TARGET INCOME FUND, INC.
26691 Plaza Drive, Suite 222, Mission Viejo, California 92691
The investment objectives of the Target Income Fund, Inc. (the
"Fund" ) are to seek as high a level of current income as is consistent with
preservation of capital by investing primarily in variable rate collateralized
small business loans and variable rate asset-backed securities. The Fund is a
continuously offered closed-end, non-diversified management investment company.
Shares of the Fund involve investment risks, including
fluctuations in value and the possible loss of investment principal. The Fund
attempts to minimize fluctuations in its net asset value due to changes in
interest rates by investing primarily in variable rate loans and asset-backed
securities. The Fund is not a money market fund and the Fund shares are not
deposits or obligations of, or guaranteed by, any bank or other depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency. An
investment in shares of the Fund does not constitute a complete investment
program. See "Investment Objective and Policies."
Shares of the Fund are offered continuously at a price equal to
their net asset value plus a sales charge of up to 3.00% of the public offering
price of the shares purchased. See "Purchase of Shares."
The Fund has a policy of making quarterly repurchase offers for
a specified percentage (currently 5%) of the Fund's outstanding shares at net
asset value to provide shareholder liquidity. No market presently exists for the
Fund's shares, and it is not anticipated that a secondary market will develop.
See "Repurchase Offers".
This Prospectus sets forth concisely information about the
Fund that a prospective investor ought to know before investing. Investors are
advised to read this Prospectus carefully and retain it for future reference. A
Statement of Additional Information dated September 27, 1996 containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is available without charge upon request to the Fund at
the above address or by telephone (800) 385-7003. The Statement of Additional
Information is incorporated by reference in its entirety into this Prospectus,
and its table of contents appears on page 14 of this Prospectus.
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.
Price to Sales Proceeds to
Public(1) Charge(1) Fund(2)
--------- --------- -------
Per Share $10.31 $0.31 $10.00
Total $25,750,000 $750,000 $25,000,000
(1) The shares are offered on a best efforts basis at a price
equal to net asset value, which as of the date of this prospectus is $10.00 per
share, plus a sales charge of up to 3.00% of the public offering price.
(2) These amounts (i) do not take into account organizational
expenses of the Fund in the amount of $63,000, which are being amortized over a
five year period and charged as expenses against the income of the Fund, and
(ii) assume all shares currently registered are sold pursuant to a continuous
offering.
The date of this Prospectus is September 27, 1996.
<PAGE>
FEE TABLE
Shareholder Transaction Expenses
Sales Charge (as a percentage of offering price).........3.00%
Annual Expenses (as a percentage of net assets)
Management Fees..........................................0.75%
Shareholder Servicing Expenses...........................0.25%
Administration Fees......................................0.25%
Other Operating Expenses.................................1.25%
-----
Total Annual Expenses ................................. 2.50%*
======
Example
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
An Investor in the Fund would pay the following expenses 1 year 3 years 5 years 10 years
on a $1,000 investment, assuming a 5% annual return $55 $106 $159 $305
</TABLE>
The purpose of this table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear, whether directly or indirectly. The example should not be considered a
representation of past or future expenses, and the Fund's actual expenses may be
more or less than those shown.
*The Advisor of the Fund has agreed to reduce its fees to ensure that the
expenses for the Fund will not exceed the limits set by applicable state
regulations, currently 2.5% of net assets. To the extent the Advisor reduces its
fees due to the expense limitation, the Fund will reimburse the Advisor when
operating expenses (before reimbursement) for the Fund are less than the
applicable percentage limitation. The Fund has also agreed to reimburse Concord
Growth Corporation ("CGC") for expenses paid by CGC in prior years on behalf of
the Fund and is making payments which are included within the Fund's expense
limitation of 2.5% of net assets. In subsequent years, overall operating
expenses will not fall below the applicable percentage limitation until the
Advisor has been fully reimbursed for fees forgone and CGC has been fully
reimbursed.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The following information for a share outstanding throughout
the period has been derived from the audited financial statements of the Fund
for the period November 24, 1992 (commencement of operations) through October
31, 1995 and for the unaudited period ending April 30, 1996. This information
should be read in conjunction with the financial statements and accompanying
notes which are incorporated by reference in the Statement of Additional
Information. More detailed information concerning the Fund's performance,
including audited financial statements, is available in the Fund's Annual Report
dated October 31, 1995 and Semi-Annual Report dated April 30, 1996.
<TABLE>
<CAPTION>
Six Months Year Ended Year Ended For the period from
Ended October 31, October 31, November 24, 1992*
April 30, 1996++ 1995 1994 to October 31, 1993
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<S> <C> <C> <C> <C>
Net asset value, beginning of period............. $10.00 $10.00 $10.00 $10.00
Income from Investment operations:
Net Investment Income.......................... 0.34 0.76 0.76 0.68
Total From Investment Operations............... 0.34 0.76 0.75 0.68
Less Distributions..........................
Distributions From Net Investment
Income.................................. (0.34) (0.76) (0.75) (0.68)
Total Distributions .............................. (0.34) (0.76) (0.75) (0.68)
------ ------ ------ ------
Net Asset Value, End of Period.................... $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Total Return (a).................................. 7.1%+ 7.7% 7.7% 7.0%+
Net Assets, End of Period (000's)................. $11,111 $10,793 $10,465 $6,288
Ratio of Expenses to Average Net Assets........... 2.5%(1)+ 2.5%(1) 2.5%(1) 2.5%(1)+
Ratio of Net Investment Income
to Average Net Assets ......................... 7.0%(1)+ 7.6%(1) 7.5%(1) 7.7%(1)+
</TABLE>
(a) Exclusive of deduction of a sales charge on investments.
(1) Prior to reimbursement and waiver of expenses, the annualized ratio of
expenses to average net assets was 2.5%, 2.8%, 2.9% and 4.4%, respectively, and
the annualized ratio of net investment income to average net assets was 7.0%,
7.3%, 6.9% and 3.1%, respectively. * Commencement of operations
.+ Annualized.
++ Unaudited
See accompanying notes to financial statements
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund is a continuously offered closed-end, non-diversified
management investment company that seeks as high a level of current income as is
consistent with preservation of capital by investing primarily in variable rate
collateralized small business loans (the "Loans") and variable rate asset-backed
securities.
Investment Policies
The Fund attempts to meet its objectives by investing primarily in
variable rate, fully-secured small business Loans and variable rate,
asset-backed securities. This policy is designed to minimize fluctuations in the
Fund's net asset value in response to changes in interest rates. Under normal
market conditions, the Fund will invest at least 80% of its total assets in
direct investments and participation interests ("Participations") in variable
rate Loans and asset- backed securities.
The small business Loans in which the Fund invests are typically made
to small to medium size, U.S. companies or their affiliates ("Borrowers"), have
floating interest rates and are senior and fully secured at the time the Loan is
made. The Loans typically have short-term maturities of six to 12 months and
meet business and credit quality criteria established by the lenders. The
primary consideration in the Advisor's selection of Loans for direct investment
or the acquisition of a Participation by the Fund is the asset quality and
creditworthiness of the Borrower on an individual Loan.
The Fund's investments in Loans have been concentrated in
Participations. When the Fund purchases a Participation, the Fund enters into a
contractual relationship with the loan originator (the "Lender") selling the
Participation, but not with the Borrower. The Participation gives the Fund the
right to receive a fractional undivided interest in the principal and interest
payments on the Loan, at an interest rate negotiated with the Lender. The
interest income on the Participation above the negotiated rate to the Fund is
retained by the Lender as compensation for its services in originating,
servicing and administering the Loan. See "Risk Factors -- Credit Risks
Associated with Participations", for a discussion of the risks associated with
Participations.
By investing in asset-backed securities, the Fund expects to achieve a
much greater diversity of investments and have access to a greater range of
investment opportunities. Small business and consumer finance lenders are
increasingly utilizing the issuance of asset-backed securities, rather than
selling participation interests in Loans to third-parties such as the Fund.
The asset-backed securities are in the form of certificates
representing interests in, or notes secured by, segregated pools of assets such
as small business loans, automobile loans and leases, and equipment leases (but
may not include perfected security interests in the actual physical assets),
credit card receivables, mortgage loans, trade receivables and other forms of
consumer and commercial-purpose loans, which may be secured or unsecured (the
"Receivables"). The asset-backed securities in which the Fund invests may be
unrated and subordinated, although fully secured, to senior classes of other
securities representing interests in the same pool of Receivables. The Fund will
only invest in subordinated asset-backed securities of an issuer where the
senior classes of securities of the same issuer are rated at least investment
grade or better by a nationally recognized rating agency. However, in most
cases, the subordinated securities in which the Fund invests may not be rated.
Although junior in right of payment to senior classes of securities of the same
issuer, the subordinated asset-backed securities are secured by the underlying
Receivables and may be supported by a cash reserve fund established by the
issuer and other forms of credit enhancement. The Advisor does not perform a
credit analysis for each asset in the pool, but relies on the credit criteria
established for the pool by the issuer to meet the eligibility requirements of
the rating services. Management of the Fund believes the Fund's investments in
subordinated securities provides the Fund with an opportunity to obtain a higher
yield than can be obtained on the senior securities, while still maintaining a
secured interest in the underlying collateral. The Advisor's decision to
diversify the Fund's portfolio by investing in asset-backed securities is based
in part on the ratings of the senior securities and overall credit quality of
the Receivables collateralizing the securities.
The asset-backed securities are issued for varying terms depending on
the nature of the underlying Receivables. Interest is generally payable on a
monthly, quarterly or semi-annual basis. Principal is generally payable on an
amortization schedule which will reflect subordination to senior classes of
securities and may include a balloon payment over the final year of the stated
maturity of the security.
The Advisor performs its own credit analysis of the individual
Borrower in the case of direct investments in Loans and Loan Participations. In
addition, the Advisor may use any available information that may be supplied by
the Lending
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<PAGE>
Agents, co-lenders or other participants involved in the Loans. The Fund does
not concentrate in Loans to companies in any specific industry. The Borrowers
are typically manufacturing, distribution and service firms in such fields as
industrial equipment, electronics, business machines and business services.
When the Fund purchases a Participation, the Lender selling the
Participation is interpositioned between the Fund and the Borrower. Accordingly,
the Fund has established procedures to minimize the credit risk of the Lender
under the Participation that are intended to insulate the Fund's investments in
Participations from a possible bankruptcy or failure of the Lender. The Fund has
established lock box and trust account collection procedures for all
Participations which provide that all payments of principal and interest on the
Loans are made directly to a Fund trust or collection account. The Lender is
required to obtain the Fund's consent before amending or waiving any of its
rights under the financing documents with the Borrower, or releasing any Loan
collateral, waiving any payment event of default by the Borrower, or making any
assignment or pledge of the Lender's rights under the financing documents. The
Lender may also be required to maintain a minimum ownership interest in the Loan
and may be required to set up a reserve account from all revenues received on
the Loan of up to a designated percentage of the principal amount of the Loan,
as a reserve against any losses to the Fund on the Loan. The Fund has the right,
at its election, to assume and enforce all of the Lender's right to administer,
manage, perform and enforce the terms of the Loan against the Borrower in the
event of a bankruptcy or failure of the Lender, or a breach of its duties under
the Participation. The Fund believes that these procedures will significantly
reduce the credit risk of a Lender in a Participation.
The Fund has established eligibility criteria for Lenders from whom it
will purchase Participations or with whom it will invest as a co-lender. These
criteria include demonstrated experience in originating and administering small
business commercial loans, satisfactory business and credit history, experienced
personnel, and minimum capital standards.
The rate of interest payable on Loans is established as the sum of a
base lending rate plus a specified spread. These base lending rates are
generally the Prime Rate of a designated U.S. bank, the London InterBank Offered
Rate ("LIBOR"), the Certificate of Deposit ("CD") rate of a designated U.S. bank
or another base lending rate used by commercial lenders. The interest rates on
Prime Rate-based, LIBOR-based and CD-based Loans are periodically reset with
reset periods typically ranging from 30 days to three months. Due to the
periodic reset periods, there may be a differential between the interest rate on
the Loans in the portfolio and current market interest rates. The Fund attempts
to maintain a portfolio that has a dollar weighted average period to the next
interest rate readjustment of approximately 90 days or less. The Fund is not a
money market fund. See "Investment Objective and Policies" and "Yield
Information" in the Statement of Additional Information, and "Risk Factors"
below for additional discussion of the characteristics of the Loans.
Up to 20% of the Fund's total assets may be held in cash or invested
in investment grade short-term debt obligations which may not be secured.
Other Investment Policies
The Fund has adopted certain other polices as summarized below and
described in more detail under "Other Investment Policies" in the Statement of
Additional Information.
Leverage. The Fund may from time to time borrow money on a secured or
unsecured basis at variable or fixed rates in any amounts up to 33 1/3% of the
Fund's total assets (after giving effect to the amount borrowed). The borrowings
may be for the purpose of providing additional cash to purchase additional
asset-backed securities and Loans or to provide funds to finance the purchase of
shares pursuant to Repurchase Offers. The Fund would be limited in its
borrowings to 33 1/3% of net assets. See "Risk Factors -- Borrowings".
The Fund has entered into a revolving credit facility with Deutsche
Bank AG, New York Branch, dated March 29, 1996, pursuant to which the bank has
agreed to provide a credit facility in the maximum amount of $3 million to the
Fund. The amount that may be borrowed at any time under the facility is limited
to 33 1/3% of the Fund's total assets. The facility will expire on March 27,
1997, unless extended by its terms. As of the date of this Prospectus, the
Fund's borrowings under the credit facility totalled $925,000. See "Repurchase
Offers" in the Statement of Additional Information."
Repurchase Agreements. The Fund may enter into repurchase agreements
with commercial banks or broker-dealers as a temporary investment of surplus
funds. The Fund has not previously entered into any repurchase agreements but
reserves the right to do so in the future without further notice to
shareholders.
The investment objectives and policies stated above are not
fundamental and may be changed by the Board of Directors without shareholder
approval. The investment restrictions of the Fund described under the caption
"Investment Restrictions" in the Statement of Additional Information and the
Fund's policy of making periodic repurchase offers for its shares (see
"Repurchase Offers") are all fundamental policies of
4
<PAGE>
the Fund which may not be changed without shareholder approval.
Risk Factors
Interest Rate Changes. The securities in which the Fund invests are
subject to the risk of changes in interest rates. When prevailing interest rates
rise, the value of such securities and the Fund's net asset value may decline.
Also, the Fund's net asset value may be affected by changes in the credit
standing of asset-backed securities and of the Borrowers under the Loans.
Non-Diversified Status. The Fund has registered as a "non-diversified"
investment company. As a non-diversified investment company, the Fund may not
purchase the securities of any one issuer if, as a result of such purchase, more
than 5% of the Fund's total assets would be invested in the securities of such
issuer at the end of any fiscal quarter, except that with respect to 50% of the
Fund's assets, the Fund may invest up to 25% of its assets in the obligations of
any one issuer, which could be a single Loan or asset- backed security that is
not rated by any nationally recognized rating service. Since the Fund may invest
a relatively high percentage of its assets in the obligations of a limited
number of issuers, and with a limited number of co-lenders or other
intermediaries between the Fund and the Borrower, the value of the Fund's
investments may be more affected by any single adverse economic, political or
regulatory occurrence affecting such issuers or co-lenders than would the value
of the investments of a diversified investment company.
Dependence on CGC for Loan Originations and Master Servicing. As of June 30,
1996, all of the Loan participations held by the Fund have been originated as
small business loans through Concord Growth Corporation ("CGC"), a commercial
finance services firm located in Palo Alto, California. A majority of the
borrowers on the Loans have their operations based in California and therefore
may be susceptible to changes in the general California business economy. The
Fund has established lock box and trust account collection procedures to provide
that all payments on the Participations held by the Fund are made directly to
the Fund account rather than passed through the lender, and therefore are
intended to insulate the Fund's portfolio securities from a possible bankruptcy
or failure of CGC or any other Lender. While the Fund is attempting to expand
its base of loan originators, it is still dependent on CGC for the origination
of Loans for the Fund portfolio and would have difficulty finding new Loans
meeting its current investment criteria if CGC discontinued doing business with
the Fund.
CGC has also been appointed the Master Servicer for the Fund to act as
a Lending Agent, at no charge or expense to the Fund. As Master Servicer, CGC
services the Loans originated by it and performs due diligence and
administrative services and monitors the Fund's direct investment in Loans and
Participations originated by other Lenders for review by the Advisor.
Lack of Market for Fund Shares. No market presently exists for the
Fund's shares, and it is not anticipated that a secondary market will develop.
However, if a secondary market develops for the Fund's shares, it is possible
that shares would not trade at a premium to net asset value because the Fund is
offering its shares on a continuous basis. Conversely, because the Fund
primarily invests in short-term variable rate Loans and variable-rate
asset-backed securities and it has a fundamental policy that requires it to make
quarterly repurchase offers at net asset value, the Fund's shares are unlikely
to trade at a discount. However, there can be no assurance that the Fund's
shares will trade at a price which equals or approximates net asset value.
Illiquidity. Most of the securities in which the Fund invests are not
readily marketable. The asset-backed securities are generally privately placed
and are not registered for sale under Federal or State securities laws. The
Loans in which the Fund invests typically have short-term maturities and provide
for relatively rapid access to collateral, however they also are privately
placed and do not have the liquidity of conventional debt securities traded in
the secondary market. Also, the Fund's ability to dispose of a Loan may be
influenced by a perceived or actual decline in the creditworthiness of a
particular Borrower or Borrowers, or by events that reduce the level of interest
in the market for Loans.
Borrowings. The Fund is authorized to borrow money from time on a
secured or unsecured basis at variable or fixed rates in any amounts up to 33
1/3% of the Fund's total assets (after giving effect to the amount borrowed).
The rights of any lenders to the Fund to receive payments of interest on and
repayments of principal of such borrowings will be senior to those of the
holders of the Fund's common stock, and the terms of any such borrowing may
contain provisions which limit certain activities of the Fund, including the
payment of dividends to holders of common stock in certain circumstances.
Further, the terms of any such borrowings may, and the provisions of the
Investment Company Act of 1940 (the "1940 Act") do (in certain circumstances),
grant lenders certain voting rights in the event of default in the payment of
interest or repayment of principal. In the event such provisions would impair
the Fund's status as a regulated investment company, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings. Interest payments
5
<PAGE>
and fees incurred in connection with any such borrowings will reduce the amount
of net income available for payment to the holders of common stock. See "Other
Investment Policies -- Leverage" for a description of the Fund's $3 million
revolving credit facility in effect at the date of this Prospectus.
Risk Related to Loans
Financial Condition of Borrowers; Collateral. The securities in which
the Fund invests are subject to a risk of nonpayment of scheduled interest or
principal payments. A nonpayment by a Borrower would reduce both the amount of
the Fund's income and the value of its assets. The Fund's ability to receive
interest and principal payments depends primarily on the financial condition of
the Borrowers and their assets and, in the case of Loans and Participations, on
the creditworthiness of any institution that is interposed between the Fund and
the Borrower. The Loans in which the Fund invests directly or through
Participations are senior, fully secured debt obligations of Borrowers that are
believed by the Fund's Advisor to have adequate assets and/or cash flow to pay
scheduled interest and principal and that meet the Advisor's other credit
standards. However, the Loans are not rated and may be subject to a higher risk
of default than rated loans or the asset-backed securities, which represent
interests in pools of assets. The Loans are secured by collateral which the
Advisor believes to have a market value, at the time of acquiring the Loan, that
will exceed the principal amount of the Loan. Assets which may serve as
collateral include, but are not limited to, accounts receivable, inventory,
equipment, real property, personal guaranties of principals, patents and general
intangibles, certificates of deposit and letters of credit. Accounts receivable
are expected to be the primary form of collateral. The Advisor believes that
accounts receivable are the most liquid collateral and can be readily monitored.
Although the Advisor will use due care in its continuing credit analysis, there
can be no assurance that such analysis will be able to detect misrepresentations
or fraud on the part of Borrowers. There also can be no assurance that the
liquidation of collateral underlying a Loan would satisfy the Borrower's
obligation in the event of nonpayment of scheduled interest or principal, or
that the collateral could be readily liquidated.
Concentration of Investments, Loans. A majority of the Borrowers on
the Loans have their principal place of business in California and the Fund's
investments are expected to continue to be concentrated in California
businesses. Adverse economic conditions or other factors particularly affecting
California could increase the risk of loss on the securities.
Absence of Ratings on Loans. The Loans in which the Fund invests are
not currently rated by any nationally recognized rating service, because the
firms issuing the Loans are primarily small to medium size private businesses.
Accordingly, the Fund is more dependent on the Advisor's credit analysis and
that of co-lenders and Lending Agents or other intermediaries than would be the
case with loans of larger, more established companies whose debt securities may
be rated by a nationally recognized rating service. Although the Advisor will
evaluate the asset quality and consequent creditworthiness of Borrowers, there
can be no assurance that such analysis will disclose all factors which may
impair the value of the Loans.
Loans Issued by Smaller Companies. The companies issuing Loans in
which the Fund invests typically will have annual revenues of between $1 million
and $25 million. Equity capitalization of such companies may be minimal and
normally will not exceed $250,000. Small to medium sized firms may be more
dependent upon key personnel, have more limited product lines and generally have
more limited financing resources. Such companies may be more vulnerable to
general economic conditions and may be more likely to experience financial
difficulties or insolvency or bankruptcy.
Credit Risks Associated with Investments in Participations. When the
Fund purchases a Participation, the Fund enters into a contractual relationship
with the Lender selling the Participation, but not with the Borrower. Since the
Lender is interpositioned between the Fund and the Borrower, the Fund may incur
some credit risk of the Lender selling the Participation, in addition to the
credit risk of the Borrower. In the event of the insolvency of the Lender
selling the Participation, the Fund may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the Borrower.
The Lender is required to obtain the Fund's consent before amending or waiving
any of its rights under the financing documents for the Loan. If the Lender
becomes insolvent or fails to comply with its obligations under the
Participation Agreement, the Fund may terminate the Lender's administrative
duties under the Participation and enforce the Lender's rights under the Loan
financing documents directly against the Borrower. The Borrower has established
certain policies under the Participation to minimize the credit risk of the
Lender. See "Investment Policies."
Co-Lenders; Lending Agents; Intermediaries. With respect to direct
investments in Loans, the Fund may be the sole investor in a given Loan, or it
may act as co-lender with other firms, such as commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions. Issuers of Loans may use the services of financial institutions as
Lending Agents. The Fund may be dependent on the intermediary to administer and
service the Loan and could therefore be adversely affected by a credit
6
<PAGE>
problem or business failure of the intermediary. The Loans in which the Such
Lending Agents perform administrative functions such as computing outstanding
loan balances, amount of unfunded credit commitments, issuers' compliance with
the terms of such credit facilities including collection of accounts receivable,
and monitoring credit quality. For these services, the issuers typically pay
Lending Agents an administrative and servicing fee. Before investing in a Loan
where an issuer makes use of a Lending Agent, the Advisor will evaluate the
Lending Agent based on factors such as minimum asset size and capacity,
experience in administering revolving credit facilities, and default rates on
past loan experience. Risk of loss to the Fund is increased where it acts as
sole investor in a Loan. Also, the financial condition of co-lenders or Lending
Agents or other intermediaries may affect the ability of the Fund to receive
payments, inasmuch as they may be responsible for the administration and
enforcement of the Loan and its terms.
Risks Related to the Asset-Backed Securities
Security. The asset-backed securities represent obligations solely of
the issuer, which typically is a newly-formed limited purpose entity, typically
a trust or corporation (an "Asset-Backed Issuer"), with no significant assets
other than the related Receivables. The obligations of the related Asset-Backed
Issuers are secured by perfected first priority security interests in the
related Receivables and other collateral and may be further secured by a reserve
fund established by the issuer of the securities and other forms of credit
enhancement. The reserve fund is funded typically over time as payments are made
on the underlying loans; an initial deposit also may be made to the reserve
fund, which would be funded with a portion of the offering proceeds from the
sale of the asset-backed securities. Payments of principal and interest on the
securities depends solely on the amount and timing of payments and collections
on the underlying Receivables, amounts on deposit in any reserve fund, amounts
received from other providers of credit enhancement such as credit insurers, and
realization of the security interests in the collateral, if any, held as
security for the related Receivables.
Subordination. The Fund generally invests in asset-backed securities
that are subordinated in payment of principal and interest to senior classes of
asset-backed securities of the same issuer. Consequently, the Fund may not
receive any payments of principal and interest for any payment period until the
payments of principal and interest on the senior securities have been made in
full.
Absence of Rating. The Fund's investments in asset-backed securities
may be concentrated in subordinated and unrated classes of securities. However,
the Fund will only invest in subordinated asset-backed securities of an issuer
where the senior classes of securities of the same issuer are rated at least
investment grade or better by a nationally recognized rating agency. Since the
class of securities in which the Fund invests may not be rated, an investor
should not rely on the rating given to senior classes of securities of the same
issuer in which the Fund has not invested. While a rating addresses the
likelihood of the ultimate full payment of principal and interest on the rated
securities, it does not address the likelihood that the outstanding principal
amount will be paid by the stated maturity.
7
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PURCHASE OF SHARES
Finance 500, Inc., 19762 MacArthur Boulevard, Suite 200, Irvine, CA 92612
(the "Distributor"), is a registered broker-dealer and acts as the distributor
of shares of the Fund. The Fund is engaged in a continuous offering of its
shares of common stock through the Distributor and other securities dealers
which have entered into selected dealer agreements with the Distributor.
Proceeds from the offering may be used to fund investments, to finance the
Fund's Repurchase Offers, and to reduce the amount of any borrowing or
indebtedness incurred by the Fund as described above under "Other Investment
Policies -- Leverage."
In order to maximize returns consistent with its investment objectives, the
Fund attempts to invest proceeds from the offering of Fund shares as soon as,
and to the fullest extent, possible. However delays may occur in the event
suitable investments are not available. The full investment of proceeds from the
offering of Fund shares in Loans and asset-backed securities may take one to
three months, up to a maximum of six months, from the date the Fund receives
such proceeds. Pending such investment, the proceeds will be held in cash or
invested in investment grade short-term debt obligations. Investments in such
short-term debt obligations will reduce the Fund's yield. The Fund may also
require such short-term debt obligations during unusual market conditions for
temporary defensive purposes.
During any continuous offering of the Fund's common stock, shares may be
purchased by mailing or wiring funds directly to the Transfer Agent. The minimum
initial purchase is $5,000, except for IRA and retirement plans for which the
minimum initial purchase is $2,000. The minimum subsequent purchase amount is
$500. The Fund's shares are offered at a public offering price equal to the next
determined net asset value per share plus a front-end sales charge as determined
by the following table:
Sales Charge as Dealer
Percentage of Discount as
Offering Amount Percentage of
Amount of Purchase Price Invested Offering Price
- --------------------------------------------------------------------------------
Less than $99,999 3.00% 3.09% 2.50%
$100,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.50% 1.52% 1.25%
$1,000,000 and over None None None
From time to time the Distributor may reallow the full sales load to
dealers as a concession. Dealers reallowed 90% or more of the sales load may be
deemed to be underwriters for purposes of the 1933 Act.
Purchase at Net Asset Value
Shares of the Fund may be purchased at net asset value by officers,
directors and full time employees of the Fund, Advisor or Distributor, their
family members, registered representatives and employees of firms which have
sales agreements with the Distributor, investment advisors, financial planners
or other intermediaries who place trades for their own accounts or the accounts
of their clients and who charge a management, consulting or other fee for their
services; clients of such investment advisors, financial planners or other
intermediaries who place trades for their own accounts if the accounts are
linked to the master account of such investment advisors, financial planners or
other intermediaries on the books and records of the broker or agent, and
retirement and deferred compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Section 401(a), 403(b) or 457 of
the Internal Revenue Code and "rabbi trusts"; and by such other persons who are
determined to have acquired shares under circumstances not involving any sales
expense to the Fund or Distributor. Investors may be charged a fee if they
effect transactions in Fund shares through a broker or agent.
The offering price is based on the net asset value of the Fund next
determined after receipt of payment by the Transfer Agent. If payment is not
received by the Transfer Agent prior to 4:00 p.m. New York time, shares will be
purchased for the investor on the next business day. Any order may be rejected
by the Distributor or the Fund. The Fund or the Distributor
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<PAGE>
may suspend the offering of the Fund's shares at any time in response to
conditions in the securities markets or otherwise and may thereafter resume such
offering from time to time.
Purchase by Wire
Shares may be purchased by wiring federal funds to the Transfer Agent. If
payment is wired it should be sent to Star Bank, ABA # 0420-0001-3 ATTN: Target
Income Fund, Inc., Account # 485772685, for further credit to [name of
investor]. Before sending a federal funds wire, an investor should first call
the Transfer Agent at (800) 385-7003 to obtain an account number. The investor
should then complete the application contained in this Prospectus and forward it
to the Transfer Agent. For subsequent investments by wire, investors should call
the Transfer Agent before wiring funds, in order to obtain a reference number to
use when sending the wire.
Purchase by Check
Investors may purchase shares by sending a check to the Transfer Agent. An
initial investment must include a completed, signed application form. Subsequent
investments by check must provide account information, including an account
number.
USE OF PROCEEDS
Proceeds from the continuous offer of Fund common shares may be used to
fund investments in portfolio securities, to finance the Fund's Repurchase
Offers, (if any) and to reduce the amount of any borrowing or indebtedness
incurred by the Fund as described under " Other Investment Policies -- Leverage"
and "Risk Factors --Borrowings". The full investment of proceeds from the
continuous offer of Fund shares, consistent with the Fund's investment
objectives, may take one to three months, up to a maximum of six months, from
the date the Fund receives such proceeds. Pending such investments, the proceeds
will be held in cash or invested in investment grade short-term debt
obligations. Investments in such short-term debt obligations will reduce the
Fund's yield. The Fund also may acquire such debt obligations during unusual
market conditions for temporary defensive purposes.
REPURCHASE OFFERS
In recognition of the likelihood that a secondary market for the Fund's
shares will not develop, the Fund has adopted a fundamental policy of making a
"Repurchase Offer" each quarter for not less than 5% nor more than 25% of the
Fund's outstanding shares at net asset value. Before each Repurchase Offer, the
"Repurchase Offer Amount," currently 5% of the Fund's outstanding shares, shall
be determined by the Board of Directors. The Repurchase Offer is open for a
period of at least 21 days from the date a "Notification" of the Repurchase
Offer is sent to shareholders, during which period the Fund's net asset value is
calculated daily and may be obtained by calling the Fund at (800) 385-7003. A
Shareholder may withdraw or modify the number of shares tendered at any time up
to the "Repurchase Request Deadline", which it is the intention of the Fund to
set as the close of business on the last business day of January, April, July,
and October of each year. If the scheduled day for the Repurchase Request
Deadline falls on a Friday or the weekend, then the last business day prior to
the intended date will be set as the Repurchase Request Deadline. The
"Repurchase Pricing Date" is set as of the day following the Repurchase Request
Deadline. The Fund expects to make payment to the tendering shareholders within
seven days of the Repurchase Pricing Date. No fees or charges are imposed by the
Fund on any shares tendered under the Repurchase Offers. All shares purchased
under the Repurchase Offers will be retired by the Fund.
The Notification sent to shareholders with respect to each Repurchase Offer
will describe the terms of the Repurchase Offer and information shareholders
should consider in deciding whether or not to participate in the Repurchase
Offer, including detailed
instructions on how to tender shares.
The Fund anticipates using available liquid capital to repurchase shares
tendered pursuant to Repurchase Offers. To insure that adequate funds will be
available, the Fund will maintain liquid assets during the period that the
Repurchase Offer is open in an amount equal to at least 100% of the Repurchase
Offer amount. If there is insufficient cash available to pay for all tendered
shares, the Fund intends to liquidate portfolio securities or borrow money on a
temporary basis to raise cash. The purchase of the shares of the Fund pursuant
to the Repurchase Offers will decrease the total assets of the Fund and could
therefore increase the Fund's expense ratio. However, any such decrease in the
Fund's total assets may be offset by the Fund's continuous sales of shares to
investors. The timing and Repurchase Offer Amount of each Repurchase Offer must
be approved by the Fund's Board of Directors. In making these determinations,
the Board will consider the benefit of providing a
9
<PAGE>
means of liquidity to shareholders, the availability of sufficient liquid assets
to finance the Repurchase Offers and the effects on the Fund's expense ratio and
total asset base.
Although the Fund expects that ordinarily there will be no secondary market
for its shares, the Repurchase Offers will provide a periodic source of
liquidity for Fund shareholders. The Fund's policy of making Repurchase Offers
is fundamental and can only be discontinued by a majority vote of shareholders
or suspended for extraordinary reasons by a vote of a majority of disinterested
directors. See "Repurchase Offers" in the Statement of Additional Information.
MANAGEMENT
The Fund's Board of Directors decides on matters of general policy and
reviews the activities of the Advisor and other service providers to the Fund;
and the Fund's officers conduct and supervise the daily business operations of
the Fund. See "Management" in the Statement of Additional Information.
The Advisor
Target Capital Advisors, Inc. (the "Advisor") provides the Fund with
investment advisory and administrative services. The Advisor is a California
corporation organized in 1995 to serve as advisor to the Fund. The Advisor was
formed for that purpose and does not manage any other regulated investment
company. The Advisor became the investment advisor of the Fund in November 1995,
after being approved by the shareholders of the Fund at a special meeting on
June 26, 1995. The Advisor has no previous experience in managing a registered
investment company and does not manage any other registered investment
companies. The Advisor is controlled by Mr. Jon M. LaVine, its President. Mr.
LaVine has over 20 years experience in public accounting and the financial
services industry. The principal business address of the Advisor is 26691 Plaza
Drive, Suite 222, Mission Viejo, California 92691.
Under the Investment Advisory Agreement, subject to the direction of the
Board of Directors of the Fund, the Advisor is responsible for the actual
management of the Fund's portfolio. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Advisor, subject to
review by the Board of Directors. The Advisor considers analyses from various
sources, makes the necessary investment decisions, and places orders for
transactions accordingly. The Advisor also performs certain administrative
services necessary for the operation of the Fund, including paying all
compensation of and furnishing office space for officers and employees of the
Fund connected with investment and economic research, trading and investment
management of the Fund as well as compensation of Directors of the Fund who are
affiliated persons of the Advisor or any of its affiliates.
For its services, the Advisor receives from the Fund a monthly fee at an
annual rate of 0.75% of the Fund's average daily net assets (i.e., the average
daily value of the total assets of the Fund, minus borrowings and all other
liabilities). This fee is higher than that paid by most investment companies.
The Fund pays all other expenses incurred in its operations, including, among
other things, expenses for legal and auditing services, taxes, costs of printing
proxies, mailing expenses, listing fees, if any, stock certificates and
shareholder reports, charges of the custodian and transfer agent, expenses of
registering its shares under Federal and any state securities laws, fees and
expenses associated with the issuance of preferred shares or any borrowing,
other regulatory fees, fees and expenses of its disinterested directors,
accounting and pricing costs, insurance, interest, any brokerage costs,
litigation and other extraordinary or non-recurring expenses. The Investment
Advisory Agreement will remain in effect from year to year if approved annually
(a) by the Board of Directors of the Fund or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the 1940 Act) of any such
party. Such contracts may be terminated without penalty on 60 days' written
notice at the option of either party thereto or by the vote of the shareholders
of the Fund.
10
<PAGE>
The Administrator
Investment Company Administration Corporation (the "Administrator")
provides certain administrative services to the Fund, including preparing
various Federal and state regulatory filings, reports and returns, preparing
reports and materials to be supplied to the directors, monitoring the activities
of the Fund's custodian, transfer agent and auditors, coordinating the
preparation and payment of Fund expenses, reviewing the Fund's expense accruals
and providing accounting services. For its services, the Administrator receives
an annual fee of $24,000 for performing the Fund accounting, and 0.25% of the
Fund's average daily net assets, or $30,000, whichever is greater for providing
administrative services.
Multiple Classes
Under the Fund's charter documents, the Fund's Board of Directors has the
power to classify or reclassify any unissued shares of the Fund into one or more
additional classes by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms and conditions of
redemption. The Board of Directors has currently designated one class of shares
of the Fund.
NET ASSET VALUE
The Fund computes net asset value per share on each day the New York Stock
Exchange is open for trading, as of the close of regular trading on the Exchange
(normally 4:00 p.m. New York time). The Fund will be closed for business and
will not price its shares on the following business holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value per share will be determined by dividing the value of the
net assets of the Fund by the total number of shares outstanding. For the
purpose of determining the net asset value per share, the value of the Fund's
net assets shall be deemed to equal the value of the Fund's assets less the
Fund's liabilities (including the outstanding principal amount of any
indebtedness issued by the Fund and any unpaid interest on such indebtedness).
The Advisor will, following procedures established by the Directors, value
the asset-backed securities and Loans held by the Fund at fair value. The
Advisor will consider relevant factors, data, and information, including (i) the
characteristics of and fundamental analytical data relating to the asset-backed
security or the Loan, including the cost, size, current interest rate, period
until next interest rate reset, maturity and base lending rate of the
asset-backed security or the Loan, the terms and conditions of the asset-backed
security or the Loan and any related agreements, and the position of the
asset-backed security or the Loan in the Borrower's debt structure; (ii) the
nature, adequacy and value of the collateral, including the Fund's rights,
remedies and interests with respect to the collateral; (iii) the
creditworthiness of the Borrower, based on an evaluation of its financial
condition, financial statements and information about the Borrower's business,
cash flows, capital structure and future prospects; (iv) information relating to
the market for the asset-backed security or the Loan, (including price
quotations, if any, that are considered reliable), and trading in the security
or the Loan and interests in similar loans and the market environment and
investor attitudes towards the security or the Loan and similar loans, (v) the
reputation and financial condition of any lending agent or other intermediate
participant; and (vi) general economic and market conditions affecting the fair
value of the asset-backed security or the Loan.
Other portfolio securities may be valued on the basis of prices furnished
by one or more pricing services which determine prices for normal,
institutional-size trading units of such securities using market information,
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. In certain
circumstances, portfolio securities will be valued at the last sale price on the
exchange that is the primary market for such securities, or the last quoted bid
price for those securities for which the over-the-
11
<PAGE>
counter market is the primary market or for listed securities in which there
were no sales during the day. Short-term obligations which mature in 60 days or
less are valued at amortized cost, if their original term to maturity when
acquired by the Fund was 60 days or less, or are valued at amortized cost using
their value on the 61st day prior to maturity, if their original term to
maturity when acquired by the Fund was more than 60 days, unless in each case
this is determined not to represent fair value. Repurchase agreements will be
valued at cost plus accrued interest. Securities for which there exists no price
quotations or valuations and all other assets are valued at fair value as
determined in good faith by or on behalf of the Directors.
SHAREHOLDER SERVICE PLAN
The Fund has adopted a Shareholder Service Plan, under which it reimburses
the Distributor for shareholder servicing expenses. Under this Plan, the Fund
pays the Distributor a fee at the annual rate of up to 0.25% of the average
daily net assets of the Fund as reimbursement for certain expenses actually
incurred in connection with non-distribution related shareholder services
provided by the Distributor and for payments to securities broker-dealers and
other securities professionals ("Service Organizations") for the provision of
such services. These services include establishing and maintaining accounts and
records relating to clients who invest in the Fund, aggregating and processing
orders for Fund shares and recordkeeping, processing dividend and distribution
payments, participation in dividend options,answering shareholder inquiries,
providing information regarding Fund operations, preparing tax reports on behalf
of shareholders and beneficial owners of Fund shares, and providing such other
information and assistance to shareholders as they may reasonably request.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends
from such net investment income are declared daily and paid monthly to holders
of common stock. Monthly distributions to holders of common stock consist of
substantially all net investment income remaining after the payment of interest
on such borrowing. All net realized long or short-term capital gains, if any,
are distributed at least annually to holders of common stock. Shares of common
stock accrue dividends as long as they are issued and outstanding. Shares of
common stock are issued and outstanding from the settlement date of a purchase
order to the settlement date of a tender order. Any limitation on the Fund's
ability to make distributions on its common stock could, under certain
circumstances, impair the ability of the Fund to maintain its qualification as a
regulated investment company for Federal income tax purposes.
TAXES
The Fund intends to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Code. If it so qualifies, in
any taxable year in which it distributes at least 90% of its net income, the
Fund will not be subject to Federal income tax to the extent that it distributes
its net investment income and any realized capital gains. The Fund intends to
distribute substantially all of such income.
Dividend paid by the Fund from its ordinary income, and distributions of the
Fund's net realized short-term capital gains (together referred to hereinafter
as "ordinary income dividends"), regardless of whether such distributions are
paid in cash or are invested in additional shares of the Fund's common stock,
are taxable to shareholders as ordinary income. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted basis of a holder's
common stock and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such stock is
held as a capital asset).
Since the Fund does not invest in qualifying state and municipal
obligations and does not believe it will earn other tax preference income, the
Fund and its shareholders will not be subject to any alternative minimum tax.
12
<PAGE>
Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
dividends eligible for the dividends received deduction or capital gains
distributions.
Under certain Code provisions, some shareholders may be subject to a 31%
backup withholding tax on reportable dividends, capital gain distributions and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. See "Additional Tax Considerations" in the
Statement of Additional Information.
Repurchase Offers
Under current law, a holder of common stock who, pursuant to any Repurchase
Offer, tenders all shares of common stock owned by such shareholder under
attribution rules contained in the Code will realize a taxable gain or loss
depending upon the shareholder's basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are held as capital assets in the
shareholder's hands and will be long-term or short-term depending upon the
shareholder's holding period for the shares. Different tax consequences may
apply to tendering and nontendering holders of commons stock in connection with
a Repurchase Offer, and these consequences will be disclosed in the related
offering documents. For example, if a tendering holder of common stock tenders
less than all shares owned by or attributed to such shareholder, and if the
distribution to such shareholder does not otherwise qualify as an exchange, the
proceeds received will be treated as a taxable dividend, return of capital or
capital gain depending on the Fund's earnings and profits and the shareholder's
basis in the tendered shares. Also, there is a risk that non-tendering holders
of common stock may be considered to have received a deemed distribution which
may be a taxable dividend in whole or in part. Holders of common stock may wish
to consult their tax advisors prior to tendering. If holders of common stock
whose shares are acquired by the Fund in the open market sell less than all
shares owned by or attributed to them, a risk exists that these shareholders
will be subject to taxable dividend treatment, as well as a risk that the
remaining shareholders may be considered to have received a deemed distribution.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A shareholder
may at any time, by written notification to the transfer agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event, payment will be mailed on or about the
payment date. The automatic reinvestment of dividends and distributions will not
relieve participants of any Federal income tax that may be payable or required
to be withheld on such dividends or distributions. Dividends and distributions
are taxable to shareholders whether they are reinvested in shares of the Fund or
received in cash. Additional information about the Dividend Reinvestment Plan
may be obtained by calling (800) 385-7003.
13
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 100,000,000 shares of capital stock, par
value $.01 per share, all of which shares initially are classified as common
stock. The Board of Directors is authorized, however, to classify and reclassify
any unissued shares of capital stock by setting or changing in any one or more
respects the designation and number of shares of any such class or series, and
the nature, rates, amounts and times at which and the conditions under which
dividends shall be payable on, and the voting, conversion, redemption and
liquidation rights of, such class or series and any other preferences, rights,
restrictions and qualifications applicable thereto.
Shares of common stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
Antitakeover Provisions of the Articles of
Incorporation
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors 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. A Director elected by the affirmative
vote of all holders of capital stock may be removed from office only for cause
by vote of the holders of at least 80% of the shares of capital stock of the
Fund entitled to be voted on the matter.
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 66 2/3% of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt, or authorize
the following transactions between the Fund and a "Principal Stockholder" of the
Fund (as such terms are defined in the Articles of Incorporation): (i) a merger
or consolidation of the Fund with or into any Principal Stockholder; (ii) the
issuance of any securities of the Fund to the Principal Stockholder for cash;
(iii) the sale, lease or exchange of all or a substantial part of the Fund's
assets to a Principal Stockholder (except assets having a fair market value of
less than $1,000,000 as computed in accordance with the Articles of
Incorporation); unless such action has been approved, adopted, or authorized by
the affirmative vote of a majority of the total number of Directors fixed in
accordance with the bylaws, in which case the affirmative vote of a majority of
the Fund's shares of capital stock is required. The Board of Directors has
determined that the 66 2/3% voting requirements described in the foregoing
paragraph and under Article Nine of the Articles of Incorporation, which are
greater than the minimum requirements under Maryland law or the 1940 Act, are in
the best interest of the shareholders generally.
CUSTODIAN; TRANSFER AGENT; AUDITOR; SHAREHOLDER REPORTS
The Fund's securities and cash are held under a Custodial Agreement with
Union Bank of California, P.O. Box 45000 San Francisco, California 94145.
American Data Services, Inc. of Huntington, New York, acts as Transfer and
Dividend Disbursing Agent for shares of the Fund. Tait, Weller & Baker are the
Fund's independent auditors. The Fund will send unaudited reports at least
semi-annually and audited annual financial statements to all of its shareholders
of record.
14
<PAGE>
PERFORMANCE INFORMATION
From time to time the Fund may advertise its total return and yield. These
figures are based on historical earnings and are not intended to indicate future
performance. Total return shows how much an investment in the Fund would have
increased (or decreased) over a specified period of time (i.e., one, five or ten
years or since inception of the Fund) assuming that all distributions and
dividends by the Fund to investors were reinvested on the reinvestment dates
during the period. Total return does not take into account any federal or state
income taxes which may be payable by the investor. Yield will be calculated on a
30-day period pursuant to a formula prescribed by the Securities and Exchange
Commission (the "Commission"). The Fund also may include comparative performance
information in advertising or marketing Fund shares. Such performance
information may include data from Lipper Analytical Services, Inc., other
industry publications, business periodicals, rating services and market indices.
See "Performance Information" in the Statement of Additional Information.
Further information about the performance of the Fund will be contained in
the Fund's Annual Reports to Shareholders, which may be obtained without charge
by calling (800) 385-7003.
FURTHER INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all the information set forth in the Registration Statement that the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by its Rules and Regulations.
The table of contents of the Statement of Additional Information is as
follows:
Page
Investment Objective and Polices............B-1
Investment Restrictions.....................B-9
Additional Tax Considerations...............B-10
Repurchase Offers...........................B-11
Yield Information...........................B-14
Management..................................B-15
Compensation of Management and
Investment Advisor..........................B-15
Portfolio Transactions......................B-16
Financial Statements........................B-16
15
<PAGE>
TABLE OF CONTENTS
Fee Table................................... 2
Financial Highlights........................ 2
Investment Objective and Policies........... 3
Purchase of Shares.......................... 8
Use of Proceeds............................. 9
Repurchase Offers........................... 9
Management..................................10
Net Asset Value.............................11
Shareholder Service Plan....................12
Dividends and Distributions.................12
Taxes.......................................12
Automatic Dividend Reinvestment Plan........13
Description of Capital Stock................14
Custodian; Transfer Agent; Auditor;
Shareholder Reports.....................14
Performance Information.....................15
Further Information.........................15
TARGET INCOME FUND
TARGET INCOME FUND
-----------------------
PROSPECTUS
September 27, 1996
-----------------------
FINANCE 500, INC.
16
<PAGE>
TARGET INCOME FUND, INC
STATEMENT OF ADDITIONAL INFORMATION
Target Income Fund, Inc. (the "Fund") is a continuously offered, closed-end, non
diversified management investment company whose investment objective is to
provide shareholders as high a level of current income as is consistent with
preservation of capital by investing primarily in variable rate collateralized
small business loans and variable rate asset-backed securities. This Statement
of Additional Information is not a prospectus, but should be read in connection
with the Prospectus for the Fund dated September 27, 1996 (the "Prospectus").
This Statement of Additional Information does include information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge by calling (800) 385-7003.
This Statement of Additional Information incorporates by reference the entire
Prospectus.
TABLE OF CONTENTS
Page
Investment Objective and Polices......................................... B-1
Investment Restrictions.................................................. B-9
Additional Tax Considerations............................................ B-10
Repurchase Offers........................................................ B-11
Yield Information........................................................ B-14
Management............................................................... B-15
Compensation of Management and Investment Advisor........................ B-15
Portfolio Transactions................................................... B-16
Financial Statements..................................................... B-16
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Securities and Exchange Commission, Washington, D.C. (the "SEC"). The
complete Registration Statement may be obtained from the SEC upon payment of the
fee prescribed by its Rules and Regulations, or inspected at the SEC's office at
no charge.
The Statement of Additional Information is dated September 27, 1996.
INVESTMENT OBJECTIVE AND POLICIES
General
The Fund seeks as high a level of current income as is consistent with
preservation of capital by investing primarily in variable rate, collateralized
small business and consumer loans made to U.S. companies or their affiliates
(the "Loans") and in variable rate asset-backed securities. The asset-backed
securities are in the form of certificates representing interests in, or secured
by, segregated pools of assets such as small business loans, automobile loans
and leases and equipment leases (but may not include perfected security
interests in the actual physical assets), credit card receivables, mortgage
loans, trade receivables and other forms of consumer and commercial-purpose
loans, which may be secured or unsecured. The rate of interest payable on the
variable rate Loans and asset-backed securities is generally established as the
sum of a base lending rate plus a specified spread. These base lending rates are
generally the Prime Rate of a designated U.S. bank, the London interbank Offered
Rate ("LIBOR"), the Certificate of Deposit ("CD") rate
B-1
<PAGE>
of a designated U.S. bank or another base lending rate used by commercial
lenders. The interest rates on Prime Rate-based, LIBOR-based and CD-based Loans
are periodically reset with reset periods typically ranging from 30 days to
three months. There can be no assurance that the Fund will achieve its
objective.
Under normal market conditions, the Fund will invest at least 80% of
its total assets in direct investments and participation interests
("Participations") in Loans and in asset-backed securities. The remainder of the
Fund's total assets may be invested in short term debt obligations as described
below under "Other Investments."
Description of Loans
The small business Loans in which the Fund invests directly or through
Participations share many common characteristics in terms of loan amounts,
maturity terms, security interests, nature of Borrowers, type of collateral and
foreclosure terms.
The Loans typically consist of obligations of a Borrower undertaken to
finance the growth of the Borrower's business internally or externally, or to
finance a capital restructuring. It is expected that Loans held by the Fund will
typically have maturities of between 6 and 12 months, although in some cases,
the maturity may be as short as 3 months. Loans are made to companies which are
manufacturing, distribution and service firms which sell to other businesses
(i.e., commercial accounts). While the Fund does not intend to concentrate in
Loans to issuers in a specific industry or industries, it is anticipated that
issuers of the portfolio securities to be held by the Fund will include a
variety of firms that are wholesalers and manufacturers of products and services
in such fields as industrial equipment, electronics, business machines and
business services. Such firms usually will have annual revenues between $1
million and $25 million.
Because the Fund usually will purchase Loans of small and medium sized
firms, most of which will be privately held, there generally will be no direct
ratings of debt issued by these companies. The Fund will thus be more dependent
on the Advisor's credit analysis than would be the case with loans of larger,
better established companies whose debt securities may be rated by a nationally
recognized rating service. Small to medium sized firms may be more dependent
upon key personnel, have more limited product lines and generally have more
limited financing resources. Such companies may be more vulnerable to general
economic conditions and may be more likely to experience financial difficulties
or insolvency. Based on the adequacy of assets that serve as collateral for
Loans and the Advisor's policy of obtaining collateral in excess of Loan value,
the Advisor believes that the Loans in which the Fund invests are the equivalent
of investment grade.
Loan Participations
The Fund's investments in Loans have been concentrated in
Participations. When the Fund purchases a Participation, the Fund enters into a
contractual relationship with the loan originator (the "Lender") selling the
Participation, but not with the Borrower. The Participation gives the Fund the
right to receive a fractional undivided interest in the principal and interest
payments on the Loan, at an interest rate negotiated with the Lender. The
interest income on the Participation above the negotiated rate to the Fund is
retained by the Lender as compensation for its services in originating,
servicing and administering the Loan. See "Risk Factors -- Credit Risks
Associated with Participations", in the Fund's Prospectus for a discussion of
the risks associated with Participations.
Description of Asset-Backed Securities
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The asset-backed securities in which the Fund invests are in the form
of certificates representing interests in, or notes secured by, segregated pools
of assets such as small business loans, automobile loans and leases, equipment
leases, credit card receivables, mortgage loans and other forms of consumer and
commercial-purpose loans, which may be secured or unsecured (the "Receivables").
The securities are issued by a limited purpose entity, typically a trust or
corporation (an "Asset-Backed Issuer"), which has been created solely for the
purpose of holding all of the collateral related thereto.
The asset-backed securities represent obligations solely of the
respective Asset-Backed Issuers, which have no significant assets other than the
related Receivables. The obligations of the related Asset-Backed Issuers are
secured by perfected, first priority security interests in the related
Receivables and other collateral and may be further secured by a reserve fund
established by the issuer of the securities and other forms of credit
enhancement. The reserve fund is funded typically over time as payments are
received on the underlying Receivables; in certain cases an initial deposit also
may be made to the reserve fund, which would be funded with a portion of the
offering proceeds from the sale of the asset-backed securities. Payments of
principal and interest on the securities depends solely on the amount and timing
of payments and collections on the underlying Receivables, amounts on deposit in
any reserve fund, amounts received from other providers of credit enhancement
such as credit insurers, and realization of the security interests in the
collateral, if any, held as security for the related Receivables.
The asset-backed securities are issued for varying terms depending on
the nature of the underlying Receivables. Interest is generally payable on a
monthly, quarterly or semi-annual basis. Principal is generally payable on an
amortization schedule which will reflect subordination to senior classes of
securities and may include a balloon payment over the final year of the stated
maturity of the security. The primary consideration in the Advisor's selection
of asset-backed securities for investment by the Fund is the asset and credit
quality of the underlying Receivables pool.
The asset-backed securities are typically issued in two or more
tranches or classes, each class being substantially identical in form except
that the first (or"A") tranche is senior in right of payment of principal and
interest to the second ("B") tranche and the B tranche is senior to any other
tranche of securities. The Fund expects to concentrate its investments in the
subordinated tranches or classes of asset-backed securities in order to obtain a
higher yield than is available from the A tranche securities, while still
maintaining a fully secured interest in the underlying collateral. The A tranche
securities typically are rated by a nationally recognized rating service, while
the B tranche and lower classes of securities typically are unrated. The B and
lower tranches may not benefit from any reserve fund or credit enhancement. The
Fund will only invest in subordinated asset-backed securities of an Asset-Backed
Issuer where the senior classes of securities of the same Asset-Backed Issuer
are rated at least investment grade or better by a nationally recognized rating
agency. However, in most cases, the subordinated tranche securities in which the
Fund invests may not be rated. Since the subordinated tranche securities in
which the Fund invests may not be rated, an investor should not rely on the
rating given to senior classes of securities of the same issuer in which the
Fund has not invested. Although the B and lower tranche securities are unrated
and subordinated to the A tranche securities, management of the Fund believes
the subordinated securities are fully secured by the underlying collateral on
the asset-backed securities.
Credit Analysis
Loans
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The Advisor does perform a credit analysis on each Loan in which the
Fund invests directly or acquires a Participation. The Fund will make a direct
investment or purchase a Participation in Loans only if, in the Advisor's
judgment, the Borrower can meet debt service on the Loan from existing cash
flow. The primary consideration in selecting corporate loans for direct
investment by the Fund is the asset quality and creditworthiness of the
Borrower. The Advisor will perform its own independent credit analysis of the
Borrower, in addition to using any information that may be prepared and supplied
by any lending agents, co-lenders or other participants (as set forth below)
involved in Loans. The aspects of potential borrowers that are reviewed by the
Advisor include, profitability, credit history (of the firm and its principals),
the nature and characteristics of the companies that comprise the Borrowers'
markets, the payment history of such companies, overall financial position with
respect to working capital, the presence or absence of major customers on whom
the Borrower may be dependent, and the current value of available collateral.
The Advisor's analysis will continue on an ongoing basis for any Loans in which
the Fund has invested, inasmuch as any subsequent financial difficulties
experienced by the Borrower may increase the potential for loss. Although the
Advisor will use due care in making such analysis, there can be no assurance
that such analysis will disclose factors which may impair the value of the
Loans. Even if such factors were disclosed, there can be no assurance that
liquidation of collateral underlying a loan would satisfy the Borrower's
obligation, that the collateral could be readily liquidated, and thus there can
be no assurance that a substantial writedown in the Loan value can be avoided.
The Advisor also may consider other factors it deems to be
appropriate to the analysis of the Borrower and the Loans. These factors include
financial ratios of the Borrower, such as pre-tax interest coverage, leverage
ratios, ratio of cash flows to total debt and the ratio of tangible assets to
debt. In analyzing these factors, the Advisor also will be influenced by the
nature of the industry in which the Borrower is engaged, the nature of the
Borrower's assets and the Advisor's assessment of the general quality of the
Borrower. Such factors are reviewed with the Fund's Board of Directors. It is
not expected that the Fund will hold Loans of non-U.S. borrowers.
Asset Backed Securities
The issuers of asset-backed securities in which the Fund invests have
established eligibility criteria for the Receivables in each segregated trust
pool. Additional criteria are established for each Receivables pool to ensure
diversity of investments and protect against undue concentration of assets,
including a minimum number of borrowers, limitation on the size of any single
asset and on the size of loans to a single borrower. The Advisor performs a
credit analysis of the asset-backed securities, relying on the credit criteria
established by the issuer of the securities. The Advisor does not perform a
credit analysis for each asset in the pool.
Interest Rate Considerations and Changes in Net Asset Value
When interest rates decline, the value of a portfolio invested in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a portfolio invested in fixed rate obligations can be expected to
decline. The Advisor expects the Fund's net asset value to be relatively stable
during normal market conditions, because the Fund's portfolio will consist
primarily of interests in variable rate Loans and asset-backed securities and of
short-term instruments. For these reasons, the Advisor expects the value of the
Fund's portfolio to fluctuate significantly less as a result of interest rate
changes than would a portfolio of fixed rate obligations. However, a default in
Loans or asset-backed securities, a material deterioration in a Loan on an
asset-backed security's perceived or actual creditworthiness or a sudden and
extreme increase in
prevailing interest rates would cause a decline in the Fund's net asset value.
Conversely, a sudden and extreme decline in interest rates could result in an
increase in the Fund's net asset value. The Fund is not a money market fund, and
its net asset value will fluctuate. See "Net Asset Value."
The Advisor anticipates that, during normal market conditions when the
Fund is fully invested, the effective yield of the Fund should approximate the
average Prime Rate of leading U.S. banks as published in The Wall Street Journal
or the LIBOR rate. The yield on Loans or asset-backed securities held by the
Fund will
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primarily depend on the terms of the Loan and the base lending rate agreed upon
with the Borrower initially and on subsequent dates specified in the applicable
loan agreement. The relationship between the Prime Rate, the CD rate and LIBOR
will vary as market conditions change. Under normal market conditions, the
relationship between the Prime Rate and the other possible base lending rates is
reasonably stable, and Loans are structured with appropriate spreads over the
base rates so that the income earned by the Fund is approximately the same no
matter which alternative the Borrower selects. During abnormal market
conditions, such as when the traditional spread between the Prime Rate and other
base lending rates has widened, the Fund may be unable to achieve an effective
yield approximating LIBOR or the average published Prime Rate of leading U.S.
banks.
The maximum dollar weighted average time period to the next interest
rate reset for the Fund's portfolio is expected to be 90 days.
Loan Collateral
The Loans in which the Fund invests directly or through Participations
will, in the judgment of the Advisor, be in the category of senior debt of the
Borrowers and will hold the most senior position in the capitalization structure
of the Borrowers. Except as set forth below under "Other Investments," each Loan
will be secured by collateral which the Advisor believes to have a market value,
at the time of acquiring the Loan, which exceeds the principal amount of the
Loan. On the Fund's direct investments in Loans, the Fund's policies typically
call for a 1.25 to 1 ratio of collateral to amounts loaned. Assets which may
serve as collateral include accounts receivable, inventory, equipment, real
property, personal guaranties of principals, patents and general intangibles,
certificates of deposit and letters of credit. Accounts receivable are expected
to be the primary form of collateral, in that the Advisor believes them to be
the most liquid collateral that is easily monitored.
The value of collateral generally will be determined by reference to
financial statements of the Borrower, an independent appraisal performed at the
time the Loan is initially made, the market value of the collateral if it is
readily ascertainable and/or by other customary valuation techniques considered
appropriate by the Advisor. Collateral is generally valued on the basis of the
Borrower's status as a going concern and such valuation may exceed the immediate
liquidation value of the collateral. While the Advisor expects to be able to
evaluate accounts receivable as collateral independently, inventory, equipment
and real property valuations may require that an expert appraiser be called in
to evaluate the collateral jointly with the Advisor.
On the Fund's direct Loan investments, the Advisor monitors the
Borrowers' financial condition on an ongoing basis. However, subsequent to
purchase, the value of the collateral may decline, and the Loan may no longer be
fully secured. In such circumstances, the Advisor requires that additional
collateral be provided with a value that is equivalent to that required at the
time of purchase. In some of these cases, the Advisor may require that the Loan
be paid down to an amount corresponding to the initial collateralization ratio.
It is the policy of the Fund to obtain perfected security interests in
collateral in each instance, and the Fund expects that as a perfected secured
lender, it will be able to take possession and/or liquidate collateral in the
event of voluntary or involuntary bankruptcy of a Borrower. There can be no
assurance, however, that the liquidation value of collateral will be sufficient
to cover the entire amount of any given Loan.
Loan Participations
When the Fund purchases a Participation, the Lender selling the
Participation is interpositioned between the Fund and the Borrower. Accordingly,
the Fund has established procedures to minimize the credit risk of the Lender
under the Participation that are intended to insulate the Fund's investments in
Participations from a possible bankruptcy or failure of the Lender. The Fund has
established lock box and trust account collection procedures for all
Participations which provide that all payments of principal and interest on the
Loans are made directly to a Fund trust or collection account. The Lender is
required to obtain the Fund's consent before amending or waiving any of its
rights under the financing documents with the Borrower, or releasing any Loan
collateral,
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waiving any payment event of default by the Borrower, or making any assignment
or pledge of the Borrower's rights under the financing documents. The Lender may
also be required to maintain a minimum ownership interest in the Loan and may be
required to set up a reserve account from all revenues received on the Loan of a
designated percentage of the principal amount of the Loan, as a reserve against
any losses to the Fund on the Loan. The Fund has the right, at its election, to
assume and enforce all of the Lender's right to administer, manage, perform and
enforce the terms of the Loan against the Borrower in the event of a bankruptcy
or failure of the Lender, or a breach of its duties under the Participation. The
Fund believes that these procedures will significantly reduce the credit risk of
a Lender in a Participation.
The Fund has established eligibility criteria for Lenders from whom it
will purchase Participations or with whom it will invest as a co-lender. These
criteria include demonstrated experience in originating and administering small
business commercial loans, satisfactory business and credit history, experienced
personnel, and minimum capital standards.
Lending Agents
The Fund may be the sole investor in a given Loan, or it may act as
co-lender or participant with other firms, such as commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions. To the extent that one or a few entities are involved in
performing the credit analysis with respect to a Loan, the risk of default may
be higher.
Issuers of Loans may use the services of financial institutions as
Lending Agents. Such Lending Agents perform administrative functions such as
computing outstanding loan balances, amounts of unfunded credit commitments,
issuers' compliance with the terms of such credit facilities, including
collection of accounts receivable, and monitoring credit quality. For these
services, the issuers typically pay Lending Agents an administrative and
servicing fee. Before investing in a Loan where an issuer makes use of a Lending
Agent, the Advisor will evaluate the Lending Agent based on factors such as
minimum asset size and capacity, experience in administering revolving credit
facilities, and default rates on past loan experience.
In some instances, Lending Agents may act together with the Fund as
co-lenders to the Borrower. In these instances, the Fund intends to structure
the transaction so as to maintain the power to enforce its rights directly
against the Borrower in the event the Borrower fails to pay principal and
interest when due.
Dependence on CGC for Loan Originations and Master Servicing
As of June 30, 1996, all of the Participations held by the Fund have
been originated as small business loans through Concord Growth Corporation
("CGC"), a commercial finance services firm located in Palo Alto, California. A
majority of the borrowers on the Loans have their operations based in California
and therefore may be susceptible to changes in the general California business
economy. The Fund has established lock box and trust account collection
procedures to provide that all payments on the Participations held by the Fund
are made directly to the Fund account rather than passed through the Lender, and
therefore are intended to insulate the Fund's portfolio securities from a
possible bankruptcy or failure of CGC or any other Lender. While the Fund is
attempting to expand its base of loan originators, it is still dependent on CGC
for the origination of Loans for the
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Fund portfolio and would have difficulty finding new Loans meeting its current
investment criteria if CGC discontinued doing business with the Fund.
Prepayments
The rate of principal payment on the asset-backed securities will
depend on the priority of payment of the class of securities and the rate and
timing of payments (including prepayments) on the underlying assets. In certain
cases, the underlying Receivables or contracts in a pool may be replaced as they
mature by new Receivables or contracts of the same nature. The new Receivables
will be made in accordance with the credit and loan eligibility criteria
established by the issuer of the securities. The issuer of the securities, not
the Fund, will be responsible for monitoring the eligibility, credit quality and
payment performance of the individual assets in a pool.
The Loans in which the Fund invests directly or through Participations
permit the prepayment of the Loan. The degree to which Borrowers prepay Loans,
whether as contractual requirements or at their election, may be affected by
general business conditions, the financial condition of the Borrower and
competitive conditions among lenders. As such, prepayments cannot be predicted
with accuracy. Upon a prepayment, either in part or in full, the actual
outstanding debt on which the Fund derives interest income will be reduced.
Illiquid Securities
Most of the securities in the Fund's portfolio are not readily
marketable. The asset-backed securities may be privately placed and not
registered for sale under Federal or State securities laws. The Loans in which
the Fund invests typically have short-term maturities and provide for relatively
rapid access to collateral, however they also are privately placed and do not
have the liquidity of conventional debt securities traded in the secondary
market. Although Loans are transferred among certain financial institutions, and
the Loans in which the Fund invests typically have shorter maturities and
provide for relatively rapid access to collateral, they do not have the
liquidity of conventional debt securities traded in the secondary market and may
be considered illiquid. The Fund's ability to dispose of a Loan may be reduced
to the extent that there has been a perceived or actual deterioration in the
creditworthiness of an individual Borrower or of Borrowers in general, or by
events that reduce the level of confidence in the market for Loans. As the
market for Loans becomes more seasoned, liquidity is expected to improve. There
is no limit on the amount of Fund assets which may be invested in Loans which
are not readily marketable.
There may be less public information about the financial condition of
issuers of such Loans, and the Fund may be more dependent on the Advisor's
evaluation of such issuers than a fund which invests in publicly offered
securities. To the extent the net asset value of Fund shares may differ from
their actual value, illiquid investments may affect the Fund's ability to
realize net asset value in the event of a voluntary or involuntary liquidation
of its assets. Also, illiquid investments may adversely affect the Fund's
ability to dispose of portfolio securities in order to purchase shares of its
common stock pursuant to repurchase offers. The Board of Directors will consider
the liquidity of the Fund's portfolio securities in determining the amount of a
Repurchase Offer. See "Net Asset Value."
Other Investments
Under normal market conditions, the Fund may invest up to 20% of its
total assets in short-term debt obligations with maturities of one year or less,
including, but not limited to, U.S. Government and Government agency securities
(some of which may not be backed by the full faith and credit of the United
States), bank money instruments (such as certificates of deposit and bankers'
acceptances), corporate and commercial obligations (such as commercial paper)
and repurchase agreements or money market mutual funds, subject to provisions of
applicable law. Such short-term debt obligations, which need not be secured,
will all be investment grade (rated Baa, P-3 or higher by Moody's Investors
Service, Inc. or BBB, A-3 or higher by Standard & Poor's Corporation or, if
unrated, determined to be of comparable quality in the judgment of the Advisor).
Securities rated Baa, BBB, P-3 or A-3 are considered to have adequate capacity
for payment of principal and interest, but are more susceptible
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to adverse economic conditions, and, in the case of securities rated BBB or Baa
(or comparable unrated securities), have speculative characteristics. The Fund's
investment in such short-term debt obligations will not exceed 20% of the Fund's
total assets except (i) during interim periods pending investment of the net
proceeds of public offerings of the Fund's securities and (ii) during temporary
defensive periods when, in the opinion of the Advisor, suitable Loans are not
available for investment by the Fund or prevailing market or economic conditions
warrant.
Other Investment Policies
The Fund has adopted certain other policies as set forth below:
Leverage. The Fund is authorized to borrow money from time to time on a
secured or unsecured basis at variable or fixed rates in any amounts up to 33
1/3% of the Fund's total assets (after giving effect to the amount borrowed).
Borrowings by the Fund (commonly known as "leveraging") create an opportunity
for greater total return but, at the same time, increase exposure to capital
risk. The Fund may incur borrowings in order to remain fully invested and to
provide funds for the repurchase of Fund shares in connection with Repurchase
Offers. For example, the Fund may use borrowed cash to purchase Loans and repay
such borrowings from the proceeds of expected sales of Fund shares. The Fund may
borrow for the purpose of acquiring additional income-producing investments when
it believes that the interest payments and other costs with respect to such
borrowings or indebtedness will be exceeded by the anticipated total return (a
combination of income and appreciation) on such investments. The amount of any
such borrowing will depend upon market and economic conditions existing at that
time.
Capital raised through leverage will be subject to interest costs which
may or may not exceed the return earned on the borrowed funds. The Fund also may
be required 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. Borrowings create an opportunity for greater income per common share, but,
at the same time, such borrowing is a speculative technique in that it will
increase the Fund's exposure to capital risk. Such risks may be reduced through
the use of borrowings that have floating rates of interest. Unless the income
and appreciation, if any, on assets acquired with borrowed funds exceeds the
cost of borrowing, the use of leverage will diminish the investment performance
of the Fund compared with what it would have been without leverage.
The Fund may also borrow money for temporary, extraordinary or
emergency purchases. The Fund's willingness to borrow money, and the amount it
will borrow, will depend on many factors, the most important of which are the
investment outlook, market conditions, and interest rates. Successful use of a
leveraging strategy depends on the Advisor's ability to forecast 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.
Repurchase Agreements. The Fund may enter into repurchase agreements
with commercial banks or broker-dealers. Under a repurchase agreement, the Fund
buys a security at one price and simultaneously promises to sell the same
security back to the seller at a higher price. The Fund's repurchase agreements
will provide that the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price, including any
accrued interest earned on the repurchase agreement, and will be marked to
market daily. The repurchase date is usually within seven days of the original
repurchase date. The Advisor must be satisfied
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with the creditworthiness of the other party before entering into an agreement.
In the event of bankruptcy or other insolvency proceeding of the other party to
the repurchase agreement, the Fund might experience possible delays and expenses
in liquidating the securities subject to the repurchase agreement, and a
possible decline in their value and loss of interest.
Diversification and Industry Concentration Polices. The Fund has
registered as a "non-diversified" investment company. As a result, the Fund is
required to comply with the diversification requirements of Subchapter M of the
Code. Since the Fund may invest a relatively high percentage of its assets in
the obligations of a limited number of issuers, the value of the Fund's
investments may be more affected by any single adverse economic, political or
regulatory occurrence than would the value of the investments of a diversified
investment company. Investments to U.S. Government securities are not subject to
this investment restriction.
INVESTMENT RESTRICTIONS
The Fund's investment objective, as well as the following investment
restrictions, are designated as fundamental policies and may not be changed
without the approval of a majority of the outstanding shares of common stock.
Under the 1940 Act, such a majority means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares. The Fund may not:
1. Issue senior securities or borrow money except as permitted by the
1940 Act, except that the Fund may borrow on an unsecured basis from banks for
temporary or emergency purposes, for the clearance of transactions, or to
finance Repurchase Offers, in amounts not exceeding 10% of its total assets (not
including the amount borrowed), provided that it will not make investments while
such temporary borrowings in excess of 5% of its total assets are outstanding.
2. Make investments for the purpose of exercising control or
management.
3. Invest more than 10% of its assets in the securities of other
investment companies or purchase more than 3% of any other investment company's
voting securities or make any other investment in other investment companies
except as permitted by Federal and state law.
4. Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein (mortgage loans and
mortgage-backed securities) or issued by companies which invest in real estate
or interests therein.
5. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 (the "1933 Act"),
in selling portfolio securities.
6. Make loans to other persons except to the extent that the Fund may
be deemed to be making loans by purchasing Loans and other debt securities and
entering into repurchase agreements in accordance with its investment objective,
policies and limitations.
7. 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.
8. Purchase any securities on margin except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
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9. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options.
10. Purchase the securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result of such purchase, more than 5% of the Funds's
total assets (taken at current value) would be invested in the securities of
such issuer at the end of any fiscal quarter, provided that, with respect to 50%
of the Fund's total assets, the Fund may invest up to 25% of its total assets in
the security of any one issuer.
11. Purchase or sell commodities or commodity contracts including
futures contracts.
If a percentage restriction on investment policies or the investment
use of assets set forth above is adhered to at the time a transaction is
effective, later changes in such percentage resulting from changing values will
not be considered a violation.
For the purpose of investment restriction 7, the Fund will consider all
relevant factors in determining who is the issuer of the Loan, including: the
credit quality of the Borrower, the amount and quality of the collateral, the
terms of the Loan Agreement and other relevant agreements (including
inter-creditor agreements) the degree to which the credit of such
interpositioned person was deemed material to the decision to purchase the Loan,
the interest rate environment, and general economic conditions applicable to the
Borrower and such interpositioned person. For the purpose of investment
restriction 10, the Fund will consider the Borrower to be the issuer of an
individual Loan.
ADDITIONAL TAX CONSIDERATIONS
A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. Distributions, if any, of net long-term capital
gains from the sale of securities, whether paid in cash or reinvested in Fund
shares, are taxable at long-term capital gains rates for Federal income tax
purposes; a long-term capital gain distribution with respect to shares of the
Fund held for six months or less, however, will cause any loss on a subsequent
sale or exchange of such shares to be treated as a long-term capital gain
distribution. If the Fund pays a dividend in January which was declared in the
previous October, November, or December to shareholders of record in such month,
then such dividend or distribution will be treated as being received by its
shareholders on December 31 of the year in which the dividend was declared.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year end, plus certain
undistributed amounts from previous years. The Fund anticipates that it will
make sufficient timely distributions of income so as to avoid imposition of the
excise tax.
REPURCHASE OFFERS
Policy
In recognition of the likelihood that a secondary market will not
develop for the Fund's shares, the Fund has adopted a fundamental policy of
making a "Repurchase Offer" each quarter of not less than 5% nor more than 25%
of the Fund's outstanding shares at net asset value. Before each Repurchase
Offer, the "Repurchase Offer Amount", currently set at 5% of the Fund's
outstanding shares, shall be determined by the Board of Directors. The
Repurchase Offer is open for a period of at least 21 days from the date a
"Notification" is sent to
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Shareholders, during which the Fund's net asset value is calculated daily and
may be obtained by contacting the Fund at (800) 385-7003. A Shareholder may
withdraw or modify the number of shares tendered at any time up to the
"Repurchase Request Deadline", which it is the intention of the Fund to set as
the close of business on the last business day of January, April, July, and
October of each year. If the scheduled day for the Repurchase Request Deadline
falls on a Friday or the weekend, then the last business day prior to the
intended date will be set as the Repurchase Request Deadline. The "Repurchase
Pricing Date" is set as of the day following the Repurchase Request Deadline.
Purpose of the Repurchase Offer
The Fund does not currently believe that there is or is likely to be an
active secondary market for its shares. The Fund has adopted a fundamental
policy that periodic repurchase offers are in the best interest of Shareholders
as a means of providing liquidity to Shareholders. Nevertheless, if a secondary
market develops for the common stock of the Fund, the market price of the shares
may vary from net asset value from time to time. Such variance may be affected
by, among other factors, relative demand and supply of shares and the
performance of the Fund, especially as it affects the yield on and net asset
value of the common stock, but it is likely that shares would not trade at a
premium to net asset value because the Fund is offering its shares on a
continuous basis.
A Repurchase Offer for shares of common stock of the Fund is designed
to reduce any spread between net asset value and market price that may otherwise
develop. However, there can be no assurance that such action would result in the
Fund's common stock trading at a price which equals or approximates net asset
value.
Although the Board of Directors believes that Repurchase Offers
generally would be beneficial to holders of the Fund's common stock, the
acquisition of shares of common stock by the Fund will decrease the total assets
of the Fund and therefore have the likely effect of increasing the Fund's
expense ratio (assuming such acquisition is not offset by the issuance of
additional shares of common stock).
B-11
<PAGE>
Notification
Shareholders of record and each beneficial owner of the Fund's stock
will receive notification containing specified information at least twenty-one
days, and no more than forty-two days, before the repurchase request deadline.
The information provided will include the repurchase offer amount, the dates of
the repurchase request deadline, repurchase pricing date and repurchase payment
deadline. Notification will also include the procedures under which the Fund may
repurchase such shares on a pro rata basis, and the circumstances under which
the Fund may suspend or postpone the repurchase offer. The Fund will provide the
net asset value of the common stock, which will be computed no more than seven
days before the date of Notification and the means by which shareholders may
ascertain the net asset value thereafter.
Source of Funds
The Fund anticipates using cash on hand to purchase shares acquired
pursuant to the Repurchase Offers. However, if there is insufficient cash
available to consummate a Repurchase Offer, the Fund may be required to
liquidate portfolio securities. In this regard, the Fund will maintain liquid
assets during the notification period in an amount equal to at least 100% of the
Repurchase Offer Amount. As a result of liquidating portfolio securities, the
Fund may realize gains or losses, at a time when the Advisor would otherwise
consider it disadvantageous to do so. In such event, gains may be realized on
securities held for less than three months. In order to qualify as a regulated
investment company under the Code, the Fund must limit such gains, and
accordingly, the amount of gain the Fund could realize from sales of other
securities held for less than three months would be reduced. This could
adversely affect the Fund's yield. Subject to the Fund's investment restrictions
with respect to Borrowings, the Fund may borrow money to finance the repurchase
of shares pursuant to the Repurchase Offers. Furthermore, if the Fund borrows to
finance the making of Repurchase Offers, interest on such borrowing will reduce
the Fund's net investment income.
Repurchase Offers could also significantly reduce the asset coverage of
any Borrowings below the asset coverage requirement set forth in the 1940 Act.
Accordingly, in order to purchase all shares of common stock tendered, the Fund
may have to repay all or part of any then outstanding Borrowings to maintain the
required asset coverage. Also, the amount of shares of common stock for which
the Fund makes any particular Repurchase Offer may be affected for the reasons
set forth above or in respect of other concerns related to liquidity of the
Fund's portfolio.
The Fund has entered into a revolving credit facility with Deutsche
Bank AG, New York Branch, dated March 29, 1996, pursuant to which the bank has
agreed to provide a credit facility in the maximum amount of $3 million to the
Fund. The amount that may be borrowed at any time under the facility is limited
to 33 1/3% of the Fund's total assets. The facility will expire on March 27,
1997, unless extended by its terms. As of the date of this Statement of
Additional Information, the Fund had not borrowed any amounts under the credit
facility. The purpose of the credit facility is to provide the Fund with
additional liquidity to meet its obligations to purchase shares under its
quarterly share repurchase program and to otherwise provide funds for cash
management and investment purposes. Loans made under the credit facility, if
any, will bear interest at the option of the Fund for each quarterly interest
period, either, (1) at the higher of the bank's federal funds rate or prime
lending rate, (2) at the New York interbank rate ("NIBOR") plus .75%, or (3) at
the London interbank rate ("LIBOR") plus .75%.
Withdrawal Rights
Tenders made pursuant to the Repurchase Offer will be irrevocable after
the Repurchase Request Deadline. However, shareholders may modify the number of
shares being tendered or withdraw Shares
tendered at any time up to the Repurchase Request Deadline. All shares purchased
by the Fund pursuant to the Repurchase Offer will be retired by the Fund.
B-12
<PAGE>
Tax Consequences
The following discussion is a general summary of the Federal Income Tax
consequences of a tender of Shares pursuant to a Repurchase Offer. You should
consult your own tax advisor regarding the specific tax consequences, including
state and local tax consequences, of such a tender by you.
A tender of Shares pursuant to a Repurchase Offer will be a taxable
transaction for Federal income tax purposes. In general, the transaction should
be treated as a sale or exchange of the Shares under Section 302 of the Internal
Revenue Code of 1986 as amended (the "Code"), if the tender (i) completely
terminates the Shareholder's interest in the Fund, (ii) is treated as a
distribution that is "not essentially equivalent to a dividend." A complete
termination of the Shareholder's interest generally requires that the
Shareholder dispose of all Shares directly owned or attributed to him under
Section 318 of the Code. A "substantially disproportionate" distribution
generally requires a reduction of at least 20% in the Shareholder's
proportionate interest in the Fund after all Shares are tendered. A distribution
"not essentially equivalent to a dividend" requires that there be a "meaningful
reduction" in the Shareholders interest, which should be the case if the
Shareholder has a minimal interest in the Fund, exercises no control over Fund
affairs, and suffers a reduction in his proportionate interest.
The Fund intends to take the position that tendering Shareholders will
qualify for sale or exchange treatment. If the transaction is treated as a sale
or exchange for tax purposes, any gain or loss recognized will be treated as a
capital gain or loss by Shareholders who hold their Shares as a capital asset
and as a long-term capital gain or loss if such Shares have been held for more
than one year.
If the transaction is not treated as a sale or exchange, the amount
received upon a sale of shares may consist in whole or in part of ordinary
dividend income, a return of capital or capital gain, depending on the Fund's
earnings and profits for its taxable year and the Shareholder's tax basis in the
Shares. In addition, if any amounts received are treated as a dividend to
tendering Shareholders, a constructive dividend under Section 305 of the Code
may be received by non-tendering Shareholders whose proportionate interest in
the Fund has been increased as a result of the tender.
The Fund or its agent could be required to withhold 31% of gross
proceeds paid to a Shareholder or other payee pursuant to a Repurchase Offer if
(a) it has not been provided with the Shareholder's taxpayer identification
number (which, for an individual, is usually the social security number) and
certification under penalties of perjury (i) that such number is correct and
(ii) that the Shareholder is not subject to withholding as a result of failure
to report all interest and dividend income or (b) the Internal Revenue Service
(IRS) or a broker notifies the Fund that the number provided is incorrect or
withholding is applicable for other reasons. Backup withholding does not apply
to certain payments that are exempt from information reporting or are made to
exempt payees, such as corporations. Foreign Shareholders are required to
provide the Fund with a completed IRS Form W-8 to avoid 31% withholding on
payments received on a sale or exchange. Foreign Shareholders may be subject to
top withholding of 30% (or a lower treaty rate) on any portion of payments
received that is deemed to constitute a dividend.
Suspension and Postponements of Repurchase Offers
The Fund shall not suspend or postpone a Repurchase Offer except by
vote of a majority of the Directors (including a majority of the disinterested
Directors) and only: (1) if such purchases would impair
the Fund's status as a regulated investment company under the Code; (2) for any
period during which an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable, or during which it
is not reasonably practicable for the Fund fairly to determine the value of its
net asset value; or (3) for such other periods as the Commission may by order
permit for the protection of shareholders of the Fund.
B-13
<PAGE>
If the Repurchase Offer is suspended or postponed, the Fund will
provide notice thereof to shareholders. If the Fund renews the Repurchase offer,
the Fund will send a new Notification to all shareholders.
Discretionary Repurchase Offers
In addition to the Fund's policy of periodic repurchase offers, the
Fund may make discretionary repurchase offers once every two years. Because a
discretionary repurchase offer would not be made pursuant to a fundamental
policy of the Fund, it would require only a vote of the Directors. Discretionary
repurchase offers must comply with several of the requirements that apply to
periodic repurchase offers. Among other requirements, the Fund must pay
repurchase proceeds within twenty-one days after the repurchase request
deadline, must compute net asset value daily on the five business days preceding
the discretionary repurchase request deadline, and must send notification
according to applicable procedures. The Fund has never made a discretionary
repurchase offer, it is not required to make discretionary repurchase offers,
and there can be no assurance that one will be conducted.
YIELD INFORMATION
The Fund intends to publish its yield on a periodic basis. The yield on
Fund shares normally will fluctuate. Therefore, the yield for any given past
period is not an indication or representation by the Fund of future yields or
rates of return on its shares. The Fund's yield is affected by changes in
prevailing interest rates, average portfolio maturity and operating expenses.
Current yield information may not provide a basis for comparison with bank
deposits or other investments which pay a fixed yield over a stated period of
time.
The Fund's yield shows the rate of income that it earns on its
investments, expressed as a percentage of the net asset value of Fund shares.
The Fund calculates yield by determining the interest income it earned from its
portfolio investments for a specified thirty-day period (net of expenses),
dividing such income by the average number of Fund shares outstanding, and
expressing the result as an annualized percentage based on the maximum offering
price at the end of that thirty day period. Yield accounting methods differ from
the methods used for other accounting purposes; accordingly, the Fund's yield
may not equal the dividend income actually paid to investors or the income
reported in the Fund's financial statements.
On occasion the Fund may compare its yield to (1) the Prime Rate,
quoted daily in The Wall Street Journal as the base rate on corporate loans at
large U.S. Money center commercial banks, (2) the CD rate, quoted daily in The
Wall Street Journal as the average of top rates paid by major New York banks on
primary new issues of negotiable CD's, usually on amounts of $1 million or more,
(3) one or more averages compiled by Donoghue's Money Fund Report, a widely
recognized independent publication that monitors the performance of money market
mutual funds, (4) the average yield reported by Bank Rate Monitor Nation Index
TM for money market deposit accounts offered by the 1000 leading banks and
thrift institutions in the ten largest standard metropolitan statistical areas,
(5) yield data published by Lipper Analytical Services, Inc., or (6) the yield
on an investment in 90 day Treasury bills on a rolling basis, assuming quarterly
compounding. In addition, the Fund may compare the Prime Rate, the CD rate, the
Donoghue's averages and the other data described above to each other.
MANAGEMENT
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address Age With Registrant During Past 5 Years
- ---------------- --- --------------- -------------------
<S> <C> <C> <C>
Mr. Jon M. LaVine * 51 President and Chairman of the Board and President
26691 Plaza Drive, Suite 222 Chairman of the Board of the Fund and President, Secretary
</TABLE>
B14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Mission Viejo, CA 92691 and Treasurer of the Advisor.
Principal of LaVine & Associates, a
public accounting firm since its
inception in November, 1994; and a
principal of the predecessor
accounting firm, LaVine & Luxenberg
since 1982.
Lawson C. Adams 51 Director Accounting Manager, Lockheed Corp.
Martin 6737 Tannahill Drive
San Jose, CA 95120
R. Gillem Lucas 49 Director Chief Executive Officer, XL
12300 Twinbrook Parkway Associates, Inc.; Gillem Lucas &
Suite 525 Associates (consultants).
Rockville, MD 20852
Eric M. Banhazl 39 Secretary and Interim President of the Fund, May
2025 East Financial Way Treasurer 1994-November 1995; Vice President,
Glendora, CA 91741 Secretary and Treasurer of the Former
Advisor to the Fund, April
1992-November 1995; Senior Vice
President Robert H. Wadsworth
& Associates, Inc.Since 1990.
</TABLE>
* Denotes "Interested Director"
COMPENSATION OF MANAGEMENT AND THE INVESTMENT ADVISOR
The Fund has not paid and does not intend to pay any annual
compensation to the Fund's officers for their services as executive officers.
The Fund pays each director who is not an "interested party" as defined
in the 1940 Act an annual fee of $1,000 per year plus $1,000 for each meeting
attended, together with such Director's actual out of pocket expenses related to
attendance at meetings. The Fund also pays members of its audit committee, which
consists of all directors who are not interested persons as defined in the 1940
Act, an annual fee of $500.
For the fiscal years ended October 31, 1993, 1994 and 1995, the Fund
paid investment advisory fees pursuant to the Investment Advisory Agreement of
$17,563, $31,979, and $51,481, respectively.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, the Advisor
is primarily responsible for the execution of the Fund's portfolio transactions.
In executing such transactions, the Advisor seeks to obtain the best results for
the Fund, taking into account such factors as price (including the applicable
fee, commission or spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Advisor generally seeks reasonably competitive
fee or commission rates, the Fund does not necessarily pay the lowest commission
or spread available.
B-15
<PAGE>
The Fund will purchase Loans and asset-backed securities in
individually negotiated transactions with commercial banks, thrifts, insurance
companies, finance companies and other financial institutions. In selecting such
firms, the Advisor may consider, among other factors, the financial strength,
professional ability, level of service and research capability of the
institution. The Fund has no obligation to deal with any bank, broker or dealer
in execution of transactions in portfolio securities. Subject to obtaining best
price and execution, firms which provide supplemental investment research to the
Advisor may receive orders for transactions by the Fund.
In the process of buying, selling and holding loans, the Fund may
receive and/or pay certain fees. These fees are in addition to interest payments
received and may include facility fees, commitment fees, commissions and
prepayment penalty fees upon the prepayment of a loan by a borrower. Other
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 circumstances where
better prices and execution are available elsewhere.
FINANCIAL STATEMENTS
Audited financial staetments for the Fund's fiscal year ended October
31, 1995 and unaudited financial statements for the Fund's six-month fiscal
period ended April 30, 1996, as contained in the Fund's Annual Report to
Shareholders and Semi-Annual Report to Shareholders, respectively, are
incorporated herein by reference to the Annual Report and Semi-Annual Report.
B-16
