the Underwriters, the Fund will remain liable to pay all of the costs, expenses, fees and taxes specified in the preceding paragraph and will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (includ ing reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. 8. Indemnification and Contribution. (a) The Fund and the Investment -------------------------------- Manager jointly and severally agree to indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter, and each person who controls any Underwriter within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Securities as originally filed or in any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Fund and the Investment Manager -------- ------- will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Fund by or on behalf of any Underwriter through the Representative specifically for inclusion therein. This indemnity agreement will be in addition to any liability which the Fund or the Investment Manager may otherwise have. 28 (b) Each Underwriter severally agrees to indemnify and hold harmless the Fund and the Investment Manager, each of its respective directors, each of its respective officers who signs the Registration Statement, and each person who controls the Fund and the Investment Manager within the meaning of either the Act or the Exchange Act, to the same extent as the foregoing indemnity to each Underwriter, but only with reference to written information relating to such Underwriter furnished to the Fund by or on behalf of such Underwriter through the Representative specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any Underwriter may otherwise have. The Fund and the Investment Manager acknowledge that the statements set forth in the last paragraph of the cover page and under the heading "Underwriting" in any Preliminary Prospectus and the Prospectus constitute the only information furnished in writing by or on behalf of the several Underwriters for inclusion in any Preliminary Prospectus or the Prospectus, and you, as the Representa tive, confirm that such statements are correct. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be -------- ------- satisfactory to the indemnified party. Notwithstanding the indemnify- 29 ing party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indem nifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Fund and the Investment Manager, jointly and severally, and the Underwriters agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Fund, the Investment Manager and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Investment Manager on the one hand and by the Underwriters on the other from the offering of the Securities; 30 provided, however, that in no case shall any Underwriter (except as may be - -------- ------- provided in any agreement among underwriters relating to the offering of the Securities) be responsible for any amount in excess of the underwriting discount or commission applicable to the Securities purchased by such Underwriter hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Fund and the Investment Manager, jointly and severally, and the Underwriters shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Fund and the Investment Manager on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Fund and the Investment Manager shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses), and benefits received by the Underwriters shall be deemed to be equal to the total underwriting discounts and commissions, in each case as set forth on the cover page of the Prospectus. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Fund, the Investment Manager or by the Underwriters. The Fund, the Investment Manager and the Underwriters agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8(d), no person guilty of fraudulent misrepresentation (within the mean ing of Section ll(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls an Underwriter within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of an Underwriter shall have the same rights to contribution as such Underwriter, and each person who controls the Fund or the Investment Manager within the meaning of either the Act or the Exchange Act, each officer of the Fund who shall have signed the Registration Statement and each director of the Fund shall have the same rights to contribution as the Fund, subject in each case to the applicable terms and conditions of this Section 8(d). 31 9. Default by an Underwriter. If any one or more Underwriters shall ------------------------- fail to purchase and pay for any of the Securities agreed to be purchased by such Underwriter or Underwriters hereunder and such failure to purchase shall constitute a default in the performance of its or their obligations under this Agreement, the remaining Underwriters shall be obligated severally to take up and pay for (in the respective proportions which the amount of Securities set forth opposite their names in Schedule I hereto bears to the aggregate amount of Securities set forth opposite the names of all the remaining Underwriters) the Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase; provided, however, that in the event that the aggregate amount of -------- ------- Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of the aggregate amount of Securities set forth in Schedule I hereto, the remaining Underwriters shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Securities, and if such nondefaulting Underwriters do not purchase all the Securities, this Agreement will terminate without liability to any nondefaulting Underwriter, the Investment Manager or the Fund. In the event of a default by any Underwriter as set forth in this Section 9, the Closing Date shall be postponed for such period, not exceeding seven days, as the Representative shall determine in order that the required changes in the Registration Statement and the Prospectus or in any other documents or arrangements may be effected. Nothing contained in this Agreement shall relieve any defaulting Underwriter of its liability, if any, to the Fund, the Investment Manager, and any nondefaulting Underwriter for damages occasioned by its default hereunder. 10. Termination. This Agreement shall be subject to termination in ----------- the absolute discretion of the Representative, by notice given to the Fund prior to delivery of and payment for the Securities, if prior to such time (i) trading in the Fund's Common Stock shall have been suspended by the Commission or the New York Stock Exchange or trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such Exchange, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or (iii) there shall have occurred any outbreak or esca- 32 lation of hostilities, declaration by the United States of a national emergency or war or other calamity or crisis the effect of which on financial markets is such as to make it, in the judgment of the Representative, impracticable or inadvisable to proceed with the offering or delivery of the securities as contemplated by the Prospectus (exclusive of any supplement thereto). 11. Representations and Indemnities to Survive. The respective ------------------------------------------ agreements, representations, warranties, indemnities and other statements of the Fund or its officers and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, the Investment Manager, or the Fund or any of the officers, directors or controlling persons referred to in Section 8 hereof, and will survive delivery of and payment for the Securities. The provisions of Sections 7 and 8 hereof shall survive the termination or cancellation of this Agreement. 12. Notices. All communications hereunder will be in writing and ------- effective only on receipt, and, if sent to the Representative, will be mailed, delivered or telegraphed and confirmed to them, care of Smith Barney Inc. at 388 Greenwich Street, New York, New York, 10013, attention: Counsel; or, if sent to the Fund, will be mailed, delivered or telegraphed and confirmed to care of Salomon Brothers Asset Management Inc, Seven World Trade Center, New York, New York 10048, attention: Counsel. 13. Successors. This Agreement will inure to the benefit of and be ---------- binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 8 hereof, and no other person will have any right or obligation hereunder. 14. Applicable Law. This Agreement will be governed by and construed -------------- in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. 15. Counterparts. This agreement may be signed in any number of ------------ counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 33 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement between the Fund and the several Underwriters. Very truly yours, SALOMON BROTHERS HIGH INCOME FUND II INC By:__________________________ Name: Title: SALOMON BROTHERS ASSET MANAGEMENT INC By:__________________________ Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first above written. SMITH BARNEY INC. By:______________________ Managing Director For itself and the several Underwriters named in Schedule I to the foregoing Agreement. 34 SCHEDULE I Underwriters Number of Shares ------------ ---------------- Salomon Smith Barney.................. --------- A.G. Edwards & Sons, Inc. ............ --------- Advest, Inc. ......................... --------- EVEREN Securities, Inc. .............. --------- Fahnestock & Co. Inc. ................ --------- Janney Montgomery Scott Inc. ......... --------- Legg Mason Wood Walker, Incorporated . --------- McDonald & Company Securities, Inc. .. --------- Morgan Keegan & Company, Inc. ........ --------- The Robinson-Humphrey Company, LLC.... --------- Tucker Anthony Incorporated........... --------- Wedbush Morgan Securities............. --------- Total.............................. --------- 35 EX-99.2J 6 FORM OF CUSTODIAN AGREEMENT EXHIBIT 99.2(j) Form of Agreement CUSTODIAN SERVICES AGREEMENT ---------------------------- THIS AGREEMENT is made as of _______________, 1998 by and between PNC BANK, NATIONAL ASSOCIATION, a national banking association ("PNC Bank"), and SALOMON BROTHERS HIGH INCOME FUND II INC., a Maryland corporation (the "Fund"). W I T N E S S E T H: WHEREAS, the Fund is registered as a closed-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Fund wishes to retain PNC Bank to provide custodian services and PNC Bank wishes to furnish custodian services, either directly or through an affiliate or affiliates, as more fully described herein. NOW, THEREFORE, In consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. DEFINITIONS. AS USED IN THIS AGREEMENT: ---------------------------------------- (a) "1933 Act" means the Securities Act of 1933, as amended. ---------- (b) "1934 Act" means the Securities Exchange Act of 1934, as amended. ---------- (c) "Authorized Person" means any officer of the Fund and any other ------------------- person duly authorized by the Fund's Board of Directors to give Oral Instructions and Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as may be received by PNC Bank. An Authorized Person's scope of authority may be limited by the Fund by setting forth such limitation in the Authorized Persons Appendix. (d) "Book-Entry System" means Federal Reserve Treasury book-entry ------------------- system for United States and federal agency securities, its successor or successors, and its nominee or nominees and any book-entry system maintained by an exchange registered with the SEC under the 1934 Act. (e) "CEA" means the ----- Commodities Exchange Act, as amended. (f) "Oral Instructions" mean oral instructions received by PNC Bank ------------------- from an Authorized Person or from a person reasonably believed by PNC Bank to be an Authorized Person. (g) "PNC Bank" means PNC Bank, National Association or ---------- a subsidiary or affiliate of PNC Bank, National Association. (h) "SEC" means the Securities and Exchange Commission. ----- (i) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act ----------------- and the CEA. (j) "Shares" mean the shares of beneficial interest of any -------- series or class of the Fund. (k) "Property" means: ---------- (i) any and all securities and other investment items which the Fund may from time to time deposit, or cause to be deposited, with PNC Bank or which PNC Bank may from time to time hold for the Fund; (ii) all income in respect of any of such securities or other investment items; (iii) all proceeds of the sale of any of such securities or investment items; and (iv) all proceeds of the sale of securities issued by the Fund, which are received by PNC Bank from time to time, from or on behalf of the Fund. 2 (k) "Written Instructions" mean written instructions signed by two ---------------------- Authorized Persons and received by PNC Bank. The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device. 2. APPOINTMENT. The Fund hereby appoints PNC Bank to provide custodian ----------- services to the Fund and PNC Bank accepts such appointment and agrees to furnish such services. 3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable, --------------------- will provide PNC Bank with the following: (a) certified or authenticated copies of the resolutions of the Fund's Board of Directors, approving the appointment of PNC Bank or its affiliates to provide services; (b) a copy of the Fund's most recent effective registration statement; (c) a copy of the advisory agreement; (d) a copy of the distribution agreement with respect to each class of Shares; (e) a copy of the administration agreement if PNC Bank is not providing such services; (f) copies of any shareholder servicing agreements made in respect of the Fund; and (g) certified or authenticated copies of any and all amendments or supplements to the foregoing. 4. COMPLIANCE WITH LAWS. -------------------- PNC Bank undertakes to comply with all applicable requirements of the Securities Laws and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PNC Bank hereunder. Except as specifically set forth herein, PNC Bank assumes no responsibility for such compliance by the Fund. 3 5. INSTRUCTIONS. ------------ (a) Unless otherwise provided in this Agreement, PNC Bank shall act only upon Oral Instructions and Written Instructions. (b) PNC Bank shall be entitled to rely upon any Oral Instructions and Written Instructions it receives from an Authorized Person (or from a person reasonably believed by PNC Bank to be an Authorized Person) pursuant to this Agreement. PNC Bank may assume that any Oral Instructions or Written Instructions received hereunder are not in any way inconsistent with the provisions of organizational documents of the Fund or of any vote, resolution or proceeding of the Fund's Board of Directors or of the Fund's shareholders, unless and until PNC Bank receives Written Instructions to the contrary. (c) The Fund agrees to forward to PNC Bank Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PNC Bank or its affiliates) so that PNC Bank receives the Written Instructions by the close of business on the same day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PNC Bank shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. Where Oral Instructions or Written Instructions reasonably appear to have been received from an Authorized Person, PNC Bank shall incur no liability to the Fund in acting upon such Oral Instructions or Written Instructions provided that PNC Bank's actions comply with the other provisions of this Agreement. 6. RIGHT TO RECEIVE ADVICE. ----------------------- (a) Advice of the Fund. If PNC Bank is in doubt as to any action it ------------------ should or should not take, PNC Bank may request directions or advice, including Oral Instructions or 4 Written Instructions, from the Fund. (b) Advice of Counsel. If PNC Bank shall be in doubt as to any ----------------- question of law pertaining to any action it should or should not take, PNC Bank may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund's investment adviser or PNC Bank, at the option of PNC Bank). (c) Conflicting Advice. In the event of a conflict between ------------------ directions, advice or Oral Instructions or Written Instructions PNC Bank receives from the Fund, and the advice it receives from counsel, PNC Bank shall be entitled to rely upon and follow the advice of counsel. In the event PNC Bank so relies on the advice of counsel, PNC Bank remains liable for any action or omission on the part of PNC Bank which constitutes willful misfeasance, bad faith, gross negligence or reckless disregard by PNC Bank of any duties, obligations or responsibilities set forth in this Agreement. (d) Protection of PNC Bank. PNC Bank shall be protected in any action ---------------------- it takes or does not take in reliance upon directions, advice or Oral Instructions or Written Instructions it receives from the Fund or from counsel and which PNC Bank believes, in good faith, to be consistent with those directions, advice or Oral Instructions or Written Instructions. Nothing in this section shall be construed so as to impose an obligation upon PNC Bank (i) to seek such directions, advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral Instructions or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PNC Bank's properly taking or not taking such action. Nothing in this subsection shall excuse PNC Bank when an action or omission on the part of PNC Bank constitutes willful misfeasance, bad faith, gross 5 negligence or reckless disregard by PNC Bank of any duties, obligations or responsibilities set forth in this Agreement. 7. RECORDS; VISITS. The books and records pertaining to the Fund, which --------------- are in the possession or under the control of PNC Bank, shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations. The Fund and Authorized Persons shall have access to such books and records at all times during PNC Bank's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PNC Bank to the Fund or to an authorized representative of the Fund, at the Fund's expense. 8. CONFIDENTIALITY. PNC Bank agrees to keep confidential all records of --------------- the Fund and information relating to the Fund and its shareholders, unless the release of such records or information is otherwise consented to, in writing, by the Fund. The Fund agrees that such consent shall not be unreasonably withheld and may not be withheld where PNC Bank may be exposed to civil or criminal contempt proceedings or when required to divulge such information or records to duly constituted authorities. 9. COOPERATION WITH ACCOUNTANTS. PNC Bank shall cooperate with the Fund's ---------------------------- independent public accountants and shall take all reasonable action in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund. 10. DISASTER RECOVERY. PNC Bank shall enter into and shall maintain in ----------------- effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the 6 event of equipment failures, PNC Bank shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. PNC Bank shall have no liability with respect to the loss of data or service interruptions caused by equipment failure provided such loss or interruption is not caused by PNC Bank's own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties or obligations under this Agreement. 11. COMPENSATION. As compensation for custody services rendered by PNC ------------ Bank during the term of this Agreement, the Fund will pay to PNC Bank a fee or fees as may be agreed to in writing from time to time by the Fund and PNC Bank. 12. INDEMNIFICATION. The Fund agrees to indemnify and hold harmless PNC --------------- Bank and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws, and amendments thereto, and expenses, including (without limitation) attorneys' fees and disbursements, arising directly or indirectly from any action or omission to act which PNC Bank takes (i) at the request or on the direction of or in reliance on the advice of the Fund or (ii) upon Oral Instructions or Written Instructions. Neither PNC Bank, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of PNC Bank's or its affiliates' own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties under this Agreement. 13. RESPONSIBILITY OF PNC BANK. -------------------------- (a) PNC Bank shall be under no duty to take any action on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PNC Bank in writing. PNC Bank shall be obligated to exercise care and diligence in the performance of its 7 duties hereunder, to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement. PNC Bank shall be liable for any damages arising out of PNC Bank's failure to perform its duties under this agreement to the extent such damages arise out of PNC Bank's willful misfeasance, bad faith, gross negligence or reckless disregard of its duties under this Agreement. (b) Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) PNC Bank shall not be under any duty or obligation to inquire into and shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral Instruction or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which PNC Bank reasonably believes to be genuine; or (B) subject to section 10, delays or errors or loss of data occurring by reason of circumstances beyond PNC Bank's control, including acts of civil or military authority, national emergencies, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply. (c) Notwithstanding anything in this Agreement to the contrary, neither PNC Bank nor its affiliates shall be liable to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of PNC Bank's or its affiliates' performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PNC Bank or its affiliates. 14. DESCRIPTION OF SERVICES. ----------------------- (a) Delivery of the Property. The Fund will deliver or arrange for ------------------------ delivery to PNC Bank, all the Property owned by the Fund, including cash received as a result of the 8 distribution of Shares, during the period that is set forth in this Agreement. PNC Bank will not be responsible for such property until actual receipt. (b) Receipt and Disbursement of Money. PNC Bank, acting upon Written --------------------------------- Instructions, shall open and maintain separate accounts in the Fund's name using all cash received from or for the account of the Fund, subject to the terms of this Agreement. In addition, upon Written Instructions, PNC Bank shall open separate custodial accounts for each separate series of the Fund (collectively, the "Accounts") and shall hold in the Accounts all cash received from or for the Accounts of the Fund specifically designated to each separate series. PNC Bank shall make cash payments from or for the Accounts of a Fund only for: (i) purchases of securities in the name of the Fund or PNC Bank or PNC Bank's nominee as provided in sub-section (j) and for which PNC Bank has received a copy of the broker's or dealer's confirmation or payee's invoice, as appropriate; (ii) purchase or redemption of Shares of the Fund delivered to PNC Bank; (iii) payment of, subject to Written Instructions, interest, taxes, administration, accounting, distribution, advisory, management fees or similar expenses which are to be borne by the Fund; (iv) payment to, subject to receipt of Written Instructions, the Fund's transfer agent, as agent for the shareholders, an amount equal to the amount of dividends and distributions stated in the Written Instructions to be distributed in cash by the transfer agent to shareholders, or, in lieu of paying the Fund's transfer agent, PNC Bank may arrange for the direct payment of cash dividends and distributions to shareholders in accordance with procedures mutually agreed upon from time to time by and among the Fund, PNC Bank and the Fund's transfer agent. (v) payments, upon receipt Written Instructions, in connection with the conversion, exchange or surrender of securities owned or subscribed to by the Fund and held by or delivered to PNC Bank; (vi) payments of the amounts of dividends received with respect to securities 9 sold short; (vii) payments made to a sub-custodian pursuant to provisions in sub- section (c) of this Section; and (viii) payments, upon Written Instructions, made for other proper Fund purposes. PNC Bank is hereby authorized to endorse and collect all checks, drafts or other orders for the payment of money received as custodian for the Accounts. (c) Receipt of Securities; Subcustodians. ------------------------------------ (i) PNC Bank shall hold all securities received by it for the Accounts in a separate account that physically segregates such securities from those of any other persons, firms or corporations, except for securities held in a Book-Entry System. All such securities shall be held or disposed of only upon Written Instructions of the Fund pursuant to the terms of this Agreement. PNC Bank shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such securities or investment, except upon the express terms of this Agreement and upon Written Instructions, accompanied by a certified resolution of the Fund's Board of Directors, authorizing the transaction. In no case may any member of the Fund's Board of Directors, or any officer, employee or agent of the Fund withdraw any securities. At PNC Bank's own expense and for its own convenience, PNC Bank may enter into sub-custodian agreements with other United States banks or trust companies to perform duties described in this sub-section (c). Such bank or trust company shall have an aggregate capital, surplus and undivided profits, according to its last published report, of at least one million dollars ($1,000,000), if it is a subsidiary or affiliate of PNC Bank, or at least twenty million dollars ($20,000,000) if such bank or trust company is not a subsidiary or affiliate of PNC Bank. In addition, such bank or trust company must be qualified to act as custodian and agree to comply with the relevant provisions of the 1940 Act and other applicable rules and regulations. Any such arrangement will not be entered into without prior written notice to the Fund. PNC Bank shall remain responsible for the performance of all of its duties as described in this Agreement and shall hold the Fund 10 harmless from its own acts or omissions, under the standards of care provided for herein, or the acts and omissions of any sub-custodian chosen by PNC Bank under the terms of this sub-section (c). (d) Transactions Requiring Instructions. Upon receipt of Oral ----------------------------------- Instructions or Written Instructions and not otherwise, PNC Bank, directly or through the use of the Book-Entry System, shall: (i) deliver any securities held for the Fund against the receipt of payment for the sale of such securities; (ii) execute and deliver to such persons as may be designated in such Oral Instructions or Written Instructions, proxies, consents, authorizations, and any other instruments whereby the authority of an owner of any securities may be exercised; (iii) deliver any securities to the issuer thereof, or its agent, when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to PNC Bank; (iv) deliver any securities held against receipt of other securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, tender offer, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege; (v) deliver any securities held to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, and receive and hold under the terms of this Agreement such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery; (vi) make such transfer or exchanges of the assets of the Fund and take such other steps as shall be stated in said Oral Instructions or Written Instructions to be for the purpose of effectuating a duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Fund; (vii) release securities belonging to the Fund to any bank or trust company for 11 the purpose of a pledge or hypothecation to secure any loan incurred by the Fund; provided, however, that securities shall be released only upon payment to PNC Bank of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made subject to proper prior authorization, further securities may be released for that purpose; and repay such loan upon redelivery to it of the securities pledged or hypothecated therefor and upon surrender of the note or notes evidencing the loan; (viii) release and deliver securities owned by the Fund in connection with any repurchase agreement entered into on behalf of the Fund, but only on receipt of payment therefor; and pay out moneys of the Fund in connection with such repurchase agreements, but only upon the delivery of the securities; (ix) release and deliver or exchange securities owned by the Fund in connection with any conversion of such securities, pursuant to their terms, into other securities; (x) release and deliver securities owned by the fund for the purpose of redeeming in kind shares of the Fund upon delivery thereof to PNC Bank; and (xi) release and deliver or exchange securities owned by the Fund for other corporate purposes. PNC Bank must also receive a certified resolution describing the nature of the corporate purpose and the name and address of the person(s) to whom delivery shall be made when such action is pursuant to sub-paragraph d. (e) Use of Book-Entry System. The Fund shall deliver to PNC Bank ------------------------ certified resolutions of the Fund's Board of Directors approving, authorizing and instructing PNC Bank on a continuous basis, to deposit in the Book-Entry System all securities belonging to the Fund eligible for deposit therein and to utilize the Book-Entry System to the extent possible in connection with settlements of purchases and sales of securities by the Fund, and deliveries and returns of securities loaned, subject to repurchase agreements or used as collateral in connection with borrowings. PNC Bank shall continue to perform such duties until it receives Written 12 Instructions or Oral Instructions authorizing contrary actions. PNC Bank shall administer the Book-Entry System as follows: (i) With respect to securities which are maintained in the Book-Entry System, the records of PNC Bank shall identify by Book-Entry or otherwise those securities belonging to the Fund. PNC Bank shall furnish to the Fund a detailed statement of the Property held under this Agreement at least monthly and from time to time and upon written request. (ii) Securities and any cash of the Fund deposited in the Book-Entry System will at all times be segregated from any assets and cash controlled by PNC Bank in other than a fiduciary or custodian capacity but may be commingled with other assets held in such capacities. PNC Bank and its sub-custodian, if any, will pay out money only upon receipt of securities and will deliver securities only upon the receipt of money. (iii) All books and records maintained by PNC Bank which relate to the Fund's participation in the Book-Entry System will at all times during PNC Bank's regular business hours be open to the inspection of Authorized Persons, and PNC Bank will furnish to the Fund all information in respect of the services rendered as it may require. PNC Bank will also provide the Fund with such reports on its own system of internal control as the Fund may reasonably request from time to time. (f) Registration of Securities. All Securities held for the Fund -------------------------- which are issued or issuable only in bearer form, except such securities held in the Book-Entry System, shall be held by PNC Bank in bearer form; all other securities held for the Fund may be registered in the name of the Fund, PNC Bank, the Book-Entry System, a sub-custodian, or any duly appointed nominees of the Fund, PNC Bank, Book-Entry System or sub-custodian. The Fund reserves the right to instruct PNC Bank as to the method of registration and safekeeping of the securities of the Fund. The Fund agrees to furnish to PNC Bank appropriate instruments to enable PNC Bank to hold or deliver in proper form for transfer, or to register in the name of its nominee or in the 13 name of the Book-Entry System, any securities which it may hold for the Accounts and which may from time to time be registered in the name of the Fund. (g) Voting and Other Action. Neither PNC Bank nor its nominee shall ----------------------- vote any of the securities held pursuant to this Agreement by or for the account of a Portfolio, except in accordance with Written Instructions. PNC Bank, directly or through the use of the Book-Entry System, shall execute in blank and promptly deliver all notices, proxies and proxy soliciting materials to the registered holder of such securities. If the registered holder is not the Fund then Written Instructions or Oral Instructions must designate the person who owns such securities. (h) Transactions Not Requiring Instructions. --------------------------------------- In the absence of contrary Written Instructions, PNC Bank is authorized to take the following actions: (i) Collection of Income and Other Payments. ---------------------------------------- (A) collect and receive for the account of the Fund, all income, dividends, distributions, coupons, option premiums, other payments and similar items, included or to be included in the Property, and, in addition, promptly advise the Fund of such receipt and credit such income, as collected, to the Fund's custodian account; (B) endorse and deposit for collection, in the name of the Fund, checks, drafts, or other orders for the payment of money; (C) receive and hold for the account of the Fund all securities received as a distribution on the Fund's securities as a result of a stock dividend, share split-up or reorganization, recapitalization, readjustment or other rearrangement or distribution of rights or similar securities issued with respect to any securities belonging to the Fund and held by PNC Bank hereunder; (D) present for payment and collect the amount payable upon all securities which may mature or be called, redeemed, or retired, or otherwise become payable on the date such 14 securities become payable; and (E) take any action which may be necessary and proper in connection with the collection and receipt of such income and other payments and the endorsement for collection of checks, drafts, and other negotiable instruments. (ii) Miscellaneous Transactions. -------------------------- (A) deliver or cause to be delivered Property against payment or other consideration or written receipt therefor in the following cases: (1) for examination by a broker or dealer selling for the account of the Fund in accordance with street delivery custom; (2) for the exchange of interim receipts or temporary securities for definitive securities; and (3) for transfer of securities into the name of the Fund or PNC Bank or nominee of either, or for exchange of securities for a different number of bonds, certificates, or other evidence, representing the same aggregate face amount or number of units bearing the same interest rate, maturity date and call provisions, if any; provided that, in any such case, the new securities are to be delivered to PNC Bank. (B) Unless and until PNC Bank receives Oral Instructions or Written Instructions to the contrary, PNC Bank shall: (1) pay all income items held by it which call for payment upon presentation and hold the cash received by it upon such payment for the account of the Fund; (2) collect interest and cash dividends received, with notice to the Fund, to the account of the Fund; (3) hold for the account of the Fund all stock dividends, rights and similar securities issued with respect to any securities held by PNC Bank; and 15 (4) execute as agent on behalf of the Fund all necessary ownership certificates required by the Internal Revenue Code or the Income Tax Regulations of the United States Treasury Department or under the laws of any state now or hereafter in effect, inserting the Fund's name on such certificate as the owner of the securities covered thereby, to the extent it may lawfully do so. (i) Segregated Accounts. ------------------- (i) PNC Bank shall upon receipt of Written Instructions or Oral Instructions establish and maintain a segregated accounts on its records for and on behalf of the Fund. Such accounts may be used to transfer cash and securities, including securities in the Book-Entry System: (A) for the purposes of compliance by the Fund with the procedures required by a securities or option exchange, providing such procedures comply with the 1940 Act and any releases of the SEC relating to the maintenance of segregated accounts by registered investment companies; and (B) Upon receipt of Written Instructions, for other proper corporate purposes. (ii) PNC Bank shall arrange for the establishment of IRA custodian accounts for such shareholders holding Shares through IRA accounts, in accordance with the Fund's prospectuses, the Internal Revenue Code of 1986, as amended (including regulations promulgated thereunder), and with such other procedures as are mutually agreed upon from time to time by and among the Fund, PNC Bank and the Fund's transfer agent. (j) Purchases of Securities. PNC Bank shall settle purchased securities ----------------------- upon receipt of Oral Instructions or Written Instructions from the Fund or its investment advisers that specify: (i) the name of the issuer and the title of the securities, including CUSIP number if applicable; (ii) the number of shares or the principal amount purchased and accrued interest, if any; 16 (iii) the date of purchase and settlement; (iv) the purchase price per unit; (v) the total amount payable upon such purchase; (vi) the name of the person from whom or the broker through whom the purchase was made. PNC Bank shall upon receipt of securities purchased by the Fund pay out of the moneys held for the account of the Fund the total amount payable to the person from whom or the broker through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Oral Instructions or Written Instructions. (k) Sales of Securities. PNC Bank shall settle sold securities upon ------------------- receipt of Oral Instructions or Written Instructions from the Fund that specify: (i) the name of the issuer and the title of the security, including CUSIP number if applicable; (ii) the number of shares or principal amount sold, and accrued interest, if any; (iii) the date of trade and settlement; (iv) the sale price per unit; (v) the total amount payable to the Fund upon such sale; (vi) the name of the broker through whom or the person to whom the sale was made; and (vii) the location to which the security must be delivered and delivery deadline, if any; PNC Bank shall deliver the securities upon receipt of the total amount payable to the Fund upon such sale, provided that the total amount payable is the same as was set forth in the Oral Instructions or Written Instructions. Subject to the foregoing, PNC Bank may accept 17 payment in such form as shall be satisfactory to it, and may deliver securities and arrange for payment in accordance with the customs prevailing among dealers in securities. (l) Reports; Proxy Materials. ------------------------ (i) PNC Bank shall furnish to the Fund the following reports: (A) such periodic and special reports as the Fund may reasonably request; (B) a monthly statement summarizing all transactions and entries for the account of the Fund, listing securities belonging to the Fund with the adjusted average cost of each issue and the market value at the end of such month and stating the cash account of the Fund including disbursements; (C) the reports required to be furnished to the Fund pursuant to Rule 17f-4; and (D) such other information as may be agreed upon from time to time between the Fund and PNC Bank. (ii) PNC Bank shall transmit promptly to the Fund any proxy statement, proxy material, notice of a call or conversion or similar communication received by it as custodian of the Property. PNC Bank shall be under no other obligation to inform the Fund as to such actions or events. (m) Collections. All collections of monies or other property in respect, ----------- or which are to become part, of the Property (but not the safekeeping thereof upon receipt by PNC Bank) shall be at the sole risk of the Fund. If payment is not received by PNC Bank within a reasonable time after proper demands have been made, PNC Bank shall notify the Fund in writing, including copies of all demand letters, any written responses, memoranda of all oral responses and shall await instructions from the Fund. PNC Bank shall not be obliged to take legal action for collection unless and until reasonably indemnified to its satisfaction. PNC Bank shall also notify the Fund as soon as reasonably practicable whenever income due on securities is not collected in due course and shall provide the Fund with periodic status reports of such income collected after a reasonable time. 18 15. DURATION AND TERMINATION. This Agreement shall continue until ------------------------ terminated by the Fund or by PNC Bank on sixty (60) days' prior written notice to the other party. In the event this Agreement is terminated (pending appointment of a successor to PNC Bank or vote of the shareholders of the Fund to dissolve or to function without a custodian of its cash, securities or other property), PNC Bank shall not deliver cash, securities or other property to the Fund. It may deliver them to a bank or trust company of PNC Bank's choice, having an aggregate capital, surplus and undivided profits, as shown by its last published report, of not less than twenty million dollars ($20,000,000), as a custodian for the Fund to be held under terms similar to those of this Agreement. PNC Bank shall not be required to make any such delivery or payment until full payment shall have been made to PNC Bank of all of its fees, compensation, costs and expenses. PNC Bank shall have a security interest in and shall have a right of setoff against the Property as security for the payment of such fees, compensation, costs and expenses. 16. NOTICES. All notices and other communications, including Written ------- Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. Notice shall be addressed (a) if to PNC Bank at Airport Business Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113, marked for the attention of the Custodian Services Department (or its successor) (b) if to the Fund, at _______________________, Attn:________________ or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given 19 five days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered. 17. AMENDMENTS. This Agreement, or any term hereof, may be changed or ---------- waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought. 18. DELEGATION; ASSIGNMENT. PNC Bank may assign its rights and delegate ---------------------- its duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PNC Bank gives the Fund thirty (30) days' prior written notice; (ii) the delegate (or assignee) agrees with PNC Bank and the Fund to comply with all relevant provisions of the 1940 Act; and (iii) PNC Bank and such delegate (or assignee) promptly provide such information as the Fund may request, and respond to such questions as the Fund may ask, relative to the delegation (or assignment), including (without limitation) the capabilities of the delegate (or assignee). 19. COUNTERPARTS. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 20. FURTHER ACTIONS. Each party agrees to perform such further acts and --------------- execute such further documents as are necessary to effectuate the purposes hereof. 21. MISCELLANEOUS. ------------- (a) Entire Agreement. This Agreement embodies the entire agreement ---------------- and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more 20 separate documents their agreement, if any, with respect to delegated duties and Oral Instructions. (b) Captions. The captions in this Agreement are included for -------- convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. (c) Governing Law. This Agreement shall be deemed to be a contract ------------- made in Pennsylvania and governed by Pennsylvania law, without regard to principles of conflicts of law. (d) Partial Invalidity. If any provision of this Agreement shall be ------------------ held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. (e) Successors and Assigns. This Agreement shall be binding upon and ---------------------- shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. (f) Facsimile Signatures. The facsimile signature of any party to -------------------- this Agreement shall constitute the valid and binding execution hereof by such party. 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. PNC BANK, NATIONAL ASSOCIATION By:_________________________________________ Title:______________________________________ SALOMON BROTHERS HIGH INCOME FUND II INC By:_______________________________________ Title:____________________________________ 22 AUTHORIZED PERSONS APPENDIX NAME (TYPE) SIGNATURE - --------------------- --------------------------------- - --------------------- --------------------------------- - --------------------- --------------------------------- - --------------------- --------------------------------- - --------------------- --------------------------------- - --------------------- --------------------------------- 23 EX-99.2L 7 OPINION AND CONSENT OF COUNSEL EXHIBIT 99.2(l) Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 May 21, 1998 Salomon Brothers High Income Fund II Inc Seven World Trade Center New York, New York 10048 Ladies and Gentlemen: We have acted as counsel to Salomon Brothers High Income Fund II Inc, a Maryland corporation (the "Fund"), in connection with the preparation of a Registration Statement on Form N-2 filed by the Fund under the Securities Act of 1933 and the Investment Company Act of 1940, both as amended (the "Registration Statement"), relating to the offer and sale of up to 66,666,667 shares of Common Stock of the Fund, par value $.001 per share (the "Shares"). We have examined the Registration Statement and such corporate records, agreements, documents and other instruments and such certificates or comparable documents of public officials and of officers and representatives of the Fund, and have made such other and further investigations, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. Salomon Brothers High Income Fund II Inc -2- May 21, 1998 Based upon the foregoing, and subject to the qualifications and limitations stated herein, we are of the opinion that the Shares to be issued by the Fund have been duly authorized and, upon payment and delivery in accordance with the underwriting agreement among the Fund, Salomon Brothers Asset Management Inc and Smith Barney Inc., as representative of the several underwriters listed in Schedule I thereto, the Shares will be validly issued, fully paid and nonassessable. Insofar as the opinions expressed herein relate to or are dependent upon matters governed by the laws of the State of Maryland, we have relied upon the opinion of Piper & Marbury L.L.P., a copy of which is attached hereto. We are members of the Bar of the State of New York, and we do not express any opinion herein concerning any law other than the law of the State of New York, the federal law of the United States, and, to the extent set forth herein, the laws of the State of Maryland. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the caption "Legal Matters" in the prospectus forming a part thereof. Very truly yours, /s/ SIMPSON THACHER & BARTLETT SIMPSON THACHER & BARTLETT PIPER & MARBURY L.L.P. CHARLES CENTER SOUTH 36 SOUTH CHARLES STREET WASHINGTON BALTIMORE, MARYLAND 21201-3018 NEW YORK 410-539-2530 PHILADELPHIA FAX: 410-539-0489 EASTON May 21, 1998 Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017-3954 Re: Salomon Brothers High Income Fund II Inc 66,666,667 Shares of Common Stock ---------------------------------------- Ladies and Gentlemen: We have acted as special Maryland counsel to Salomon Brothers High Income Fund II Inc, a Maryland corporation (the "Company"), in connection with the Company's Registration Statement on Form N-2, including all amendments or supplements thereto, filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and the Investment Company Act of 1940, as amended (File Nos. 333-48351 and 811-08709) and the issuance of up to 66,666,667 shares of the Company's Common Stock, par value of $0.001 per share (the "Shares"), pursuant to the Registration Statement. In this capacity, we have examined the Company's Charter and By-Laws, the proceedings of the Board of Directors of the Company relating to the issuance of the Shares and such other statutes, certificates, instruments and documents relating to the Company and matters of law as we have deemed necessary to the issuance of this opinion. In such examination, we have assumed the genuineness of all signatures, the legal capacity of all individuals who have executed any of the aforesaid documents, the conformity of final documents in all material respects to the versions thereof submitted to us in draft form, the authenticity of all documents submitted to us as originals, the conformity with originals of all documents submitted to us as copies and the due authorization, validity and binding effect of all such documents (other than the authorization, execution and delivery of the documents by the Company). Piper Marbury L.L.P. Simpson Thacher & Bartlett May 21, 1998 Page 2 Based upon the foregoing, and limited in all respects to applicable Maryland law, we are of the opinion and advise you that: 1. The Company has been duly incorporated and is validly existing as a corporation under the laws of the State of Maryland. 2. The issuance and the sale of the Shares have been duly authorized, and upon payment and delivery in accordance with the underwriting agreement among the Company, Salomon Brothers Asset Management, Inc and Smith Barney, Inc., as representative of the several underwriters listed in Schedule I thereto, the Shares will be validly issued, fully paid and nonassessable. You may rely upon this opinion in rendering your opinion to the Company which is to be filed as an exhibit to the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the heading "Legal Matters" in the Prospectus included in the Registration Statement. Very truly yours, /s/ Piper & Marbury L.L.P. Piper & Marbury L.L.P. EX-99.2N 8 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 99.2(n) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Pre- Effective Amendment No. 2 to the Registration Statement on Form N-2 of our report, dated May 21, 1998, relating to the statement of assets and liabilities of Salomon Brothers High Income Fund II Inc, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP New York, New York May 21, 1998 -----END PRIVACY-ENHANCED MESSAGE-----