Target Income Fund
Supplement to Prospectus dated March 11, 1996
The disclosure under the caption "Purchase by Wire" and the New Account
Application in the Fund's prospectus dated March 11, 1996 is supplemented by the
following information. Shareholders should review those portions of the
prospectus for a complete discussion regarding purchases of fund shares.
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 # 485772776 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. 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.
NEW ACCOUNT APPLICATION
For investments by mail.
Mail to:
Target Income Fund
24 West Carver Street, 2nd Floor
Huntington, NY 11743
All other shareholder account questions should be directed to 1-800-385-7003.
Dated: April 23, 1996
<PAGE>
TARGET INCOME FUND, INC.
26691 Plaza Drive, Suite 222, Mission Viejo, California 92691
Target Income Fund, Inc. (the "Fund") is a continuously offered
closed-end, non-diversified management investment company. The Fund seeks as
high a level of current income as is consistent with preservation of capital by
investing primarily in variable rate collateralized small business loans and
variable rate asset-backed securities.
The Fund's policy of investing only in variable rate loans and variable
rate asset-backed securities is expected to minimize fluctuations in the Fund's
net asset value in response to changes in interest rates. However, the Fund's
net asset value may be affected by changes in interest rates and any non payment
by the Borrowers under such loans and securities. The variable rate loans and
asset-backed securities are generally unrated, although the Fund may in some
instances invest in rated asset-backed securities. Accordingly, the Fund is more
dependent upon the adequacy of the Advisor's credit analysis in attempting to
achieve its objectives. Although the Fund is not a money market fund, the Fund
attempts to maintain a portfolio that has a dollar weighted average period to
the next interest rate readjustment of approximately 90 days or less. An
investment in shares of the Fund does not constitute a complete investment
program. See "Investment Objective and Policies."
Shares of the Fund are offered continuously at a price equal to their
net asset value plus a sales charge of up to 3.00% of the public offering price
of the shares purchased. See "Purchase of Shares."
No market presently exists for the Fund's shares, and it is not
anticipated that a secondary market will develop. To provide shareholder
liquidity, the Fund has adopted a fundamental policy that requires the Fund to
make quarterly repurchase offers to purchase a specified percentage (currently
5%) of the Fund's outstanding shares at net asset value. See "Repurchase
Offers". This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus carefully and retain it for future reference. A Statement
of Additional Information dated March 11, 1996 containing additional information
about the Fund has been filed with the Securities and Exchange Commission and is
available without charge upon request to the Fund at the above address or by
telephone (800) 385-7003. The Statement of Additional Information is
incorporated by reference in its entirety into this Prospectus, and its table of
contents appears on page 12 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Price to Sales Proceeds to
Public(1) Charge(1) Company(2)
Per Share $10.31 $0.31 $10.00
Total $25,750,000 $750,000 $25,000,000
- --------------------------------------------------------------------------------
(1) The shares are offered on a best efforts basis at a price equal to
net asset value, which as of the date of this prospectus is $10.00 per share,
plus a sales charge of up to 3.00% of the public offering price.
(2) These amounts (i) do not take into account organizational expenses
of the Fund in the amount of $63,000, which are being amortized over a five year
period and charged as expenses against the income of the Fund, and (ii) assume
all shares currently registered are sold pursuant to a continuous offering.
The date of this Prospectus is March 11, 1996.
1
<PAGE>
FEE TABLE
Shareholder Transaction Expenses
Sales Charge (as a percentage of offering price)..................3.00%
Annual Expenses (as a percentage of net assets)
Management Fees...................................................0.75%
Administration Fees...............................................0.25%
Other Operating Expenses..........................................1.50%
-----
Total Annual Expenses ............................................2.50%
=====
Example
An Investor in the Fund would pay the following expenses on
a $1,000 investment, assuming a 5% annual return
1 year 3 years 5 years 10 years
$55 $106 $159 $305
The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. The example should not be considered a representation of
past or future expenses, and the Fund's actual expenses may be more or less that
those shown.
*The Advisor of the Fund has agreed to reduce its fees to ensure that the
expenses for the Fund will not exceed the limits set by applicable state
regulations, currently 2.5% of net assets. To the extent the Advisor reduces its
fees due to the expense limitation, the Fund will reimburse the Advisor when
operating expenses (before reimbursement) for the Fund are less than the
applicable percentage limitation. In subsequent years, overall operating
expenses will not fall below the applicable percentage limitation until the
Advisor has been full reimbursed for fees forgone.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The following information for a share outstanding throughout the period
has been derived from the audited financial statements of the Fund for the
period November 24, 1992 (commencement of operations) through October 31, 1995.
This information should be read in conjunction with the financial statements and
accompanying notes which appear in the Statement of Additional Information. More
detailed information concerning the Fund's performance, including audited
financial statements, is available in the Fund's Annual Report dated October 31,
1995.
<TABLE>
<CAPTION>
For the Period
from
November 24,
Year Ended Year Ended 1992
October 31, October 31, to October 31,
1995 1994 1993
------------- --------- -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................ $10.00 $10.00 $10.00
Income From Investment Operations
Net Investment Income........................... 0.76 0.75 0.68
------ ----- ------
Total From Investment Operations.............. 0.76 0.75 0.68
------ ----- ------
Less Distributions
Distributions From Net Investment Income (0.76) ( 0.75) (0.68)
------- ------
Total Distributions........................... (0.76) ( 0.75) (0.68)
------- ------- ------
Net Asset Value, End of Period...................... $10.00 $10.00 $10.00
====== ====== ======
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total Return (a)..................................... 7.7% 7.7% 7.0%+
Net Assets, End of Period (000's).................... $10,793 $10,465 $6,288
Ratio of Expenses to Average Net Assets.............. 2.5%(1) 2.5%(1) 2.5%(1)+
Ratio of Net Investment Income to Average Net
Assets............................................... 7.6%(1) 7.5%(1) 7.7%(1)+
</TABLE>
- --------------
(a) Exclusive of deduction of a sales charge on investments.
(1) Prior to reimbursement and waiver of expenses, the annualized ratio of
expenses to average net assets was 2.8%, 2.9% and 4.4%, respectively, and
the annualized ratio of net investment income to average net assets was
7.3%, 6.9% and 3.1%, respectively.
* Commencement of operations.
+ Annualized.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund is a continuously offered closed-end, non-diversified management
investment company that seeks as high a level of current income as is consistent
with preservation of capital by investing primarily in variable rate
collateralized small business loans (the "Loans") and variable rate asset-backed
securities.
Investment Policies
The Fund attempts to meet its objectives by investing primarily in variable
rate, fully-secured small business Loans and variable rate, asset-backed
securities. This policy is designed to minimize fluctuations in the Fund's net
asset value in response to changes in interest rates. Under normal market
conditions, the Fund will invest at least 80% of its total assets in direct
investments and participation interests in variable rate Loans and asset-backed
securities.
The small business Loans in which the Fund invests are typically made to
small to medium size, U.S. companies or their affiliates ("Borrowers"), have
floating interest rates and are senior and fully secured at the time the Loan is
made. The Loans typically have short-term maturities of six to 12 months and
meet business and credit quality criteria established by the lenders. The
primary consideration in the Advisor's selection of Loans for direct investment
or the acquisition of a loan participation by the Fund is the asset quality and
creditworthiness of the Borrower on an individual Loan.
Prior to the date of this Prospectus, the Fund invested exclusively in
participation interests in Loans. By expanding the scope of portfolio
investments to include asset-backed securities, the Fund will achieve a much
greater diversity of investments and will have access to a greater range of
investment opportunities, as small business and consumer finance lenders are
increasingly utilizing the issuance of asset-backed securities rather than
selling participation interests in Loans to third-parties such as the Fund.
The asset-backed securities are in the form of certificates representing
interests in, or notes secured by, segregated pools of assets such as small
business loans, automobile loans and leases, and equipment leases (but may not
include perfected security interests in the actual physical assets), credit card
receivables, mortgage loans, trade receivables and other forms of consumer and
commercial-purpose loans, which may be secured or unsecured (the "Receivables").
The asset-backed securities in which the Fund invests may be unrated and
subordinated, although fully secured, to senior classes of other securities
representing interests in the same pool of Receivables. The Fund will only
invest in subordinated asset-backed securities of an issuer where the senior
classes of securities of the same issuer are rated at least investment grade or
better by a nationally recognized rating agency. However, in most cases, the
subordinated securities in which the Fund invests may not be rated. Although
junior in right of payment to senior classes of securities of the same issuer,
the subordinated asset- backed securities are secured by the underlying
Receivables and may be supported by a cash reserve fund established by the
issuer and other forms of credit enhancement. The Advisor does not perform a
credit analysis for each asset in the pool, but relies on the credit criteria
established for the pool by the issuer to meet the eligibility requirements of
the rating services. Management of the Fund believes the Fund's investments in
subordinated securities provides the Fund with an opportunity to obtain a higher
yield than can be obtained on the senior securities, while still maintaining a
secured interest in the underlying collateral. The Advisor's decision to
diversify the Fund's portfolio by investing in asset-backed securities was based
in part on the ratings of the senior securities and overall credit quality of
the Receivables collateralizing the securities.
The asset-backed securities are issued for varying terms depending on the
nature of the underlying Receivables. Interest is generally payable on a
monthly, quarterly or semi-annual basis. Principal is generally payable on an
amortization schedule which will reflect subordination to senior classes of
securities and may include a balloon payment over the final year of the stated
maturity of the security.
The Advisor does perform its own credit analysis of the individual Borrower
in the case of direct investments in Loans and Loan participations. In addition,
the Advisor may use any available information that may be supplied by the
Lending Agents, co-lenders or other participants involved in the Loans. The Fund
does not concentrate in Loans to companies in any specific industry. The
Borrowers are typically manufacturing, distribution and service firms in such
fields as industrial equipment, electronics, business machines and business
services.
4
<PAGE>
The rate of interest payable on Loans is established as the sum of a base
lending rate plus a specified spread. These base lending rates are generally the
Prime Rate of a designated U.S. bank, the London InterBank Offered Rate
("LIBOR"), the Certificate of Deposit ("CD") rate of a designated U.S. bank or
another base lending rate used by commercial lenders. The interest rates on
Prime Rate-based, LIBOR-based and CD-based Loans are periodically reset with
reset periods typically ranging from 30 days to three months. Due to the
periodic reset periods, there may be a differential between the interest rate on
the Loans in the portfolio and current market interest rates. The Fund attempts
to maintain a portfolio that has a dollar weighted average period to the next
interest rate readjustment of approximately 90 days or less. The Fund is not a
money market fund. See "Investment Objective and Policies" and "Yield
Information" in the Statement of Additional Information, and "Risk Factors"
below for additional discussion of the characteristics of the Loans.
Up to 20% of the Fund's total assets may be held in cash or invested in
investment grade short-term debt obligations which may not be secured.
Other Investment Policies
The Fund has adopted certain other polices as summarized below and described
in more detail under "Other Investment Policies" in the Statement of
Additional Information.
Leverage. The Fund may from time to time borrow money on a secured or
unsecured basis at variable or fixed rates. The borrowings may be for the
purpose of providing additional cash to purchase additional asset-backed
securities and Loans or to provide funds to finance the purchase of shares
pursuant to Repurchase Offers. The Fund would be limited in its borrowings to 33
1/3% of net assets. The Fund has not yet incurred any borrowings but reserves
the right to do so in the future without further notice to shareholders.
Repurchase Agreements. The Fund may enter into repurchase agreements with
commercial banks or broker-dealers as a temporary investment of surplus funds.
The Fund has not previously entered into any repurchase agreements but reserves
the right to do so in the future without further notice to shareholders.
The investment objectives and policies stated above are not fundamental and
may be changed by the Board of Directors without shareholder approval. The
investment restrictions of the Fund described under the caption "Investment
Restrictions" in the Statement of Additional Information and the Fund's policy
of making periodic repurchase offers for its shares (see "Repurchase Offers")
are all fundamental policies of the Fund which may not be changed without
shareholder approval.
Risk Factors
Interest Rate Changes. The securities in which the Fund invests are subject
to the risk of changes in interest rates. When prevailing interest rates rise,
the value of such securities and the Fund's net asset value may decline. Also,
the Fund's net asset value may be affected by changes in the credit standing of
asset- backed securities and of the Borrowers under the Loans.
Non-Diversified Status. The Fund has registered as a "non-diversified"
investment company. As a non-diversified investment company, the Fund may not
purchase the securities of any one issuer if, as a result of such purchase, more
than 5% of the Fund's total assets would be invested in the securities of such
issuer at the end of any fiscal quarter, except that with respect to 50% of the
Fund's assets, the Fund may invest up to 25% of its assets in the obligations of
any one issuer, which could be a single Loan or asset- backed security that is
not rated by any nationally recognized rating service. The same percentage
restrictions apply to Loans made by the Fund with any one co-lender. Since the
Fund may invest a relatively high percentage of its assets in the obligations of
a limited number of issuers, and with a limited number of co-lenders or other
intermediaries between the Fund and the Borrower, the value of the Fund's
investments may be more affected by any single adverse economic, political or
regulatory occurrence affecting such issuers or co-lenders than would the value
of the investments of a diversified investment company. However, it is the
Fund's intention under normal market conditions not to invest more than 10% of
its total assets in Loans of any single Borrower or in asset-backed securities
of a single issuer.
Lack of Market for Fund Shares. No market presently exists for the Fund's
shares, and it is not anticipated that a secondary market will develop. However,
if a secondary market develops for the Fund's shares, it is possible that shares
would not trade at a premium to net asset value because the Fund is offering its
shares on a continuous basis. Conversely, because the Fund primarily invests in
short-term floating rate Loans, and it has a Fundamental policy that requires it
to make quarterly repurchase offers at net asset value, the Fund's shares are
unlikely to trade at a discount. However, there
5
<PAGE>
can be no assurance that the Fund's shares will trade at a price which equals or
approximates net asset value.
Illiquidity . Most of the securities in which the Fund invests are not
readily marketable. The asset- backed securities are generally privately placed
and are not registered for sale under Federal or State securities laws. The
Loans in which the Fund invests typically have short-term maturities and provide
for relatively rapid access to collateral, however they also are privately
placed and do not have the liquidity of conventional debt securities traded in
the secondary market. Also, the Fund's ability to dispose of a Loan may be
influenced by a perceived or actual decline in the credit worthiness of a
particular Borrower or Borrowers, or by events that reduce the level of interest
in the market for Loans.
Risk Related to Loans
Financial Condition of Borrowers; Collateral. The securities in which the
Fund invests are subject to a risk of nonpayment of scheduled interest or
principal payments. A nonpayment by a Borrower would reduce both the amount of
the Fund's income and the value of its assets. The Fund's ability to receive
interest and principal payments depends primarily on the financial condition of
the Borrowers and their assets and, in the case of Loans, on the
creditworthiness of any institution that is interposed between the Fund and the
Borrower. The Loans in which the Fund invests directly or through participations
are senior, fully secured debt obligations of Borrowers that are believed by the
Fund's Advisor to have adequate cash flow to pay scheduled interest and
principal and that meet the Advisor's other credit standards. However, the Loans
are not rated and may be subject to a higher risk of default than rated loans or
the asset-backed securities, which represent interests in pools of assets. The
loans are secured by collateral which the Advisor believes to have a market
value, at the time of acquiring the Loan, that will exceed the principal amount
of the Loan. Assets which may serve as collateral include accounts receivable,
inventory, equipment, real property, personal guaranties of principals, patents
and general intangibles, certificates of deposit and letters of credit. Accounts
receivable are expected to be the primary form of collateral. The Advisor
believes that accounts receivable are the most liquid collateral and can be
easily monitored. Although the Advisor will use due care in its continuing
credit analysis, there can be no assurance that such analysis will be able to
detect misrepresentations or fraud on the part of Borrowers. There also can be
no assurance that the liquidation of collateral underlying a Loan would satisfy
the Borrower's obligation in the event of nonpayment of scheduled interest or
principal, or that the collateral could be readily liquidated.
Concentration of Investments, Loans. Substantially all the borrowers on the
Loans have their principal place of business in California and the Fund's
investments are expected to continue to be concentrated in California
businesses. Adverse economic conditions or other factors particularly affecting
California could increase the risk of loss on the securities.
Absence of Ratings on Loans. The Loans in which the Fund invests are not
currently rated by any nationally recognized rating service, because the firms
issuing the Loans are primarily small to medium size private businesses.
Accordingly, the Fund is more dependent on the Advisor's credit analysis and
that of co-lenders or other intermediaries than would be the case with loans of
larger, more established companies whose debt securities may be rated by a
nationally recognized rating service. Although the Advisor will evaluate the
asset quality and consequent creditworthiness of Borrowers, there can be no
assurance that such analysis will disclose all factors which may impair the
value of the Loans.
Loans Issued by Smaller Companies. The companies issuing Loans in which the
Fund invests typically will have annual revenues of between $1 million and $25
million. Equity capitalization of such companies may be minimal and normally
will not exceed $250,000. Small to medium sized firms may be more dependent upon
key personnel, have more limited product lines and generally have more limited
financing resources. Such companies may be more vulnerable to general economic
conditions and may be more likely to experience financial difficulties or
insolvency or bankruptcy.
Co-Lenders; Lending Agents; Intermediaries. With respect to direct
investments in Loans and Loan participations, the Fund may be the sole investor
in a given Loan, or it may act as co-lender with other firms, such as commercial
banks, thrift institutions, insurance companies, finance companies or other
financial institutions. Issuers of Loans may use the services of financial
institutions as Lending Agents. Such Lending Agents perform administrative
functions such as computing outstanding loan balances, amount of unfunded credit
commitments, issuers' compliance with the terms of such credit facilities
including collection of accounts receivable, and monitoring credit quality. For
these services, the issuers typically pay Lending Agents an administrative and
servicing fee. Before investing in a Loan where an issuer
6
<PAGE>
makes use of a Lending Agent, the Advisor will evaluate the Lending Agent based
on factors such as minimum asset size and capacity, experience in administering
revolving credit facilities, and default rates on past loan experience. Risk of
loss to the Fund is increased where it acts as sole investor in a Loan. Also,
the financial condition of co-lenders or lending agents or other intermediaries
may affect the ability of the Fund to receive payments, inasmuch as they may be
responsible for the administration and enforcement of the Loan and its terms.
Default of a co-lender or other intermediary could adversely affect the Fund's
ability to receive payments.
Risks Related to the Asset-Backed Securities
Security. The asset-backed securities represent obligations solely of the
issuer, which typically is a newly-formed limited purpose entity, typically a
trust or corporation (an "Asset-Backed Issuer"), with no significant assets
other than the related Receivables. The obligations of the related Asset-Backed
Issuers are secured by perfected, first priority security interests in the
related Receivables and other collateral and may be further secured by a reserve
fund established by the issuer of the securities and other forms of credit
enhancement. The reserve fund is funded typically over time as payments are made
on the underlying loans; in certain cases an initial deposit also may be made to
the reserve fund, which would be funded with a portion of the offering proceeds
from the sale of the asset-backed securities. Payments of principal and interest
on the securities depends solely on the amount
and timing of payments and collections on the underlying Receivables, amounts on
deposit in any reserve fund, amounts received from other providers of credit
enhancement such as credit insurers, and realization of the security interests
in the collateral, if any, held as security for the related Receivables.
Subordination. The Fund generally invests in asset-backed securities that are
subordinated in payment of principal and interest to senior classes of
asset-backed securities of the same issuer. Consequently, the Fund may not
receive any payments of principal and interest for any payment period until the
payments of principal and interest on the senior securities have been made in
full.
Absence of Rating. The Fund's investments in asset-backed securities may be
concentrated in subordinated and unrated classes of securities. However, the
Fund will only invest in subordinated asset-backed securities of an issuer where
the senior classes of securities of the same issuer are rated at least
investment grade or better by a nationally recognized rating agency. Since the
class of securities in which the Fund invests may not be rated, an investor
should not rely on the rating given to senior classes of securities of the same
issuer in which the Fund has not invested. While a rating addresses the
likelihood of the ultimate full payment of principal and interest on the rated
securities, it does not address the likelihood that the outstanding principal
amount will be paid by the stated maturity.
PURCHASE OF SHARES
7
<PAGE>
Finance 500, Inc., 19762 MacArthur Blvd., Ste. 200, Irvine CA 92715 (the
"Distributor"), is a registered broker-dealer and acts as the distributor of
shares of the Fund. The Fund is engaged in a continuous offering of its shares
of common stock through the Distributor and other securities dealers which have
entered into selected dealer agreements with the Distributor. Proceeds from the
offering may be used to fund investments, to finance the Fund's Repurchase
Offers, and to reduce the amount of any borrowing or indebtedness incurred by
the Fund as described above under "Leverage."
The investment of proceeds from the offering of Fund shares in Loans may
take one to three months, up to a maximum of six months, from the date the Fund
receives such proceeds. Pending such investment, the proceeds will be held in
cash or invested in investment grade short-term debt obligations. Investments in
such short-term debt obligations will reduce the Fund's yield. The Fund may also
require such short-term debt obligations during unusual market conditions for
temporary defensive purposes.
During any continuous offering of the Fund's common stock, shares may be
purchased by mailing or wiring funds directly to the Transfer Agent. The minimum
initial purchase is $5,000, except for IRA and retirement plans for which the
minimum initial
purchase is $2,000. The minimum subsequent purchase amount is $500. The Fund's
shares are offered at a public offering price equal to the next determined net
asset value per share plus a front-end sales charge as determined by the
following table:
Sales Charge as Dealer
Percentage of Discount as
Offering Amount Percentage of
Amount of Purchase Price Invested Offering Price
- --------------------------------------------------------------------------------
Less than $99,999 3.00% 3.09% 2.50%
$100,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.50% 1.52% 1.25%
$1,000,000 and over None None None
From time to time the Distributor may reallow the full sales load to dealers
as a concession. Dealers reallowed 90% or more of the sales load may be deemed
to be underwriters for purposes of the 1993
8
<PAGE>
Act. Shares of the Fund may be purchased at net asset value by officers,
directors and full time employees of the Fund, Advisor or Distributor, their
family members and such other persons who are determined by the Directors to
have acquired shares under circumstances not involving sales efforts by
Distributor.
The offering price is based on the net asset value of the Fund next
determined after receipt of payment by the Transfer Agent. If payment is not
received by the Transfer Agent prior to 4:00 p.m. New York time, shares will be
purchased for the investor on the next business day. Any order may be rejected
by the Distributor or the Fund. The Fund or the Distributor may suspend the
offering of the Fund's shares at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time.
Purchase by Wire
Shares may be purchased by wiring federal funds to the Transfer Agent. If
payment is wired it should be sent to Star Bank, ABA # 0420-0001-3 ATTN: Target
Income Fund, Inc., Account # 485772685, for further credit to [name of
investor]. Before sending a federal funds wire, an investor should first call
the Transfer Agent at (800) 385-7003 to obtain an account number. The investor
should then complete the application contained in this Prospectus and forward it
to the Transfer Agent. For subsequent investments by wire, investors should call
the Transfer Agent before wiring funds, in order to obtain a reference number to
use when sending the wire.
Purchase by Check
Investors may purchase shares by sending a check to the Transfer Agent. An
initial investment must include a completed, signed application form. Subsequent
investments by check must provide account information, including an account
number.
USE OF PROCEEDS
Proceeds from the continuous offer of Fund common shares may be used to
fund investments in portfolio securities, to finance the Fund's Repurchase
Offers, (if any) and to reduce the amount of any borrowing or indebtedness
incurred by the Fund as described under "Investment Objective and Policies-
Leverage" in the Statement of Additional Information. The investment of proceeds
from the continuous offer of Fund common shares may take one to three months, up
to a maximum of six months, from the date the Fund receives such proceeds.
Pending such investments, the proceeds will be held in cash or invested in
investment grade short-term debt obligations. Investments in such short-term
debt obligations will reduce the Fund's yield. The Fund also may acquire such
debt obligations during unusual market conditions for temporary defensive
purposes.
REPURCHASE OFFERS
In recognition of the likelihood that a secondary market will not develop
for the Fund's shares, the Fund has adopted a fundamental policy of making a
"Repurchase Offer" each quarter for not less than 5% nor more than 25% of the
Fund's outstanding shares at net asset value. Before each Repurchase Offer, the
"Repurchase Offer Amount," currently 5% of the Fund's outstanding shares, shall
be determined by the Board of Directors. The Repurchase Offer is open for a
period of at least 21 days from the date a "Notification" of the Repurchase
Offer is sent to shareholders, during which period the Fund's net asset value is
calculated daily and may be obtained by calling the Fund at (800) 385-7003. A
Shareholder may withdraw or modify the number of shares tendered at any time up
to the "Repurchase Request Deadline", which it is the intention of the Fund to
set as the close of business on the last business day of January, April, July,
and October of each year. If the scheduled day for the Repurchase Request
Deadline falls on a Friday or the weekend, then the last business day prior to
the intended date will be set as the Repurchase Request Deadline. The
"Repurchase Pricing Date" is set as of the day
9
<PAGE>
following the Repurchase Request Deadline. The Fund expects to make payment to
the tendering shareholders within seven days of the Repurchase Pricing Date. No
fees or charges are imposed by the Fund on any shares tendered under the
Repurchase Offers. All shares purchased under the Repurchase Offers will be
retired by the Fund.
The Notification sent to shareholders with respect to each Repurchase Offer
will describe the terms of the Repurchase Offer and information shareholders
should consider in deciding whether or not to
participate in the Repurchase Offer, including detailed instructions on how to
tender shares.
The Fund anticipates using available liquid capital to repurchase shares
tendered pursuant to Repurchase Offers. To insure that adequate funds will be
available, the Fund will maintain liquid assets during the period that the
Repurchase Offer is open in an amount equal to at least 100% of the Repurchase
Offer amount. If there is insufficient cash available to pay for all tendered
shares, the Fund intends to liquidate portfolio securities or borrow money on a
temporary basis to raise cash. The purchase of the shares of the Fund pursuant
to the Repurchase Offers will decrease the total assets of the Fund and could
therefore increase the Fund's expense ratio. However, any such decrease in the
Fund's total assets may be offset by the Fund's continuous sales of shares to
investors. The timing and Repurchase Offer Amount of each Repurchase Offer must
be approved by the Fund's Board of Directors. In making these determinations,
the Board will consider the benefit of providing a means of liquidity to
shareholders, the availability of sufficient liquid assets to finance the
Repurchase Offers and the effects on the Fund's expense ratio and total asset
base.
Although the Fund expects that ordinarily there will be no secondary market
for its shares, the Repurchase Offers will provide a periodic source of
liquidity for Fund shareholders. The Fund's policy of making Repurchase Offers
is fundamental and can only be discontinued by a majority vote of shareholders
or suspended for extraordinary reasons by a vote of a majority of disinterested
directors. See "Repurchase Offers" in the Statement of Additional Information.
MANAGEMENT
The Fund's Board of Directors decides on matters of general policy and
reviews the activities of the Advisor and other service providers to the Fund,
and the Fund's officers conduct and supervise the daily business operations of
the Fund. See "Management" in the Statement of Additional Information.
The Advisor
Target Capital Advisors, Inc. (the "Advisor") provides the Fund with
investment advisory and administrative services. The Advisor is a California
corporation organized in 1995 to serve as advisor to the Fund. The Advisor was
formed for that purpose and does not manage any other regulated investment
company. The Advisor became the investment advisor of the Fund in November 1995,
after being approved by the shareholders of the Fund at a special meeting on
June 26, 1995. The Advisor has no previous experience in managing a registered
investment company and does not manage any other registered investment
companies. The Advisor is controlled by Mr. Jon M. LaVine, its President. Mr.
LaVine has over 20 years experience in public accounting and the financial
services industry. The principal business address of the Advisor is 26691 Plaza
Drive, Suite 222, Mission Viejo, California 92691.
Under the Investment Advisory Agreement, subject to the direction of the
Board of Directors of the Fund, the Advisor is responsible for the actual
management of the Fund's portfolio. The
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responsibility for making decisions to buy, sell or hold a particular security
rests with the Advisor, subject to review by the Board of Directors. The Advisor
considers analyses from various sources, makes the necessary investment
decisions, and places orders for transactions accordingly. The Advisor also
performs certain administrative services necessary for the operation of the
Fund, including paying all compensation of and furnishing office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund as well as compensation
of Directors of the Fund who are affiliated persons of the Advisor or any of its
affiliates.
For its services, the Advisor receives from the Fund a monthly fee at an
annual rate of 0.75% of the Fund's average daily net assets (i.e., the average
daily value of the total assets of the Fund, minus borrowings and all other
liabilities). This fee is higher than that paid by most investment companies.
The Fund pays all other expenses incurred in its operations, including, among
other things, expenses for legal and auditing services, taxes, costs of printing
proxies, mailing expenses, listing fees, if any, stock certificates and
shareholder reports, charges of the custodian and transfer agent, expenses of
registering its shares under Federal and any state securities laws, fees and
expenses associated with the issuance of preferred shares or any borrowing,
other regulatory fees, fees and expenses of its disinterested directors,
accounting and pricing costs, insurance, interest, any brokerage costs,
litigation and other extraordinary or non-recurring expenses. The Investment
Advisory Agreement will remain in effect from year to year if approved annually
(a) by the Board of Directors of the
Fund or by a majority of the outstanding shares of the Fund and (b) by a
majority of the Directors who are not parties to such contract or interested
persons (as defined in the 1940 Act) of any such party. Such contracts may be
terminated without penalty on 60 days' written notice at the option of either
party thereto or by the vote of the shareholders of the Fund.
The Administrator
Investment Company Administration Corporation (the "Administrator")
provides certain administrative services to the Fund, including preparing
various Federal and state regulatory filings, reports and returns, preparing
reports and materials to be supplied to the directors, monitoring the activities
of the Fund's custodian, transfer agent and auditors, coordinating the
preparation and payment of Fund expenses, reviewing the Fund's expense accruals
and providing accounting services. For its services, the Administrator receives
an annual fee of $24,000 for performing the Fund accounting, and 0.25% of the
Fund's average daily net assets, or $30,000, whichever is greater for providing
administrative services.
Multiple Classes
Under the Fund's charter documents, the Fund's Board of Directors has the
power to classify or reclassify any unissued shares of the Fund into one or more
additional classes by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms and conditions of
redemption. The Board of Directors has currently designated one class of shares
of the Fund.
NET ASSET VALUE
The Fund computes net asset value per share on each day the New York Stock
Exchange is open for trading, as of the close of regular trading on the Exchange
(normally 4:00 p.m. New York time). The Fund will be closed for business and
will not price its shares on the following business holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value per share will be determined by dividing the value of the
net assets of the Fund by the total number of shares outstanding. For the
purpose of determining the net asset value per share, the value of the Fund's
net assets shall be deemed to equal the value of the Fund's assets less the
Fund's liabilities (including the outstanding principal amount of any
indebtedness issued by the Fund and any unpaid interest on such indebtedness).
As of October 31, 1995, the net asset value of each share of the Fund was $10.
The Advisor will, following procedures established by the Directors, value
the asset-backed securities and Loans held by the Fund at fair value. The
Advisor will consider relevant factors, data, and information, including (i) the
characteristics of and fundamental analytical data relating to the asset-backed
security or the Loan, including the cost, size, current interest rate, period
until next interest rate reset, maturity and base lending rate of the
asset-backed security or the Loan, the terms and conditions of the asset-backed
security or the Loan and any related agreements, and the position of the
asset-backed security or the Loan in the Borrower's debt structure; (ii) the
nature, adequacy and value of the collateral,
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including the Fund's rights, remedies and interests with respect to the
collateral; (iii) the creditworthiness of the Borrower, based on an evaluation
of its financial condition, financial statements and information about the
Borrower's business, cash flows, capital structure and future prospects; (iv)
information relating to the market for the asset-backed security or the Loan,
(including price quotations, if any, that are considered reliable), and trading
in the security or the Loan and interests in similar loans and the market
environment and investor attitudes towards the security or the Loan and similar
loans, (v) the reputation and financial condition of any lending agent or other
intermediate participant; and (vi) general economic and market conditions
affecting the fair value of the asset-backed security or the Loan.
Other portfolio securities may be valued on the basis of prices furnished
by one or more pricing services which determine prices for normal,
institutional-size trading units of such securities using market information,
transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, portfolio
securities will be valued at the last sale price on the exchange that is the
primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. Short-term
obligations which mature in 60 days or less are valued at amortized cost, if
their original term to maturity when acquired by the Fund was 60 days or less,
or are valued at amortized cost using their value on the 61st day prior to
maturity, if their original term to maturity when acquired by the Fund was more
than 60 days, unless in each case this is determined not to represent fair
value. Repurchase agreements will be valued at cost plus accrued interest.
Securities for which there exists no price quotations or valuations and all
other assets are valued at fair value as determined in good faith by or on
behalf of the Directors.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends
from such net investment income are declared daily and paid monthly to holders
of common stock. Monthly distributions to holders of common stock consist of
substantially all net investment income remaining after the payment of interest
on such borrowing. All net realized long or short-term capital gains, if any,
are distributed at least annually to holders of common stock. Shares of common
stock accrue dividends as long as they are issued and outstanding. Shares of
common stock are issued and outstanding from the settlement date of a purchase
order to the settlement date of a tender order. Any limitation on the Fund's
ability to make distributions on its common stock could, under certain
circumstances, impair the ability of the Fund to maintain its qualification as a
regulated investment company for Federal income tax purposes.
TAXES
The Fund intends to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Code. If it so qualifies, in
any taxable year in which it distributes at least 90% of its net income, the
Fund will not be subject to Federal income tax to the extent that it distributes
its net investment income and any realized capital gains. The Fund intends to
distribute substantially all of such income.
Dividend paid by the Fund from its ordinary income, and distributions of
the Fund's net realized short-term capital gains (together referred to
hereinafter as "ordinary income dividends"), regardless of whether such
distributions are paid in cash or are invested in additional shares of the
Fund's common stock, are taxable to shareholders as ordinary income.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted basis of a holder's common stock and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming such
stock is held as a capital asset).
Since the Fund does not invest in qualifying state and municipal
obligations and does not believe it will earn other tax preference income, the
Fund and its shareholders will not be subject to any alternative minimum tax.
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Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
dividends eligible for the dividends received deduction or capital gains
distributions.
Under certain Code provisions, some shareholders may be subject to a 31%
backup withholding tax on reportable dividends, capital gain distributions and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. See "Additional Tax Considerations" in the
Statement of Additional Information.
Repurchase Offers
Under current law, a holder of common stock who, pursuant to any Repurchase
Offer, tenders all shares of common stock owned by such shareholder under
attribution rules contained in the Code will realize a taxable gain or loss
depending upon the shareholder's basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are held as capital assets in the
shareholder's hands and will be long-term or short-term depending upon the
shareholder's holding period for the shares. Different tax consequences may
apply to tendering and nontendering holders of commons stock in connection with
a Repurchase Offer, and these consequences will be disclosed in the related
offering documents. For example, if a tendering holder of common stock tenders
less than all shares owned by or attributed to such shareholder, and if the
distribution to such shareholder does not otherwise qualify as an exchange, the
proceeds received will be treated as a taxable dividend, return of capital or
capital gain depending on the Fund's earnings and profits and the shareholder's
basis in the tendered shares. Also, there is a risk that non-tendering holders
of common stock may be considered to have received a deemed distribution which
may be a taxable dividend in whole or in part. Holders of common stock may wish
to consult their tax advisors prior to tendering. If holders of common stock
whose shares are acquired by the Fund in the open market sell less than all
shares owned by or attributed to them, a risk exists that these shareholders
will be subject to taxable dividend treatment, as well as a risk that the
remaining shareholders may be considered to have received a deemed distribution.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A shareholder
may at any time, by written notification to the transfer agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. The automatic reinvestment of dividends and distributions will not
relieve participants of any Federal income tax that may be payable or required
to be withheld on such dividends or distributions. Dividends and distributions
are taxable to shareholders whether they are reinvested in shares of the Fund or
received in cash. Additional information about the Dividend Reinvestment Plan
may be obtained by calling (800) 385-7003.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 100,000,000 shares of capital stock, par
value $.01 per share, all of which shares initially are classified as common
stock. The Board of Directors is authorized, however, to classify and reclassify
any unissued shares of capital stock by setting or changing in any one or more
respects the designation and number of shares of any such class or series, and
the nature, rates, amounts and times at which and the conditions under which
dividends shall be payable on, and the voting, conversion, redemption and
liquidation rights of, such class or series and any other preferences, rights,
restrictions and qualifications applicable thereto.
Shares of common stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
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Antitakeover Provisions of the Articles of
Incorporation
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director elected by the affirmative
vote of all holders of capital stock may be removed from office only for cause
by vote of the holders of at least 80% of the shares of capital stock of the
Fund entitled to be voted on the matter.
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 66 2/3% of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt, or authorize
the following transactions between the
Fund and a "Principal Stockholder" of the Fund (as such terms are defined in the
Articles of Incorporation): (i) a merger or consolidation of the Fund with or
into any Principal Stockholder; (ii) the issuance of any securities of the Fund
to the Principal Stockholder for cash; (iii) the sale, lease or exchange of all
or a substantial part of the Fund's assets to a Principal Stockholder (except
assets having a fair market value of less than $1,000,000 as computed in
accordance with the Articles of Incorporation); unless such action has been
approved, adopted, or authorized by the affirmative vote of a majority of the
total number of Directors fixed in accordance with the bylaws, in which case the
affirmative vote of a majority of the Fund's shares of capital stock is
required. The Board of Directors has determined that the 66 2/3% voting
requirements described in the foregoing paragraph and under Article Nine of the
Articles of Incorporation, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interest of the shareholders
generally.
CUSTODIAN; TRANSFER AGENT; AUDITOR; SHAREHOLDER REPORTS
The Fund's securities and cash are held under a Custodial Agreement with
the Bank of California, P.O. Box 45000 San Francisco, California 94145. American
Data Services, Inc. of Huntington, New York, acts as Transfer and Dividend
Disbursing Agent for shares of the Fund. Tait, Weller & Baker are the Fund's
independent auditors. The Fund will send unaudited reports at least
semi-annually and audited annual financial statements to all of its shareholders
of record.
FURTHER INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all the information set forth in the Registration Statement that the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by its Rules and Regulations.
The table of contents of the Statement of Additional Information is as
follows:
Page
----
Investment Objective and Polices............B-1
Investment Restrictions.....................B-8
Additional Tax Considerations...............B-9
Repurchase Offers...........................B-10
Yield Information...........................B-13
Management..................................B-14
Compensation................................B-14
Portfolio Transactions......................B-14
Independent Auditor's Report................B-15
Financial Statements........................B-16
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