Date: July , 1996
Securities Act File No. 33-45173
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Amendment No.______
[X] Post -Effective Amendment No.7
and/or
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 9
------------------------
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. o
It is proposed that this filing will become effective (check
appropriate box)
[x] 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.
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on __________, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on ( ) 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].
<PAGE>
TARGET INCOME FUND
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
<TABLE>
<CAPTION>
Part A
Item Number Caption Prospectus Caption
- - - ----------- ------- ------------------
<S> <C> <C>
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
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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 Information
18 Management............................................ Management
19 Control Persons and Principal Holders of
Securities............................................ Not Applicable
20 Investment Advisory and Other Services................ Management; Compensation of Management and
.
Investment Advisor
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
</TABLE>
<PAGE>
TARGET INCOME FUND, INC.
26691 Plaza Drive, Suite 222, Mission Viejo, California 92691
The investment objectives of the Target Income Fund, Inc. (the "Fund" )
are to seek as high a level of current income as is consistent with preservation
of capital by investing primarily in variable rate collateralized small business
loans and variable rate asset-backed securities. The Fund is a continuously
offered closed-end, non-diversified management investment company.
Shares of the Fund involve investment risks, including fluctuations in
value and the possible loss of investment principal. The Fund attempts to
minimize fluctuations in its net asset value due to changes in interest rates by
investing primarily in variable rate loans and asset-backed securities. The Fund
is not a money market fund and the Fund shares are not deposits or obligations
of, or guaranteed by, any bank or other depository institution, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency. An investment in shares of the
Fund does not constitute a complete investment program. See "Investment
Objective and Policies."
Shares of the Fund are offered continuously at a price equal to their
net asset value plus a sales charge of up to 3.00% of the public offering price
of the shares purchased. See "Purchase of Shares."
The Fund has a policy of making quarterly repurchase offers for a
specified percentage (currently 5%) of the Fund's outstanding shares at net
asset value to provide shareholder liquidity. No market presently exists for the
Fund's shares, and it is not anticipated that a secondary market will develop.
See "Repurchase Offers".
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus carefully and retain it for future reference. A Statement
of Additional Information dated July, 1996 containing additional information
about the Fund has been filed with the Securities and Exchange Commission and is
available without charge upon request to the Fund at the above address or by
telephone (800) 385-7003. The Statement of Additional Information is
incorporated by reference in its entirety into this Prospectus, and its table of
contents appears on page 14 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Sales Proceeds to
Public(1) Charge(1) Fund(2)
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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 July , 1996.
1
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
<S> <C>
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%
====
</TABLE>
Example
<TABLE>
<S> <C> <C> <C> <C>
An Investor in the Fund would pay the following expenses 1 year 3 years 5 years 10 years
on a $1,000 investment, assuming a 5% annual return $55 $106 $159 $305
</TABLE>
The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. The example should not be considered a representation of
past or future expenses, and the Fund's actual expenses may be more or less than
those shown.
*The Advisor of the Fund has agreed to reduce its fees to ensure that the
expenses for the Fund will not exceed the limits set by applicable state
regulations, currently 2.5% of net assets. To the extent the Advisor reduces its
fees due to the expense limitation, the Fund will reimburse the Advisor when
operating expenses (before reimbursement) for the Fund are less than the
applicable percentage limitation. The Fund has also agreed to reimburse Concord
Growth Corporation ("CGC") for expenses paid by CGC in prior years on behalf of
the Fund and is making payments which are included within the Fund's expense
limitation of 2.5% of net assets. In subsequent years, overall operating
expenses will not fall below the applicable percentage limitation until the
Advisor has been fully reimbursed for fees forgone and CGC has been fully
reimbursed.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The following information for a share outstanding throughout the period
has been derived from the audited financial statements of the Fund for the
period November 24, 1992 (commencement of operations) through October 31, 1995
and for the unaudited period ending April 30, 1996. This information should be
read in conjunction with the financial statements and accompanying notes which
are incorporated by reference in the Statement of Additional Information. More
detailed information concerning the Fund's performance, including audited
financial statements, is available in the Fund's Annual Report dated October 31,
1995 and Semi-Annual Report dated April 30, 1996.
<TABLE>
<CAPTION>
Six Months Year Ended Year Ended For the period from
Ended October 31, October 31, November 24, 1992*
April 30, 1996+ 1995 1994 to October 31, 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period................... $10.00 $10.00 $10.00 $10.00
Income from Investment operations:
Net Investment Income................................ 0.34 0.76 0.76 0.68
Total From Investment Operations..................... 0.34 0.76 0.75 0.68
Less Distributions................................
Distributions From Net Investment
Income.................................. (0.34) (0.76) (0.75) (0.68)
Total Distributions .................................... (0.34) (0.76) (0.75) (0.68)
------ ------ ------ ------
Net Asset Value, End of Period.......................... $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Total Return (a)........................................ 7.1%+ 7.7% 7.7% 7.0%+
Net Assets, End of Period (000's)....................... $11,111 $10,793 $10,465 $6,288
Ratio of Expenses to Average Net Assets................. 2.5%(1)+ 2.5%(1) 2.5%(1) 2.5%(1)+
Ratio of Net Investment Income
to Average Net Assets ............................... 7.0%(1)+ 7.6%(1) 7.5%(1) 7.7%(1)+
</TABLE>
- - - ----------
(a) Exclusive of deduction of a sales charge on investments.
(1) Prior to reimbursement and waiver of expenses, the annualized ratio of
expenses to average net assets was 2.5%, 2.8%, 2.9% and 4.4%, respectively, and
the annualized ratio of net investment income to average net assets was 7.0%,
7.3%, 6.9% and 3.1%, respectively. * Commencement of operations
.+ Annualized.
+- Unaudited
See accompanying notes to financial statements
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund is a continuously offered closed-end, non-diversified
management investment company that seeks as high a level of current income as is
consistent with preservation of capital by investing primarily in variable rate
collateralized small business loans (the "Loans") and variable rate asset-backed
securities.
Investment Policies
The Fund attempts to meet its objectives by investing primarily in
variable rate, fully-secured small business Loans and variable rate,
asset-backed securities. This policy is designed to minimize fluctuations in the
Fund's net asset value in response to changes in interest rates. Under normal
market conditions, the Fund will invest at least 80% of its total assets in
direct investments and participation interests ("Participations") in variable
rate Loans and asset-backed securities.
The small business Loans in which the Fund invests are typically made
to small to medium size, U.S. companies or their affiliates ("Borrowers"), have
floating interest rates and are senior and fully secured at the time the Loan is
made. The Loans typically have short-term maturities of six to 12 months and
meet business and credit quality criteria established by the lenders. The
primary consideration in the Advisor's selection of Loans for direct investment
or the acquisition of a Participation by the Fund is the asset quality and
creditworthiness of the Borrower on an individual Loan.
The Fund's investments in Loans have been concentrated in
Participations. When the Fund purchases a Participation, the Fund enters into a
contractual relationship with the loan originator (the "Lender") selling the
Participation, but not with the Borrower. The Participation gives the Fund the
right to receive a fractional undivided interest in the principal and interest
payments on the Loan, at an interest rate negotiated with the Lender. The
interest income on the Participation above the negotiated rate to the Fund is
retained by the Lender as compensation for its services in originating,
servicing and administering the Loan. See "Risk Factors -- Credit Risks
Associated with Participations", for a discussion of the risks associated with
Participations.
By investing in asset-backed securities, the Fund expects to achieve a
much greater diversity of investments and have access to a greater range of
investment opportunities. Small business and consumer finance lenders are
increasingly utilizing the issuance of asset-backed securities, rather than
selling participation interests in Loans to third- parties such as the Fund.
The asset-backed securities are in the form of certificates
representing interests in, or notes secured by, segregated pools of assets such
as small business loans, automobile loans and leases, and equipment leases (but
may not include perfected security interests in the actual physical assets),
credit card receivables, mortgage loans, trade receivables and other forms of
consumer and commercial- purpose loans, which may be secured or unsecured (the
"Receivables"). The asset-backed securities in which the Fund invests may be
unrated and subordinated, although fully secured, to senior classes of other
securities representing interests in the same pool of Receivables. The Fund will
only invest in subordinated asset-backed securities of an issuer where the
senior classes of securities of the same issuer are rated at least investment
grade or better by a nationally recognized rating agency. However, in most
cases, the subordinated securities in which the Fund invests may not be rated.
Although junior in right of payment to senior classes of securities of the same
issuer, the subordinated asset-backed securities are secured by the underlying
Receivables and may be supported by a cash reserve fund established by the
issuer and other forms of credit enhancement. The Advisor does not perform a
credit analysis for each asset in the pool, but relies on the credit criteria
established for the pool by the issuer to meet the eligibility requirements of
the rating services. Management of the Fund believes the Fund's investments in
subordinated securities provides the Fund with an opportunity to obtain a higher
yield than can be obtained on the senior securities, while still maintaining a
secured interest in the underlying collateral. The Advisor's decision to
diversify the Fund's portfolio by investing in asset-backed securities is based
in part on the ratings of the senior securities and overall credit quality of
the Receivables collateralizing the securities.
The asset-backed securities are issued for varying terms depending on
the nature of the underlying Receivables. Interest is generally payable on a
monthly, quarterly or semi-annual basis. Principal is generally payable on an
amortization schedule which will reflect subordination to senior classes of
securities and may include a balloon payment over the final year of the stated
maturity of the security.
3
<PAGE>
The Advisor performs its own credit analysis of the individual Borrower
in the case of direct investments in Loans and Loan Participations. In addition,
the Advisor may use any available information that may be supplied by the
Lending Agents, co-lenders or other participants involved in the Loans. The Fund
does not concentrate in Loans to companies in any specific industry. The
Borrowers are typically manufacturing, distribution and service firms in such
fields as industrial equipment, electronics, business machines and business
services.
When the Fund purchases a Participation, the Lender selling the
Participation is interpositioned between the Fund and the Borrower. Accordingly,
the Fund has established procedures to minimize the credit risk of the Lender
under the Participation that are intended to insulate the Fund's investments in
Participations from a possible bankruptcy or failure of the Lender. The Fund has
established lock box and trust account collection procedures for all
Participations which provide that all payments of principal and interest on the
Loans are made directly to a Fund trust or collection account. The Lender is
required to obtain the Fund's consent before amending or waiving any of its
rights under the financing documents with the Borrower, or releasing any Loan
collateral, waiving any payment event of default by the Borrower, or making any
assignment or pledge of the Lender's rights under the financing documents. The
Lender may also be required to maintain a minimum ownership interest in the Loan
and may be required to set up a reserve account from all revenues received on
the Loan of up to a designated percentage of the principal amount of the Loan,
as a reserve against any losses to the Fund on the Loan. The Fund has the right,
at its election, to assume and enforce all of the Lender's right to administer,
manage, perform and enforce the terms of the Loan against the Borrower in the
event of a bankruptcy or failure of the Lender, or a breach of its duties under
the Participation. The Fund believes that these procedures will significantly
reduce the credit risk of a Lender in a Participation.
The Fund has established eligibility criteria for Lenders from whom it
will purchase Participations or with whom it will invest as a colender. These
criteria include demonstrated experience in originating and administering small
business commercial loans, satisfactory business and credit history, experienced
personnel, and minimum capital standards.
The rate of interest payable on Loans is established as the sum of a
base lending rate plus a specified spread. These base lending rates are
generally the Prime Rate of a designated U.S. bank, the London InterBank Offered
Rate ("LIBOR"), the Certificate of Deposit ("CD") rate of a designated U.S. bank
or another base lending rate used by commercial lenders. The interest rates on
Prime Rate-based, LIBOR-based and CD-based Loans are periodically reset with
reset periods typically ranging from 30 days to three months. Due to the
periodic reset periods, there may be a differential between the interest rate on
the Loans in the portfolio and current market interest rates. The Fund attempts
to maintain a portfolio that has a dollar weighted average period to the next
interest rate readjustment of approximately 90 days or less. The Fund is not a
money market fund. See "Investment Objective and Policies" and "Yield
Information" in the Statement of Additional Information, and "Risk Factors"
below for additional discussion of the characteristics of the Loans.
Up to 20% of the Fund's total assets may be held in cash or invested in
investment grade short-term debt obligations which may not be secured.
Other Investment Policies
The Fund has adopted certain other polices as summarized below and
described in more detail under "Other Investment Policies" in the Statement of
Additional Information.
Leverage. The Fund may from time to time borrow money on a secured or
unsecured basis at variable or fixed rates in any amounts up to 33 1/3% of the
Fund's total assets (after giving effect to the amount borrowed). The borrowings
may be for the purpose of providing additional cash to purchase additional
asset-backed securities and Loans or to provide funds to finance the purchase of
shares pursuant to Repurchase Offers. The Fund would be limited in its
borrowings to 33 1/3% of net assets. See "Risk Factors -- Borrowings".
The Fund has entered into a revolving credit facility with Deutsche
Bank AG, New York Branch, dated March 29, 1996, pursuant to which the bank has
agreed to provide a credit facility in the maximum amount of $3 million to the
Fund. The amount that may be borrowed at any time under the facility is limited
to 33 1/3% of the Fund's total assets. The facility will expire on March 27,
1997, unless extended by its terms. As of the date of this Prospectus, the Fund
had borrowed $800,000 under the credit facility. See "Repurchase Offers" in the
Statement of Additional Information."
Repurchase Agreements. The Fund may enter into repurchase agreements
with commercial banks or broker-dealers as a temporary investment
4
<PAGE>
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. Since the Fund may invest
a relatively high percentage of its assets in the obligations of a limited
number of issuers, and with a limited number of co-lenders or other
intermediaries between the Fund and the Borrower, the value of the Fund's
investments may be more affected by any single adverse economic, political or
regulatory occurrence affecting such issuers or co- lenders than would the value
of the investments of a diversified investment company.
Dependence on CGC for Loan Originations and Master Servicing. As of June 30,
1996, all of the Loan participations held by the Fund have been originated as
small business loans through Concord Growth Corporation ("CGC"), a commercial
finance services firm located in Palo Alto, California. A majority of the
borrowers on the Loans have their operations based in California and therefore
may be susceptible to changes in the general California business economy. The
Fund has established lock box and trust account collection procedures to provide
that all payments on the Participations held by the Fund are made directly to
the Fund account rather than passed through the lender, and therefore are
intended to insulate the Fund's portfolio securities from a possible bankruptcy
or failure of CGC or any other Lender. While the Fund is attempting to expand
its base of loan originators, it is still dependent on CGC for the origination
of Loans for the Fund portfolio and would have difficulty finding new Loans
meeting its current investment criteria if CGC discontinued doing business with
the Fund.
CGC has also been appointed the Master Servicer for the Fund to act as
a Lending Agent, at no charge or expense to the Fund. As Master Servicer, CGC
services the Loans originated by it and performs due diligence and
administrative services and monitors the Fund's direct investment in Loans and
Participations originated by other Lenders for review by the Advisor.
Lack of Market for Fund Shares. No market presently exists for the
Fund's shares, and it is not anticipated that a secondary market will develop.
However, if a secondary market develops for the Fund's shares, it is possible
that shares would not trade at a premium to net asset value because the Fund is
offering its shares on a continuous basis. Conversely, because the Fund
primarily invests in short-term variable rate Loans and variable-rate
asset-backed securities and it has a fundamental policy that requires it to make
quarterly repurchase offers at net asset value, the Fund's shares are unlikely
to trade at a discount. However, there can be no assurance that the Fund's
shares will trade at a price which equals or approximates net asset value.
Illiquidity. Most of the securities in which the Fund invests are not
readily marketable. The asset-backed securities are generally privately placed
and are not registered for sale under Federal or State securities laws. The
Loans in which the Fund invests typically have short-term maturities and provide
for relatively rapid access to collateral, however they also are privately
placed and do not have the liquidity of conventional debt securities traded in
the secondary market. Also, the Fund's ability to dispose of a Loan may be
influenced by a perceived or actual decline in the creditworthiness of a
particular Borrower or Borrowers, or by events that reduce the level of interest
in the market for Loans.
5
<PAGE>
Borrowings. The Fund is authorized to borrow money from time on a
secured or unsecured basis at variable or fixed rates in any amounts up to 33
1/3% of the Fund's total assets (after giving effect to the amount borrowed).
The rights of any lenders to the Fund to receive payments of interest on and
repayments of principal of such borrowings will be senior to those of the
holders of the Fund's common stock, and the terms of any such borrowing may
contain provisions which limit certain activities of the Fund, including the
payment of dividends to holders of common stock in certain circumstances.
Further, the terms of any such borrowings may, and the provisions of the
Investment Company Act of 1940 (the "1940 Act") do (in certain circumstances),
grant lenders certain voting rights in the event of default in the payment of
interest or repayment of principal. In the event such provisions would impair
the Fund's status as a regulated investment company, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings. Interest payments and fees incurred in connection with any such
borrowings will reduce the amount of net income available for payment to the
holders of common stock. See "Other Investment Policies -- Leverage" for a
description of the Fund's $3 million revolving credit facility in effect at the
date of this Prospectus.
Risk Related to Loans
Financial Condition of Borrowers; Collateral. The securities in which
the Fund invests are subject to a risk of nonpayment of scheduled interest or
principal payments. A nonpayment by a Borrower would reduce both the amount of
the Fund's income and the value of its assets. The Fund's ability to receive
interest and principal payments depends primarily on the financial condition of
the Borrowers and their assets and, in the case of Loans and Participations, on
the creditworthiness of any institution that is interposed between the Fund and
the Borrower. The Loans in which the Fund invests directly or through
Participations are senior, fully secured debt obligations of Borrowers that are
believed by the Fund's Advisor to have adequate assets and/or cash flow to pay
scheduled interest and principal and that meet the Advisor's other credit
standards. However, the Loans are not rated and may be subject to a higher risk
of default than rated loans or the asset- backed securities, which represent
interests in pools of assets. The Loans are secured by collateral which the
Advisor believes to have a market value, at the time of acquiring the Loan, that
will exceed the principal amount of the Loan. Assets which may serve as
collateral include, but are not limited to, accounts receivable, inventory,
equipment, real property, personal guaranties of principals, patents and general
intangibles, certificates of deposit and letters of credit. Accounts receivable
are expected to be the primary form of collateral. The Advisor believes that
accounts receivable are the most liquid collateral and can be readily monitored.
Although the Advisor will use due care in its continuing credit analysis, there
can be no assurance that such analysis will be able to detect misrepresentations
or fraud on the part of Borrowers. There also can be no assurance that the
liquidation of collateral underlying a Loan would satisfy the Borrower's
obligation in the event of nonpayment of scheduled interest or principal, or
that the collateral could be readily liquidated.
Concentration of Investments, Loans. A majority of the Borrowers on the
Loans have their principal place of business in California and the Fund's
investments are expected to continue to be concentrated in California
businesses. Adverse economic conditions or other factors particularly affecting
California could increase the risk of loss on the securities.
Absence of Ratings on Loans. The Loans in which the Fund invests are
not currently rated by any nationally recognized rating service, because the
firms issuing the Loans are primarily small to medium size private businesses.
Accordingly, the Fund is more dependent on the Advisor's credit analysis and
that of co-lenders and Lending Agents or other intermediaries than would be the
case with loans of larger, more established companies whose debt securities may
be rated by a nationally recognized rating service. Although the Advisor will
evaluate the asset quality and consequent creditworthiness of Borrowers, there
can be no assurance that such analysis will disclose all factors which may
impair the value of the Loans.
Loans Issued by Smaller Companies. The companies issuing Loans in which
the Fund invests typically will have annual revenues of between $1 million and
$25 million. Equity capitalization of such companies may be minimal and normally
will not exceed $250,000. Small to medium sized firms may be more dependent upon
key personnel, have more limited product lines and generally have more limited
financing resources. Such companies may be more vulnerable to general economic
conditions and may be more likely to experience financial difficulties or
insolvency or bankruptcy.
Credit Risks Associated with Investments in Participations. When the
Fund purchases a Participation, the Fund enters into a contractual relationship
with the Lender selling the Participation, but not with the Borrower. Since the
Lender is interpositioned between the Fund and the Borrower, the Fund may incur
some credit risk of
6
<PAGE>
the Lender selling the Participation, in addition to the credit risk of the
Borrower. In the event of the insolvency of the Lender selling the
Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the Borrower. The Lender
is required to obtain the Fund's consent before amending or waiving any of its
rights under the financing documents for the Loan. If the Lender becomes
insolvent or fails to comply with its obligations under the Participation
Agreement, the Fund may terminate the Lender's administrative duties under the
Participation and enforce the Lender's rights under the Loan financing documents
directly against the Borrower. The Borrower has established certain policies
under the Participation to minimize the credit risk of the Lender. See
"Investment Policies."
Co-Lenders; Lending Agents;
Intermediaries.With respect to direct investments in Loans, the Fund
may be the sole investor in a given Loan, or it may act as co-lender with other
firms, such as commercial banks, thrift institutions, insurance companies,
finance companies or other financial institutions. Issuers of Loans may use the
services of financial institutions as Lending Agents. The Fund may be dependent
on the intermediary to administer and service the Loan and could therefore be
adversely affected by a credit problem or business failure of the intermediary.
The Loans in which the Such Lending Agents perform administrative functions such
as computing outstanding loan balances, amount of unfunded credit commitments,
issuers' compliance with the terms of such credit facilities including
collection of accounts receivable, and monitoring credit quality. For these
services, the issuers typically pay Lending Agents an administrative and
servicing fee. Before investing in a Loan where an issuer makes use of a Lending
Agent, the Advisor will evaluate the Lending Agent based on factors such as
minimum asset size and capacity, experience in administering revolving credit
facilities, and default rates on past loan experience. Risk of loss to the Fund
is increased where it acts as sole investor in a Loan. Also, the financial
condition of co-lenders or Lending Agents or other intermediaries may affect the
ability of the Fund to receive payments, inasmuch as they may be responsible for
the administration and enforcement of the Loan and its terms.
Risks Related to the Asset-Backed Securities
Security. The asset-backed securities represent obligations solely of
the issuer, which typically is a newly-formed limited purpose entity, typically
a trust or corporation (an "Asset-Backed Issuer"), with no significant assets
other than the related Receivables. The obligations of the related Asset-Backed
Issuers are secured by perfected first priority security interests in the
related Receivables and other collateral and may be further secured by a reserve
fund established by the issuer of the securities and other forms of credit
enhancement. The reserve fund is funded typically over time as payments are made
on the underlying loans; an initial deposit also may be made to the reserve
fund, which would be funded with a portion of the offering proceeds from the
sale of the asset-backed securities. Payments of principal and interest on the
securities depends solely on the amount and timing of payments and collections
on the underlying Receivables, amounts on deposit in any reserve fund, amounts
received from other providers of credit enhancement such as credit insurers, and
realization of the security interests in the collateral, if any, held as
security for the related Receivables.
Subordination. The Fund generally invests in asset-backed securities
that are subordinated in payment of principal and interest to senior classes of
asset-backed securities of the same issuer. Consequently, the Fund may not
receive any payments of principal and interest for any payment period until the
payments of principal and interest on the senior securities have been made in
full.
Absence of Rating. The Fund's investments in asset-backed securities
may be concentrated in subordinated and unrated classes of securities. However,
the Fund will only invest in subordinated asset-backed securities of an issuer
where the senior classes of securities of the same issuer are rated at least
investment grade or better by a nationally recognized rating agency. Since the
class of securities in which the Fund invests may not be rated, an investor
should not rely on the rating given to senior classes of securities of the same
issuer in which the Fund has not invested. While a rating addresses the
likelihood of the ultimate full payment of principal and interest on the rated
securities, it does not address the likelihood that the outstanding principal
amount will be paid by the stated maturity.
7
<PAGE>
PURCHASE OF SHARES
Finance 500, Inc., 19762 MacArthur Boulevard, Suite 200, Irvine, CA
92612 (the "Distributor"), is a registered broker-dealer and acts as the
distributor of shares of the Fund. The Fund is engaged in a continuous offering
of its shares of common stock through the Distributor and other securities
dealers which have entered into selected dealer agreements with the Distributor.
Proceeds from the offering may be used to fund investments, to finance the
Fund's Repurchase Offers, and to reduce the amount of any borrowing or
indebtedness incurred by the Fund as described above under "Other Investment
Policies -- Leverage."
In order to maximize returns consistent with its investment objectives,
the Fund attempts to invest proceeds from the offering of Fund shares as soon
as, and to the fullest extent, possible. However delays may occur in the event
suitable investments are not available. The full investment of proceeds from the
offering of Fund shares in Loans and asset- backed securities may take one to
three months, up to a maximum of six months, from the date the Fund receives
such proceeds. Pending such investment, the proceeds will be held in cash or
invested in investment grade short-term debt obligations. Investments in such
short-term debt obligations will reduce the Fund's yield. The Fund may also
require such short-term debt obligations during unusual market conditions for
temporary defensive purposes.
During any continuous offering of the Fund's common stock, shares may
be purchased by mailing or wiring funds directly to the Transfer Agent. The
minimum initial purchase is $5,000, except for IRA and retirement plans for
which the minimum initial purchase is $2,000. The minimum subsequent purchase
amount is $500. The Fund's shares are offered at a public offering price equal
to the next determined net asset value per share plus a front-end sales charge
as determined by the following table:
<TABLE>
<CAPTION>
Sales Charge as Dealer
Percentage of Discount as
Offering Amount Percentage of
Amount of Purchase Price Invested Offering Price
- - - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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 Act.
Purchase at Net Asset Value
Shares of the Fund may be purchased at net asset value by officers,
directors and full time employees of the Fund, Advisor or Distributor, their
family members, registered representatives and employees of firms which have
sales agreements with the Distributor, investment advisors, financial planners
or other intermediaries who place trades for their own accounts or the accounts
of their clients and who charge a management, consulting or other fee for their
services; clients of such investment advisors, financial planners or other
intermediaries who place trades for their own accounts if the accounts are
linked to the master account of such investment advisors, financial planners or
other intermediaries on the books and records of the broker or agent, and
retirement and deferred compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Section 401(a), 403(b) or 457 of
the Internal Revenue Code and "rabbi trusts"; and by such other persons who are
determined to have acquired shares under circumstances not involving any sales
expense to the Fund or Distributor. Investors may be charged a fee if they
effect transactions in Fund shares through a broker or agent.
The offering price is based on the net asset value of the Fund next
determined after receipt of payment by the Transfer Agent. If payment is not
received by the Transfer Agent prior to 4:00 p.m.
8
<PAGE>
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 " Other Investment Policies -- Leverage" and "Risk
Factors -- Borrowings". The full investment of proceeds from the continuous
offer of Fund shares, consistent with the Fund's investment objectives, may take
one to three months, up to a maximum of six months, from the date the Fund
receives such proceeds. Pending such investments, the proceeds will be held in
cash or invested in investment grade short-term debt obligations. Investments in
such short-term debt obligations will reduce the Fund's yield. The Fund also may
acquire such debt obligations during unusual market conditions for temporary
defensive purposes.
REPURCHASE OFFERS
In recognition of the likelihood that a secondary market for the Fund's
shares will not develop, the Fund has adopted a fundamental policy of making a
"Repurchase Offer" each quarter for not less than 5% nor more than 25% of the
Fund's outstanding shares at net asset value. Before each Repurchase Offer, the
"Repurchase Offer Amount," currently 5% of the Fund's outstanding shares, shall
be determined by the Board of Directors. The Repurchase Offer is open for a
period of at least 21 days from the date a "Notification" of the Repurchase
Offer is sent to shareholders, during which period the Fund's net asset value is
calculated daily and may be obtained by calling the Fund at (800) 385-7003. A
Shareholder may withdraw or modify the number of shares tendered at any time up
to the "Repurchase Request Deadline", which it is the intention of the Fund to
set as the close of business on the last business day of January, April, July,
and October of each year. If the scheduled day for the Repurchase Request
Deadline falls on a Friday or the weekend, then the last business day prior to
the intended date will be set as the Repurchase Request Deadline. The
"Repurchase Pricing Date" is set as of the day following the Repurchase Request
Deadline. The Fund expects to make payment to the tendering shareholders within
seven days of the Repurchase Pricing Date. No fees or charges are imposed by the
Fund on any shares tendered under the Repurchase Offers. All shares purchased
under the Repurchase Offers will be retired by the Fund.
The Notification sent to shareholders with respect to each Repurchase
Offer will describe the terms of the Repurchase Offer and information
shareholders should consider in deciding whether or not to participate in the
Repurchase Offer, including detailed instructions on how to tender shares.
The Fund anticipates using available liquid capital to repurchase shares
tendered pursuant to Repurchase Offers. To insure that adequate funds will be
available, the Fund will maintain liquid assets during the period that the
Repurchase Offer is open in an amount equal to at least 100% of the Repurchase
Offer amount. If there is insufficient cash available to pay for all tendered
shares, the Fund intends to liquidate portfolio securities or
9
<PAGE>
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 responsibility for making decisions to
buy, sell or hold a particular security rests with the Advisor, subject to
review by the Board of Directors. The Advisor considers analyses from various
sources, makes the necessary investment decisions, and places orders for
transactions accordingly. The Advisor also performs certain administrative
services necessary for the operation of the Fund, including paying all
compensation of and furnishing office space for officers and employees of the
Fund connected with investment and economic research, trading and investment
management of the Fund as well as compensation of Directors of the Fund who are
affiliated persons of the Advisor or any of its affiliates.
For its services, the Advisor receives from the Fund a monthly fee at
an annual rate of 0.75% of the Fund's average daily net assets (i.e., the
average daily value of the total assets of the Fund, minus borrowings and all
other liabilities). This fee is higher than that paid by most investment
companies. The Fund pays all other expenses incurred in its operations,
including, among other things, expenses for legal and auditing services, taxes,
costs of printing proxies, mailing expenses, listing fees, if any, stock
certificates and shareholder reports, charges of the custodian and transfer
agent, expenses of registering its shares under Federal and any state securities
laws, fees and expenses associated with the issuance of preferred shares or any
borrowing, other regulatory fees, fees and expenses of its disinterested
directors, accounting and pricing costs, insurance, interest, any brokerage
costs, litigation and other extraordinary or non-recurring expenses. The
Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contracts may be terminated without penalty on 60
days' written notice at the option of either party thereto or by the vote of the
shareholders of the Fund.
10
<PAGE>
The Administrator
Investment Company Administration Corporation (the "Administrator")
provides certain administrative services to the Fund, including preparing
various Federal and state regulatory filings, reports and returns, preparing
reports and materials to be supplied to the directors, monitoring the activities
of the Fund's custodian, transfer agent and auditors, coordinating the
preparation and payment of Fund expenses, reviewing the Fund's expense accruals
and providing accounting services. For its services, the Administrator receives
an annual fee of $24,000 for performing the Fund accounting, and 0.25% of the
Fund's average daily net assets, or $30,000, whichever is greater for providing
administrative services.
Multiple Classes
Under the Fund's charter documents, the Fund's Board of Directors has the
power to classify or reclassify any unissued shares of the Fund into one or more
additional classes by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms and conditions of
redemption. The Board of Directors has currently designated one class of shares
of the Fund.
NET ASSET VALUE
The Fund computes net asset value per share on each day the New York
Stock Exchange is open for trading, as of the close of regular trading on the
Exchange (normally 4:00 p.m. New York time). The Fund will be closed for
business and will not price its shares on the following business holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Net asset value per share will be determined by dividing the value of the
net assets of the Fund by the total number of shares outstanding. For the
purpose of determining the net asset value per share, the value of the Fund's
net assets shall be deemed to equal the value of the Fund's assets less the
Fund's liabilities (including the outstanding principal amount of any
indebtedness issued by the Fund and any unpaid interest on such indebtedness).
As of June 30, 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, 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
11
<PAGE>
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.
SHAREHOLDER SERVICE PLAN
The Fund has adopted a Shareholder Service Plan, under which it
reimburses the Distributor for shareholder servicing expenses. Under this Plan,
the Fund pays the Distributor a fee at the annual rate of up to 0.25% of the
average daily net assets of the Fund as reimbursement for certain expenses
actually incurred in connection with non-distribution related shareholder
services provided by the Distributor and for payments to securities
broker-dealers and other securities professionals ("Service Organizations") for
the provision of such services. These services include establishing and
maintaining accounts and records relating to clients who invest in the Fund,
aggregating and processing orders for Fund shares and recordkeeping, processing
dividend and distribution payments, participation in dividend options,answering
shareholder inquiries, providing information regarding Fund operations,
preparing tax reports on behalf of shareholders and beneficial owners of Fund
shares, and providing such other information and assistance to shareholders as
they may reasonably request.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends
from such net investment income are declared daily and paid monthly to holders
of common stock. Monthly distributions to holders of common stock consist of
substantially all net investment income remaining after the payment of interest
on such borrowing. All net realized long or short-term capital gains, if any,
are distributed at least annually to holders of common stock. Shares of common
stock accrue dividends as long as they are issued and outstanding. Shares of
common stock are issued and outstanding from the settlement date of a purchase
order to the settlement date of a tender order. Any limitation on the Fund's
ability to make distributions on its common stock could, under certain
circumstances, impair the ability of the Fund to maintain its qualification as a
regulated investment company for Federal income tax purposes.
TAXES
The Fund intends to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Code. If it so qualifies, in
any taxable year in which it distributes at least 90% of its net income, the
Fund will not be subject to Federal income tax to the extent that it distributes
its net investment income and any realized capital gains. The Fund intends to
distribute substantially all of such income.
Dividend paid by the Fund from its ordinary income, and distributions of the
Fund's net realized short-term capital gains (together referred to hereinafter
as "ordinary income dividends"), regardless of whether such distributions are
paid in cash or are invested in additional shares of the Fund's common stock,
are taxable to shareholders as ordinary income. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted basis of a holder's
common stock and, after such adjusted tax basis is reduced to zero, will
12
<PAGE>
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.
Not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any dividends eligible for the dividends received deduction or capital gains
distributions.
Under certain Code provisions, some shareholders may be subject to a
31% backup withholding tax on reportable dividends, capital gain distributions
and redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. See "Additional Tax Considerations" in the
Statement of Additional Information.
Repurchase Offers
Under current law, a holder of common stock who, pursuant to any
Repurchase Offer, tenders all shares of common stock owned by such shareholder
under attribution rules contained in the Code will realize a taxable gain or
loss depending upon the shareholder's basis in the shares. Such gain or loss
will be treated as capital gain or loss if the shares are held as capital assets
in the shareholder's hands and will be long-term or short-term depending upon
the shareholder's holding period for the shares. Different tax consequences may
apply to tendering and nontendering holders of commons stock in connection with
a Repurchase Offer, and these consequences will be disclosed in the related
offering documents. For example, if a tendering holder of common stock tenders
less than all shares owned by or attributed to such shareholder, and if the
distribution to such shareholder does not otherwise qualify as an exchange, the
proceeds received will be treated as a taxable dividend, return of capital or
capital gain depending on the Fund's earnings and profits and the shareholder's
basis in the tendered shares. Also, there is a risk that non- tendering holders
of common stock may be considered to have received a deemed distribution which
may be a taxable dividend in whole or in part. Holders of common stock may wish
to consult their tax advisors prior to tendering. If holders of common stock
whose shares are acquired by the Fund in the open market sell less than all
shares owned by or attributed to them, a risk exists that these shareholders
will be subject to taxable dividend treatment, as well as a risk that the
remaining shareholders may be considered to have received a deemed distribution.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions are reinvested
automatically in full and fractional shares of the Fund at the net asset value
per share next determined on the payable date of such dividend or distribution.
A shareholder may at any time, by written notification to the transfer agent,
elect to have subsequent dividends or capital gains distributions, or both, paid
in cash, rather than reinvested, in which event, payment will be mailed on or
about the payment date. The automatic reinvestment of dividends and
distributions will not relieve participants of any Federal income tax that may
be payable or required to be withheld on such dividends or distributions.
Dividends and distributions are taxable to shareholders whether they are
reinvested in shares of the Fund or received in cash. Additional information
about the Dividend Reinvestment Plan may be obtained by calling (800) 385-7003.
13
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 100,000,000 shares of capital stock,
par value $.01 per share, all of which shares initially are classified as common
stock. The Board of Directors is authorized, however, to classify and reclassify
any unissued shares of capital stock by setting or changing in any one or more
respects the designation and number of shares of any such class or series, and
the nature, rates, amounts and times at which and the conditions under which
dividends shall be payable on, and the voting, conversion, redemption and
liquidation rights of, such class or series and any other preferences, rights,
restrictions and qualifications applicable thereto.
Shares of common stock, when issued and outstanding, will be fully paid
and non-assessable. Shareholders are entitled to share pro rata in the net
assets of the Fund available for distribution to shareholders upon liquidation
of the Fund. Shareholders are entitled to one vote for each share held.
Antitakeover Provisions of the Articles of Incorporation
The Fund's Articles of Incorporation include provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Directors and
could have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. A Director elected by the
affirmative vote of all holders of capital stock may be removed from office only
for cause by vote of the holders of at least 80% of the shares of capital stock
of the Fund entitled to be voted on the matter.
In addition, the Articles of Incorporation require the favorable vote
of the holders of at least 66 2/3% of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt, or authorize
the following transactions between the Fund and a "Principal Stockholder" of the
Fund (as such terms are defined in the Articles of Incorporation): (i) a merger
or consolidation of the Fund with or into any Principal Stockholder; (ii) the
issuance of any securities of the Fund to the Principal Stockholder for cash;
(iii) the sale, lease or exchange of all or a substantial part of the Fund's
assets to a Principal Stockholder (except assets having a fair market value of
less than $1,000,000 as computed in accordance with the Articles of
Incorporation); unless such action has been approved, adopted, or authorized by
the affirmative vote of a majority of the total number of Directors fixed in
accordance with the bylaws, in which case the affirmative vote of a majority of
the Fund's shares of capital stock is required. The Board of Directors has
determined that the 66 2/3% voting requirements described in the foregoing
paragraph and under Article Nine of the Articles of Incorporation, which are
greater than the minimum requirements under Maryland law or the 1940 Act, are in
the best interest of the shareholders generally.
CUSTODIAN; TRANSFER AGENT; AUDITOR; SHAREHOLDER REPORTS
The Fund's securities and cash are held under a Custodial Agreement
with Union Bank of California, P.O. Box 45000 San Francisco, California 94145.
American Data Services, Inc. of Huntington, New York, acts as Transfer and
Dividend Disbursing Agent for shares of the Fund. Tait, Weller & Baker are the
Fund's independent auditors. The Fund will send unaudited reports at least
semi-annually and audited annual financial statements to all of its shareholders
of record.
14
<PAGE>
PERFORMANCE INFORMATION
From time to time the Fund may advertise its total return and yield.
These figures are based on historical earnings and are not intended to indicate
future performance. Total return shows how much an investment in the Fund would
have increased (or decreased) over a specified period of time (i.e., one, five
or ten years or since inception of the Fund) assuming that all distributions and
dividends by the Fund to investors were reinvested on the reinvestment dates
during the period. Total return does not take into account any federal or state
income taxes which may be payable by the investor. Yield will be calculated on a
30-day period pursuant to a formula prescribed by the Securities and Exchange
Commission (the "Commission"). The Fund also may include comparative performance
information in advertising or marketing Fund shares. Such performance
information may include data from Lipper Analytical Services, Inc., other
industry publications, business periodicals, rating services and market indices.
See "Performance Information" in the Statement of Additional Information.
Further information about the performance of the Fund will be contained
in the Fund's Annual Reports to Shareholders, which may be obtained without
charge by calling (800) 385-7003.
FURTHER INFORMATION
The Prospectus and the Statement of Additional Information do not
contain all the information set forth in the Registration Statement that the
Fund has filed with the Securities and Exchange Commission. The complete
Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by its Rules and Regulations.
The table of contents of the Statement of Additional Information is as
follows:
Page
- - - --------------------------------------------------------------------------------
Investment Objective and Polices........................................B-1
Investment Restrictions.................................................B-9
Additional Tax Considerations...........................................B-10
Repurchase Offers.......................................................B-11
Yield Information.......................................................B-14
Management..............................................................B-15
Compensation of Management and
Investment Advisor......................................................B-15
Portfolio Transactions..................................................B-16
Financial Statements....................................................B-16
15
<PAGE>
TARGET INCOME FUND
-----------------------
PROSPECTUS
JULY , 1996
-----------------------
FINANCE 500, INC.
<PAGE>
TABLE OF CONTENTS
Fee Table .................................................................. 2
Financial Highlights ....................................................... 2
Investment Objective and Policies .......................................... 3
Purchase of Shares ......................................................... 8
Use of Proceeds ............................................................ 9
Repurchase Offers .......................................................... 9
Management.................................................................. 10
Net Asset Value............................................................. 11
Shareholder Service Plan.................................................... 12
Dividends and Distributions................................................. 12
Taxes....................................................................... 12
Automatic Dividend Reinvestment Plan........................................ 13
Description of Capital Stock................................................ 14
Custodian; Transfer Agent; Auditor;
Shareholder Reports...................................................... 14
Performance Information..................................................... 15
Further Information.......................................................... 15
TARGET INCOME FUND
16
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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 July , 1996 (the "Prospectus"). This
Statement of Additional Information does include information that a prospective
investor should consider before purchasing shares of the Fund, and investors
should obtain and read the Prospectus prior to purchasing shares. A copy of the
Prospectus may be obtained without charge by calling (800) 385-7003. This
Statement of Additional Information incorporates by reference the entire
Prospectus.
TABLE OF CONTENTS
Page
Investment Objective and Polices......................................... B-1
Investment Restrictions.................................................. B-9
Additional Tax Considerations............................................ B-10
Repurchase Offers........................................................ B-11
Yield Information........................................................ B-14
Management............................................................... B-15
Compensation of Management and Investment Advisor........................ B-15
Portfolio Transactions................................................... B-16
Financial Statements..................................................... B-16
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Securities and Exchange Commission, Washington, D.C. (the "SEC"). The
complete Registration Statement may be obtained from the SEC upon payment of the
fee prescribed by its Rules and Regulations, or inspected at the SEC's office at
no charge.
The Statement of Additional Information is dated July,_________ 1996.
INVESTMENT OBJECTIVE AND POLICIES
General
The Fund seeks as high a level of current income as is consistent with
preservation of capital by investing primarily in variable rate, collateralized
small business and consumer loans made to U.S. companies or their affiliates
(the "Loans") and in variable rate asset-backed securities. The asset-backed
securities are in the form of certificates representing interests in, or secured
by, segregated pools of assets such as small business loans, automobile loans
and leases and equipment leases (but may not include perfected security
interests in the actual physical assets), credit card receivables, mortgage
loans, trade receivables and other forms of consumer and commercial-purpose
loans, which may be secured or unsecured. The rate of interest payable on the
variable rate Loans and asset-backed securities is generally established as the
sum of a base lending rate plus a specified spread. These base lending rates are
generally the Prime Rate of a designated U.S. bank, the London interbank Offered
Rate ("LIBOR"), the Certificate of Deposit ("CD") rate
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of a designated U.S. bank or another base lending rate used by commercial
lenders. The interest rates on Prime Rate-based, LIBOR-based and CD-based Loans
are periodically reset with reset periods typically ranging from 30 days to
three months. There can be no assurance that the Fund will achieve its
objective.
Under normal market conditions, the Fund will invest at least 80% of
its total assets in direct investments and participation interests
("Participations") in Loans and in asset-backed securities. The remainder of the
Fund's total assets may be invested in short term debt obligations as described
below under "Other Investments."
Description of Loans
The small business Loans in which the Fund invests directly or through
Participations share many common characteristics in terms of loan amounts,
maturity terms, security interests, nature of Borrowers, type of collateral and
foreclosure terms.
The Loans typically consist of obligations of a Borrower undertaken to
finance the growth of the Borrower's business internally or externally, or to
finance a capital restructuring. It is expected that Loans held by the Fund will
typically have maturities of between 6 and 12 months, although in some cases,
the maturity may be as short as 3 months. Loans are made to companies which are
manufacturing, distribution and service firms which sell to other businesses
(i.e., commercial accounts). While the Fund does not intend to concentrate in
Loans to issuers in a specific industry or industries, it is anticipated that
issuers of the portfolio securities to be held by the Fund will include a
variety of firms that are wholesalers and manufacturers of products and services
in such fields as industrial equipment, electronics, business machines and
business services. Such firms usually will have annual revenues between $1
million and $25 million.
Because the Fund usually will purchase Loans of small and medium sized
firms, most of which will be privately held, there generally will be no direct
ratings of debt issued by these companies. The Fund will thus be more dependent
on the Advisor's credit analysis than would be the case with loans of larger,
better established companies whose debt securities may be rated by a nationally
recognized rating service. Small to medium sized firms may be more dependent
upon key personnel, have more limited product lines and generally have more
limited financing resources. Such companies may be more vulnerable to general
economic conditions and may be more likely to experience financial difficulties
or insolvency. Based on the adequacy of assets that serve as collateral for
Loans and the Advisor's policy of obtaining collateral in excess of Loan value,
the Advisor believes that the Loans in which the Fund invests are the equivalent
of investment grade.
Loan Participations
The Fund's investments in Loans have been concentrated in
Participations. When the Fund purchases a Participation, the Fund enters into a
contractual relationship with the loan originator (the "Lender") selling the
Participation, but not with the Borrower. The Participation gives the Fund the
right to receive a fractional undivided interest in the principal and interest
payments on the Loan, at an interest rate negotiated with the Lender. The
interest income on the Participation above the negotiated rate to the Fund is
retained by the Lender as compensation for its services in originating,
servicing and administering the Loan. See "Risk Factors -- Credit Risks
Associated with Participations", in the Fund's Prospectus for a discussion of
the risks associated with Participations.
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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 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.
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Credit Analysis
Loans
The Advisor does perform a credit analysis on each Loan in which the
Fund invests directly or acquires a Participation. The Fund will make a direct
investment or purchase a Participation in Loans only if, in the Advisor's
judgment, the Borrower can meet debt service on the Loan from existing cash
flow. The primary consideration in selecting corporate loans for direct
investment by the Fund is the asset quality and creditworthiness of the
Borrower. The Advisor will perform its own independent credit analysis of the
Borrower, in addition to using any information that may be prepared and supplied
by any lending agents, co-lenders or other participants (as set forth below)
involved in Loans. The aspects of potential borrowers that are reviewed by the
Advisor include, profitability, credit history (of the firm and its principals),
the nature and characteristics of the companies that comprise the Borrowers'
markets, the payment history of such companies, overall financial position with
respect to working capital, the presence or absence of major customers on whom
the Borrower may be dependent, and the current value of available collateral.
The Advisor's analysis will continue on an ongoing basis for any Loans in which
the Fund has invested, inasmuch as any subsequent financial difficulties
experienced by the Borrower may increase the potential for loss. Although the
Advisor will use due care in making such analysis, there can be no assurance
that such analysis will disclose factors which may impair the value of the
Loans. Even if such factors were disclosed, there can be no assurance that
liquidation of collateral underlying a loan would satisfy the Borrower's
obligation, that the collateral could be readily liquidated, and thus there can
be no assurance that a substantial writedown in the Loan value can be avoided.
The Advisor also may consider other factors it deems to be
appropriate to the analysis of the Borrower and the Loans. These factors include
financial ratios of the Borrower, such as pre-tax interest coverage, leverage
ratios, ratio of cash flows to total debt and the ratio of tangible assets to
debt. In analyzing these factors, the Advisor also will be influenced by the
nature of the industry in which the Borrower is engaged, the nature of the
Borrower's assets and the Advisor's assessment of the general quality of the
Borrower. Such factors are reviewed with the Fund's Board of Directors. It is
not expected that the Fund will hold Loans of non-U.S. borrowers.
Asset Backed Securities
The issuers of asset-backed securities in which the Fund invests have
established eligibility criteria for the Receivables in each segregated trust
pool. Additional criteria are established for each Receivables pool to ensure
diversity of investments and protect against undue concentration of assets,
including a minimum number of borrowers, limitation on the size of any single
asset and on the size of loans to a single borrower. The Advisor performs a
credit analysis of the asset-backed securities, relying on the credit criteria
established by the issuer of the securities. The Advisor does not perform a
credit analysis for each asset in the pool.
Interest Rate Considerations and Changes in Net Asset Value
When interest rates decline, the value of a portfolio invested in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a portfolio invested in fixed rate obligations can be expected to
decline. The Advisor expects the Fund's net asset value to be relatively stable
during normal market conditions, because the Fund's portfolio will consist
primarily of interests in variable rate Loans and asset-backed securities and of
short-term instruments. For these reasons, the Advisor expects the value of the
Fund's portfolio to fluctuate significantly less as a result of interest rate
changes than would a portfolio of fixed rate obligations. However, a default in
Loans or asset-backed securities, a material deterioration in a Loan on an
asset-backed security's perceived or actual creditworthiness or a sudden and
extreme increase in
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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 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.
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Loan Participations
When the Fund purchases a Participation, the Lender selling the
Participation is interpositioned between the Fund and the Borrower. Accordingly,
the Fund has established procedures to minimize the credit risk of the Lender
under the Participation that are intended to insulate the Fund's investments in
Participations from a possible bankruptcy or failure of the Lender. The Fund has
established lock box and trust account collection procedures for all
Participations which provide that all payments of principal and interest on the
Loans are made directly to a Fund trust or collection account. The Lender is
required to obtain the Fund's consent before amending or waiving any of its
rights under the financing documents with the Borrower, or releasing any Loan
collateral, waiving any payment event of default by the Borrower, or making any
assignment or pledge of the Borrower's rights under the financing documents. The
Lender may also be required to maintain a minimum ownership interest in the Loan
and may be required to set up a reserve account from all revenues received on
the Loan of a designated percentage of the principal amount of the Loan, as a
reserve against any losses to the Fund on the Loan. The Fund has the right, at
its election, to assume and enforce all of the Lender's right to administer,
manage, perform and enforce the terms of the Loan against the Borrower in the
event of a bankruptcy or failure of the Lender, or a breach of its duties under
the Participation. The Fund believes that these procedures will significantly
reduce the credit risk of a Lender in a Participation.
The Fund has established eligibility criteria for Lenders from whom it
will purchase Participations or with whom it will invest as a co-lender. These
criteria include demonstrated experience in originating and administering small
business commercial loans, satisfactory business and credit history, experienced
personnel, and minimum capital standards.
Lending Agents
The Fund may be the sole investor in a given Loan, or it may act as
co-lender or participant with other firms, such as commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions. To the extent that one or a few entities are involved in
performing the credit analysis with respect to a Loan, the risk of default may
be higher.
Issuers of Loans may use the services of financial institutions as
Lending Agents. Such Lending Agents perform administrative functions such as
computing outstanding loan balances, amounts of unfunded credit commitments,
issuers' compliance with the terms of such credit facilities, including
collection of accounts receivable, and monitoring credit quality. For these
services, the issuers typically pay Lending Agents an administrative and
servicing fee. Before investing in a Loan where an issuer makes use of a Lending
Agent, the Advisor will evaluate the Lending Agent based on factors such as
minimum asset size and capacity, experience in administering revolving credit
facilities, and default rates on past loan experience.
In some instances, Lending Agents may act together with the Fund as
co-lenders to the Borrower. In these instances, the Fund intends to structure
the transaction so as to maintain the power to enforce its rights directly
against the Borrower in the event the Borrower fails to pay principal and
interest when due.
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Dependence on CGC for Loan Originations and Master Servicing
As of June 30, 1996, all of the Participations held by the Fund have
been originated as small business loans through Concord Growth Corporation
("CGC"), a commercial finance services firm located in Palo Alto, California. A
majority of the borrowers on the Loans have their operations based in California
and therefore may be susceptible to changes in the general California business
economy. The Fund has established lock box and trust account collection
procedures to provide that all payments on the Participations held by the Fund
are made directly to the Fund account rather than passed through the Lender, and
therefore are intended to insulate the Fund's portfolio securities from a
possible bankruptcy or failure of CGC or any other Lender. While the Fund is
attempting to expand its base of loan originators, it is still dependent on CGC
for the origination of Loans for the Fund portfolio and would have difficulty
finding new Loans meeting its current investment criteria if CGC discontinued
doing business with the Fund.
Prepayments
The rate of principal payment on the asset-backed securities will
depend on the priority of payment of the class of securities and the rate and
timing of payments (including prepayments) on the underlying assets. In certain
cases, the underlying Receivables or contracts in a pool may be replaced as they
mature by new Receivables or contracts of the same nature. The new Receivables
will be made in accordance with the credit and loan eligibility criteria
established by the issuer of the securities. The issuer of the securities, not
the Fund, will be responsible for monitoring the eligibility, credit quality and
payment performance of the individual assets in a pool.
The Loans in which the Fund invests directly or through Participations
permit the prepayment of the Loan. The degree to which Borrowers prepay Loans,
whether as contractual requirements or at their election, may be affected by
general business conditions, the financial condition of the Borrower and
competitive conditions among lenders. As such, prepayments cannot be predicted
with accuracy. Upon a prepayment, either in part or in full, the actual
outstanding debt on which the Fund derives interest income will be reduced.
Illiquid Securities
Most of the securities in the Fund's portfolio are not readily
marketable. The asset-backed securities may be privately placed and not
registered for sale under Federal or State securities laws. The Loans in which
the Fund invests typically have short-term maturities and provide for relatively
rapid access to collateral, however they also are privately placed and do not
have the liquidity of conventional debt securities traded in the secondary
market. Although Loans are transferred among certain financial institutions, and
the Loans in which the Fund invests typically have shorter maturities and
provide for relatively rapid access to collateral, they do not have the
liquidity of conventional debt securities traded in the secondary market and may
be considered illiquid. The Fund's ability to dispose of a Loan may be reduced
to the extent that there has been a perceived or actual deterioration in the
creditworthiness of an individual Borrower or of Borrowers in general, or by
events that reduce the level of confidence in the market for Loans. As the
market for Loans becomes more seasoned, liquidity is expected to improve. There
is no limit on the amount of Fund assets which may be invested in Loans which
are not readily marketable.
There may be less public information about the financial condition of
issuers of such Loans, and the Fund may be more dependent on the Advisor's
evaluation of such issuers than a fund which invests in publicly offered
securities. To the extent the net asset value of Fund shares may differ from
their actual value, illiquid investments may affect the Fund's ability to
realize net asset value in the event of a voluntary or involuntary liquidation
of its assets. Also, illiquid investments may adversely affect the Fund's
ability to dispose of portfolio securities in order to purchase shares of its
common stock pursuant to repurchase offers. The Board of Directors will consider
the liquidity of the Fund's portfolio securities in determining the amount of a
Repurchase Offer. See "Net Asset Value."
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Other Investments
Under normal market conditions, the Fund may invest up to 20% of its
total assets in short-term debt obligations with maturities of one year or less,
including, but not limited to, U.S. Government and Government agency securities
(some of which may not be backed by the full faith and credit of the United
States), bank money instruments (such as certificates of deposit and bankers'
acceptances), corporate and commercial obligations (such as commercial paper)
and repurchase agreements or money market mutual funds, subject to provisions of
applicable law. Such short-term debt obligations, which need not be secured,
will all be investment grade (rated Baa, P-3 or higher by Moody's Investors
Service, Inc. or BBB, A-3 or higher by Standard & Poor's Corporation or, if
unrated, determined to be of comparable quality in the judgment of the Advisor).
Securities rated Baa, BBB, P-3 or A-3 are considered to have adequate capacity
for payment of principal and interest, but are more susceptible to adverse
economic conditions, and, in the case of securities rated BBB or Baa (or
comparable unrated securities), have speculative characteristics. The Fund's
investment in such short-term debt obligations will not exceed 20% of the Fund's
total assets except (i) during interim periods pending investment of the net
proceeds of public offerings of the Fund's securities and (ii) during temporary
defensive periods when, in the opinion of the Advisor, suitable Loans are not
available for investment by the Fund or prevailing market or economic conditions
warrant.
Other Investment Policies
The Fund has adopted certain other policies as set forth below:
Leverage. The Fund is authorized to borrow money from time to time on a
secured or unsecured basis at variable or fixed rates in any amounts up to 33
1/3% of the Fund's total assets (after giving effect to the amount borrowed).
Borrowings by the Fund (commonly known as "leveraging") create an opportunity
for greater total return but, at the same time, increase exposure to capital
risk. The Fund may incur borrowings in order to remain fully invested and to
provide funds for the repurchase of Fund shares in connection with Repurchase
Offers. For example, the Fund may use borrowed cash to purchase Loans and repay
such borrowings from the proceeds of expected sales of Fund shares. The Fund may
borrow for the purpose of acquiring additional income-producing investments when
it believes that the interest payments and other costs with respect to such
borrowings or indebtedness will be exceeded by the anticipated total return (a
combination of income and appreciation) on such investments. The amount of any
such borrowing will depend upon market and economic conditions existing at that
time.
Capital raised through leverage will be subject to interest costs which
may or may not exceed the return earned on the borrowed funds. The Fund also may
be required to maintain minimum average balances in connection with borrowings
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements will increase the cost of borrowing over the stated interest
rate. Borrowings create an opportunity for greater income per common share, but,
at the same time, such borrowing is a speculative technique in that it will
increase the Fund's exposure to capital risk. Such risks may be reduced through
the use of borrowings that have floating rates of interest. Unless the income
and appreciation, if any, on assets acquired with borrowed funds exceeds the
cost of borrowing, the use of leverage will diminish the investment performance
of the Fund compared with what it would have been without leverage.
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The Fund may also borrow money for temporary, extraordinary or
emergency purchases. The Fund's willingness to borrow money, and the amount it
will borrow, will depend on many factors, the most important of which are the
investment outlook, market conditions, and interest rates. Successful use of a
leveraging strategy depends on the Advisor's ability to forecast interest rates
and market movements, and there is no assurance that a leveraging strategy will
be successful during any period in which it is employed.
Repurchase Agreements. The Fund may enter into repurchase agreements
with commercial banks or broker-dealers. Under a repurchase agreement, the Fund
buys a security at one price and simultaneously promises to sell the same
security back to the seller at a higher price. The Fund's repurchase agreements
will provide that the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price, including any
accrued interest earned on the repurchase agreement, and will be marked to
market daily. The repurchase date is usually within seven days of the original
repurchase date. The Advisor must be satisfied with the creditworthiness of the
other party before entering into an agreement. In the event of bankruptcy or
other insolvency proceeding of the other party to the repurchase agreement, the
Fund might experience possible delays and expenses in liquidating the securities
subject to the repurchase agreement, and a possible decline in their value and
loss of interest.
Diversification and Industry Concentration Polices. The Fund has
registered as a "non-diversified" investment company. As a result, the Fund is
required to comply with the diversification requirements of Subchapter M of the
Code. Since the Fund may invest a relatively high percentage of its assets in
the obligations of a limited number of issuers, the value of the Fund's
investments may be more affected by any single adverse economic, political or
regulatory occurrence than would the value of the investments of a diversified
investment company. Investments to U.S. Government securities are not subject to
this investment restriction.
INVESTMENT RESTRICTIONS
The Fund's investment objective, as well as the following investment
restrictions, are designated as fundamental policies and may not be changed
without the approval of a majority of the outstanding shares of common stock.
Under the 1940 Act, such a majority means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares. The Fund may not:
1. Issue senior securities or borrow money except as permitted by the
1940 Act, except that the Fund may borrow on an unsecured basis from banks for
temporary or emergency purposes, for the clearance of transactions, or to
finance Repurchase Offers, in amounts not exceeding 10% of its total assets (not
including the amount borrowed), provided that it will not make investments while
such temporary borrowings in excess of 5% of its total assets are outstanding.
2. Make investments for the purpose of exercising control or
management.
3. Invest more than 10% of its assets in the securities of other
investment companies or purchase more than 3% of any other investment company's
voting securities or make any other investment in other investment companies
except as permitted by Federal and state law.
4. Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein (mortgage loans and
mortgage-backed securities) or issued by companies which invest in real estate
or interests therein.
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5. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 (the "1933 Act"),
in selling portfolio securities.
6. Make loans to other persons except to the extent that the Fund may
be deemed to be making loans by purchasing Loans and other debt securities and
entering into repurchase agreements in accordance with its investment objective,
policies and limitations.
7. Invest more than 25% of its total assets in the securities of
issuers in any one industry; provided that this limitation shall not apply with
respect to obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities.
8. Purchase any securities on margin except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
9. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options.
10. Purchase the securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result of such purchase, more than 5% of the Funds's
total assets (taken at current value) would be invested in the securities of
such issuer at the end of any fiscal quarter, provided that, with respect to 50%
of the Fund's total assets, the Fund may invest up to 25% of its total assets in
the security of any one issuer.
11. Purchase or sell commodities or commodity contracts including
futures contracts.
If a percentage restriction on investment policies or the investment
use of assets set forth above is adhered to at the time a transaction is
effective, later changes in such percentage resulting from changing values will
not be considered a violation.
For the purpose of investment restriction 7, the Fund will consider all
relevant factors in determining who is the issuer of the Loan, including: the
credit quality of the Borrower, the amount and quality of the collateral, the
terms of the Loan Agreement and other relevant agreements (including
inter-creditor agreements) the degree to which the credit of such
interpositioned person was deemed material to the decision to purchase the Loan,
the interest rate environment, and general economic conditions applicable to the
Borrower and such interpositioned person. For the purpose of investment
restriction 10, the Fund will consider the Borrower to be the issuer of an
individual Loan.
ADDITIONAL TAX CONSIDERATIONS
A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. Distributions, if any, of net long-term capital
gains from the sale of securities, whether paid in cash or reinvested in Fund
shares, are taxable at long-term capital gains rates for Federal income tax
purposes; a long-term capital gain distribution with respect to shares of the
Fund held for six months or less, however, will cause any loss on a subsequent
sale or exchange of such shares to be treated as a long-term capital gain
distribution. If the Fund pays a dividend in January which was declared in the
previous October, November, or December to shareholders of record in such month,
then such dividend or distribution will be treated as being received by its
shareholders on December 31 of the year in which the dividend was declared.
B10
<PAGE>
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year end, plus certain
undistributed amounts from previous years. The Fund anticipates that it will
make sufficient timely distributions of income so as to avoid imposition of the
excise tax.
REPURCHASE OFFERS
Policy
In recognition of the likelihood that a secondary market will not
develop for the Fund's shares, the Fund has adopted a fundamental policy of
making a "Repurchase Offer" each quarter of not less than 5% nor more than 25%
of the Fund's outstanding shares at net asset value. Before each Repurchase
Offer, the "Repurchase Offer Amount", currently set at 5% of the Fund's
outstanding shares, shall be determined by the Board of Directors. The
Repurchase Offer is open for a period of at least 21 days from the date a
"Notification" is sent to 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).
B11
<PAGE>
Notification
Shareholders of record and each beneficial owner of the Fund's stock
will receive notification containing specified information at least twenty-one
days, and no more than forty-two days, before the repurchase request deadline.
The information provided will include the repurchase offer amount, the dates of
the repurchase request deadline, repurchase pricing date and repurchase payment
deadline. Notification will also include the procedures under which the Fund may
repurchase such shares on a pro rata basis, and the circumstances under which
the Fund may suspend or postpone the repurchase offer. The Fund will provide the
net asset value of the common stock, which will be computed no more than seven
days before the date of Notification and the means by which shareholders may
ascertain the net asset value thereafter.
Source of Funds
The Fund anticipates using cash on hand to purchase shares acquired
pursuant to the Repurchase Offers. However, if there is insufficient cash
available to consummate a Repurchase Offer, the Fund may be required to
liquidate portfolio securities. In this regard, the Fund will maintain liquid
assets during the notification period in an amount equal to at least 100% of the
Repurchase Offer Amount. As a result of liquidating portfolio securities, the
Fund may realize gains or losses, at a time when the Advisor would otherwise
consider it disadvantageous to do so. In such event, gains may be realized on
securities held for less than three months. In order to qualify as a regulated
investment company under the Code, the Fund must limit such gains, and
accordingly, the amount of gain the Fund could realize from sales of other
securities held for less than three months would be reduced. This could
adversely affect the Fund's yield. Subject to the Fund's investment restrictions
with respect to Borrowings, the Fund may borrow money to finance the repurchase
of shares pursuant to the Repurchase Offers. Furthermore, if the Fund borrows to
finance the making of Repurchase Offers, interest on such borrowing will reduce
the Fund's net investment income.
Repurchase Offers could also significantly reduce the asset coverage of
any Borrowings below the asset coverage requirement set forth in the 1940 Act.
Accordingly, in order to purchase all shares of common stock tendered, the Fund
may have to repay all or part of any then outstanding Borrowings to maintain the
required asset coverage. Also, the amount of shares of common stock for which
the Fund makes any particular Repurchase Offer may be affected for the reasons
set forth above or in respect of other concerns related to liquidity of the
Fund's portfolio.
The Fund has entered into a revolving credit facility with Deutsche
Bank AG, New York Branch, dated March 29, 1996, pursuant to which the bank has
agreed to provide a credit facility in the maximum amount of $3 million to the
Fund. The amount that may be borrowed at any time under the facility is limited
to 33 1/3% of the Fund's total assets. The facility will expire on March 27,
1997, unless extended by its terms. As of the date of this Statement of
Additional Information, the Fund had not borrowed any amounts under the credit
facility. The purpose of the credit facility is to provide the Fund with
additional liquidity to meet its obligations to purchase shares under its
quarterly share repurchase program and to otherwise provide funds for cash
management and investment purposes. Loans made under the credit facility, if
any, will bear interest at the option of the Fund for each quarterly interest
period, either, (1) at the higher of the bank's federal funds rate or prime
lending rate, (2) at the New York interbank rate ("NIBOR") plus .75%, or (3) at
the London interbank rate ("LIBOR") plus .75%.
Withdrawal Rights
Tenders made pursuant to the Repurchase Offer will be irrevocable after
the Repurchase Request Deadline. However, shareholders may modify the number of
shares being tendered or withdraw Shares
B12
<PAGE>
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 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
B13
<PAGE>
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
In addition to the Fund's policy of periodic repurchase offers, the
Fund may make discretionary repurchase offers once every two years. Because a
discretionary repurchase offer would not be made pursuant to a fundamental
policy of the Fund, it would require only a vote of the Directors. Discretionary
repurchase offers must comply with several of the requirements that apply to
periodic repurchase offers. Among other requirements, the Fund must pay
repurchase proceeds within twenty-one days after the repurchase request
deadline, must compute net asset value daily on the five business days preceding
the discretionary repurchase request deadline, and must send notification
according to applicable procedures. The Fund has never made a discretionary
repurchase offer, it is not required to make discretionary repurchase offers,
and there can be no assurance that one will be conducted.
YIELD INFORMATION
The Fund intends to publish its yield on a periodic basis. The yield on
Fund shares normally will fluctuate. Therefore, the yield for any given past
period is not an indication or representation by the Fund of future yields or
rates of return on its shares. The Fund's yield is affected by changes in
prevailing interest rates, average portfolio maturity and operating expenses.
Current yield information may not provide a basis for comparison with bank
deposits or other investments which pay a fixed yield over a stated period of
time.
The Fund's yield shows the rate of income that it earns on its
investments, expressed as a percentage of the net asset value of Fund shares.
The Fund calculates yield by determining the interest income it earned from its
portfolio investments for a specified thirty-day period (net of expenses),
dividing such income by the average number of Fund shares outstanding, and
expressing the result as an annualized percentage based on the maximum offering
price at the end of that thirty day period. Yield accounting methods differ from
the methods used for other accounting purposes; accordingly, the Fund's yield
may not equal the dividend income actually paid to investors or the income
reported in the Fund's financial statements.
On occasion the Fund may compare its yield to (1) the Prime Rate,
quoted daily in The Wall Street Journal as the base rate on corporate loans at
large U.S. Money center commercial banks, (2) the CD rate, quoted daily in The
Wall Street Journal as the average of top rates paid by major New York banks on
primary new issues of negotiable CD's, usually on amounts of $1 million or more,
(3) one or more averages compiled by Donoghue's Money Fund Report, a widely
recognized independent publication that monitors the performance of money market
mutual funds, (4) the average yield reported by Bank Rate Monitor Nation Index
TM for money market deposit accounts offered by the 1000 leading banks and
thrift institutions in the ten largest standard metropolitan statistical areas,
(5) yield data published by Lipper Analytical Services, Inc., or (6) the yield
on an investment in 90 day Treasury bills on a rolling basis, assuming quarterly
compounding. In addition, the Fund may compare the Prime Rate, the CD rate, the
Donoghue's averages and the other data described above to each other.
B14
<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 of the Fund and
26691 Plaza Drive, Suite 222 Chairman of the Board President, Secretary and Treasurer of the Advisor.
Mission Viejo, CA 92691 Principal of LaVine & Associates, a public
accounting firm since its inception in November,
1994; and a principal of the predecessor accounting
firm, LaVine & Luxenberg since 1982.
Lawson C. Adams 51 Director Accounting Manager, Lockheed Martin
6737 Tannahill Drive Corp.
San Jose, CA 95120
R. Gillem Lucas 49 Director Chief Executive Officer, XL Associates, Inc.; Gillem
12300 Twinbrook Parkway Lucas & Associates (consultants).
Suite 525
Rockville, MD 20852
Eric M. Banhazl 39 Secretary and Interim President of the Fund, May 1994-November
2025 East Financial Way Treasurer 1995; Vice President, Secretary and Treasurer of the
Glendora, CA 91741 Former Advisor to the Fund, April 1992- November
1995; Senior Vice PresidentRobert H. Wadsworth &
Associates, Inc.Since 1990.
* Denotes "Interested Director"
</TABLE>
COMPENSATION OF MANAGEMENT AND THE INVESTMENT ADVISOR
The Fund has not paid and does not intend to pay any annual
compensation to the Fund's officers for their services as executive officers.
The Fund pays each director who is not an "interested party" as defined
in the 1940 Act an annual fee of $1,000 per year plus $1,000 for each meeting
attended, together with such Director's actual out of pocket expenses related to
attendance at meetings. The Fund also pays members of its audit committee, which
consists of all directors who are not interested persons as defined in the 1940
Act, an annual fee of $500.
For the fiscal years ended October 31, 1993, 1994 and 1995, the Fund
paid investment advisory fees pursuant to the Investment Advisory Agreement of
$17,563, $31,979, and $51,481, respectively.
B15
<PAGE>
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
Audited financial staetments for the Fund's fiscal year ended October
31, 1995 and unaudited financial statements for the Fund's six-month fiscal
period ended April 30, 1996, as contained in the Fund's Annual Report to
Shareholders and Semi-Annual Report to Shareholders, respectively, are
incorporated herein by reference to the Annual Report and Semi-Annual Report.
B16
<PAGE>
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
(a) Financial Statements:
The following financial statements are included as part of Registrant's
Annual Report to Shareholders for the year ended October 31, 1995,
incorporated herein by reference in Part B:
Statement of Assets and Liabilities (Audited), October 31,
1995
Statement of Operations (Audited), For the Year ended October
31, 1995
Statement of Changes in Net Assets (Audited), For the Year
ended October 31, 1994 & 1995
Statement of Cash Flows (Audited), For the Year ended October
31, 1995
Financial Highlights (Audited), For the Year ended October 31,
1995
Schedule of Investment (Audited), October 31, 1995 Notes to
Financial Statements (Audited), October 31, 1995
The following financial statements are included as part of Registrant's
Semi-Annual Report to Shareholders for the six-month period ended April
30, 1996, incorporated herein by reference in Part B:
Statement of Assets and Liabilities (Unaudited), April 30,
1996
Statement of Operations (Unaudited), For the Six Months ended
April 30, 1996
Statement of Changes in Net Assets (Unaudited), for the Six
Months ended April 30, 1996
Statement of Cash Flows (Unaudited), For the Six Months ended
April 30, 1996
Financial Highlights (Unaudited), For the Six Month ended
April 30, 1996
Schedule of Investments (Unaudited), April 30, 1996
Notes to Financial Statements (Unaudited), April 30, 1996
(b) Exhibits
(1) Articles of Incorporation**
(2) Bylaws**
(3) None
(4) None
(5) None
(6) None
(7) Form of Investment Management Agreement with Target
Capital Advisors, Inc.*****
(8) Form of Underwriting Agreement***
(8.1) Form of Shareholder Servicing Agreement*
(9) None
(10) Form of Custodian Agreement***
(11.1) Form of Transfer Agency and Service Agreement with
American Data Services, Inc.*
(11.2) Form of Administration Agreement****
(11.3) Form of Master Servicing Agreement*
(11.4) Form of Credit Agreement with Deutsche Bank AG, New
York Branch*
(12) Opinion and Consent of Jeffers, Wilson & Shaff*
(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
***** Previously filed and incorporated by reference from post-effective
amendment no. 5
C1
<PAGE>
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
=======
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At October 31, 1994, the Registrant had the following number of
securities holders:
Number of
Title of Class Record Holders
-------------- --------------
Common Shares, par value $.01 per share 72
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 the Advisor (File No.
801-40727).
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
C2
<PAGE>
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 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.
C3
<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
26th day of July, 1996.
TARGET INCOME FUND, INC.
By Jon La Vine
----------------------
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.
/s/ Lawson C. Adams Director July 26, 1996
- - - -------------------
Lawson C. Adams
/s/ R. Gillem Lucas Director July 26, 1996
- - - -------------------
R. Gillem Lucas
/s/ Jon LaVine Director July 26, 1996
- - - --------------
Jon LaVine
/s/ Eric M. Banhazl Principal July 26, 1996
- - - -------------------
Eric M. Banhazl Financial Officer
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
1 Articles of Incorporation**
2 Bylaws**
3 None
4 None
5 None
6 None
7 Form of Investment Management Agreement
with Target Capital Advisors, Inc.*****
8 Form of Underwriting Agreement***
8.1 Form of Shareholder Servicing Agreement*
9 None
10 Form of Custodian Agreement***
11.1 Form of Transfer Agency and Service Agreement
with American Data Services, Inc.*
11.2 Form of Administration Agreement****
11.3 Form of Master Servicing Agreement*
11.4 Form of Credit Agreement with Deutsche Bank
AG, New York Branch*
12 Opinion and Consent of Jeffers, Wilson &
Shaff, LLP*
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
***** Previously filed and incorporated by reference from post-effective
amendment no. 5
TARGET INCOME FUND, INC.
SHAREHOLDER SERVICE PLAN
WHEREAS:
--------
Target Income Fund, Inc. (the "Fund") is registered as a closed-end
investment company under the investment company act of 1940 (the "Act").
The Fund intends to distribute its shares and desires to adopt a Plan
to provide services to shareholders of the Fund.
The Fund uses Finance 500, Inc. (The "Distributor") as a principal
underwriter of its shares pursuant to an Underwriting Agreement dated November
1, 1992.
NOW, THEREFORE, in consideration of the foregoing, the Fund hereby
adopts this Plan on the following terms and conditions:
1. The Fund will pay the Distributor for expenses incurred in
connection with nondistribution shareholder services provided by the Distributor
to securities broker-dealers and other securities professionals ("Service
Organizations") and/or beneficial owners of the shares of the Fund, including
but not limited to shareholder servicing provided by the Distributor at
facilities dedicated to the Fund, provided that such shareholder servicing is
not duplicative of the servicing otherwise provided on behalf of the Fund.
2. The Fund will also reimburse the Distributor for fees paid by the
distributor to Service Organizations (which may include the Distributor itself)
for the providing of support services to beneficial owners of shares of the Fund
("Clients"). Such services may include, but are not limited to, (a) establishing
and maintaining accounts and records relating to Clients who invest in the Fund;
(b) aggregating and processing orders involving the shares of the Fund; (c)
processing dividend and other distribution payments from the Fund on behalf of
Clients; (d) providing information to Clients as to their ownership of shares of
the Fund or about other aspects of the operations of the Fund; (e) preparing tax
reports or forms on behalf of Clients; (f) forwarding communications from the
Fund to Clients; (g) assisting Clients in changing the Fund's records as to
their addresses, dividend options, account registrations or other data; and (h)
providing such other similar services as the Distributor may reasonably request
to the extent the Service Organization is permitted to do so under applicable
statutes, rules or regulations.
3. The Fund shall reimburse the Distributor for services, an annual
rate of up to 0.25 of 1% of the average daily net assets of the Fund. The Fund
may make such payments monthly and the payments to the Distributor may exceed
the amount expended by the Distributor during the month or the year to date,
provided that no amount may be carried over for use beyond the end of a fiscal
year. In the event that payments to the Distributor during a fiscal year exceed
the amounts expended (or accrued, in the case of payments to Service
Organizations) during a fiscal year, the Distributor will promptly refund to the
Fund any such excess. Payments to the
<PAGE>
Distributor may be discontinued, or the rate amended, at any time by the Board
of Directors of the Fund, in its sole discretion.
The Distributor may make final and binding decisions as to all matters
relating to payments to Service Organizations, including but not limited to (i)
the identity of Service Organizations; and (ii) what shares of the Fund, if any,
are to be attributed to a particular Service Organization, to a different
Service Organization or to no Service Organization.
4. While this Plan is in effect, the Distributor shall report in
writing at least quarterly to the Fund's Board of Directors, and the Board shall
review, the amounts expended under this Plan and the purposes for which such
expenditures were made.
5. This Plan has been approved by a vote of the Board of Directors of
the Fund, including a majority of the Directors who are not "interested person"
(as defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of this Plan (the ("Disinterested Directors"), cast in
person at a meeting called for the purpose of voting on this Plan. This Plan
shall, unless terminated as hereinafter provided, continue in effect until
November 1, 1996, and from year to year thereafter only so long as such
continuance is specifically approved at least annually by the Fund's Board of
Directors including the Disinterested Directors cast in person at a meeting
called for the purpose of voting on such continuance.
This Plan may be terminated at any time by a vote of a majority of the
Disinterested Directors or by the vote of the holders of a "majority" (as
defined in the Act) of the outstanding voting securities of the Fund.
TRANSFER AGENCY AND SERVICE AGREEMENT
between
TARGET INCOME FUND, INC.
and
AMERICAN DATA SERVICES, INC.
<PAGE>
INDEX
-----
1. TERMS OF APPOINTMENT; DUTIES OF ADS.........................................
2. FEES AND EXPENSES...........................................................
3. REPRESENTATIONS AND WARRANTIES OF ADS.......................................
4. REPRESENTATIONS AND WARRANTIES OF THE FUND..................................
5. INDEMNIFICATION.............................................................
6. COVENANTS OF THE FUND AND ADS...............................................
7. TERMINATION OF AGREEMENT....................................................
8. ASSIGNMENT..................................................................
9. AMENDMENT...................................................................
10. NEW YORK LAWS TO APPLY.....................................................
11. MERGER OF AGREEMENT........................................................
12. NOTICES....................................................................
FEE SCHEDULE....................................................................
- - - ------------
(a) ACCOUNT MAINTENANCE CHARGE:.................................................
FEE WAIVER:..................................................................
----------
(b) TRANSACTION FEES:...........................................................
(c) IRA PLAN FEES:..............................................................
FEE INCREASES................................................................
-------------
(d) EXPENSES:...................................................................
(e) SPECIAL REPORTS:............................................................
(f) SECURITY DEPOSIT:...........................................................
(g) CONVERSION CHARGE:..........................................................
SCHEDULE A......................................................................
- - - ----------
2
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made the____day of _____, 1996, by and between THE TARGET INCOME FUND,
INC. A Maryland Corporation, having its principal office and place of business
at 26691 Plaza Drive, Suite 222, Mission Viejo, CA 92691 (the "Fund"), and
American Data Services, Inc., a New York corporation having its principal office
and place of business at 24 West Carver Street., Huntington, New York 11743
("ADS").
WHEREAS, the Fund desires to appoint ADS as its transfer agent, dividend
disbursing agent and agent in connection with certain other activities, and ADS
desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. TERMS OF APPOINTMENT; DUTIES OF ADS
1.01 Subject to the terms and conditions set forth in this agreement, the
Fund hereby employs and appoints ADS to act as, and ADS agrees to act as its
transfer agent for the Fund's authorized and issued shares of its common stock,
$0.01 par value, ("Shares"), dividend disbursing agent and agent in connection
with any accumulation, open-account or similar plans provided to the
shareholders of the fund ("Shareholders") set out in the currently effective
prospectus and statement of additional information ("prospectus") of the Fund.
1.02 ADS agrees that it will perform the following services:
(a) In accordance with the Fund's Registration Statement, which
describes how sales and redemptions of Shares shall be made, ADS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefore to the
Custodian of the Fund authorized by the Board of Directors of the Fund (the
"Custodian");
(ii)Pursuant to purchase orders, issue the appropriate number of
full and fractional Shares and hold such Shares in the appropriate Shareholder
account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefore to the Custodian;
(iv)At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi)Prepare and transmit payments for dividends and distributions
declared by the Fund, and effect dividend and capital gains distribution
reinvestments in accordance with Shareholder instructions;
(vii) Serve as a record keeping transfer agent for the Fund, and
maintain records of account for and advise the Fund and its Shareholders as to
the foregoing; and
(viii) Record the issuance of shares of the Fund and maintain
pursuant to SEC Rule 17Ad-10(e) a record of the total number of shares of the
Fund which are authorized, based upon data provided to it by the
3
<PAGE>
Fund, and issued and outstanding. ADS shall also provide the Fund each business
day with the following: (I) the total number and dollar amount of Shares issued
and outstanding as of the close of business on the preceding business day; (ii)
the total number and dollar amount of Shares sold on the preceding business day;
(iii) the total number and dollar amount of Shares redeemed on the preceding
business day; (iv) the total number and dollar amount of Shares sold on the
preceding business day pursuant to dividend and capital gains distribution
reinvestments; and (v) the total number and dollar amount of Shares which are
authorized and issued and outstanding as of the opening of business on such day.
(b) In addition to and not in lieu of the services set forth in the
above paragraph (a), ADS shall:
(i) Perform all of the customary services of a transfer agent,
dividend disbursing agent, including but not limited to: maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
receiving and tabulating proxies, mailing Shareholder reports and prospectuses
to current Shareholders, withholding taxes on U.S. resident and non-resident
alien accounts, preparing and filing U.S. Treasury Department Forms 1099 and
other appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases redemptions of
Shares and other confirmable transactions in Shareholder accounts as prescribed
in the federal securities laws or as described in the Fund's Registration
Statement, preparing and mailing activity statements for Shareholders, and
providing Shareholder account information and (ii) provide a system and reports
which will enable the Fund to monitor the total number of Shares sold in each
State.
(c) In addition, the Fund shall (i) identify to ADS in writing those
transactions and shares to be treated as exempt from blue sky reporting for each
State and (ii) monitor the daily activity for each State, as provided by ADS.
The responsibility of ADS pursuant to this Agreement for the Fund's blue sky
State registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided above.
Procedures applicable to certain of these services may be
established from time to time by agreement between the Fund and ADS.
2. FEES AND EXPENSES
2.01 For performance by ADS pursuant to this Agreement, the Fund agrees to
pay ADS an annual maintenance fee for each Shareholder account and transaction
fees for each portfolio or class of shares serviced under this Agreement (See
Schedule A) as set out in the fee schedule attached hereto. Such fees and out-of
pocket expenses and advances identified under Section 2.02 below may be changed
from time to time subject to mutual written agreement between the Fund and ADS.
2.02 In addition to the fee paid under Section 2.01 above, the Fund agrees
to reimburse ADS for out-of-pocket expenses or advances incurred by ADS for the
items set out in the fee schedule attached hereto. In addition, any other
expenses incurred by ADS at the request or with the consent of the Fund, will be
reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within five
days following the receipt of the respective billing notice. Postage for mailing
of dividends, proxies, Fund reports and other mailings to all shareholder
accounts shall be advanced to ADS by the Fund at least seven (7) days prior to
the mailing date of such materials.
4
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF ADS
ADS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good standing
under the laws of The State of New York.
3.02 It is duly qualified to carry on its business in The State of New
York.
3.03 It is empowered under applicable laws and by its charter and by-laws
to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
3.06 ADS is duly registered as a transfer agent under the Securities
Exchange Act of 1934 and shall continue to be registered throughout the
remainder of this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to ADS that;
4.01 It is a corporation duly organized and existing and in good standing
under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of Incorporation
and By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is an closed-end and non-diversified management investment company
registered under the Investment Company Act of 1940.
4.05 A registration statement under the Securities Act of 1933 is currently
or will become effective and will remain effective, and appropriate state
securities law filings as required, have been or will be made and will continue
to be made, with respect to all Shares of the Fund being offered for sale.
5. INDEMNIFICATION
5.01 ADS shall not be responsible for, and the Fund shall indemnify and
hold ADS harmless from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liability arising out of or attributable
to:
(a) All actions of ADS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence, willful misconduct,
5
<PAGE>
or in reckless disregard of its duties under this Agreement..
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack good faith, gross negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by ADS or its agents or subcontractors of
information, records and documents which (i) are received by ADS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
(d) The reliance on, or the carrying out by ADS or its agents or
subcontractors of any written instruction signed by an officer of the Fund, or
any legal opinion of counsel to the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or regulations
of any state that such Shares be registered in such state or in violation of any
stop order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such Shares in such state.
5.02 ADS shall indemnify and hold the Fund harmless from and against any
and all losses, damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to any action or failure or omission to
act by ADS as a result of ADS's lack of good faith, gross negligence or willful
misconduct or the breach of any warranty or representation of ADS hereunder.
5.03 At any time ADS may apply to any officer of the Fund for instructions,
and may consult with the Fund's legal counsel with respect to any matter arising
in connection with the services to be performed by ADS under this Agreement, and
ADS and its agents or subcontractors shall not be liable and shall be
indemnified by the Fund for any action taken or omitted by it in reliance upon
such instructions or upon the opinion of such counsel. ADS, its agents and
subcontractors shall be protected and indemnified in acting upon any paper or
document furnished by or on behalf of the Fund, reasonably believed to be
genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided ADS or its agents
or subcontractors by machine readable input, telex, CRT data entry or other
similar means authorized by the Fund, and shall not be held to have notice of
any change of authority of any person, until receipt of written notice thereof
from the Fund. ADS, its agents and subcontractors shall also be protected and
indemnified in recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signatures of the officers of the Fund, and
the proper countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
5.06 In order that the indemnification provisions contained in this Article
5 shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party of seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
6
<PAGE>
6. COVENANTS OF THE FUND AND ADS
6.01 The Fund Shall promptly furnish to ADS a certified copy of the
resolution of the Board of Directors of the Fund authorizing the appointment of
ADS and the execution and delivery of this Agreement.
6.02 ADS hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Fund for safekeeping of stock certificates, check
forms and facsimile signature imprinting devices, if any; and for the
preparation or use, and for keeping account of, such certificates, forms and
devices.
6.03 ADS shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended, and
the Rules thereunder, ADS agrees that all such records prepared or maintained by
ADS relating to the services to be performed by ADS hereunder are the property
of the Fund and will be preserved, maintained and made available in accordance
with such Section and Rules, and will be surrendered promptly to the Fund on and
in accordance with its request.
6.04 ADS and the Fund agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other person, except
as may be required by law.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, ADS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. ADS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person, and shall
promptly notify the Fund of any unusual request to inspect or copy the
shareholder records of the Fund or the receipt of any other unusual request to
inspect, copy or produce the records of the Fund.
7. TERMINATION OF AGREEMENT
7.01 This Agreement shall become effective as of the date hereof and shall
remain in force for a period of three years, provided however, that both parties
to this Agreement have the option to terminate the Agreement, without penalty,
upon ninety (90) days prior written notice.
7.02 Should the Fund exercise its right to terminate, all expenses incurred
by ADS associated with the movement of records and material will be borne by the
Fund. Such expenses will include all out-of-pocket expenses and all time
incurred to train or consult with the successor transfer agent with regard to
the transfer of shareholder accounting and stock transfer responsibilities. The
charge for all time incurred by ADS will be calculated in accordance with the
rates specified in the Fee Schedule paragraph (e).
8. ASSIGNMENT
8.01 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective successors and assigns.
7
<PAGE>
9. AMENDMENT
9.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Directors of the Fund.
10. NEW YORK LAWS TO APPLY
10.01 The provisions of this Agreement shall be construed and interpreted
in accordance with the laws of the State of New York as at the time in effect
and the applicable provisions of the 1940 Act. To the extent that the applicable
law of the State of New York, or any of the provisions herein, conflict with the
applicable provisions of the 1940 Act, the latter shall control.
11. MERGER OF AGREEMENT
11.01 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
12. NOTICES.
All notices and other communications hereunder shall be in writing, shall
be deemed to have been given when received or when sent by telex or facsimile,
and shall be given to the following addresses (or such other addresses as to
which notice is given):
To the Fund: To American Data Services
Mr. Jon LaVine Michael Miola
President President
Target Income Fund, Inc. American Data Services
26691 Plaza Drive, Suite 222 24 West Carver Street
Mission Viejo, CA 92691 Huntington, New York 11743
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
TARGET INCOME FUND, INC. AMERICAN DATA SERVICES, INC.
By:____________________________ By:__________________________
Jon LaVine, President Michael Miola, President
8
<PAGE>
FEE SCHEDULE
------------
For the services rendered by ADS in its capacity as transfer agent, the
Fund shall pay ADS, within ten (10) days after receipt of an invoice from ADS at
the beginning of each month, a fee, calculated as a combination of account
maintenance charges and transaction charges as follows:
(a) ACCOUNT MAINTENANCE CHARGE:
The Greater of:
(1) Minimum maintenance charge per fund - $500.00/month (No prorating partial
months);
OR,
(2) Based upon the total of all open/closed accounts in the Fund upon the
following annual rates (billed monthly):
Equity Fund ............... $ 8.00 per account
Fixed Income Fund...........$ 10.00 per account
Money Market Fund ..........$ 12.00 per account
Closed accounts ........... $ 2.00 per account***
** All accounts closed during a calendar year will be considered as open
accounts for billing purposes until all 1099's and 5498's have been sent to
shareholders and reported (via mag media) to the IRS.
PLUS,
(b) TRANSACTION FEES:
Trade Entry (purchase/liquidation).......................$ 1.35 each
New account set-up......................................$ 2.50 each
Customer service calls...................................$ 1.00 each
Correspondence/ information requests ....................$ 1.25 each
Liquidations paid by wire transfer.......................$ 3.00 each
Omnibus accounts ........................................$ 1.25 per transaction*
ACH charg................................................$ .30 each
SWP......................................................$ 1.25 each *
* Not included as a Trade Entry.
9
<PAGE>
FEE REDUCTION:
--------------
As consideration for entering into a three year contract, ADS will reduce the
above fees as follows:
o While the net assets of the Fund to be serviced under this Agreement (see
Schedule A) are below $15 million, account maintenance fees (EXCLUDING $500
MINIMUM MONTHLY FEE) will be reduced by 40% and transaction fees will be
reduced by 50%.
o While the net assets of the Fund are between $15 million and $18 million,
account maintenance (EXCLUDING $500 MINIMUM MONTHLY FEE) fees will be
reduced by 20% and transaction fees will be reduced by 30%.
o Once the net assets of the Fund exceed $18 million, the fee schedule above
will be in force without any fee reduction.
o Out of pocket expenses are not subject to the fee reduction and will
be charged to the Fund as incurred.
(c) IRA PLAN FEES:
The following fees will be charged directly to the shareholder account:
Annual maintenance fee.................................$ 12.00 /account *
Incoming transfer from prior custodian ................$ 12.00
Distribution to a participant..........................$ 15.00
Refund of excess contribution..........................$ 15.00
Transfer to successor custodian........................$ 12.00
Automatic periodic distributions .....................$ 15.00/year per account
* Includes Star Bank N.A. $8.00 Custody Fee.
FEE INCREASES
-------------
On each annual anniversary date of this Agreement, the fees enumerated above
(except for the IRA Plan fees) will be increased by the lesser of, the change in
the Consumer Price Index for the Northeast region (CPI), or the overall
inflation rate for the twelve month period ending with the month preceding such
annual anniversary date.
(d) EXPENSES:
The Fund shall reimburse ADS for any out-of-pocket expenses, exclusive of
salaries, advanced by ADS in connection with but not limited to the printing of
confirmation forms and statements, proxy expenses, quotation services, travel
requested by the Fund, record storage, postage (plus a $0.07 service charge for
all mailings), and telex and courier charges authorized by the Fund
10
<PAGE>
(e) SPECIAL REPORTS:
All reports and /or analyses requested by the Fund, its auditors, legal counsel,
portfolio manager, or any regulatory agency having jurisdiction over the Fund,
that are not in the normal course of fund stock transfer activities as specified
in Paragraph 1 of this Agreement and are not required to clarify standard
reports generated by ADS, shall be subject to an additional charge, agreed upon
in advance and in writing, based upon the following rates:
Labor:
Senior staff $100.00/hr.
Junior staff $ 50.00/hr.
Computer time $ 45.00/hr.
(g) CONVERSION CHARGE:
There will be a charge to convert the Fund's shareholder accounting
records on to the ADS stock transfer system (ADSHARE). In addition, ADS will be
reimbursed for all out-of-pocket expenses, enumerated in paragraph (b) above and
data media conversion costs, incurred during the conversion process.
The aforementioned conversion charge will be agreed upon in advance and
will be based upon the conditions of records and the volume of records to be
converted.
11
<PAGE>
SCHEDULE A
----------
PORTFOLIOS TO BE SERVICED UNDER THIS AGREEMENT:
Target Income Fund, Inc.
12
[LOGO]
TARGET INCOME FUND
Master Servicing Agreement
TIF-CGC
<PAGE>
Target Income Fund, Inc.
2025 East Financial Way, Suite 105
Glendora, CA 91740
818-852-1033
FAX 818-852-1039
September 16, 1993
<PAGE>
TARGET INCOME FUND
MASTER SERVICING AGREEMENT
This Agreement is made in the City of Palo Alto, State of California,
as of _______________ between the Target Income Fund, Inc. (TIF) (hereinafter
referred to as "TIF") and Concord Growth Corporation (CGC) (hereinafter referred
to as "Master Servicer").
RECITALS
TIF invests primarily in senior, fully secured floating rate loans from
small and midsized firms (Borrowers). TIF will utilize the services of
Originator/Managers and Processors in providing loans to Borrowers. TIF requires
support services from Master Servicer in the compilation of due-diligence
packages on prospective Borrowers and Originator/Managers; preparation of
documentation for transactions entered; ongoing review of borrowing
relationships; and cash management recordkeeping.
CGC is in the business of providing financial management services to
lenders and seeks to provide support services to TIF.
AGREEMENT
1. DEFINITIONS.
1.1. In addition to the terms defined above, the following terms shall
have the following respective meanings:
1.1.1. Borrower. Company borrowing money from TIF.
1.1.2. Originator/Manager. Firm which solicits Borrowers for TIF's
approval and then manages the borrowing relationship as described
in the TIF operations manual.
1.1.3. Processors. Origanization which handles the transaction reporting
function between Borrowers and TIF. In some case,
Originator/Managers may also be a Processor.
TIF/CGC Master Servicer Agreement
July 26, 1996
,Page 3 of 4
<PAGE>
1.1.4. Due Diligence. Process of review to determine whether or not TIF
seeks to enter into a borrower or originator/manager relationship
with another organization.
1.1.5. Fund Advisor. The TIF Investment Advisor or Manager appointed by
the TIF Board of Directors.
1.1.6. Financing Agreements. Agreements and related documents describing
the relationship between TIF, Borrowers and related parties.
2. SERVICER RESPONSIBILITIES
2.1. Due Diligence. Master Servicer shall assemble Due Diligence packages
for the investment advisor to review. Due Diligence packages shall
be assembled for Borrowers, Originator/Managers and Processors in
the respective forms set forth in the TIF Operations Manual.
2.2. Ongoing Review. Master Servicer shall perform ongoing review for the
Fund Advisor to assure that Fund standards are complied with. These
reviews shall be compiled for Borrower, Originator/Managers and
Processors in the manner set forth in the TIF Operations Manual.
2.3. Cash Tracking/Management. Master Servicer shall provide cash
tracking services in order to assist the fund advisor in monitoring
and distributing cash. Cash Tracking/Management services shall be
performed in the manner set forth in the TIF Operations Manual.
3. PROCEDURES
3.1. Documentation. TIF shall contract with the Master Servicer to
prepare and manage the following documents.
3.1.1. Agreements. Master Servicer shall be responsible to prepare and
have signed all borrower loan agreements and related documents.
Such documents shall be approved by the Fund Advisor and TIF
Counsel.
3.1.2. Security Perfection. Master Servicer shall be responsible to
confirm that TIF's security interests are properly perfected.
3.2. Reports Master servicer shall assemble and monitor all reports
outlined for Borrowers, Originators/Managers and Processors as set
forth in the TIF Operations Manual. Reports as required by the Fund
Advisor shall be forwarded to the Fund Advisor for review.
TIF/CGC Master Servicer Agreement
July 26, 1996
,Page 4 of 4
<PAGE>
3.3. Filing. Master Servicer shall prepare all agreements and critical
documentation for filing at the location specified by the Fund
Advisor. Additionally, back up copies shall be maintained with the
Master Servicer.
3.4. Compensation. Master Servicer shall be paid by servicing charged
directly to Borrowers and Originator/Managers. TIF shall have no
obligation to pay fees to Servicer.
4. MANAGEMENT
4.1. Inspection. At any reasonable time, during normal business hours,
Master Servicer will permit such agents as may be designated to it
in writing by TIF or the Fund Advisor to examine its books, records,
and accounts relating to transactions with Borrowers,
Originator/Managers or Processors and will from time to time, at the
request of TIF or the Fund Advisor for specific information, furnish
to TIF or the Fund Advisor such information as Master Servicer may
have or be able to obtain with respect to the Fund's business.
4.2. Standard of Care/Limitation of Liability. Master Servicer will
exercise the same care in administering this Servicing Agreement as
if the Servicing were done entirely for Master Servicer's own
account; provided, however, that in any activity other than simple
administration of the Financing Agreements (e.g., work out
negotiations, enforcement, etc.) Master Servicer shall have no
liability to TIF for any loss except a loss due to Master Servicer's
own gross negligence or willful misconduct. Without limiting the
generality of the foregoing, Master Servicer shall be fully
protected in relying on any certificate, document or other
communication which appears to it to be genuine and to have been
signed or presented by the proper person or persons, upon a
communication from TIF permitting such action or inaction by Master
Servicer, and upon the advice of legal counsel, independent
accountants and other appropriate experts (including those retained
by Borrowers, Originator/Managers and Processors).
5. REPRESENTATIONS & WARRANTIES
5.1. Representations And Warranties of TIF. TIF represents and warrants
to Master Servicer that this Agreement has been duly authorized and
is valid and binding on TIF.
5.2. Representations and Warranties of Master Servicer. Master Servicer
represents and warrants to TIF that this Agreement has been duly
authorized and is valid and binding on Master Servicer;
5.3. Duty of Confidentiality. Master Servicer agrees it shall treat as
confidential all Confidential Information regarding the Agreements
between TIF and Borrowers, Originator/Managers and Processors
(collectively "TIF Parties") furnished to it by TIF. "Confidential
Information" means any information respecting TIF Parties other than
(i) information previously filed with any governmental agency and
available to the public, (ii) information previously published in
any public medium, and (iii) information previously disclosed by TIF
Parties or any of their subsidiaries to any person not associated
with TIF Parties with a confidentiality agreement. Participant's
obligation of confidentiality shall not apply to Confidential
Information which
TIF/CGC Master Servicer Agreement
July 26, 1996
,Page 5 of 4
<PAGE>
Master Servicer is required to disclose (i) to any governmental
authority in the course of its duties or (ii) pursuant to a subpoena
or other legal process. Nothing in this Paragraph shall be construed
to create or give rise to any trust or fiduciary duty on the part of
Master Servicer to TIF Parties.
5.4. Quality of Information. TIF understands that Master Servicer has
compiled information from sources that are believed to be reliable.
Documentation provided is of the quality that Master Servicer would
require for making decisions on its own behalf. TIF acknowledges
that:
5.4.1. TIF has performed and will continue to perform its own credit
analysis of the Customer and any other entity which may have
liability for the Borrower's payment obligation, and its own
investigation of the risks involved in the transactions
contemplated, and it is not relying, and will not rely, on the
Master Servicer with respect thereto;
5.4.2. TIF has reviewed and approved the form and substance of the
Financing Agreements; and
5.4.3. Master Servicer has not made and shall not at any time be deemed
to have made any representation or warranty, express or implied,
with respect to (i) the due execution, authenticity, legality,
accuracy, completeness, validity or enforceability of any of the
Financing Agreements; (ii) the financial condition or
creditworthiness of the Borrowers, Originators/Managers or any
other entity which may have liability to TIF, (iii) the validity,
perfection, enforceability, value or sufficiency of, or title to
any security for the Borrowers and Originators/Managers, or the
filing, or recording, or taking of any other actions with respect
to the Financing Agreements, or the security for the credits, or
(iv) any other matter having any relation to this Agreement, or
the Financing Agreements not expressly stated herein.
6. GENERAL
6.1. Successors and Assigns. Master Servicer shall not sell, assign, or
otherwise transfer its rights under this Agreement without the prior
written consent of TIF. Subject to the foregoing, all provisions
contained in this Agreement or any document or agreement referred to
herein or relating hereto shall inure to the benefit of and shall be
binding upon the respective permitted successors and assigns of the
parties hereto.
6.2. Entire Agreement; Modificaiton. This Agreement embodies the entire
agreement and understanding between TIF and Master Servicer and
supersedes any and all prior agreements and understandings with
respect to the subject matter hereof. This Agreement may not be
amended or in any manner modified unless such amendment or
modification is in writing and signed by both parties.
6.3. Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall
together constitute but one and the same instrument.
6.4. Severabiltiy. If any provision hereof would be invalid under
applicable law, then such provision shall be
TIF/CGC Master Servicer Agreement
July 26, 1996
,Page 6 of 4
<PAGE>
deemed to be modified to the extent necessary to render it valid
while most nearly preserving its original intent; no provision
hereof shall be affected by another provision's being held invalid.
6.5. Captions. Captions and headings herein are for convenience only and
shall not effect the construction hereof.
6.6. Duration. This Agreement shall be effective from the date set forth
above and shall remain in force for two years thereafter unless
terminated pursuant to the provisions of paragraph 6.7 below. This
Agreement shall continue in force from year to year after the
initial two year term, but only so long as such continuance is
specifically approved annually:
6.6.1. by TIF's Board of Directors or by a vote of a majority of
the Corporation's outstanding voting securities; and
6.6.2. by a majority of the Directors who are not parties to this
Agreement or interested person of any such party.
6.7. Termination. This Agreement may be terminated by CGC at any time
without penalty, providing a Servicer acceptable to TIF has been
recruited to assume servicing responsibilities, upon giving TIF not
less than sixty (60) days' written notice (which may be waived by
TIF). This Agreement may be terminated by TIF at any time without
penalty upon giving CGC not less than sixty (60) days written notice
(which notice may be waived by CGC), provided that such termination
by TIF shall be directed or approved by the vote of a majority of
all of its Directors in office at the time or by the vote of the
holders of a majority (as defined in the Act) of the voting
securities of TIF.
6.8. Governing Law, Consent to Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State
of California. Any legal action or proceeding arising out of or
relating to this Agreement may be brought in the courts of the State
of California, or the courts of the United States of America located
in the City and County of San Francisco, and the Participant hereby
irrevocably submits to the jurisdiction of each of such courts in
any action or proceeding. The Participant hereby irrevocably
consents to service of process in any said action or proceeding in
any of such courts by the mailing of copies thereof certified mail,
postage prepaid, to the Participant at its address set forth herein,
such service to become effective 10 days after such mailing.
IN WITNESS WHEREOF, the parties have duly executed this Master Servicing
Agreement the day and year first above written.
TARGET INCOME FUND
TIF
By_________________________________________
Its________________________________________
CONCORD GROWTH CORPORATION
MASTER SERVICER
By_________________________________________
Its________________________________________
TIF/CGC Master Servicer Agreement
July 26, 1996
,Page 7 of 4
<PAGE>
EXHIBIT
TIF Operations Manual
Execution Copy
CREDIT AGREEMENT
among
TARGET INCOME FUND, INC.
and
DEUTSCHE BANK AG,
NEW YORK BRANCH
----------------------------------
Dated as of March 29, 1996
----------------------------------
<PAGE>
TABLE OF CONTENTS
SECTION 1. Amount and Terms of Credit.........................................1
1.01 The Facility.........................................................1
1.02 Minimum Amount of Each Borrowing.....................................1
1.03 Notice of Borrowing..................................................1
1.04 Disbursement of Funds................................................1
1.05 Revolving Notes......................................................2
1.06 Bank Notations.......................................................2
1.07 Interest.............................................................2
1.08 Interest Periods.....................................................3
1.09 Compensation.........................................................3
1.11 Increased Costs, Illegality, etc.....................................4
SECTION 2. Prepayments; Payments; Taxes.......................................6
2.01 Repayments...........................................................6
2.02 Method and Place of Payment..........................................6
Section 2.03 Expiry Date..................................................6
SECTION 3. Conditions Precedent to Effective Date.............................7
3.01 Execution of Agreement; Notes........................................7
3.02 Officer's Certificate................................................7
3.03 Opinions of Counsel..................................................7
3.04 Corporate Documents; Proceedings; etc................................7
3.05 Adverse Change, etc..................................................7
3.06 Litigation...........................................................8
SECTION 4. Conditions Precedent to All Loans..................................8
4.01 No Default; Representations and Warranties...........................8
4.02 Request for Borrowing................................................8
4.03 Bank's Discretion....................................................8
SECTION 5. Representations, Warranties and Agreements.........................8
5.01 Corporate or Trust Status............................................9
5.02 Corporate Power and Authority........................................9
5.03 No Violation.........................................................9
5.04 Governmental Approvals...............................................9
5.05 Financial Statements; Financial Condition;
Undisclosed Liabilities; etc..............................................10
5.06 Litigation..........................................................10
5.07 True and Complete Disclosure........................................10
5.08 Use of Proceeds; Margin Regulations.................................10
5.09 ERISA...............................................................11
5.10 Compliance with Statutes, etc.......................................11
5.11 Investment Company..................................................11
5.12 Investment Adviser..................................................11
5.13 Affiliation with the Bank...........................................11
SECTION 6. Affirmative Covenants.............................................11
6.01 Information Covenants...............................................11
-3-
<PAGE>
6.02 Books, Records and Inspections......................................12
6.03 Compliance with Statutes, etc.......................................13
6.04 Investment Company..................................................13
6.05 Compliance with Investment Practices................................13
SECTION 7. Negative Covenants................................................13
7.01 Liens...............................................................13
7.02 Consolidation, Merger, Sale or Purchase of
Assets, etc...............................................................14
7.03 Modifications of Investment Practices,
Articles of Incorporation, By-Laws and Certain
Other Agreements..........................................................14
7.04 Business............................................................14
7.05 ERISA...............................................................14
7.06 Affiliated Person...................................................14
SECTION 8. Events of Default.................................................14
8.01 Payments............................................................14
8.02 Representations, etc................................................15
8.03 Covenants...........................................................15
8.04 Default Under Other Agreements......................................15
8.05 Bankruptcy, etc.....................................................15
8.06 Judgments...........................................................15
8.07 Investment Adviser..................................................16
8.08 Asset Coverage......................................................16
SECTION 9 Definitions and Accounting Terms...................................16
9.01 Defined Terms.......................................................16
SECTION 10. Miscellaneous.....................................................22
10.01 Payment of Expenses, etc...........................................22
10.02 Right of Setoff....................................................22
10.03 Notices............................................................23
10.04 Benefit of Agreement...............................................23
10.05 No Waiver; Remedies Cumulative.....................................24
10.06 Calculations; Computations.........................................24
10.07 GOVERNING LAW; SUBMISSION TO JURISDICTION;
VENUE; WAIVER OF JURY TRIAL..............................................25
10.08 Counterparts.......................................................25
10.09 Headings Descriptive...............................................26
10.10 Amendment or Waiver; etc...........................................26
10.11 Survival...........................................................26
10.12 Domicile of Loans..................................................26
-4-
<PAGE>
Exhibit A
CREDIT AGREEMENT, dated as of March 29, 1996, among Target Income Fund,
Inc. (the "Borrower"), and Deutsche Bank AG, New York Branch (together with its
successors and assigns, the "Bank"; all capitalized terms used herein and
defined in Section 9 are used herein as therein defined).
W I T N E S S E T H :
WHEREAS, subject to and upon the terms and conditions herein set forth,
the Borrower may request that the Bank make available the credit facilities
provided for herein;
NOW, THEREFORE, IT IS AGREED:
SECTION 1. Amount and Terms of Credit.SECTION 1. Amount and Terms of
Credit
1.01 The Facility. (a) Subject to and upon the terms and conditions set
forth herein, the Bank agrees, at any time and from time to time on and after
the Effective Date and prior to the Expiry Date, to consider requests from the
Borrower to make a Loan or Loans (each a "Loan" and, collectively, the "Loans")
to the Borrower, which Loans (i) shall, at the option of the Borrower, be Base
Rate Loans, LIBOR Loans or NIBOR Loans, provided that all Loans comprising the
same Borrowing shall at all times be of the same Type, (ii) may be repaid and
reborrowed in accordance with the provisions hereof, and (iii) shall not exceed
for the Borrower the lesser of the Borrower's Borrowing Base and, when
aggregated with all Loans then outstanding, the Total Borrower Facility.
Notwithstanding anything to the contrary contained herein the Bank shall not at
any time have any obligation or commitment to make any Loan to the Borrower.
1.02 Minimum Amount of Each Borrowing. The aggregate principal amount
of each Borrowing shall not be less than $50,000 and, if greater, shall be in an
integral multiple of $10,000. More than one Borrowing may occur on the same
date.
1.03 Notice of Borrowing. Whenever the Borrower desires to make a
Borrowing hereunder, it shall give the Bank at its Notice Office notice of its
request before 2:30 p.m. (New York time) on the Business Day on which it desires
to incur such Loan. Each such request (each a "Request for Borrowing") shall be
given by or on behalf of the Borrower in the form of Exhibit A, appropriately
completed to specify (a) the aggregate principal amount of the Loans requested
to be made pursuant to such Borrowing,(b) the Business Day on which such Loans
are to be made, (c) whether such Loans are to be Base Rate Loans, LIBOR Loans or
NIBOR Loans,(d) the aggregate amount of principal and interest on outstanding
Loans which are payable by the Borrower on such date; (e) if the amount
specified pursuant to clause (a) is greater than the amount specified pursuant
to clause (d), the net amount to be remitted by the Bank pursuant to Section
1.04 in the event that the Bank elects to make the Requested Loan and (f) if the
amount specified pursuant to clause (d) is greater than the amount specified
pursuant to clause (a), the net amount to be remitted by the Borrower pursuant
to Section 2.02.
1.04 Disbursement of Funds. In the event that the Bank elects to make a
Loan, it will make funds to the Borrower in an amount equal to the net amount,
if any specified in the related Request for Borrowing pursuant to Section
1.03(g) by a wire transfer, initiated no later than 4:00 P.M. New York Time on
the date specified in a
<PAGE>
Exhibit A
page 2
Request for Borrowing, of immediately available funds to an account specified by
or on behalf of the Borrower. To the extent the Bank elects not to make a Loan,
it shall notify the Borrower not later than 4:00 P.M. on such date.
1.05 Revolving Notes. The Borrower's obligation to pay the principal
of, and interest on, the Loans made to it by the Bank shall be evidenced by a
promissory note duly executed and delivered by the Borrower substantially in the
form of Exhibit B, with blanks appropriately completed in conformity herewith
(each a "Note" and collectively the "Notes"). The Note shall (i) be executed by
the Borrower, (ii) be payable to the Bank and be dated the Effective Date, (iii)
be in a stated principal amount equal to the Total Borrower Facility and be
payable in the principal amount of the Loans evidenced thereby, (iv) be payable
upon demand by the Bank, (v) bear interest as provided in the appropriate clause
of Section 1.07 in respect of the Base Rate Loans, LIBOR Loans or NIBOR Loans,
as the case may be, evidenced thereby, (vi) be subject to mandatory repayment as
provided in Section 2.01 and (vii) be entitled to the benefits of this Agreement
and the other Credit Documents.
1.06 Bank Notations. The Bank will note on its internal records the
amount of each Loan made by it to the Borrower and each payment in respect
thereof and will prior to any transfer of its Note endorse on the reverse side
thereof the outstanding principal amount of Loans evidenced thereby. Failure to
make any such notation shall not affect the Borrower's obligations in respect of
such Loans.
1.07 Interest. (a) The Borrower agrees to pay interest in respect of
the unpaid principal amount of each Base Rate Loan made to it from the date the
proceeds thereof are made available to the Borrower until the maturity thereof
(whether by acceleration, demand or otherwise) at a rate per annum which shall,
during each Interest Period applicable thereto, be equal to the Base Rate in
effect from time to time.
(b) The Borrower agrees to pay interest in respect of the unpaid
principal amount of each NIBOR Loan made to it from the date the proceeds
thereof are made available to the Borrower until the maturity thereof (whether
by acceleration, demand or otherwise) at a rate per annum which shall, during
each Interest Period applicable thereto, be equal to the sum of the NIBOR Rate
for such Interest Period plus .75%.
(c) The Borrower agrees to pay interest in respect of the unpaid
principal amount of each LIBOR Loan made to it from the date the proceeds
thereof are made available to the Borrower until the maturity thereof (whether
by acceleration, demand or otherwise) at a rate per annum which shall, during
each Interest Period applicable thereto, be equal to the sum of the LIBOR Rate
for such Interest Period plus .75% of 1%.
(d) Overdue principal and, to the extent permitted by law, overdue
interest in respect of each Loan and any other overdue amount payable hereunder
shall, in each case, bear interest at a rate per annum equal to the greater of
(x) 2% per annum in excess of the rate otherwise applicable to Loans maintained
as Base Rate Loans from time to time or (y) the rate which is 2% in excess of
the rate then borne by such Loans, in each case with such interest to be payable
on demand by the Borrower.
-2-
<PAGE>
Exhibit A
page 3
(e) Accrued (and theretofore unpaid) interest shall be payable (i) in
respect of each Base Rate Loan, quarterly in arrears on the last Business Day of
January, April, July and October; (ii) in respect of each Fixed Rate Loan, on
the last day of each Interest Period applicable thereto and (ii) in respect of
each Loan, on any repayment or prepayment (on the amount repaid or prepaid), at
maturity (whether by acceleration, demand or otherwise) and, after such
maturity, on demand.
(e) Upon each Interest Determination Date, the Bank shall determine the
interest rate for the Fixed Rate Loans for which such determination is being
made and shall promptly notify the Borrower thereof. The Bank shall make such
determination promptly following its determination to make a Loan hereunder.
Each determination of the interest rate shall, absent manifest error, be final
and conclusive and binding on all parties hereto.
1.08 Interest Periods. At the time it gives any Request for Borrowing
in respect of the making of any Fixed Rate Loan, the Borrower shall have the
right to elect, by giving the Bank notice thereof, the interest period (each an
"Interest Period") applicable to such Fixed Rate Loan, which Interest Period
shall, at the option of the Borrower, in the case of a LIBOR Loan, be a one,
two, three or six month period, and in the case of a NIBOR Loan be a period of
up to a thirty days, provided that: (i) all Fixed Rate Loans comprising a
Borrowing shall at all times have the same Interest Period; (ii) the initial
Interest Period for any Fixed Rate Loan shall commence on the date of Borrowing
of such Loan (including the date of any conversion thereof into a Loan of a
different Type) and each Interest Period occurring thereafter in respect of such
Loan shall commence on the day on which the next preceding Interest Period
applicable thereto expires; (iii) if any Interest Period relating to a Fixed
Rate Loan begins on a day for which there is no numerically corresponding day in
the calendar month at the end of such Interest Period, such Interest Period
shall end on the last Business Day of such calendar month; (iv) if any Interest
Period would otherwise expire on a day which is not a Business Day, such
Interest Period shall expire on the next succeeding Business Day, provided that
if any Interest Period for a LIBOR Loan would otherwise expire on a day which is
not a Business Day but is a day of the month after which no further Business Day
occurs in such month, such Interest Period shall expire on the next preceding
Business Day; (v) no Interest Period shall extend beyond the Expiry Date. If
upon the expiration of any Interest Period applicable to a Fixed Rate Loan, the
Borrower has failed to elect a new Interest Period to be applicable to such
Fixed Rate Loan as provided above, the Borrower shall be deemed to have elected
to convert such Loan into a Base Rate Loan effective as of the expiration date
of such current Interest Period.
1.09 Compensation. The Borrower shall compensate the Bank, upon its
written request (which request shall set forth the basis for requesting such
compensation), for all reasonable losses, expenses and liabilities (including,
without limitation, any loss, expense or liability incurred by reason of the
liquidation or reemployment of deposits or other funds required by the Bank to
fund its Fixed Rate Loans) which such Bank may sustain: (i) if for any reason
(other than the Bank's failure to make a Loan) a Borrowing of Fixed Rate Loans
does not occur on a date specified therefor in a Request for Borrowing; (ii) if
any repayment (including any repayment made pursuant to Section 2 or a result of
any demand made by the Bank
-3-
<PAGE>
Exhibit A
page 4
or an acceleration of the Loans pursuant to Section 8) of any of its NIBOR Loans
occurs on a date which is not the last day of an Interest Period with respect
thereto; or (iii) as a consequence of any other default by the Borrower to repay
its Loans when required by the terms of this Agreement or any Note held by the
Bank.
1.10 Increased Costs, Illegality, etc. 1.11 Increased Costs,
Illegality, etc. (a) In the event that the Bank shall have determined (which
determination shall, absent manifest error, be final and conclusive and binding
upon all parties hereto): (i) on any Interest Determination Date that, by reason
of any changes arising after the date of this Agreement affecting the interbank
market, adequate and fair means do not exist for ascertaining the applicable
interest rate on the basis provided for in the definition of NIBOR or LIBOR; or
(ii) at any time, that the Bank shall incur increased costs or reductions in the
amounts received or receivable hereunder with respect to any Fixed Rate Loan
because of any change since the date of this Agreement in any applicable law or
governmental rule, regulation, order or request (whether or not having the force
of law) (or in the interpretation or administration thereof and including the
introduction of any new law or governmental rule, regulation, order or request),
such as, for example, but not limited to, (A) a change in the basis of taxation
of payments to the Bank or its applicable lending office of the principal of or
interest on the Note or any other amounts payable hereunder (except for changes
in the rate of tax on, or determined by reference to, the net income or profits
of the Bank or its applicable lending office imposed by the jurisdiction in
which its principal office or applicable lending office is located) or (B) a
change in official reserve requirements, but, in all events, excluding reserves
required under Regulation D to the extent covered by Section 1.10(d) or included
in the computation of NIBOR or LIBOR; or (iii) at any time, that the making or
continuance of any Fixed Rate Loan has been made (x) unlawful by any law or
governmental rule, regulation or order, or (y) impossible by compliance by the
Bank with any governmental request (whether or not having force of law); then,
and in any such event, the Bank shall promptly give notice (by telephone
confirmed in writing) to the Borrower. Thereafter (x) in the case of clause (i)
above, Fixed Rate Loans shall no longer be available until such time as the Bank
notifies the Borrower that the circumstances giving rise to such notice by the
Bank no longer exist, and any Request for Borrowing given by the Borrower with
respect to Fixed Rate Loans which have not yet been incurred shall be deemed
rescinded by the Borrower; (y) in the case of clause (ii) above, the Borrower
shall pay to the Bank, within two Business Days after written demand therefor,
such additional amounts (in the form of an increased rate of, or a different
method of calculating, interest or otherwise as the Bank in its sole discretion
shall determine) as shall be required to compensate the Bank for such increased
costs or reductions in amounts received or receivable hereunder (a written
notice as to the additional amounts owed to the Bank, showing the basis for the
calculation thereof, submitted to the Borrower by the Bank shall be conclusive,
absent manifest error); and (z) in the case of clause (iii) above, take one of
the actions specified in Section 1.10(b) as promptly as possible and, in any
event, within the time period required by law.
(b) At any time that any Fixed Rate Loan is affected by the
circumstances described in Section 1.10(a)(ii) or (iii), the Borrower may (and,
in the case of a Fixed Rate Loan affected by the circumstances described in
Section 1.10(a)(iii), shall) either (i) if the affected Fixed Rate Loan is then
being made initially or pursuant
-4-
<PAGE>
Exhibit A
page 5
to a conversion, cancel said Borrowing, or change the Type of Loan to become a
Base Rate Loan by giving the Bank notice by telephone (confirmed in writing) of
the cancellation on the same date (if practicable) that the Borrower was
notified by the Bank pursuant to Section 1.10(a)(ii) or (iii); or (ii) if the
affected Loan is then outstanding, upon at least three Business Days' written
notice, require the Bank to convert such Fixed Rate Loan into a Base Rate Loan.
(c) If the Bank determines at any time that any change since the date
of this Agreement in any applicable law or governmental rule, regulation, order
or request (whether or not having the force of law) concerning capital adequacy,
or any change since the date of this Agreement in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency, will have the effect of increasing the amount of capital required or
expected to be maintained by the Bank based on the existence of the Bank's
obligations hereunder, then the Borrower shall pay to the Bank, upon its written
demand therefor, such additional amounts as shall be required to compensate the
Bank for the increased cost to the Bank as a result of such increase of capital.
The Bank, upon determining that any additional amounts will be payable pursuant
to this Section 1.10(c), will give prompt written notice thereof to the
Borrower, which notice shall show the basis for calculation of such additional
amounts. In determining such additional amounts, the Bank will act reasonably
and in good faith and will use averaging and attribution methods that are
reasonable; provided that the Bank's determination of compensation owing under
this Section 1.10(c) shall be conclusive, absent manifest error.
(d) In the event that the Bank shall determine (which determination shall be
prima facie evidence with respect to all the parties hereto) at any time that by
reason of Regulation D the Bank's lending office is required to maintain
reserves in respect of Eurocurrency liabilities (as defined in Regulation D)
during any period in which it has a Fixed Rate Loan outstanding (each such
period, for the Bank, a "Eurocurrency Reserve Period"), then the Bank shall
promptly give notice (by telephone confirmed in writing) to the Borrower of such
determination, and the Borrower shall pay to the Bank additional interest on the
unpaid principal amount of each Fixed Rate Loan of the Bank during such
Eurocurrency Reserve Period at a rate per annum which shall, during each
Interest Period applicable to such Fixed Rate Loan, be the amount by which (i)
the NIBOR or LIBOR for such Interest Period divided (and rounded to the nearest
whole multiple of 1/16 of 1%) by a percentage equal to 100% minus the then
stated maximum rate of all reserve requirements (including, without limitation,
any marginal, emergency, supplemental, special or other reserves) applicable to
any member bank of the Federal Reserve System in respect of Eurocurrency
liabilities (as defined in Regulation D) exceeds (ii) the NIBOR or LIBOR for
such Interest Period. Additional interest payable pursuant to the immediately
preceding sentence shall be paid by the Borrower at the time that it is
otherwise required to pay interest in respect of such Fixed Rate Loan. The Bank
agrees that if it gives notice to the Borrower of the existence of a
Eurocurrency Reserve Period, it shall promptly notify the Borrower of any
termination thereof, at which time the Borrower shall cease to be obligated to
pay additional interest to such Bank pursuant to the first sentence of this
Section 1.10(d) until such time, if any, as a subsequent Eurocurrency Reserve
Period shall occur.
-5-
<PAGE>
Exhibit A
page 6
SECTION 2. Prepayments; Payments;
2.01 Repayments. (a) On any day on which the aggregate outstanding
principal amount of Loans made to the Borrower when aggregated with all Loans
then outstanding exceeds the Total Borrower Facility as then in effect, the
Borrower shall prepay principal of Loans in an amount equal to such excess.
(b) If on any date the aggregate outstanding principal amount of Loans
made to the Borrower exceeds the Borrower's Borrowing Base, the Borrower shall
promptly (and in any event within 2 Business Days) after the occurrence of such
date, prepay principal of Loans in an amount equal to such excess.
(d) Notwithstanding anything to the contrary contained elsewhere in
this Agreement, the Borrower shall repay the outstanding principal amount of
each Loan made to it on the last day of the Interest Period for such Loan and
all then outstanding Loans shall be repaid in full on the Expiry Date.
2.02 Method and Place of Payment. Except as otherwise specifically
provided herein, all payments shall be made in Dollars in immediately available
funds at the Payment Office of the Bank not later than 2:30 P.M (New York time)
on the date such payments are due. In the event that, on any date on which a
payment of principal or interest is due on a Loan to the Borrower, the Bank
elects to make a new Loan to the Borrower pursuant to Section 1.04, the Borrower
shall only be obligated to remit to the Bank an amount equal to the difference,
if a positive number, between the amount of such payment of principal and
interest less the amount of the new Loan. Whenever any payment to be made
hereunder or under any Note shall be stated to be due on a day which is not a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest shall be
payable at the applicable rate during such extension.
Section 2.03 Expiry Date. The expiration of the Facility shall be 364
days from the Effective Date (the "Expiry Date"); provided, however, that before
(but not earlier than 120 days nor later than 90 days before) each anniversary
of the Effective Date, the Borrower may make a written request (an "Extension
Request") to the Bank at its Notice Office that the Expiry Date be extended by
364 days. Such Extension Request shall include a certification by a senior
officer of the Borrower that no Default or Event of Default has occurred and is
continuing and all representations and warranties contained herein and the other
Credit Documents are true and correct in all material aspects on and as of the
date of the Extension Request (it being understood and agreed that any
representation or warranty which expressly refers by its terms to a specified
date shall be required to be true only as of such date). If the Bank agrees
thereto, "Expiry Date" shall mean the day 364 days following the Expiry Date
then in effect, provided that any failure by the Bank to notify the Borrower
shall be deemed to be a disapproval by the Bank of the Borrower's Extension
Request. The Bank shall not be obligated to grant any extension pursuant to this
Section 3.04 and any such extension shall be in the sole discretion of the Bank.
The Borrower shall pay to the Bank if it does not so agree all amounts owing
under the Note and this Agreement on the Expiry Date or upon the termination of
the Facility. In the event of any extension pursuant to this Section 3.04, the
Borrower shall be deemed to have represented and warranted on and as of the
effective date of such extension that no
-6-
<PAGE>
Exhibit A
page 7
Default or Event of Default has occurred and is continuing and all
representations and warranties contained herein and the other Credit Documents
are true and correct in all material respects on and as of the date of such
extension (it being understood and agreed that any representation or warranty
which expressly refers by its terms to a specified date shall be required to be
true only as of such date).
SECTION 3. Conditions Precedent to Effective Date. This Agreement will
become effective on the date (the "Effective Date") on which the following
conditions have been satisfied:
3.01 Execution of Agreement; Notes. The Borrower and the Bank shall
have executed a counterpart of this Agreement and there shall have been
delivered to the Bank the Note executed by the Borrower in the amount, maturity
and as otherwise provided herein.
3.02 Officer's Certificate. The Bank shall have received a certificate
dated the Effective Date signed on behalf of the Borrower by any authorized
officer of the Borrower stating that all of the conditions set forth in Sections
3.05, 3.06 and 4.01 have been satisfied on such date.
3.03 Opinions of Counsel. The Bank shall have received from counsel to
the Borrower, an opinion addressed to the Bank and dated the Effective Date
covering the matters set forth in Exhibit C and such other matters incident to
the transactions contemplated herein as the Bank may reasonably request.
3.04 Corporate Documents; Proceedings; etc.. (a) The Bank shall have
received a certificate, dated the Effective Date, signed by any authorized
officer of the Borrower, and attested to by the Secretary or any Assistant
Secretary of the Borrower, in the form of Exhibit D with appropriate insertions,
together with copies of the Articles of Incorporation and By-Laws or Declaration
of Trust of the Borrower and the resolutions of the Borrower referred to in such
certificate, and the foregoing shall be acceptable to the Bank.
(b) All corporate and legal proceedings and all instruments and
agreements in connection with the transactions contemplated by this Agreement
and the other Credit Documents shall be satisfactory in form and substance to
the Bank and the Bank shall have received all information and copies of all
documents and papers, including records of corporate proceedings, governmental
approvals, good standing certificates and bring-down telegrams, if any, which
the Bank reasonably may have requested in connection therewith, such documents
and papers where appropriate to be certified by proper corporate or governmental
authorities.
3.05 Adverse Change, etc.. (a) Nothing shall have occurred (and the
Bank shall not have become aware of any facts or conditions not previously
known) which the Bank shall have determined has, or could reasonably be expected
to have, a material adverse effect on the rights or remedies of the Bank, or on
the ability of the Borrower to perform its obligations to the Bank or which has,
or could reasonably be expected to have, a materially adverse effect on the
business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of the Borrower.
(b) All necessary governmental (domestic and foreign) and third party
approvals, if any, in connection with the transactions
-7-
<PAGE>
Exhibit A
page 8
contemplated by the Credit Documents and otherwise referred to herein or therein
shall have been obtained and remain in effect, and all applicable waiting
periods shall have expired without any action being taken by any competent
authority which restrains, prevents or imposes materially adverse conditions
upon the consummation of the transactions contemplated by the Credit Documents
and otherwise referred to herein or therein. Additionally, there shall not exist
any judgment, order, injunction or other restraint issued or filed or a hearing
seeking injunctive relief or other restraint pending or notified prohibiting or
imposing materially adverse conditions upon the consummation of the transactions
contemplated by the Credit Documents or the making of the Loans.
3.06 Litigation. No litigation by any entity (private or governmental)
shall be pending or threatened with respect to this Agreement or any
documentation executed in connection herewith or the transactions contemplated
hereby, or which the Bank shall have determined could reasonably be expected to
have a materially adverse effect on the business, operations, property, assets,
liabilities, condition (financial or otherwise) or prospects of the Borrower.
SECTION 4. Conditions Precedent to All Loans. No Loan shall be made to
the Borrower hereunder unless the following conditions are satisfied:
4.01 No Default; Representations and Warranties. At the time of each
such Loan and also after giving effect thereto (i) there shall exist no Default
or Event of Default with respect to the Borrower, (ii) the Borrower shall be in
full compliance with the Investment Company Act (including without limitation
Section 18 thereof) and (iii) all representations and warranties by or with
respect to the Borrower contained herein shall be true and correct in all
material respects with the same effect as though such representations and
warranties had been made on the date of the making of such Loan (it being
understood and agreed that any representation or warranty which by its terms is
made as of a specified date shall be required to be true and correct in all
material respects only as of such specified date).
4.02 Request for Borrowing. Prior to the making of each Loan, the Bank
shall have received a Request for Borrowing meeting the requirements of Section
1.03.
4.03 Bank's Discretion The Bank in its sole discretion desires to make
such Loan.
The acceptance of the proceeds of each Loan shall constitute a representation
and warranty by the Borrower to the Bank that all the conditions specified in
Section 3 and in Sections 4.01 and 4.02 and applicable to such Loan are
satisfied as of that time. The Note, certificates, legal opinions and other
documents and papers referred to in Section 3 and in Section 4, unless otherwise
specified, shall be delivered to the Bank at its Notice Office and shall be in
form and substance satisfactory to the Bank.
SECTION 5. Representations, Warranties and Agreements. In order to
induce the Bank to enter into this Agreement and to make the Loans, the Borrower
makes the following representations, warranties and agreements as to itself, all
of which shall survive the
-8-
<PAGE>
Exhibit A
page 9
execution and delivery of this Agreement and the Note and the making of the
Loans, with the incurrence of each Loan on or after the Initial Borrowing Date
being deemed to constitute a representation and warranty that the matters
specified in this Section 5 are true and correct on and as of the Effective Date
and on the date of each such Loan:
5.01 Corporate or Trust Status. The Borrower (i) is a duly organized
and validly existing trust, series of a trust or corporation in good standing
under the laws of the jurisdiction of its establishment or incorporation, (ii)
has the trust or corporate power and authority to own its property and assets
and to transact the business in which it is engaged and presently proposes to
engage and (iii) is duly qualified and is authorized to do business and is in
good standing in each jurisdiction where the ownership, leasing or operation of
its property or the conduct of its business requires such qualifications except
for failures to be so qualified which, individually or in the aggregate, could
not reasonably be expected to have a material adverse effect on the business,
operations, property, assets, liabilities, condition (financial or otherwise) or
prospects of the Borrower.
5.02 Corporate Power and Authority. The Borrower has the power and
authority to execute, deliver and perform the terms and provisions of each of
the Credit Documents and has taken all necessary corporate action to authorize
the execution, delivery and performance by it of each of the Credit Documents.
The Borrower has duly executed and delivered each of the Credit Documents to
which it is party, and each of the Credit Documents constitutes its legal, valid
and binding obligation enforceable against it in accordance with its terms,
except to the extent that the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws generally affecting creditors' rights and by equitable principles
(regardless of whether enforcement is sought in equity or at law).
5.03 No Violation. To the best of the Borrower's knowledge after due
inquiry, neither the execution, delivery or performance (including such
Borrowing of Loans hereunder) by the Borrower of any of the Credit Documents,
nor compliance by it with the terms and provisions thereof, (i) will contravene
any provision of any law, statute, rule or regulation (including, without
limitation, the Investment Company Act) or any order, writ, injunction or decree
of any court or governmental instrumentality, (ii) will conflict with or result
in any breach of any of the terms, covenants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of (or the
obligation to create or impose) any Lien upon any of the property or assets of
the Borrower pursuant to the terms of any indenture, mortgage, deed of trust,
credit agreement or loan agreement, or any other material agreement, contract or
instrument to which the Borrower is a party or by which it or any of its
property or assets is bound or to which it may be subject or (iii) will violate
or conflict with the Investment Practices or any provision of the Articles of
Incorporation, By-Laws or Declaration of Trust of the Borrower.
5.04 Governmental Approvals. No order, consent, approval, license,
authorization or validation of, or filing, recording or registration with
(except as have been obtained or made prior to the Effective Date and which
remain in full force and effect), or exemption by, any governmental or public
body or
-9-
<PAGE>
Exhibit A
page 10
authority, or any subdivision thereof, is required to authorize, or is required
in connection with, (i) the execution, delivery and performance by the Borrower
of any Credit Document to which it is a party or (ii) the legality, validity,
binding effect or enforceability of any such Credit Document.
5.05 Financial Statements; Financial Condition; Undisclosed
Liabilities; etc.. (a) The statements of financial condition of the Borrower as
of December 31, 1994 and the related statements of assets and liabilities,
operations and changes in net assets of the Borrower for the fiscal year ended
on such date, and furnished to the Bank prior to the Effective Date present
fairly the financial condition of the Borrower at the date of such statements of
financial condition and the results of the operations of the Borrower for such
fiscal year. All such financial statements have been prepared in accordance with
generally accepted accounting principles and practices consistently applied.
Since December 31, 1994, there has been no material adverse change in the
business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of the Borrower that would materially and adversely
affect its ability to perform its obligations hereunder).
(b) Except as fully disclosed in the financial statements delivered
pursuant to Section 5.05(a), there were as of the Effective Date no liabilities
or obligations with respect to the Borrower of any nature whatsoever (whether
absolute, accrued, contingent or otherwise and whether or not due) which, either
individually or in aggregate, would be material to the Borrower. As of the
Effective Date, the Borrower knows of any basis for the assertion against it of
any liability or obligation of any nature whatsoever that is not fully disclosed
in the financial statements delivered pursuant to Section 5.05(a) which, either
individually or in the aggregate, could be material to the Borrower.
5.06 Litigation. There are no actions, suits or proceedings pending or,
to the best knowledge of the Borrower after due inquiry, threatened (i) with
respect to any Credit Document or (ii) that could reasonably be expected to
materially and adversely affect the business, operations, property, assets,
liabilities, condition (financial or otherwise) or prospects of the Borrower.
5.07 True and Complete Disclosure. All factual information (taken as a
whole) furnished by or on behalf of the Borrower in writing to the Bank
(including, without limitation, all information contained in the Credit
Documents) for purposes of or in connection with this Agreement, the other
Credit Documents or any transaction contemplated herein or therein is, and all
other such factual information (taken as a whole) hereafter furnished by or on
behalf of the Borrower in writing to the Bank will be, true and accurate in all
material respects on the date as of which such information is dated or certified
and not incomplete by omitting to state any fact necessary to make such
information (taken as a whole) not misleading in any material respect at such
time in light of the circumstances under which such information was provided.
5.08 Use of Proceeds; Margin Regulations. (a) The proceeds of all Loans
shall be utilized by the Borrower to repay Loans outstanding hereunder and to
finance temporarily until settlement the sale or purchase of portfolio
securities by the Borrower, the repurchase or redemption of shares of the
Borrower at the request of the holders of such and other temporary and emergency
purposes.
-10-
<PAGE>
Exhibit A
page 11
(b) Neither the making of any Loan nor the use of the proceeds thereof
will violate or be inconsistent with the provisions of Regulations G, T, U or X
of the Board of Governors of the Federal Reserve System.
5.09 ERISA. The Borrower nor any ERISA Affiliate has ever maintained or
been obligated to contribute to any "employee benefit plan" (as defined in
Section 3(3) of ERISA).
5.10 Compliance with Statutes, etc.. The Borrower is in compliance with
(i) all applicable statutes (including, without limitation, the Investment
Company Act), regulations and orders of, and all applicable restrictions imposed
by, all governmental bodies, domestic or foreign, in respect of the conduct of
its business and the ownership of its property, except such noncompliances as
could not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the business, operations, property, assets,
liabilities, condition (financial or otherwise) or prospects of the Borrower or
any adverse effect on the legality, validity or enforceability of this Agreement
or any of the other Credit Documents and (ii) all investment policies and
restrictions set forth in its Articles of Incorporation, By-Laws or Declaration
of Trust, as applicable, and Investment Practices.
5.11 Investment Company. The Borrower is duly registered as a
closed-end management investment company or is a series thereof under the
Investment Company Act, and such registration has not been revoked or rescinded
and is in full force and effect.
5.12 Investment Adviser. The Investment Adviser to the Borrower is duly
registered as an investment adviser under the Investment Advisers Act and is the
sole investment adviser to the Borrower.
5.13 Affiliation with the Bank. Neither the Borrower nor any Affiliated
Person of the Borrower is an Affiliated Person of the Bank.
SECTION 6. Affirmative Covenants. The Borrower covenants and agrees
that on and after the Effective Date and until Loans and Notes, together with
interest, incurred hereunder and thereunder are paid in full:
6.01 Information Covenants. The Borrower will deliver to the Bank:
(a) Semi-Annual and Annual Financial
Statements. Within 60 days after the close of each semi-annual
and annual accounting period in each fiscal year of the
Borrower, the statement of assets and liabilities, operations
and changes in net assets of the Borrower as of the end of
such semi-annual and annual accounting period, in each case
setting forth comparative figures where applied for the
related periods in the prior fiscal year, all of which shall
be certified by the Treasurer of the Borrower, subject to
normal year-end audit adjustments, together with, in the case
of annual statements, a certification by an independent
certified public accountant of recognized standing stating
that its regular audit was conducted in accordance with
generally accepted audit standards.
-11-
<PAGE>
Exhibit A
page 12
(b) Monthly Reports. On each Monthly
Valuation Date, a monthly unaudited statement (each a "Monthly
Report"), prepared in accordance with generally accepted
accounting principles, listing (i) the value (as determined in
accordance with the definition of "Asset Coverage Numerator")
of all of the Borrower's assets and (ii) the Asset Coverage
Ratio (and, in each case, showing in reasonable detail the
calculation thereof), all as of the open of business on such
Monthly Valuation Date, and certified by the Treasurer of the
Borrower, which certification shall also include the
calculations required to establish the Asset Coverage Ratio as
of such Monthly Valuation Date.
(c) Officer's Certificates. At the time of
the delivery of the financial statements provided for in
Section 6.01(a) and (b), a certificate by the Treasurer of the
Borrower to the effect that the representations and warranties
by or with respect to the Borrower are true and correct in all
material respects and no Default or Event of Default has
occurred and is continuing or, if any Default or Event of
Default has occurred and is continuing, specifying the nature
and extent thereof, which certificate shall set forth the
calculations required to establish the Borrowing Base and the
Asset Coverage Ratio of the Borrower at the end of such
monthly, semi-annual or annual period, as the case may be.
(d) Notice of Default, Litigation or Asset
Coverage Deterioration. Promptly, and in any event within
three Business Days after an officer of the Borrower obtains
knowledge thereof, notice of (i) the occurrence of any event
which constitutes a Default or an Event of Default, (ii) any
litigation or governmental investigation or proceeding pending
(x) against the Borrower which could reasonably be expected to
materially and adversely affect the business, operations,
property, assets, liabilities, condition (financial or
otherwise) or prospects of the Borrower or (y) with respect to
any Credit Document and (iii) its Asset Coverage Ratio
decreases by more than 75% from its Asset Coverage Ratio as of
the immediately preceding Monthly Valuation Date.
(e) Other Reports and Filings. (i) Promptly,
copies of all financial information, proxy materials,
prospectuses, statements of additional information,
registration statements and other information and reports
(including without limitation all information, material and
reports filed or distributed pursuant to Section 30 of the
Investment Company Act) which the Borrower shall deliver to
its shareholders or deliver to the holders of its Indebtedness
pursuant to the terms of the documentation governing such
Indebtedness (or any trustee, agent or other representative
therefor).
(f) Other Information. From time to time,
such other information or documents (financial or otherwise)
with respect to the Borrower or any of its investments as the
Bank may reasonably request in writing.
6.02 Books, Records and Inspections. The Borrower will keep proper
books of record and account in which full, true and correct entries in
conformity with generally accepted accounting principles and all requirements of
law shall be made of all dealings
-12-
<PAGE>
Exhibit A
page 13
and transactions in relation to its business and activities. The Borrower will
permit officers and designated representatives of the Bank to visit and inspect,
under guidance of officers of the Borrower, any of the properties of the
Borrower, and to examine the books of account of the Borrower and discuss the
affairs, finances and accounts of the Borrower with, and be advised as to the
same by, its officers and independent accountants, all at such reasonable times
and intervals and to such reasonable extent as the Bank may request.
6.03 Compliance with Statutes, etc.. The Borrower will comply with all
applicable statutes (including, without limitation, the Investment Company Act),
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property, except such noncompliances as could
not, individually or in the aggregate, reasonably be expected to have a material
adverse effect on the business, operations, property, assets, liabilities,
condition (financial or otherwise) or prospects of the Borrower or any adverse
effect on the legality, validity or enforceability of this Agreement or any of
the other Credit Documents.
6.04 Investment Company. The Borrower will at all times (x) be a
registered, closed-end management investment company under the Investment
Company Act or a series thereof and (y) qualify and be treated as a regulated
investment company under the Code.
6.05 Compliance with Investment Practices. The Borrower will at all
times comply with the investment policies and restrictions set forth in its
Investment Practices.
SECTION 7. Negative Covenants. The Borrower covenants and agrees that
on and after the Effective Date and until the Loans and Notes, together with
interest and all other Obligations incurred by the Borrower hereunder and
thereunder are paid in full:
7.01 Liens. The Borrower will not create, incur, assume or suffer to
exist any Lien upon or with respect to any of its property or assets (real or
personal, tangible or intangible), whether now owned or hereafter acquired, or
sell any such property or assets subject to an understanding or agreement,
contingent or otherwise, to repurchase such property or assets (including
pursuant to repurchase agreements relating to securities), or assign any right
to receive income or permit the filing of any financing statement under the UCC
or any other similar notice of Lien under any similar recording or notice
statute; provided that the provisions of this Section 7.01 shall not prevent the
creation, incurrence, assumption or existence of the following:
(i) inchoate Liens for taxes, assessments or governmental
charges or levies not yet due or Liens for taxes, assessments
or governmental charges or levies being contested in good
faith and by appropriate proceedings for which adequate
reserves have been established in accordance with generally
accepted accounting principles;
(ii) Liens in respect of property or assets of the
Borrower imposed by law, which were incurred in the ordinary
course of business and do not secure Indebtedness for borrowed
money, such as carriers', warehousemen's, materialmen's and
mechanics' liens and other similar Liens arising in the
ordinary
-13-
<PAGE>
Exhibit A
page 14
course of business, and (x) which do not in the aggregate
materially detract from the value of the Borrower's property
or assets or materially impair the use thereof in the
operation of the business of the Borrower or (y) which are
being contested in good faith by appropriate proceedings,
which proceedings have the effect of preventing the forfeiture
or sale of the property or assets subject to any such Lien;
and
(iii) Liens in respect of Hedging Agreements entered into
in the ordinary course of business.
7.02 Consolidation, Merger, Sale or Purchase of Assets, etc.. The
Borrower will not wind up, liquidate or dissolve its affairs or enter into any
transaction of merger or consolidation, or convey, sell, lease or otherwise
dispose of (or agree to do any of the foregoing at any future time) all or
substantially all of its property or assets, or enter into any short sales
contracts or contracts to sell assets that it does not yet own, or enter into
any sale-leaseback transactions, or purchase or otherwise acquire (in one or a
series of related transactions) all or substantially all of the property or
assets of any Person.
7.03 Modifications of Investment Practices, Articles of Incorporation,
By-Laws and Certain Other Agreements. The Borrower will not (i) amend or modify,
or permit the amendment or modification of, its Investment Practices, (ii)
amend, modify or change its Articles of Incorporation (including, without
limitation, by the filing or modification of any certificate of designation) or
By-Laws or trust documentation, or any agreement entered into by it with respect
to its capital stock, or enter into any new agreement with respect to its
capital stock or (iii) amend, modify or change its Investment Advisory and
Management Agreement other than any amendments, modifications or changes
pursuant to clauses (i) or (iii) of this Section 7.03 which are not in any way
adverse to its ability to perform its obligations hereunder and copies of which
are provided to the Bank.
7.04 Business. The Borrower will not engage (directly or indirectly) in
any business other than the business in which the Borrower is engaged on the
Effective Date and other businesses reasonably related thereto.
7.05 ERISA. The Borrower will not and will not permit any ERISA
Affiliate to maintain or become obligated to contribute to any Plan.
7.06 Affiliated Person. Neither the Borrower nor any Affiliated Person
of the Borrower will directly or indirectly own, control or hold with power to
vote 5% or more of the outstanding voting securities of (or otherwise be or
become an Affiliated Person of) the Bank.
SECTION 8. Events of Default. Upon the occurrence of any of the
following specified events (each an "Event of Default"):
8.01 Payments. The Borrower shall (i) default in the payment when due
of any principal of any Loan or any Note or (ii) default, and such default shall
continue unremedied for two or more Business Days, in the payment when due of
any interest on any Loan or Note, or any other amounts owing hereunder or
thereunder; or
-14-
<PAGE>
Exhibit A
page 15
8.02 Representations, etc.. Any representation, warranty or statement
made by the Borrower herein or in any other Credit Document or in any
certificate delivered pursuant hereto or thereto shall prove to be untrue in any
material respect on the date as of which made or deemed made; or
8.03 Covenants. (a) The Borrower shall (i) default in the due
performance or observance by it of any term, covenant or agreement contained in
Section 6.01, 6.04, 6.05 or Section 7 or (ii) default in the due performance or
observance by it of any other term, covenant or agreement contained in this
Agreement and such default shall continue unremedied for a period of 30 days
after written notice to the Borrower by the Bank; or
8.04 Default Under Other Agreements. The Borrower shall (i) default in
any payment of any Indebtedness beyond the period of grace, if any, provided in
the instrument or agreement under which such Indebtedness was created or (ii)
default in the observance or performance of any agreement or condition relating
to such Indebtedness or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or condition exist,
the effect of which default or other event or condition is to cause, or to
permit the holder or holders of such Indebtedness (or a trustee or agent on
behalf of such holder or holders) to cause (determined without regard to whether
any notice is required), any such Indebtedness to become due prior to its stated
maturity, or (iii) any such Indebtedness of the Borrower shall be declared to be
due and payable, or required to be prepaid other than by a regularly scheduled
required prepayment, prior to the stated maturity thereof, provided that it
shall not be a Default or an Event of Default under this Section 8.04; or
8.05 Bankruptcy, etc.. The Borrower shall commence a voluntary case
concerning itself under Title 11 of the United States Code entitled
"Bankruptcy," as now or hereafter in effect, or any successor thereto (the
"Bankruptcy Code"); or an involuntary case is commenced against the Borrower,
and the petition is not controverted within 10 days, or is not dismissed within
60 days, after commencement of the case; or a custodian (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or substantially all
of the property of the Borrower, or the Borrower commences any other proceeding
under any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to the Borrower, or there is
commenced against the Borrower any such proceeding which remains undismissed for
a period of 60 days, or the Borrower is adjudicated insolvent or bankrupt; or
any order of relief or other order approving any such case or proceeding is
entered; or the Borrower suffers any appointment of any custodian or the like
for it or any substantial part of its property to continue undischarged or
unstayed for a period of 60 days; or the Borrower makes a general assignment for
the benefit of creditors; or any corporate action is taken by the Borrower for
the purpose of effecting any of the foregoing; or
8.06 Judgments. One or more judgments or decrees shall be entered
against the Borrower involving a liability (not paid or fully covered by a
reputable and solvent insurance company) and such judgments and decrees either
shall be final and non-appealable or shall not be vacated, discharged or stayed
or bonded pending appeal
-15-
<PAGE>
Exhibit A
page 16
for any period of 30 consecutive days, and the aggregate amount of all such
judgments exceeds $100,000.00 ; or
8.07 Investment Adviser. (i) Target Capital Advisors, Inc. shall cease
to be the primary investment adviser to the Borrower or (ii) any Investment
Advisory and Management Agreement shall cease to be in full force and effect or
the Investment Adviser shall deny or disaffirm any of its obligations to be
performed by it under its Investment Advisory and Management Agreement or shall
default in the performance of any such obligations; or
8.08 Asset Coverage. The aggregate outstanding principal amount of
Loans made to the Borrower shall exceed an amount equal to 33-1/3% of the Asset
Coverage Numerator at such time;
then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Bank, may by written notice to the Borrower, take
any or all of the following actions, without prejudice to the rights of the Bank
or the holder of any Note to enforce its claims against the Borrower (provided,
that, if an Event of Default specified in Section 8.05 shall occur, the result
which would occur upon the giving of written notice by the Bank to the Borrower
as specified in clauses (i) and (ii) below shall occur automatically without the
giving of any such notice): (i) declare the Total Borrower Facility terminated
with respect to the Borrower; and (ii) declare the principal of and any accrued
interest in respect of all Loans made to the Borrower and the Note issued by the
Borrower and all Obligations owing by the Borrower hereunder and thereunder to
be, whereupon the same shall become, forthwith due and payable without any other
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower.
Notwithstanding anything to the contrary contained herein, the Borrower
hereby acknowledges and agrees that the Loans made hereunder are demand Loans
and that the Bank may at any time (whether or not a Default or Event of Default
shall have occurred) declare the principal of and any accrued interest in
respect of all or any Loan to be due and payable, whereupon the same shall
become, forthwith due and payable without any other presentment, demand, protest
or other notice of any kind, all of which are hereby waived by the Borrower.
SECTION 9 Definitions and Accounting Terms.
9.01 Defined Terms. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Affiliated Person" shall have the meaning provided in the Investment
Company Act.
"Agreement" shall mean this Credit Agreement, as modified, supplemented
or amended from time to time.
"Asset Coverage Denominator" at any time shall mean the aggregate
amount of Senior Securities (including in any event all Loans hereunder)
representing indebtedness of the Borrower, determined in accordance with Section
18 of the Investment Company Act.
-16-
<PAGE>
Exhibit A
page 17
"Asset Coverage Numerator" shall mean the value of the total assets of
the Borrower, less all liabilities and indebtedness not represented by Senior
Securities, all determined in accordance with Section 18 of the Investment
Company Act, provided that for purposes of this Agreement (x) in no event shall
the value of the total assets of the Borrower as so calculated exceed the values
of the assets as same would be determined in computing net asset value as
described in the Prospectus of the Borrower under the heading "Net Asset Value"
and (y) in no event shall the liabilities and indebtedness (other than Senior
Securities) be less than the respective liabilities as same would be determined
in calculating net asset value as described under the heading "Net Asset Value"
in such Prospectus.
"Asset Coverage Ratio" at any time shall mean the ratio of the Asset
Coverage Numerator at such time to the Asset Coverage Denominator at such time.
"Bank" shall mean Deutsche Bank AG, New York Branch as well as any
Person which becomes a "Bank" hereunder pursuant to 10.04(b).
"Bankruptcy Code" shall have the meaning provided in Section 8.05.
"Base Rate" at any time shall mean the higher of (i) 1/2 of 1% in
excess of the Federal Funds Rate and (ii) the Prime Lending Rate.
"Base Rate Loan" shall mean each Loan designated or deemed designated
as such by the Borrower at the time of the incurrence thereof or conversion
thereto.
"Borrower" shall have the meaning provided in the first paragraph of
this Agreement.
"Borrowing" shall mean and include the borrowing of one Type of Loan
from the Bank on a given date.
"Borrowing Base" shall mean, with respect to the Borrower, 33-1/3% of
its Asset Coverage Ratio at the time of determination (or such lesser amount as
shall be permitted indebtedness pursuant to the Borrower's Prospectus).
"Business Day" shall mean (i) for all purposes other than as covered by
clauses (ii) and (iii) below, any day except Saturday, Sunday and any day which
shall be in New York City a legal holiday or a day on which banking institutions
are authorized or required by law or other government action to close, (ii) with
respect to all notices and determinations in connection with, and payments of
principal and interest on, NIBOR Loans, any day which is a Business Day
described in clause (i) above and which is also a day for trading by and between
banks in the New York interbank market and (iii) with respect to the information
required to be delivered in each Monthly Report, any day which is a Business Day
described in clause (i) above and which is also a day on which the New York
Stock Exchange is open for trading.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time and the regulations promulgated and the rulings issued thereunder.
Section references to the Code are to the Code, as in effect at the date of this
Agreement, and to any
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<PAGE>
Exhibit A
page 18
subsequent provision of the Code, amendatory thereof, supplemental thereto or
substituted therefor.
"Contingent Obligation" shall mean, as to any Person, any obligation of
such Person guaranteeing or intended to guarantee any Indebtedness, leases,
dividends or other obligations ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (x) for the
purchase or payment of any such primary obligation or (y) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation or (iv) otherwise to assure or hold harmless the holder
of such primary obligation against loss in respect thereof; provided, that the
term Contingent Obligation shall not include endorsements of instruments for
deposit or collection in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof (assuming such Person is
required to perform thereunder) as determined by such Person in good faith.
"Credit Documents" shall mean this Agreement and, after the execution
and delivery thereof, each Note.
"Default" shall mean any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.
"Dollars" and the sign "$" shall each mean freely transferable lawful
money of the United States.
"Effective Date" shall have the meaning provided in Section 3.
"Eligible Transferee" shall mean and include a commercial bank,
financial institution or other "accredited investor" (as defined in Regulation D
of the Securities Act); provided that no Affiliated Person of the Borrower and
no Affiliated Person of such an Affiliated Person of the Borrower shall be an
Eligible Transferee.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and the regulations promulgated and rulings issued
thereunder. Section references to ERISA are to ERISA, as in effect at the date
of this Agreement, and to any subsequent provisions of ERISA, amendatory
thereof, supplemental thereto or substituted therefor.
"ERISA Affiliate" shall mean each person (as defined in Section 3(9) of
ERISA) which together with the Borrower would be deemed to be a "single
employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code.
"Event of Default" shall have the meaning provided in Section 8.
-18-
<PAGE>
Exhibit A
page 19
"Expiry Date" shall mean March 27, 1997.
"Federal Funds Rate" shall mean the rate at which the Bank, as a branch
of a foreign bank, in its sole discretion can obtain federal funds in the
interbank overnight federal funds market including through brokers of recognized
standing.
"Fixed Rate Loan" shall mean any LIBOR loan or NIBOR loan.
"Hedging Agreement" shall mean any Repurchase Agreements, Reverse
Repurchase Agreements, securities lending arrangements, financial futures
contracts, agreement to purchase and sell (or write) exchange listed or
over-the-counter put and call options on securities, fixed income indices,
Interest Rate Protection Agreement, foreign exchange contracts, currency swap
agreements or other similar agreements or arrangements.
"Indebtedness" shall mean, as to any Person, without duplication, (i)
all indebtedness (including principal, interest, fees and charges) of such
Person for borrowed money or for the deferred purchase price of property or
services, (ii) the maximum amount available to be drawn under all letters of
credit issued for the account of such Person and all unpaid drawings in respect
of such letters of credit, (iii) all Indebtedness of the types described in
clause (i), (ii), (iv), (v), (vi), (vii) or (viii) of this definition secured by
any Lien on any property owned by such Person, whether or not such Indebtedness
has been assumed by such Person, (iv) the aggregate amount required to be
capitalized under leases under which such Person is the lessee, (v) all
obligations of such person to pay a specified purchase price for goods or
services, whether or not delivered or accepted, i.e., take-or-pay and similar
obligations, (vi) all Contingent Obligations of such Person, (vii) borrowings of
securities by such Person, and (viii) all obligations under any Hedging
Agreement.
"Initial Borrowing Date" shall mean the date occurring on or after the
Effective Date on which the initial Borrowing of Loans hereunder occurs.
"Interest Determination Date" shall mean with respect to any NIBOR
Loan, the Business Day any NIBOR Loan is made on.
"Interest Period" shall have the meaning provided in Section 1.08.
"Interest Rate Protection Agreement" shall mean any interest rate swap
agreement, interest rate cap agreement, interest collar agreement, interest rate
hedging agreement or other similar agreement or arrangement.
"Investment Advisor" shall mean Target Capital Advisors, Inc.
"Investment Advisers Act" shall mean the Investment Advisers Act of
1940, as amended, including the rules and regulations promulgated thereunder.
"Investment Advisory and Management Agreement" shall mean Investment
Avisory Agreement between Investment Advisor and Target Income Fund, Inc. dated
as of November 1, 1995 as such agreement may
-19-
<PAGE>
Exhibit A
page 20
be amended from time to time in accordance with the terms of this Agreement.
"Investment Company Act" shall mean the Investment Company Act of 1940,
as amended, including the rules and regulations promulgated thereunder.
"Investment Practices" shall mean the investment objectives, investment
policies and investment restrictions of the Borrower as set forth in the
Prospectus.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), preference,
priority or other security agreement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing or similar statement or notice filed under the UCC or
any other similar recording or notice statute, and any lease having
substantially the same effect as any of the foregoing).
"Loan" shall have the meaning provided in Section 1.01(a).
"Monthly Report" shall have the meaning provided in Section 6.01(b).
"Monthly Valuation Date" shall mean the last Friday of each calendar
month, or if such Friday is not a Business Day, the immediately preceding
Business Day.
"NIBOR Loan" shall mean each Loan designated as such by the Borrower at
the time of the incurrence thereof or conversion thereto.
"NIBOR Rate" shall mean the offered quotation in the New York interbank
market to Deutsche Bank AG, New York Branch for Dollar deposits of amounts in
immediately available funds comparable to the outstanding principal amount of
the NIBOR Loan with respect to which such determination is being made with
maturities comparable to the Interest Period applicable to such NIBOR Loan
commencing on the Business Day which is the commencement of such Interest Period
rounded off to the nearest 1/16 of 1%.
"Note" shall have the meaning provided in Section 1.05.
"Notice Office" shall mean the office of the Bank located at 31 West 52
Street, New York, New York 10019, Attention: Lynn Sierra, or such other office
as the Bank may hereafter designate in writing as such to the other parties
hereto.
"Obligations" shall mean all amounts owing to the Bank pursuant to the
terms of this Agreement or any other Credit Document.
"Payment Office" shall mean the office of the Bank located at 31 West
52 Street, New York, New York 10019, or such other office in the United States
as the Bank may hereafter designate in writing as such to the other parties
hereto.
"Permitted Investments" shall mean those investments in portfolio
securities permitted to be made by the Borrower in accordance with (x) its
Investment Practices and (y) the terms of this Agreement.
-20-
<PAGE>
Exhibit A
page 21
"Person" shall mean any individual, partnership, joint venture, firm,
corporation, association, trust or other enterprise or any government or
political subdivision or any agency, department or instrumentality thereof.
"Plan" shall mean any multiemployer or single-employer plan as defined
in Section 4001 of ERISA, which is maintained or contributed to by (or to which
there is an obligation to contribute of) the Borrower or an ERISA Affiliate.
"Prime Lending Rate" shall mean the rate which Deutsche Bank AG, New
York Branch announces from time to time as its prime lending rate, the Prime
Lending Rate to change when and as such prime lending rate changes. The Prime
Lending Rate is a reference rate and does not necessarily represent the lowest
or best rate actually charged to any customer. Deutsche Bank AG, New York Branch
may make commercial loans or other loans at rates of interest at, above or below
the Prime Lending Rate.
"Prospectus" shall mean with respect to the Borrower, its Prospectus,
dated November 1, 1995 with respect to the public offering of its shares of
beneficial interest together with any Statement of Additional Information
incorporated therein.
"Registration Statement" shall mean the Borrower's Registration
Statement.
"Regulation D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing reserve requirements.
"Regulations G, T, U and X" shall mean Regulations G, T, U and X of the
Board of Governors of the Federal Reserve System as from time to time in effect
and any successor to all or a portion thereof.
"Repurchase Agreement" shall mean any agreement to purchase an asset
presently and then to sell such asset to a third party in the future.
"Request for Borrowing" shall have the meaning provided in Section
1.03.
"Reverse Repurchase Agreement" shall mean any agreement to sell an
asset presently and then to repurchase such asset in the future.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
"Senior Securities" shall have the meaning ascribed to such term in
Section 18 of the Investment Company Act.
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<PAGE>
Exhibit A
page 22
"Subsidiary" shall mean, as to any Person, (i) any corporation more
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person and/or one or
more Subsidiaries of such Person and (ii) any partnership, association, joint
venture or other entity in which such Person and/or one or more Subsidiaries of
such Person has more than a 50% equity interest at the time.
"Total Borrower Facility" shall mean $3 million.
"Type" shall mean the type of Loan determined with regard to the
interest option applicable thereto, i.e., whether a Federal Funds Rate Loan, a
Base Rate Loan or a NIBOR Loan.
"UCC" shall mean the Uniform Commercial Code as from time to time in
effect in the relevant jurisdiction.
"Unfunded Current Liability" of any Plan means the amount, if any, by
which the actuarial present value of the accumulated benefits under the Plan as
of the close of its most recent plan year exceed the fair market value of the
assets allocable thereto determined in accordance with the Code.
"United States" and "U.S." shall each mean the United States of
America.
"Valuation Date" shall mean each Monthly Valuation Date, each day on
which a Borrowing occurs and the first day of each Interest Period.
SECTION 10. Miscellaneous.
10.01 Payment of Expenses, etc.. The Borrower, on a several basis shall
pay all out-of-pocket costs and expenses of the Bank (including, without
limitation, the reasonable fees and disbursements of counsel) in connection with
any amendment, waiver or consent relating hereto or thereto, of the Bank in
connection with its syndication efforts with respect to this Agreement and of
the Bank in connection with the enforcement of this Agreement and the other
Credit Documents and the documents and instruments referred to herein and
therein (including, without limitation, the reasonable fees and disbursements of
counsel for the Bank).
10.02 Right of Setoff. In addition to any rights now or hereafter
granted under applicable law or otherwise, and not by way of limitation of any
such rights, upon the occurrence of an Event of Default, the Bank is hereby
authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to the Borrower or to any other Person, any
such notice being hereby expressly waived, to set off and to appropriate and
apply any and all deposits (general or special) and any other Indebtedness at
any time held or owing by the Bank (including, without limitation, by branches
and agencies of the Bank wherever located) to or for the credit or the account
of the Borrower against and on account of the Obligations and liabilities of the
Borrower to the Bank under this Agreement or under any of the other Credit
Documents, including, without limitation, all
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<PAGE>
Exhibit A
page 23
interests in Obligations purchased by the Bank pursuant to Section 10.04(b), and
all other claims of any nature or description arising out of or connected with
this Agreement or any other Credit Document, irrespective of whether or not the
Bank shall have made any demand hereunder and although said Obligations,
liabilities or claims, or any of them, shall be contingent or unmatured.
10.03 Notices. Except as otherwise expressly provided herein, all
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, telecopier or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered: if to the Borrower, at
the Borrower's address specified opposite its signature below; if to the Bank,
at its Notice Office; or, as to the Borrower or the Bank, at such other address
as shall be designated by such party in a written notice to the other parties
hereto. All such notices and communications shall, when mailed, telegraphed,
telexed, telecopied, or cabled or sent by overnight courier, be effective when
deposited in the mails, delivered to the telegraph company, cable company or
overnight courier, as the case may be, or sent by telex or telecopier, except
that notices and communications to the Bank shall not be effective until
received by the Bank.
10.04 Benefit of Agreement. (a) This Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided, that the Borrower may assign or
transfer any of its rights, obligations or interest hereunder or under any other
Credit Document without the prior written consent of the Bank and, provided
further, that although the Bank may transfer, assign or grant participations in
its rights hereunder, the Bank shall remain a "Bank" for all purposes hereunder
(and may not transfer or assign all or any portion of its Loans hereunder except
as provided in Section 10.04(b)) and the transferee, assignee or participant, as
the case may be, shall not constitute a "Bank" hereunder and, provided further,
that the Bank shall not transfer or grant any participation under which the
participant shall have rights to approve any amendment to or waiver of this
Agreement or any other Credit Document except to the extent such amendment or
waiver would (i) extend the final scheduled maturity of any Loan or Note in
which such participant is participating, or reduce the rate or extend the time
of payment of interest thereon (except in connection with a waiver of
applicability of any post-default increase in interest rates) or reduce the
principal amount thereof, or increase the amount of the participant's
participation over the amount thereof then in effect , or (ii) consent to the
assignment or transfer by the Borrower of any of its rights and obligations
under this Agreement. In the case of any such participation, the participant
shall not have any rights under this Agreement or any of the other Credit
Documents (the participant's rights against the Bank in respect of such
participation to be those set forth in the agreement executed by such Bank in
favor of the participant relating thereto) and all amounts payable by the
Borrower hereunder shall be determined as if such Bank had not sold such
participation.
(b) Notwithstanding the foregoing, the Bank may (x) assign all or a
portion of its Loans, rights and related outstanding Obligations hereunder to
its parent company and/or any affiliate of such Bank or to any one or more
Banks, provided that any such assignee is a bank (as defined in the Investment
Company Act) or (y) assign all or a portion of such Loans, rights and
Obligations to one or more Eligible Transferees, each of which assignees shall
become party to
-23-
<PAGE>
Exhibit A
page 24
this Agreement as a Bank by execution of an Assignment and Assumption Agreement,
provided that (i) at such time the Banks and the Borrower shall modify this
Agreement to the extent necessary to effect such assignment and (ii) new Notes
will be issued, at the Borrower's expense, to such new Bank and to the assigning
Bank upon the request of such new Bank or assigning Bank, such new Notes to be
in conformity with the requirements of Section 1.05. To the extent of any
assignment pursuant to this Section 10.04(b), the assigning Bank shall be
relieved of its obligations hereunder with respect to its assigned Loans, rights
and Obligations.
(c) Notwithstanding anything to the contrary contained above, in
connection with any participation or assignment pursuant to preceding Sections
10.04(a) or (b), the Bank granting the assignment or participation shall, in the
agreement with respect thereto, obtain a representation from the participant or
assignee to the effect that it is not an Affiliated Person of the Borrower or an
Affiliated Person of such an Affiliated Person of the Borrower.
(d) Nothing in this Agreement shall prevent or prohibit the Bank from
pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of
borrowings made by the Bank from such Federal Reserve Bank.
(e) The Borrower hereby acknowledges and agrees that the Bank may share
with any of its affiliates any information related to the Borrower and its
affiliates (including, without limitation, any non-public customer information
regarding the creditworthiness of the Borrower and its affiliates), provided
that such affiliate shall keep any such information confidential in accordance
with its customary banking procedures.
10.05 No Waiver; Remedies Cumulative; Recourse.
No failure or delay on the part of the Bank or any holder of any Note
in exercising any right, power or privilege hereunder or under any other Credit
Document and no course of dealing between the Borrower and the Bank or the
holder of any Note shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder or under any other
Credit Document preclude any other or further exercise thereof or the exercise
of any other right, power or privilege hereunder or thereunder. The rights,
powers and remedies herein or in any other Credit Document expressly provided
are cumulative and not exclusive of any rights, powers or remedies which the
Bank or the holder of any Note would otherwise have. No notice to or demand on
the Borrower in any case shall entitle the Borrower to any other or further
notice or demand in similar or other circumstances or constitute a waiver of the
rights of the Bank or the holder of any Note to any other or further action in
any circumstances without notice or demand.
10.06 Calculations; Computations. (a) The financial statements to be
furnished to the Bank and the calculation of Asset Coverage Ratios and Borrowing
Base pursuant hereto shall be made and prepared in accordance with generally
accepted accounting principles in the United States consistently applied
throughout the periods involved (except as set forth in the notes thereto or as
otherwise disclosed in writing by the Borrower to the Bank); provided that,
except as otherwise specifically provided herein, all computations determining
compliance with Section 6, shall utilize accounting principles and policies in
conformity with those used to prepare
-24-
<PAGE>
Exhibit A
page 25
the historical financial statements delivered to the Bank pursuant to Section
5.05(a).
(b) All computations of interest hereunder shall be made on the basis
of a year of 360 days for the actual number of days (including the first day but
excluding the last day) occurring in the period for which such interest is
payable.
10.07 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY
TRIAL. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ANY LEGAL
ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT
MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES
FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, THE BORROWER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF
ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS. THE BORROWER HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT SUCH
COURTS LACK JURISDICTION OVER THE BORROWER, AND AGREES NOT TO PLEAD OR CLAIM, IN
ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER
CREDIT DOCUMENT BROUGHT IN ANY OF THE AFORESAID COURTS, THAT ANY SUCH COURT
LACKS JURISDICTION OVER THE BORROWER. THE BORROWER FURTHER IRREVOCABLY CONSENTS
TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH
ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, TO THE BORROWER AT ITS ADDRESS SET FORTH OPPOSITE ITS
SIGNATURE BELOW, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING.
THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS
AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR
PROCEEDING COMMENCED UNDER THIS AGREEMENT OR UNDER ANY OTHER CREDIT DOCUMENT
THAT SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN
SHALL AFFECT THE RIGHT OF THE BANK UNDER THIS AGREEMENT, THE BANK OR THE HOLDER
OF ANY NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER
JURISDICTION.
(b) THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR
PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER
CREDIT DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY
FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT
THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN
AN INCONVENIENT FORUM.
(c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT
OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
10.08 Counterparts. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A set of counterparts
executed by all the parties hereto shall be lodged with the Borrower and the
Bank.
-25-
<PAGE>
Exhibit A
page 26
10.09 Headings Descriptive. The headings of the several sections and
subsections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
10.10 Amendment or Waiver; etc.. Neither this Agreement nor any other
Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination is
in writing signed by the Borrower and the Bank.
10.11 Survival. All indemnities set forth herein shall survive the
execution, delivery and termination of this Agreement and the Notes and the
making and repayment of the Loans.
10.12 Domicile of Loans. The Bank may transfer and carry its Loans at,
to or for the account of any office, Subsidiary or banking affiliate of the
Bank.
-26-
<PAGE>
Exhibit A
page 27
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
Address: TARGET INCOME FUND, INC.
Target Income Fund, Inc.
_____________________________
_____________________________ ----------------------------
_____________________________ By:
Attention: Title:
Telephone:
Telecopier:
DEUTSCHE BANK AG, NEW YORK BRANCH
---------------------------------
Name:
Title:
----------------------------------
Name:
Title:
-27-
<PAGE>
JEFFERS, WILSON & SHAFF, LLP
ATTORNEYS AT LAW
18881 VON KARMAN AVENUE
SUITE 1400
IRVINE, CALIFORNIA 92612
TELEPHONE: (714) 660-7700
FACSIMILE: (714) 660-7799
July 25, 1996
Target Income Fund, Inc.
26691 Plaza Drive, Suite 222
Mission Viejo, California 92691
Re: Sale of Shares Pursuant to Post-Effective Amendment to Registration
-------------------------------------------------------------------
Statement
---------
Gentlemen:
We have examined a copy of the Amendment to the Registration Statement
(the "Registration Statement") on Form N-2, Post-Effective Amendment No. 7 under
the Securities Act of 1933 (the "Act") and Amendment No. 9 under the Investment
Company Act of 1940 of Target Income Fund, Inc., a Maryland corporation (the
"Company"), for registration under the Act of the sale of up to 2,500,000 shares
of the Company's stock, par value $0.01 (the "Shares"). We have also examined
the Articles of Incorporation, as amended, and such other corporate records,
including the resolutions of the Company's Board of Directors, and such other
documents as we have deemed necessary in order to express the opinion set forth
below. In our examination we have assumed the genuineness of all signatures and
the authenticity of all documents submitted to us as originals and the
conformity to originals of all documents submitted to us as copies. As to
questions of fact material to such opinion, we have relied upon statements and
representations of the Company.
Our opinion is based on existing law which is subject to change either
prospectively or retroactively. Relevant laws could change in a manner that
could adversely affect the Company or its stockholders. We have no obligation to
inform the Company of any such change in the law. We have not been requested to
opine, and we have not opined, as to any issues other than those expressly set
forth herein. This opinion extends only to questions relating to the validity of
the Shares offered and sold under the Registration Statement. We express no
opinion with respect to any other issue.
We are admitted to practice law in the State of California and our
opinion is limited to federal law and the laws of the State of Maryland that
affect such opinion. We express no opinion with respect to any other law or the
laws of any other jurisdiction.
<PAGE>
Target Income Fund, Inc.
July 25, 1996
Page 2
Assuming the Shares are issued and paid for in accordance with the
terms of the offering described in the Registration Statement, including
documents incorporated by reference thereto, and when certificates representing
such Shares have been issued to the purchasers, based on the foregoing, we are
of the opinion that the Shares will have been duly authorized, validly issued,
and will be fully paid and nonassessable shares of stock of the Company.
Our Opinion contained herein is solely for the benefit of the Company
and may be relied upon by the Company only in connection with the Registration
Statement. In this regard, we hereby consent to the filing of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Jeffers, Wilson & Shaff, LLP
JEFFERS, WILSON & SHAFF, LLP
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.
/s/ Tait, Weller & Baker
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
July 25, 1996
