PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE , 1998
, 1998
Shares
DLJ High Yield Bond Fund
Common Shares
DLJ High Yield Bond Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund's primary
investment objective is to seek high current income. The Fund may, and in
certain market conditions will, seek to maximize return through opportunistic
investment in smaller high yield issues. The Fund will also seek capital
appreciation as a secondary objective to the extent consistent with its
objective of seeking high current income. Under normal market conditions, the
Fund will invest at least 65% of its total assets in fixed income securities of
U.S. issuers rated below investment grade quality (lower than Baa by Moody's
Investors Service, Inc. or lower than BBB by Standard & Poor's Ratings Group or
comparably rated by another nationally recognized rating agency) or in unrated
income securities that DLJ Investment Management Corp. ("DLJIM"), the Fund's
investment manager, determines to be of comparable quality. The Fund may invest
up to 30% of its total assets in securities of issuers domiciled outside the
United States or that are denominated in various foreign currencies or
multinational foreign currency units. There can be no assurance that the Fund
will achieve its objectives.
Investments in lower grade securities are subject to special risks,
including greater price volatility and a greater risk of loss of principal and
non-payment of interest. As a non-diversified investment company, the Fund may
invest a significant portion of its assets in a small number of issuers. The
Fund may engage in various portfolio strategies to seek to enhance income and
hedge its portfolio against investment, interest rate and foreign currency
risks, including the use of leverage and the use of derivative financial
instruments. The Fund is designed for investors willing to assume additional
risk in return primarily for the potential for high current income and
secondarily capital appreciation. An investment in the Fund may be speculative
in that it involves a high degree of risk and should not constitute a complete
investment program. Investors should carefully assess the risks associated with
an investment in the Fund.
See "Risk Factors" beginning on page 27 for information that should be
considered by prospective investors.
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Price Proceeds
to the Sales to the
Public(1) Load(1)(2) Fund(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ......................... $10.00 None $10.00
Total (4) ......................... $ None $
- --------------------------------------------------------------------------------
</TABLE>
(footnotes on the following page)
THE FUND IS NEWLY ORGANIZED AND THEREFORE HAS NO HISTORY OF PUBLIC
TRADING. CLOSED-END FUND SHARES FREQUENTLY TEND TO TRADE AT A
DISCOUNT FROM NET ASSET VALUE WHICH CREATES A RISK OF LOSS
FOR INVESTORS PURCHASING SHARES IN THIS OFFERING.
The Shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of the Shares will be made against payment in New York,
New York on or about , 1998.
Donaldson, Lufkin & Jenrette
Securities Corporation
<TABLE>
<S> <C> <C>
Advest, Inc. FAC/Equities Fahnestock & Co. Inc.
First of Michigan Corporation Gruntal & Co., L.L.C. Interstate/Johnson Lane
Janney Montgomery Scott Inc. Sands Brothers & Co., Ltd. Corporation
Tucker Anthony Incorporated Sutro & Co. Incorporated
</TABLE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF THE
FUND. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR AND PURCHASE SHARES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
--------------
(continued from cover page)
This Prospectus sets forth in concise form the information about the Fund
that a prospective investor should know before investing in the Fund. Investors
should read and retain this Prospectus for future reference. DLJIM will serve as
investment manager to the Fund. The Fund's address is 277 Park Avenue, New York,
New York 10172, and its toll-free telephone number is 1-888-649-5711.
At times, the Fund expects to utilize leverage through borrowings,
including the issuance of debt securities or the issuance of preferred shares or
through other transactions, such as reverse repurchase agreements, which have
the effect of leverage. The Fund intends to utilize leverage in an initial
amount equal to approximately 20% of its total assets (including the amount
obtained through leverage), but the Fund may increase this percentage in the
future. The Fund generally will not utilize leverage if it anticipates that the
Fund's leveraged capital structure would result in a lower return to common
shareholders than that obtainable over time with an unleveraged capital
structure. Use of leverage creates an opportunity for increased income and
capital appreciation for the common shareholders but, at the same time, creates
special risks, and there can be no assurance that a leveraging strategy will be
successful during any period in which it is employed. See "Risk
Factors--Leverage" on page 28 for information that should be considered by
prospective investors.
The Fund is offering its common shares of beneficial interest, par value
$.001 per share (the "Shares"). Prior to this offering, there has been no market
for the Shares. The Shares have been approved for listing on the New York Stock
Exchange under the symbol "DHY," subject to official notice of issuance. Shares
of closed-end management investment companies frequently trade at discounts from
their net asset values, and the Shares may also trade at a discount. The minimum
investment in this offering is 200 Shares ($2,000).
(footnotes from cover page)
(1) DLJIM or an affiliate (not the Fund) from its own assets will pay a
commission to the Underwriters in the amount of % of the Price to the
Public per Share in connection with the sale of the Shares offered hereby.
See "Underwriting."
(2) The Fund and DLJIM have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(3) Before deducting organizational and offering expenses payable by the Fund,
including payment of $ to the Underwriters in partial reimbursement of
their expenses related to the organization of the Fund, estimated at $
and $ , respectively. Offering expenses will be deducted from net
proceeds, and organizational expenses will be capitalized and amortized
against income from the inception of the Fund through October 31, 1999.
(4) The Fund has granted to the Underwriters a -day option exercisable from
time to time to purchase up to an aggregate of additional Shares
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to the Public and Proceeds to the Fund will be $
and $ , respectively. See "Underwriting."
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Investors should carefully
consider information set forth under the heading "Risk Factors."
The Fund............................... DLJ High Yield Bond Fund (the
"Fund") is a newly organized,
non-diversified, closed-end management
investment company. The Fund is
managed by DLJ Investment Management
Corp. ("DLJIM"). See "The Fund."
The Offering........................... The Fund is offering common shares
of beneficial interest, par value
$.001 per share (the "Shares"),
through a group of underwriters
("Underwriters") led by Donaldson,
Lufkin & Jenrette Securities
Corporation ("DLJ"). The Underwriters
have been granted a -day option
exercisable from time to time to
purchase up to an aggregate of
additional Shares solely to cover
over-allotments, if any. The initial
public offering price is $10.00 per
Share. The minimum investment in the
offering is 200 Shares ($2,000). See
"Underwriting." The aggregate number
of Shares offered in the offering may
increase prior to the consummation of
the offering.
No Sales Load.......................... The Shares will be sold in the
offering without any sales load or
underwriting discounts payable by
investors or the Fund. DLJIM or an
affiliate (not the Fund) will pay a
commission from its own assets to the
Underwriters in connection with sales
of the Shares in the offering. See
"Underwriting."
Investment Objectives and Policies..... The Fund's primary investment
objective is to seek high current
income. The Fund may, and in certain
market conditions will, seek to
maximize return through opportunistic
investment in smaller high yield
issues. The Fund will also seek
capital appreciation as a secondary
objective, to the extent consistent
with its objective of seeking high
current income. The Fund is designed
for investors willing to assume
additional risk in return for the
potential for high current income and
capital appreciation. The Fund is not
intended to be a complete investment
program and there can be no assurance
that the Fund will achieve its
objectives.
Under normal market conditions, the
Fund will invest at least 65% of its
total assets in fixed income
securities of U.S. issuers rated
below investment grade quality (lower
than Baa by Moody's Investors
Service, Inc. ("Moody's") or lower
than BBB by Standard & Poor's Ratings
Group ("S&P") or comparably rated by
another nationally recognized rating
agency) or in unrated income
securities that DLJIM determines to
be of comparable quality. Lower grade
income securities are commonly known
as "junk bonds." As a component of
the Fund's investment in "junk
bonds," the Fund may also invest up
to 20% of its total assets in
1
<PAGE>
securities of issuers that are the
subject of bankruptcy proceedings or
in securities otherwise in default or
in significant risk of being in
default ("Distressed Securities").
However, the Fund does not intend
initially to invest in any Distressed
Securities. The Fund may invest up to
30% of its total assets in securities
of issuers domiciled outside the
United States or that are denominated
in various foreign currencies or
multinational currency units. The
Fund may engage in various portfolio
strategies to seek to enhance income
and hedge its portfolio against
investment, interest rate and foreign
exchange risks, including the use of
leverage and the use of derivative
financial instruments. There can be
no assurance that the Fund's
strategies will be successful. The
Fund is designed for investors
willing to assume additional risk in
return primarily for the potential
for high current income and
secondarily capital appreciation. An
investment in the Fund may be
speculative in that it involves a
high degree of risk.
At times, the Fund expects to utilize
leverage through borrowings,
including the issuance of debt
securities, or the issuance of
preferred shares or through other
transactions, such as reverse
repurchase agreements, which have the
effect of leverage. The Fund intends
to utilize leverage in an initial
amount equal to approximately 20% of
its total assets, but it may use
leverage up to 331/3% of its total
assets (50% if in the form of
preferred shares) (in each case
including the amount obtained through
leverage). The Fund generally will
not utilize leverage if it
anticipates that the Fund's leveraged
capital structure would result in a
lower return to holders of Shares
(the "Shareholders") than that
obtainable over time with an
unleveraged capital structure. Use of
leverage creates an opportunity for
increased income and capital
appreciation for the Shareholders
but, at the same time, creates
special risks, and there can be no
assurance that a leveraging strategy
will be successful during any period
in which it is employed. See "Risk
Factors--Leverage."
In selecting investments for the
Fund's portfolio, DLJIM will seek to
identify issuers and industries that
DLJIM believes are likely to
experience stable or improving
financial conditions. DLJIM believes
that this strategy should enhance the
Fund's ability to earn high current
income while also providing
opportunities for capital
appreciation. DLJIM's analysis may
include consideration of general
industry trends, the issuer's
managerial strength, market position,
financial condition, debt maturity
schedules and liquidity. DLJIM may
also consider relative values based
on cash flow, interest or dividend
coverage, asset coverage and earnings
prospects. Initially, DLJIM will tend
to make investments in larger, more
liquid high yield issues
2
<PAGE>
because of the need to be fully
invested soon after issuance of
Shares to maximize current income.
However, DLJIM believes that focusing
on smaller, less liquid high yield
issues over the long term may offer a
return premium that can be captured
through a research-intensive
investment process. Smaller high
yield issues are defined as those of
companies whose total outstanding
high yield debt is $100 million or
less. DLJIM may instead focus on
larger high yield issues if market
conditions warrant. There can be no
assurances that this strategy will be
successful.
The Fund will seek its secondary
objective of capital appreciation by
investing in securities that DLJIM
expects may appreciate in value as a
result of favorable developments
affecting the business or prospects
of the issuer, which may improve the
issuer's financial condition and
credit rating, or as a result of
declines in long-term interest rates.
The Fund may implement various
temporary "defensive" strategies at
times when DLJIM determines that
conditions in the markets make
pursuing the Fund's basic investment
strategy inconsistent with the best
interests of Shareholders. These
strategies may include investing less
than 65% of its total assets in lower
grade income securities by investing
in higher quality debt and/or money
market instruments. See "Investment
Objectives and Policies."
Investment Manager..................... DLJIM is the Fund's investment
manager and is responsible for the
management of the Fund's investment
portfolio, including determining the
composition of the Fund's portfolio,
placing all orders for the purchase
and sale of securities and for other
transactions, and overseeing the
settlement of the Fund's securities
and other portfolio transactions. For
these investment management services,
the Fund will pay DLJIM a monthly fee
(the "Management Fee") in arrears at
an annual rate equal to 1% of the
average weekly value of the Fund's
total assets minus the sum of accrued
liabilities (other than the aggregate
indebtedness constituting leverage)
(the "Managed Assets"). During periods
in which the Fund is utilizing
leverage, the Management Fee will be
higher than if the Fund did not
utilize a leveraged capital structure
because the fee is calculated as a
percentage of the Managed Assets
including those purchased with
leverage. DLJIM provides investment
management services primarily to other
investment companies and institutional
and corporate clients. As of May 31,
1998, aggregate assets under the
management of DLJIM exceeded $5
billion. As of May 31, 1998,
Donaldson, Lufkin & Jenrette Asset
Management Group ("DLJAM"), which
includes DLJIM, managed assets of
approximately $16 billion. DLJIM is a
wholly-owned subsidiary of DLJ.
3
<PAGE>
Administrator.......................... The Fund's administrator is First
Data Investor Services Group, Inc.
("First Data"). First Data is
responsible for providing various
services to the Fund, including, among
other things, overseeing the provision
to the Fund of accounting services,
preparing or assisting in preparing
materials for Shareholders and
regulatory agencies and any other
Shareholder servicing activities. For
these administration services, the
Fund will pay First Data a fee (the
"Administration Fee") at the annual
rate of $50,000 per year. First Data
provides administration services to
other investment companies.
Listing................................ Prior to this offering, there has
been no market for the Shares. The
Shares have been approved for listing
on the New York Stock Exchange under
the symbol "DHY," subject to official
notice of issuance.
Dividends and Other Distributions...... The Fund intends to distribute
monthly dividends consisting of
substantially all of its net
investment income to Shareholders. The
initial distribution to Shareholders
is expected to be paid approximately
60 days after the completion of the
offering of the Shares. All net
realized capital gains, if any, are
expected to be distributed to the
Shareholders at least annually. See
"Dividends and Other Distributions."
Automatic Dividend Reinvestment Plan... The Fund has established an
Automatic Dividend Reinvestment Plan
(the "Plan"). Under the Plan, all
dividend and capital gain
distributions will be automatically
reinvested in additional Shares of the
Fund either purchased in the open
market, or issued by the Fund if the
Shares are trading at or above their
net asset value, unless in either case
the Shareholder elects to receive
cash. A Shareholder who intends to
hold Shares through a broker or
nominee should contact its broker or
nominee to determine whether or how
they may participate in the Plan. See
"Automatic Dividend Reinvestment
Plan."
Taxes.................................. The Fund intends to elect to be, and
to qualify as, a regulated investment
company for U.S. federal income tax
purposes. For each taxable year the
Fund so qualifies, the Fund (but not
Shareholders) will be relieved of U.S.
federal income tax on the portion of
its investment company taxable income
and net capital gain that it
distributes to Shareholders. See
"Taxes."
Share Repurchases and Tender
Offers; Conversion to an Open-End
Investment Company.................... In recognition of the possibility
that the Shares might trade at a
discount to net asset value and that
any such discount may not be in the
interest of Shareholders, the Fund's
Board of Trustees (the "Board" or the
"Trustees"), in consultation with
DLJIM, from time to time may consider
the possibility of making open market
repurchases or tender offers for
Shares at net asset
4
<PAGE>
value. There can be no assurance that
the Board will consider or decide to
undertake either of these actions or
that, if undertaken, such actions
would result in the Shares trading at
a price equal to or close to net
asset value per Share. The Board from
time to time also may consider the
conversion of the Fund to an open-end
investment company. Such conversion
would require the affirmative consent
of two-thirds of each class of Shares
outstanding at that time (or a
majority of each class if two-thirds
of the Board vote in favor of such
conversion). See "Conversion to
Open-End Fund."
Custodian and Transfer and
Dividend Disbursing Agent............. Citibank, N.A. will act as custodian
for the Fund and may employ
sub-custodians outside the U.S.
approved by the Custodian of the Fund
in accordance with regulations of the
Securities and Exchange Commission
("SEC"). First Data will act as the
Fund's Transfer and Dividend
Disbursing Agent.
Risk Factors........................... Investors are advised to consider
carefully the special risks involved
in investing in the Fund.
General. The Fund is a newly
organized, non-diversified,
closed-end management investment
company and has no operating history.
Shares of closed-end management
investment companies frequently trade
at a discount from their net asset
value. The Shares are designed
primarily for long-term investors and
should not be considered a vehicle
for trading purposes. The net asset
value of the Shares will fluctuate
with interest rate changes as well as
with price changes of the Fund's
portfolio securities and these
fluctuations are likely to be greater
during periods in which the Fund
utilizes a leveraged capital
structure. See "Other Investment
Practices--Leverage."
Lower Grade Securities. Lower grade
securities are regarded as being
predominantly speculative as to the
issuer's ability to make payments of
principal and interest. Investment in
such securities involves substantial
risk. Lower grade securities are
commonly referred to as "junk bonds."
Issuers of lower grade securities may
be highly leveraged and may not have
available to them more traditional
methods of financing. Therefore, the
risks associated with acquiring the
securities of such issuers generally
are greater than is the case with
higher-rated securities. For example,
during an economic downturn or a
sustained period of rising interest
rates, issuers of lower grade
securities may be more likely to
experience financial stress,
especially if such issuers are highly
leveraged. During periods of economic
downturn, such issuers may not have
sufficient revenues to meet their
interest payment obligations. The
issuer's ability to service its debt
obligations also may be adversely
affected by specific issuer
developments, the issuer's inability
to meet specific pro-
5
<PAGE>
jected business forecasts or the
unavailability of additional
financing. Therefore, there can be no
assurance that in the future there
will not exist a higher default rate
relative to the rates currently
existing in the market for lower
grade securities. The risk of loss
due to default by the issuer is
significantly greater for the holders
of lower grade securities because
such securities may be unsecured and
may be subordinate to other
securities of the issuer. Other than
with respect to Distressed
Securities, discussed below, the
lower grade securities in which the
Fund may invest do not include
instruments which, at the time of
investment, are in default or the
issuers of which are in bankruptcy.
However, there can be no assurance
that such events will not occur after
the Fund purchases a particular
security, in which case the Fund may
experience losses and incur costs.
Lower grade securities frequently
have call or redemption features that
would permit an issuer to repurchase
the security from the Fund. If a call
were exercised by the issuer during a
period of declining interest rates,
the Fund is likely to have to replace
such security with a lower yielding
security, thus decreasing the net
investment income to the Fund and
dividends to Shareholders.
Lower grade securities have been in
the past, and may again in the future
be, more volatile than higher-rated
fixed-income securities, so that
adverse economic events may have a
greater impact on the prices of lower
grade securities than on higher-rated
fixed-income securities. Factors
adversely affecting the market value
of such securities are likely to
affect adversely the Fund's net asset
value. Recently, demand for lower
grade securities has increased
significantly and the difference
between the yields paid by lower
grade securities and investment grade
bonds (i.e., the "spread") has
narrowed. To the extent this
differential increases, the value of
lower grade securities in the Fund's
portfolio could be adversely
affected.
Like higher-rated fixed-income
securities, lower grade securities
generally are purchased and sold
through dealers who make a market in
such securities for their own
accounts. However, there are fewer
dealers in the lower grade securities
market, which market may be less
liquid than the market for
higher-rated fixed-income securities,
even under normal economic
conditions. Also, there may be
significant disparities in the prices
quoted for lower grade securities by
various dealers. As a result, during
periods of high demand in the lower
grade securities market, it may be
difficult to acquire lower grade
securities appropriate for investment
by the Fund. Adverse economic
conditions and investor perceptions
thereof (whether or not based on
6
<PAGE>
economic reality) may impair
liquidity in the lower grade
securities market and may cause the
prices the Fund receives for its
lower grade securities to be reduced.
In addition, the Fund may experience
difficulty in liquidating a portion
of its portfolio when necessary to
meet the Fund's liquidity needs or in
response to a specific economic event
such as deterioration in the
creditworthiness of the issuers.
Under such conditions, judgment may
play a greater role in valuing
certain of the Fund's portfolio
instruments than in the case of
instruments trading in a more liquid
market. In addition, the Fund may
incur additional expense to the
extent that it is required to seek
recovery upon a default on a
portfolio holding or to participate
in the restructuring of the
obligation. See "Investment
Objectives and Policies."
Distressed Securities. As a component
of the Fund's investment in "junk
bonds," the Fund may invest up to 20%
of its total assets in Distressed
Securities. Such securities are the
subject of bankruptcy proceedings or
otherwise in default as to the
repayment of principal and/or payment
of interest at the time of
acquisition by the Fund or are rated
in the lower rating categories (Ca or
lower by Moody's and CC or lower by
S&P) or which, if unrated, are in the
judgment of DLJIM of equivalent
quality. Investment in Distressed
Securities is speculative and
involves significant risk. Distressed
Securities frequently do not produce
income while they are outstanding and
may require the Fund to bear certain
extraordinary expenses in order to
protect and recover its investment.
Therefore, to the extent the Fund
pursues its secondary objective of
capital appreciation through
investment in Distressed Securities,
the Fund's ability to achieve current
income for Shareholders may be
diminished. See "Investment
Objectives and Policies."
Smaller Companies in General. The
Fund may invest in smaller high yield
issues which are those of companies
whose total outstanding high yield
debt is $100 million or less. Such
smaller high yield issues may be
issued by any company but are often
issued by smaller companies. In
addition to the general risks of such
securities, those issued by smaller
companies often have higher market
risks associated with them. They may
have limited product lines, markets,
market share or financial resources,
or they may be dependent on a small
or inexperienced management team. In
addition, their securities may be
less liquid, have more limited volume
or be subject to greater and more
abrupt price swings than securities
of larger companies.
Leverage. The use of leverage by the
Fund creates an opportunity for
increased net income and capital
appreciation for the Shares, but, at
the same time, cre-
7
<PAGE>
ates special risks. There can be no
assurance that a leveraging strategy
will be successful during any period
in which it is employed. The Fund
intends to utilize leverage to
provide the Shareholders with a
potentially higher return. Leverage
creates risks for Shareholders
including the likelihood of greater
volatility of net asset value and
market price of the Shares and the
risk that fluctuations in interest
rates on borrowings and debt or in
the dividend rates on any preferred
shares may affect the return to the
Shareholders. To the extent the
income or capital appreciation
derived from securities purchased
with funds received from leverage
exceeds the cost of leverage, the
Fund's return will be greater than if
leverage had not been used.
Conversely, if the income or capital
appreciation from the securities
purchased with such funds is not
sufficient to cover the cost of
leverage, the return to the Fund will
be less than if leverage had not been
used, and therefore the amount
available for distribution to
Shareholders as dividends and other
distributions will be reduced. In the
latter case, DLJIM in its best
judgment may nevertheless determine
to maintain the Fund's leveraged
position if it deems such action to
be appropriate under the
circumstances. During periods in
which the Fund is utilizing leverage,
the Management Fee will be higher
than if the Fund did not utilize a
leveraged capital structure. Certain
types of borrowings by the Fund may
result in the Fund being subject to
covenants in credit agreements,
including those relating to asset
coverage and portfolio composition
requirements. The Fund may be subject
to certain restrictions on
investments imposed by guidelines of
one or more Rating Agencies, which
may issue ratings for the debt
securities or preferred shares issued
by the Fund. These guidelines may
impose asset coverage or portfolio
composition requirements that are
more stringent than those imposed by
the Investment Company Act of 1940,
as amended (the "Investment Company
Act"). It is not anticipated that
these covenants or guidelines will
impede DLJIM in managing the Fund's
portfolio in accordance with the
Fund's investment objectives and
policies. Subject to applicable
regulatory requirements, the Fund at
times may borrow from affiliates of
DLJIM, provided that the terms of
such borrowings are no less favorable
than those available from comparable
sources of funds in the marketplace.
See "Other Investment
Practices--Leverage."
Foreign Securities. The Fund may
invest up to 30% of its total assets
in securities of issuers domiciled
outside of the United States or that
are denominated in various foreign
currencies or multinational foreign
currency units. Investing in
securities of foreign entities and
securities denominated in foreign
currencies involves certain risks not
involved in domestic invest-
8
<PAGE>
ments, including, but not limited to,
fluctuations in foreign exchange
rates, future foreign political and
economic developments, different
legal and accounting systems and the
possible imposition of exchange
controls or other foreign
governmental laws or restrictions.
Securities prices in different
countries are subject to different
economic, financial, political and
social factors. Since the Fund may
invest in securities denominated or
quoted in currencies other than the
U.S. dollar, changes in foreign
currency exchange rates may affect
the value of securities in the Fund
and the unrealized appreciation or
depreciation of investments.
Currencies of certain countries may
be volatile and therefore may affect
the value of securities denominated
in such currencies. The Fund may
engage in certain transactions to
hedge the currency-related risks of
investing in non-U.S. dollar
denominated securities. See "Other
Investment Practices." In addition,
with respect to certain foreign
countries, there is the possibility
of expropriation of assets,
confiscatory taxation, difficulty in
obtaining or enforcing a court
judgment, economic, political or
social instability or diplomatic
developments that could affect
investments in those countries.
Moreover, individual foreign
economies may differ favorably or
unfavorably from the U.S. economy in
such respects as growth of gross
domestic product, rates of inflation,
capital reinvestment, resources,
self-sufficiency and balance of
payments position. Certain foreign
investments also may be subject to
foreign withholding taxes. These
risks often are heightened for
investments in smaller, emerging
capital markets. See "Investment
Objectives and Policies."
As a result of these potential risks,
DLJIM may determine that,
notwithstanding otherwise favorable
investment criteria, it may not be
practicable or appropriate to invest
in a particular country. The Fund may
invest in countries in which foreign
investors, including DLJIM, have had
no or limited prior experience.
Other Investment Management
Techniques. The Fund may use various
other investment management
techniques that also involve special
considerations, including engaging in
interest rate transactions,
utilization of options and futures
transactions, making forward
commitments and lending its portfolio
securities. For further discussion of
these and other practices and the
associated risks and special
considerations, see "Other Investment
Practices."
Illiquid Securities. The Fund may
invest in securities for which no
readily available market exists or
which are otherwise illiquid. The
Fund may not be able readily to
dispose of such securities at prices
that approximate those at which the
Fund could sell such securities if
they were more widely traded and, as
a
9
<PAGE>
result of such illiquidity, the Fund
may have to sell other investments or
engage in borrowing transactions if
necessary to raise cash to meet its
obligations. Illiquid securities
generally trade at a discount.
Non-Diversified Status. The Fund is
classified as a "non-diversified"
management investment company under
the Investment Company Act, which
means that the Fund may invest a
greater portion of its assets in a
limited number of issuers than would
be the case if the Fund were
classified as a "diversified"
management investment company.
Accordingly, the Fund may be subject
to greater risk with respect to its
portfolio securities than a
management investment company that is
"diversified" because changes in the
financial condition or market
assessment of a single issuer may
cause greater fluctuations in the net
asset value of the Shares.
Market Price, Discount and Net Asset
Value of Shares. Shares of closed-end
management investment companies in
the past frequently have traded at a
discount from their net asset values.
Whether investors will realize gains
or losses upon the sale of Shares
will not depend directly upon the
Fund's net asset value, but will
depend upon the market price of the
Shares at the time of sale. Since the
market price of the Shares will be
determined by such factors as
relative demand for and supply of the
Shares in the market, general market
and economic conditions and other
factors beyond the control of the
Fund, the Fund cannot predict whether
the Shares will trade at, below or
above net asset value or at, below or
above the initial offering price. The
Shares are designed primarily for
long-term investors, and investors in
the Shares should not view the Fund
as a vehicle for trading purposes.
See "Risk Factors" and "Description
of Shares."
Anti-Takeover Provisions. The Fund's
Agreement and Declaration of Trust
(the "Declaration of Trust") contains
provisions limiting (i) the ability
of other entities or persons to
acquire control of the Fund, (ii) the
Fund's freedom to engage in certain
transactions, and (iii) the ability
of the Board or Shareholders to amend
the Declaration of Trust. These
provisions of the Declaration of
Trust may be regarded as
"anti-takeover" provisions. These
provisions could have the effect of
depriving the Shareholders of
opportunities to sell their Shares at
a premium over prevailing market
prices by discouraging a third party
from seeking to obtain control of the
Fund in a tender offer or similar
transaction. See "Investment
Objectives and Policies," "Risk
Factors" and "Description of Shares."
10
<PAGE>
FEE TABLE
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.
<TABLE>
<CAPTION>
Assuming
20% Leverage
<S> <C>
Shareholder Transaction Expenses:
Sales Load (as a percentage of offering price) ...................... None
Automatic Dividend Reinvestment Plan Fees ........................... None
Annual Expenses (as a percentage of net assets
attributable to Shares):
Investment Management Fee(2) ........................................ 1.25%
Administration Fee .................................................. 0.02
Interest Payments on Borrowed Funds(3) .............................. 1.50
Other Expenses ...................................................... 0.17
----
Total Annual Expenses ............................................... 2.94%(1)
====
</TABLE>
(1) Total Annual Expenses would be 1.19% if the Fund were not to utilize
leverage. Total Annual Expenses in the table above reflect the use of 20%
leverage through borrowed funds, and not the use of preferred shares.
"Other Expenses" have been estimated. The Fund will only enter into
leverage if DLJIM anticipates that the returns to investors with its use
will be greater than if such leverage is not utilized. The chart above
reflects leverage in an initial amount equal to approximately 20% of its
total assets (including the amount obtained from leverage); however, the
Fund has the ability to utilize leverage in an amount up to 331/3% of its
total assets from borrowing and 50% through the use of preferred shares
(in each case including the amount obtained from leverage). See "Risk
Factors--Leverage" and "Other Investment Policies--Leverage." In the event
the Fund does not utilize leverage, it is estimated that, as a percentage
of net assets attributable to the Shares, the Management Fee would be
1.00%, the Administration Fee would remain 0.02%, there would be no
Interest Payments on Borrowed Funds, and other Expenses would remain
0.17%. Therefore, Total Annual Expenses would be 1.19%.
(2) DLJIM is paid a Management Fee of 1.00% of Managed Assets (see "Prospectus
Summary--Investment Manager"). The number in the table above reflects the
use of leverage. If the Fund does not utilize leverage, Managed Assets
will equal net assets of the Fund and DLJIM's Management Fee will be 1.00%
of net assets. However, as the Fund's use of leverage increases, the
Management Fee as a percentage of net assets also increases, as shown in
the table above. See "Management of the Fund" for additional information.
(3) Assumes an interest rate of 6%.
Example:
The following Example illustrates the projected dollar amount of
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Fund. These amounts are based upon payment by
the Fund of expenses at the levels set forth in the above table.
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming (i) total annual expenses of 1.19%
(assuming no leverage) and 2.94% (assuming leverage of 20% of the Fund's total
assets) and (ii) a 5% annual return throughout the periods and reinvestment of
all dividends and other distributions at net asset value:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assuming No Leverage ........... $12 $38 $ 65 $144
Assuming 20% Leverage .......... $30 $91 $155 $326
</TABLE>
The above tables and the assumption in the Example of a 5% annual return
and reinvestment at net asset value are required by regulation of the SEC
applicable to all investment companies; the assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual performance of
the Shares. Actual expenses and annual rates of return may be more or less than
those assumed for purposes of the Example. In addition, although the Example
assumes reinvestment of all dividends and other distributions at net asset
value, participants in the Fund's Automatic Dividend Reinvestment Plan may
receive Shares obtained by the Plan Agent at or based on the market price in
effect at that time, which may be at, above or below net asset value.
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.
11
<PAGE>
THE FUND
DLJ High Yield Bond Fund is registered under the Investment Company Act as
a non-diversified, closed-end management investment company. The Fund was
organized as an unincorporated business trust under the laws of the State of
Delaware on April 24, 1998 and has no operating history. The Fund's principal
office is located at 277 Park Avenue, New York, New York 10172, and its
toll-free telephone number is 1-888-649-5711. DLJIM is the Fund's investment
manager.
The Fund has been organized as a closed-end management investment company.
Closed-end management investment companies differ from open-end management
investment companies (commonly referred to as mutual funds) in that closed-end
management investment companies do not redeem their securities at the option of
the shareholder, whereas mutual funds issue securities redeemable at net asset
value at any time at the option of the shareholder and typically engage in a
continuous offering of their shares. Mutual funds are subject to continuous
asset in-flows and out-flows that can complicate portfolio management, whereas
closed-end funds generally can stay more fully invested. To facilitate
redemption obligations, mutual funds are subject to more stringent regulatory
limitations on certain investments, such as investments in illiquid securities,
than are closed-end funds. However, shares of closed-end companies frequently
trade at a discount from net asset value.
DLJIM believes that its affiliation with DLJ will enable the Fund to
benefit from DLJ's market leadership in high yield securities. During the
period from 1993 through 1997, DLJ was the leading high yield lead-underwriter
(measured by dollar volume) with approximately $37.9 billion of securities
offered. DLJ's average monthly trading volume in high yield securities exceeds
$5 billion, and DLJ's traders average over ten years of experience. DLJ's high
yield underwriting and trading position is supported by an award-winning
research group, which will be made available to DLJIM.
USE OF PROCEEDS
The proceeds of this initial public offering are estimated at $
($ if the Underwriters' overallotment option is exercised in full) before
payment of organizational and offering expenses (estimated at $ and
$ , respectively). The proceeds will be invested in accordance with the
Fund's investment objectives and policies during a period not to exceed six
months from the closing of the initial public offering. Pending such
investment, the proceeds may be invested in U.S. dollar-denominated, high
quality, short-term instruments. A portion of the Fund's organizational and
offering expenses has been advanced by DLJIM and will be repaid by the Fund
upon completion of the initial public offering. DLJIM or an affiliate (not the
Fund) from its own assets will pay a commission to the Underwriters in
connection with sales of Shares in this offering. See "Underwriting."
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The Fund's primary investment objective is to seek high current income.
The Fund may seek to maximize return through opportunistic investment in
smaller high yield issues. The Fund will also seek capital appreciation as a
secondary objective to the extent consistent with its objective of seeking high
current income. The Fund is designed for investors willing to assume additional
risk in return primarily for the potential for high current income and
secondarily capital appreciation. The Fund is not intended to be a complete
investment program and there can be no assurance that the Fund will achieve its
objectives.
Investment Policies
Under normal market conditions, the Fund will invest at least 65% of its
total assets in fixed income securities of U.S. issuers rated below investment
grade quality (lower than Baa by Moody's or lower than BBB by S&P or comparably
rated by another nationally recognized rating agency) or in unrated income
securities that DLJIM determines to be of comparable quality. Lower grade
income securities are commonly known as "junk bonds." As a component of the
Fund's investment in "junk bonds," the Fund may also invest up to 20% of its
total assets in Distressed Securities. The Fund may invest up to 30% of its
total assets in securities of issuers domiciled outside the United States or
that are denominated in various foreign currencies and multinational currency
units. The Fund may also invest in money market instruments consisting of U.S.
Government securities, certificates of deposits, time deposits, bankers'
acceptances, short-term investment grade corporate bonds and other short-term
debt instruments and repurchase agreements. Under normal market conditions, the
Fund does not expect to have a substantial portion of its assets invested in
money market instruments.
At times, the Fund expects to utilize leverage through borrowings,
including the issuance of debt securities, or the issuance of preferred shares
or through other transactions, such as reverse repurchase agreements, which
have the effect of leverage. The Fund intends to utilize leverage in an initial
amount equal to approximately 20% of its total assets, but may use leverage up
to 331/3% of its total assets through borrowing and 50% through the use of
preferred shares (in each case including the amount obtained through leverage).
The Fund generally will not utilize leverage if it anticipates that the Fund's
leveraged capital structure would result in a lower return to Shareholders than
that obtainable over time with an unleveraged capital structure. Use of
leverage creates an opportunity for increased income and capital appreciation
for the Shareholders but also creates special risks. There can be no assurance
that a leveraging strategy will be successful during any period in which it is
employed. See "Other Investment Practices--Leverage" and "Risk
Factors--Leverage."
The Fund may implement various temporary "defensive" strategies at times
when DLJIM determines that conditions in the markets make pursuing the Fund's
basic investment strategy inconsistent with the best interests of Shareholders.
These strategies may include investing less than 65% of its total assets in
lower grade income securities by investing in higher quality debt and/or money
market instruments.
In selecting investments for the Fund's portfolio, DLJIM will seek to
identify issuers and industries that DLJIM believes are likely to experience
stable or improving financial conditions. DLJIM believes that this strategy
should enhance the Fund's ability to earn high current income while also
providing opportunities for capital appreciation. DLJIM's analysis may include
consideration of general industry trends, the issuer's managerial strength,
market position, financial condition, debt maturity schedules and liquidity.
DLJIM may also consider relative values based on cash flow, interest or
dividend coverage, asset coverage and earnings prospects. Initially, DLJIM will
tend to make investments in larger, more liquid high yield issues because of
the need to be fully invested soon after issuance of Shares to maximize current
income. However, DLJIM believes that focusing on smaller, less liquid high
yield issues over the long term may offer a return premium that can be captured
through a research-intensive investment process. Smaller high yield issues are
defined as those of companies whose total outstanding high yield debt is $100
million or less. DLJIM may instead focus on larger high yield issues if market
conditions warrant. The Fund will seek its secondary objective of capital
appreciation by investing in securities that DLJIM expects may appreciate in
value as a result of favorable developments affecting the business or prospects
of the issuer which may improve the issuer's financial condition and credit
rating or as a result of declines in long-term interest rates. There can be no
assurance the Fund's strategies will be successful.
The market of outstanding lower grade income securities has increased over
the years. The outstanding principal amounts of lower grade income securities
of U.S. issuers in 1984 was $56.5 billion, in 1989 was $241.8 billion, in 1994
was $282.6 billion and in 1997 was over $460 billion. The statistical
information with respect to the principal amounts of outstanding securities is
based on information the Fund obtained from DLJ.
13
<PAGE>
High yield securities historically have been riskier investments than more
highly rated bonds, although in recent years high yield securities have
produced high absolute returns with lower risk in terms of standard deviation
or volatility than equity securities. DLJIM believes that high yield securities
offer diversification to fixed-income and equity portfolios and that the
returns of high yield securities have a relatively low historical correlation
of returns with other asset classes.
Total annual returns for the market for (i) lower-grade income securities,
as measured by the DLJ High Yield Bond Index, an industry index for the high
yield bond market (the "High Yield Bond Index"), (ii) investment-grade income
securities, as measured by the ML Corporate Index and (iii) the U.S. Treasury
Bill market, as measured by the SB U.S. Three-Month Treasury Bill Index, as
well as the default rates on the lower grade income securities as measured by
the Altman Default Study from 1989 through 1996 and DLJ for 1997 are reflected
in the chart below. The Fund will have no direct investment in, nor will its
performance be indicative of, these unmanaged indices, nor are these results
indicative of the future performance of these indices or of the Fund.
The table below is for illustrative purposes only and the past performance
of any security should not be viewed as indicative of the future performance of
the Fund or of the anticipated return to Shareholders.
RETURNS ON INDICES OF FIXED INCOME SECURITIES(1)
<TABLE>
<CAPTION>
SB U.S.
High Yield ML Corporate 3-month
Year Bond Index Index Treasury Bill Default Rate
- ------ ------------ -------------- --------------- -------------
<S> <C> <C> <C> <C>
1989 0.39% 14.12% 8.73% 4.29%
1990 (6.38) 7.37 8.06 10.14
1991 43.75 18.24 6.01 10.27
1992 16.66 9.12 3.74 3.40
1993 18.00 12.43 3.09 1.11
1994 (2.04) (3.34) 4.06 1.45
1995 19.68 21.23 5.81 1.90
1996 13.03 3.66 5.28 1.23
1997 12.21 10.39 5.28 0.84
</TABLE>
(1) The High Yield Bond Index is an unmanaged composite of U.S.
dollar-denominated securities rated below Baa by Moody's or below BBB by
S&P. The ML Corporate Index is an unmanaged composite index which includes
fixed coupon domestic corporate bonds that are rated no lower than Baa by
Moody's or BBB by S&P.
The Fund will invest primarily in bonds, debentures, notes and other debt
instruments. The Fund's portfolio securities may have fixed or variable rates
of interest and may include zero coupon securities, payment-in-kind securities
or other deferred payment securities, preferred stock, convertible debt
obligations and convertible preferred stock, units consisting of debt or
preferred stock with warrants or other equity features, participation interests
in, or assignments of, commercial loans, government securities, stripped
securities, commercial paper and other short-term debt obligations. The issuers
of the Fund's portfolio securities may include domestic and foreign
corporations, partnerships, trusts or similar entities, and governmental
entities or their political subdivisions, agencies or instrumentalities. The
Fund may invest in companies in, or governments of, developing countries. The
Fund may invest up to 30% of its total assets in securities of issuers
domiciled outside the United States or that are denominated in various foreign
currencies and multinational foreign currency units. In connection with its
investments in corporate debt securities, or restructuring of investments owned
by the Fund, the Fund may receive warrants or other non-income producing equity
securities. The Fund may retain such securities, including equity shares
received upon conversion of convertible securities, until DLJIM determines it
is appropriate in light of current market conditions to dispose of such
securities.
Portfolio Securities
Lower Grade Securities
Under normal market conditions, the Fund will invest at least 65% of its
total assets in fixed-income securities of U.S. issuers rated below investment
grade quality (lower than Baa by Moody's or lower than BBB by S&P or comparably
rated by another rating agency) or in unrated fixed-income securities that
DLJIM determines to be of comparable quality. Securities rated Ba by Moody's or
BB by S&P and lower are considered to have speculative elements, with higher
vulnerability to default than corporate securities with higher ratings. See
"Appendix A--Ratings of Corporate Bonds" for additional information concerning
rating categories of Moody's and S&P.
14
<PAGE>
Lower grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
securities. The retail secondary market for lower grade securities may be less
liquid than that of higher rated securities; adverse conditions could make it
difficult at times for the Fund to sell certain securities or could result in
lower prices than those used in calculating the Fund's net asset value.
Bond prices generally are inversely related to interest rate changes;
however, bond price volatility also is inversely related to coupon.
Accordingly, lower grade securities may be relatively less sensitive to
interest rate changes than higher quality securities of comparable maturity,
because of their higher coupon. This higher coupon is what the investor
receives in return for bearing greater credit risk. The higher credit risk
associated with lower grade securities potentially will have a greater effect
on the value of such securities than may be the case with higher quality issues
of comparable maturity, and will be a substantial factor in the Fund's relative
Share price volatility.
Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could disrupt severely the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities. The ratings of Moody's, S&P and the other rating agencies
represent their opinions as to the quality of the obligations which they
undertake to rate. Ratings are relative and subjective and, although ratings
may be useful in evaluating the safety of interest and principal payments, they
do not evaluate the market value risk of such obligations. Although these
ratings may be an initial criterion for selection of portfolio investments,
DLJIM also will evaluate these securities and the ability of the issuers of
such securities to pay interest and principal. To the extent that the Fund
invests in lower grade securities that have not been rated by a rating agency,
the Fund's ability to achieve its investment objectives will be more dependent
on DLJIM's credit analysis than would be the case when the Fund invests in
rated securities.
The Fund may also invest in zero coupon, pay-in-kind or deferred payment
lower grade securities. Zero coupon securities are securities that are sold at
a discount to par value and on which interest payments are not made during the
life of the security. Upon maturity, the holder is entitled to receive the par
value of the security. While interest payments are not made on such securities,
holders of such securities are deemed annually to have received "phantom
income." Because the Fund will distribute this "phantom income" to
Shareholders, to the extent that Shareholders elect to receive dividends in
cash rather than reinvesting such dividends in additional Shares, the Fund will
have fewer assets with which to purchase income-producing securities. The Fund
accrues income with respect to these securities prior to the receipt of cash
payments. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain zero coupon securities until a predetermined date,
at which time the stated coupon rate becomes effective and interest becomes
payable at regular intervals. Zero coupon, pay-in-kind and deferred payment
securities are subject to greater fluctuation in value and may have less
liquidity in the event of adverse market conditions than comparably rated
securities paying cash interest at regular interest payment periods.
Preferred Stock
Preferred stock represents a share of ownership in a company. Generally,
preferred stock has a specified dividend and ranks after bonds but before
common stock on its claim on a company's income for dividend payments and on a
company's assets should the company's assets be liquidated. While most
preferred stocks pay a dividend, the Fund may purchase preferred stock where
the issuer has failed to pay, or is in danger of failing to pay, the dividends
on such preferred stock, or may purchase preferred stock that pays a dividend
in kind.
Convertible Securities
Convertible securities may be converted at either a stated price or stated
rate into underlying shares of common stock. Convertible securities have
characteristics similar to both fixed-income and equity securities. Convertible
securities generally are subordinated to other similar but non-convertible
securities of the same issuer, although convertible bonds, as corporate debt
obligations, enjoy seniority in right of payment to all equity securities, and
convertible preferred stock is senior to shares of common stock of the same
issuer. Because of the subordination feature, however, convertible securities
typically have lower ratings than similar non-convertible securities.
Although to a lesser extent than with fixed-income securities, the market
value of convertible securities tends to decline as interest rates increase
and, conversely, tends to increase as interest rates decline. In addition,
because of the conversion feature, the market value of convertible securities
tends to vary with fluctuations in the market value of the underlying common
stock. As the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same
15
<PAGE>
extent as the underlying common stock. When the market price of the underlying
common stock increases, the prices of the convertible securities tend to rise
as a reflection of the value of the underlying common stock. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
Convertible securities provide for a stable stream of income with
generally higher yields than common stock and offer the potential for capital
appreciation through the conversion feature, which enables the holder to
benefit from increases in the market price of the underlying common stock. In
return, however, convertible securities generally offer lower interest or
dividend yields than non-convertible securities of similar quality.
Participation Interests
The Fund may invest in corporate obligations denominated in U.S. and
foreign currencies that are originated, negotiated and structured by a
syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift
institutions, insurance companies, financial companies or other financial
institutions one or more of which administer the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Fund may invest in such securities either by
participating as a Co-Lender at origination or by acquiring an interest in the
security from a Co-Lender or a Participant (collectively, "participation
interests"). Co-Lenders and Participants interposed between the Fund and the
corporate borrower (the "Borrower"), together with Agent Banks, are referred to
herein as "Intermediate Participants." The Fund also may purchase a
participation interest in a portion of the rights of an Intermediate
Participant, which would not establish any direct relationship between the Fund
and the Borrower. In such cases, the Fund would be required to rely on the
Intermediate Participant that sold the participation interest not only for the
enforcement of the Fund's rights against the Borrower but also for the receipt
and processing of payments due to the Fund under the security. Because it may
be necessary to assert through an Intermediate Participant such rights as may
exist against the Borrower, in the event the Borrower fails to pay principal
and interest when due, the Fund may be subject to delays, expenses and risks
that are greater than those that would be involved if the Fund would enforce
its rights directly against the Borrower. Moreover, under the terms of a
participation interest, the Fund may be regarded as a creditor of the
Intermediate Participant (rather than of the Borrower), so that the Fund may
also be subject to the risk that the Intermediate Participant may become
insolvent. Similar risks may arise with respect to the Agent Bank if, for
example, assets held by the Agent Bank for the benefit of the Fund were
determined by the appropriate regulatory authority or court to be subject to
the claims of the Agent Bank's creditors. In such case, the Fund might incur
certain costs and delays in realizing payment in connection with the
participation interest or suffer a loss of principal and/or interest. Further,
in the event of the bankruptcy or insolvency of the Borrower, the obligation of
the Borrower to repay the loan may be subject to certain defenses that can be
asserted by such Borrower as a result of improper conduct by the Agent Bank or
Intermediate Participant.
Distressed Securities
As a component of the Fund's investment in "junk bonds," the Fund may
invest up to 20% of its total assets in Distressed Securities, including
participation interests purchased in the secondary market. Investment in
Distressed Securities is speculative and involves significant risk. Distressed
Securities frequently do not produce income while they are outstanding and may
require the Fund to bear certain extraordinary expenses in order to protect and
recover its investment. Therefore, to the extent the Fund pursues its secondary
objective of capital appreciation through investment in Distressed Securities,
the Fund's ability to achieve current income for Shareholders may be
diminished. The Fund also will be subject to significant uncertainty as to when
and in what manner and for what value the obligations evidenced by the
Distressed Securities will eventually be satisfied (e.g., through a liquidation
of the obligor's assets, an exchange offer or plan of reorganization involving
the Distressed Securities or a payment of some amount in satisfaction of the
obligation). In addition, even if an exchange offer is made or plan of
reorganization is adopted with respect to Distressed Securities held by the
Fund, there can be no assurance that the securities or other assets received by
the Fund in connection with such exchange offer or plan of reorganization will
not have a lower value or income potential than may have been anticipated when
the investment was made. Moreover, any securities received by the Fund upon
completion of an exchange offer or plan of reorganization may be restricted as
to resale. As a result of the Fund's participation in negotiations with respect
to any exchange offer or plan of reorganization with respect to an issuer of
Distressed Securities, the Fund may be restricted from disposing of such
securities. See "Risk Factors."
Foreign Securities
The Fund may invest up to 30% of its total assets in securities of issuers
domiciled outside the United States or that are denominated in various foreign
currencies or multinational foreign currency units. Foreign securities
16
<PAGE>
markets generally are not as developed or efficient as those in the United
States. Securities of some foreign issuers are less liquid and more volatile
than securities of comparable U.S. issuers. Similarly, volume and liquidity in
most foreign securities markets are less than in the United States and, at
times, volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held outside
the United States, the Fund will be subject to additional risks which include
possible adverse political and economic developments, seizure or
nationalization of foreign deposits and adoption of governmental restrictions
which might adversely affect or restrict the payment of principal and interest
on the foreign securities to investors located outside the country of the
issuer, whether from currency blockage or otherwise.
Developing countries have economic structures that are generally less
diverse and mature, and political systems that are less stable, than those of
developed countries. The markets of developing countries may be more volatile
than the markets of more mature economies; however, such markets may provide
higher rates of return to investors. Many developing countries providing
investment opportunities for the Fund have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain of these countries.
Since foreign securities often are purchased with and payable in
currencies of foreign countries, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency rates
and exchange control regulations. The Fund may engage in certain transactions
to hedge the currency related risks of investing in non-U.S. dollar denominated
securities. See "Other Investment Practices."
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
The Fund may invest in floating rate debt instruments ("floaters"). The
interest rate on a floater is a variable rate which is tied to another interest
rate, such as a money-market index or Treasury Bill rate. The interest rate on
a floater resets periodically, typically every six months. Because of the
interest rate reset feature, floaters provide the Fund with a certain degree of
protection against rises in interest rates, although the Fund will participate
in any declines in interest rates as well. The Fund also may invest in inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed or inversely to a multiple of
the applicable index. An inverse floating rate security may exhibit greater
price volatility than a fixed rate obligation of similar credit quality.
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities that differ in their
interest rates, maturities and times of issuance. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities are supported by
the full faith and credit of the U.S. Treasury; others by the right of the
issuer to borrow from the Treasury; others by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others only by the credit of the agency or
instrumentality. These securities bear fixed, floating or variable rates of
interest. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies and instrumentalities, no assurance can be given
that it will always do so since it is not so obligated by law.
Foreign Government Obligations; Securities of Supranational Entities
The Fund may invest in obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by DLJIM to be of comparable quality to
the other obligations in which the Fund may invest. Supranational entities
include international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies.
Stripped Securities
The Fund may invest in zero coupon U.S. Treasury securities, which are
Treasury Notes and Treasury Bonds that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. Such
stripped securities also are issued by
17
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corporations and financial institutions which constitute a proportionate
ownership of the issuer's pool of underlying securities. A stripped security
pays no interest to its holder during its life and is sold at a discount to its
face value at maturity. The market prices of such securities generally are more
volatile than the market prices of securities that pay interest periodically
and are likely to respond to a greater degree to changes in interest rates than
coupon securities having similar maturities and credit qualities.
Money Market Instruments
The Fund may invest in the following types of money market instruments.
Repurchase Agreements. In a repurchase agreement, the Fund buys, and the
seller agrees to repurchase, a security at a mutually agreed upon time and price
(usually within seven days). The repurchase agreement thereby determines the
yield during the purchaser's holding period, while the seller's obligation to
repurchase is secured by the value of the underlying security. Repurchase
agreements could involve risks in the event of a default or insolvency of the
other party to the agreement, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities. The Fund may enter into
repurchase agreements with certain banks or non-bank dealers.
Bank Obligations. The Fund may purchase certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks, foreign subsidiaries or foreign branches of domestic banks,
domestic and foreign branches of foreign banks, domestic savings and loan
associations and other banking institutions. With respect to such securities
issued by foreign subsidiaries or foreign branches of domestic banks, and
domestic and foreign branches of foreign banks, the Fund may be subject to
additional investment risks.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time (in no event longer than seven days)
at a stated interest rate.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
Commercial Paper. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The commercial
paper purchased by the Fund will consist only of direct obligations which, at
the time of their purchase, are (a) rated not lower than Prime-1 by Moody's or
A-1 by S&P, (b) issued by companies having an outstanding unsecured debt issue
currently rated at least A3 by Moody's or A- by S&P, or (c) if unrated,
determined by DLJIM to be of comparable quality to those rated obligations
which may be purchased by the Fund.
Other Short-Term Corporate Obligations. These instruments include
variable amount master demand notes, which are obligations that permit the Fund
to invest fluctuating amounts at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the borrower. These notes permit
daily changes in the amounts borrowed. Because these obligations are direct
lending arrangements between the lender and borrower, it is not contemplated
that such instruments generally will be traded, and there generally is no
established secondary market for these obligations, although they are
redeemable at face value, plus accrued interest, at any time. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, the Fund's right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies, and the Fund may invest in
them only if at the time of an investment DLJIM determines that such investment
is of comparable quality to those rated obligations which may be purchased by
the Fund.
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<PAGE>
OTHER INVESTMENT PRACTICES
The Fund may utilize other investment practices and portfolio management
techniques as set forth below.
Leverage
At times, the Fund expects to utilize leverage through borrowings or
issuance of debt securities or preferred shares. The Fund intends to utilize
leverage in an initial amount equal to approximately 20% of its total assets
(including the amount obtained from leverage); however, the Fund has the
ability to utilize leverage in an amount up to 331/3% of its total assets if
borrowing and 50% through the use of preferred shares (in each case including
the amount obtained from leverage). The Fund generally will not utilize
leverage if it anticipates that the Fund's leveraged capital structure would
result in a lower return to Shareholders than that obtainable if the Shares
were unleveraged for any significant amount of time.
Under the Investment Company Act, the Fund is not permitted to incur
indebtedness unless immediately after such incurrence the Fund's total assets
(less any liabilities and indebtedness not related to the issuance of senior
securities) are at least 300% of the aggregate amount of all senior securities
representing such indebtedness (i.e., such indebtedness may not exceed 331/3%
of the Fund's total assets). Additionally, under the Investment Company Act,
the Fund may not declare any dividend or other distribution upon any class of
its capital shares, or purchase any such capital shares, unless the aggregate
indebtedness of the Fund has, at the time of the declaration of any such
dividend or distribution or at the time of any such purchase, an asset coverage
of at least 300% after deducting the amount of such dividend, distribution, or
purchase price, as the case may be. Under the Investment Company Act, the Fund
is not permitted to issue preferred shares unless immediately after such
issuance the Fund's total assets (less any liabilities and indebtedness not
related to the issuance of senior securities) are at least 200% of the
aggregate amount of (i) all senior securities representing indebtedness plus
(ii) the involuntary liquidation preference of all senior securities
representing preferred shares (i.e., such liquidation value may not exceed 50%
of the Fund's total assets). The involuntary liquidation preference shall be
the amount in which such preferred shares would be entitled upon the
involuntary liquidation of the Fund. In addition, the Fund is not permitted to
declare any cash dividend or other distribution on Shares unless, at the time
of such declaration, the net asset value of the Fund's portfolio (determined
after deducting the amount of such dividend or other distribution) is at least
200% of such liquidation value. If preferred shares are issued, the Fund
intends, to the extent possible, to purchase or redeem preferred shares from
time to time to maintain coverage of any preferred shares of at least 200%.
The Fund also may borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise may require untimely dispositions of
Fund securities. Subject to applicable regulatory requirements, the Fund at
times may borrow from affiliates of DLJIM, provided that the terms of such
borrowings are no less favorable than those available from comparable sources
of funds in the marketplace.
The concept of leveraging is based on the premise that the cost of the
assets to be obtained from leverage will be based on short-term rates which
normally will be lower than the return earned by the Fund on its longer term
portfolio investments. Since it is anticipated that the total assets of the
Fund (including the assets obtained from leverage) will be invested in the
higher yielding portfolio investments or portfolio investments with the
potential for capital appreciation, the Shareholders should be the
beneficiaries of any incremental return. Should the differential between the
return on the underlying assets and cost of leverage narrow, the incremental
return "pick up" will be reduced.
Leverage creates risks for Shareholders including the likelihood of
greater volatility of net asset value and market price of the Shares, and the
risk that fluctuations in interest rates on borrowings and short-term debt or
in the dividend rates on any preferred shares may affect the return to the
Shareholders. To the extent the income or capital appreciation derived from
securities purchased with funds received from leverage exceeds the cost of
leverage, the Fund's return will be greater than if leverage had not been used.
Conversely, if the income or capital appreciation from the securities purchased
with such funds is not sufficient to cover the cost of leverage, the return on
the Fund will be less than if leverage had not been used, and therefore the
amount available for distribution to Shareholders as dividends and other
distributions will be reduced. In the latter case, DLJIM in its best judgment
nevertheless may determine to maintain the Fund's leveraged position if it
deems such action to be appropriate under the circumstances. As discussed under
"Management of the Fund," the Management Fee paid to DLJIM will be calculated
on the basis of the Fund's Managed Assets which includes proceeds from
borrowings for leverage and the issuance of preferred shares.
Capital raised through leverage will be subject to interest costs or
dividend payments which may or may not exceed the income and appreciation on
the assets purchased. The Fund, among other things, also may be required
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<PAGE>
to maintain minimum average balances in connection with borrowings or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements will increase the cost of borrowing over the stated interest rate.
The issuance of classes of preferred shares involves offering expenses and
other costs and may limit the Fund's freedom to pay dividends on Shares or to
engage in other activities.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset coverage and
portfolio composition requirements. The Fund may be subject to certain
restrictions on investments imposed by guidelines of one or more Rating
Agencies which may issue ratings for the corporate debt securities or preferred
shares issued by the Fund. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed
by the Investment Company Act. It is not anticipated that these covenants or
guidelines will impede DLJIM from managing the Fund's portfolio in accordance
with the Fund's investment objectives and policies.
The Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount the Fund will borrow or issue, will depend
on many factors, the most important of which are investment outlook, market
conditions and interest rates. Successful use of a leveraging strategy depends
on DLJIM's ability to predict correctly interest rates and market movements,
and there is no assurance that a leveraging strategy will be successful during
any period in which it is employed.
Assuming the utilization of leverage by borrowings in the amount of
approximately 20% of the Fund's total assets, and an annual interest rate of 6%
payable on such leverage based on market rates as of the date of this
Prospectus, the annual return that the Fund's portfolio must experience (net of
expenses) in order to cover such interest payments would be 1.5%.
The following table is designed to illustrate the effect on the return to
a Shareholder of the leverage obtained by borrowings in the amount of
approximately 20% of the Fund's total assets, assuming hypothetical annual
returns of the Fund's portfolio of minus 10% to plus 10%. As the table shows,
the leverage generally increases the return to Shareholders when portfolio
return is positive and greater than the cost of leverage and decreases the
return when the portfolio return is negative or less than the cost of leverage.
The figures appearing in the table are hypothetical and actual returns may be
greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of expenses) ... (10)% (5)% 0 % 5% 10%
Corresponding Share Return ................... (14)% (8)% (1.5)% 5% 11%
</TABLE>
Until the Fund borrows or issues preferred shares, the Shares will not be
leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the Shares
cannot be fully achieved until the proceeds resulting from the use of leverage
have been invested in longer-term debt instruments in accordance with the
Fund's investment objectives and policies.
Short-Selling
In these transactions, the Fund sells a security it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the Fund must borrow the security to make delivery to the buyer.
The Fund is obligated to replace the security borrowed by purchasing it
subsequently at the market price at the time of replacement. The price at such
time may be more or less than the price at which the security was sold by the
Fund, which would result in a loss or gain, respectively.
Securities will not be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed
25% of the value of the Fund's net assets. The Fund may not make a short sale
which results in the Fund having sold short in the aggregate more than 10% of
the outstanding securities of any class of an issuer.
The Fund also may make short sales "against the box" in which the Fund
enters into a short sale of a security it owns. See "Taxes."
Until the Fund closes out its short position or replaces the borrowed
security, it will: (a) maintain a segregated account, containing permissible
liquid assets, at such a level that the amount deposited in the account plus
the amount deposited with the broker as collateral always equals the current
value of the security sold short; or (b) otherwise cover its short position.
Lending Portfolio Securities
The Fund may lend securities from its portfolio to brokers, dealers and
other financial institutions needing to borrow securities to complete certain
transactions. The Fund continues to be entitled to payments in amounts
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equal to the interest, dividends or other distributions payable on the loaned
securities, which affords the Fund an opportunity to earn interest on the
amount of the loan and on the loaned securities' collateral. Loans of portfolio
securities may not exceed 33-1/3% of the value of the Fund's total assets, and
the SEC currently requires the Fund to receive collateral consisting of cash,
U.S. Government securities or irrevocable letters of credit which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. According to the SEC, such loans
currently must be terminable by the Fund at any time upon specified notice. The
Fund might experience risk of loss if the institution with which it has engaged
in a portfolio loan transaction breaches its agreement with the Fund. In
connection with its securities lending transactions, the Fund may return to the
borrower or a third party which is acting as a "placing broker," a part of the
interest earned from the investment of collateral received for securities
loaned.
Generally, the SEC currently requires that the following conditions must
be met whenever portfolio securities are loaned: (1) the Fund must receive at
least 100% cash or equivalent collateral from the borrower; (2) the borrower
must increase such collateral whenever the market value of the securities rises
above the level of such collateral; (3) the Fund must be able to terminate the
loan at any time; (4) the Fund must receive reasonable interest on the loan, as
well as any dividends, interest or other distributions payable on the loaned
securities, and any increase in market value; (5) the Fund may pay only
reasonable custodian fees in connection with the loan; and (6) while voting
rights on the loaned securities may pass to the borrower, the Board must
terminate the loan and regain the right to vote the securities if a material
event adversely affecting the investment occurs. If the regulatory requirements
pertaining to portfolio securities lending were to change, the Fund would
comply with such changes as required.
Illiquid Securities
The Fund may purchase securities subject to legal or contractual
restriction, or that are otherwise illiquid, without limitation. When
purchasing securities that have not been registered under the Securities Act of
1933, as amended, and are not readily marketable, the Fund will endeavor, to
the extent practicable, to obtain the right to registration at the expense of
the issuer. Generally, there will be a lapse of time between the Fund's
decision to sell any such security and the registration of the security
permitting sale. During any such period, the price of the securities will be
subject to market fluctuations. However, where a substantial market of
qualified institutional buyers has developed for certain unregistered
securities purchased by the Fund pursuant to Rule 144A under the Securities Act
of 1933, as amended, the Fund intends to treat such securities as liquid
securities in accordance with procedures approved by the Board. Because it is
not possible to predict with assurance how the market for specific restricted
securities sold pursuant to Rule 144A will develop, the Board has directed
DLJIM to monitor carefully the Fund's investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. To the extent that, for a period of
time, qualified institutional buyers cease purchasing restricted securities
pursuant to Rule 144A, the Fund's investing in such securities may have the
effect of increasing the level of illiquidity in its investment portfolio
during such period. Substantial illiquid positions in the Fund could adversely
impact its ability to convert to open-end status.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with respect to its
portfolio investments subject to the investment restrictions set forth herein.
Reverse repurchase agreements involve the sale of securities held by the Fund
with an agreement by the Fund to repurchase the securities at an agreed upon
price, date and interest payment. The use by the Fund of reverse repurchase
agreements involves many of the same risks of leverage described under "Risk
Factors" and "--Leverage" since the proceeds derived from such reverse
repurchase agreements may be invested in additional securities. At the time the
Fund enters into a reverse repurchase agreement, it may establish and maintain
a segregated account with the custodian containing liquid instruments having a
value not less than the repurchase price (including accrued interest). If the
Fund establishes and maintains such a segregated account, a reverse repurchase
agreement will not be considered a borrowing by the Fund; however, under
circumstances in which the Fund does not establish and maintain such a
segregated account, such reverse repurchase agreement will be considered a
borrowing for the purpose of the Fund's limitation on borrowings. Reverse
repurchase agreements involve the risk that the market value of the securities
acquired in connection with the reverse repurchase agreement may decline below
the price of the securities the Fund has sold but is obligated to repurchase.
Also, reverse repurchase agreements involve the risk that the market value of
the securities retained in lieu of sale by the Fund in connection with the
reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
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<PAGE>
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
Derivatives
The Fund may invest in, or use, derivatives ("Derivatives"). These are
financial instruments that derive their performance, at least in part, from the
performance of an underlying asset, index or interest rate. The Derivatives the
Fund may use include options, futures contracts, forward contracts, securities
and swaps. The Fund may invest in, or enter into, Derivatives for a variety of
reasons, including to hedge certain market risks, to provide a substitute for
purchasing or selling particular securities or to increase potential income
gain. Derivatives may provide a cheaper, quicker or more specifically focused
way for the Fund to invest than "traditional" securities would.
Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular Derivative and the
portfolio as a whole. Derivatives permit the Fund to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Fund can increase or decrease the level of
risk, or change the character of the risk, of its portfolio by purchasing or
selling specific securities.
Derivatives may entail investment exposures that are greater than their
cost would suggest, meaning that a small investment in Derivatives could have a
large potential impact on the Fund's performance.
If the Fund invests in Derivatives at inopportune times or judges market
conditions incorrectly, such investments may lower the Fund's return or result
in a loss. The Fund also could experience losses if its Derivatives were poorly
correlated with its other investments, or if the Fund were unable to liquidate
its position because of an illiquid secondary market. The market for many
Derivatives is, or suddenly can become, illiquid. Changes in liquidity may
result in significant, rapid and unpredictable changes in the prices for
Derivatives.
Derivatives may be purchased on established exchanges or through privately
negotiated transactions referred to as over-the-counter Derivatives.
Exchange-traded Derivatives generally are guaranteed by the clearing agency
that is the issuer or counterparty to such Derivatives. This guarantee usually
is supported by a daily payment system (i.e., variation margin requirements)
operated by the clearing agency in order to reduce overall credit risk. As a
result, unless the clearing agency defaults, there is relatively little
counterparty credit risk associated with Derivatives purchased on an exchange.
By contrast, no clearing agency guarantees over-the-counter Derivatives.
Therefore, each party to an over-the-counter Derivative bears the risk that the
counterparty will default. Accordingly, DLJIM will consider the
creditworthiness of counterparties to over-the-counter Derivatives in the same
manner as it would review the credit quality of a security to be purchased by
the Fund. Over-the-counter Derivatives are less liquid than exchange-traded
Derivatives since the other party to the transaction may be the only investor
with sufficient understanding of the Derivative to be interested in bidding for
it.
Futures and Options on Futures Transactions
In General. The Fund may enter into futures contracts and options on
futures contracts in U.S. domestic markets, such as the Chicago Board of Trade
and the International Monetary Market of the Chicago Mercantile Exchange or on
exchanges located outside the United States, such as the London International
Financial Futures Exchange and the Sydney Futures Exchange Limited. Foreign
markets may offer advantages such as trading opportunities or arbitrage
possibilities not available in the United States. Foreign markets, however, may
have greater risk potential than domestic markets. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
an investor may look only to the broker for performance of the contract. In
addition, any profits that the Fund might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Fund could incur
losses as a result of those changes. Transactions on foreign exchanges may
include both commodities which are traded on domestic exchanges and those that
are not. Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the Commodity Futures Trading
Commission ("CFTC").
Engaging in these transactions involves risk of loss to the Fund that
could adversely affect the value of the Fund's net assets. Although the Fund
intends to purchase or sell futures contracts and options thereon only if there
is an active market for such contracts, no assurance can be given that a liquid
market will exist for any particular contract at any particular time. Many
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract or option prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit or trading may be suspended for specified
periods during the trading day. Futures contract or option prices could move to
the limit for several consecutive
22
<PAGE>
trading days with little or no trading, thereby preventing prompt liquidation of
futures or option positions and potentially subjecting the Fund to substantial
losses. Successful use of futures and options on futures by the Fund also is
subject to the ability of DLJIM to predict correctly movements in the direction
of the relevant market and, to the extent the transaction is entered into for
hedging purposes, to ascertain the appropriate correlation between the
transaction being hedged and the price movements of the futures contract or
option thereon. For example, if the Fund uses futures to hedge against the
possibility of a decline in the market value of securities held in its portfolio
and the prices of such securities instead increase, the Fund will lose part or
all of the benefit of the increased value of securities that it has hedged
because it will have offsetting losses in its futures positions. Furthermore, if
in such circumstances the Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. The Fund may have to
sell such securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the SEC, the Fund
may be required to segregate cash or other liquid assets in connection with its
futures and options on futures transactions in an amount generally equal to the
value of the underlying commodity. The segregation of such assets will have the
effect of limiting the Fund's ability otherwise to invest those assets.
To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, that are not for bona fide hedging purposes (as defined by the CFTC),
the aggregate initial margin and premiums required to establish these positions
(excluding the amount by which options are "in-the-money" at the time of
purchase) may not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. (In general, a call option on a futures
contract is "in-the-money" if the value of the underlying futures contract
exceeds the exercise ("strike") price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract is
exceeded by the strike price of the put). This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
Specific Futures Transactions. The Fund may purchase and sell interest
rate futures contracts. An interest rate future obligates the Fund to purchase
or sell an amount of a specific debt security at a future date at a specific
price.
The Fund may purchase and sell currency futures. A foreign currency future
obligates the Fund to purchase or sell an amount of a specific currency at a
future date at a specific price. The Fund may purchase and sell stock index and
debt futures contracts. An index future obligates the Fund to pay or receive an
amount of cash equal to a fixed dollar amount specified in the futures contract
multiplied by the difference between the settlement price of the contract on
the contract's last trading day and the value of the index based on the prices
of the securities that comprise it at the opening of trading in such securities
on the next business day.
The Fund may also purchase and sell options on interest rate, currency and
index futures. When the Fund writes an option on a futures contract, it becomes
obligated, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time during the terms of the
option. If the Fund writes a call, it assumes a short futures position. If it
writes a put, it assumes a long futures position. When the Fund purchases an
option on a futures contract, it acquires the right, in return for the premium
it pays, to assume a position in the futures contract (a long position if the
option is a call and a short position if the option is a put).
Forward Currency Contracts. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time the forward
currency contract is entered into. Forward currency contracts are traded
directly between currency traders (usually large commercial banks) and their
customers.
The Fund may purchase a forward currency contract to lock in the U.S.
dollar price of a security denominated in a foreign currency that the Fund
intends to acquire. The Fund may sell a forward currency contract to lock in
the U.S. dollar equivalent of the proceeds from the anticipated sale of a
security or a dividend or interest payment denominated in a foreign currency.
The Fund may also use forward currency contracts to shift the Fund's exposure
to foreign currency exchange rate changes from one currency to another. For
example, if the Fund owns securities denominated in a foreign currency and
DLJIM believes that currency will decline relative to another currency, it
might enter into a forward currency contract to sell the appropriate amount of
the first foreign currency with payment to be made in the second currency. The
Fund may also purchase forward currency contracts to enhance income when DLJIM
anticipates that the foreign currency will appreciate in value but securities
denominated in that currency do not present attractive investment
opportunities.
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<PAGE>
The Fund may also use forward currency contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
Such a hedge would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused by other
factors. The Fund could also hedge the position by entering into a forward
currency contract to sell another currency expected to perform similarly to the
currency in which the Fund's existing investments are denominated. This type of
hedge could offer advantages in terms of cost, yield or efficiency, but may not
hedge currency exposure as effectively as a simple hedge into U.S. dollars.
This type of hedge may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities are
denominated.
The Fund may also use forward currency contracts in one currency or a
basket of currencies to attempt to hedge against fluctuations in the value of
securities denominated in a different currency if DLJIM anticipates that there
will be a correlation between the two currencies.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of some or all of any expected benefit of the transaction.
Secondary markets generally do not exist for forward currency contracts,
with the result that closing transactions generally can be made for forward
currency contracts only by negotiating directly with the counterparty. Thus,
there can be no assurance that the Fund will in fact be able to close out a
forward currency contract at a favorable price prior to maturity. In addition,
in the event of insolvency of the counterparty, the Fund might be unable to
close out a forward currency contract. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue
to be required to maintain a position in securities denominated in the foreign
currency or to maintain cash or liquid assets in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
forward currency contract has been established. Thus, the Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward currency contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Interest Rate Swaps. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or receive interest
(for example, an exchange of floating rate payments for fixed rate payments).
The exchange commitments can involve payments to be made in the same currency
or in different currencies. The use of interest rate swaps is a highly
specialized activity that involves investment techniques and risks different
from those associated with ordinary portfolio security transactions. If DLJIM
is incorrect in its forecasts of market values, interest rates and other
applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these investment techniques were not
used. Moreover, even if DLJIM is correct in its forecasts, there is a risk that
the swap position may correlate imperfectly with the price of the asset or
liability being hedged. There is no limit on the amount of interest rate swap
transactions that may be entered into by the Fund. These transactions do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the Fund's risk of
loss consists of the net amount of interest payments that the Fund
contractually is entitled to receive.
Credit Derivatives. The Fund may engage in credit derivative transactions.
There are two broad categories of credit derivatives: default price risk
derivatives and market spread derivatives. Default price risk derivatives are
linked to the price of reference securities or loans after a default by the
issuer or borrower, respectively. Market spread derivatives are based on the
risk that changes in market factors, such as credit spreads, can cause a
decline in the value of a security, loan or index. There are three basic
transactional forms for credit derivatives: swaps, options and structured
instruments. The use of credit derivatives is a highly specialized activity
which involves strategies and risks different from those associated with
ordinary portfolio security transactions. If DLJIM is incorrect in its
forecasts of default risks, market spreads or other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these techniques were not used. Moreover, even if DLJIM is correct
in its forecasts, there is a risk that a credit derivative position, may
correlate imperfectly with the price of the asset or liability being hedged.
There is no limit on the amount of credit derivative transactions
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that may be entered into by the Fund. The Fund's risk of loss in a credit
derivative transaction varies with the form of the transaction. For example, if
the Fund purchases a default option on a security, and if no default occurs
with respect to the security, the Fund's loss is limited to the premium it paid
for the default option. In contrast, if there is a default by the grantor of a
default option, the Fund's loss will include both the premium that it paid for
the option and the decline in value of the underlying security that the default
option hedged.
Options--In General. The Fund may purchase and write (i.e., sell) call or
put options with respect to specific securities. A call option gives the
purchaser of the option the right to buy, and obligates the writer to sell, the
underlying security or securities at the exercise price at any time during the
option period, or at a specific date. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy, the
underlying security or securities at the exercise price at any time during the
option period, or at a specific date.
A covered call option written by the Fund is a call option with respect to
which the Fund owns the underlying security or otherwise covers the transaction
by segregating cash or other liquid assets. A put option written by the Fund is
covered when, among other things, cash or liquid assets having a value equal to
or greater than the exercise price of the option are placed in a segregated
account with the Fund's custodian to fulfill the obligation undertaken. The
principal reason for writing covered call and put options is to realize,
through the receipt of premiums, a greater return than would be realized on the
underlying securities alone. The Fund receives a premium from writing covered
call or put options which it retains whether or not the option is exercised.
There is no assurance that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist for any particular option
or at any particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a variety
of reasons. In the past, for example, higher than anticipated trading activity
or order flow, or other unforeseen events, at times have rendered certain of
the clearing facilities inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Specific Options Transactions. The Fund may purchase and sell call and put
options on foreign currency. These options convey the right to buy or sell the
underlying currency at a price which is expected to be lower or higher than the
spot price of the currency at the time the option is exercised or expires.
The Fund may purchase and sell call and put options in respect of specific
securities (or groups or "baskets" of specific securities) or indices listed on
national securities exchanges or traded in the over-the-counter market. An
option on an index is similar to an option in respect of specific securities,
except that settlement does not occur by delivery of the securities comprising
the index. Instead, the option holder receives an amount of cash if the closing
level of the index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the
option. Thus, the effectiveness of purchasing or writing index options will
depend upon price movements in the level of the index rather than the price of
a particular security.
The Fund also may purchase cash-settled options on swaps in pursuit of its
investment objectives. A cash settled option on a swap gives the purchaser the
right, but not the obligation, in return for the premium paid, to receive an
amount of cash equal to the value of the underlying swap as of the exercise
date. These options typically are purchased in privately negotiated
transactions from financial institutions, including securities brokerage firms.
Successful use by the Fund of options will be subject to the ability of
DLJIM to predict correctly movements in the prices of individual securities,
the securities markets generally, foreign currencies, or interest rates. To the
extent such predictions are incorrect, the Fund may incur losses.
Future Developments. The Fund may take advantage of opportunities in the
area of options and futures contracts and options on futures contracts and any
other Derivatives that are not presently contemplated for use by the Fund or
that are not currently available but that may be developed, to the extent such
opportunities are both consistent with the Fund's investment objectives and
legally permissible for the Fund.
Forward Commitments; When-Issued Securities
The Fund may purchase securities on a forward commitment or when-issued
basis, which means that delivery and payment take place a number of days after
the date of the commitment to purchase. The payment obligation and the interest
rate receivable on a forward commitment or when-issued security are fixed when
the Fund enters
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into the commitment, but the Fund does not make payment until it receives
delivery from the counterparty. The Fund will commit to purchase such
securities only with the intention of actually acquiring the securities, but
the Fund may sell these securities before the settlement date if it is deemed
advisable. The Fund will set aside in a segregated account of the Fund
permissible liquid assets at least equal at all times to the amount of the
commitments.
Securities purchased on a forward commitment or when-issued basis are
subject to changes in value (generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise) based upon the public's perception of the creditworthiness of the issuer
and changes, real or anticipated, in the level of interest rates. Securities
purchased on a forward commitment or when-issued basis may expose the Fund to
risks because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued basis can involve the
additional risk that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the
Fund is fully or almost fully invested may result in greater potential
fluctuation in the value of the Fund's net assets and its net asset value per
Share.
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RISK FACTORS
Investors are advised to consider carefully the special risks involved in
investing in the Fund.
General
The Fund is a newly organized, non-diversified, closed-end management
investment company and has no operating history. Shares of closed-end
management investment companies frequently trade at a discount from their net
asset value. The Shares are designed primarily for long-term investors and
should not be considered a vehicle for trading purposes. The net asset value of
the Shares will fluctuate with interest rate changes as well as with price
changes of the Fund's portfolio securities and these fluctuations are likely to
be greater in the case of a fund having a leveraged capital structure, as
contemplated for the Fund.
Lower Grade Securities
Lower grade securities are regarded as being predominantly speculative as
to the issuer's ability to make payments of principal and interest. Investment
in such securities involves substantial risk. Lower grade securities are
commonly referred to as "junk bonds." Issuers of lower grade securities may be
highly leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of
such issuers generally are greater than is the case with higher-rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of lower grade securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During periods of economic downturn, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be adversely affected by specific issuer
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. Therefore, there can
be no assurance that in the future there will not exist a higher default rate
relative to the rates currently existing in the market for lower grade
securities. The risk of loss due to default by the issuer is significantly
greater for the holders of lower grade securities because such securities may
be unsecured and may be subordinate to other creditors of the issuer. Other
than with respect to Distressed Securities, discussed below, the lower grade
securities in which the Fund may invest do not include instruments which, at
the time of investment, are in default or the issuers of which are in
bankruptcy. However, there can be no assurance that such events will not occur
after the Fund purchases a particular security, in which case the Fund may
experience losses and incur costs.
Lower grade securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
is likely to have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to Shareholders.
Lower grade securities have been in the past, and may again in the future
be, more volatile than higher-rated fixed-income securities, so that adverse
economic events may have a greater impact on the prices of lower grade
securities than on higher-rated fixed income securities. Factors adversely
affecting the market value of such securities are likely to affect adversely
the Fund's net asset value. Recently, demand for lower grade securities has
increased significantly and the difference between the yields paid by lower
grade securities and investment grade bonds (i.e., the "spread") has narrowed.
To the extent this differential increases, the value of lower grade securities
in the Fund's portfolio could be adversely affected.
Like higher-rated fixed-income securities, lower grade securities
generally are purchased and sold through dealers who make a market in such
securities for their own accounts. However, there are fewer dealers in the
lower grade securities market, which market may be less liquid than the market
for higher-rated fixed-income securities, even under normal economic
conditions. Also, there may be significant disparities in the prices quoted for
lower grade securities by various dealers. As a result, during periods of high
demand in the lower grade securities market, it may be difficult to acquire
lower grade securities appropriate for investment by the Fund. Adverse economic
conditions and investor perceptions thereof (whether or not based on economic
reality) may impair liquidity in the lower grade securities market and may
cause the prices the Fund receives for its lower grade securities to be
reduced. In addition, the Fund may experience difficulty in liquidating a
portion of its portfolio when necessary to meet the Fund's liquidity needs or
in response to a specific economic event such as deterioration in the
creditworthiness of the issuers. Under such conditions, judgment may play a
greater role in valuing certain of the Fund's portfolio instruments than in the
case of instruments trading in a more liquid market. In addition, the Fund may
incur additional expense to the extent that it is required to seek recovery
upon a default on a portfolio holding or to participate in the restructuring of
the obligation.
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Distressed Securities
As a component of the Fund's investment in "junk bonds," the Fund may
invest up to 20% of its total assets in Distressed Securities. Investment in
Distressed Securities is speculative and involves significant risk. Distressed
Securities frequently do not produce income while they are outstanding and may
require the Fund to bear certain extraordinary expenses in order to protect and
recover its investment. Therefore, to the extent the Fund pursues its secondary
objective of capital appreciation through investment in Distressed Securities,
the Fund's ability to achieve current income for Shareholders may be
diminished.
Smaller Companies in General
The Fund may invest in smaller high yield issues which are those of
companies whose total outstanding high yield debt is $100 million or less. Such
smaller high yield issues may be issued by any company but are often issued by
smaller companies. In addition to the general risks of such securities, those
issued by smaller companies often have higher market risks associated with
them. They may have limited product lines, markets, market share and financial
resources, or they may be dependent on a small or inexperienced management
team. In addition, their securities may be less liquid, have more limited
volumes and be subject to greater and more abrupt price swings than securities
of larger companies.
Leverage
The use of leverage by the Fund creates an opportunity for increased net
income and capital appreciation for the Shares, but, at the same time, creates
special risks, and there can be no assurance that a leveraging strategy will be
successful during any period in which it is employed. The Fund intends to
utilize leverage to provide the Shareholders with a potentially higher return.
Leverage creates risks for Shareholders including the likelihood of greater
volatility of net asset value and market price of the Shares and the risk that
fluctuations in interest rates on borrowings and short-term debt or in the
dividend rates on any preferred shares may affect the return to the
Shareholders. To the extent the income or capital appreciation derived from
securities purchased with funds received from leverage exceeds the cost of
leverage, the Fund's return will be greater than if leverage had not been used.
Conversely, if the income or capital appreciation from the securities purchased
with such funds is not sufficient to cover the cost of leverage, the return to
the Fund will be less than if leverage had not been used, and therefore the
amount available for distribution to Shareholders as dividends and other
distributions will be reduced. In the latter case, DLJIM in its best judgment
nevertheless may determine to maintain the Fund's leveraged position if it
deems such action to be appropriate under the circumstances. During periods in
which the Fund is utilizing leverage, the Management Fee will be higher than if
the Fund did not utilize a leveraged capital structure because the fee is
calculated as a percentage of the Managed Assets including those purchased with
leverage. Certain types of borrowings by the Fund may result in the Fund's
being subject to covenants in credit agreements, including those relating to
asset coverage and portfolio composition requirements. The Fund may be subject
to certain restrictions on investments imposed by guidelines of one or more
Rating Agencies, which may issue ratings for the corporate debt securities or
preferred shares issued by the Fund. These guidelines may impose asset coverage
or portfolio composition requirements that are more stringent than those
imposed by the Investment Company Act. It is not anticipated that these
covenants or guidelines will impede DLJIM in managing the Fund's portfolio in
accordance with the Fund's investment objectives and policies. Subject to
applicable regulatory requirements, the Fund at times may borrow from
affiliates of DLJIM, provided that the terms of such borrowings are no less
favorable than those available from comparable sources of funds in the
marketplace.
Foreign Securities
The Fund may invest up to 30% of its total assets in securities of issuers
domiciled outside of the United States or that are denominated in various
foreign currencies and multinational foreign currency units. Investing in
securities of foreign entities and securities denominated in foreign currencies
involves certain risks not involved in domestic investments, including, but not
limited to, fluctuations in foreign exchange rates, future foreign political
and economic developments, different legal and accounting systems and the
possible imposition of exchange controls or other foreign governmental laws or
restrictions. Securities prices in different countries are subject to different
economic, financial, political and social factors. Since the Fund may invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of securities
in the Fund and the unrealized appreciation or depreciation of investments.
Currencies of certain countries may be volatile and therefore may affect the
value of securities denominated in such currencies. In addition, with respect
to certain foreign countries, there is the possibility of expropriation of
assets, confiscatory taxation, difficulty in obtaining or enforcing a court
judgment, economic, political or social instability or diplomatic developments
that
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could affect investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross domestic product, rates of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments position.
Certain foreign investments also may be subject to foreign withholding taxes.
These risks often are heightened for investments in smaller, emerging capital
markets.
As a result of these potential risks, DLJIM may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including DLJIM, have had no or
limited prior experience.
Illiquid Securities
The Fund may invest in securities for which no readily available market
exists or are otherwise considered illiquid. The Fund may not be able readily
to dispose of such securities at prices that approximate those at which the
Fund could sell such securities if they were more widely traded and, as a
result of such illiquidity, the Fund may have to sell other investments or
engage in borrowing transactions if necessary to raise cash to meet its
obligations.
Non-Diversified Status
The Fund is classified as a "non-diversified" management investment
company under the Investment Company Act, which means that the Fund may invest
a greater portion of its assets in a limited number of issuers than would be
the case if the Fund were classified as a "diversified" management investment
company. Accordingly, the Fund may be subject to greater risk with respect to
its portfolio securities than a management investment company that is
"diversified" because changes in the financial condition or market assessment
of a single issuer may cause greater fluctuations in the net asset value of the
Shares.
Market Price, Discount and Net Asset Value of Shares
Shares of closed-end management investment companies in the past
frequently have traded at a discount from their net asset values. Whether
investors will realize gains or losses upon the sale of Shares will not depend
directly upon the Fund's net asset value, but will depend upon the market price
of the Shares at the time of sale. Since the market price of the Shares will be
determined by such factors as relative demand for and supply of the Shares in
the market, general market and economic conditions and other factors beyond the
control of the Fund, the Fund cannot predict whether the Shares will trade at,
below or above the net asset value or at, below or above the initial offering
price. The Shares are designed primarily for long-term investors, and investors
in the Shares should not view the Fund as a vehicle for trading purposes.
Anti-Takeover Provisions
The Fund's Declaration of Trust contains provisions limiting (i) the
ability of other entities or persons to acquire control of the Fund, (ii) the
Fund's freedom to engage in certain transactions, and (iii) the ability of the
Board or Shareholders to amend the Declaration of Trust. These provisions of
the Declaration of Trust may be regarded as "anti-takeover" provisions. These
provisions could have the effect of depriving the Shareholders of opportunities
to sell their Shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Fund in a tender offer or
similar transaction.
Year 2000 Risks
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by DLJIM and the Fund's other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." DLJIM is
taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by the Fund's other major service providers. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact on the Fund.
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INVESTMENT RESTRICTIONS
In addition to its investment objectives, the Fund has adopted investment
restrictions numbered 1 through 6 as fundamental policies, which cannot be
changed without approval by the holders of a majority (as defined in the
Investment Company Act) of the Fund's outstanding voting shares. Unless
expressly designated as fundamental, all other policies of the Fund may be
changed by the Board without Shareholder approval. The percentage restrictions
set forth below, as well as those contained elsewhere in this Prospectus, apply
at the time a transaction is effected, and a subsequent change in a percentage
resulting from market fluctuations or any other cause other than an action by
the Fund will not require the Fund to dispose of portfolio securities or take
other action to satisfy the percentage restriction. The Fund may not:
1. Invest more than 25% of the value of its total assets in the securities
of issuers in a single industry, provided that there shall be no limitation on
the purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
2. Invest in commodities or commodity contracts, except that the Fund may
purchase and sell commodities to the maximum extent permitted by regulations of
the CFTC (or any successor) that would not require registration of the Fund as
a commodity pool.
3. Purchase, hold or deal in real estate, or oil, gas or other mineral
leases or exploration or development programs, but the Fund may purchase and
sell securities that are secured by real estate or issued by companies that
invest or deal in real estate or real estate investment trusts. If real estate
is delivered as a result of foreclosure, the Fund may hold such property until
it can dispose of it in an orderly manner at a reasonable price.
4. Issue senior securities or borrow money except as permitted by the
Investment Company Act.
5. Make loans to others, except through the purchase of debt obligations
and the entry into repurchase agreements. However, the Fund may lend its
portfolio securities in an amount not to exceed 331/3% of the value of its
total assets. Any loans of portfolio securities will be made according to
guidelines established by the SEC and the Board.
6. Act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter under the Securities Act of 1933,
as amended, by virtue of disposing of portfolio securities.
7. Invest in the securities of a company for the purpose of exercising
management or control, but the Fund will vote the securities it owns in its
portfolio as a shareholder in accordance with its views.
8. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings or leverage and to the extent
necessary related to the purchase of securities on a when-issued or forward
commitment basis, the deposit of assets in escrow in connection with writing
covered options, and collateral and initial or variation margin or similar
arrangements with respect to options, forward contracts, futures contracts,
options on futures contracts, swaps, caps, collars, floors and other derivative
instruments.
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MANAGEMENT OF THE FUND
Investment Manager
DLJIM, located at 277 Park Avenue, New York, New York 10172, was formed in
1996 and serves as the Fund's investment manager. DLJIM is a wholly-owned
subsidiary of DLJ. As of May 31, 1998, aggregate assets under the management of
DLJIM exceeded $5 billion. As of May 31, 1998, DLJAM, which includes DLJIM,
managed or administered assets of approximately $16 billion.
DLJ, a member of the New York Stock Exchange, is a wholly-owned subsidiary
of Donaldson, Lufkin & Jenrette, Inc. ("DLJ, Inc."), a major international
supplier of financial services. DLJ, Inc. is an independently operated,
indirect subsidiary of The Equitable Companies Incorporated, a holding company
controlled by AXA-UAP ("AXA"), a member of a large French insurance group. AXA
is indirectly controlled by a group of four French mutual insurance companies.
DLJIM supervises and assists in the overall management of the Fund's
affairs under an investment management agreement with the Fund, subject to the
authority of the Board in accordance with Delaware law. The Fund's primary
portfolio manager is Lars M. Berkman. Mr. Berkman has been employed by DLJIM as
Senior Vice President and Director of High Yield Investments since March 1998.
Previously, Mr. Berkman spent 19 years at The Prudential Insurance Company of
America ("Prudential"), most recently as Managing Director in charge of High
Yield in Prudential Investments, the investment management subsidiary of
Prudential. In that capacity, Mr. Berkman managed a $4.5 billion high yield
mutual fund and supervised the management of seven other high yield portfolios
for pension and mutual fund clients. In 1997, the class A shares of the high
yield mutual fund managed by Mr. Berkman carried a Morningstar rating of 5
stars for the risk and return profile over the last five years. Before that,
Mr. Berkman worked in various investment management business units at
Prudential, primarily involved in leveraged buyout investing.
In selecting investments for the Fund's portfolio, DLJIM will seek to
identify issuers and industries that DLJIM believes are likely to experience
stable or improving financial conditions. DLJIM believes that this strategy
should enhance the Fund's ability to earn high current income while also
providing opportunities for capital appreciation. DLJIM's analysis may include
consideration of general industry trends, the issuer's managerial strength,
market position, financial condition, debt maturity schedules and liquidity.
DLJIM may also consider relative values based on cash flow, interest or
dividend coverage, asset coverage and earnings prospects. The Fund will seek
its secondary objective of capital appreciation by investing in securities that
DLJIM expects may appreciate in value as a result of favorable developments
affecting the business or prospects of the issuer which may improve the
issuer's financial condition and credit rating or as a result of declines in
long-term interest rates. There can be no assurance the Fund's strategies will
be successful.
DLJIM and its affiliates may sponsor and advise new investment vehicles
with investment objectives, policies and restrictions similar or identical to
those of the Fund.
Management and Administration Agreements
DLJIM provides investment management services pursuant to the Investment
Management Agreement (the "Management Agreement") dated July , 1998 with the
Fund. As compensation for DLJIM's management services to the Fund, the Fund has
agreed to pay DLJIM a Management Fee at the annual rate of 1% of the value of
the Managed Assets. During the period in which the Fund is utilizing leverage,
the Management Fee payable to DLJIM will be higher than if the Fund did not
utilize a leveraged capital structure because the fees are calculated as a
percentage of the Managed Assets, including those purchased with leverage. A
majority of the Trustees who are not "interested persons" shall monitor and
resolve any potential conflict that exists regarding DLJIM and the calculation
of its fees as described herein. The Management Agreement is subject to annual
approval by (i) the Fund's Board or (ii) vote of a majority (as defined in the
Investment Company Act) of the outstanding voting securities of the Fund,
provided that in either event the continuance is also approved by a majority of
the Board members who are not "interested persons" (as defined in the
Investment Company Act) of the Fund or DLJIM, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Management
Agreement was approved by the Fund's Board, including a majority of the Board
members who are not "interested persons" of any party to the Management
Agreement, at a meeting held on July , 1998. The Management Agreement was
approved by the Fund's initial shareholder on July , 1998. The Management
Agreement is terminable without penalty, on 60 days' notice, by the Fund's
Board or by vote of the holders of a majority of the Shares, or, on not less
than 90 days' notice, by DLJIM. The Management Agreement will terminate
automatically in the event of its assignment (as defined in the Investment
Company Act). First Data provides administration services to the Fund pursuant
to the Services Agreement (the "Administration Agreement") dated July , 1998
with the Fund. As
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compensation for First Data's administration services to the Fund, the Fund has
agreed to pay an Administration Fee at the rate of $50,000 per year.
DLJIM manages the Fund's investments in accordance with the stated
policies of the Fund, subject to the approval of the Fund's Board. DLJIM is
responsible for investment decisions, and provides the Fund with portfolio
managers who are authorized by the Board to execute purchases and sales of
securities. DLJIM and its affiliates also maintain a research department with a
professional staff of portfolio managers and securities analysts who provide
research services for the Fund as well as for other funds and investment
advisory clients advised by DLJIM and its affiliates.
DLJIM and its affiliates may have deposit, loan and commercial banking or
other relationships with the issuers of securities purchased by the Fund. DLJIM
has informed the Fund that in making its investment decisions it does not
obtain or use material non-public information that DLJ, or its affiliates, may
possess with respect to such issuers.
DLJIM maintains office facilities on behalf of the Fund, and furnishes
statistical, and research data, clerical help, accounting, data processing,
bookkeeping and internal auditing and certain other required services to the
Fund. DLJIM also may make such advertising and promotional expenditures, using
its own resources, as it deems appropriate.
Expenses
All expenses incurred in the operation of the Fund are borne by the Fund,
except to the extent specifically assumed by DLJIM. The expenses borne by the
Fund include: organizational costs, taxes, interest, brokerage fees and
commissions, if any, fees of Board members who are not officers, trustees,
employees or holders of 5% or more of the outstanding voting securities of
DLJIM or any of its affiliates, SEC fees, state Blue Sky qualification fees,
exchange listing fees, advisory and administration fees, shareholder servicing
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, industry association fees, outside auditing and
legal expenses, costs of maintaining the Fund's existence, expenses of
reacquiring Shares, expenses in connection with the Fund's Automatic Dividend
Reinvestment Plan, costs of maintaining the required books and accountings
(including the costs of calculating the net asset value of the Shares), costs
of independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
preparing and printing prospectuses, and mailing Share certificates, proxy
statements and costs of Shareholders' reports and meetings, any extraordinary
expenses and other expenses properly payable by the Fund.
32
<PAGE>
TRUSTEES AND OFFICERS OF THE FUND
The Board is composed of five Trustees who supervise the Fund's investment
activities and review contractual arrangements with companies that provide the
Fund with services. The following lists the Trustees and officers and their
positions with the Fund and their present and principal occupations during the
past five years. Each Trustee who is an "interested person" of the Fund (as
defined in the Investment Company Act) is indicated by an asterisk (*). Each
Trustee who is not an "interested person" serves on the Audit Committee of the
Board. Each Trustee serves as a trustee for registered investment companies
which are affiliates of the Fund and DLJAM.
*G. Moffett Cochran, 47, Chairman of the Board and President of the Fund,
is Chairman of DLJAM, with which he has been associated since prior to 1993.
Prior to his association with the Fund and DLJAM, Mr. Cochran was a Senior Vice
President with Bessemer Trust Companies.
Robert E. Fischer, 68, Trustee of the Fund, has been a partner at the law
firm of Wolf, Block, Schorr and Solis-Cohen LLP (or its predecessor firm) since
prior to 1993.
*Martin Jaffe, 51, Trustee, Vice President, Secretary and Treasurer of the
Fund, is Chief Operating Officer of DLJAM, with which he has been associated
since prior to 1993.
Wilmot H. Kidd, III, 56, Trustee of the Fund, has been President of
Central Securities Corporation since prior to 1993.
John W. Waller, III, 46, Trustee of the Fund, has been Chairman of Waller
Capital Corporation, an investment banking firm, since prior to 1993.
Lars M. Berkman, 49 , Vice President of the Fund, has been associated with
DLJAM since March 1998. Prior to his association with DLJAM, Mr. Berkman was a
Managing Director with Prudential since prior to 1993.
Brian Kammerer, 40, Vice President of the Fund, has been associated with
DLJAM since prior to 1993.
The address of each officer of the Fund is 277 Park Avenue, New York, New
York 10172.
The officers and Trustees of the Fund as a group owned beneficially less
than 1% of the total Shares of the Fund outstanding as of July , 1998.
No officer or employee of the Fund receives any compensation from the Fund
for serving as an officer or Trustee of the Fund. The Fund pays each Trustee
who is not an "interested person" $ 2,000 per Board meeting attended, $1,000
per audit committee meeting attended and reimbursement for travel and
out-of-pocket expenses.
Compensation Table
<TABLE>
<CAPTION>
Total
Compensation
Pension or from the
Aggregate Retirement Benefits Estimated Fund Complex
Compensation Accrued as Part Annual Benefits Paid to Board
Name of Board Member from Fund(1) of Fund Expenses upon Retirement Member
- --------------------------------------- ------------ ------------------- --------------- -------------
<S> <C> <C>
G. Moffett Cochran, Trustee .......... $ 0 None None $ 0
Robert E. Fischer, Trustee ........... 10,000 None None 20,000
Martin Jaffe, Trustee ................ 0 None None 0
Wilmot H. Kidd, III, Trustee ......... 10,000 None None 20,000
John W. Waller, III, Trustee ......... 10,000 None None 20,000
</TABLE>
(1) The Fund anticipates paying each independent Trustee approximately
$10,000 in each calendar year.
33
<PAGE>
PORTFOLIO TRANSACTIONS
DLJIM assumes general supervision over placing orders on behalf of the
Fund for the purchase or sale of portfolio securities. Allocation of brokerage
transactions, including their frequency is made in the best judgment of DLJIM
and in a manner deemed fair and reasonable to Shareholders. The primary
consideration is prompt execution of orders at the most favorable net price.
Subject to this consideration, the brokers selected will include those that
supplement DLJIM's research facilities with statistical data, investment
information, economic facts and opinions. Information so received is in
addition to and not in lieu of services required to be performed by DLJIM and
DLJIM's fees are not reduced as a consequence of the receipt of such
supplemental information. Such information may be useful to DLJIM in serving
both the Fund and other investment advisory clients and funds which it advises
and, conversely, supplemental information obtained by the placement of business
of other clients may be useful to DLJIM in carrying out its obligations to the
Fund.
In allocating brokerage transactions, DLJIM seeks to obtain the best
execution of orders at the most favorable net price. Subject to this
determination, DLJIM may consider, among other things, the receipt of research
services and/or the sale of other funds managed, advised or administered by
DLJIM or its affiliates as factors in the selection of broker-dealers to
execute portfolio transactions for the Fund. The Fund has no obligation to deal
with any broker or dealer in execution of transactions. While DLJIM generally
seeks reasonably competitive fees, commissions or spreads, the Fund does not
necessarily pay the lowest fee, commission or spread available. DLJIM may
allocate brokerage transactions to DLJ pursuant to procedures adopted by the
Board which comply with the Investment Company Act. Such procedures state that
any commissions charged by DLJ will be fair and reasonable and will not exceed
DLJ's usual and customarily charged commissions.
Securities in which the Fund may invest are traded primarily in the
over-the-counter markets, and the Fund intends to deal directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere.
Because of the affiliation of DLJ with the Fund, the Fund is prohibited from
engaging in certain transactions involving DLJ and its affiliates except
pursuant to an exemptive order or otherwise in compliance with the provisions
of the Investment Company Act and the rules and regulations promulgated
thereunder. Included among such restricted transactions will be purchases from
or sales to DLJ and its affiliates of securities in transactions in which it
acts as principal. In addition, the Fund is prohibited from engaging in any
transaction in which DLJIM may possess, or has access to through DLJ, material
non-public information. DLJIM believes that these restrictions will not
materially inhibit the ability of the Fund to seek to achieve its investment
objectives. The Fund may purchase securities for the Fund during the existence
of any underwriting syndicate of which DLJ is a member pursuant to procedures
approved by the Board which comply with the rules adopted by the SEC.
Brokers will be selected because of their ability to handle special
executions such as are involved in large block trades or broad distributions,
provided the primary consideration is met. Large block trades may, in certain
cases, result from two or more funds or investment advisory clients advised by
DLJIM or its affiliates being engaged simultaneously in the purchase or sale of
the same security. Certain of the Fund's transactions in securities of foreign
issuers may not benefit from the negotiated commission rates available to the
Fund for transactions in securities of domestic issuers. When transactions are
executed in the over-the-counter market, the Fund will deal with the primary
market makers unless a more favorable price or execution otherwise is
obtainable. Foreign exchange transactions are made with banks or institutions
in the interbank market at prices reflecting a mark-up or mark-down and/or
commission.
Portfolio turnover may vary from year to year as well as within a year. It
is anticipated that in any fiscal year the turnover rate may approach the 300%
level for the Fund. In periods in which extraordinary market conditions
prevail, DLJIM will not be deterred from changing the Fund's investment
strategy as rapidly as needed, in which case higher turnover rates can be
anticipated which would result in greater brokerage expenses. The overall
reasonableness of brokerage commissions paid is evaluated by DLJIM based upon
its knowledge of available information as to the general level of commissions
paid by other institutional investors for comparable services. A turnover rate
of 100% is equivalent to the Fund buying and selling all of the securities in
its portfolio once in the course of a year. Higher portfolio turnover rates
usually generate additional brokerage commissions and expenses, and the
short-term gains realized from these transactions are taxable to Shareholders
as ordinary income when distributed to them.
Investment decisions for the Fund are made independently from those of
other investment companies and investment advisory clients advised by DLJIM.
If, however, such other investment companies or investment
34
<PAGE>
advisory clients desire to invest in, or dispose of, the same securities as the
Fund, available investments or opportunities for sales will be allocated
equitably to each investment company and investment advisory client. In some
cases, this procedure may adversely affect the size of the position obtained
for or disposed of by the Fund or the price paid or received by the Fund.
Securities held by the Fund also may be held by or be appropriate
investments for other funds or investment advisory clients for which DLJIM or
an affiliate acts as an adviser. Because of different investment objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities for the Fund or other funds for which DLJIM or an affiliate acts as
investment adviser or for their advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client during
the same period may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
35
<PAGE>
DETERMINATION OF NET ASSET VALUE
The Fund's investments are valued after the close of regular trading on
the New York Stock Exchange on the last business day of each week, using
available market quotations or at fair value. For purposes of determining the
net asset value, the value of the securities held by the Fund plus any cash or
other assets (including interest accrued but not yet received) minus all
liabilities (including accrued expenses) is divided by the total number of
Shares outstanding at such time. The Fund determines and makes available for
publication the net asset value of its Shares weekly. Currently, the net values
of shares of publicly traded closed-end investment companies investing in debt
securities are published in Barron's, the Monday edition of The Wall Street
Journal and the Monday and Saturday editions of The New York Times.
Substantially all of the Fund's investments (excluding short-term
investments) are valued by one or more independent pricing services (the
"Service") approved by the Board. Securities valued by the Service for which
quoted bid prices in the judgment of the Service are readily available and are
representative of the bid side of the market are valued at the mean between the
quoted bid prices (as obtained by the Service from dealers in such securities)
and asked prices (as calculated by the Service based upon its evaluation of the
market for such securities). Other investments valued by the Service are
carried at fair value as determined by the Service, based on methods which
include consideration of: yields or prices of securities of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. Debt securities which mature in less than 60 days are valued
at amortized cost (unless the Board determines that this method does not
represent fair value), if their original maturity was 60 days or less or by
amortizing the value as of the 61st day prior to maturity, if their original
term to maturity exceeded 60 days. Other investments that are readily
marketable portfolio securities listed on an exchange are valued at the last
sale price at the close of the exchange on the business day as of which such
value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the closing bid and asked prices on such
day. If no bid or asked prices are quoted on such day, then the security is
valued by such method as the Board shall determine in good faith to reflect its
fair value. Readily marketable securities, including certain options, not
listed on an exchange but admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ("NASDAQ") National List (the
"List") are valued in like manner. Portfolio securities traded on more than one
exchange are valued at the last sale price on the business day as of which such
value is being determined at the close of the exchange representing the
principal market for such securities. Readily marketable securities, including
certain options traded only in the over-the-counter market and listed
securities whose primary market is believed by DLJIM to be over-the-counter
(excluding those admitted to trading on the List) are valued at the mean of the
current bid and asked prices as reported by such sources as the Board deem
appropriate to reflect their fair market value.
Options, futures contracts and options thereon which are traded on
exchanges are valued at their last sale or settlement price as of the close of
the exchanges or, if no sales are reported, at the average of the quoted bid
and asked prices as of the close of the exchange. Portfolio securities
underlying listed call options will be valued at their market price and
reflected in net assets accordingly. Premiums received on call options written
by the Fund will be included in the liability section of the financial
statements as a deferred credit and subsequently adjusted (marked-to-market) to
the current market value of the option written.
Any assets or liabilities initially expressed in terms of foreign currency
will be translated into U.S. dollars at the prevailing rates of exchange or, if
no such rate is quoted on such date, at the exchange rate utilized on the
previous business day or at such other quoted market exchange rate as may be
determined to be appropriate by DLJIM. Expenses and fees, including the
Management Fee, are accrued weekly and taken into account for the purpose of
determining the net asset value of the Shares.
Securities that are not valued by the Service are valued at fair value as
determined in good faith by the Board utilizing such factors as the Board deems
appropriate. The Board will review the method of such valuations on a current
basis.
The holidays (as observed) on which the New York Stock Exchange is closed
currently are: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
36
<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to distribute substantially all of its net investment
income monthly. All net realized capital gains, if any, are expected to be
distributed to the Shareholders at least annually. The Fund will distribute to
the Shareholders at least annually all net realized gains from foreign currency
transactions, if any. The Fund may make additional distributions if necessary
to avoid a 4% excise tax on certain undistributed income and capital gain. See
"Taxes." The Fund may change the foregoing distribution policy if its
experience indicates, or its Board for any reason determines, that changes are
desirable.
Under the Investment Company Act, the Fund is not permitted to incur
indebtedness unless after such incurrence the Fund has an asset coverage of at
least 300% of the aggregate outstanding principal balance of indebtedness.
Additionally, under the Investment Company Act, the Fund may not declare any
dividend or other distribution upon any class of its capital shares, or
purchase any such capital shares, unless the aggregate indebtedness of the Fund
has, at the time of the declaration of any such dividend or other distribution
or at the time of any such purchase, an asset coverage of at least 300% after
deducting the amount of such dividend, other distribution, or purchase price,
as the case may be. While any preferred shares are outstanding, the Fund may
not declare any cash dividend or other distribution on Shares, unless at the
time of such declaration, (1) all accumulated preferred share dividends have
been paid and (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200%
of the liquidation value of the outstanding preferred shares (expected to be
equal to the original purchase price per share plus any accumulated and unpaid
dividends thereon). In addition to the limitations imposed by the Investment
Company Act as described in this paragraph certain lenders may impose
additional restrictions on the payment of dividends or other distributions on
the Shares in the event of a default on the Fund's borrowings. Any limitation
on the Fund's ability to make distributions on Shares could in certain
circumstances impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. See "Other Investment
Practices--Leverage" and "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and other distributions to Shareholders may be
automatically reinvested in Shares of the Fund. Dividends and other
distributions will be taxable to Shareholders whether they are reinvested in
Shares of the Fund or received in cash.
The Fund expects that it will commence paying dividends approximately 60
days of the date of this Prospectus.
37
<PAGE>
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a Shareholder otherwise elects, all dividends and capital gain
distributions will be automatically reinvested by First Data as agent for
Shareholders in administering the Plan (the "Plan Agent"), in additional Shares
of the Fund. Shareholders who elect not to participate in the Plan will receive
all dividends and other distributions in cash paid by check mailed directly to
the Shareholder of record (or, if the Shares are held in street or other
nominee name, then to such nominee) by First Data as the Dividend Disbursing
Agent. Such participants may elect not to participate in the Plan and to
receive all dividends and capital gain distributions in cash by sending written
instructions to First Data, as the Dividend Disbursing Agent, at the address
set forth below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if received
by the Plan Agent not less than ten days prior to any dividend record date;
otherwise such termination will be effective with respect to any subsequently
declared dividend or other distribution.
Whenever the Fund declares an income dividend or a capital gain
distribution (collectively referred to as "dividends") payable either in Shares
or in cash, non-participants in the Plan will receive cash and participants in
the Plan will receive the equivalent in Shares. The Shares will be acquired by
the Plan Agent for the participants' accounts, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized Shares from the Fund ("newly issued Shares") or (ii) by purchase of
outstanding Shares on the open market ("open-market purchases") on the NYSE or
elsewhere. If on the record date for the dividend, the net asset value per
Share is equal to or less than the market price per Share plus estimated
brokerage commissions (such condition being referred to herein as "market
premium"), the Plan Agent will invest the dividend amount in newly issued
Shares on behalf of the participants. The number of newly issued Shares to be
credited to each participant's account will be determined by dividing the
dollar amount of the dividend by the net asset value per Share on the date the
Shares are issued. If on the dividend record date the net asset value per Share
is greater than the market value (such condition being referred to herein as
"market discount"), the Plan Agent will invest the dividend amount in Shares
acquired on behalf of the participants in open-market purchases.
In the event of a market discount on the dividend record date, the Plan
Agent will have until the last business day before the next date on which the
Shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend record date (the "last purchase date") to invest the dividend
amount in Shares acquired in open-market purchases. It is contemplated that the
Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the record date of the
dividend through the date before the next "ex-dividend" date which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a Share exceeds the net asset value
per Share, the average per Share purchase price paid by the Plan Agent may
exceed the net asset value of the Shares, resulting in the acquisition of fewer
Shares than if the dividend had been paid in newly issued Shares on the
dividend record date. Because of the foregoing difficulty with respect to open
market purchases, the Plan provides that if the Plan Agent is unable to invest
the full dividend amount in open market purchases during the purchase period or
if the market discount shifts to a market premium during the purchase period,
the Plan Agent may cease making open-market purchases and may invest the
uninvested portion of the dividend amount in newly issued Shares at the net
asset value per Share at the close of business on the last purchase date.
The Plan Agent maintains all Shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by Shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent on behalf of the Plan
participant, and each Shareholder proxy will include those Shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for Shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of Shareholders such as banks, brokers or nominees that hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by
the record Shareholder and held for the account of beneficial owners who
participate in the Plan.
There will be no brokerage charges with respect to Shares issued directly
by the Fund as a result of dividends or capital gains distributions payable
either in Shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's
open-market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends will not relieve participants of
any Federal, state or local income tax that may be payable (or required to be
withheld) on such dividends. See "Taxes."
38
<PAGE>
Shareholders participating in the Plan may receive benefits not available
to Shareholders not participating in the Plan. If the market price (plus
commissions) of the Shares is above their net asset value, participants in the
Plan will receive Shares of the Fund at less than they could otherwise purchase
them and will have Shares with a cash value greater than the value of any cash
distribution they would have received on their Shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions in Shares with a net asset value greater than the value of any
cash distribution they would have received on their Shares. However, there may
be insufficient Shares available in the market to make distributions in Shares
at prices below the net asset value. Also, since the Fund does not redeem
Shares, the price on resale may be more or less than the net asset value.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan
Agent at P.O. Box 8030, Boston, MA 02266-8030, 1-800-331-1710.
39
<PAGE>
TAXES
The following discussion is a general summary of certain U.S. federal
income tax considerations relating to the Fund and to an investment in the
Shares of the Fund. The discussion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), applicable Treasury regulations and
administrative rulings and pronouncements of the Internal Revenue Service, all
as in effect on the date hereof and which are subject to change, possibly
retroactively. This summary does not purport to discuss all of the income tax
consequences applicable to the Fund or to all categories of investors, some of
whom may be subject to special rules (including dealers in securities,
insurance companies, tax-exempt entities and non-U.S. persons). Prospective
investors are urged to consult their tax advisors regarding the federal income
tax consequences of ownership of the Shares of the Fund, as well as any tax
consequences that may arise under the laws of any foreign, state, local or
other taxing jurisdiction.
For purposes of the following discussion, a Non-U.S. Shareholder is a
Shareholder who is not (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized under the laws of the United
States or any state thereof, (iii) an estate, the income of which is subject to
United States federal income taxation regardless of its source, (iv) a trust
(a) the administration over which a United States court can exercise primary
supervision and (b) all of the substantial decisions of which one or more
United States persons have the authority to control, or (v) a Shareholder who
is otherwise subject to United States federal income taxation on a net income
basis in respect of the Shares.
Tax Status
The Fund intends to elect to be, and to qualify to be treated as, a
regulated investment company ("RIC") under the Code. For each taxable year that
the Fund so qualifies, the Fund (but not Shareholders) will be relieved of
federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain and
net gains from certain foreign currency transactions) and net capital gain that
is distributed to Shareholders.
In order to qualify for treatment as a RIC under the Code, the Fund must
make an election to be so treated and must distribute to Shareholders for each
taxable year at least 90% of its investment company taxable income
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement"); (2) at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs and other securities that are limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (3) at the close of each quarter of
the Fund's taxable year, not more than 25% of the value of its total assets may
be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer or of two or more issuers which the
Fund controls and which are engaged in the same or related trades or
businesses.
The Fund will be subject to a non-deductible 4% excise tax ("Excise Tax")
to the extent that it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31st of that year, plus
certain other amounts. For these purposes, any such income retained by the
Fund, and on which it pays federal income tax, will be treated as having been
distributed.
Nature of the Fund's Investments
Some of the investment practices that may be employed by the Fund will be
subject to special provisions that, among other things, may defer the use of
certain losses of the Fund and affect the holding period of the securities held
by the Fund and, particularly in the case of transactions in or with respect to
foreign currencies, the character of the gains or losses realized. These
provisions may also require the Fund to mark-to-market some of the positions in
its portfolio (i.e., treat as sold for their fair market value) or to accrue
original issue discount, both of which may cause the Fund to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy the Distribution Requirement and avoid imposition of the Excise Tax.
Moreover, the Fund will be required to include in its gross income each year
any "interest" distributed in the form of additional securities on
payment-in-kind securities. In order to satisfy the Distribution Requirement
and avoid the Excise Tax, the Fund may be required to liquidate portfolio
securities or borrow funds. The Fund intends to monitor its transactions and
may make certain elections in order to mitigate the effect of these rules and
prevent disqualification of the Fund as a regulated investment company.
40
<PAGE>
The Fund intends to invest in, among other things, foreign securities. If,
in connection with such investments, the Fund owns shares of stock in certain
foreign investment entities, referred to as passive foreign investment companies
("PFICs"), the Fund may be subject to U.S. federal income tax, and additional
charges in the nature of interest, on a portion of any "excess distribution"
from such company or gain from the disposition of such shares, even if the
entire distribution or gain is distributed by the Fund to Shareholders. If the
Fund were able and elected to treat a PFIC as a "qualified electing fund," in
lieu of the treatment described above, the Fund would be required each year to
include in income, the Fund's pro rata share of the ordinary earnings and net
capital gains of the company, whether or not actually received by the Fund.
Proposed Treasury Regulations and newly enacted provisions of the Code would
each allow certain regulated investment companies to elect to mark-to-market
their stock in certain PFICs at the end of each taxable year, whereby the Fund
would include in its taxable income each year any unrealized gain on such PFIC
investments. In order to satisfy the Distribution Requirement under either
election, maintain its qualification as a regulated investment company, and
avoid income taxes and the Excise Tax, the Fund may be required to liquidate
portfolio securities that it might otherwise have continued to hold. In the case
of the proposed Treasury Regulations, there can be no assurance that these
regulations will be finalized in the form proposed or as to the effective date
of any such final regulations.
Income received by the Fund from investments in foreign securities may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
Shareholders (but may be deductible by the Fund), and may be withheld at a
higher rate than that which would be applicable if the underlying securities
had been held directly by a Shareholder. Tax conventions between certain
countries and the United States may reduce or eliminate those taxes.
Taxation of Shareholders
Dividends from the Fund's investment company taxable income (whether
received in cash or reinvested in additional Fund Shares) generally are taxable
to Shareholders as ordinary income. Distributions of the Fund's net capital
gain (whether received in cash or reinvested in additional Fund Shares), when
designated as such, are taxable to Shareholders as long-term capital gain,
regardless of how long they have held their Fund Shares. See below for a
summary of the tax rates applicable to capital gain distributions. A
participant in the Automatic Dividend Reinvestment Plan will be treated as
having received a distribution in the amount of the cash used to purchase
Shares on his or her behalf, including a pro rata portion of the brokerage fees
incurred by the Transfer Agent. Distributions by the Fund to Shareholders in
any year that exceed the Fund's earnings and profits generally may be applied
by each Shareholder against his or her basis for the Shares and will be taxable
at capital gains rates (assuming the Shares are held as capital assets) to any
Shareholder only to the extent the distributions to the Shareholder exceed the
Shareholder's basis for his or her Shares. The Fund may retain for investment
its net capital gain. However, if the Fund does so, it will be subject to a tax
of 35% on the amount retained. In that event, the Fund expects to designate the
retained amount as undistributed capital gain in a notice to Shareholders, who
(i) will be required to include in income for tax purposes, as long-term
capital gain, their proportionate shares of such undistributed amount, (ii)
will be entitled to credit their proportionate shares of the 35% tax paid by
the Fund against their federal income tax liabilities, if any, and to claim
refunds to the extent the credit exceeds those liabilities, and (iii) will
increase the tax basis of their Fund Shares by an amount equal to the
difference between the amount of undistributed capital gain included in their
gross income and the tax deemed paid by such Shareholders.
The Fund will notify Shareholders following the end of each calendar year
of the amounts of dividends and capital gain distributions paid (or deemed
paid) that year and undistributed capital gain designated for that year. The
information regarding capital gain distributions and undistributed capital gain
will designate the portion thereof subject to the different maximum rates of
tax applicable to noncorporate taxpayers' net capital gain indicated below.
Dividends and other distributions declared by the Fund in October,
November or December of any year and payable to Shareholders of record on a
specified date in such a month will be deemed to have been paid by the Fund and
received by the Shareholders on December 31st if the distributions are paid by
the Fund during the following January. Accordingly, those distributions will be
taxed to Shareholders for the year in which that December 31st falls.
An investor should be aware that, if Shares are purchased shortly before
the record date for any dividend or other distribution, the investor will pay
full price for the Shares and will receive some portion of the purchase price
back as a taxable distribution.
Upon the sale or exchange of Shares (including a sale pursuant to a Share
repurchase or tender offer by the Fund), a Shareholder generally will recognize
a taxable gain or loss equal to the difference between his or her adjusted
basis for the Shares and the amount received. Any such gain or loss will be
treated as a capital gain or
41
<PAGE>
loss if the Shares constitute capital assets in the Shareholder's hands and
will be long-term capital gain or loss if the Shares have been held for more
than one year. See below for a discussion of the tax rates applicable to
capital gains. Any loss recognized on a sale or exchange of Shares that were
held for six months or less will be treated as long-term, rather than
short-term, capital loss to the extent of any capital gain distributions
previously received (or deemed to be received) thereon. A loss realized on a
sale or exchange of Shares will be disallowed to the extent those Shares are
replaced by other Shares within a period of 61 days beginning 30 days before
and ending 30 days after the date of disposition of the Shares (which could
occur, for example, as a result of participation in the Automatic Dividend
Reinvestment Plan). In that event, the basis of the replacement Shares will be
adjusted to reflect the disallowed loss.
Under the Taxpayer Relief Act of 1997 ("1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are generally (i) the same as ordinary income tax rates
for capital assets held for one year or less; (ii) 28% for capital assets held
for more than one year but not more than 18 months and (iii) 20% (10% for
taxpayers in the 15% marginal tax bracket) for capital assets held for more
than 18 months. The 1997 Tax Act did not affect the maximum net capital gain
tax rate for corporations, which remains at 35%. The tax rates described above
will apply to distributions of net capital gain by the Fund (if, as expected,
the Fund designates net capital gain distributions as 28% rate gain
distributions or 20% rate gain distributions, in accordance with its holding
periods for the securities it sold that generated the distributed gains) as
well as to sales and exchanges of Shares. With respect to capital losses
recognized on dispositions of Shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gain
distributions received thereon (see discussion in the preceding paragraph), it
is unclear how such capital losses offset the capital gains referred to above.
Shareholders should consult their own tax advisers as to the application of the
new capital gains rates to their particular circumstances.
Back-up Withholding
The Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individual Shareholders
and certain other non-corporate Shareholders who do not provide the Fund with a
correct taxpayer identification number. The Fund is also required to withhold
31% of all dividends and capital gain distributions payable to such
Shareholders who otherwise are subject to backup withholding.
Non-U.S. Shareholders
The foregoing discussion relating to taxation of Shareholders applies to
Non-U.S. Shareholders except to the extent provided below. A Non U.S.
Shareholder generally will be subject to withholding of United States federal
income tax at a 30% rate (or lower applicable treaty rate) on dividends from
the Fund (other than capital gain distributions) unless the dividends are (i)
"effectively connected" with a United States trade or business carried on by
such Shareholder or (ii), under certain income tax treaties, attributable to a
permanent establishment in the United States maintained by such Non-U.S.
Shareholder, in which case such dividends will be subject to United States
federal income tax on a net income basis in the same manner as if such Non-U.S.
Shareholder were a resident of the United States (and with respect to corporate
holders, also may be subject to an additional branch profits tax). Accordingly,
investment in the Fund is likely to be appropriate for a Non-U.S. Shareholder
only if such person can utilize a foreign tax credit or corresponding tax
benefit in respect of such United States withholding tax.
A Non-U.S. Shareholder generally will not be subject to United States
federal income tax on capital gain distributions and gains realized from the
sale of Shares unless (i) such Non-U.S. Shareholder is an individual and is
present in the United States for more than 182 days during the taxable year
(assuming that certain other conditions are met) or (ii) the gain is either (a)
effectively connected with the conduct of a United States trade or business of
such Non-U.S. Shareholder or (b), if an applicable treaty provides,
attributable to a permanent establishment in the United States maintained by
such Non-U.S. Shareholder. Gain that is either (a) effectively connected with
the conduct of a United States trade or business of a Non-U.S. Shareholder or
(b), if an applicable tax treaty provides, attributable to a permanent
establishment in the United States maintained by the Non-U.S. Shareholder will
be subject to United States federal income tax on a net income basis in the
same manner as if such Non-U.S. Shareholder were a resident of the United
States, and in the case of a corporation, may be subject to an additional
branch profits tax.
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax generally will
not apply to dividends paid to a Non-U.S. Shareholder at an address outside the
United States. Under certain circumstances, capital gain distributions and
proceeds from the sale of Shares paid to a Non-U.S. Shareholder may be subject
to the information reporting requirements and backup withholding at
42
<PAGE>
the rate of 31% unless such Non-U.S. Shareholder certifies as to its Non-U.S.
Shareholder status under penalties of perjury or otherwise establishes an
exemption.
The United States Treasury Department recently issued final Treasury
regulations generally effective for payments made after December 31, 1999
concerning the withholding of tax and information reporting for certain amounts
paid to Non-U.S. Shareholders (the "Final Withholding Regulations"). Among
other things, the Final Withholding Regulations may require Non-U.S.
Shareholders to furnish new certification of their foreign status after
December 31, 1999. Prospective investors should consult their tax advisors
concerning the applicability and effect of the Final Withholding Regulations on
an investment in Shares.
The tax consequences to Non-U.S. Shareholders entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this summary. Non-U.S. Shareholders may be required to provide appropriate
documentation to establish their entitlement to the benefits of such a treaty.
Foreign investors are advised to consult their tax advisors with respect to the
tax implications of purchasing, holding and disposing of Shares.
General
The foregoing is only a brief summary of some of the important federal
income tax considerations generally affecting the Fund and Shareholders. There
may be other federal, state, local or foreign tax considerations applicable to
a particular investor. Prospective investors are urged to consult their tax
advisers regarding the specific federal income tax consequences of purchasing,
holding and disposing of Shares, as well as the effects of state, local and
foreign tax laws and any proposed tax law changes.
43
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
July , 1998 (the "Underwriting Agreement"), the Underwriters named below, who
are represented by DLJ (the "Representative"), have severally agreed to
purchase from the Fund the respective number of Shares set forth opposite their
names below:
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------------------------------------------------------ -----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation .......
Advest, Inc. ..............................................
First Albany Corporation ..................................
Fahnestock & Co. Inc. .....................................
First of Michigan Corporation .............................
Gruntal & Co., L.L.C. .....................................
Interstate/Johnson Lane Corporation .......................
Janney Montgomery Scott Inc. ..............................
Sands Brothers & Co., Ltd. ................................
Sutro & Co. Incorporated ..................................
Tucker Anthony Incorporated ...............................
---------------
Total ..................................................
===============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the Shares hereby are subject
to approval by their counsel of certain legal matters and to certain other
conditions. The Underwriters are obligated to purchase and accept delivery of
all the Shares offered hereby (other than those Shares covered by the
over-allotment option described below) if any are purchased.
The Underwriters initially propose to offer the Shares in part directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and in part to certain dealers (including the Underwriters) at
such price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may re-allow, to certain other dealers a concession
not in excess of $ per share. After the initial offering of the Shares, the
public offering price and other selling terms may be changed by the
Representatives at any time without notice. The Underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
The Fund has granted to the Underwriters an option, exercisable within
days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of additional Shares at the initial
public offering price less underwriting discounts and commissions. The
Underwriters may exercise such option solely to cover overallotments, if any,
made in connection with the offering. To the extent that the Underwriters
exercise such option, each Underwriter will become obligated, subject to
certain conditions, to purchase its pro rata portion of such additional shares
based on such Underwriter's percentage underwriting commitment as indicated in
the preceding table.
The Fund has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Fund has agreed not to offer or sell any additional common shares of
beneficial interest of the Fund, other than as contemplated by this Prospectus,
for a period of 180 days after the date of the Underwriting Agreement without
the prior written consent of DLJ.
Prior to the offering, there has been no established trading market for
the Shares. The initial public offering price for the Shares offered hereby has
been determined by negotiation among the Fund and the Representatives. There
can be no assurance, however, that the price at which the Shares will sell in
the public market after the offering will not be lower than the price at which
they are sold by the Underwriters.
The Shares have been approved for listing on the New York Stock Exchange
(the "NYSE") under the symbol "DHY," subject to official notice of issuance. In
order to meet the requirements for listing the Shares on the NYSE, the
Underwriters have undertaken to sell lots of 100 or more Shares to a minimum of
2,000 beneficial owners.
Other than in the United States, no action has been taken by the Fund or
the Underwriters that would permit a public offering of the Shares offered
hereby in any jurisdiction where action for that purpose is required. The
Shares offered hereby may not be offered or sold, directly or indirectly, nor
may this Prospectus or any other offering material or advertisements in
connection with the offer and sale of any such Shares be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations
44
<PAGE>
of such jurisdiction. Persons into whose possession this Prospectus comes are
advised to inform themselves about and to observe any restrictions relating to
the offering of Shares and the distribution of this Prospectus. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
Shares offered hereby in any jurisdiction in which such an offer or a
solicitation is unlawful.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Shares. Specifically, the Underwriters may overallot the offering, creating a
syndicate short position. The Underwriters may bid for and purchase Shares in
the open market to cover such syndicate short position or to stabilize the
price of the Shares. In addition, the underwriting syndicate may reclaim
selling concessions from syndicate members if the syndicate repurchases
previously distributed Shares in syndicate covering transactions, in
stabilization transactions or otherwise. These activities may stabilize or
maintain the market price of the Shares above independent market levels. The
Underwriters are not required to engage in these activities, and may end any of
these activities at any time.
The Fund anticipates that the Representative and certain other
Underwriters may from time to time act as brokers or dealers in connection with
the execution of its portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as such brokers
while they are Underwriters. See "Management of the Fund."
45
<PAGE>
DESCRIPTION OF SHARES
The Fund is a newly organized unincorporated business trust under the laws
of the State of Delaware organized on April 24, 1998. The Fund is authorized to
issue an unlimited number of Shares. Each Share has one vote and, when issued
and paid for in accordance with the terms of the offering, will be fully paid
and non-assessable. Shares are of one class and have equal rights as to
dividends and in liquidation. Shares have no preemptive, subscription or
conversion rights and are freely transferable. The Fund will send annual and
semi-annual financial statements to all its Shareholders.
The Fund has no present intention of offering additional Shares, except as
described herein and under the Automatic Dividend Reinvestment Plan, as it may
be amended from time to time. See "Automatic Dividend Reinvestment Plan." Other
offerings of Shares, if made, will require approval of the Board. The Board is
authorized, however, to classify and reclassify any unissued shares into one or
more additional or other classes or series as may be established from time to
time by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption of such shares and pursuant to such classification or
reclassification to increase or decrease the number of authorized shares of any
existing class or series. The Fund may reclassify and offer unissued shares as
preferred stock subject to the limitations of the Investment Company Act. Any
additional offering will not be made at a price per Share below the then
current net asset value (exclusive of underwriting discounts and commissions)
except in connection with an offering to existing Shareholders or with the
consent of a majority of the Fund's outstanding Shares.
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, and could have the
effect of depriving Shareholders of an opportunity to sell their Shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. These provisions may have the effect of
discouraging attempts to acquire control of the Fund, which attempts could have
the effect of increasing the expenses of the Fund and interfering with the
normal operation of the Fund.
The Board is divided into three classes, with the terms of one class
expiring at each annual meeting of Shareholders. At each annual meeting, one
class of Trustees is elected to a three-year term. This provision could delay
for up to two years the replacement of a majority of the Board. A Trustee may
be removed from office for any reason or for no reason 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 Shares.
In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 80% of the outstanding Shares of each class of the Fund,
voting as a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of Shares and their
associates, unless the Board shall by resolution have approved a memorandum of
understanding with such holders, in which case normal voting requirements would
be in effect. For purposes of these provisions, a 5%-or-greater holder of a
class of Shares (a "Principal Shareholder") refers to any person who, whether
directly or indirectly and whether alone or together with its affiliates and
associates, beneficially owns 5% or more of the outstanding shares of any class
of beneficial interest of the Fund. The transactions subject to these special
approval requirements are: (i) the merger or consolidation of the Fund or any
subsidiary of the Fund with or into any Principal Shareholder; (ii) the
issuance of any securities of the Fund to any Principal Shareholder for cash
(except pursuant to the Automatic Dividend Reinvestment Plan); (iii) the sale,
lease or exchange of all or any substantial part of the assets of the Fund to
any Principal Shareholder (except assets having an aggregate fair market value
of less than $1,000,000, aggregating for the purpose of such computation all
assets sold, leased or exchanged in any series of similar transactions within a
twelve-month period); or (iv) the sale, lease or exchange to the Fund or any
subsidiary thereof, in exchange for securities of the Fund, of any assets of
any Principal Shareholder (except assets having an aggregate fair market value
of less than $1,000,000, aggregating for the purposes of such computation all
assets sold, leased or exchanged in any series of similar transactions within a
twelve-month period).
The Board has determined that provisions with respect to the Board and the
80% voting requirements described above which voting requirements are greater
than the minimum requirements under Delaware law or the Investment Company Act,
are in the best interests of Shareholders generally. Reference should be made
to the Declaration of Trust on file with the SEC for the full text of these
provisions.
46
<PAGE>
Repurchase of Shares
Shares of closed-end management investment companies often trade at a
discount to their net asset values, and the Shares may likewise trade at a
discount to their net asset value, although it is possible that they may trade
at a premium above net asset value. The market price of the Shares will be
determined by such factors as relative demand for and supply of such Shares in
the market, the Fund's net asset value, general market and economic conditions
and other factors beyond the control of the Fund. See "Determination of Net
Asset Value." Although the Shareholders will not have the right to redeem their
Shares, the Fund may take action to repurchase Shares in the open market or
make tender offers for Shares at their net asset value. This may have the
effect of reducing any market discount from net asset value.
There is no assurance that if action is undertaken to repurchase or tender
for Shares, such action will result in the Shares' trading at a price which
approximates their net asset value. Although Share repurchases and tenders
could have a favorable effect on the market price of the Shares, it should be
recognized that the acquisition of Shares by the Fund will decrease the total
assets of the Fund and, therefore, have the effect of increasing the Fund's
expense ratio. Any Share repurchases or tender offers will be made in
accordance with requirements of the Securities Exchange Act of 1934, as
amended, and the Investment Company Act.
47
<PAGE>
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time by
an amendment to the Declaration of Trust. The Declaration of Trust provides
that such an amendment would require the approval of two-thirds of each of the
Fund's outstanding classes of shares (including any preferred shares)
outstanding at that time entitled to vote on the matter (or a majority of such
shares if the amendment previously was approved, adopted or authorized by at
least two-thirds of the total number of Trustees). Such a vote also would
satisfy a separate requirement in the Investment Company Act that the change be
approved by the Shareholders. If approved in the foregoing manner, conversion
of the Fund could not occur until at least 90 days after the Shareholders'
meeting at which such conversion was approved and could take significantly
longer and would also require at least 30 days' prior notice to all
Shareholders. Conversion of the Fund to an open-end investment company would
require the redemption of any outstanding preferred shares and any indebtedness
not constituting bank loans, which could eliminate or alter the leveraged
capital structure of the Fund with respect to the Shares. Thus, preferred
shareholders, if any, would generally not have an incentive to consent to such
conversion. Following any such conversion, it is also possible that certain of
the Fund's investment policies and strategies would have to be modified to
assure sufficient portfolio liquidity. Such requirement could also cause the
Fund to dispose of portfolio securities or other assets at a time when it is
not advantageous to do so, and could adversely affect the ability of the Fund
to meet its investment objectives. In the event of conversion, the Shares would
cease to be listed on the NYSE or other national securities exchange or market
system. Shareholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by or under the Investment Company Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of a
redemption. The Fund expects to pay all such redemption requests in cash, but
intends to reserve the right to pay redemption requests in a combination of
cash or securities. If a payment in securities were made, investors may incur
brokerage costs in converting such securities to cash. If the Fund were
converted to an open-end fund, it is likely that new common shares would be
sold at net asset value plus a sales load.
OTHER INFORMATION
Prior to the registration statement becoming effective, the Underwriters
or other appropriate party may distribute advertising or other solicitation
material which discusses (i) economic and market conditions and trends
generally; (ii) historical and current conditions and trends in the lower grade
securities market, and risk and reward potential in such market; (iii)
comparative information, including statistical analysis and performance-related
information, related to lower grade securities generally and investing in lower
grade securities; (iv) the special considerations and potential benefits of
investing in closed-end management investment companies; and (v) information
about DLJIM and the Fund's portfolio manager, biographical information about
the Fund's portfolio manager, including honors or awards received, and
information and commentary on investment strategy or other matters of general
interest to investors.
LEGAL MATTERS
Certain legal matters in connection with the Shares offered hereby will be
passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom LLP and for
the Underwriters by Davis Polk & Wardwell.
EXPERTS
The statement of assets, liabilities and capital of the Fund included in
this Prospectus has been so included in reliance upon the report of Ernst &
Young LLP, 787 Seventh Avenue, New York, New York, independent auditors, and on
their authority as experts in auditing and accounting.
48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of
DLJ High Yield Bond Fund
We have audited the accompanying statement of assets, liabilities and
capital of DLJ High Yield Bond Fund as of , 1998. This statement of assets,
liabilities and capital is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this statement of assets,
liabilities and capital based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets, liabilities and
capital is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statement of assets, liabilities and capital referred
to above presents fairly, in all material respects, the financial position of
the DLJ High Yield Bond Fund as of , 1998, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
New York, New York
, 1998
49
<PAGE>
DLJ High Yield Bond Fund
Statement of Assets, Liabilities and Capital
, 1998
<TABLE>
<S> <C>
ASSETS
Cash ......................................................... $
Other Assets .................................................
Total Assets ..............................................
LIABILITIES
Accrued expenses (Note 1) ....................................
----------
NET ASSETS .................................................... $
==========
CAPITAL
Common Shares, par value $ .001 per share; shares
authorized; shares issued and outstanding (Note 1) .......... $
Paid in Capital in excess of par .............................
----------
Total Capital--Equivalent of $ net asset value per
common share (Note 1) ....................................... $
==========
</TABLE>
Notes to Statement of Assets, Liabilities and Capital
Note 1. Organization
The Fund was organized as an unincorporated business trust under the laws
of the State of Delaware on April 24, 1998 and is a closed-end, non-diversified
management investment company and has had no operations other than the sale to
DLJ Investment Management Corp. (the "Investment Manager") of an aggregate of
shares for $ on , 1998.
Offering costs of $ will be charged to capital upon completion of the
initial public offering. Organization costs of $ will be capitalized and
amortized to expense upon the commencement of operations.
Note 2. Management and Administration Arrangements
The Fund has engaged the Investment Manager to provide investment
management services to the Fund. The Investment Manager will receive a monthly
fee for advisory services an annual rate equal to 1% of the average weekly
value of the Fund's total assets minus the sum of accrued liabilities (other
than the aggregate indebtedness constituting leverage).
The Fund has engaged First Data Investor Services Group, Inc. (the
"Administrator") to provide administration services to the Fund. The
Administrator will receive a fee for such services at a rate of $50,000 per
year.
Note 3. Federal Income Taxes
The Fund intends to qualify as a "regulated investment company" and as
such (and by complying with the applicable provisions of the Internal Revenue
Code of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
50
<PAGE>
Appendix A
RATINGS OF CORPORATE BONDS
Description of Corporate Bond Ratings of Standard & Poor's Ratings Group:
AAA--Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB--Bonds rated BB have less near-term vulnerability to default than other
speculative grade debt. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B--Bonds rated B have a greater vulnerability to default but presently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC--Bonds rated CCC have a current identifiable vulnerability to default
and are dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
CC--The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C--The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
D--Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Description of Bond Ratings of Moody's Investors Service, Inc.
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issuers.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
A-1
<PAGE>
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and, therefore, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issuers may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated Ca present obligations which are speculative in
a high degree. Such issuers are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and
issuers so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
the categories below B. The modifier 1 indicates a ranking for the security in
the higher end of a rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of a rating
category.
A-2
<PAGE>
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Fund or any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy the Shares by anyone in any jurisdiction in
which such offer or solicitation is not authorized, or in which the person
making the 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, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary .................................... 1
Fee Table ............................................. 11
The Fund .............................................. 12
Use of Proceeds ....................................... 12
Investment Objectives and Policies .................... 13
Other Investment Practices ............................ 19
Risk Factors .......................................... 27
Investment Restrictions ............................... 30
Management of the Fund ................................ 31
Trustees and Officers of the Fund ..................... 33
Portfolio Transactions ................................ 34
Determination of Net Asset Value ...................... 36
Dividends and Other Distributions ..................... 37
Automatic Dividend Reinvestment Plan .................. 38
Taxes ................................................. 40
Underwriting .......................................... 44
Description of Shares ................................. 46
Conversion to Open-End Fund ........................... 48
Other Information ..................................... 48
Legal Matters ......................................... 48
Experts ............................................... 48
Report of Independent Auditors ........................ 49
Statement of Assets, Liabilities and Capital .......... 50
Appendix A ............................................ A-1
</TABLE>
------------------------
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Shares, whether or not participating in
this distribution, may be required to deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
Shares
DLJ HIGH YIELD
BOND FUND
Common Shares
-------------------------------
P R O S P E C T U S
-------------------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
Advest, Inc.
FAC/Equities
Fahnestock & Co. Inc.
First of Michigan Corporation
Gruntal & Co., L.L.C.
Interstate/Johnson Lane
Corporation
Janney Montgomery Scott Inc.
Sands Brothers & Co., Ltd.
Sutro & Co. Incorporated
Tucker Anthony Incorporated
, 1998
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