<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
/ X / REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
CN Loan Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
City National Center
400 North Roxbury Drive
Beverly Hills, California 90210
(Address of Principal Executive Offices)
(213) 347-2646
(Registrant's Telephone Number, including Area Code)
BARBARA S. POLSKY
City National Center
400 North Roxbury Drive
Beverly Hills, California 90210
(Name and Address of Agent for Service)
Copies to:
MARTIN E. LYBECKER, ESQ.
ROPES & GRAY
ONE FRANKLIN SQUARE
1301 K STREET, N.W.
SUITE 800 EAST
WASHINGTON, D.C. 20005
Approximate Date of Proposed Public Offering: Not Applicable
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant to
Section 8(b) of the Investment Company Act of 1940, as amended (the "1940
Act"). However, common stock in the Registrant are not being registered under
the Securities Act of 1933, as amended (the "1933 Act") since such stock will
be issued solely in private placement transactions which do not involve any
"public offering" within the meaning of Section 4(2) of the 1933 Act.
Investments in the Registrant's series may only be made by "accredited
investors" within the meaning of Regulation D under the 1933 Act which
generally includes institutional investors. This Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
common stock of the Registrant.
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Pursuant to General Instruction 63 of Form N-2, a registration statement filed
under only the 1940 Act shall consist of the facing sheet of the Form,
responses to all items of Parts A and B except Items 1,2,3.2,4,5,6, and 7 of
Part A thereof, responses to all items of Part C except Items 24.2h, 24.2l,
24.2n, and 24.2o, required signatures, and all other documents that are
required or which the Registrant may file as part of the registration
statement.
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PART A
ITEM 1. OUTSIDE FRONT COVER
Not Applicable.
ITEM 2. COVER PAGES; OTHER OFFERING INFORMATION
Not Applicable.
ITEM 3. FEE TABLE AND SYNOPSIS
3.1. Expense Information
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
--------------------------------
<S> <C>
Sales Load (as a percentage of offering price)......................None
Dividend Reinvestment and Cash Purchase Plan Fees...................None
Annual Expenses
---------------
Management Fees.....................................................None
Other expenses(1)....................................................0.10%
Total Annual Expenses................................................0.10%
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Example 1 year 3 years 5 years 10 years
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming a 5% annual return: $ 1.02 $ 3.23 $ 5.65 $ 12.83
-----------------------------------------------------------------------------------------
</TABLE>
The purpose of the preceding table is to assist the investor in
understanding the various costs and expenses that an investor in CN Loan Fund,
Inc. (the "Fund") will bear directly or indirectly.
(1) "Other expenses" are based on estimated amounts for the current
fiscal year. The example above should not be considered a representation of
future expenses, which may be higher or lower.
<TABLE>
<S> <C>
3.2. Not Applicable.
3.3. Not Applicable.
ITEM 4. FINANCIAL HIGHLIGHTS
</TABLE>
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<TABLE>
<S> <C>
Not Applicable.
ITEM 5. PLAN OF DISTRIBUTION
Not Applicable.
ITEM 6. SELLING SHAREHOLDERS
Not Applicable.
ITEM 7. USE OF PROCEEDS
Not Applicable.
ITEM 8. GENERAL DESCRIPTION OF THE REGISTRANT
</TABLE>
8.1. General
The Fund was incorporated under the laws of the State of Maryland on
April 5, 2000, and is a non-diversified closed-end management investment
company registered under the Investment Company Act of 1940, as amended.
8.2. Investment Objectives and Policies
The Fund's investment objective is to seek current income consistent
with preservation of capital. The investment objective of the Fund may be
changed without the vote of the holders of a majority of voting securities.
The Fund intends to achieve its objective by investing in a
portfolio of medium to high quality debt securities which the Manager believes
does not involve undue risk to income or principal. Under normal market
conditions, the Fund will invest substantially all of its assets in (i)
Construction and Development Loans, (ii) Mortgage-Backed Securities, (iii)
Collateralized Mortgage Obligations ("CMOs"), (iv) U.S. Government Agency
Securities, (v) U.S. Treasury Securities, (vi) Single Family Residential
Mortgages, (vii) Fixed and Floating Rate Commercial Real Estate Mortgages,
(viii) Syndicated Loans, and (ix) Grantor Trusts that invest in such
obligations. (Construction and Development Loans, Single Family Residential
Mortgages, Fixed and Floating Rate Commercial Real Estate Mortgages and
Syndicated Loans are collectively referred to as "Whole Loans.") It is
anticipated that substantially all of the Fund's assets will be contributed by
Shareholders of the Fund in exchange for Shares of the Fund. Each of the Whole
Loans will have been originated or purchased by City National Bank pursuant to
its underwriting procedures and guidelines. The Fund does not expect to make
new advances on any of the Whole Loans and that such advances will be made by
City National Bank as servicer of the Whole Loans. The Manager will seek to
balance the risk and return potential of the Fund's investments in a manner
that
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attempts to maximize return while minimizing the risk of losses to the Fund
through defaults on portfolio securities. An investment in the Fund may not be
appropriate for all investors and there is no assurance that the Fund will
achieve its investment objective. The Fund is designed primarily as a long-term
investment and not as a trading vehicle.
The discussion below describes in greater detail the principal categories of
securities in which the Fund intends to invest.
Whole Loans. Whole Loans include Construction and Development Loans,
Single Family Residential Mortgages, Fixed and Floating Rate Commercial Real
Estate Mortgages and Syndicated Loans that City National Bank either originated
or purchased. Construction and Development Loans are short-term real estate
loans to finance building costs. The funds are typically disbursed as needed or
in accordance with a prearranged plan, and the money is repaid on completion of
the project, usually from the proceeds of a mortgage loan. Single Family
Residential Mortgages are entire ownership interests in mortgage loans on
residential property, typically single family residences. Commercial Real
Estate Mortgages are mortgage loans secured by commercial property, such as
industrial and warehouse properties, office buildings, retail space and
shopping malls, multifamily properties and cooperative apartments, hotels and
motels, nursing homes, hospitals and senior living centers. Fixed-rate loans
have interest rates that are fixed and that do not fluctuate with general
market conditions while floating-rate loans have variable interest rates that
are periodically adjusted in response to market conditions. Syndicated Loans
typically represent participations in larger loans extended to non-investment
grade, leveraged borrowers. These loans typically finance a buyout, acquisition
or recapitalization transaction and rely on "enterprise value" to mitigate
deficient equity or collateral values. Syndicated Loans may be agented by City
National Bank or another commercial bank.
Mortgage-Backed Securities. Mortgage-Backed Securities are
securities that, directly or indirectly, represent participations in, or are
secured by and payable from, loans secured by real property including
pass-through securities such as Ginnie Mae, Fannie Mae and Freddie Mac
Certificates, private pass-through securities, commercial mortgage-backed
securities and certain collateralized mortgage obligations. Mortgage-Backed
Securities may have fixed or adjustable interest rates. The Fund will only
invest in Mortgage-Backed Securities that are issued or guaranteed by the
United States Government or one of its agencies or instrumentalities, such as
Ginnie Mae, Fannie Mae and Freddie Mac.
CMOs. Collateralized Mortgage obligations ("CMOs") are debt
instruments issued by special purpose entities which are secured by pools of
mortgage loans or other Mortgage-Backed Securities. Payments of principal and
interest on underlying collateral provide the funds to pay debt service on the
CMO. CMOs may be issued by agencies or instrumentalities of the United States
Government or by private organizations. The Fund will not invest in CMO's
issued by private organizations.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specified coupon rate and has a stated maturity or final distribution date.
Principal prepayments on collateral underlying a CMO
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may cause it to be retired substantially earlier than the stated maturities or
final distribution dates. Interest is paid or accrues on all classes of a CMO
on a monthly, quarterly or semi-annual basis. The principal and interest on the
underlying mortgages may be allocated among the several classes of a series or
a CMO in many ways. In a common structure, payments of principal, including any
principal prepayments, on the underlying mortgages are applied to the classes
of the series of a CMO in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be made on any
class of a CMO until all other classes having an earlier stated maturity or
final distribution date have been paid in full.
U.S. Government Securities. U.S. Government Securities are obligations
issued or guaranteed by the United States Government, its agencies, authorities
or instrumentalities. Securities issued by the U.S. Government, such as United
States Treasury bills, Treasury notes and Treasury bonds (collectively, "U.S.
Treasury Securities"), which differ only in their interest rates, maturities
and times of issuance, are supported by the full faith and credit in the United
States. U.S. Government Agency Securities, which are securities issued by
agencies and instrumentalities of the U.S. Government such as Ginnie Mae,
Fannie Mae and Freddie Mac, are supported by: (i) the full faith and credit of
the United States, such as securities issued by Ginnie Mae; (ii) the right of
the issuer to borrow from the United States Treasury, such as securities of the
Federal Home Loan Banks; or (iii) only the credit of the issuer, such as
securities of the Student Loan Marketing Association.
Grantor Trusts. Grantor Trusts are special purpose vehicles used to issue
mortgage-backed securities wherein Whole Loans are deposited with a trustee
under a custodial or trust agreement. The Fund may invest in Grantor Trusts for
which City National Bank or an affiliate of City National Bank serves as
trustee.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions which may not be
changed without the affirmative vote of a "majority of the outstanding voting
securities" of the Fund, which is defined in the 1940 Act to mean the
affirmative vote of the lesser of (1) more than 50% of the outstanding Shares
of the Fund, or (2) 67% or more of the Shares present at the meeting in person
or by proxy. The Fund:
1. May not concentrate investments in a particular industry or
group of industries, as concentration is defined under the 1940 Act, or
the rules and regulations thereunder, as such statute, rules or
regulations may be amended from time to time, except that the Fund will
concentrate in securities which represent interests in mortgages on real
property.
2. May issue senior securities to the extent permitted by the
1940 Act, or the rules or regulations thereunder, as such statute, rules
or regulations may be amended from time to time.
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3. May lend or borrow money to the extent permitted by the 1940
Act, or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
4. May purchase or sell commodities, commodities contracts,
futures contracts, or real estate to the extent permitted by the 1940
Act, or the rules or regulations thereunder, as such statute, rules
or regulations may be amended from time to time.
5. May underwrite securities to the extent permitted by the
1940 Act, or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
6. May pledge, mortgage or hypothecate any of its assets to
the extent permitted by the 1940 Act, or the rules or regulations
thereunder, as such statute, rules or regulations may be amended from
time to time.
The fundamental limitations of the Fund have been adopted to avoid
wherever possible the necessity of shareholder meetings otherwise required by
the 1940 Act. This recognizes the need to react quickly to changes in the law
or new investment opportunities in the securities markets and the cost and time
involved in obtaining shareholder approvals for diversely held investment
companies. However, the Fund also has adopted non-fundamental limitations, set
forth below, which in some instances may be more restrictive than the
fundamental limitations. Any changes in the Fund's non-fundamental limitations
will be communicated to the Fund's shareholders prior to effectiveness.
The following investment limitations of the fund are non-fundamental policies.
The Fund may not:
1. Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 10% of the Fund's total
assets would then be invested in securities of a single issuer or if as a
result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer; provided that, with respect to 50% of
the Fund's assets, the Fund may invest up to 25% of its assets in the
securities of any one issuer. For purposes of this restriction, the term
issuer includes both the borrower under a loan agreement and the lender
selling a participation to the Fund together with any other persons
interpositioned between such lender and the Fund with respect to a
participation.
2. Make investments for the purpose of exercising control or
participation in management, except to the extent that exercise by the
Fund of its rights under loan agreements would be deemed to constitute
such control or participation.
3. Borrow money, except for temporary or emergency purposes and
then only in an amount not exceeding one-third of the value of total
assets and except that a
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Fund may borrow from banks or enter into reverse repurchase agreements
for temporary emergency purposes in amounts up to 15% of the value of its
total assets at the time of such borrowing.
4. Pledge, mortgage or hypothecate assets except to secure
temporary borrowings permitted by (3) above in aggregate amounts not to
exceed 15% of total assets taken at current value at the time of the
incurrence of such loan, except as permitted with respect to securities
lending.
5. Invest more than 25% of its total assets in the securities of
issuers in any one industry; provided that this limitation shall not
apply with respect to obligations issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities; and provided further
that the Fund shall, under normal market conditions, invest more than 25%
and up to 100% of its assets in securities which represent interests in
mortgages on real property.
6. Make short sales of securities, maintain a short position or
purchase securities on margin, except that the Fund may obtain short-term
credits as necessary for the clearance of security transactions.
7. Act as an underwriter of securities of other issuers except as
it may be deemed an underwriter in selling a Fund security.
8. Issue senior securities, as defined in the 1940 Act, other
than (i) preferred shares which immediately after issuance will have
asset coverage of at least 200%, (ii) indebtedness which immediately
after issuance will have asset coverage of at least 300%, or (iii) the
borrowings permitted by investment restriction 3 above.
All percentage limitations on investments described in this document will
apply at the time of investment and shall not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of such
investment. The other investment policies described in this document are also
not fundamental and may be changed by approval of the Fund's Directors.
SELECTION OF INVESTMENTS
Initially, substantially all of the Fund's assets will be contributed by
Shareholders of the Fund in connection with this offering. Subsequently, the
Manager will buy and sell securities for the Fund's portfolio with a view to
seeking a high level of current income, and will select investments which the
Manager believes do not involve undue risk to income or principal considered in
relation to the particular investment policies of the Fund. At the time of
making investments in the categories discussed above, the Manager will consider
the quality of the securities in which the Fund may invest. All investments
must be in securities that are medium to high quality. As a result, the Fund
will not necessarily invest in the highest yielding investments permitted by
its investment policies if the Manager determines that market risks or credit
risks associated with such investments would subject the Fund's
<PAGE> 9
portfolio to excessive risk. The potential for realization of capital gains
resulting from possible changes in interest rates will not be a major
consideration. The Manager will be free to take full advantage of the entire
range of maturities offered by fixed-income securities and may adjust the
average maturity of the Fund's portfolio from time to time, depending on its
assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates.
New types of mortgage-related assets, and other securities in which the
Fund may invest are developed and marketed from time to time and that,
consistent with its investment limitations, the Fund expects to invest in those
securities and instruments that the Manager believes may assist the Fund in
achieving its investment objectives. These investments will be disclosed to
shareholders in the Fund's annual and semi-annual reports.
The Manager seeks to minimize the risks involved in investing in
mortgage-related assets and other fixed-income securities through careful
investment analysis. It should be noted, however, that the amount of
information about the financial condition of an issuer of securities may not be
as extensive as that which is made available by corporations whose securities
are publicly traded.
PORTFOLIO TURNOVER AND SHORT TERM TRADING
The Manager may buy and sell securities for the Fund to accomplish its
investment objective. Although it is impossible to predict portfolio turnover
rate, the Manager expects that the annual portfolio turnover rate of the Fund
will be low and should not exceed 30%. Portfolio turnover generally involves
some expense to the Fund, including transaction costs on the sale of securities
and reinvestment in other securities, and may result in realization of ordinary
income or capital gains.
The Fund believes that in general the secondary market for some
fixed-income securities is less liquid than that for other fixed-income
securities. Also, there may be limited liquidity for certain fixed income
securities, such as Whole Loans, that the Fund may purchase or hold.
Accordingly, the ability of the Fund to buy and sell securities may, at any
particular time and with respect to any particular securities, be limited.
8.3. Risk Factors
a. General
No Operating History; Reliance on Management. The Fund is newly organized
and does not have an investment track record. It is anticipated that initially
all of the Fund's assets will be contributed by the Shareholders of the Fund.
Subsequently, the Fund will be wholly dependent for the selection, structuring,
closing, and monitoring of its investments on the diligence and skill of its
Manager, acting under the supervision of the Board. The Manager, Heng Chen,
will have responsibility for the selection of investments, the negotiation of
the terms of such investments, and the monitoring of such investments after
they are made. There can be no
<PAGE> 10
assurance that Mr. Chen will remain associated with the Fund or that, in the
event he ceases to be associated with the Fund, the Fund would be able to find
a qualified person or persons to fill his position. See Item 9 - Management.
Limited Transferability of Shares. The Fund has been organized to make
investments in illiquid debt securities. The Shares will not be registered
under the federal or state securities laws and are subject to substantial
restrictions on transfer. There will be no trading market for the Shares. Fund
shares, subject to Board and shareholder approval, are expected to be subject
to redemption from time to time as discussed in Item 10.1 - Capital Stock:
Repurchase of Shares.
The Shares will not be registered under the 1933 Act or under the
securities laws of the various states (except as necessary to claim a limited
offering exemption) on the grounds that their issuance and sale is exempt from
such registration requirements as not involving a public offering pursuant to
Section 4(2) of the 1933 Act and applicable provisions of the securities laws
of the various states.
Because the Shares will be acquired by investors in transactions not
involving a public offering, they will be "restricted securities" and may be
required to be held indefinitely. Shares may not be sold, transferred,
assigned, pledged, or otherwise disposed of without registration under
applicable federal or state securities laws or pursuant to an exemption from
registration (in which case the Shareholder will at the option of the Fund be
required to provide the Fund with a legal opinion, in form and substance
satisfactory to the Fund, that registration is not required). Accordingly, an
investor must be willing to bear the economic risk of investment in the Shares
until Shares are redeemed or the Fund is liquidated. No sale, transfer,
assignment, pledge, or other disposition, whether voluntary or involuntary, of
the Shares may be made except by registration by the transfer agent on the
Fund's books. Each transferee will be required to execute an instrument
agreeing to be bound by these restrictions and to execute such other
instruments or certifications as are reasonably required by the Fund or the
transfer agent. The Fund may withhold consent to such an assumption at its
absolute discretion.
Illiquidity of Investments. From time to time, the Fund's investments in
fixed-income securities may include securities as to which the Fund, by itself
or together with other funds or accounts managed by the Manager or City
National Bank, holds a major portion or all of an issue of such securities.
Because there may be relatively few potential purchasers for such investments
and, in some cases, there may be contractual restrictions on resales, the Fund
may find it more difficult to sell such securities at a time when the Manager
believes it is advisable to do so. In addition, in order to enforce its rights
in the event of a default in the payment of interest or repayment of principal,
or both, the Fund may be required to take possession of and manage the assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the net asset value of the Fund.
In addition, the Fund's intention to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended, may limit the
extent to which the Fund may exercise its rights by taking possession of such
assets, because as a regulated investment company the
<PAGE> 11
Fund is subject to certain limitations on its investments and on the nature of
its income. See Item 10.4 - Taxes.
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the 1940 Act, which means that the Fund is not limited by the
1940 Act in the proportion of its assets that it may invest in securities of a
single issuer. Because the Fund may invest a larger portion of its assets in
the securities of a single issuer than a diversified fund, an investment in the
Fund may be subject to greater fluctuations in value than an investment in a
diversified fund.
Tax Status. The Fund must meet a number of requirements, described under
Item 10.4 - Taxes, to qualify as a RIC and, if qualified, to continue to
qualify. If the Fund experiences difficulty in meeting the diversification
requirement for any fiscal quarter, it might accelerate capital calls or
borrowings in order to increase the portion of the Fund's total assets
represented by cash, cash items, and U.S. government securities as of the close
of the following fiscal quarter and thus attempt to meet the diversification
requirement. However, the Fund would incur additional interest and other
expenses in connection with any such accelerated borrowings, and increased
investments by the Fund in cash, cash items, and U.S. government securities
(whether the funds to make such investments are derived from called equity
capital or from accelerated borrowings) are likely to reduce the Fund's return
to investors. Furthermore, there can be no assurance that the Fund would be
able to meet the diversification requirements through such actions. Failure to
qualify as a RIC would subject the Fund's distributed and undistributed income
to federal income taxation, and in a year in which the Fund has taxable income
or net realized gain, would have a significant adverse effect on the return to
investors. See Item 10.4 - Taxes.
Risks of Whole Loans. While Whole Loans in which the Fund will invest
generally will have a higher yield than Mortgage-Backed Securities, holders of
such interests may bear a greater risk of loss arising from a default on the
part of the borrower of the underlying loans than do holders of Mortgage-Backed
Securities. This is because Whole Loans, unlike most Mortgage-Backed
Securities, generally are not backed by any government guarantee or private
credit enhancement. Such risk may be greater during a period of declining or
stagnant real estate values. In addition, individual loans underlying Whole
Loans may be larger than those underlying Mortgage-Backed Securities. There may
be certain costs and delays in the event of a foreclosure and there is no
assurance that the subsequent sale of the property will produce an amount equal
to the sum of the unpaid principal balance of the loan as of the date the
borrower went into default, accrued but unpaid interest and all foreclosure
expenses, in which case the Fund may suffer a loss.
The Manager will itself or through third parties hired on its behalf,
with respect to the Fund's investments in Whole Loans, review to the extent
practicable the documents generated in connection with the underlying loans
with a view towards determining, among other things, that: (i) the Fund upon
purchase or acquisition thereof will acquire valid loans (or interests therein)
and a perfected security interest in the property securing the loans; (ii)
there are no claims to the property superior to that of the underlying mortgage
or contract holder (except, in the case of second mortgage loans, those of the
first mortgage holders); and (iii) the Fund's
<PAGE> 12
purchase or acquisition will not give rise to rights on the part of third
parties, the exercise of which could adversely affect the Fund. It may,
however, be impracticable for the Manager to examine prior to purchase every
relevant document within the limited due diligence period afforded by the
financial institution selling or contributing the loans, and in some cases the
document files may not be well-maintained and important documents or contracts
may be missing. The Manager will make certain assumptions regarding the rate
and severity of defaults on the mortgages or installment sales contracts
underlying Whole Loans purchased by the Fund and will determine the acquisition
price for such investments accordingly. There can be no assurance, however,
that the actual rate and/or severity of defaults will not be greater than that
anticipated by the Manager.
Interest Rate Risk. Because the prices of the Fund's assets will
fluctuate with changes in prevailing interest rates, the net asset value of the
Fund's Shares can also fluctuate in relation to interest rate changes. When
interest rates decline, the value of a portfolio invested substantially in
fixed income securities can be expected to rise. Conversely, when interest
rates rise, the value of a portfolio invested substantially in fixed-income
securities can be expected to decline. The values of securities rated in the
lower rating categories generally fluctuate more than those of securities rated
on the higher rating category.
Prepayment Risk. The yield characteristics of mortgage-related assets
differ from traditional debt securities. The major differences typically
include more frequent interest and principal payments (usually monthly) the
possibility that prepayments of principal may be made at any time. As a result,
if the Fund purchases a security at a premium, a prepayment rate that is faster
than expected will reduce yield to maturity while a prepayment rate that is
slower than expected will increase yield to maturity. Conversely, if the Fund
purchases the securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to
maturity. Prepayment rates are influenced by changes in current interest rates
and a variety of other economic, geographic, social and other factors.
Amounts available for reinvestment by the Fund are likely to be greater
during a period of declining interest rates than during a period of rising
interest rates as prepayments on the loans or other collateral underlying the
securities in which the Fund has invested result in prepayments of the Fund's
securities. The yield on the securities in which such amounts are reinvested is
likely to be lower than the yield on the securities that were prepaid or the
yield that could be achieved if such amounts were reinvested during a time of
rising interest rates. Mortgage-Related Assets may decrease in value as a
result of increases in interest rates and may benefit less than other fixed
income securities from declining interest rates because of the risk of
prepayment.
Credit Risk. All investments purchased by the Fund will be medium to high
quality. Credit risk is the possibility that the issuer of a security, or the
counterparty to a contract, will default or otherwise become unable to honor a
financial obligation. Generally speaking, the lower a security's credit rating,
the higher its credit risk. If a security's credit rating is downgraded, its
price tends to decline sharply, especially as it becomes more probable that the
issuer will default. Although credit risk for the Fund should generally be low,
there can be no assurance
<PAGE> 13
that the credit rating of an investment will remain unchanged over the period
of the Fund's ownership of that investment.
b. Effects of Leverage
Not applicable.
8.4. Other Policies
DEFENSIVE STRATEGIES
At times the Manager may judge that conditions in the markets for
mortgage-related assets and other fixed-income securities make pursuing the
Fund's basic investment strategy inconsistent with the best interests of its
Shareholders. At such times the Manager may use alternative strategies,
primarily designed to reduce fluctuations in the value of the Fund's assets. In
implementing these "defensive" strategies, the Fund may invest substantially
all of its assets in high-quality fixed-income obligations such as U.S.
Treasury Securities; commercial paper; certificates of deposit and bankers'
acceptances; repurchase agreements with respect to any of the foregoing
investments; or any other fixed-income securities that the Manager considers
consistent with such strategy. It is impossible to predict when, or for how
long, the Fund will use these alternative strategies.
8.5. Share Price Data
Not Applicable.
8.6. Business Development Companies
Not Applicable.
ITEM 9. MANAGEMENT
9.1. General
(a) BOARD OF DIRECTORS. The Directors set broad policies for the Fund and
choose its officers. The Fund has four (4) Directors. Under the Bylaws, which
the Directors may amend, and except for the initial Board of Directors, the
Board of Directors shall consist of not fewer than three (3) nor more than nine
(9) Directors, as specified by a resolution of a majority of the entire Board
of Directors. No more than 60% of the Directors are "interested persons" of the
Fund, as defined in the 1940 Act.
(b) INVESTMENT MANAGER. The Investment Manager, Heng Chen, is located at
City National Center, 400 North Roxbury Drive, Beverly Hills, California 90210.
Mr. Chen is an employee of the Fund and of City National Bank, a national
banking association. Mr. Chen has been the Executive Vice President-Finance of
City National Bank since March 2000 and the Assistant Chief Financial Officer
and Assistant Treasurer of City National Corporation
<PAGE> 14
since June 1998. Mr. Chen has been with City National Bank since 1985 during
which time he has served as Controller and Assistant Treasurer of City National
Corporation and as Senior Vice President-Finance and Controller of City
National Bank. Prior to joining City National Bank, Mr. Chen was a senior
manager at Price Waterhouse & Company from 1975 to 1984. In total, Mr. Chen has
over 5 years of experience managing fixed income securities.
Mr. Chen received a B.A. degree in Economics from the University of
California at Santa Barbara in 1973 and an MBA from the University of
California at Los Angeles in 1974.
There is no management contract between the Fund and the Manager. Subject
to such policies as the Directors may determine, the Manager, at his own
expense, furnishes continuously an investment program for the Fund and makes
investment decisions on behalf of the Fund. Subject to the control of the
Directors, the Manager also manages, supervises, and conducts the other affairs
and business of the Fund, furnishes office space and equipment, provides
bookkeeping and clerical services (including determination of the Fund's net
asset value, but excluding transfer agency services), and places all orders for
the purchase and sale of the Fund's portfolio securities.
The Fund will not pay the Manager any compensation for the services
rendered, facilities furnished, and expenses borne by the Manager.
As an employee of the Fund, the Manager shall not be subject to any
liability to the Fund or to any shareholder of the Fund for any act or omission
in the course of or connected with rendering services to the Fund in the
absence of the Manager's willful misfeasance, bad faith, gross negligence, or
reckless disregard of its duties.
The Manager may be terminated without penalty by vote of the Directors or
the Shareholders of the Fund, or by City National Bank. The continuance of the
Manager will be considered at least annually by vote of either the Directors or
the Shareholders, and, in either case, by a majority of the Directors who are
not "interested persons" of City National Bank or the Fund.
(c) PORTFOLIO MANAGER. The Fund's portfolio manager will be Heng Chen.
See Item 9.1 (b) above.
(d) ADMINISTRATOR. Not Applicable.
(e) CUSTODIAN. City National Bank (the "Bank"), located at City National
Center, 400 North Roxbury Drive, Beverly Hills, California 90210, will serve as
the Fund's custodian, transfer agent, and dividend disbursing agent.
The Bank will serve as custodian for the Fund's portfolio securities and
cash, and in such capacity, maintains certain financial and accounting books
and records pursuant to agreements with the Fund. For these services, the Bank
receives a fee as follows:
For Custody Services
<PAGE> 15
0.003% per year for the first $25,000,000 of securities and 0.0015% per
year for securities held in excess of $25,000,000. There is no additional
fee for custody services related to grantor trust certificates and loans
and loan participation interests serviced by City National Bank.
For Recordkeeping Services
There is no separate charge for recordkeeping services.
All fees are to be accrued daily and paid monthly.
As transfer agent and dividend disbursing agent, the Bank is responsible
for, among other things, establishing and maintaining accounts of Shareholders,
monitoring the number of Shares issued and outstanding from time to time and
effecting payments of dividends or distributions declared from time to time by
the Directors with respect to the Shares. For these services, the Bank receives
a fee from the Fund in the amount of $10,000 per month plus City National
Bank's reasonable out-of-pocket expenses incurred in the performance of its
services.
(f) EXPENSES
The Fund's service providers bear all expenses in connection with the
performance of their respective services, except that the Fund will bear the
following expenses relating to its operations: taxes, interest, brokerage fees
and commissions, if any, fees and travel expenses of Directors who are not
partners, officers, directors, shareholders or employees of City National Bank
or City National Corporation, Securities and Exchange Commission fees and state
fees and expenses, certain insurance premiums, outside and, to the extent
authorized by the Fund, inside auditing and legal fees and expenses, fees and
reasonable out-of-pocket expenses of the custodian and transfer agent, expenses
incurred for pricing securities owned by the Fund, costs of maintenance of
corporate existence, costs and expenses of Shareholders' and Directors' reports
and meetings and any extraordinary expenses.
(g) AFFILIATED BROKERAGES
None.
9.2. Non-resident Managers
Not Applicable.
9.3. Control Persons
As of July 11, 2000, City National Bank owned 100% of the outstanding
Shares of the Fund.
ITEM 10. CAPITAL STOCK, LONG-TERM DEBT, AND OTHER SECURITIES
<PAGE> 16
10.1. Capital Stock
The Fund is authorized to issue 23,000,000 shares of Common Stock, $0.001
par value, all of which are initially classified as Common Stock. The Fund's
Shares have no preemptive, conversion, exchange or redemption rights. Each
Share has equal voting rights. Shareholders are entitled to one vote per Share.
All voting rights for the election of Directors are noncumulative, which means
that the holders of more than 50% of the Shares can elect 100% of the Directors
then nominated for election if they choose to do so and, in such event, the
holders of the remaining Fund's Shares will not be able to elect any Directors.
The Fund's Shares outstanding are and those offered hereby, when issued, will
be fully paid and nonassessable. The rights of the Fund's shares with respect
to dividends and distributions are described under "Dividends and
Distributions." Each Share is entitled to participate equally in the net
distributable assets of the Fund upon liquidation or termination.
A private offering of the Shares has been approved by the Board of
Directors of the Fund. The Fund may from time to time sell additional Shares.
Any additional offering will be subject to the requirements of the 1940 Act
that Shares may not be sold at a price below the then current net asset value,
exclusive of sales loads and commissions, except in connection with an offering
to existing shareholders or with consent of the holders of a majority of the
Fund's outstanding voting securities.
REPURCHASE OF SHARES
Since the Fund is a closed-end investment company, Shareholders of the
Fund do not, and will not, have the right to redeem their Shares. It is not
expected that any trading market in Shares of the Fund will ever emerge.
Although the Fund has no present intention to do so, the Fund may, from
time to time, consider repurchasing its Shares or to tender for its Shares at
their net asset value. The Fund currently has no established tender offer or
share repurchase program, and no established schedule for considering the
adoption of such programs. No assurance can be given that the Fund will, in
fact, decide to undertake any tender offers or share repurchases in the future.
Subject to the Fund's investment restrictions with respect to borrowings
and subject to the Fund's compliance with the 1940 Act, the Fund may incur debt
to finance repurchases and/or tenders. See Item 8.2 - Investment Objections and
Policies: Investment and Restrictions. Interest on any such borrowings will
reduce the Fund's net investment income.
Although share repurchases and tenders could have a favorable effect for
the owners of the Fund's Shares, it should be recognized that the acquisition
of Shares by the Fund will decrease the total assets of the Fund and,
therefore, will have the effect of increasing the Fund's expense ratio.
DIVIDENDS AND DISTRIBUTIONS
<PAGE> 17
The Fund intends to make annual distributions to Shareholders from net
investment income. Net investment income of the Fund consists of all interest
and other income (excluding capital gains and losses) accrued on portfolio
assets less all expenses of the Fund allocable thereto. Expenses of the Fund
are accrued each day. It is currently anticipated that amounts which
economically represent net realized long-term capital gains, if any, will be
distributed to Shareholders at least annually.
To permit the Fund to maintain a more stable annual distribution, the
Fund may from time to time pay out less than the entire amount of available net
investment income and net realized short-term capital gains to Shareholders
earned in any particular period. Any such amount retained by the Fund would be
available to stabilize future distributions. As a result, the distributions
made by the Fund for any particular period may be more or less than the amount
of net investment income and net realized short-term capital gains actually
earned by the Fund during such period. For information concerning the tax
treatment of such dividends and distributions to Shareholders, see Item 10.4 -
Taxes. The Fund intends, however, to make such distributions as are necessary
for it to qualify as a regulated investment company that is not subject to
federal tax.
<TABLE>
<S> <C>
10.2. Long-Term Debt
None.
10.3. General
None.
10.4. Taxes
</TABLE>
The following discussion is based on the advice of KPMG LLP, and reflects
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing Treasury regulations and IRS published rulings, as of the date of this
filing.
<PAGE> 18
The following is a general summary of certain of the United States
federal income tax laws relating to the Fund. This discussion is based on the
Internal Revenue Code, regulations thereunder, published rulings, procedures
and announcements and court decisions as of the date hereof. The tax law, as
well as the implementation thereof, is subject to change, and any such change
might interfere with the Fund's ability to qualify as a regulated investment
company ("RIC") or, if the Fund so qualifies, to maintain such qualification.
This discussion does not purport to deal with all of the United States federal
income tax consequences applicable to the Fund or to all categories of
investors, some of whom may be subject to special rules. In addition, it does
not address state, local, foreign or other taxes to which the Fund or its
investors may be subject, or any proposed changes in applicable tax laws.
Investors should consult their tax advisers with respect to an investment in
Fund Shares, including in particular with respect to the new regulations
concerning disclosure of arrangements a significant effect of which is to
reduce corporate federal income tax liability.
TAXATION OF THE FUND AS AN ORDINARY CORPORATION.
It is anticipated that the Fund will seek to meet the requirements to
qualify for the special pass-through status available to RICs under the
Internal Revenue Code, and thus to be relieved of federal income tax on that
part of its net investment income and realized capital gains that it
distributes to shareholders. If the Fund's status as a RIC is not respected, it
should be taxed as an ordinary corporation on its taxable income for that year
and assuming certain ownership requirements are met, should be included in the
Federal consolidated return of its corporate shareholder. There is no assurance
that the Fund will meet the requirements to qualify as a RIC, or that the
shareholders will be entitled to the benefits of ownership of shares of a RIC.
TAXATION OF THE FUND AS A RIC
RIC Qualification Requirements. To qualify as a RIC, the Fund must be
registered under the 1940 Act as a management investment company (which in the
opinion of Fund counsel, Ropes & Gray, the Fund became so registered upon the
filing of its Form N-8A with the U.S. Securities and Exchange Commission on
April 11, 2000). The Fund must also distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income (consisting
generally of net investment income and net short-term capital gain) and must
meet several additional requirements. It should be noted that a distribution of
warrants or equity investments to the Fund will be treated as a sale by the
Fund of such assets with the excess of the fair market value of those assets
over their tax basis being the amount of the income or gain to the Fund. Among
the requirements are the following: (a) the Fund must derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to loans of securities and gains from the sale or other disposition of
securities or other income derived with respect to its business of investing in
securities; (b) the Fund must diversify its assets so that, at the close of
each quarter of the Fund's taxable year, (i) not more than 25% of the market
value of its total assets is invested in the securities of a single issuer, or
in the securities of two or more issuers that the Fund controls and that are
engaged in the same or similar trades or businesses or related trades or
businesses, and (ii) at least 50% of the market value of its total assets is
represented by cash, cash items, government securities, securities of other
RICs and other securities (with each investment in such other securities
limited so that not more than 5% of the market value of the Fund's total assets
is invested in the securities of a single issuer and the Fund does not own more
than 10% of the outstanding
<PAGE> 19
voting securities of a single issuer); and (c) the Fund must file an election
to be treated as a RIC. If, after initially qualifying as a RIC, the Fund fails
to qualify for treatment as a RIC for a taxable year, it would be taxed as an
ordinary corporation on its taxable income for that year and, assuming certain
ownership requirements are met, it should be included in the Federal
consolidated return of its corporate shareholder. In such a case, there could
be substantial tax and other costs associated with re-qualifying as a RIC.
However, under the final version of the applicable regulations expected to be
adopted, the foregoing should not apply upon requalification so long as the
Fund had qualified as a RIC for at least one taxable year period prior to such
disqualification, and had remained disqualified for only one taxable year.
The Fund will be subject to a non-deductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year at least 98% of its
ordinary income for such calendar year and 98% of its capital gain net income
for the one-year period ending on October 31 of such calendar year, plus
certain other amounts. For these purposes, any taxable income retained by the
Fund, and on which it pays federal income tax, will be treated as having been
distributed.
The Fund currently intends to distribute in each year for which it
qualifies as a RIC substantially all of its net investment income and capital
gain net income so as to not be subject to federal income or excise taxes.
TAXATION OF THE FUND'S SHAREHOLDERS IF THE FUND QUALIFIES AS A RIC
General. Dividends paid to shareholders that are attributable to the
Fund's net investment income will be taxable to shareholders as ordinary
income. Capital gain distributions are taxable as long-term capital gains
regardless of how long the shareholder has held the shares. It is not
anticipated that any portion of the Fund's dividends will qualify for the
dividends-received deduction for shareholders in respect of their Fund
dividends.
Distributions are generally taxable to shareholders at the time the
distribution is received. Any distribution, however, declared by the Fund in
October, November or December, made payable to shareholders of record in such a
month and paid the following January, is deemed paid by the Fund and received
by shareholders on December 31 of the year declared. This will prevent the
application of the excise tax, discussed above, to the Fund as a result of the
delay in the payment of the dividends.
If, for any calendar year, the Fund's total distributions exceed its net
investment income and net capital gains, the excess will generally be
considered a tax-free return of capital to a shareholder to the extent of the
shareholder's adjusted tax basis in its shares and then as capital gain. The
amount treated as tax-free return of capital will reduce the adjusted tax basis
of a shareholder's shares, thereby increasing the potential gain or reducing
the potential loss on the sale of the shares.
In general, upon the sale or other disposition of shares of the Fund by a
shareholder, the shareholder will recognize a gain or loss equal to the
difference between the amount realized on the sale and the seller's adjusted
tax basis in the shares. Any loss realized will be
<PAGE> 20
disallowed to the extent the seller has acquired (or entered into a contract to
acquire) substantially identical shares within a period beginning 30 days
before the disposition of shares and ending 30 days after the disposition. In
such case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Gain or loss realized upon sale of shares or interest
generally will be treated as a capital gain or loss. The gain or loss will be a
long-term capital gain or loss if the shares were held for more than one year.
In addition, if the shares sold by a shareholder were not held for more than
six months, any loss on the sale will be treated as long-term capital loss to
the extent of any capital gain dividend received by the shareholder with
respect to such shares.
The Fund is required to withhold 31% of reportable payments (which may
include dividends and capital gain distributions) to individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number or who otherwise are subject to backup
withholding. The certification of a shareholder's taxpayer identification
number will be provided to the Fund.
Federal withholding taxes at a rate of 30% (or a lesser treaty rate) may
apply to distributions to shareholders of the Fund who are nonresident aliens
or foreign limited liability companies, trust or corporations. The rules
governing United Sates federal income taxation of foreign shareholders and
members of a partnership are complex, and prospective non-U.S. owners should
consult with their own tax advisors to determine the impact of federal, state
and local income tax laws with regard to an investment in shares, including any
reporting requirements.
Individuals and certain other persons who are shareholders will be
required to include in their gross income an amount of certain Fund expenses
relating to the production of gross income that are allocable to the Fund.
These shareholders, therefore, will be deemed to receive gross income from the
Fund in excess of the distributions they actually receive. Such allocated
expenses may be deductible by an individual shareholder as a miscellaneous
itemized deduction, subject to the limitation on miscellaneous itemized
deductions not exceeding 2% of adjusted gross income.
The Fund will notify its shareholders following the end of each calendar
year of the amounts of dividends and capital gain distributions paid or deemed
paid during the year.
In certain circumstances the IRS may disallow the federal income tax
benefits provided by a particular arrangement when the arrangement
significantly reduces or postpones corporate tax liability, or when tax
avoidance is a significant purpose of the arrangement. Shareholders should
consult their tax advisers about the availability of the benefits anticipated
through investment in the Fund, and possible disclosure obligations relating to
that investment.
10.5. Outstanding Securities
<TABLE>
<S> <C> <C> <C>
Amount Held by Amount Outstanding Exclusive
Amount Registrant or for its of Amount Shown Under
Title of Class Authorized Account Previous Column
</TABLE>
<PAGE> 21
<TABLE>
<S> <C> <C> <C>
------------- ------------- --------------- -----------------
Common Stock 23,000,000 None 20,570,989
</TABLE>
10.6. Securities Ratings
None.
ITEM 11. DEFAULTS AND ARREARS ON SENIOR SECURITIES
11.1. None.
11.2. None.
ITEM 12. LEGAL PROCEEDINGS.
None.
<PAGE> 22
PART B
ITEM 16. GENERAL INFORMATION AND HISTORY
Not Applicable.
ITEM 17. INVESTMENT OBJECTIVE AND POLICIES
See Item 8.2 Investment Objective and Policies.
ITEM 18. MANAGEMENT
18.1 through 18.3. Management Information
DIRECTORS AND OFFICERS
The Directors of the Fund are responsible for the general oversight of
the Fund's business. The Directors and executive officers of the Fund and their
principal occupations during the last five years are set forth below. The
mailing address of each of the officers and Directors is City National Center,
400 North Roxbury Drive, Beverly Hills, California 90210, unless otherwise
indicated.
<TABLE>
<CAPTION>
Present principal occupation and principal
Name and Address Position with Fund occupation during the past five years
---------------- ------------------ -------------------------------------
<S> <C> <C>
*Russell Goldsmith Director and Chief Executive Officer and Vice
Age: 50 President Chairman, City National Corporation,
October 1995 to present; Chairman of the
Board and Chief Executive Officer, City
National Bank, October 1995 to present;
President, Goldsmith Entertainment
Company, production and media company,
1994 and 1995; Consultant, Spelling
Entertainment Group, Inc., television and
home video company, 1994 to 1995
*Frank P. Pekny Director and Chief Executive Vice President and
Age: 56 Financial Officer Treasurer/Chief Financial Officer, City
National Corporation, since 1992. Vice
Chairman and Chief Financial Officer,
City National Bank since 1995; Executive
Vice President and Chief Financial
Officer, City National Bank, 1992 to
October 1995
</TABLE>
<PAGE> 23
<TABLE>
<S> <C> <C>
Marshall Ezralow Director From 1973 to present, The Ezralow
Age: 63 Company (real estate development company)
The Ezralow Company
23622 Calabasas Road
Calabasas, CA 91302
Sandy Singer Director From 1969 to present, Senior Partner,
Age: 61 Singer, Burke & Co., LLP (CPA)
Singer, Burke & Company LLP
6345 Balboa Boulevard,
Building 4, Suite 375
Encino, CA 91316
Heng W. Chen Manager Assistant Chief Financial Officer and
Age: 48 and Assistant Assistant Treasurer since June 1998,
Chief Financial Controller, 1996 to 1998, Assistant
Officer Treasurer, 1991 to 1996, City National
Corporation; Executive Vice President-
Finance since March 2000; Senior Vice
President-Finance, June 1998 to March
2000, Senior Vice President-Finance and
Controller, 1995 to 1998, City National
Bank
Barbara S. Polsky Secretary Executive Vice President, Secretary and
Age: 45 General Counsel, City National Bank and
City National Corporation November 1999
to present; General Counsel, Executive
Vice President and Secretary,Aames
Financial Corporation June 1996 to
October 1999; Partner Manatt, Phelps &
Phillips March 1994 to May 1996
Kim Bingham Assistant Vice Senior Vice President and Manager,
Age: 43 President Structured Finance, City National Bank,
from February 2000 to present. Senior
Vice President, Westside Commercial
Banking Center, City National Bank, since
1994.
Rod Bollins Assistant Vice Vice President and Manager, Media and
Age: 27 President Communications Finance, City National
Bank, March 2000 to present. Vice
President, Media and Communications
Finance, 1997 to March 2000. Assistant
Vice President, Westside Commercial
Banking Center, City National Bank, 1996
to 1997. Credit Analyst, Westside
Commercial Banking Center, City
National Bank, 1995 to 1996. Analyst,
Franchise Finance Group, Citibank, 1994
to 1995.
</TABLE>
<PAGE> 24
<TABLE>
<S> <C> <C>
Lisa Gaston Assistant Vice Senior Vice President/Senior Loan Officer,
Age: 40 President City National Bank, 1999 to present;
Division Corporate Credit Administrator,
California Bank & Trust (formerly
Sumitomo Bank), 1996 to 1999; Division
Commercial Credit Administrator, Union
Bank of California, until 1996.
Bill Souza Assistant Senior Trust Counsel, City National Bank,
Age: 48 Secretary October 1998 to present; Counsel, Home
Savings of America, September 1997 to
October 1998; Senior Counsel, Wells
Fargo Bank, April 1996 to September
1997; Managing Counsel, First Interstate
Bank, January 1995 to April 1996.
</TABLE>
--------------------------
* Directors who are "interested persons" (as defined in the 1940 Act) of
the Fund, the Manager, or City National Bank.
Except as stated below, the principal occupations of the officers and
Directors for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
None of the Directors are directors of any other funds associated with
City National Bank. Each Director of the Fund that is not an interested person
will receive a fee of $1,500 for each Directors' meeting attended. It is
anticipated that there will be at least four meetings each year.
18.4 Compensation Information
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or Retirement
Aggregate Benefits Estimated Total
Compensation Accrued Annual Compensation
From Fund As Part of Benefits Upon From the Fund
NAME, POSITION Expenses Fund Expenses Retirement Paid to Director
-------- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
Russell Goldsmith None None None None
Director
Frank P. Pekny, None None None None
Director
Marshall Ezralow, None None None $6,000
Director
</TABLE>
<PAGE> 25
<TABLE>
<S> <C> <C> <C> <C>
Sandy Singer, None None None $6,000
Director
</TABLE>
(1) Figures are for the Fund's fiscal year ending December, 31, 2000.
18.5 Code of Ethics
The Fund has adopted a Code of Ethics ("Code") under Rule 17j-1 of the
Investment Company Act, and this Code permits personnel subject to the Code to
invest in securities, including securities that may be purchased or held by the
Fund.
This Code can be reviewed and copied at the Commission's Public Reference
Room in Washington, D.C. Information on the operation of the Public Reference
Room may be obtained by calling the Commission at (202) 942-8090. This Code is
available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov. Copies of this Code may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.
Item 19. Control Persons and Principal Holders of Securities
19.1. As of July 11, 2000, City National Bank, a national banking
association, whose principal office is located at City National Center, 400
North Roxbury Drive, Beverly Hills, California 90210, owns 100% of the voting
shares of the Registrant. City National Bank is a subsidiary of City National
Corporation, a bank holding company that is a California corporation whose
principal office is located at City National Center, 400 North Roxbury, Beverly
Hills, California 90210. As of March 31, 2000, City National Corporation had
assets of approximately $8.4 billion.
<TABLE>
<S> <C>
19.2. See 19.1 above.
19.3. None.
Item 20. Investment Advisory and Other Services
1-6. See Item 9 - Management.
</TABLE>
7. The Fund will provide audited annual financial statements to its
Shareholders. For the Fund's first fiscal year, the independent auditors
engaged to audit the Fund's financial statements are KPMG LLP, 355 South
Grand Avenue, Suite 2000, Los Angeles 90071; thereafter the selection of
independent auditors by the Fund's directors will be ratified annually by
Shareholders at the Fund's annual meeting.
8. See Item 9 - Management.
<PAGE> 26
Item 21. Brokerage Allocation And Other Practices
INVESTMENT DECISIONS
Investment decisions for the Fund are made with a view to achieving its
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
particular security may be bought or sold by the Manager even though it could
have been bought or sold for City National Bank at the same time. Likewise, a
particular security may be bought by the Manager when City National Bank is
selling the security. There may be circumstances when purchases or sales of
portfolio securities by the Manager for City National Bank will have an adverse
effect on the Fund.
BROKERAGE AND RESEARCH SERVICES
Whole Loans, mortgage-related assets and other fixed-income securities
will generally be acquired by the Fund from the issuer thereof in
privately-negotiated transactions not involving payment of brokerage
commissions. The Fund may occasionally pay a commission or other fee to an
unaffiliated third party for brokerage or referral services. Some fixed-income
securities may be purchased through dealers on a "net" basis without a stated
commission.
Item 22. Tax Status
See Item 10.4 - Taxes.
Item 23. Financial Statements
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
CN Loan Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of the CN
Loan Fund, Inc. as of April 11, 2000. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the statement of
assets and liabilities is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of assets and liabilities. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluation the overall statement of assets and liabilities
presentation. We believe that our audit of the statement of assets and
liabilities provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the CN Loan
Fund, Inc. as of April 11, 2000 in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Los Angeles, California
July 7, 2000
CN LOAN FUND, INC.
Statement of Assets and Liabilities
April 11, 2000
Assets--cash $ 1,000
===========
Net assets represented by common stock $ 1,000
===========
Shares outstanding ($100 par value) 10
===========
Net asset value per share $ 100
===========
See accompanying note to statement of assets and liabilities.
CN LOAN FUND, INC.
Note to Statement of Assets and Liabilities
April 11, 2000
The CN Loan Fund, Inc. (the Fund), a Delaware Business Trust, is registered
under the Investment Company Act of 1940, as amended, as a nondiversified
closed-end management investment company. The Fund is an indirect wholly owned
subsidiary City National Corporation. As of the date of this report, operations
of the Fund have been limited to organizational matters and the issuance of
initial shares. All organization costs have been borne by City National
Corporation.
<PAGE> 27
PART C
Item 24. Financial Statements and Exhibits
<TABLE>
<S> <C>
(1) Financial Statements
(a) Included in Part A:
None.
(b) Included in Part B:
Statement of Assets and Liabilities at April 11, 2000.
(2) (a) Articles of Incorporation of CN Loan Fund, Inc. dated April 5, 2000 are
filed herewith.
(b) Bylaws of CN Loan Fund, Inc. dated as of April 11, 2000 are filed herewith.
(c) None.
(d) The following portions of the Fund's Articles of Incorporation filed as
exhibit 2(a) hereto, define the rights of shareholders:
</TABLE>
SIXTH: Shares of Stock
B. Stockholders shall not have preemptive or
preferential rights to acquire any shares of the capital
stock of the Corporation, and any or all of such shares,
whenever authorized, may be issued, or may be reissued and
transferred if such shares have been reacquired and have
treasury status, to any person, firm, corporation, trust,
partnership, association or other entity for such lawful
consideration and on such terms as the Board of Directors
determines in its discretion without first offering the
shares to any such holder.
D. The Board of Directors of the Corporation may, by
adoption of a resolution or Bylaw, impose restrictions upon
the transferability by shareholders of shares of the
Corporation's capital stock.
E. No shares of the Corporation's capital stock shall
have any conversion or exchange rights or privileges or have
cumulative voting rights.
F. Except as otherwise required under the 1940 Act,
voting power for the election of directors and for all other
purposes shall be vested exclusively in the holders of the
Common Stock. Each holder of a full or fractional share of
Common Stock shall be entitled, in the case of full shares,
to one vote for each such share and, in the case of
fractional shares, to a fraction of one vote corresponding to
the fractional amount of each such fractional share, in each
case based upon the number of shares registered in such
holder's name on the books of the Corporation.
G. The assets so distributed to the stockholders shall
be distributed among such stockholders, in cash or in kind at
the option of the directors, in proportion to the number of
full and fractional shares of Common Stock held by them and
recorded on the books of the Corporation.
<PAGE> 28
H. Each holder of shares of capital stock shall, upon
demand, disclose to the Corporation such information with
respect to direct or indirect holdings of such shares as the
directors or any officer or agent of the Corporation
designated by the directors deem necessary to comply with
provisions of the Internal Revenue Code of 1986 applicable to
the Corporation, to comply with requirements of any other
appropriate taxing authority, or to comply with the
provisions of the 1940 Act or of the Employee Retirement
Income Security Act of 1974, as any of said laws may be
amended from time to time.
NINTH: Stockholder Liability. The stockholders shall not be
liable to any extent for the payment of any debt of the
Corporation.
TENTH: Majority of Votes. Except as otherwise provided in
these Articles, under the 1940 Act, or under any provision of
Maryland law requiring approval by a greater proportion than
a majority of the votes entitled to be cast in order to take
or authorize any action, any action may be taken or
authorized by the Corporation upon the affirmative vote of a
majority of the votes entitled to be cast thereon.
ELEVENTH: Special Voting Requirements: Control Shares.
A. The Corporation shall not be governed by the
provisions of Section 3-602 of the Maryland General
Corporation Law.
B. Any acquisition of shares of the stock of the
Corporation, by any person and at any time, shall be
generally exempted from the requirements of subtitle 7 of
Title 3 of the Maryland General Corporation Law.
TWELFTH: Limitation on Liability.
A. To the maximum extent permitted by the laws of
Maryland law (but not in violation of any applicable
requirement or limitation of the 1940 Act), in each case as
currently in effect or as may hereafter be amended:
1. No director or officer of the Corporation shall be
liable to the Corporation or its stockholders for
money damages; and
THIRTEENTH: Right of Amendment. Any provision of these
Articles may be amended, altered, or repealed upon the
affirmative vote of a two-thirds of all the votes entitled to
be cast on the matter.
The following portions of the Fund's By-laws filed as exhibit 2(b) hereto,
define the rights of shareholders:
<PAGE> 29
ARTICLE II
SHAREHOLDERS
Section 1. Annual Meetings. It will not be the policy of the
corporation to have an annual meeting unless required by the
holders of 10% of outstanding voting securities or scheduled by
the Board of Directors. If required, the annual meeting of
shareholders shall be held during the month of March, at which
they shall elect a Board of Directors and transact such other
business as may be required by law or these bylaws or as may
properly come before the meeting.
Section 2. Special Meetings. Special meetings of shareholders
may be called at any time by the Chairman of the Board, or
President, or by a majority of the Board of Directors, and
shall be held at such time and place as may be stated in the
notice of the meeting.
Special meetings of the shareholders may be called by the
Secretary upon the written request of the holders of shares
entitled to vote not less than twenty-five percent of all the
votes entitled to be cast at such of meeting, prov ided that
(1) such request shall stated the purposes such meeting and the
matters proposed to be acted on, an (2) the ration shareholders
requesting such meeting shall have paid to the Corporation the
reasonably estimated cost of preparing and mailing the notice
thereof, which the Secretary shall determine and specify to
such shareholders. No special meeting shall be called upon the
request a of shareholders to consider any matter which is
substantially the same as matter voted upon at any special
meeting of the shareholders held during the preceding twelve
months, unless requested by the holders of a majority of all
shares entitled to be voted at such meeting.
Section 3. Notice of Meetings. The Secretary shall cause notice
of the place, date, and hour, and, in the case of a special
meeting, the purpose or purposes for which the meeting is
called, to be mailed, postage prepaid not less than ten nor
more than ninety days before the date of the meeting to each
shareholder entitled to vote at such meeting at his or her
address as it appears on the records of the Corporation at the
time of such mailing. Notice shall be deemed to be given when
deposited in the Unite States mail addressed to the
shareholders as aforesaid. Notice of any shareholders' meeting
need not be given to any shareholder who shall sign a written
waiver of such notice whether before or after the time of such
meeting, or to any shareholder who is present at such meeting
in person or by proxy. Notice of adjournment of a shareholders'
meeting to another time or place need not be given if such time
and place are announced at the meeting. Irregularities in the
notice of any meeting to, or the nonreceipt of any such notice
by, any of the shareholders shall not invalidate any action
otherwise properly taken by or at any such meeting.
<PAGE> 30
Section 4. Quorum and Adjournment of Meetings. The presence at
any , of shareholders' meeting, in person, by telephone
conference, or by proxy of shareholders entitled to cast a
majority of the votes shall be necessand the sufficient to
constitute a quorum for the transaction of business. In ote
absence of a quorum, the holders of a majority of shares
entitled to vote at the meeting and present in person or by
proxy, or, if no shareholder entitled to vote is present in
person or by proxy, any officer present entitled preside or act
as secretary of such meeting may adjourn the meeting without
determining the date of the new meeting or from time to time
without further notice to a date not more than 120 days after
the original record date. Any business that might have been
transacted at the meeting originally called may be transacted
at any such adjourned meeting at which a quorum is present.
Section 5. Voting. Except as otherwise provided in the Articles
of Incorporation or by applicable law, at each shareholders'
meeting each he shareholder shall be entitled to one vote for
each share of stock of t r naCorporation validly issued and
outstanding and registered in his or heme on th the books of
the Corporation on the record date fixed in accordance wi by
Section 5 of Article VI hereof, either in person or by proxy
appointed y instrument in writing subscribed by such
shareholder or his or her dul authorized attorney, except that
no shares held by the Corporation shall be entitled to a vote.
Except as otherwise provided in the Articles of Incorporation,
these Bylaws, as required by provisions of the Investment
Company Act of 1940, as amended ("1940 Act") or as required
under Maryland law, all matters shall be decided by a vote of
the majority of the votes validly cast. The vote upon any
question shall be by ballot whenever requested by any person
entitled to vote, but, unless such a request is made, voting
may be conducted in any way approved at the meeting.
At any meeting at which there is an election of Directors, the
Chairman of the meeting may, and upon the request of the
holders of ten percent of the stock entitled to vote at such
election shall, appoint two inspectors of election who shall
first subscribe an oath or affirmation to execute faithfully
the duties of inspectors at such election with strict
impartiality and according to the best of their ability, and
shall, after the election, make a certificate of the result of
the vote taken. No candidate for the office of Director shall
be appointed as an inspector.
Section 6. Validity of Proxies. The right to vote by proxy
shall exist only if the instrument authorizing such proxy to
act shall have been signed by the shareholder or by his or her
duly authorized attorney. Unless a proxy provides otherwise, it
shall not be valid more than eleven months after its date. All
proxies shall be delivered to the Secretary of the Corporation
or to the person
<PAGE> 31
acting as Secretary of the meeting before being voted, who
shall decide all questions concerning qualification of voters,
the validity of proxies, and the acceptance or rejection of
votes. If inspectors of election have been appointed by the
Chairman of the meeting, such inspectors shall decide all such
questions. A proxy with respect to stock held in the name of
two or more persons shall be valid if executed by one of them
unless at or prior to exercise of such proxy the Corporation
receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a
shareholder shall be deemed valid unless challenged at or prior
to its exercise.
Section 7. Stock Ledger and List of Shareholders. It shall be
the duty of the Secretary or Assistant Secretary of the
Corporation to cause an original or duplicate stock ledger to
be maintained at the office of the Corporation's transfer
agent. Such stock ledger may be in written form or any other
form capable of being converted into written form within a
reasonable time for visual inspection.
Any one or more persons, each of whom has been a shareholder of
record of the Corporation for more than six months next
preceding such request, who owns in the aggregate five percent
or more of the outstanding capital stock of the Corporation,
may submit (unless the Corporation at the time of the request
maintains a duplicate stock ledger at its principal office in
Maryland) a written request to any officer of the Corporation
or its resident agent in Maryland for a list of the
shareholders of the Corporation. Within twenty days after such
a request, there shall be prepared and filed at the
Corporation's principal office in Maryland a list containing
the names and addresses of all shareholders of the Corporation
and the number of shares of each class held by each
shareholder, certified as correct by an officer of the
Corporation, by its stock transfer agent, or by its registrar.
Section 8. Action Without Meeting. Any action required or
permitted to be taken by shareholders at a meeting of
shareholders may be taken without a meeting if (1) all
shareholders entitled to vote on the matter sign a written
consent to the action, (2) all shareholders entitled to notice
of the meeting but not entitled to vote at it sign a written
waiver of any right to dissent, and (3) the consents and
waivers are filed with the records of the meetings of
shareholders. Such consent shall be treated for all purposes as
a vote at the meeting.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates of Stock. The interest of each
shareholder of the Corporation may be evidenced by certificates
for shares of stock in such form as the Board of Directors may
from time to time authorize; provided, however,
<PAGE> 32
the Board of Directors may, in its discretion, authorize the
issuance of non-certificated shares. No certificate shall be
valid unless it is signed by the Chairman, Vice Chairman,
President, or a Vice President and countersigne by the
Secretary or an Assistant Secretary, or the Treasurer or an
Assistant Treasurer of the Corporation and sealed with the seal
of the Corporation, or bears the facsimile signatures of such
officers and a facsimile of such seal In case any officer who
shall have signed any such certificate, or whose facsimile
signature has been placed thereon, shall cease to be such an
officer (because of death, resignation, or otherwise) before
such certificate is issued, such certificate may be issued and
delivered by the Corporation with the same effect as if he or
she were such officer at the date of issue.
In the event that the Board of Directors authorizes the issuance
of non-certificated shares of stock, the Board of Directors may,
in its discretion, and, at any time, discontinue the issuance of
share certificates and may, by written notice to the registered
owners of each certificated share, require the surrender of
share certificates to the Corporation for cancellation. Such
surrender and cancellation shall not affect the ownership of
shares of the Corporation.
Section 2. Transfer of Shares. Subject to the provisions of the
next sentence of this Section 2 of Article VI, Shares of the
Corporation shall be transferable on the books of the
Corporation by the holder of record thereof in person or by his
or her duly authorized attorney or legal representative (i)
upon surrender and cancellation of any certificate or
certificates for the same number of shares of the same class,
duly endorsed or accompanied by proper instruments of
assignment and transfer, with such proof of the authenticity of
the signature as the Corporation or its agents may reasonably
require, or (ii) as otherwise prescribed by the Board of
Directors. The Board of Directors may, from time to time, adopt
limitations and rules and regulations with reference to the
transfer of the shares of stock of the Corporation to comply
with the requirements of the Securities Act of 1933, as
amended, or other applicable laws. The Corporation shall be
entitled to treat the holder of record of any share of stock as
the absolute owner thereof for all purposes, and accordingly
shall not be bound to recognize any legal, equitable, or other
claim or interest in such share on the part of any other
person, whether or not it shall have express or other notice
thereof, except as otherwise expressly provided by law or the
statutes of the State of Maryland.
Section 5. Fixing of Record Date. The Board of Directors may
fix in advance a date as a record date for the determination of
the shareholders entitled to notice of or to vote at any
shareholders' meeting or any adjournment thereof, or to express
consent to corporate action in writing without a meeting, or to
receive payment of any dividend or other distribution or
allotment of any rights, or to exercise any rights in respect
of any change, conversion, or exchange of stock, or for the
purpose of any other lawful action, provided that
<PAGE> 33
(1) such record date shall be within ninety days prior to the
date on which the particular action requiring such
determination will be taken, (2) the transfer books shall not
be closed for a period longer than twenty days, and (3) in the
case of a meeting of shareholders, the record date shall be at
least ten days before the date of the meeting.
Section 6. Lost, Stolen or Destroyed Certificates. Before
issuing a new certificate for stock of the Corporation alleged
to have been lost, stolen, or destroyed, the Board of Directors
or any officer authorized by the Board may, in their
discretion, require the owner of the lost, stolen, or destroyed
certificate (or his or her legal representative) to give the
Corporation a bond or other indemnity, in such form and in such
amount as the Board or any such officer may direct and with
such surety or sureties as may be satisfactory to the Board or
any such officer, sufficient to indemnify the Corporation
against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or
the issuance of such new certificate.
ARTICLE X
AMENDMENTS
Section 2. By Shareholders Only. No amendment of any section of
these Bylaws shall be made except by the at shareholders of the
Corporation if the Bylaws provide th such section may not be
amended, altered, or repealed any except by the shareholders.
From and after the issue of shares of the capital stock of the
Corporation, no be amendment, alteration, or repeal of this
Article X shall made except by the affirmative vote of the
holders of either: (a) more than two-thirds of the
Corporation's outstanding shares present at a meeting at which
the holders of more than fifty percent of the outstanding
shares are present in person or by proxy, or (b) more than
fifty percent of the Corporation's outstanding shares.
(e) None.
(f) None.
(g) None.
(h) Not Applicable.
(i) None.
(j) Custodian Agreement between CN Loan Fund, Inc. and City
National Bank dated as of April 11, 2000 is filed herewith.
<PAGE> 34
(k) Fund Accounting Agreement between CN Loan Fund, Inc. and City
National Bank dated as of April 11, 2000 is filed herewith.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Purchase Agreement between CN Loan Fund, Inc. and Heng Chen
dated as of April 11, 2000 is filed herewith.
(q) None.
(r) Code of Ethics of CN Loan Fund, Inc. dated as of April 11, 2000
is filed herewith.
Item 25. Marketing Arrangements
None.
Item 26. Other Expenses of Issuance and Distribution
None.
Item 27. Persons Controlled by or Under Common Control with Registrant
The Fund does not control any person.
Item 28. Number of Holders of Securities of the Fund
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Stock 1
Item 29. Indemnification
</TABLE>
The corporation law of the State of Maryland, under which the Fund is
incorporated, permits the articles of incorporation of a Maryland corporation
to include a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages, subject to specified
restrictions. The law does not, however, allow the liability of directors and
officers to the corporation or its stockholders to be limited to the extent
that (1) it is proved that the person actually received an improper benefit or
profit or (2) a judgment or other final adjudication is entered in a proceeding
based on a finding that the person's action,
<PAGE> 35
or failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the process. The Articles of
Incorporation of the Fund contain a provision limiting the liability of the
directors and officers of the Fund and its Shareholders to the fullest extent
permitted from time to time by the laws of Maryland (but not in violation of
the 1940 Act). The Maryland corporation law also permits a corporation to
indemnify its directors, officers and agents, among others, against judgments,
penalties, fines, settlements, and reasonable expenses actually incurred by
them in connection with any proceeding to which they may be made a party by
reason of their service in those or other capacities unless it is established
that the act or omissions of the party seeking to be indemnified was material
to the matter giving rise to the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty, or the party actually
received an improper personal benefit, or, in the case of any criminal
proceeding, the party had reasonable cause to believe that the act or omission
was unlawful.
The Fund's Articles of Incorporation and Bylaws require the Fund to
indemnify its directors, officers and agents (including the Manager) to the
fullest extent permitted from time to time by the laws of Maryland, subject to
the limitations on indemnification under the 1940 Act. The Fund's Bylaws
provide that the Fund may purchase and maintain insurance on behalf of any
person who is or was a director, officer, or agent of the Fund against any
liability asserted against that person and incurred by that person in or
arising out of his or her position, whether or not the Fund would have the
power to indemnify him or her against such liability; provided that no such
insurance purchased will protect or purport to protect any officer or director
against liabilities for willful misfeasance, bad faith, gross negligence, or
reckless disregard of duty.
Item 30. Business and Other Connections of Investment Adviser
See Item 9 - Management.
Item 31. Location of Accounts and Records
<TABLE>
<S> <C>
(1) City National Bank, City National Center, 400 North Roxbury
Drive, Beverly Hills, California 90210 (records relating to
management of the Fund and to City National Bank's function as
custodian and transfer agent)
(2) Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite
800 East, Washington, DC 20005 (the Registrant's Articles of
Incorporation, By-laws and Minute Books)
</TABLE>
Item 32. Management Services
None.
Item 33. Undertakings
Not Applicable.
<PAGE> 36
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Washington, DC on the 10th day of July, 2000.
CN Loan Fund, Inc.
By: /s/ Russell Goldsmith
----------------------------
Russell Goldsmith
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Russell Goldsmith
----------------------- July 10, 2000
Russell Goldsmith President and Director
/s/ Frank P. Pekny
----------------------- July 10, 2000
Frank P. Pekny Chief Financial Officer
and Director
/s/ Marshall Ezralow
-------------------- July 10, 2000
Marshall Ezralow Director
/s/ Sandy Singer
---------------- July 10, 2000
Sandy Singer Director
</TABLE>
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
(2)(a) Articles of Incorporation of CN Loan Fund, Inc. filed on April
5, 2000.
(2)(b) Bylaws of CN Loan Fund, Inc. dated as of April 11, 2000.
(2)(j) Custodian Agreement between CN Loan Fund, Inc. and City
National Bank dates as of April 11, 2000.
(2)(k) Fund Accounting Agreement between CN Loan Fund, Inc. and City
National Bank dated as of April 11, 2000.
(2)(p) Purchase Agreement between CN Loan Fund, Inc. and Heng Chen
dated as of April 11, 2000.
(2)(r) Code of Ethics of CN Loan Fund, Inc. dated as of April 11,
2000.
</TABLE>
