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SIERRA PRIME INCOME FUND
9301 CORBIN AVENUE
P.O. BOX 1160
NORTHRIDGE, CALIFORNIA 91328-1160
Sierra Prime Income Fund (the "Fund") is a recently organized, non-diversified,
closed-end management investment company. The Fund will seek to provide a high
level of current income, consistent with preservation of capital. The Fund will
seek to achieve its objective by investing primarily in a portfolio of interests
in floating or variable rate senior loans ("Senior Loans") made primarily to
U.S. corporations, partnerships and other entities ("Borrowers"). It is expected
that such Senior Loans will pay interest at rates which float or reset at a
margin above a generally recognized base lending rate, such as the prime rate of
a designated U.S. bank, certificate of deposit rate, or the London Interbank
Offered Rate ("LIBOR"). There can be no assurance that the Fund will achieve its
objective. See "Investment Objective and Policies and Special Risk Factors."
Shares of the Fund will be offered continuously at a price equal to their net
asset value plus a sales charge of up to 4.5% of the public offering price of
the shares purchased. See "Offering of Shares."
No market presently exists for the Fund's shares, and it is not anticipated that
a secondary market will develop. To provide shareholder liquidity, the Fund
intends to make quarterly tender offers subject to approval by the Board of
Trustees to purchase a specified percentage of the Fund's outstanding shares at
net asset value. See "Repurchase of Shares." This Prospectus sets forth
concisely the information that a prospective investor should know before
investing. Please read and retain this Prospectus for future reference. A
Statement of Additional Information dated February 14, 1996 has been filed with
the Securities and Exchange Commission and can be obtained without charge upon
request at the above address or by calling 800-222-5852. This Prospectus
incorporates by reference the entire Statement of Additional Information, and
its table of contents appears on page 36 of this Prospectus.
Sierra Investment Services Corporation ("SISC"), the Distributor of the Shares
is not a bank. The Fund's Shares are not obligations, deposits or accounts
(trust or otherwise) of, or endorsed or guaranteed by, Great Western Bank, or
any of its affiliates or correspondents. The Fund's Shares are not federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency. Shares of the Fund involve investment risks,
including the possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Proceeds to
Public(1) Sales Load(1) Fund(2)
--------- ------------- -----------
Class A Per
Share (1) ...... $ 10.47 $ 0.47 $ 10.00
======= ====== =======
Total .......... $2,350,000 $50,000,000
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(1) The shares are offered on a best efforts basis at a price equal to the net
asset value which initially is $10.00 per share, plus a sales charge of up
to 4.50% of the public offering price. See "Offering of Shares."
(2) Before deduction of organizational expenses payable by the Trust, estimated
at $185,375 and assuming all shares currently registered are sold pursuant
to a continuous offering.
PROSPECTUS DATED FEBRUARY 14, 1996
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TABLE OF CONTENTS
Page
Fund Expenses ............................................................. 3
Prospectus Summary ........................................................ 4
The Fund .................................................................. 8
Use of Proceeds ........................................................... 9
Investment Objective and Policies and Special Risk Factors ................ 10
Certain Characteristics of Senior Loan Interests ........................ 10
Special Risk Considerations ............................................. 15
Investment Practices and Special Risks .................................... 17
Taxation .................................................................. 20
Management of the Fund .................................................... 21
Distributions ............................................................. 23
Repurchase (Tender Offer) of Shares ....................................... 23
Description of Common Shares .............................................. 25
Net Asset Value ........................................................... 26
Offering of Shares ........................................................ 27
How to Buy Shares ....................................................... 28
General Information About Purchases ..................................... 28
Reduced Sales Charge at Purchase .......................................... 31
Waivers of Class A Common Shares Sales Charges ............................ 32
Application of Class A Common Shares Early Withdrawal Charge .............. 33
Communications with Shareholders .......................................... 33
Custodian, Administrator and Transfer Agent ............................... 35
Legal Opinions ............................................................ 36
Experts ................................................................... 36
Additional Information .................................................... 36
Table of Contents for Statement of Additional Information ................. 36
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE FUND'S ADVISOR OR PRINCIPAL UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE
COMMON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, IN ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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FUND EXPENSES
The following tables are intended to assist investors in understanding the
expected costs and expenses directly or indirectly associated with investing in
the Fund.
CLASS A COMMON SHARES
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price) .............. 4.50%
Dividend Reinvestment Plan Fees ............................. None
Early Withdrawal Charge ..................................... None*
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE
TO COMMON SHARES)
Management Fee .............................................. 0.95%
Interest Payments on Borrowed Funds ......................... 0.00%
Other Expenses .............................................. 0.55%
Total Annual Fund Operating Expenses ................. 1.50%**
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* Purchases of $1 million or more and certain other purchases are not subject
to the sales charge at the time of purchase, but may be subject to a 1.0%
early withdrawal charge on repurchases or tenders within one year of purchase
or a 0.5% early withdrawal charge during the second year after purchase. See
"Offering of Shares -- How to Buy Shares" for a complete description of these
charges.
** Under the Investment Advisory Agreement, the Advisor has agreed to reimburse
the Fund to the extent that the Fund's annual ordinary expenses exceed the
most stringent limits prescribed by any state in which the Fund's Shares are
offered for sale. Currently, the most restrictive applicable limitations
provide that the Fund's expenses may not exceed an annual rate of 2.5% of the
first $30 million of average net assets, 2% of the next $70 million of the
average net assets and 1 1/2% of assets in excess of that amount. Expenses
which are not subject to this limitation include interest, taxes,
amortization of organizational expenses and extraordinary expenses.
EXAMPLE
An investor would pay the following expenses on a $1,000 investment in the Fund,
assuming a 5% annual return:
CLASS A COMMON SHARES
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- ------- --------
Assuming no tender of
Common Shares ........... $60 $90 $123 $216
This "Example" assumes that all dividends and other distributions are reinvested
at net asset value and that the percentage amounts listed under Total Annual
Operating Expenses remain the same for the completion of organization expense
amortization. The above tables and the assumptions in the Example of a 5% annual
return and reinvestment at net asset value are required by regulation of the
Securities and Exchange Commission ("SEC"); the assumed 5% annual return is not
a prediction of, and does not represent, the projected or actual performance of
the Fund's Common Shares. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF FUTURE EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN
THOSE SHOWN.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement of
Additional Information.
THE FUND Sierra Prime Income Fund (the "Fund" or "Trust") is a recently
organized, non-diversified, closed-end management investment company, organized
as a Massachusetts business trust. The Fund has no history of operations. See
"The Fund."
THE OFFERING The Fund will engage in a continuous offering of its Class A common
shares of beneficial interest ("Class A Common Shares") through Sierra
Investment Services Corporation ("SISC"), as distributor and principal
underwriter, and Authorized Dealers (i.e., dealers who are in good standing with
the NASD and who have entered into selected dealer agreements with the principal
underwriter). During the continuous offering, the Fund's shares will be valued
at a public offering price equal to the next determined net asset value ("NAV")
per share plus a maximum sales charge of 4.5% on purchases of less than $50,000,
declining to zero on purchases of $1,000,000 or greater. This sales charge, if
applicable, will be payable to SISC. See "Offering of Shares."
COMMON SHARES The Fund will offer Class A Common Shares at NAV subject to a 4.5%
sales charge on purchases of less than $50,000, declining to zero on purchases
of $1,000,000 or greater, at the time of purchase. This sales charge is payable
to SISC as principal underwriter for distribution of the Common Shares.
Purchases of $1 million or more and certain other purchases are not subject to
the sales charge at the time of purchase, but may be subject to a 1.0% early
withdrawal charge on repurchases or tenders within one year of purchase or a
0.5% early withdrawal charge during the second year after purchase. See
"Offering of Shares" for a complete description of these charges.
INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is to provide
a high level of current income, consistent with preservation of capital. The
Fund will seek to achieve its objective by investing in a professionally managed
portfolio of interests in floating or variable rate senior loans ("Senior
Loans") made primarily to United States corporations, partnerships and other
entities ("Borrowers"). Senior Loans may take the form of syndicated loans
("Syndicated Loans") or of debt obligations of Borrowers issued directly to
investors in the form of debt securities ("Senior Notes"). 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. These base
lending rates are generally the prime rate offered by one or more major United
States banks ("Prime Rate"), the London Inter-Bank Offered Rate ("LIBOR"), the
Certificate of Deposit ("CD") rate or other base lending rates used by
commercial lenders.
The Fund will seek to achieve over time a high effective yield. 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 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. 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. As discussed in this Prospectus Summary under "Tender Offers," an
investment in the Common Shares should be considered illiquid.
Under normal market conditions, at least 80% of the Fund's total assets will be
invested in interests, participations and assignments of Senior Loans. The
remainder of the Fund's assets may be invested in high quality, short-term debt,
money market instruments, warrants, equity securities and junior debt securities
acquired in connection with the Fund's investment in Senior Loans. There is no
restriction or percentage limitation with respect to the Fund's investment in
illiquid securities. 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. For further discussion
of the Fund's investment objective and policies and its investment practices and
associated considerations, see "Investment Objective and Policies and Special
Risk Factors" and "Investment Practices and Special Risks" in this Prospectus.
INVESTMENT ADVISOR Sierra Investment Advisors Corporation ("Sierra Advisors" or
"Advisor"), an indirectly wholly-owned subsidiary of Great Western Financial
Corporation ("GWFC"), is the Fund's investment advisor. The Advisor currently
manages or supervises approximately $3.3 billion in assets. Such assets include
those of twenty-seven portfolios or funds (including the Fund) comprising four
management investment companies. See "Management of the Fund."
THE SUB-ADVISOR Van Kampen American Capital Management Inc. (the "Sub-Advisor"
or "Van Kampen") is the sub-advisor to the Fund, located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. The Sub-Advisor selects the investments made
by the Fund subject to the oversight and specific direction of the Advisor. In
particular and subject to oversights and procedures adopted by the Board of
Trustees, the Advisor with oversight of the Board may accept or reject portfolio
selections and pricing determinations of Van Kampen. In addition, the
Sub-Advisor also monitors the provisions of the Loan Agreements and any
agreements with respect to Participations and Assignments, provides
recordkeeping responsibilities with respect to Senior Loans in the Fund's
portfolio and provides certain services to holders of the Fund's Common Shares.
See "Management of the Fund." The Sub-Advisor provides investment advice to a
wide variety of individual, institutional and investment company clients and
together with its affiliated entities had aggregate assets under management or
supervision, as of December 31, 1995, of more than $54 billion. Van Kampen is a
wholly-owned subsidiary of Van Kampen American Capital, Inc. Van Kampen American
Capital, Inc. is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding,
Inc. is controlled, through the ownership of a substantial majority of its
common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The General Partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore,
Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson,
each of whom is a principal of Clayton, Dubilier & Rice, Inc. In addition,
certain officers, directors and employees of Van Kampen American Capital, Inc.
own, in the aggregate, not more than seven percent of the common stock of VK/AC
Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own five percent or more of the common
stock of VK/AC Holding, Inc.
ADMINISTRATOR Sierra Fund Administration Corporation ("Sierra Administration")
is the Fund's administrator. Sierra Administration is responsible for managing
the business affairs of the Fund, subject to the supervision of the Fund's Board
of Trustees, although it may delegate certain of its responsibilities to
sub-administrators. See "Management of the Fund." Sierra Administration has
delegated certain administrative and custodial services to State Street Bank &
Trust Company ("State Street"). Sierra Administration has also delegated certain
transfer agent responsibilities to First Data Investor Services Group, Inc.
("First Data").
FEES AND EXPENSES The Fund will pay the Advisor a monthly fee at an annual rate
of .95% of the average daily net assets of the Fund, out of which .475% is paid
to Van Kampen for services rendered as the Sub-Advisor. The advisory fee,
although higher than the fees paid by most other management investment
companies, is comparable to the fees paid by several similar closed-end
management investment companies. The Fund will also pay the Administrator a
monthly fee at the annual rate of .35% of the average daily assets of the Fund.
See "Management of the Fund."
DISTRIBUTIONS The Fund's policy will be to declare daily and pay monthly
distributions to holders of Class A Common Shares of substantially all net
investment income of the Fund. Distributions to holders of these Common Shares
cannot be assured, and the amount of each monthly distribution is likely to
vary. Net realized long-term capital gains, if any, are to be distributed to
holders of the Common Shares at least annually. Holders of the Common Shares may
elect to have distributions automatically reinvested in additional Common
Shares. See "Distributions," "Taxation" and "Dividend Reinvestment Plan."
TENDER OFFERS The Board of Trustees of the Fund currently intends, each quarter,
to consider authorizing the Fund to make tender offers for a portion of its
outstanding Class A Common Shares at the then current net asset value of these
Common Shares. The Fund does not intend to list the Common Shares on any
national securities exchange and none of the Fund, the Advisor or SISC intends
to make a secondary trading market in the classes of the Common Shares at any
time. Accordingly, there is not expected to be any secondary trading market in
the Common Shares and an investment in such Common Shares should be considered
illiquid. There can be no assurance that the Fund will in fact tender for any of
its Common Shares. If the Fund tenders for Common Shares there is no guarantee
that all, or any, Common Shares tendered will be purchased. Subject to its
borrowing restrictions, the Fund may incur debt to finance repurchases of its
Common Shares pursuant to tender offers; such borrowings entail additional
risks. The ability of the Fund to tender for its Common Shares may be limited by
certain requirements of the Internal Revenue Code of 1986, as amended, that must
be satisfied in order for the Fund to maintain its desired tax status as a
regulated investment company. The Fund may be required to suspend the continuous
offering of its Common Shares during the term of any such tender offer
consistent with rules promulgated by the SEC under the Securities Exchange Act
of 1934, as amended. 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. See "The
Fund," "Offering of Shares" and "Repurchase (Tender Offer) of Shares."
SPECIAL RISK CONSIDERATIONS
Illiquidity. The Fund is a closed-end investment company designed primarily for
long-term investors and not as a trading vehicle. The Fund does not intend to
list its Common Shares for trading on any national securities exchange. There is
not expected to be any secondary trading market in the Common Shares and an
investment in the Common Shares should be considered illiquid. In the event that
the Fund's Board of Trustees does not, at any time or from time to time,
authorize the Fund to engage in tender offers for its Common Shares, it is
unlikely that a holder of Class A Common Shares will be able to otherwise sell
their shares to the Fund. The shares of closed-end investment companies often
trade at a discount from their net asset values and, in the unlikely event that
a secondary market for the Common Shares were to develop, the Common Shares
likewise may trade at a discount from net asset value. Because the Fund intends
to offer its Common Shares continuously at a price equal to net asset value, it
is unlikely that the Common Shares would trade at a Premium to net asset value
should a secondary market for the Common Shares develop.
Borrowings. The Fund as a fundamental policy is authorized to borrow money in an
amount up to 33 1/3% of the Fund's total assets (after giving effect to the
amount borrowed). The Fund currently expects, however, to limit its borrowing to
an amount sufficient to meet its tender offer purchases or 10% of its assets,
whichever is greater. Under the requirements of the 1940 Act, the Fund,
immediately after any such borrowings, is required to have asset coverage of at
least 300%. Asset coverage is the ratio which the value of the total assets of
the Fund, less all liabilities and indebtedness not represented by senior
securities (as that term is defined in the 1940 Act), bears to the aggregate
amount of any such borrowings by the Fund. The rights of any lenders to the Fund
to receive payments of interest on and repayments of principal of such
borrowings will be senior to those of the holders of Common Shares, and the
terms of any such borrowings may contain provisions which limit certain
activities of the Fund, including the payment of dividends to holders of Common
Shares in certain circumstances. Further, the terms of any such borrowings may,
and the provisions of the 1940 Act do (in certain circumstances), grant lenders
certain voting rights in the event of default in the payment of interest or
repayment of principal. In the event that such provisions would impair the
Fund's status as a regulated investment company, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings. Interest payments and fees incurred in connection with any such
borrowings will reduce the amount of net income available for payment to the
holders of Common Shares. Accordingly, the Fund will not purchase additional
portfolio securities, other than with proceeds from the sale or maturity of
existing portfolio securities, at any time that borrowings, including the Fund's
commitments pursuant to reverse repurchase agreements, exceed 5% of the Fund's
total assets (after giving effect to the amount borrowed). See "Repurchase
(Tender Offer) of Shares."
Senior Loans. 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 generally 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 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 abilities of the Advisor and
particularly the Sub-Advisor, Van Kampen, than would be the case for an
investment company that invests primarily in rated, registered or
exchange-listed securities. See "Investment Objective and Policies and Special
Risk Factors."
Interests in Senior Loans generally are not listed on any national securities
exchange or automated quotation system and no regular market has developed in
which interests in Senior Loans are traded. 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 liquid securities. 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 or when the
Advisor considers it advantageous to increase the percentage of the Fund's
portfolio invested in high quality, short-term securities, and may in certain
circumstances result in the Fund engaging in borrowings to meet short-term cash
requirements. See "Investment Objective and Policies and Special Risk Factors."
Credit Risks Associated with Investments in Participations. The Fund will
purchase Participations in Senior Loans. With respect to any given Senior Loan,
the terms of Participations are arrived at through private negotiations between
the Fund and the seller of such an interest in a Senior Loan, and may result in
the Fund having rights which differ from, and are more limited than, the rights
of Lenders or of persons who acquire such interests by Assignment.
Participations typically result in the Fund having a contractual relationship
with the Lender selling the Participation, but not with the Borrower. In the
event of the insolvency of the Lender selling the Participation, the Fund may be
treated as a general creditor of such Lender, and may not have any exclusive or
senior claim with respect to such Lender's interest in, or the collateral with
respect to, the Senior Loan. As such, the Fund may incur the credit risk of the
Lender selling the Participation in addition to the credit risk of the Borrower
with respect to the Senior Loan when purchasing Participations and may not
benefit directly from the security provided by the collateral supporting the
Senior Loan with respect to which such Participation was sold. The Fund may pay
a fee or forego a portion of interest payments when acquiring Participations or
Assignments. See "Investment Objective and Policies and Special Risk Factors."
Credit Risks Associated with Senior Loans. 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 Senior Loans in
which the Fund will invest generally will be secured by specific collateral,
there can be no assurance that liquidation of such collateral would satisfy the
Borrower's obligation in the event of non-payment of scheduled interest or
principal or that such collateral could be readily liquidated. 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 non-payment of interest or loss of principal than do
collateralized Senior Loans. See "Investment Objective and Policies and Special
Risk Factors."
Certain Investment Practices. The Fund may use various investment practices that
involve special considerations including lending its portfolio securities,
entering into when-issued and delayed-delivery transactions and entering into
repurchase and reverse repurchase agreements. In addition, the Fund has the
authority to engage in interest rate and other hedging and risk management
transactions. For further discussion of these practices and associated special
considerations, see "Investment Practices and Special Risks."
Diversification. The Fund has registered as a "non-diversified" investment
company so that it will be able to invest more than 5% of the value of its
assets in the obligations of any single issuer, including Senior Loans of a
single Borrower or Participations purchased from a single Lender. The Fund
initially expects to invest up to 10% of the value of its assets in interests
in Senior Loans of Single Borrowers until its aggregate asset level reaches $20
million. Once this $20 million asset level is reached, the Fund intends to limit
the value of its assets in interests in Senior Loans of a single Borrower to 5%.
To the extent the Fund invests a relatively high percentage of its assets in
obligations of a limited number of issuers, the Fund will be more susceptible
than a more widely diversified investment company to any single corporate,
economic, political or regulatory occurrence. See "The Fund."
Percentage of Assets in Participations. The Fund may invest up to 100% of its
assets in Participations. The Lenders selling such Participations and other
persons interpositioned between such Lenders and the Fund with respect to such
Participations will likely conduct their principal business activities in the
bank, finance and financial services industries. Because the Fund may invest a
relatively high percentage of its assets in such Participations, 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. The Fund
has taken measures which it believes significantly reduce its exposure to such
risk. See "Investment Objective and Policies and Special Risk Factors" and
"Investment Restrictions."
Anti-Open-End Investment Company Provisions. The Fund's Declaration of Trust
includes provisions that may limit the ability of the shareholders to convert
the Fund to an open-end investment company as defined in the Investment Company
Act of 1940, as amended. See "Description of Common Shares -- Anti-Open-End
Investment Provisions of the Declaration of Trust."
Anti-Takeover Provisions. The Fund's Declaration of Trust includes provisions
that could have the effect of limiting the ability of other persons or entities
to acquire control of the Fund or to change the composition of its Board of
Trustees. See "Description of Common Shares -- Anti-Takeover Provisions of the
Declaration of Trust."
THE FUND
Sierra Prime Income Fund (the "Fund") is a recently organized, non-diversified,
closed-end management investment company whose investment objective is to
provide a high level of current income, consistent with preservation of capital.
The Fund will seek to achieve its objective through investing in a
professionally managed portfolio of interests in floating or variable rate
senior loans ("Senior Loans") to United States corporations, partnerships and
other entities ("Borrowers"). The Fund's policy of acquiring interests in
floating or variable rate Senior Loans is expected to minimize fluctuations in
the Fund's net asset value as a result of changes in interest rates. An
investment in the Fund may not be appropriate for all investors, and no
assurance can be given that the Fund will achieve its investment objective. The
Fund is designed primarily for long-term investment and not as a trading
vehicle.
The Fund was organized as a Massachusetts business trust on October 4, 1995.
Sierra Investment Advisors Corporation ("Advisors") is the Fund's investment
advisor. The Fund also employs a sub-advisor, Van Kampen American Capital
Management Inc. ("Sub-Advisor" or "Van Kampen"), who directly selects the Fund's
investments subject to the oversight and specific direction of the Advisor. The
Fund has no operating history. The Fund's principal office is located at 9301
Corbin Avenue, Northridge, CA 91324.
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of common shares of beneficial interest ("Common Shares") with no par value. The
Fund is initially offering 5,000,000 Class A Common Shares by this Prospectus in
a continuous offering pursuant to Rule 415 under the Securities Act of 1933, as
amended. Class A Common Shares are subject to a maximum sales charge of 4.5% on
purchases of less than $50,000, declining to zero on purchases of $1,000,000 at
the time of purchase. See "Offering of Shares."
The Fund is a closed-end investment company with no history of operations. The
Fund does not intend to list its Common Shares for trading on any national
securities exchange and none of the Fund, Advisor, Van Kampen or SISC intends to
make a secondary trading market in the Common Shares at any time. Accordingly,
there is not expected to be any secondary trading market in the Common Shares
and an investment in the Common Shares should be considered illiquid. The Board
of Trustees of the Fund currently intends each quarter to consider authorizing
the Fund to make tender offers for a portion of its then outstanding Common
Shares at the then current net asset value for the Common Shares. There can be
no assurance that the Fund will in fact tender for any of its Common Shares and,
in the event that the Fund does not so tender it is unlikely that a holder of
Common Shares will be able to otherwise sell the Common Shares to the Fund. If
the Fund tenders for Common Shares, there is no guarantee that all, or any,
Common Shares tendered will be purchased. Subject to its borrowing restrictions,
the Fund may incur debt to finance the repurchases of its Common Shares pursuant
to tender offers. The ability of the Fund to enter into tender offers may be
limited by certain requirements of the Internal Revenue Code of 1986, as
amended, that must be satisfied in order for the Fund to maintain its desired
tax status as a regulated investment company. See "Repurchase (Tender Offer) of
Shares."
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. These base lending rates are generally the prime rate offered by a
major United States bank ("Prime Rate"), the London Inter-Bank Offered Rate
("LIBOR"), the certificate of deposit ("CD") rate or other base lending rates
used by commercial lenders. The Senior Loans in the Fund's portfolio will at all
times have a dollar-weighted average time until next interest rate
redetermination of 90 days or less. As a result, as short-term interest rates
increase, the interest payable to the Fund from its investments in Senior Loans
should increase, and as short-term interest rates decrease, the interest payable
to the Fund on 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
securities in the Fund's portfolio. See "Investment Objective and Policies."
The Fund has registered as a "non-diversified" investment company so that,
subject to its investment restrictions, it will be able to invest more than 5%
of the value of its assets in the obligations of any single issuer, including
Senior Loans of a single Borrower or Participations purchased from a single
Lender. See "Investment Restrictions." The Fund initially expects to invest up
to 10% of the value of its assets in interest in Senior Loans of Single
Borrowers until its aggregate asset level reaches $20 million. Once this $20
million asset level is reached, the Fund intends to limit the value of its
assets in interests in Senior Loans of a single Borrower to 5%. To the extent
the Fund invests a relatively high percentage of its assets in obligations of a
limited number of issuers, the Fund will be more susceptible than a more widely
diversified investment company to any single corporate, economic, political or
regulatory occurrence.
USE OF PROCEEDS
Proceeds from the continuous offer of the Fund's Class A Common Shares may be
used to fund investments in portfolio securities, to finance the Fund's Tender
Offers (if any) and to reduce the amount of any borrowing or indebtedness
incurred by the Fund as described under "Repurchase (Tender Offer) of Shares" in
this Prospectus. The investment of proceeds from the continuous offer of the
Fund's Class A Common Shares may take one to three months, up to a maximum of
six months, from the date the Fund receives such proceeds. Pending such
investments, the proceeds will be held in cash or invested in investment grade
short-term debt obligations. Investments in such short-term debt obligations
will reduce the Fund's yield. The Fund also may acquire such debt obligations
during unusual market conditions for temporary defensive purposes.
A portion of the organizational expenses of the Fund has been advanced by the
Advisor and will be repaid by the Fund. Certain expenses of the continuous
offering of the Fund's Class A Common Shares, including distributor compensation
and sales commissions payable to authorized dealers, will be paid by SISC and/or
the Advisor, from its own assets and will not be repaid by the Fund.
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 ("Senior Loans") to United States
corporations, partnerships and other entities ("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. The Fund's 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 non-payment of interest or loss of principal than do
collateralized Senior Loans.
At least 80% of the Fund's total assets normally will be invested in Senior
Loans. 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 ranging from 30 days up
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.
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
and, in certain limited circumstances discussed above, junior debt securities
acquired in connection with the Fund's investments in Senior Loans. Such high
quality, short-term securities may include commercial paper rated at least in
the top two rating categories of either S&P or Moody's, or unrated commercial
paper considered by the Advisor to be of similar quality, interests in
short-term loans of Borrowers having short-term debt obligations rated or a
short-term credit rating at least in such top two rating categories or having no
such rating but determined by the Advisor to be of comparable quality,
certificates of deposit and bankers' acceptances and securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Such high
quality, short-term securities may pay interest at rates which are periodically
redetermined or may pay interest at fixed rates. 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.
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.
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
"Diversification and Concentration."
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, Borrowers will generally pay more than the Prime Rate to
the Fund on the Senior Loans. These base lending rates generally are the prime
rate offered by one or more major United States banks (the "Prime Rate"), the
London Inter-Bank Offered Rate ("LIBOR"), the certificate of deposit ("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.
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 of which may have outstanding debt securities 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 subordinate obligations. These
difficulties could detract from the Borrower's perceived creditworthiness or its
abilities to obtain financing to cover short-term cash flow needs and may force
the Borrower into various forms of credit restructuring. 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 acquire Participations only 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-I 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.
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 holding of assets in safekeeping for, or 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
forego 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 carried in connection with reinvestment.
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 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. 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 Securities and Exchange Commission ("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
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. Although interests in Senior Loans are
traded among certain financial institutions in private transactions between
buyers and sellers, these loans continue to be considered illiquid. Senior
Loans' 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.
Diversification and Concentration. The Fund has registered as a
"non-diversified" investment company so that, subject to its investment
restrictions, it will be able to invest more than 5% of the value of its assets
in the obligations of any single issuer, including Senior Loans of a single
Borrower or Participations purchased from a single Lender. See "Investment
Restrictions" in the Statement of Additional Information. As a result, the Fund
is required to comply only with the diversification requirements of Subchapter M
of the Internal Revenue Code of 1986, as amended. See "Taxation" in the
Statement of Additional Information for a description of these requirements. The
Fund initially expects to invest up to 10% of the value of its assets in
interests in Senior Loans of single Borrowers until its aggregate asset level
reaches $20 million. Once this $20 million asset level is reached, the Fund
intends to limit the value of its assets in interests in Senior Loans of a
single Borrower to 5%.
Pursuant to the Investment Company Act of 1940, as amended, a "diversified
company" is required with respect to 75% of its assets to limit investment in
any one issuer to 5% of assets. The other 25% of the investment company's assets
may be invested without regard to such restrictions. The limited number of loan
syndication and lending banks requires the Fund to register as a non-diversified
investment company in order to comply with the Investment Company Act of 1940,
as amended. Moreover, even though the Fund may be able in the future to be
classified as a "diversified" investment company, the flexibility provided by
the "non-diversified" classification for investing the Fund's assets is
essential upon commencing operations. To the extent the Fund invests a
relatively high percentage of its assets in obligations of a limited number of
issuers, the Fund will be more susceptible than a more widely diversified
investment company to any single corporate, economic, political or regulatory
occurrence.
The Fund may acquire interests in Senior Loans made to Borrowers in any
industry. However, the Fund will not invest more than 25% of its assets in
Senior Loans of Borrowers or Lending Agents determined to be issuers that are
concentrated in any one particular industry.
INVESTMENT PRACTICES AND SPECIAL RISKS
In connection with the investment objectives and policies described above, the
Fund may engage in interest rate and other hedging transactions, lend portfolio
holdings, purchase and sell interests in Senior Loans and other portfolio debt
securities on a "when issued" or "delayed delivery" basis, and enter into
repurchase and reverse repurchase agreements. These investment practices involve
certain special risk considerations. The Advisor may use some or all of the
following investment practices when, in its opinion, their use is appropriate.
Although the Advisor believes that these investment practices may further the
Fund's investment objective, no assurance can be given that these investment
practices will achieve this result.
INTEREST RATE AND OTHER HEDGING TRANSACTIONS
The Fund may enter into various interest rate hedging and risk management
transactions. The Fund expects to enter into these transactions primarily to
seek to preserve a return on a particular investment or portion of its
portfolio, and may also enter into such transactions to seek to protect against
decreases in the anticipated rate of return on floating or variable rate
financial instruments the Fund owns or anticipates purchasing at a later date,
or for other risk management strategies such as managing the effective
dollar-weighted average duration of the Fund's portfolio. In addition, with
respect to fixed-income securities and interests in Senior Loans in the Fund's
portfolio, the Fund may also engage in hedging transactions to seek to protect
the value of its portfolio against declines in net asset value resulting from
changes in interest rates or other market changes. The Fund does not intend to
engage in such transactions to enhance the yield on its portfolio to increase
income available for distributions. Market conditions will determine whether and
in what circumstances the Fund would employ any of the hedging and risk
management techniques described below. The Fund will not engage in any of the
transactions for speculative purposes and will use them only as a means to hedge
or manage the risks associated with assets held in, or anticipated to be
purchased for, the Fund's portfolio or obligations incurred by the Fund. The
successful utilization of hedging and risk management transactions requires
skills different from those needed in the selection of the Fund's portfolio
securities. The Fund believes that the Sub-Advisor possesses the skills
necessary for the successful utilization of hedging and risk management
transactions. The Fund will incur brokerage and other costs in connection with
its hedging transactions.
To the extent permitted by applicable regulatory authority, the Fund may enter
into interest rate swaps or purchase or sell interest rate caps or floors. The
Fund will not sell interest rate caps or floors that it does not own. Interest
rate swaps involve the exchange by the Fund with another party of their
respective obligations to pay or receive interest, e.g., an exchange of an
obligation to make floating rate payments for an obligation to make fixed rate
payments. For example, the Fund may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio the Borrower to which
has selected an interest rate redetermination period of one year. The Fund could
exchange the Borrower's obligation to make fixed rate payments for one year for
an obligation to make payments that readjust monthly. In such event, the Fund
would consider the interest rate redetermination period of such Senior Loan to
be the shorter period.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest at the difference of the index and the predetermined rate on a notional
principal amount (the reference amount with respect to which interest
obligations are determined although no actual exchange of principal occurs) from
the party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest at the difference
of the index and the predetermined rate on a notional principal amount from the
party selling such interest rate floor. The Fund will not enter into swaps, caps
or floors if, on a net basis, the aggregate notional principal amount with
respect to such agreements exceeds the net assets of the Fund.
In circumstances in which the Advisor anticipates that interest rates will
decline, the Fund might, for example, enter into an interest rate swap as the
floating rate payor or, alternatively, purchase an interest rate floor. In the
case of purchasing an interest rate floor, if interest rates declined below the
floor rate, the Fund would receive payments from its counterparty which would
wholly or partially offset the decrease in the payments it would receive in
respect of the portfolio assets being hedged. In the case where the Fund
purchases such an interest rate swap, if the floating rate payments fell below
the level of the fixed rate payment set in the swap agreement, the Fund's
counterparty would pay the Fund amounts equal to interest computed at the
difference between the fixed and floating rates over the notional principal
amount. Such payments would offset or partially offset the decrease in the
payments the Fund would receive in respect of floating rate portfolio assets
being hedged.
The successful use of swaps, caps and floors to preserve the rate of return on a
portfolio of financial instruments depends on the Advisor's ability to predict
correctly the direction and extent of movements in interest rates. Although the
Fund believes that use of the hedging and risk management techniques described
above will benefit the Fund, if the Advisor's judgment about the direction or
extent of the movement in interest rates is incorrect, the Fund's overall
performance would be worse than if it had not entered into any such
transactions. For example, if the Fund had purchased an interest rate swap or an
interest rate floor to hedge against its expectation that interest rates would
decline but instead interest rates rose, the Fund would lose part or all of the
benefit of the increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its counterparty under
the swap agreement or would have paid the purchase price of the interest rate
floor.
Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, the Advisor and the Fund believe such obligations do not
constitute senior securities. The Fund will usually enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If the Fund enters into a swap on other than a net basis, the
Fund will maintain in the segregated account the full amount of the Fund's
obligations under each such swap. Accordingly, the Fund does not treat swaps as
senior securities. The Fund may enter into swaps, caps and floors with member
banks of the Federal Reserve System, members of the New York Stock Exchange or
other entities determined by the Advisor, pursuant to procedures adopted and
reviewed on an ongoing basis by the Board of Trustees, to be creditworthy. If a
default occurs by the other party to such transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction but
such remedies may be subject to bankruptcy and insolvency laws which could
affect the Fund's rights as a creditor. The swap market has grown substantially
in recent years with a large number of banks and financial services firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations and they are less liquid than swaps. There can be no
assurance, however, that the Fund will be able to enter into interest rate swaps
or to purchase interest rate caps or floors at prices or on terms the Advisor
believes are advantageous to the Fund. In addition, although the terms of
interest rate swaps, caps and floors may provide for termination, there can be
no assurance that the Fund will be able to terminate an interest rate swap or to
sell or offset interest rate caps or floors that it has purchased.
New financial products continue to be developed and the Fund may invest in any
such products as may be developed to the extent consistent with its investment
objective and the regulatory and federal tax requirements applicable to
investment companies.
LENDING OF PORTFOLIO HOLDINGS
The Fund may seek to increase its income by lending financial instruments in its
portfolio in accordance with present regulatory policies, including those of the
Board of Governors of the Federal Reserve System and the SEC. Such loans may be
made, without limit, to brokers, dealers, banks or other recognized
institutional borrowers of financial instruments and would be required to be
secured continuously by collateral, including cash, cash equivalents or U.S.
Treasury bills maintained on a current basis at an amount at least equal to the
market value of the financial instruments loaned. The Fund would have the right
to call a loan and obtain the financial instruments loaned at any time on five
days' notice. For the duration of a loan, the Fund would continue to receive the
equivalent of the interest paid by the issuer on the financial instruments
loaned and also would receive compensation from the investment of the
collateral.
The Fund would not have the right to vote any financial instruments having
voting rights during the existence of the loan, but the Fund could call the loan
in anticipation of an important vote to be taken among holders of the financial
instruments or in anticipation of the giving or withholding of their consent on
a material matter affecting the financial instruments. As with other extensions
of credit, risks of delay in recovery or even loss of rights in the collateral
exist should the borrower of the financial instruments fail financially.
However, the loans would be made only to firms deemed by the Advisor to be of
good standing and when, in the judgment of the Advisor, the consideration which
can be earned currently from loans of this type justifies the attendant risk.
The creditworthiness of firms to which the Fund lends its portfolio holdings
will be monitored on an ongoing basis by the Advisor pursuant to procedures
adopted and reviewed, on an ongoing basis, by the Board of Trustees of the Fund.
No specific limitation exists as to the percentage of the Fund's assets which
the Fund may lend.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell interests in Senior Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Senior Loans and other portfolio debt securities
at delivery may be more or less than their purchase price, and yields generally
available on such interests or securities when delivery occurs may be higher or
lower than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous.
When the Fund is the buyer in such a transaction, however, it will maintain, in
a segregated account with its custodian, cash or high-grade portfolio securities
having an aggregate value equal to the amount of such purchase commitments until
payment is made. The Fund will make commitments to purchase such interests or
securities on such basis only with the intention of actually acquiring these
interests or securities, but the Fund may sell such interests or securities
prior to the settlement date if such sale is considered to be advisable. To the
extent the Fund engages in "when issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring interests or securities for the Fund's
portfolio consistent with the Fund's investment objective and policies and not
for the purpose of investment leverage. No specific limitation exists as to the
percentage of the Fund's assets which may be used to acquire securities on a
"when issued" or "delayed delivery" basis.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements (a purchase of, and a simultaneous
commitment to resell, a financial instrument at an agreed upon price on an
agreed upon date) only with member banks of the Federal Reserve System and
member firms of the New York Stock Exchange. When participating in repurchase
agreements, the Fund buys securities from a vendor, e.g., a bank or brokerage
firm, with the agreement that the vendor will repurchase the securities at a
higher price at a later date. Such transactions afford an opportunity for the
Fund to earn a return on available cash at minimal market risk, although the
Fund may be subject to various delays and risks of loss if the vendor is unable
to meet its obligation to repurchase. Under the 1940 Act, repurchase agreements
are deemed to be collateralized loans of money by the Fund to the seller. In
evaluating whether to enter into a repurchase agreement, the Advisor will
consider carefully the creditworthiness of the vendor. If the member bank or
member firm that is the party to the repurchase agreement petitions for
bankruptcy or otherwise becomes subject to the U.S. Bankruptcy Code, the law
regarding the rights of the Fund is unsettled. The securities underlying a
repurchase agreement will be marked to market every business day so that the
value of the collateral is at least equal to the value of the loan, including
the accrued interest thereon, and the Advisor will monitor the value or the
collateral. No specific limitation exists as to the percentage of the Fund's
assets which may be used to participate in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with respect to debt
obligations which could otherwise be sold by the Fund. A reverse repurchase
agreement is an instrument under which the Fund may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker or dealer) to sell the security back to the Fund at
an agreed upon price on an agreed upon date. The Fund will maintain in a
segregated account with its custodian cash or liquid high grade portfolio
securities in an amount sufficient to cover its obligations with respect to
reverse repurchase agreements. The Fund receives payment for such securities
only upon physical delivery or evidence of book entry transfer by its custodian.
Regulations of the SEC require either that securities sold by the Fund under a
reverse repurchase agreement be segregated pending repurchase or that the
proceeds be segregated on the Fund's books and records pending repurchase.
Reverse repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them. Reverse repurchase agreements will be considered
borrowings by the Fund and as such would be subject to the restrictions on
borrowing described in the Statement of Additional Information under "Investment
Restrictions." The Fund will not hold more than 5% of the value of its total
assets in reverse repurchase agreements.
TAXATION
The following federal tax discussion is based on the advice of Morgan, Lewis &
Bockius LLP, reflects applicable tax laws as of the date of this Prospectus and
is qualified by reference to the additional federal income tax discussion
included in the Statement of Additional Information.
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"). 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 gains) in each year, the Fund will
not be required to pay federal income taxes on any income distributed to
shareholders. 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.
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 were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income.
Distributions. Distributions of the Fund's net investment income are taxable to
holders of Class A Common Shares 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 holders of Common
Shares at the rates applicable to long-term capital gains regardless of the
length of time shares of the Fund have been held by such shareholders. The Fund
will inform shareholders of the source and tax status of all distributions
promptly after the close of each calendar year.
Sale of Shares. Except as discussed below, selling 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. The federal income tax consequences of the 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 and state tax consequences of holding and disposing of
Common Shares, as well as the effects of other state, local and foreign tax laws
and any proposed tax law changes.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The management of the Fund, including general supervision of the duties
performed by the Advisor under the Advisory Agreement, is the responsibility of
the Fund's Board of Trustees. The trustees are experienced business persons who
meet throughout the year to oversee the Fund's activities, review contractual
arrangements with companies that provide services to the Fund, and review
performance. The majority of trustees are not affiliated with SISC, Sierra
Advisors or Sierra Administration other than as trustees of the Fund. The Fund
was organized on October 4, 1995 under the laws of the Commonwealth of
Massachusetts as a "Massachusetts business trust."
As a Massachusetts business trust, the Fund is not required to hold annual
shareholder meetings. On occasion, however, special meetings may be called to
elect or remove trustees, change fundamental policies, approve a management
contract, or for other purposes. Trustees may be removed by shareholders at a
special meeting called upon the request of shareholders among at least 10% of
the outstanding shares of the Fund. Shareholders not attending these meetings
are encouraged to vote by proxy. Sierra Administration will mail proxy materials
in advance, including a voting card and information about the proposals to be
voted on. When matters are submitted for shareholder vote, shareholders of the
Fund will have one vote for each full share owned and proportionate, fractional
votes for fractional shares held.
THE ADVISOR
Sierra Advisors was incorporated in California in 1988 and is a wholly-owned
subsidiary of Great Western Financial Corporation ("Great Western"). Great
Western's other operations include real estate finance, mortgage banking, retail
banking and consumer finance. Pursuant to the Advisory Agreement between the
Advisor and the Fund, the Advisor has specific responsibility for investment
services provided to the Fund. Accordingly, the Advisor with the general
oversight of the Board of Trustees has the authority to accept or reject
portfolio selections and pricing determinations of Van Kampen.
The Advisor currently manages or supervises over $3.3 billion in assets. The
Advisor is a registered investment advisor under the Investment Advisors Act of
1940, as amended, and in this capacity has general oversight responsibility for
the investment advisory services provided to the Trust, Sierra Trust Funds
("Sierra Trust") and The Sierra Variable Trust ("Sierra Variable"). Sierra Trust
is an open-end management investment company that currently offers three money
market funds and thirteen mutual funds. Sierra Variable is a no-load, open-end
management investment company that currently offers nine separate funds. Sierra
Variable is intended as an investment vehicle exclusively for variable annuity
or variable life insurance contracts offered by the separate accounts of various
insurance companies.
The Advisor's other responsibilities include participating in the formulation of
Sierra Trust and Sierra Variable investment policies, analyzing economic trends
affecting Sierra Trust and Sierra Variable and monitoring and evaluating the
services provided by the sub-advisors, including their adherence to Sierra Trust
and Sierra Variable investment objectives, policies and performance.
THE SUB-ADVISOR
Van Kampen is the sub-advisor to the Fund, located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. Pursuant to the sub-advisory agreement with
the Advisor, Van Kampen selects the investments made by the Fund subject to the
oversight and specific direction of the Advisor. The Sub-Advisor also monitors
the provisions and the Loan Agreements and any agreements with respect to
Participations and Assignments, provides recordkeeping responsibilities with
respect to Senior Loans in the Fund's portfolio and provides certain services to
holders of the Fund's Common Shares.
Moreover, the Sub-Advisor also provides investment advice to a wide variety of
individual, institutional and investment company clients and has aggregate
assets under management, as of December 31, 1995, of more than $54 billion.
Moreover, Van Kampen American Capital Investment Advisory Corp., a sister
affiliate of Van Kampen, currently manages a similar prime rate fund, Van Kampen
American Capital Prime Rate Income Trust, which as of December 31, 1995
consisted of approximately $3.65 billion of assets under management. Van Kampen
is a wholly-owned subsidiary of Van Kampen American Capital, Inc. Van Kampen
American Capital, Inc. is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC
Holding, Inc. is controlled, through the ownership of a substantial majority of
its common stock by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The General Partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore,
Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson,
each of whom is a principal of Clayton, Dubilier & Rice, Inc. In addition,
certain officers, directors and employees of Van Kampen American Capital, Inc.
own, in the aggregate, not more than seven percent of the common stock of VK/AC
Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own five percent or more of the common
stock of VK/AC Holding, Inc.
Portfolio Manager. Jeffrey W. Maillet is a Senior Vice President of Van Kampen
and has been primarily responsible for the day-to-day management of Van Kampen's
Prime Rate Income Trust since the Fund's commencement of investment operations
in 1989. Mr. Maillet has been employed by Van Kampen American Capital Investment
Advisory Corp. since 1989.
THE ADMINISTRATOR
Sierra Administration provides shareholders service and other administrative
services. Sierra Administration is under common control with the Advisor and
SISC. SISC is the principal underwriter of the Common Shares in connection with
the offering thereof by the Fund. See "Offering of Shares." Sierra
Administration's principal business address is 9301 Corbin Avenue, Northridge,
CA 91324.
Pursuant to the Administration Agreement, Sierra Administration is responsible
for all administrative functions with respect to the Trust, although it
delegates certain of its responsibilities to a sub-administrator. Sierra
Administration itself or through its sub-administrator performs many shareholder
transaction and accounting functions. In addition to such services, Sierra
Administration is responsible for performing activities as Transfer/Shareholder
Servicing Agent, such as keeping records of shareholders and handling
shareholder communications. Sierra Administration is entitled to a monthly fee
at an annual rate of 0.35% of the Fund's average daily net assets. Sierra
Administration pays State Street Bank & Trust Company ("State Street") for
certain administrative and custodial services. In addition, Sierra
Administration also pays First Data Investor Services Group, Inc. ("First Data")
for certain transfer agency services. The Fund pays for the sub-transfer agent,
sub-administrator and custodial out-of-pocket expenses.
THE DISTRIBUTOR
SISC is the distributor of the Class A Common Shares of the Fund. SISC is
located at 9301 Corbin Avenue, Northridge, California 91324. SISC, an indirectly
wholly-owned subsidiary of GWFC, was established in 1992 and is a registered
broker-dealer with the NASD and a registered investment advisor.
The Fund intends to distribute the shares of the Fund in accordance with a
Distribution Agreement entered into between the Fund and SISC. Under this
Distribution Agreement, SISC will comply with the terms of the Distribution
Agreement and the NASD Rules concerning sales charges. Under the Distribution
Agreement, SISC will not be paid an annual fee as compensation in connection
with the offering and sale of the Class A Common Shares of the Fund. In
addition, the Distribution Agreement also recognizes that Sierra Advisors may
use its investment advisory fees or other resources to pay expenses associated
with activities primarily intended to result in the promotion and distribution
of the Fund's shares. SISC, may, from time to time, pay to other dealers, in
connection with retail sales or the distribution of shares of the Fund, material
compensation in the form of merchandise or trips.
DISTRIBUTIONS
The Fund's policy will be to declare daily and pay monthly distributions to
holders of Class A Common Shares of substantially all net investment income of
the Fund. Net investment income of the Fund consists of all interest income, fee
income, other ordinary income earned by the Fund on its portfolio assets and net
short-term capital gains, less all expenses of the Fund. Expenses of the Fund
will be accrued each day. Distributions to holders of Common Shares cannot be
assured, and the amount of each monthly distribution is likely to vary. Net
realized long-term capital gains, if any, are expected to be distributed to
holders of Common Shares at least annually. Holders of Common Shares may elect
to have distributions automatically reinvested in additional Common Shares.
See "Dividend Reinvestment Plan."
DISTRIBUTION OPTIONS
When you open an account, specify on your Application Form how you want to
receive your distributions. The election may be made or changed by writing to
Sierra Administration or by calling 800-222-5852. Each Fund offers two options:
REINVESTMENT OPTION. Your dividend and capital gain distributions will be
automatically reinvested in additional shares of the same Fund, unless you
instruct the Fund on the application form or later in writing or by telephone to
pay all dividends and distributions in cash. Dividends from a class of one Fund
may be reinvested in the same class of the same Fund or a different Fund. If the
Fund in which the reinvestment is made has a sales charge, you will not pay the
sales charge on the reinvested amount.
CASH OPTION. You will be sent a check for each dividend and capital gain
distribution.
REPURCHASE (TENDER OFFER) OF SHARES
The Board of Trustees of the Fund currently intends, each quarter, to consider
authorizing the Fund to make tender offers for a portion of its then outstanding
Class A Common Shares at the net asset value of such Common Shares on the
expiration date of the tender offer. Although such tender offers, if undertaken
and completed, will provide some liquidity for holders of the Common Shares,
there can be no assurance that such tender offers will in fact be undertaken or
completed or, if completed, that they will provide sufficient liquidity for all
holders of Common Shares who may desire to sell such Common Shares. Accordingly,
investment in the Common Shares should be considered illiquid.
Commencement by the Fund of such 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. No assurance can be given that the
Fund will obtain such an exemption. If the Board of Trustees of the Fund
authorizes the Fund to make such a tender offer prior to such time, if any, that
the Fund shall have obtained such an exemption, the Fund intends to suspend the
continuous offering of its Common Shares during the term of such tender offer.
Although the Board of Trustees believes that tender offers for the Common Shares
generally would increase the liquidity of the Common Shares, the acquisition of
Common Shares by the Fund will decrease the total assets of the Fund and,
therefore, have the effect of increasing the Fund's expense ratio. Because of
the nature of the Fund's investment objective and policies and the Fund's
portfolio, the Advisor anticipates potential difficulty in disposing of
portfolio securities in order to consummate tender offers for the Common Shares.
As a result, the Fund may be required to borrow money in order to finance
repurchases and tenders.
As a fundamental policy of the Fund, the Fund's Declaration of Trust authorizes
the Fund, without prior approval of the holders of Common Shares, to borrow
money in an amount up to 33 1/3% of the Fund's total assets, for the purpose of,
among other things, obtaining short-term credits in connection with tender
offers by the Fund for its Common Shares. The Fund currently expects, however,
to limit its borrowing to an amount sufficient to meet its tender offer
purchases or 10% of its assets, whichever is greater. In this connection, the
Fund may issue notes or other evidence of indebtedness or secure any such
borrowings by mortgaging, pledging or otherwise subjecting as security the
Fund's assets. Under the requirements of the 1940 Act, the Fund, immediately
after any such borrowing, must have an "asset coverage" of at least 300%. With
respect to any such borrowing, asset coverage means the ratio which the value of
the total assets of the Fund, less all liabilities and indebtedness not
represented by senior securities (as defined in the 1940 Act), bears to the
aggregate amount of such borrowing by the Fund. The rights of lenders to the
Fund to receive interest on and repayment of principal of any such borrowings
will be senior to those of the holders of Common Shares, and the terms of any
such borrowings may contain provisions which limit certain activities of the
Fund, including the payment of dividends to holders of Common Shares in certain
circumstances. Further, the terms of any such borrowing may and the 1940 Act
does (in certain circumstances) grant to the lenders to the Fund certain voting
rights in the event of default in the payment of interest on or repayment of
principal. In the event that such provisions would impair the Fund's status as a
regulated investment company, the Fund, subject to its ability to liquidate its
relatively illiquid portfolio, intends to repay the borrowings. Any borrowing
will likely rank senior to or pari passu with all other existing and future
borrowings of the Fund. Interest payments and fees incurred in connection with
borrowings will reduce the amount of net income available for payment to the
holders of Common Shares. The Fund does not intend to use borrowings for
leverage purposes. Accordingly, the Fund will not purchase additional portfolio
securities, other than with proceeds from the sale or maturity of existing
portfolio securities, at any time that borrowings, including the Fund's
commitments, pursuant to reverse repurchase agreements, exceed 5% of the Fund's
total assets (after giving effect to the amount borrowed).
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 holders of Common Shares to ascertain readily such net asset value.
Each tender offer will be made and shareholders notified in accordance with the
requirements of the Securities Exchange Act of 1934, as amended, either by
publication or mailing or both. Each tender offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. The Fund will purchase its Common Shares tendered in
accordance with the terms of the offer unless it determines to terminate the
offer. The repurchase of tendered shares by the Fund is a taxable event. See
"Taxation." The Fund will pay all costs and expenses associated with the making
of any tender offer by the Fund. See the Statement of Additional Information for
additional information concerning repurchase of the Fund's Common Shares.
If the Fund must liquidate portfolio holdings in order to purchase Common Shares
tendered, the Fund may realize gains and losses. Such gains may be realized on
securities held for less than three months. Due to the requirement for
qualification as a regulated investment company under the Code 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 its portfolio management, which may affect
adversely the Fund's yield.
EXCHANGE PRIVILEGE. The Fund may make available to tendering shareholders the
privilege of exchanging Class A Common Shares for Class A shares of certain
open-end investment companies managed by the Advisor subject to any restrictions
or qualifications set forth in the prospectus of any such fund. Class A Common
Shares may be exchanged for Class A Shares of any of the funds of Sierra Trust
Funds. 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.
The exchange privilege is available only in those states where the offer and
sale of shares of the funds may legally be made. Upon 60 days' prior written
notice to shareholders, the Fund in its sole discretion may terminate or modify
the exchange privileges and restrictions and/or the Fund may begin imposing a
charge of up to $5.00 for each exchange. The prospectus for each "exchange fund"
describes its investment objectives and policies, and shareholders should obtain
a prospectus and consider the objectives and policies carefully before
requesting an exchange. Each exchange must involve shares which meet the minimal
requirements of a fund for an initial or subsequent purchase.
DESCRIPTION OF COMMON SHARES
The Fund is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by a Declaration of Trust dated October 4, 1995
(the "Declaration of Trust"). The Declaration of Trust provides that the
Trustees of the Fund may authorize separate classes of shares of beneficial
interest. The Trustees have authorized an unlimited number of Common Shares. The
Declaration of Trust also authorizes the Fund to borrow money or otherwise
obtain credit and in this connection issue notes or other evidence of
indebtedness. The Fund does not intend to hold annual meetings of the holders of
Common Shares.
COMMON SHARES. The Declaration of Trust permits the Fund to issue an unlimited
number of full and fractional Common Shares of beneficial interest with no par
value. The Declaration of Trust also provides authorization for establishing
multiple classes of Common Shares. Each Class A Common Share represents an equal
proportionate interest in the assets of the Fund with each other Common Share in
the Fund and has identical voting, dividend, liquidation and other rights.
Holders of Common Shares will be entitled to the payment of dividends when and
if declared by the Board of Trustees. The terms of any borrowings may limit the
payment of dividends to the holders of Common Shares. Each whole Common Share
shall be entitled to one vote as to matters on which it is entitled to vote
pursuant to the terms of the Fund's Declaration of Trust on file with the SEC.
Upon liquidation of the Fund, after paying or adequately providing for the
payment of all liabilities of the Fund, and upon receipt of such releases,
indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining assets of the Fund among
the holders of the Common Shares. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Fund, and indemnifies
shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law, in certain
limited circumstances, may be held personally liable for the obligations of the
Trust as though they were general partners, the provisions of the Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote.
The Common Shares are not, and are not expected to be, listed for trading on any
national securities exchange nor, to the Fund's knowledge, is there, or is there
expected to be, any secondary trading market in the Common Shares.
ANTI OPEN-END INVESTMENT COMPANY PROVISIONS IN THE DECLARATION OF TRUST. The
Fund's Declaration of Trust includes provisions that could have the effect of
limiting the ability of the Fund to convert from a closed-end to an open-end
management investment company. Specifically, the Declaration of Trust provides
that an amendment to such Declaration which makes the Fund's Common Shares a
"redeemable security" as defined in the Investment Company Act of 1940, as
amended, is required to be approved by at least (a) a majority of the Trustees,
including a majority of the Trustees who are not interested persons, and (b) a
majority shareholder vote.
ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST. The Fund's Declaration of
Trust includes provisions that could have the effect of limiting the ability of
other entities or persons to acquire control of the Fund or to change the
composition of its Board of Trustees by discouraging a third party from seeking
to obtain control of the Fund. In addition, in the event a secondary market were
to develop in the Common Shares, such provisions could have the effect of
depriving holders of Common Shares of an opportunity to sell their Common Shares
at a premium over prevailing market prices. A Trustee may be removed from office
only for cause by a written instrument signed by at least two-thirds of the
remaining Trustees or by a vote of the holders of at least two-thirds of the
Common Shares.
In addition, the Declaration of Trust requires the favorable vote of the holders
of at least two-thirds of the outstanding Common Shares then entitled to vote to
approve, adopt or authorize certain transactions with 5%-or-greater holders of
Common Shares and their associates, unless the Board of Trustees shall by
resolution have approved a memorandum of understanding with such holders, in
which case normal voting requirements would be in effect. See "Repurchase
(Tender Offer) of Shares -- Anti-Takeover Provisions" in the Statement of
Additional Information.
NET ASSET VALUE
The Fund values its shares once on each day the New York Stock Exchange (the
"NYSE") is open for trading, as of the close of regular trading on the NYSE
(normally 4:00 p.m. Eastern standard time). The Fund's net asset value per share
is determined by State Street, in the manner authorized by the Board of
Trustees. The Fund will be closed for business and will not price its shares on
the following business holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's net asset value is computed by determining the value of the total
assets (the securities it holds plus cash or other assets, including interest
accrued but not yet received), and subtracting all liabilities (including the
outstanding principal amount of any indebtedness issued and any unpaid interest
thereon). For future information regarding valuation, see "Determination of Net
Asset Value" in the Statement of Additional Information.
Because Senior Loans are not actively traded in a public market, the Advisor and
Sub-Advisor, following procedures established by the Fund's Board of Trustees,
will value the Senior Loan interests held by the Fund at fair value. In valuing
a Senior Loan interest, the Advisor and Sub-Advisor will consider relevant
factors, data and information, including: (i) the characteristics of and
fundamental analytical data relating to the Senior Loan, including the cost,
size, current interest rate, period until next interest rate reset, maturity and
base lending rate of the Senior Loan interest, the terms and conditions of the
Senior Loan and any related agreements, and the position of the Senior Loan in
the Borrower's debt structure; (ii) the nature, adequacy and value of the
collateral, including the Fund's rights, remedies and interests with respect to
the collateral; (iii) the creditworthiness of the Borrower's business, cash
flows, capital structure and future prospects; (iv) information relating to the
market for Senior Loans, including price quotations (if considered reliable) for
and trading in Senior Loans and interests in similar Loans and the market
environment and investor attitudes towards the Senior Loans and interests in
similar Loans; (v) the reputation and financial condition of the Agent and any
Intermediate Participants in the Senior Loans; and (vi) general economic and
market conditions affecting the fair value of Senior Loans.
Other Fund holdings (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 average of the last quoted bid price and asked 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 Portfolio 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 by the Fund 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 Board of Trustees.
OFFERING OF SHARES
The Fund will engage in a continuous offering of its Class A Common Shares
through SISC, the distributor and principal underwriter, whose offices are
located at 9301 Corbin Avenue, Northridge, CA 91324. The Class A Common Shares
may also be offered through members of the National Association of Securities
Dealers, Inc. ("NASD") or eligible non-NASD members who are acting as brokers or
agents for investors (i.e., Authorized Dealers). The Fund reserves the right to
terminate or suspend the continuous offering of its Common Shares at any time
without prior notice.
The Fund does not intend to list the Class A Common Shares on any national
securities exchange and none of the Fund, the Advisor, Van Kampen or SISC
intends to make a secondary market in such Common Shares. Accordingly, there is
not expected to be any secondary trading market in the Class A Common Shares and
an investment in these Common Shares should be considered illiquid.
The Class A Common Shares will be offered by the Fund at the public offering
price next computed after an investor places an order to purchase directly with
SISC, or with the investor's broker-dealer.
During the continuous offering, the Fund's shares will be valued at a public
offering price equal to the next determined net asset value ("NAV") per share
plus a maximum sales charge, payable to SISC, based on the following schedule:
As a % of Offering
Amount of Transaction Price Per Share
- --------------------- ---------------
Less than $50,000 4.50%
$50,000 but less than $100,000 4.00%
$100,000 but less than $250,000 3.50%
$250,000 but less than $500,000 3.00%
$500,000 but less than $1,000,000 2.00%
$1,000,000 and over 0%*
- -----------------------
* Purchases of $1 million or more and certain other purchases are not subject to
the sales charge at the time of purchase, but may be subject to a 1.0% early
withdrawal charge on repurchases or tenders within one year of purchase or a
0.5% early withdrawal charge on repurchases or tenders during the second year
after purchase. See "Application of Class A Common Shares Early Withdrawal
Charge" and "Waivers of Class A Common Shares Sales Charges" sections.
AUTHORIZED DEALERS. The price of Common Shares ordered through an Authorized
Dealer will be the public offering price next determined after the Fund receives
the order. Because the Fund determines the public offering price once daily on
each business day as of 4:00 p.m. Eastern standard time, orders placed through
an Authorized Dealer must be transmitted to the Fund by such dealer prior to
such time for the investor's order to be executed at the public offering price
to be determined that day.
SISC will compensate Authorized Dealers participating in the continuous offering
of the Fund's Class A Common Shares pursuant to the following schedule:
Dealers' Reallowance
Amount of Transactions as a % of Offering Price
- ---------------------- ------------------------
Less than $50,000 4.00%
$50,000 but less than $100,000 3.50%
$100,000 but less than $250,000 3.00%
$250,000 but less than $500,000 2.50%
$500,000 but less than $1,000,000 1.75%
$1,000,000 and over 0%*
- ---------------------------
* Investors do not pay a sales charge at the time of purchase on purchases of $1
million or more; however, except as waived by the dealer of record as stated
in the subsection "Application of Class A Common Shares Early Withdrawal
Charge," SISC may pay the investment dealers of record on purchases of Class A
Common Shares of $1 million or more a fee of up to 1% of the net asset value
of each purchase.
As mentioned above SISC may pay Authorized Dealers a fee of up to 1.00% of net
asset value for Class A Common Share transactions over $1,000,000. Dealer
reallowance may be changed by SISC from time to time, and upon notice, SISC may
reallow up to the full applicable sales charge to certain Authorized Dealers. In
addition, if Common Shares of the Fund are sold by an Authorized Dealer, SISC
may in its discretion pay up to a maximum of 0.25% of the value of such Common
Shares to such Authorized Dealers.
HOW TO BUY SHARES
If you are new to the Fund or Sierra Trust Funds, complete and sign a new
Account Application and mail it along with your check. You may also open your
account in person or by wire as described on the following pages. Shares can be
purchased directly through a representative of Great Western Financial
Securities Corporation ("GW Securities"). Payment for shares is due at GW
Securities no later than the settlement date, which is the third business day
after the order is placed. If there is no application form accompanying this
prospectus, call 800-222-5852.
AFTER HAVING READ THE FUND'S PROSPECTUS, IF YOU HAVE MONEY INVESTED IN A FUND OF
THE SIERRA TRUST FUNDS, YOU CAN:
o Mail in a check with the additional investment slip attached to your account
statement;
o Mail in a completed application form with a check; or
o Invest in the Fund by exchanging from the same Class of another Fund of the
Sierra Trust Funds by calling
800-222-5852.
IF YOU ARE INVESTING THROUGH A TAX-SHELTERED RETIREMENT PLAN, such as an IRA,
you will need a special application form. Retirement investing also involves its
own investment procedures. Call 800-222-5852 for more information and a
retirement application form.
GENERAL INFORMATION ABOUT PURCHASES.
MINIMUM INVESTMENTS
TO OPEN A CLASS A COMMON SHARES ACCOUNT $250
For Sierra Automatic Investment Plan Accounts
and
Investment of Dividends or Distributions of a
Non-Affiliated Fund (as defined in the following
paragraph) $100
For investment of Distributions Paid to GW Securities
Clients by Certain Unit Investment Trusts (each, a "UIT") $ 25
TO ADD TO A CLASS A COMMON SHARES ACCOUNT $100
For Sierra Automatic Investment Plan Accounts
and
Investment of Dividends or Distributions of a
Non-Affiliated Fund $ 25
For Investment of Distributions Paid to GW Securities
Clients by Certain UITs $ 25
MINIMUM BALANCE FOR A CLASS A COMMON SHARES
ACCOUNT $250
For Sierra Automatic Investment Plan Accounts
and
Investment of Dividends or Distributions of a
Non-Affiliated Fund None
For Investment of Distributions Paid to GW Securities
Clients by Certain UITs $ 25
The Fund has a minimum of $250 for initial investments and $100 for subsequent
investments for Class A Common Shares, except that (i) shareholders who
participate in the Sierra Automatic Investment Plan (the "Plan") may establish
Fund accounts for a minimum initial investment of $100 and subsequent automatic
investments of $25 a month (ii) shareholders of non-money market mutual funds
not affiliated with the Trust or Sierra Services (each, a "Non-Affiliated Fund")
may establish Fund accounts by investing dividends or distributions for such
Non-Affiliated Fund for a minimum initial investment of $100 and subsequent
investments of $25; and (iii) GW Securities clients may establish Fund accounts
by investing UIT distributions for a minimum initial investment of $25 and
subsequent investments of $25. For more information see section entitled
"Waivers of Class A Common Shares Sales Charge."
ACCEPTANCE OF ORDERS
The Fund reserves the right to reject any purchase order for its Common Shares
and to suspend the offering of its Common Shares for any period of time.
INVESTMENTS MADE BY CHECK
Money transmitted by a check drawn on a member of the Federal Reserve System is
converted to Federal Funds within one business day following receipt and is then
invested in the Fund. Checks drawn on banks that are not members of the Federal
Reserve System may take longer to be converted and invested. All payments must
be in U.S. Dollars.
IF YOU BUY SHARES BY CHECK and then tender those shares except in an exchange to
a fund of the Sierra Trust Funds, the payment may be delayed for up to fifteen
days or more to ensure that your check clears.
DIVIDEND REINVESTMENT PLAN
A Dividend Reinvestment Plan will be established automatically for each
shareholder unless the shareholder specifies by completing the appropriate
section of the Fund's Account Application or otherwise notifies Shareholder
Services in writing at the address provided below. Under this plan, all income
dividends and capital gain distributions will be automatically reinvested in
additional shares of the Fund that paid the dividend at the net asset value
("NAV") determined on the dividend payment date. The election may be made or
changed by writing to Sierra Administration at 9301 Corbin Avenue, Suite 333,
P.O. Box 1160, Northridge, California 91328-1160 or by telephoning Sierra
Administration at 800-222-5852.
SIERRA AUTOMATIC INVESTMENT PLAN (THE "PLAN")
One easy way to pursue your financial goals is to invest money regularly. While
regular investment plans do not guarantee a profit and will not protect you
against loss in a declining market, they can be an excellent way to invest for
retirement, a home, educational expenses, and other long-term financial goals.
Certain restrictions apply for retirement accounts. Call 800-222-5852 for more
information.
The Plan offers a simple way to maintain a regular investment program. With the
Plan, monthly investments (minimum $25) are made automatically from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account on the 15th of each month. The minimum for opening a
Fund account through the Plan is $100. By enrolling in the Plan, the shareholder
authorizes the Fund and its agents to withdraw funds from the designated account
at a bank or other financial institution. Such an account must have check or
draft writing privileges. This privilege may be selected by completing the
appropriate section of the Fund's Account Application or by contacting a GW
Securities representative, or Sierra Administration (800-222-5852) for the
appropriate forms.
Once enrolled in the Plan, shareholders will receive written confirmation of
each transaction, and a debit will appear on the shareholder's bank statement.
To change the amount, the shareholder must notify Sierra Administration at
800-222-5852 at least ten business days prior to the scheduled investment date.
Shareholders who redeem their Plan accounts in full are not required to provide
prior notification to terminate the service. The Fund may immediately terminate
a shareholder's Plan in the event that any item is unpaid by the shareholder's
financial institution. Fund shares purchased through the Plan must be owned for
15 days before they may be redeemed. The Fund may terminate or modify this
privilege at any time.
RETIREMENT PLANS
Shares of the Fund are available for purchase in connection with a variety of
tax-deferred prototype retirement plans: (1) IRAs (including "rollovers" from
existing retirement plans) for individuals and their spouses; (2) Profit Sharing
and Money-Purchase Plans for corporations and self-employed individuals and
their partners to benefit themselves and their employees; and (3) 403(b) Plans.
Custodian fees may be charged in connection with these retirement plans. If you
are investing through an IRA, you will need a special application form.
Retirement investing also involves its own investment procedures. For additional
information regarding investments made by qualified plans, see "Waivers of Class
A Common Shares Sales Charges." For more information regarding retirement plans
or to receive an IRA application form, telephone Sierra Administration at
800-222-5852.
<PAGE>
HOW TO INVEST IN THE FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
MINIMUM $250* MINIMUM $100*
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY PHONE o Exchange from a Sierra Trust Fund account o Exchange from a Sierra
800-222-5852 with same registration, including name, Trust Fund account with the
address, and taxpayer ID number (social same registration, including name,
security number for an individual). address, and taxpayer ID number.
o Call Sierra Administration at o To transfer funds from your Great
800-222-5852. Western Bank Checking Account or Savings
Account, or your GW Securities Brokerage
Account, call your GW Securities representative.
o Call Sierra Administration at 800-222-5852.
- --------------------------------------------------------------------------------------------------------------------
BY MAIL o Complete and sign the application. Make your o Make your check payable to "Great
check or negotiable bank draft payable to Western Financial Securities Corporation."
"Great Western Financial Securities Indicate your Fund account number on your
Corporation" or include the account number of check. Include the "next investment" stub
the Great Western account or GW Securities from your previous account statement. Mail
brokerage account from which your investment the check and stub to the address printed on
will be drawn. your account statement.
o Mail the completed application form and check o Exchange by mail: call 800-222-5852 for
to: instructions.
Sierra Prime Income Fund
9301 Corbin Avenue, Suite 333
P.O. Box 1160
Northridge, California 91328-1160
Tables continued on following page.
- --------------------------------------------------------------------------------------------------------------------
IN PERSON o Visit a GW Securities Representative o Visit a GW Securities Representative
at your nearest Great Western Bank branch. at your nearest Great Western Bank branch.
Call 800-222-5852 for the Great Western Bank Call 800-222-5852 for the Great Western branch
branch nearest you. nearest you.
BY WIRE 1. Telephone Sierra Administration and o Instruct your bank/financial institution to
give the (a) name of the account as you wish wire Federal Funds as described at left under
it to be registered; (b) address of the paragraph 2 and inform Sierra Administration
account; (c) taxpayer ID number (social 800-222-5852 of the incoming wire.
security number for an individual); and (d)
Fund name.
2. Instruct your bank to wire Federal
Funds exactly as follows:
Great Western Bank
Beverly Hills, California
aba #322270039
For credit to (Sierra Prime Income
Fund)
Account #008-852200-5
(Fund Name)
(Customer's Name)
(Customer's Social Security Number)
3. Mail the completed application form
to:
Sierra Fund Administration Corporation
9301 Corbin Avenue, Suite 333
P.O. Box 1160
Northridge, California 91328-1160
- --------------------------------------------------------------------------------------------------------------------
AUTOMATICALLY 1. Obtain and complete an application o Pre-authorized monthly investments
form. are now processed automatically.
(Minimum New
Account amount 2. Attach a voided check or deposit slip
$100) from the account you would like the (Minimum Amount $25)
investments transferred from on the 15th of
each month.
3. Mail the application to the address
listed above.
</TABLE>
* $25 minimum to open or add to an account with investment of certain UIT
distributions, and $100 minimum to open an account, and $25 minimum to add to
an account, with investment of dividends or distributions from Non-Affiliated
Funds. See "How to Buy Shares -- Minimum Investments" section.
REDUCED SALES CHARGE AT PURCHASE
As described below, the sales charge on purchases of the Fund's Class A Common
Shares may be reduced through: (1) a Right of Accumulation; (2) Quantity
Discounts; (3) a Letter of Intent; and (4) Reinvestment Privileges. Reduced
sales charges may be modified or terminated at any time as to new purchases
and/or letters of intent and are subject to confirmation of an investor's
holdings. For more information about reduced sales charges, contact your GW
Securities representative or call 800-222-5852.
RIGHT OF ACCUMULATION
Under the Right of Accumulation, the current value of an investor's existing
Class A Shares in a Non-Money Market Fund of Sierra Trust Funds and Class B and
Class S Shares in all the Funds of the Sierra Trust Funds may be combined with
the amount of the investor's current purchase in the Fund in determining the
sales charge applicable to the Class A Common Shares. In order to receive the
cumulative quantity reduction, the investor or the securities dealer must call
previous purchases of such Class A, Class B and Class S Shares to the attention
of Sierra Administration at the time of the current purchase.
QUANTITY DISCOUNTS
As shown in the tables on pages 27 and 28 and under the Right of Accumulation
section, larger purchases of the Class A Common Shares of the Fund combined with
Non-Money Fund Class A Shares and Class B and Class S Shares of all the Sierra
Trust Funds reduce the sales charge paid on the Class A Common Shares. The Fund
will combine purchases of the Class A Common Shares of the Fund with the
Non-Money Fund Class A Shares, Class B and Class S Shares of Sierra Trust Funds
made on the same day by the investor, spouse, and any minor children when
calculating the Class A Common Shares sales charge. In order to receive the
cumulative quantity reduction, the investor or the securities dealer must call
related purchases of such Class A Common Shares, Class A, Class B and Class S
Shares to the attention of Sierra Administration at the time of the current
purchase.
LETTER OF INTENT
An investor may qualify for a reduced sales charge on Class A Common Shares
immediately by signing a non-binding "Letter of Intent" stating the investor's
intention to invest during the following 13 months a specified amount in the
Class A Common Shares which, if made at one time, would qualify for a reduced
sales charge. Any redemptions of Class A Common Shares made during the 13-month
period will be subtracted from the amount of purchases of Class A Common Shares
in determining whether the terms of the Letter of Intent have been met. During
the term of a Letter of Intent, Sierra Administration will hold Class A Common
Shares representing 5% of the amount purchased in escrow for payment of a higher
sales load if the full amount specified in the Letter of Intent is not purchased
within the 13-month period. The escrowed shares will be released when the full
amount specified has been purchased. If the full amount specified is not
purchased within the 13-month period, the investor will be required to pay an
amount equal to the difference in the dollar amount of sales charge actually
paid and the amount of sales charge the investor would have had to pay on the
investor's aggregate purchases of Class A Common Shares if the total of such
purchases had been made at a single time.
REINVESTMENT PRIVILEGE
Upon repurchase of the Class A Common Shares, a shareholder has the right, to be
exercised within 180 days, to reinvest any or all of the repurchase proceeds in
Class A Common Shares of the Fund without any sales charge at the next
determined NAV after receipt of the purchase order. The shareholder must notify
GW Securities in writing concerning the reinvestment in order to avoid the sales
charge.
EXCHANGE PRIVILEGE
Shareholders of Sierra Trust Funds are permitted to 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.
WAIVERS OF CLASS A COMMON SHARES SALES CHARGES
No initial sales charge will be assessed with respect to Class A Common Shares
of the Fund on: (1) purchases by (a) employees or retired employees of Great
Western Financial Corporation ("GWFC") or any of its affiliates and members of
their immediate families (spouses and minor children) and IRAs, Keogh Plans or
employee benefit plans for those employees and retired employees; (b) directors,
trustees, officers or advisory board members, or persons retired from such
positions, of any investment company for which GWFC or an affiliate serves as
investment advisor; (c) registered representatives or full-time employees of
Authorized Dealers or full-time employees of banks affiliated with such dealers;
(2) purchases by retirement plans created pursuant to Section 457 of the Code;
(3) purchases that are paid for with the proceeds from the redemption of shares
of a non-money market mutual fund not affiliated with the Trust or Sierra
Services, where the purchase occurs within 15 Business Days of the prior
redemption and is evidenced by a confirmation of the redemption transaction or a
broker-to-broker transfer request (Shareholder Services must be notified at the
time of purchase that the purchase being made qualifies for a purchase at NAV);
(4) purchases by employees of any of the Fund's Sub-Advisors; (5) purchases by
accounts as to which an Authorized Dealer or a bank affiliated with an
Authorized Dealer charges an account management fee, provided that the
Authorized Dealer or bank has an agreement with the Distributor; (6) purchases
by a GW Securities client through investment of distributions paid by a UIT
within 30 days of the payment of such distributions where the client's interests
in such UIT were acquired through GW Securities; and (7) purchases through
investment of dividends or distributions paid by a Non-Affiliated Fund within 30
days of the payment of such dividends or distributions.
No sales charge at purchase is assessed for Class A Common Shares purchased
through a 401(k) Plan or 403(b) Plan. Investors through a 401(k) Plan or 403(b)
Plan may be subject to various account fees and purchase and tender procedures
designated by the employer who has established such a plan. Such investors
should consult their employer or account agreements for information relating to
their accounts.
The Class A Common Shares Early Withdrawal Charge ("EWC"), described below, is
waived for repurchases or tendering of Class A Common Shares (i) that are part
of exchanges for Class A Shares of Sierra Trust Funds; (ii) for distributions to
pay benefits to participants from a retirement plan qualified under Section
401(a) or 401(k) of the Code, including distributions due to the death or
disability of the participant (including one who owns the shares as a joint
tenant); (iii) for distributions from a 403(b) Plan or an IRA due to death,
disability, or attainment of age 70 1/2, including certain involuntary
distributions; (iv) for tax-free returns of excess contributions to an IRA; and
(v) for distributions by other employee benefit plans to pay benefits.
APPLICATION OF CLASS A COMMON SHARES EARLY WITHDRAWAL CHARGE
The Class A Common Shares EWC of 1.0% or 0.5% may be imposed on certain
redemptions within one or two years of purchase, respectively, with respect to
Class A Common Shares (i) purchased at NAV without a sales charge at time of
purchase (purchases of $1 million or more), (ii) acquired through an exchange
for Class A Shares of a Non-Money Fund of the Sierra Trust Funds purchased at
NAV without a sales charge at time of purchase (purchases of $1 million or
more), (iii) purchased through an employee benefit trust created pursuant to a
plan qualified under Section 401(k) of the Code ("401(k) Plan"), or (iv)
purchased through a retirement plan qualified under Section 403(b) of the Code
("403(b) Plan"). The Class A Common Shares EWC will not be imposed on Class A
Common Shares purchased by (i) a qualified retirement plan that, at the time of
purchase, had not fewer than 500 eligible employees, (ii) a qualified retirement
plan that, at the time of purchase, had assets exceeding $100 million, or (iii)
an institution investing $5 million or more in the aggregate in the portfolios
of the Fund or Sierra Trust Funds. The EWCs for Class A Common Shares are
calculated on the lower of the shares' cost or current net asset value, and in
determining whether the EWC is payable, the Fund will first redeem shares not
subject to any EWC.
Purchases of $1 million or more and certain other purchases are not subject to
the sales charge at the time of purchase, but may be subject to a 1.0% early
withdrawal charge on repurchases or tenders within one year of purchase or a
0.5% early withdrawal charge on repurchases or tenders during the second year
after purchase. For a purchase of Class A Common Shares in an amount of $1
million or more, if the Fund receives at or before the purchase a written
direction from the dealer of record that the Class A Common Shares early
withdrawal charge shall not apply, then the Class A Common Shares early
withdrawal charge shall not apply and SISC may pay the investor's dealer of
record up to 0.25% of the net asset value of the purchase. For such a purchase,
if the Fund does not receive at or before the purchase a written direction from
the dealer of record that the Class A Common Shares early withdrawal charge
shall not apply, then the Class A Common Shares early withdrawal charge shall
apply and SISC may pay the investor's dealer of record up to 1.00% of the net
asset value of the purchase. No sales charge at the time of purchase and no
early withdrawal charge will be assessed on the reinvestment of dividends or
distributions on Class A Common Shares or on purchases of Class A Common Shares
under the 180-day reinvestment privilege described in a previous section.
COMMUNICATIONS WITH SHAREHOLDERS
The Fund will send semi-annual and annual reports to shareholders, including a
list of the portfolio investments held by the Fund.
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Business Week, Forbes or
other industry publications.
UNDERSTANDING PERFORMANCE
Because the Fund invests in floating and variable corporate loans, its
performance is related to the creditworthiness of the corporate issuers of the
loans, and to a lesser extent, the general level of interest rates. TOTAL RETURN
reflects both the reinvestment of income and the change in a Fund's share price.
Because the Fund primarily invests in floating and variable corporate loans, its
share price volatility and TOTAL RETURN will depend largely on the
creditworthiness of each particular corporate issuer. Share value will tend to
decrease when the floating and/or variable loans of the portfolio are having
difficulty in terms of repayment. In addition, share value may decrease when
interest rates rise and increase when interest rates fall.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment in a Fund over a given
period, assuming reinvestment of any dividends and capital gains. A CUMULATIVE
TOTAL RETURN reflects actual performance over a stated period of time.
An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
returns smooth out variations in performance; they are not the same as actual
year-by-year results.
YIELD of a Fund is the income generated by an investment in the Fund over a
30-day period. See below for a further description of these terms.
YIELD
From time to time, the Fund may advertise its 30-day YIELD. The 30-day YIELD of
the Fund refers to the income generated by an investment in the Fund over the
30-day period identified in the advertisement, and 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 Fund 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. The Fund calculates the compounded distribution rate by adding
one to the monthly distribution rate, raising the sum to the power of 12 and
subtracting one from the product. In circumstances in which the Fund believes
that, as a result of decreases in market rates of interest, its expected monthly
distributions may be less than the distributions with respect to the immediately
preceding monthly distribution period, the Fund reserves the right to calculate
the distribution rate on the basis of a period of less than one month.
TOTAL RETURN
From time to time, the Fund may advertise its average annual total return over
various periods of time. Such TOTAL RETURN figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the Fund.
Figures will be given for recent one-, five- and ten-year periods (if
applicable), and may be given for other periods as well (such as from
commencement of the Fund's operations, or on a year-by-year basis).
ADDITIONAL PERFORMANCE QUOTATIONS. Advertisements of total return will always
show a calculation that includes the effect of the maximum sales charge but may
also show total return without giving effect to that charge. Similarly, the Fund
may provide yield quotations in investor communications based on the Fund's net
asset value (rather than its Public Offering Price) per share on the last day of
the period covered by the yield computation. Because these additional quotations
will not reflect the maximum sales charge payable, such performance quotations
will be higher than the performance quotations that include the maximum sales
charge.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT A PREDICTION OF
FUTURE PERFORMANCE.
PERFORMANCE COMPARISONS
In reports or other communications to shareholders or in advertising material, a
Fund may compare the performance of its Class A Common Shares with that of other
mutual funds as listed in the rankings prepared by Lipper Analytical Services,
Inc., CDA Technologies, Inc. or similar independent services that monitor the
performance of mutual funds or with other appropriate indexes of investment
securities. In addition, certain indexes may be used to illustrate historic
performance of select asset classes. These may include, among others, the prime
rate, CD rate, money market rate and LIBOR. The performance information may also
include evaluations of the Funds published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Business Week, Forbes, Fortune, Institutional Investor, Money and The Wall
Street Journal. If the Fund compares its performance to other funds or to
relevant indexes, the Fund's performance will be stated in the same terms in
which such comparative data and indexes are stated, which is normally total
return rather than yield. For these purposes the performance of the Fund, as
well as the performance of such investment companies or indexes, may not reflect
sales charges, which, if reflected, would reduce performance results.
OBTAINING PERFORMANCE INFORMATION
The Fund's strategies, performance, and holdings will be detailed twice a year
in fund reports, which are sent to all shareholders. The SAI describes the
methods used to determine the Fund's performance. Shareholders may call
800-222-5852 for performance information. Shareholders may make inquiries
regarding the Fund, including current total return figures, to any
representative of GW Securities, or by calling 800-222-5852.
The following table is intended to provide investors with a comparison of
short-term money market rates. This comparison should not be considered a
representation of future money market rates, nor what an investment in the Fund
may earn or what an investor's yield or total return may be in the future. These
comparisons may be used in advertisements and in information furnished to
present or prospective shareholders.
<TABLE>
<CAPTION>
COMPARISON OF PRIME RATE,
CERTIFICATE OF DEPOSIT RATE, MONEY MARKET RATE AND
LONDON INTER-BANK OFFERED RATE
(AVERAGE OF CALENDAR YEAR)
-----------------------------------------------------------------
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Prime Rate(1) ........................... 10.88% 10.01% 8.46% 6.25% 6.00% 8.50%
C.D. Rate(2) ........................... 9.08 8.17 5.91 3.76 3.28 6.90
Money Market Rate (3) ................... 8.53 7.82 5.44 3.36 2.70 3.75
LIBOR(4) ................................ 8.37 7.56 4.25 3.43 3.37 6.50
</TABLE>
- -----------
(1) The Prime Rate quoted by a major U.S. bank is the base rate on corporate
loans at large U.S. money center commercial banks. Source: Federal Reserve
Bulletin.
(2) The Certificate of Deposit Rate represents the average annual rate paid on
large six-month CDs traded in the secondary market. Source: Bloomberg.
(3) The Money Market Rate represents Donoghue's Money Fund Averages for taxable
money market funds.
(4) The London Inter-Bank Offered Rate represents the rate at which most
creditworthy international banks dealing in Eurodollars charge each other
for large loans. Source: Bloomberg.
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
State Street Bank & Trust Company, located at 225 Franklin Street, Boston, MA
02110 is the custodian of the Fund and has custody of the securities and cash of
the Fund. The custodian, among other things, attends to the collection of
principal and income and payment for and collection of proceeds of securities
bought and sold by the Fund. Sierra Administration is the dividend disbursing
and transfer agent of the Fund, and will also perform certain accounting
services pursuant to an Administration Agreement between it and the Fund.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares offered hereby have
been passed upon for the Fund by Morgan, Lewis & Bockius LLP.
EXPERTS
The financial statements included in the Statement of Additional Information
have been so included in reliance on the report of Price Waterhouse LLP,
independent public accountants, given on the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Prospectus and the Statement of Additional Information do not contain all of
the information set forth in the Registration Statement that the Fund has filed
with the SEC. The complete Registration Statement may be obtained from the SEC
upon payment of the fee prescribed by its Rules and Regulations.
Statements contained in this Prospectus as to the contents of any contract or
other documents referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference.
The Table of Contents for the Statement of Additional Information is as follows:
PAGE
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
Independent Auditor's Report ......................................... FS-1
Financial Statements ................................................. FS-2
