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SIERRA PRIME INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Sierra Prime Income Fund (the "Fund") is a non-diversified, closed-end
management investment company whose investment objective is to provide Common
Shareholders with a high level of current income, consistent with preservation
of capital. This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus for the Fund dated February
14, 1996 (the "Prospectus"). This Statement of Additional Information does not
include all information that a prospective investor should consider before
purchasing shares of the Fund, and investors should obtain and read the
Prospectus prior to purchasing shares. A copy of the Prospectus may be obtained
without charge, by calling 800-222-5852. This Statement of Additional
Information incorporates by reference the entire Prospectus.
TABLE OF CONTENTS
Page
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Investment Objective and Policies and Special Risk Factors ........... B-2
Investment Restrictions .............................................. B-9
Trustees and Officers ................................................ B-11
Portfolio Transactions .............................................. B-14
Management of the Fund ............................................... B-15
Net Asset Value ...................................................... B-17
Determination of Performance.......................................... B-18
Taxation ............................................................. B-20
Repurchase (Tender Offer) of Shares .................................. B-22
Financial Statements and Independent Auditor's Report................. FS-1
The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. (the "SEC"). These items may be
obtained from the SEC upon payment of the fee prescribed or inspected at the
SEC's office at no charge.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED FEBRUARY 14, 1996.
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INVESTMENT OBJECTIVE AND POLICIES
AND SPECIAL RISK FACTORS
The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate Senior Loans to Borrowers. Although the Fund's net
asset value will vary, the Fund's policy of acquiring interests in floating or
variable rate Senior Loans is expected to minimize the fluctuations in the
Fund's net asset value as a result of changes in interest rates. While the Fund
seeks relative share price (NAV) stability, its net asset value may be affected
by changes in the credit quality of Borrowers with respect to Senior Loan
interests in which the Fund invests. The Fund seeks to achieve over time a high
effective yield. An investment in the Fund may not be appropriate for all
investors and is not intended to be a complete investment program. No assurance
can be given that the Fund will achieve its investment objective.
CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS
Senior Loans generally are arranged through private negotiations between a
Borrower and several financial institutions ("Lenders") represented in each case
by one or more such Lenders acting as agent ("Agent") of the several Lenders. On
behalf of the several Lenders, the Agent, which is frequently the commercial
bank or other entity that originates the Senior Loan and the person that invites
other parties to join the lending syndicate, will be primarily responsible for
negotiating the loan agreement or agreements ("Loan Agreement") that establish
the relative terms, conditions and rights of the Borrower and the several
Lenders. In larger transactions it is common to have several Agents; however,
generally only one such agent has primary responsibility for documentation and
administration of the Senior Loan. Agents are typically paid a fee or fees by
the Borrower for their services.
The Fund will invest in participations ("Participations") in Senior Loans, will
purchase assignments ("Assignments") of portions of Senior Loans from third
parties and may act as one of the group of Lenders originating a Senior Loan (an
"Original Lender").
It is anticipated that the proceeds of the Senior Loans in which the Fund will
acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. The Fund currently does not intend to acquire interests in Senior
Loans the proceeds of which would be used primarily to finance construction or
real estate development projects. Senior Loans have the most senior position in
a Borrower's capital structure, although some Senior Loans may hold an equal
ranking with other senior securities of the Borrower. The capital structure of
Borrowers may include Senior Loans, senior and junior subordinated debt (which
may include "junk bonds"), preferred stock and common stock issued by the
Borrower, typically in descending order of seniority with respect to claims on
the Borrower's assets. Senior Loans generally are secured by specific
collateral, which may include guarantees. In connection with the acquisition of
collateralized Senior Loans, the Fund may invest up to 5% of its total assets in
Senior Loans which are not secured by any collateral. Such unsecured Senior
Loans would constitute an interim financing intended to be refinanced through,
in whole or in part, a collateralized Senior Loan. In the event that the Fund
invests a portion of its assets in Senior Loans that are not secured by specific
collateral, the Fund will not enjoy the benefits associated with
collateralization with respect to such Senior Loans and such Senior Loans may
pose a greater risk of nonpayment of interest or loss of principal than do
collateralized Senior Loans.
As discussed below, the Fund may also acquire warrants and equity securities
issued by the Borrower or its affiliates as part of a package of investments in
the Borrower or its affiliates. Warrants and equity securities will not be
treated as Senior Loans and thus assets invested in such securities will not
count toward the 80% of the Fund's total assets that normally will be invested
in Senior Loans. The Fund will acquire such interests in unsecured Senior Loans,
warrants and equity securities only as an incident to the intended purchase of
interests in collateralized Senior Loans. Loan Agreements may also include
various restrictive covenants designed to limit the activities of the Borrower
in an effort to protect the right of the Lenders to receive timely payments of
interest on and repayment of principal of the Senior Loans. In order to borrow
money pursuant to collateralized Senior Loans, a Borrower will frequently, for
the term of the Senior Loan, pledge as collateral assets, including but not
limited to, trademarks, accounts receivable, inventory, buildings, real estate,
franchises, and common and preferred stock in its subsidiaries. In addition, in
the case of some Senior Loans, there may be additional collateral pledged in the
form of guarantees by and/or securities of affiliates of the Borrowers. In
certain instances, a Senior Loan may be secured only by stock in the Borrower or
its subsidiaries. Such collateral may consist of assets that may not be readily
liquidated, and there is no assurance that the liquidation of such assets would
satisfy fully a Borrower's obligations under a Senior Loan.
Restrictive covenants may include mandatory prepayment provisions arising from
excess cash flows and typically include restrictions on dividend payments,
specific mandatory minimum financial ratios, limits on total debt and other
financial tests. Breach of such covenants, if not waived by the Lenders, is
generally an event of default under the applicable Loan Agreement and may give
the Lenders the right to accelerate principal and interest payments. The Advisor
will consider the terms of such restrictive covenants in deciding whether to
invest in Senior Loans for the Fund's portfolio. When the Fund holds a
Participation in a Senior Loan it may not have the right to vote to waive
enforcement of any restrictive covenant breached by a Borrower. Lenders voting
in connection with a potential waiver of a restrictive covenant may have
interests different from those of the Fund and such Lenders may not consider the
interests of the Fund in connection with their votes.
Senior Loans in which the Fund will invest generally pay interest at rates which
are periodically redetermined by reference to a base lending rate plus a
premium. As a result Lenders will pay more than the Prime Rate to the Fund on
their Senior Loans. These base lending rates are generally the Prime Rate,
LIBOR, the CD rate or other base lending rates used by commercial lenders. The
Prime Rate quoted by a major U.S. bank is the interest rate at which such bank
is willing to lend U.S. dollars to its most creditworthy borrowers. LIBOR, as
provided for in Loan Agreements, is an average of the interest rates quoted by
several designated banks as the rates at which such banks would offer to pay
interest to major financial institutional depositors in the London interbank
market on U.S. dollar-denominated deposits for a specified period of time. The
CD rate, as generally provided for in Loan Agreements, is the average rate paid
on large certificates of deposit traded in the secondary market.
At least 80% of the Fund's total assets normally will be invested in Senior
Loans. In normal market conditions, at least 65% of the Fund's assets will be
invested in Senior Loans which, at the time of the Fund's initial investment in
such Senior Loans, provide the Fund with a rate of return which approximates the
Prime Rate existing on the date of such initial investment. The Fund is not
subject to any restrictions with respect to the maturity of Senior Loans held in
its portfolio. It is currently anticipated that the Fund's assets invested in
Senior Loans will consist of Senior Loans with stated maturities of between
three and seven years, inclusive, and with rates of interest which are
periodically reset with reset periods typically ranging from 30 days to one
year. Investment in Senior Loans with longer interest rate redetermination
periods may increase fluctuations in the Fund's net asset value as a result of
changes in interest rates. The Senior Loans in the Fund's portfolio will at all
times have a dollar-weighted average time until the next interest rate
redetermination of 90 days or less. As a result, as short-term interest rates
increase, interest payable to the Fund from its investments in Senior Loans
should increase, and as short-term interest rates decrease, interest payable to
the Fund from its investments in Senior Loans should decrease. The amount of
time required to pass before the Fund will realize the effects of changing
short-term market interest rates on its portfolio will vary with the
dollar-weighted average time until the next interest rate redetermination on the
Senior Loans in the Fund's portfolio. The Fund may utilize certain investment
practices to, among other things, shorten the effective interest rate
redetermination period of Senior Loans in its portfolio. In such event, the Fund
will consider such shortened period to be the interest rate redetermination
period of the Senior Loan; provided, however, that the Fund will not invest in
Senior Loans which permit the Borrower to select an interest rate
redetermination period in excess of one year. Because most Senior Loans in the
Fund's portfolio will be subject to mandatory and/or optional prepayment and
there may be significant economic incentives for a Borrower to prepay its loans,
prepayments of Senior Loans in the Fund's portfolio may occur. Accordingly, the
actual remaining maturity of the Fund's portfolio invested in Senior Loans may
vary substantially from the average stated maturity of the Senior Loans held in
the Fund's portfolio. As a result of expected prepayments from time to time of
Senior Loans in the Fund's portfolio, the Fund estimates that the actual average
maturity of the Senior Loans held in its portfolio will be approximately 18-24
months.
When interest rates decline, the value of a portfolio invested in fixed-rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested in fixed-rate obligations can be expected to
decline. Although the Fund's net asset value will vary, the Fund's management
expects the Fund's policy of acquiring interests in floating or variable rate
Senior Loans to minimize fluctuations in net asset value as a result of changes
in interest rates. Accordingly, the Fund's management expects the value of the
Fund's portfolio to fluctuate significantly less than a portfolio of fixed-rate,
longer term obligations as a result of interest rate changes. However, changes
in prevailing interest rates can be expected to cause some fluctuation in the
Fund's net asset value. In addition to changes in interest rates, changes in the
credit quality of Borrowers will also affect the Fund's net asset value.
Further, a serious deterioration in the credit quality of a Borrower could cause
a prolonged or permanent decrease in the Fund's net asset value.
Senior Loans generally are not rated by nationally recognized statistical rating
organizations. Because of the collateralized and/or guaranteed nature of most
Senior Loans, the Fund and the Advisor believe that ratings of other securities
issued by a Borrower do not necessarily reflect adequately the relative quality
of a Borrower's Senior Loans. Therefore, although the Advisor may consider such
ratings in determining whether to invest in a particular Senior Loan, the
Advisor is not required to consider such ratings and such ratings will not be
the determinative factor in the Advisor's analysis. The Fund may invest in
Senior Loans, the Borrowers with respect to which have outstanding debt
securities which are rated below investment grade by a nationally recognized
statistical rating organization or are unrated but of comparable quality to such
securities. Such Borrowers are more likely to experience difficulty in meeting
payment obligations under such debt and other subordinated obligations. These
difficulties could detract from the Borrower's perceived creditworthiness or its
ability to obtain financing to cover short-term cash flow needs and may force
the Borrower into bankruptcy or other forms of credit restrictions. The Fund
will invest only in those Senior Loans with respect to which the Borrower, in
the opinion of the Advisor, demonstrates certain of the following
characteristics: sufficient cash flow to service debt; adequate liquidity;
successful operating history; strong competitive position; experienced
management; and, with respect to collateralized Senior Loans, collateral;
coverage that equals or exceeds the outstanding principal amount of the Senior
Loan. In addition, the Advisor will consider, and may rely in part, on the
analyses performed by the Agent and other Lenders, including such persons'
determinations with respect to collateral securing a Senior Loan.
The Fund may invest up to 100% of its assets in Participations. The selling
Lenders and other persons interpositioned between such Lenders and the Fund with
respect to such Participations will likely conduct their principal business
activities in the banking, finance and financial services industries. Although,
as discussed below, the Fund has taken measures which it believes significantly
reduce its exposure to any risks incident to such policy, the Fund may be more
susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting such industries. Persons
engaged in such industries may be more susceptible than are persons engaged in
some other industry to, among other things, fluctuations in interest rates,
changes in the Federal Open Market Committee's monetary policy, governmental
regulations concerning such industries and concerning capital raising activities
generally and fluctuations in the financial markets generally.
Participations by the Fund in a Lender's portion of a Senior Loan typically
result in the Fund having a contractual relationship only with such Lender, not
with the Borrower. The Fund has 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 such Lender of such 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, nor any rights with respect to any funds acquired by other Lenders
through set-off against the Borrower and the Fund may not directly benefit from
the collateral supporting the Senior Loan in which it has purchased the
Participation. As a result, the Fund may assume the credit risk of both the
Borrower and the Lender 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 such Lender, and may not benefit from any set-off between
such Lender and the Borrower. The Fund has taken the following measures in an
effort to minimize such risks. The Fund will only acquire Participations if the
Lender selling the Participation, and any other persons interpositioned between
the Fund and the Lender, (i) at the time of investment has outstanding debt or
deposit obligations rated investment grade (BBB or A-3 or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or P-3 or higher by Moody's Investors
Service ("Moody's")) or determined by the Advisor to be of comparable quality
and (ii) has entered into an agreement which provides for the holding of assets
in safekeeping for, or the prompt disbursement of assets to, the Fund. Long-term
debt rated BBB by S&P is regarded by S&P as having adequate capacity to pay
interest and repay principal and debt rated Baa by Moody's is regarded by
Moody's as a medium grade obligation, i.e., it is neither highly protected nor
poorly secured. Commercial paper rated A-1 by S&P indicates that the degree of
safety regarding timely payment is considered by S&P to be either overwhelming
or very strong and issues of commercial paper rated Prime-1 by Moody's are
considered by Moody's to have a superior ability for repayment of senior
short-term debt obligations. The Fund ordinarily will purchase a Participation
only if, at the time of such purchase, the Fund believes that the party from
whom it is purchasing such Participation is retaining an interest in the
underlying Senior Loan. In the event that the Fund does not so believe, it will
only purchase such a Participation if, in addition to the requirements set forth
above, the party from whom the Fund is purchasing such Participation (i) is a
bank, a member of a national securities exchange or other entity designated in
the Investment Company Act of 1940, as amended, as qualified to serve as a
custodian for a registered investment company and (ii) has been approved as a
custodian by the Board of Trustees of the Fund (a "Designated Custodian").
The Fund may also purchase Assignments from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the Loan
Agreement of the assigning Lender and becomes a Lender under the Loan Agreement
with the same rights and obligations as the assigning Lender. Assignments are,
however, arranged through private negotiations between potential assignees and
potential assignors, and the rights and obligations acquired by the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.
When the Fund is an Original Lender originating a Senior Loan it may share in a
fee paid to the Original Lenders. The Fund will never act as the Agent or
principal negotiator or administrator of a Senior Loan. When the Fund is a
Lender, it will have a direct contractual relationship with the Borrower, may
enforce compliance by the Borrower with the terms of the Loan Agreement and may
have rights with respect to any funds acquired by other Lenders through set-off.
Lenders also have full voting and consent rights under the applicable Loan
Agreement. Action subject to Lender vote or consent generally requires the vote
or consent of the holders of some specified percentage of the outstanding
principal amount of the Senior Loan. Certain decisions, such as reducing the
amount or increasing the time for payment of interest on or repayment of
principal of a Senior Loan, or releasing collateral therefor, frequently require
the unanimous vote or consent of all Lenders affected.
The Fund will purchase an Assignment or act as a Lender with respect to a
syndicated Senior Loan only where the Agent with respect to such Senior Loan at
the time of investment has outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by the Advisor to be of comparable quality. In addition,
the Fund will purchase a Participation only where the Lender selling such
Participation, and any other person interpositioned between such Lender and the
Fund at the time of investment have outstanding debt obligations rated
investment grade or determined by the Advisor to be of comparable quality.
Further, the Fund will not purchase interests in Senior Loans unless such Agent,
Lender or interpositioned person has entered into an agreement which provides
for the prompt disbursement of assets to the Fund.
Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should such an Agent, Lender or assignor with respect to
an Assignment interpositioned between the Fund and the Borrower become insolvent
or enter FDIC receivership or bankruptcy, any interest in the Senior Loan of
such person and any loan payment held by such person for the benefit of the Fund
should not be included in such person's estate. If, however, any such amount
were included in such person's estate, the Fund would incur certain costs and
delays in realizing payment or could suffer a loss of principal and/or interest.
In such event, the Fund could experience a decrease in net asset value.
The Fund may be required to pay and may receive various fees and commissions in
connection with purchasing, selling and holding interests in Senior Loans. The
fees normally paid by Borrowers may include three types: facility fees,
commitment fees and prepayment penalties. Facility fees are paid to Lenders upon
origination of a Senior Loan. Commitment fees are paid to Lenders on an ongoing
basis based upon the undrawn portion committed by the Lenders of the underlying
Senior Loan. Lenders may receive prepayment penalties when a Borrower prepays
all or part of a Senior Loan. The Fund will receive these fees directly from the
Borrower if the Fund is an Original Lender, or, in the case of commitment fees
and prepayment penalties, if the Fund acquires an interest in a Senior Loan by
way of Assignment. Whether or not the Fund receives a facility fee from the
Lender in the case of an Assignment, or any fees in the case of a Participation,
depends upon negotiations between the Fund and the Lender selling such
interests. When the Fund is an assignee, it may be required to pay a fee, or
forgo a portion of interest and any fees payable to it, to the Lender selling
the Assignment. Occasionally, the assignor will pay a fee to the assignee based
on the portion of the principal amount of the Senior Loan which is being
assigned. A Lender selling a Participation to the Fund may deduct a portion of
the interest and any fees payable to the Fund as an administrative fee prior to
payment thereof to the Fund. The Fund may be required to pay over or pass along
to a purchaser of an interest in a Senior Loan from the Fund a portion of any
fees that the Fund would otherwise be entitled to.
Pursuant to the relevant Loan Agreement, a Borrower may be required in certain
circumstances, and may have the option at any time, to prepay the principal
amount of a Senior Loan, often without incurring a prepayment penalty. Because
the interest rates on Senior Loans are periodically redetermined at relatively
short intervals, the Fund and the Advisor believe that the prepayment of, and
subsequent reinvestment by the Fund in, Senior Loans will not have a materially
adverse impact on the yield on the Fund's portfolio and may have a beneficial
impact on income due to receipt of prepayment penalties, if any, and any
facility fees earned in connection with reinvestment.
A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating sufficient investments in high quality short-term, liquid
investments. The Fund will not purchase interests in Senior Loans that would
require the Fund to make any such additional loans if such additional loan
commitments would exceed 20% of the Fund's total assets or would cause the Fund
to fail to meet the diversification requirements set forth under the heading
"Investment Restrictions."
During normal market conditions, the Fund may invest up to 20% of its total
assets in (i) high quality, short-term debt securities with remaining maturities
of one year or less (including assets maintained by the Fund as a reserve
against any additional loan commitments) and (ii) warrants, equity securities,
convertible debt securities and, in certain limited circumstances discussed
above, junior debt securities acquired in connection with the Fund's investments
in Senior Loans. If the Advisor determines that market conditions temporarily
warrant a defensive investment policy, the Fund may invest, subject to its
ability to liquidate its relatively illiquid portfolio of Senior Loans, up to
100% of its assets in cash and such high quality, short-term debt securities.
The Fund will acquire such warrants and equity securities only as an incident to
the purchase or intended purchase of interests in collateralized Senior Loans.
Warrants and equity securities will not qualify as assets required to be
maintained as a reserve against additional loan commitments. Although the Fund
generally will acquire interests in warrants and equity securities only when the
Advisor believes that the relative value being given by the Fund in exchange for
such interests is substantially outweighed by the potential value of such
instruments, investment in warrants and equity securities entail certain risks
in addition to those associated with investments in Senior Loans. Warrants and
equity securities have a subordinate claim on a Borrower's assets as compared
with debt securities and junior debt securities have a subordinate claim on such
assets as compared with Senior Loans. As such, the values of warrants and equity
securities generally are more dependent on the financial condition of the
Borrower and less dependent on fluctuations in interest rates than are the
values of many debt securities. The values of warrants, equity securities and
junior debt securities may be more volatile than those of Senior Loans and thus
may have an adverse impact on the ability of the Fund to minimize fluctuations
in its net asset value.
SPECIAL RISK CONSIDERATIONS
On behalf of the several Lenders, the Agent generally will be required to
administer and manage the Senior Loan and, with respect to collateralized Senior
Loans, to service or monitor the collateral. In this connection, the valuation
of assets pledged as collateral will reflect market value and the Agent may rely
on independent appraisals as to the value of specific collateral. The Agent,
however, may not obtain an independent appraisal as to the value of assets
pledged as collateral in all cases. The Fund normally will rely primarily on the
Agent (where the Fund is an Original Lender or owns an Assignment) or the
selling Lender (where the Fund owns a Participation) to collect principal of and
interest on a Senior Loan. Furthermore, the Fund usually will rely on the Agent
(where the Fund is an Original Lender or owns an Assignment) or the selling
Lender (where the Fund owns a Participation) to monitor compliance by the
Borrower with the restrictive covenants in the Loan Agreement and notify the
Fund of any adverse change in the Borrower's financial condition or any
declaration of insolvency. Collateralized Senior Loans will frequently be
secured by all assets of the Borrower that qualify as collateral, which may
include common stock of the Borrower or its subsidiaries. Additionally, the
terms of the Loan Agreement may require the Borrower to pledge additional
collateral to secure the Senior Loan, and enable the Agent, upon proper
authorization of the Lenders, to take possession of and liquidate the collateral
and to distribute the liquidation proceeds pro rata among the Lenders. If the
terms of a Senior Loan do not require the Borrower to pledge additional
collateral in the event of a decline in the value of the original collateral,
the Fund will be exposed to the risk that the value of the collateral will not
at all times equal or exceed the amount of the Borrower's obligations under the
Senior Loan. Lenders that have sold Participation interests in such Senior Loan
will distribute liquidation proceeds received by the Lenders pro rata among the
holders of such Participations. The Advisor will also monitor these aspects of
the Fund's investments and, where the Fund is an Original Lender or owns an
Assignment, will be directly involved with the Agent and the other Lenders
regarding the exercise of credit remedies. Senior Loans, like other corporate
debt obligations, are subject to the risk of non-payment of scheduled interest
or principal. Such non-payment would result in a reduction of income to the
Fund, a reduction in the value of the Senior Loan experiencing non-payment and a
potential decrease in the net asset value of the Fund. Although, with respect to
collateralized Senior Loans, the Fund generally will invest only in Senior Loans
that the Advisor believes are secured by specific collateral which may include
guarantees, the value of which exceeds the principal amount of the Senior Loan
at the time of initial investment, there can be no assurance that the
liquidation of any such collateral would satisfy the Borrower's obligation in
the event of non-payment of scheduled interest or principal payments, or that
such collateral could be readily liquidated. In the event of bankruptcy of a
Borrower, the Fund could experience delays or limitations with respect to its
ability to realize the benefits of the collateral securing a Senior Loan. To the
extent that a Senior Loan is collateralized by stock in the Borrower or its
subsidiaries, such stock may lose all or substantially all of its value in the
event of bankruptcy of the Borrower. The Agent generally is responsible for
determining that the Lenders have obtained a perfected security interest in the
collateral securing the Senior Loan. In the event that the Fund does not believe
that a perfected security interest has been obtained with respect to a
collateralized Senior Loan, the Fund will only obtain an interest in such Senior
Loan if the Agent is a Designated Custodian. Some Senior Loans in which the Fund
may invest are subject to the risk that a court, pursuant to fraudulent
conveyance or other similar laws, could subordinate such Senior Loans to
presently existing or future indebtedness of the Borrower or take other action
detrimental to the holders of Senior Loans, such as the Fund, including, under
certain circumstances, invalidating such Senior Loans. Lenders commonly have
certain obligations pursuant to the Loan Agreement, which may include the
obligation to make additional loans or release collateral in certain
circumstances.
Senior Loans in which the Fund will invest generally will not be rated by a
nationally recognized statistical rating organization, will not be registered
with the SEC or any state securities commission and will not be listed on any
national securities exchange. Although the Fund will generally have access to
financial and other information made available to the Lenders in connection with
Senior Loans, the amount of public information available with respect to Senior
Loans will generally be less extensive than that available for rated, registered
and/or exchange listed securities. As a result, the performance of the Fund and
its ability to meet its investment objective is more dependent on the analytical
ability of the Advisor and Van Kampen American Capital Management Inc. (the
"Sub-Advisor" or "Van Kampen") than would be the case for an investment company
that invests primarily in rated, registered and/or exchange listed securities.
Senior Loans are, at present, not readily marketable and may be subject to
restrictions on resale. Interests in Senior Loans generally are not listed on
any national securities exchange or automated quotation system and no regular
market has developed for such interests. Any secondary market purchases and
sales of Senior Loans generally are conducted in private transactions between
buyers and sellers. Senior Loans are thus relatively illiquid, which illiquidity
may impair the Fund's ability to realize the full value of its assets in the
event of a voluntary or involuntary liquidation of such assets. Liquidity
relates to the ability of the Fund to sell an investment in a timely manner. The
market for relatively illiquid securities tends to be more volatile than the
market for more liquid securities. The Fund has no limitation on the amount of
its assets which may be invested in securities which are not readily marketable
or are subject to restrictions on resale. The substantial portion of the Fund's
assets invested in relatively illiquid Senior Loan interests may restrict the
ability of the Fund to dispose of its investments in Senior Loans in a timely
fashion and at a fair price, and could result in capital losses to the Fund and
holders of Common Shares. However, many of the Senior Loans in which the Fund
expects to purchase interests are of a relatively large principal amount and are
held by a relatively large number of owners which should, in the Advisor's
opinion, enhance the relative liquidity of such interests. The risks associated
with illiquidity are particularly acute in situations where the Fund's
operations require cash, such as when the Fund tenders for its Common Shares,
and may result in the Fund borrowing to meet short-term cash requirements.
To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans in connection
with highly leveraged transactions, the availability of Senior Loan interests
for investment by the Fund may be adversely affected. In addition, such
requirements or restrictions may reduce or eliminate sources of financing for
certain Borrowers. Further, to the extent that legislation or federal or state
regulators that regulate certain financial institutions require such
institutions to dispose of Senior Loan interests relating to highly leveraged
transactions or subject such Senior Loan interests to increased regulatory
scrutiny, such financial institutions may determine to sell such Senior Loan
interests in a manner that results in a price which, in the opinion of the
Advisor, is not indicative of fair value. Were the Fund to attempt to sell a
Senior Loan interest at a time when a financial institution was engaging in such
a sale with respect to such Senior Loan interest, the price at which the Fund
could consummate such a sale might be adversely affected.
The Fund may use various investment practices that involve special
considerations including engaging in interest rate and other hedging
transactions, lending its portfolio securities, entering into when-issued and
delayed delivery transactions and entering into repurchase and reverse
repurchase agreements. For further discussion of these practices and associated
special considerations, see "Investment Practices and Special Risks" in the
Prospectus.
INVESTMENT RESTRICTIONS
The Fund's investment objective and the following investment restrictions are
fundamental and cannot be changed without the approval of the holders of a
majority (defined as the lesser of (i) 67 percent or more of the voting
securities present at a meeting of shareholders, if the holders of more than 50
percent of the outstanding voting securities are present or represented by proxy
at such meeting, or (ii) more than 50 percent of the outstanding voting
securities) of the Fund's outstanding Common Shares. All other investment
policies or practices are considered by the Fund not to be fundamental and
accordingly may be changed without shareholder approval. If a percentage
restriction on investment or use of assets set forth below is adhered to at the
time a transaction is effected, later changes in percentage resulting from
changing market values will not be considered a deviation from policy. In
accordance with the foregoing, the Fund may not:
1. Purchase any securities (other than obligations issued or guaranteed
by the United States Government or by its agencies or
instrumentalities), if as a result more than 5% of the Fund's total
assets would then be invested in securities of a single issuer or if
as a result the Fund would hold more than 10% of the outstanding
voting securities of any single issuer; provided that, with respect to
50% of the Fund's assets, the Fund may invest up to 25% of its assets
in the securities of any one issuer. For purposes of this restriction,
the term "issuer" includes both the Borrower under a Loan Agreement
and the Lender selling a Participation to the Fund together with any
other persons interpositioned between such Lender and the Fund with
respect to a Participation.
2. Purchase any security if, as a result of such purchase, more than 25%
of the Fund's total assets (taken at current value) would be invested
in the securities of Borrowers and other issuers having their
principal business activities in the same industry (the electric, gas,
water and telephone utility industries, commercial banks, thrift
institutions and finance companies being treated as separate
industries for purposes of this restriction); provided, that this
limitation shall not apply with respect to obligations issued or
guaranteed by the U.S. Government or by its agencies or
instrumentalities.
3. Issue senior securities (including borrowing money or entering into
reverse repurchase agreements) in excess of 33 1/3% of its total
assets (including the amount of senior securities issued but excluding
any liabilities and indebtedness not constituting senior securities)
except that the Fund may borrow up to an additional 5% of its total
assets for temporary purposes, or pledge its assets other than to
secure such issuance or in connection with hedging transactions,
when-issued and delayed delivery transactions and similar investment
strategies.
4. Make loans of money or property to any person, except for obtaining
interests in Senior Loans in accordance with its investment objective,
through loans of portfolio securities or the acquisition of securities
subject to repurchase agreements.
5. Buy any security "on margin." Neither the deposit of initial or
variation margin in connection with hedging transactions nor
short-term credits as may be necessary for the clearance of such
transactions is considered the purchase of a security on margin.
6. Sell any security "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or
options, except to the extent that the hedging transactions in which
the Fund may engage would be deemed to be any of the foregoing
transactions.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of or
granting of interests in Senior Loans or other securities acquired by
the Fund.
8. Make investments for the purpose of exercising control or
participation in management, except to the extent that exercise by the
Fund of its rights under Loan Agreements would be deemed to constitute
such control or participation.
9. Invest in securities of other investment companies, except as part of
a merger, consolidation or other acquisition or pursuant to an order
granted by the Commission and in accordance with applicable law, to
the extent that deferred compensation of the Fund's trustees under the
Fund's deferred compensation plan for its trustees is valued in
deferred fee accounts by reference to a hypothetical investment in
such other investment companies. The Fund will rely on representations
of Borrowers in Loan Agreements in determining whether such Borrowers
are investment companies.
10. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts except pursuant to the exercise by the Fund of its rights
under Loan Agreements. In addition, the Fund may purchase securities
of issuers which deal in, represent interests in or are secured by
interests in such leases, rights or contracts.
11. Purchase or sell real estate, commodities or commodities contracts
except pursuant to the exercise by the Fund of its rights under Loan
Agreements, except to the extent the interests in Senior Loans the
Fund may invest in are considered to be interests in real estate,
commodities or commodities contracts and except to the extent that
hedging instruments the Fund may invest in are considered to be
commodities or commodities contracts.
For purposes of investment restriction number 2, the Fund will consider all
relevant factors in determining whether to treat the Lender selling a
Participation and any persons interpositioned between such Lender and the Fund
as an issuer, including: the terms of the Loan Agreement and other relevant
agreements (including inter-creditor agreements and any agreements between such
person and the Fund's custodian); the credit quality of such Lender or
interpositioned person; general economic conditions applicable to such Lender or
interpositioned person; and other factors relating to the degree of credit risk,
if any, of such Lender or interpositioned person incurred by the Fund.
The Fund generally will not engage in the trading of securities for the purpose
of realizing short-term profits, but it will adjust its portfolio as it deems
advisable in view of prevailing or anticipated market conditions to accomplish
the Fund's investment objective. For example, the Fund may sell portfolio
securities in anticipation of a movement in interest rates. Frequency of
portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund anticipates that the
annual portfolio turnover rate of the Fund will not be in excess of 100%. A high
rate of portfolio turnover involves correspondingly greater expenses than a
lower rate, which expenses must be borne by the Fund and its shareholders. High
portfolio turnover also may result in the realization of substantial net
short-term capital gains. Due to the requirement for qualification as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, that less than 30% of the Fund's annual gross income be derived from
the disposition of securities held for less than three months, the Fund may not
be able to sell portfolio holdings held for less than three months that the Fund
may wish to sell in the ordinary course of management, which may affect
adversely the Fund's yield.
TRUSTEES AND OFFICERS
The names of the Trustees and executive officers of the Fund, together with
information as to their principal business occupations, are set forth below. The
executive officers of the Fund are employees of organizations that provide
services to the Fund. Each Trustee who is an "interested person" of the Company,
as defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act"), is indicated by an asterisk.
TRUSTEES:
*F. BRIAN CERINI
President
Sierra Asset Management Corporation
9301 Corbin Avenue
Northridge, CA 91324
Mr. Cerini serves as President and CEO of Sierra Asset Management
Corp. (formerly Great Western Investment Management Corporation).
Formed Great Western Financial Securities ("GW Securities") in 1985
and served as its President and Chairman until January 1996. Prior to
joining GW Securities, he served as First Vice President, Financial
Services for Bateman Eichler, Hill Richards, Inc., a regional
brokerage firm where he directed the firm's off exchange product
responsibilities and marketing. Previously, he worked for Pacific
Southwest Airlines for seven years as Assistant to the President. He
holds a BA degree in Economics from the University of Southern
California and an MBA from the USC Graduate School of Business.
ARTHUR H. BERNSTEIN, ESQ.
President
Bancorp Capital Group, Inc.
11661 San Vicente Blvd., #405
Los Angeles, CA 90049
President of Bancorp Capital Group, Inc. and President of Bancorp
Venture Capital, Inc. since 1988. He has been a Trustee of Sierra
Trust Funds since 1989. Previously served on the Board of Directors of
Great Western Leasing Corporation, a subsidiary of Great Western
Financial Corporation, until the subsidiary was sold in 1987. Director
of Ryder System, Inc.; Chairman of the Board of Trustees of the
California Family Studies Center and Phillips Graduate Institute since
1984. He was educated at Cornell University and a graduate of the
Cornell Law School.
DAVID E. ANDERSON
Retired, Former President & CEO
GTE California, Inc.
17960 Seabreeze Drive
Pacific Palisades, CA 90272
Retired in 1988 from GTE California, Inc. after 40 years of service.
Held the position of President and CEO from 1979 to 1988. Director of
Barclay's Bank of California until 1988. Currently involved in the
following charitable organizations as a director on the following
boards: Board Chairman, Children's Bureau Foundation; Board member,
Upward Bound House of Santa Monica; Past Campaign Chairman of United
Way; Past Chairman, Los Angeles Area Chamber of Commerce. Holds BSEE
degree from Iowa State.
EDMOND R. DAVIS, ESQ.
Partner
Brobeck, Phleger & Harrison
550 South Hope Street, 21st Floor
Los Angeles, CA 90071-2604
Joined the firm as a Partner in 1987 and is responsible for estate
planning, and trusts and estate matters in the Los Angeles office.
Prior to joining the firm, had a similar position for 20 years with the
law firm of Overton, Lyman & Prince in Los Angeles. His expertise has
been recognized in Who's Who in California, The Best Lawyers of
America, and Who's Who in American Law. Member of the Board of
Directors of the following non-profit, charitable organizations:
Fifield Manors, Children's Bureau of Los Angeles, Children's Bureau
Foundation, and Braille Institute of America, Inc. Educated at
Pepperdine University and is an Order of the Coif graduate of Hastings
College of the Law.
JOHN W. ENGLISH
Retired, former Vice President & Chief Investment Officer
Ford Foundation
50 H New England Ave.
P.O. Box 640
Summit, NJ 07902-0640
Retired Vice President and Chief Investment Officer, the Ford
Foundation (a non-profit charitable organization). Chairman of the
Board and Director, The China Fund, Inc. (a closed-end mutual fund).
Director, Paribas Trust for Institutions (an open-end mutual fund).
Trustee, Retail Property Trust (a company providing management
services for a shopping center).
OFFICERS:
F. BRIAN CERINI, CHAIRMAN AND PRESIDENT
Mr. Cerini acts as a Trustee of the Fund as well as President.
Information regarding Mr. Cerini's background is listed above under
"Trustees and Officers."
KEITH PIPES, EXECUTIVE VICE PRESIDENT, TREASURER AND SECRETARY
Mr. Pipes is a Senior Vice President, Chief Financial Officer and
Secretary of Sierra Asset Management Corporation, and is responsible
for its general accounting, financial planning, compliance
administration and systems development. He joined Great Western Bank
in 1983 as Manager of Strategic Planning for the Bank and later served
as product manager for the Bank's savings products before joining GW
Securities in 1986. Prior to joining the firm, Mr. Pipes served as
Senior Planning Analyst in the Mergers and Acquisitions Department of
Mattel Corporation. He holds an undergraduate degree in Economics as
well as an MBA in Finance from UCLA.
MICHAEL D. GOTH, SENIOR VICE PRESIDENT
Since January 1991, Mr. Goth has served as Chief Operating Officer and
Portfolio Manager of Sierra Investment Advisors Corporation ("Sierra
Advisors"). Prior to joining Great Western, Mr. Goth worked for 2-1/2
years as a senior manager of Transfer Agent operations at The
Shareholder Services Group, Inc. ("TSSG") and The Boston Company. In
addition, Mr. Goth has 10 years experience as executive vice president
of the GIT mutual fund group, responsible for most aspects of that
fund group, including investments. Other experience includes 4 years
as a corporate banking officer at Citibank and 1-1/2 years in
investment banking with Drexel Firestone. He holds B.S. and M.S.
degrees from Rensselaer Polytechnic Institute and an MBA in Finance
from Harvard Business School.
STEPHEN C. SCOTT, SENIOR VICE PRESIDENT
Joined GW Securities in August 1988 to form GW Advisors, now known as
Sierra Advisors, and currently serves as the President and Chief
Investment Officer of Sierra Advisors. Prior to joining GW Securities,
served as President and Chairman of SDS Investment Advisors, a firm he
founded in which he developed asset allocation technology. Previously,
President and Chairman of Smathers and Co., an investment advisory
firm. For nine years, served as the Senior Pension Investment
Consultant for the Group Pension Investment Division of Equitable Life
Insurance, responsible for their major corporate clients. Has served
as a member on Board of Directors of several corporations and private
organizations. For 17 years, has served as a Trustee on the Long Beach
State University Foundation and currently chairs the Investment
Committee. He holds a B.A. degree in Economics and Finance from Long
Beach State University, and continued with an MBA in Finance.
RICHARD W. GRANT, ASSISTANT SECRETARY
Has been a Partner in the firm of Morgan, Lewis & Bockius LLP since
1989. Prior to that he was a Partner in the firm of Ballard, Spahr,
Andrews & Ingersoll beginning in 1983. He received his A.B. in 1968
from Brown University and his J.D. in 1971 from the Boston University
School of Law.
CRAIG M. MILLER, ASSISTANT TREASURER
Joined Great Western Investment Management Corporation in July 1993.
Currently acts as Vice President and Controller of Sierra Asset
Management Corporation. Prior thereto, acted as Audit Manager for
Coopers & Lybrand. He holds a Master's degree in Taxation from Bentley
College, where he also received his B.S. in Accountancy.
The compensation of the officers and trustees who are interested persons (as
defined in the 1940 Act) of the Advisor is paid by the Advisor or by its parent,
Great Western Financial Corporation. The Fund pays the compensation of all other
officers and trustees of the Fund. During the next year, the Fund expects to pay
the trustees who are not interested persons an annual fee of $5,000, a fee of
$1,000 per meeting of the Board of Trustees and a fee of $750 per committee
meeting of the Fund, plus expenses.
PORTFOLIO TRANSACTIONS
With respect to interests in Senior Loans, the Fund generally will engage in
privately negotiated transactions for purchase or sale in which the Sub-Advisor
will negotiate on behalf of the Fund. The Fund may be required to pay fees, or
forgo a portion of interest and any fees payable to the Fund, to the Lender
selling Participations or Assignments to the Fund. The Sub-Advisor will
determine the Lenders from whom the Fund will purchase Assignments and
Participations by considering their professional ability, level of service,
relationship with the Borrower, financial condition, credit standards and
quality of management. Although the Fund intends generally to hold interests in
Senior Loans until maturity or prepayment of the Senior Loan, the illiquidity of
Senior Loans may restrict the ability of the Sub-Advisor to locate in a timely
manner persons willing to purchase the Fund's interests in Senior Loans at a
fair price should the Fund desire to sell such interests. See "Investment
Objective and Policies."
With respect to investments other than in Senior Loans, the Sub-Advisor will
place orders for portfolio transactions for the Fund with broker-dealer firms
giving consideration to the quality, quantity and nature of each firm's
professional services. These services include execution, clearance procedures,
wire service quotations and statistical and other research information provided
to the Fund or Sub-Advisor, including quotations necessary to determine the
value of the Fund's net assets. Any research benefits so obtained are available
for all clients of the Sub-Advisor. Because statistical and other research
information only supplements the research efforts of the Sub-Advisor and still
must be analyzed and reviewed by its staff, the receipt of research information
is not expected to reduce materially its expenses. In selecting among the firms
believed to meet the criteria for handling a particular transaction, the
Sub-Advisor may take into consideration the fact that certain firms have sold
the Common Shares of the Fund and that certain firms provide market, statistical
or other research information to the Fund, Advisor and Sub-Advisor and may
select firms that are affiliated with the Fund, the Advisor, the Sub-Advisor,
Sierra Investment Services Corporation ("SISC") or Great Western Financial
Corporation.
If it is believed to be in the best interest of the Fund, the Sub-Advisor may
place portfolio transactions with brokers who provide the types of services
described above, even if the Fund will have to pay a higher commission (or, if
the broker's profit is part of the cost of the security, will have to pay a
higher price for the security) than would be the case if the Sub-Advisor did not
consider the broker's furnishing of such services. This will be done, however,
only if, in the opinion of the Sub-Advisor, the amount of additional commission
or increased cost is reasonable in relation to the value of the services.
If purchases or sales of financial instruments for the Fund and for one or more
other investment companies or clients advised by the Sub-Advisor are considered
at or about the same time, transactions in such financial instruments will be
allocated among the several investment companies and clients, in a manner deemed
equitable by the Sub-Advisor, to each such investment company or client, taking
into account their respective sizes and the aggregate amount of financial
instruments to be purchased or sold. Although in some cases this procedure could
have a detrimental effect on the price paid by the Fund for the financial
instrument or the volume of the financial instrument purchased by the Fund, the
ability to participate in volume transactions and to negotiate lower
commissions, fees and expenses possibly could benefit the Fund.
Although the Sub-Advisor will be responsible for the management of the Fund's
portfolio, the policies and practices in this regard must be consistent with the
foregoing and will be subject at all times to review by the Advisor and Trustees
of the Fund. The Fund anticipates that the annual portfolio turnover rate will
not exceed 100%.
The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act, which requires that the commissions
paid to affiliates of the Fund, or to affiliates of such persons, be reasonable
and fair compared to the commissions, fees or other remuneration received or to
be received by other brokers in connection with comparable transactions
involving similar financial instruments during a comparable period of time. The
rule and procedures also contain review requirements and require the Advisor and
Sub-Advisor to furnish reports to the Trustees and to maintain records in
connection with such reviews. After review of all factors deemed relevant, the
Trustees will consider from time to time whether the advisory fee will be
reduced by all or a portion of the brokerage commissions given to brokers that
are affiliated with the Fund.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The Board of Trustees is responsible for the management of the business and
affairs of the Trust as provided in the laws of the Commonwealth of
Massachusetts and the Trust's Declaration of Trust and By-Laws. The Trustees are
experienced business persons who meet several times during the year to oversee
the Trust's activities, review contractual arrangements with companies that
provide services to the Trust, and review performance. The majority of the
Trustees are not otherwise affiliated with Sierra Advisors or the Sub-Advisor.
INVESTMENT MANAGEMENT
INVESTMENT ADVISOR. Sierra Advisors, 9301 Corbin Avenue, Northridge, California
91324, is the Investment Advisor to the Trust. Sierra Advisors is an indirect
wholly-owned subsidiary of Great Western Financial Corporation ("Great
Western"), a publicly owned financial services company listed on the New York,
London and Pacific stock exchanges, and has general oversight responsibility for
the investment advisory services provided to the Funds. Responsibilities of
Sierra Advisors include formulating the Fund's investment policies, analyzing
economic trends affecting the Fund, and directing and evaluating the investment
services provided by the Sub-Advisor, including their adherence to the Fund's
investment objectives and policies and the Fund's investment performance. In
particular, the Advisor with the oversight of the Board of Trustees may accept
or reject portfolio selections and pricing determinations of Van Kampen. In
connection with these activities, Sierra Advisors may initiate action to change
the Sub-Advisor if it deems such action to be in the best interest of the
shareholders. Sierra Advisors is registered as an investment advisor under the
Investment Advisers Act of 1940. Sierra Advisors performs similar services for
Sierra Trust Funds which had approximately $2.8 billion in assets as of December
31, 1995.
INVESTMENT ADVISORY AGREEMENT. The business and affairs of the Fund will be
managed under the direction of the Fund's Board of Trustees. Subject to their
authority, the Advisor and the Fund's officers will supervise and implement the
Fund's investment activities and will be responsible for overall management of
the Fund's business affairs. The investment advisory agreement (the "Advisory
Agreement") between the Advisor and the Fund provides that the Advisor will
supply investment research and portfolio management, including the selection of
securities for the Fund to purchase, hold, or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed. The Advisor also
furnishes offices, necessary facilities and equipment and permits its officers
and employees to serve without compensation as Trustees and officers of the Fund
if duly elected to such positions.
The Advisory Agreement provides that the Advisor shall not be liable for any
error of judgment or of law, or for any loss suffered by the Fund in connection
with the matters to which the Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Advisor in the performance of its obligations and duties or by reason of its
reckless disregard of its obligations and duties under the Advisory Agreement.
For the services provided by the Advisor under the Advisory Agreement, the Fund
will pay the Advisor an annualized fee (accrued daily and paid monthly) equal to
0.95% of the average daily net assets of the Fund (which, for purposes of
determining such fee, shall mean the average daily value of the total assets of
the Fund minus the sum of the accrued liabilities of the Fund other than the
aggregate amount of any borrowings undertaken by the Fund). The advisory fee is
higher than the fees paid by most management investment companies, although it
is comparable to the fees paid by several publicly offered, closed-end
management investment companies with investment objectives and policies similar
to those of the Fund.
SUB-ADVISOR. In accordance with the Fund's investment objective and policies and
under the supervision of Sierra Advisors and the Trust's Board of Trustees, the
Fund's Sub-Advisor is responsible for the day-to-day investment management of
the Fund, makes investment decisions for the Fund and places orders on behalf of
the Fund to effect the investment decisions made. Jeffrey W. Maillet, a Senior
Vice President of Van Kampen, will be the portfolio manager for the Fund. Mr.
Maillet has been responsible for the day-to-day management of the Van Kampen
American Capital Prime Rate Income Trust since such Fund's commencement of
investment operations, and has been employed by Van Kampen American Capital
Investment Advisory Corp., a sister affiliate of Van Kampen since 1989.
FUND EXPENSES
In addition to investment advisory and certain administrative expenses incurred
by Sierra Fund Administration Corporation ("Sierra Administration"), the Fund
pays all expenses not assumed by Sierra Advisors. Such expenses include or could
include investment-related expenses, such as brokers' commissions, transfer
taxes and fees related to the purchase, sale, or loan of securities; fees and
expenses for Trustees not affiliated with Sierra Advisors or the Sub-Advisors;
fees and expenses of its independent auditors and legal counsel; costs of
Trustee and shareholder meetings; SEC fees; expenses of preparing and filing
registration statements; the cost of the printing and mailing to existing
Contract owners of proxy statements, prospectuses and statements of additional
information; proxy solicitors' fees; expenses of preparation, printing and
mailing to Contract owners of semi-annual shareholder reports; bank transaction
charges and certain custodians' fees and expenses; federal, state or local
income or other taxes; costs of maintaining the Trust's corporate existence;
membership fees for the Investment Company Institute and similar organizations;
fidelity bond and Trustees' liability insurance premiums; and any extraordinary
expenses such as indemnification payments or damages awarded in litigation or
settlements made. All these expenses will be passed on to the shareholders
through a daily charge made to the assets held in the Funds, which will be
reflected in share prices.
DISTRIBUTOR
Sierra Investment Services Corporation ("SISC") is the distributor of the Fund's
shares on a best efforts basis. SISC is located at 9301 Corbin Avenue,
Northridge, California 91324. SISC, as principal underwriter and distributor
will bear all of the Fund's marketing expenses. This includes the cost of
reproducing prospectuses, statements of additional information or any other
Trust documents (such as semi-annual reports) used as sales materials.
ADMINISTRATION
Subject to the authority of the Board of Trustees, Sierra Administration is
responsible for all administrative and recordkeeping functions of the Fund. It
provides office facilities and supplies; provides clerical, executive,
accounting and administrative services; prepares reports to shareholders and
filings with regulatory authorities; prepares materials for the Board of
Trustees meetings; computes and pays dividends to shareholders; and provides
securities accounting and calculates net assets. Pursuant to the terms of the
Administration Agreement, Sierra Administration has delegated certain of these
functions to State Street Bank and Trust Company ("State Street"). In addition,
Sierra Administration acts as the Fund's transfer and dividend paying agent and
has delegated certain of these functions to First Data Investor Services Group,
Inc. ("First Data"). Sierra Administration is also an indirect wholly-owned
subsidiary of Great Western Financial Corporation.
For its services, Sierra Administration is paid a monthly fee at an effective
annual rate of 0.35% of the Fund's average net assets. Sierra Administration
pays State Street a fee based on the average daily assets of the Fund and its
expenses as well as basic fees and charges for custody services. Sierra
Administration also pays First Data a fee for certain transfer agency services.
Sierra Administration may voluntarily waive fees payable to it and reimburse
expenses from time to time.
NET ASSET VALUE
The net asset value per share of the Fund's Common Shares is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities, and dividing the result by the number of Common Shares outstanding.
The net asset value will be computed on each business day as of the close of
regular trading on the New York Stock Exchange, normally 4:00 p.m. Eastern
standard time. The Fund reserves the right to calculate the net asset value more
frequently if deemed desirable.
The value of the Fund's portfolio will be determined by the Advisor, following
guidelines established and periodically reviewed by the Trustees. Interests in
Senior Loans will be valued by the Advisor on behalf of the Fund based on the
recommendations provided by the Sub-Advisor. Said recommendation of the
Sub-Advisor may either be accepted or rejected by the Advisor upon the advice
and consent of the Board of Trustees. Senior Loan evaluations will be based on
market quotations and transactions in instruments which the Advisor believes may
be comparable to Senior Loan interests with respect to the following
characteristics: credit quality, interest rate, interest rate redetermination
period and maturity. Such instruments may include commercial paper, negotiable
certificates of deposit and short-term variable rate securities which have
adjustment periods comparable to the Senior Loan interests in the Fund's
portfolio. In determining the relationship between such instruments and the
Senior Loan interests in the Fund's portfolio, the Advisor will consider on an
ongoing basis, among other factors, (i) the creditworthiness of the Borrower and
(ii) the current interest rate, the period until next interest rate
redetermination and maturity of such Senior Loan interests. It is expected that
the Fund's net asset value will fluctuate as a function of interest rate and
credit factors. Because of the short-term nature of such instruments, however,
the Fund's net asset value is expected to fluctuate less in response to changes
in interest rates than the net asset values of investment companies with
portfolios consisting primarily of fixed-income or longer term securities. The
Advisor believes that Lenders selling Senior Loan interests or otherwise
involved in a Senior Loan transaction may tend, in valuing Senior Loan interests
for their own account, to be less sensitive to interest rate and credit quality
changes and, accordingly, the Advisor does not intend to rely solely on such
valuations in valuing the Senior Loan interests for the Fund's account. In
addition, because a secondary trading market in Senior Loans has not yet fully
developed, in valuing Senior Loans, the Advisor may not rely solely on but may
consider, to the extent the Advisor believes such information to be reliable,
prices or quotations provided by banks, dealers or pricing services with respect
to secondary market transactions in Senior Loans. To the extent that an active
secondary market in Senior Loan interests develops to a reliable degree, the
Advisor may rely to an increasing extent on such market prices and quotations in
valuing the Senior Loan interests in the Fund's portfolio. In light of the
senior nature of Senior Loan interests included in the Fund's portfolio and
taking into account the Fund's access to non-public information with respect to
Borrowers relating to such Senior Loan interests, the Advisor does not currently
believe that consideration on a systematic basis of ratings provided by any
nationally recognized statistical rating organization or price fluctuations with
respect to long- or short-term debt of such Borrowers subordinate to the Senior
Loans of such Borrowers is necessary for the determination of the value of such
Senior Loan interests. Accordingly, the Advisor generally does not
systematically consider (but may consider in certain instances) and, in any
event, does not rely upon such ratings or price fluctuations in determining the
value of Senior Loan interests in the Fund's portfolio.
Other portfolio securities (other than short-term obligations, but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, portfolio
securities will be valued at the last sale price on the exchange that is the
primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The value of
interest rate swaps will be determined in accordance with a discounted present
value formula and then confirmed by obtaining a bank quotation.
Short-term obligations which mature in 60 days or less are valued at amortized
cost, if their original term to maturity when acquired by the Fund was 60 days
or less, or are valued at amortized cost using their value on the 61st day prior
to maturity, if their original term to maturity when acquired by the Fund was
more than 60 days, unless in each case this is determined not to represent fair
value. Repurchase agreements will be valued at cost plus accrued interest.
Securities for which there exist no price quotations or valuations and all other
assets are valued at fair value as determined in good faith by or on behalf of
the Trustees.
DETERMINATION OF PERFORMANCE
From time to time, the Fund may quote the performance of its Class A Common
Shares in terms of yield, actual distributions, total return or capital
appreciation in reports or other communications to shareholders or in
advertising material.
The Fund may quote a 30-day yield figure (the "SEC Yield") which is calculated
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
YIELD = 2[(a-b + 1)/6/ - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last
day of the period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by the Fund at a discount or premium,
the formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
values of the debt obligations.
The Fund may also quote a 30-day yield based on actual distributions during a
30-day period that is computed by dividing the net investment income per share
earned by the Fund during the period by the maximum Public Offering Price per
share on the last day of the 30-day period. This income is "annualized" by
assuming that the amount of income is generated each month over a one-year
period and is compounded semiannually. The annualized income is then shown as a
percentage of the maximum Public Offering Price. In addition, the Bond Funds may
advertise a similar 30-day yield computed in the same manner except that the NAV
per share is used in place of the Public Offering Price per share.
Capital appreciation for the Class A Common Shares of the Fund shows principal
changes for the period indicated, and total return combines principal changes
and dividend and interest income reinvested for the periods indicated. Principal
changes are based on the difference between the beginning and closing net asset
values for the period. Actual distributions include short-term capital gains
derived from option writing or other sources. The period selected for
performance data will depend upon the purpose of reporting the performance.
The total return of the Class A Common Shares may be calculated on an "average
annual total return" basis, and may also be calculated on an "aggregate total
return" basis, for various periods. Average annual total return reflects the
average annual percentage change in the value of an investment in a Fund over
the particular measuring period. Aggregate total return reflects the cumulative
percentage change in value over the measuring period. Average annual total
return figures provided for the Class A Common Shares will be computed according
to a formula prescribed by the SEC. The formula can be expressed as follows:
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return/aggregate total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
years (or other) periods or the life of the Fund
The formula for calculating aggregate total return can be expressed as
follows:
Aggregate Total Return = [ (ERV) - 1 ]
----
P
The calculation of average annual total return and aggregate total return
assumes reinvestment of all income dividends and capital gain distributions on
the reinvestment dates during the period and includes all recurring fees charged
to all shareholder accounts. In addition, with respect to the Class A Common
Shares, the maximum 4.5% sales charge is deducted from the initial $1,000
Payment (variable "P" in the formula).
The ERV assumes complete redemption of the hypothetical investment at the end of
the measuring period and reflects deduction of all nonrecurring charges at the
end of the measuring period covered by the computation. A Fund's net investment
income changes in response to fluctuations in interest rates and the expenses of
the Fund.
The performance of the Class A Common Shares will vary from time to time
depending upon market conditions, the composition of the Fund's portfolio and
the Fund's operating expenses. Consequently, any given performance quotation
should not be considered representative of the Fund's performance for any
specified period in the future. In addition, because performance will fluctuate,
it may not provide a basis for comparing an investment in a Fund with certain
bank deposits or other investments that pay a fixed yield or return for a stated
period of time.
Investors should recognize that, because the Fund will have a high component of
variable and floating corporate loans, yields will change in response to the
perceived creditworthiness of the corporate issuers backing such loans. In
addition, the trend in interest rates will also have an impact on the Fund's
yield, although it will be noticeably smaller as compared to the
creditworthiness of corporate issuers. Accordingly, in periods of declining
interest rates the yield of the Fund will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates yields will
tend to be somewhat lower. Comparative performance information may be used from
time to time in advertising the Class A Common Shares, including data from
Lipper Analytical Services, Inc. and other industry publications providing a
comparison of short-term money market rates.
TAXATION
The following federal income tax discussion is based on the advice of Morgan,
Lewis & Bockius LLP, and reflects applicable tax laws as of the date of this
Statement of Additional Information.
FEDERAL TAXATION
The Fund intends to qualify each year and to elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, the Fund
must, among other things: (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of securities and gains from
the sale or other disposition of securities or certain other related income; (b)
derive less than 30% of its gross income from gains from the sale or other
disposition of securities and certain other investments held for less than three
months (the "short-short rule"); and (c) diversify its holdings so that at the
end of each quarter of the Fund's taxable year (i) at least 50% of the value of
the Fund's assets is represented by cash, 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 or more than 10% of the voting securities of such issuer, and (ii)
not more than 25% of the value of the Fund's assets is invested in the
securities of any one issuer (other than U.S. government securities or the
securities of other regulated investment companies).
If the Fund so qualifies and distributes each year to its Shareholders at least
90% of its net investment income (including among other things, interest and net
short-term capital gain, but not net capital gains, which are the excess of net
long-term capital gains over net short-term capital losses), in each year, it
will not be required to pay federal income taxes on any income distributed to
Shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to Shareholders. As a Massachusetts business trust, the Fund will
not be subject to any excise or income taxes in Massachusetts as long as it
qualifies as a regulated investment company for federal income tax purposes.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (the latter of which generally is
computed on the basis of the one-year period ending on October 31 of such year),
plus any amounts that were not distributed in previous taxable years. For
purposes of the excise tax, any ordinary income or capital gain net income
retained by, and subject to federal income tax in the hands of, the Fund will be
treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income was
distributed to its Shareholders) and all distributions out of earnings and
profits would be taxed to Shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of the
Code that, among other things, may defer the use of certain losses of the Fund
and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
Shareholders. For example, with respect to certain securities issued at a
discount, the Fund will be required to accrue as income each year a portion of
the discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Fund may have to dispose of securities that it would otherwise have
continued to hold.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.
Income from investments in foreign securities received by the Fund may be
subject to withholding or other taxes imposed by foreign countries and U.S.
possessions. Such taxes will not be deductible or creditable by shareholders.
DISTRIBUTIONS
Distributions of the Fund's net investment income are taxable to Common
Shareholders as ordinary income, whether paid in cash or reinvested in
additional Common Shares. Distributions of the Fund's net capital gains
("capital gains dividends"), if any, are taxable to Common Shareholders at the
rates applicable to long-term capital gains regardless of the length of time
Shares of the Fund have been held by such Common Shareholders. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's Common Shares and, after such adjusted tax basis is reduced
to zero, will constitute capital gains to such holder (assuming such Common
Shares are held as a capital asset). It is not expected that any portion of the
distributions from the Fund will be eligible for the dividends received
deduction for corporations. The Fund will inform Shareholders of the source and
tax status of all distributions promptly after the close of each calendar year.
Common Shareholders receiving distributions in the form of additional Common
Shares issued by the Fund will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
Common Shares received, determined as of the distribution date. The basis of
such Common Shares will equal the fair market value on the distribution date.
Although dividends generally will be treated as distributed when paid, dividends
declared in October, November or December, payable to Shareholders of record on
a specified date in such a month and paid during January of the following year
will be treated as having been distributed by the Fund and received by the
Shareholders on the December 31 prior to the date of payment. In addition,
certain other distributions made after the close of a taxable year of the Fund
may be "spilled back" and treated as paid by the Fund (except for purposes of
the 4% excise tax) during such taxable year. In such case, Shareholders will be
treated as having received such dividends in the taxable year in which the
distribution was actually made.
The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to Common
Shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
SALE OF SHARES
Except as discussed below, selling Common Shareholders will generally recognize
gain or loss in an amount equal to the difference between their adjusted tax
basis in the Common Shares and the amount received. If such Common Shares are
held as a capital asset, the gain or loss will be a capital gain or loss and
will be long-term if such Common Shares have been held for more than one year.
It is possible, although the Fund believes it is unlikely, that tendering
holders of Common Shares may not qualify for gain or loss treatment as described
above, which in turn may result in deemed distributions to non-tendering holders
of Common Shares. The federal income tax consequences of repurchase of Common
Shares pursuant to tender offers will be disclosed in the related offering
documents. Any loss realized upon a taxable disposition of Common Shares held
for six months or less will be treated as a long-term capital loss to the extent
of any capital gains dividends received with respect to such Common Shares. For
purposes of determining whether Common Shares have been held for six months or
less, the holding period is suspended for any periods during which the Common
Shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.
GENERAL
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their advisors regarding the specific
federal tax consequences of holding and disposing of Common Shares, as well as
the effects of state, local and foreign tax laws and any proposed tax law
changes.
REPURCHASE (TENDER OFFER) OF SHARES
Commencement by the Fund of a tender offer during a period in which it is
simultaneously engaged in the continuous offering of its Common Shares may be a
violation of rules promulgated by the SEC under the Securities Exchange Act of
1934. The Fund intends to seek an exemption from the SEC that would permit the
Fund to make tender offers for its Common Shares while simultaneously engaged in
the continuous offering of its Common Shares. The Fund expects the SEC to grant
this exemption which is based on prior exemptions received by similar existing
"prime rate funds." No assurance can be given that the Fund will be able to
maintain such exemption indefinitely. If the Board of Trustees of the Fund
authorizes a tender offer when the Fund is unable to rely on its exemption, the
Fund intends to suspend the continuous offering of its Common Shares during the
term of such tender offer.
Even if a tender offer has been made, it is the policy of the Fund (which may be
changed by the Trustees) that it cannot accept tenders if (1) in the sole and
exclusive judgment of the Trustees, there is not sufficient liquidity of the
assets of the Fund; (2) such transactions, if consummated, would (a) impair the
Fund's status as a regulated investment company under the Code (which would make
the Fund a taxable entity, causing the Fund's taxable income to be taxed at the
Fund level, as more fully described in "Taxation") or (b) result in a failure to
comply with applicable asset coverage requirements; or (3) there is, in the
Board of Trustees' judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) suspension of or limitation on prices for
trading securities generally on any United States national securities exchange
or in the over-the-counter market, (c) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by banks in the United
States or New York State, (d) limitation affecting the Fund or the issuers of
its portfolio securities imposed by federal or state authorities on the
extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or (f) other event or condition which would have a
material adverse effect on the Fund or the holders of its Common Shares if
Common Shares were repurchased. The Trustees may modify these conditions in
light of experience.
Under the requirements of the 1940 Act, the Fund cannot accept tenders or effect
repurchases of the Common Shares if, after deducting the amount of the purchase
or tender price, the Fund's total assets, less all liabilities or indebtedness
of the Fund, would fall below 200% of the aggregate liquidation value of the
Preferred Shares, if applicable. In addition, the Fund may be precluded from
accepting tenders or effecting repurchases at any time dividends on the
Preferred Shares, if outstanding, are in arrears. Any tender offer made by the
Fund for its Common Shares will be at a price equal to the net asset value of
the Common Shares determined at the close of business on the day the offer ends.
During the pendency of any tender offer by the Fund, the Fund will calculate
daily the net asset value of the Common Shares and will establish procedures
which will be specified in the tender offer documents, to enable Common
Shareholders to ascertain readily such net asset value. The relative illiquidity
of some of the Fund's portfolio securities could adversely impact the Fund's
ability to calculate net asset value in connection with determinations of
pricing for tender offers, if any. Each offer will be made and Common
Shareholders notified in accordance with the requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, either by publication or
mailing or both. Each offering document will contain such information as is
prescribed by such laws and the rules and regulations promulgated thereunder.
Tendered Common Shares that have been accepted and repurchased by the Fund will
be held in treasury and may be retired by the Board of Trustees. Treasury Common
Shares will be recorded and reported as an offset to Shareholders' equity and
accordingly will reduce the Fund's total assets. If Treasury Common Shares are
retired, Common Shares issued and outstanding and capital in excess of par value
will be reduced accordingly.
If the Fund must liquidate portfolio securities in order to repurchase Common
Shares tendered, the Fund may realize gains and losses. Such gains may be
realized on securities held for less than three months. Because of the
limitation of 30% on the portion of the Fund's gross income that may be derived
from the sale or disposition of stocks and securities held less than three
months (in order to retain the Fund's tax status as a regulated investment
company under the Code), such gains would reduce the ability of the Fund to sell
other securities held for less than three months that the Fund may wish to sell
in the ordinary course of its portfolio management which may adversely affect
the Fund's yield.
EXCHANGE PRIVILEGE
The Fund may make available to tendering shareholders the privilege of
exchanging Class A Common Shares of the Fund at net asset value for Class A
Shares of all portfolios of the Sierra Trust Funds ("Sierra Trust"), an open-end
investment company managed by the Advisor. A shareholder would be entitled to
exchange all or part of their Class A Common Shares of the Fund for Class A
shares of Sierra Trust. If the shares acquired in the exchange are subject to a
higher sales load, a sales load may be charged in an amount up to the difference
between the sales load previously paid and the initial sales load applicable to
the shares of the fund being acquired. See "Repurchase of Shares -- Exchange
Privilege" in the Prospectus for information regarding the application of sales
charges to certain exchanges. Shareholders of the Sierra Trust Funds may
exchange their Class A Shares for the Class A Common Shares of the Fund. If the
Class A Common Shares acquired in the exchange are subject to a higher sales
load, a sales load may be charged in an amount up to the difference between the
sales load previously paid and the initial sales load applicable to the Class A
Common Shares of the Fund being acquired. See "Reduced Sales Charge at Purchase
- -- Exchange Privilege" in the Prospectus.
An exchange of shares is treated for federal income tax purposes as a redemption
(sale) of shares given in exchange by the shareholder, and an exchanging
shareholder may, therefore, realize a taxable gain or loss in connection with
the exchange. See discussion of "Taxation" in the Statement of Additional
Information. Upon 60 days prior written notice to shareholders, the exchange
privilege may be modified or terminated and the Fund may impose a charge of up
to $5 for exchanges.
Shareholders of the Fund are entitled to exchange their shares for shares of the
Funds of Sierra Trust only during the tender offer period. The exchange
privilege enables a shareholder to acquire the Class A shares in Sierra Trust
with different investment objectives or policies when the shareholder believes
that a shift between funds is an appropriate investment decision. This privilege
is available to shareholders residing in any state in which shares of the Funds
being acquired may legally be sold.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and the proceeds are immediately invested, at a price as described above, in the
same class of shares of the Fund being acquired. The Company reserved the right
to reject any exchange request.
ANTI-TAKEOVER PROVISIONS
For purposes of these provisions, a 5%-or-greater holder of Common Shares (a
"Principal Shareholder") refers to any person who, whether directly or
indirectly and whether alone or together with its affiliates and associates,
beneficially owns 5% or more of the outstanding Common Shares of the Fund. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of the Fund or any subsidiary of the Fund with or into any
Principal Shareholder; (ii) the issuance of any securities of the Fund to any
Principal Shareholder for cash; (iii) the sale, lease or exchange of all or any
substantial part of the assets of the Fund to any Principal Shareholder (except
assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period);
or (iv) the sale, lease or exchange to the Fund or any subsidiary thereof, in
exchange for securities of the Fund, of any assets of any Principal Shareholder
(except assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period).
The Board of Trustees has determined that the voting requirements described
above, which are greater than the minimum requirements under Massachusetts law
or the 1940 Act, are in the best interests of shareholders generally. Reference
should be made to the Declaration of Trust on file with the SEC for the full
text of these provisions.
<PAGE>
FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT
The following are the Audited Financial Statements for the initial
capitalization of the Fund and the report of the Independent Auditors Price
Waterhouse LLP dated February 12, 1996.
<PAGE>
Sierra Prime Income Fund
Statement of Assets and Liabilities
February 9, 1996
ASSETS
Cash $100,000
Deferred organizational expenses 185,375
--------
Total Assets 285,375
LIABILITIES
Organizational expenses payable 185,375
--------
Total Liabilities 185,375
--------
NET ASSETS $100,000
========
Shares issued and outstanding:
Class A shares 10,000
========
Net asset value per share $ 10.00
========
Maximum sales charge 4.50%
========
Maximum offering price per share
($10.00 / 0.955) $ 10.47
========
See accompanying notes.
<PAGE>
Sierra Prime Income Fund
Notes to Statement of Assets and Liabilities
February 9, 1996
1. ORGANIZATION
Sierra Prime Income Fund (the "Fund"), was organized as a Massachusetts business
trust on October 4, 1995. The Fund is registered under the Investment Company
Act of 1940, as amended, as a closed-end non-diversified management investment
company. The Board of Trustees has authorized the Fund to issue five million
shares of Class A common stock. Two additional classes of common stock have been
authorized for issue by the Board of Trustees. As of February 9, 1996, the Fund
had not registered such classes for issue.
On February 6, 1996, the Fund sold 10,000 Class A shares at net asset value (the
"Initial Shares") to Sierra Fund Administration Corporation ("Sierra
Administration"), a wholly owned subsidiary of Great Western Financial
Corporation.
The costs of organizing the Fund and registering its shares will be paid by
Sierra Administration and reimbursed by the Fund at the time of the initial
offering. The organization costs will be deferred and amortized on a straight
line basis over a period of sixty months from the commencement of investment
operations. If any of the Initial Shares are redeemed before the end of the
amortization period, the proceeds of the redemption will be reduced by the pro
rata share of the unamortized organization costs.
The Fund seeks to achieve its investment objective to provide a high level of
current income, consistent with preservation of capital, by investing primarily
in a portfolio of interests in floating or variable rate senior loans made
primarily to U.S. corporations, partnerships and other entities.
2. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Management Agreement with Sierra Investment Advisors
Corporation ("Sierra Advisors"), under which Sierra Advisors manages the
investments of the Fund. For its services, Sierra Advisors receives a fee from
the Fund at an annual rate of 0.95% of the average daily net assets of the Fund.
Sierra Advisors has entered into an Investment Sub-Advisory Agreement with Van
Kampen American Capital Management Inc. ("Van Kampen"). Van Kampen, under the
supervision of Sierra Advisors, is responsible for selecting the investments to
be made by the Fund, and monitoring the provisions of the investment agreements
made between the Fund and the companies in which the Fund invests. For these
services, Van Kampen receives a fee from Sierra Advisors at an annual rate of
0.475% of the average daily net assets of the Fund.
Sierra Administration has entered into a Fund Administration Agreement with the
Fund, under which Sierra Administration manages the business affairs of the
Fund. For its services, Sierra Administration receives a fee from the Fund at an
annual rate of 0.35% of the average daily net assets of the Fund. Sierra
Administration has delegated certain administration, custodian and accounting
responsibilities to State Street Bank and Trust Company ("State Street"), and
delegated certain transfer agency responsibilities to First Data Investor
Services Group, Inc. ("FDISG"), a wholly owned subsidiary of First Data
Corporation. Both State Street and FDISG receive compensation for services
directly from Sierra Administration.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Trustees
of Sierra Prime Income Fund
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Sierra Prime Income
Fund (the "Fund") at February 9, 1996, 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
Boston, Massachusetts
February 12, 1996
