Date: March 11, 1996
Securities Act File No. 33-45173
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
(Check appropriate box or boxes)
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Amendment No.
[ ] Post -Effective Amendment No. 6
and/or
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] Amendment No. 8
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Target Income Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
26691 Plaza Drive, Suite 222, Mission Viejo, CA 92691
(Address of Principal Executive Offices)
(714) 367-1935
(Registrant's Telephone Number, including Area Code)
Jon M. LaVine
Target Income Fund, Inc.
26691 Plaza Drive, Suite 222
Mission Viejo, CA 92691
(Name and Address of Agent for Service)
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [X]
It is proposed that this filing will become effective (check appropriate box)
[ ] when declared effective pursuant to section 8(c)
The following boxes should only be included and completed if the
registrant is a registered closed-end management investment company or business
development company which makes periodic repurchase offers under Rule 23c-3
under the Investment Company Act and is making this filing in accordance with
Rule 486 under the Securities Act.
[X] immediately upon filing pursuant to paragraph (b)
[ ] on March __, 1995 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a)
If appropriate, check the following box:
[ ] this [post-effective] amendment designates a new effective
date for a previously filed [post-effective amendment
[registration statement].
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g:\clients\tif\n2cov.396
<PAGE>
TARGET INCOME FUND
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
Part A
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
1 Outside Front Cover................. Outside Front Cover of Prospectus
2 Inside Front and Outside
Back Cover Page .................... Inside Front and Outside Back
Cover Page of Prospectus
3 Fee Table and Synopsis.............. Fee Table
4 Financial Highlights................ Financial Highlights
5 Plan of Distribution................ Outside Front Cover; Use of
Proceeds; Purchase of Shares;
Automatic Dividend Reinvestment
Plan
6 Selling Shareholder................. Not Applicable
7 Use of Proceeds..................... Use of Proceeds; Investment
Objectives and Policies;
Repurchase Offers
8 General Description of Registrant... Investment Objective and
Policies; Description of Capital
Stock; Repurchase Offers; Net
Asset Value; Purchase of Shares
9 Management.......................... Management; Custodian, Transfer
Agent, Auditor and Shareholder
Reports; Dividend Reinvestment
Plan; Description of Capital
Stock
10 Capital Stock, Long-Term Debt
and Owner Securities................ Dividends and Distributions;
Automatic Dividend Reinvestment
Plan; Description of Capital
Stock; Taxes
11 Defaults and Arrears on Senior
Securities.......................... Not Applicable
12 Legal Proceedings................... Not Applicable
13 Table of Contents of the Statement
of Additional Information........... Further Information
Part B Statement of
Item Number Caption Additional Information
- ----------- ------- ----------------------
14 Cover Page.......................... Cover Page of Statement of
Additional Information
15 Table of Contents................... Table of Contents
16 General Information and History..... Not Applicable
17 Investment Objective and Policies... Investment Objective and
Policies; Investment
Restrictions; Portfolio
Transactions; Repurchase Offers;
Yield
18 Management.......................... Management
19 Control Persons and Principal
Holders of Securities............... Not Applicable
20 Investment Advisory and
Other Services...................... Management
21 Brokerage Allocation and Other
Practices........................... Portfolio Transactions
22 Tax Status.......................... Additional Tax Considerations
23 Financial Statements................ Statement of Assets and
Liabilities; Independent
Auditors' Report
<PAGE>
TARGET INCOME FUND, INC.
26691 Plaza Drive, Suite 222, Mission Viejo, California 92691
Target Income Fund, Inc. (the "Fund") is a continuously offered
closed-end, non-diversified management investment company. 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 loans and
variable rate asset-backed securities.
The Fund's policy of investing only in variable rate loans and variable
rate asset-backed securities is expected to minimize fluctuations in the Fund's
net asset value in response to changes in interest rates. However, the Fund's
net asset value may be affected by changes in interest rates and any non payment
by the Borrowers under such loans and securities. The variable rate loans and
asset-backed securities are generally unrated, although the Fund may in some
instances invest in rated asset-backed securities. Accordingly, the Fund is more
dependent upon the adequacy of the Advisor's credit analysis in attempting to
achieve its objectives. Although the Fund is not a money market fund, 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. 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."
No market presently exists for the Fund's shares, and it is not
anticipated that a secondary market will develop. To provide shareholder
liquidity, the Fund has adopted a fundamental policy that requires the Fund to
make quarterly repurchase offers to purchase a specified percentage (currently
5%) of the Fund's outstanding shares at net asset value. 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 March 11, 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 12 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.
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Price to Sales Proceeds to
Public(1) Charge(1) Company(2)
Per Share $10.31 $0.31 $10.00
Total $25,750,000 $750,000 $25,000,000
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(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 March 11, 1996.
1
<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%
Administration Fees...............................................0.25%
Other Operating Expenses..........................................1.50%
-----
Total Annual Expenses ............................................2.50%
=====
Example
An Investor in the Fund would pay the following expenses on
a $1,000 investment, assuming a 5% annual return
1 year 3 years 5 years 10 years
$55 $106 $159 $305
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 that
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. In subsequent years, overall operating
expenses will not fall below the applicable percentage limitation until the
Advisor has been full reimbursed for fees forgone.
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.
This information should be read in conjunction with the financial statements and
accompanying notes which appear 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.
<TABLE>
<CAPTION>
For the Period
from
November 24,
Year Ended Year Ended 1992
October 31, October 31, to October 31,
1995 1994 1993
------------- --------- -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................ $10.00 $10.00 $10.00
Income From Investment Operations
Net Investment Income........................... 0.76 0.75 0.68
------ ----- ------
Total From Investment Operations.............. 0.76 0.75 0.68
------ ----- ------
Less Distributions
Distributions From Net Investment Income (0.76) ( 0.75) (0.68)
------- ------
Total Distributions........................... (0.76) ( 0.75) (0.68)
------- ------- ------
Net Asset Value, End of Period...................... $10.00 $10.00 $10.00
====== ====== ======
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total Return (a)..................................... 7.7% 7.7% 7.0%+
Net Assets, End of Period (000's).................... $10,793 $10,465 $6,288
Ratio of Expenses to Average Net Assets.............. 2.5%(1) 2.5%(1) 2.5%(1)+
Ratio of Net Investment Income to Average Net
Assets............................................... 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 2.8%, 2.9% and 4.4%, respectively, and
the annualized ratio of net investment income to average net assets was
7.3%, 6.9% and 3.1%, respectively.
* Commencement of operations.
+ Annualized.
3
<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 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 loan participation by the Fund is the asset quality and
creditworthiness of the Borrower on an individual Loan.
Prior to the date of this Prospectus, the Fund invested exclusively in
participation interests in Loans. By expanding the scope of portfolio
investments to include asset-backed securities, the Fund will achieve a much
greater diversity of investments and will have access to a greater range of
investment opportunities, as 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 was 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 does perform 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 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.
4
<PAGE>
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. 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. The Fund has not yet incurred any borrowings but reserves
the right to do so in the future without further notice to shareholders.
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 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. The same percentage
restrictions apply to Loans made by the Fund with any one co-lender. 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. However, it is the
Fund's intention under normal market conditions not to invest more than 10% of
its total assets in Loans of any single Borrower or in asset-backed securities
of a single issuer.
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 floating rate Loans, 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
5
<PAGE>
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 credit worthiness of a
particular Borrower or Borrowers, or by events that reduce the level of interest
in the market for Loans.
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, 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 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 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
easily 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. Substantially all 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 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.
Co-Lenders; Lending Agents; Intermediaries. With respect to direct
investments in Loans and Loan participations, 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. 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
6
<PAGE>
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.
Default of a co-lender or other intermediary could adversely affect the Fund's
ability to receive payments.
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; 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.
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.
PURCHASE OF SHARES
7
<PAGE>
Finance 500, Inc., 19762 MacArthur Blvd., Ste. 200, Irvine CA 92715 (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 "Leverage."
The investment of proceeds from the offering of Fund shares in Loans 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 1993
8
<PAGE>
Act. 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 and such other persons who are determined by the Directors to
have acquired shares under circumstances not involving sales efforts by
Distributor.
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 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 "Investment Objective and Policies-
Leverage" in the Statement of Additional Information. The investment of proceeds
from the continuous offer of Fund common shares may take one to three months, up
to a maximum of six months, from the date the Fund receives such proceeds.
Pending such investments, the proceeds will be held in cash or invested in
investment grade short-term debt obligations. Investments in such short-term
debt obligations will reduce the Fund's yield. The Fund also may acquire such
debt obligations during unusual market conditions for temporary defensive
purposes.
REPURCHASE OFFERS
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 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
9
<PAGE>
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 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
10
<PAGE>
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.
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).
As of October 31, 1995, the net asset value of each share of the Fund was $10.
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,
11
<PAGE>
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-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.
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.
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.
13
<PAGE>
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
the 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.
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-8
Additional Tax Considerations...............B-9
Repurchase Offers...........................B-10
Yield Information...........................B-13
Management..................................B-14
Compensation................................B-14
Portfolio Transactions......................B-14
Independent Auditor's Report................B-15
Financial Statements........................B-16
14
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Glendora and State of California on the
9 day of March, 1996.
TARGET INCOME FUND, INC.
By /s/ Jon LaVine
-----------------------
Jon LaVine
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated and each hereby certify that
this amendment meets all of the requirements for effectiveness under paragraph
(b) Rule 486 of Regulation C thereunder.
/s/ Lawson C. Adams Director March 9, 1996
- ------------------------
Lawson C. Adams
/s/ R. Gillem Lucas Director March 9, 1996
- -------------------------
R. Gillem Lucas
/s/ Jon LaVine Director March 9, 1996
- -------------------------
Jon LaVine
/s/ Eric M. Banhazl Principal March 9, 1996
- ------------------------- Financial Officer
Eric M. Banhazl
<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 March 11, 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-8
Additional Tax Considerations......................................... B-9
Repurchase Offers..................................................... B-10
Yield Information..................................................... B-13
Management............................................................ B-14
Compensation.......................................................... B-14
Portfolio Transactions................................................ B-14
Independent Auditor's Report.......................................... B-15
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 March 11, 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
B-1
<PAGE>
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 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 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
acquiring participation interests 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.
Description of Asset-Backed Securities
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
B-2
<PAGE>
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
The Advisor does perform a credit analysis on each Loan in which the
Fund invests directly or acquires a participation interest. The Fund will make a
direct investment or purchase a participation interest 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 credit worthiness 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
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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 or of 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 credit worthiness 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 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
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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.
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,
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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.
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 at present. 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 credit worthiness 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
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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 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 may from time to time borrow money on a secured or
unsecured basis at variable or fixed rates. 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 Advisor currently expects
that the Fund may incur Borrowings in order to remain fully invested by managing
anticipated cash infusions from the prepayment of Loans and the sale of Fund
shares and cash outflows from 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 to finance the purchase of shares
pursuant to a Repurchase Offer, or 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.
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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 with the credit worthiness 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. As a non-diversified company, the Fund is permitted to
invest as much as 25% of its assets in a single loan; however, the Fund's policy
under normal market conditions is to limit investments in the securities of any
one issuer to 10% of its total assets. Investments in 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
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.
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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.
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. Although not a fundamental policy, it is the
Fund's current intention not to invest more than 10% of its total assets in
Loans to any single Borrower or in asset-backed securities of a single issuer.
11. Purchase or sale 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. In addition, with respect
to Loans under which the Fund does not have privity with the Borrower or would
not have a direct cause of action against the Borrower in the event of its
failure to pay scheduled principal or interest, the Fund will also separately
meet the requirements contained in the above mentioned investment restriction
and consider each person interpositioned between the Borrower and the Fund to be
an issuer of the 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 by its shareholders on
December 31 of the year in which the dividend was declared.
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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 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 Board has set the current
"Repurchase Offer Amount" at 5% of the Fund's shares outstanding. The Repurchase
Offer is open for a period of at least 21 days from the date a "Notification" is
sent to 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).
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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.
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.
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
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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.
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
B-12
<PAGE>
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) on 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.
B-13
<PAGE>
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
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 Supervisor, Lockheed Corp.
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 38 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 of
Robert H.
Wadsworth & Associates, Inc. since
1990, Vice President Huntington
Advisor's, Inc. since 1988.
</TABLE>
* Denotes "Interested Director"
COMPENSATION
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.
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.
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
Incorporated by reference herein are portions of the Fund's annual
report to shareholders for the fiscal year ended October 31, 1995 under the
heading: "STATEMENT OF ASSETS AND LIABILITIES," "STATEMENT OF OPERATIONS,"
"STATEMENT OF CHANGES IN NET ASSETS," "STATEMENT OF CASH FLOWS," "FINANCIAL
HIGHLIGHTS," "SCHEDULE OF INVESTMENT,"and "NOTES TO FINANCIAL STATEMENTS."
copies of the annual report are available upon request and without charge by
contacting Finance 500, Inc., 19762 MacArthur Blvd. Ste. 200, Irvine, California
92715, (714) 253-3430.
B-15
<PAGE>
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
(a) Financial Statements:
(incorporated by reference in part B
(Statement of Additional Information)
under the heading "Financial Statements")
(b) Exhibits
(1) Articles of Incorporation**
(2) Bylaws**
(3) None
(4) None
(5) None
(6) None
(7) Form of Investment Management Agreement**
(8) Form of Underwriting Agreement***
(9) None
(10) Form of Custodian Agreement***
(11.1) Form of Transfer Agency Agreement****
(11.2) Form of Administration Agreement****
(12) None
(13) None
(14) Consent of Tait, Weller & Baker*
(15) None
(16) None
(17) None
* Filed herewith
** Previously filed and incorporated by reference from Form N-2
*** Previously filed and incorporated by reference from pre-effective
amendment no. 1
**** Previously filed and incorporated by reference from post-effective
amendment no. 1
Item 25: Marketing Arrangement
See Exhibit 8 to this Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees..................... $ 7,813
National Association of Securities Dealers, Inc. fees....... 3,000
Blue Sky Filing fees and expenses........................... 2,500
------
Total...................................... $13,313
=======
C-1
<PAGE>
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At October 31, 1995, the Registrant had the following number of
securities holders:
Number of
Title of Class Record Holders
-------------- --------------
Common Shares, par value $.01 per share 75
Item 29: Indemnification
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no director or officer of this Corporation shall
be personally liable to the Corporation or its stockholders for money damages;
provided, however, that nothing herein shall be deemed to limit the liability of
any director or officer to which he or she would be subject pursuant to the 1940
Act and the rules and regulations thereunder.
Item 30: Business and Other Connections of Investment Adviser
Reference is made to Part A of this Registration Statement and to Form
ADV filed under the Investment Advisers Act of 1940 by Target Capital Advisors,
Inc. (File No. 801-49367).
Item 31: Location of Accounts and Records
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession of the Registrant and
Registrant's transfer agent as follows: the documents required to be maintained
by paragraph (2)(iv) of Rule 31a-1(b) will be maintained by the transfer agent,
and all other records will be maintained by the Registrant.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
(a) Registrant undertakes to suspend offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
(b) Not applicable
(c) Not applicable
(d) Pursuant to Rule 415 under the Securities Act of 1933 and Item
512(a) of Regulation S-K, the Registrant hereby undertakes (1) to file during
any period in which offers or sales are being made, a post-effective amendment
to this registration statement: (i) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the
Prospectus any facts or events arising after the effective date
C-2
<PAGE>
of the registration statement of (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement, (2) that, for the purposes of
determining any liability under the Securities Act of 1933, each such-post
effective amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; (3) to remove
from registration by means of post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
(e) Not applicable
(f) Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-3
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1 Articles of Incorporation**
2 Bylaws**
3 None
4 None
5 None
6 None
7 Form of Investment Management Agreement**
8 Form of Underwriting Agreement***
9 None
10 Form of Custodian Agreement***
11.1 Form of Transfer Agency Agreement****
11.2 Form of Administration Agreement****
12. None
13. None
14 Consent of Tait, Weller & Baker*
15 None
16 None
17 None
- -----------------
* Filed herewith
** Previously filed and incorporated by reference from Form N-2
*** Previously filed and incorporated by reference from pre-effective
amendment no. 1
**** Previously filed and incorporated by reference from post-effective
amendment no. 1
C-4
EXHIBIT 14
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our Firm in the filing of the
Registration Statement on Form N-2 of Target Income Fund. We also consent to the
use of our report dated December 21, 1995 on the financial statements and
financial highlights of Target Income Fund which are included in the
Registration Statement.
TAIT, WELLER, & BAKER
Philadelphia, Pennsylvania
March 1, 1996
C-5
