-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EWyty+Ud6ILUgv7+ndxdrkPA9ARInapQqgL+vV6WTqcPrMmLMzpxwczw6QAp2gi+ adLvohDO4aFZLsSKf8DhaQ== 0000950146-98-000809.txt : 19980513 0000950146-98-000809.hdr.sgml : 19980513 ACCESSION NUMBER: 0000950146-98-000809 CONFORMED SUBMISSION TYPE: N-2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980511 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DLJ HIGH YIELD BOND FUND CENTRAL INDEX KEY: 0001061353 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2 SEC ACT: SEC FILE NUMBER: 333-52373 FILM NUMBER: 98615988 BUSINESS ADDRESS: STREET 1: 277 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10172 BUSINESS PHONE: 2128926692 MAIL ADDRESS: STREET 1: 277 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10172 N-2 1 REGISTRATION STATEMENT, FORM N-2 As filed with the Securities and Exchange Commission on May 11, 1998. File Nos. 33-_________ 811-_________ U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM N-2 (Check appropriate box or boxes) [X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ] Pre-Effective Amendment No.______ [ ] Post-Effective Amendment No.______ and/or [X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] Amendment No.______ DLJ High Yield Bond Fund (Exact Name of Registrant as Specified in Declaration of Trust) 277 Park Avenue, New York, New York 10172 (Address of Principal Executive Offices) 1-888-[______] (Registrant's Telephone Number, including Area Code) G. Moffett Cochran Chairman DLJ Asset Management Group 277 Park Avenue New York, New York 10172 (Name and Address of Agent for Service) ------------- Copies To: Pierre de Saint Phalle, Esq. Sharon Spodak, Esq. Philip H. Harris, Esq. Davis Polk & Wardwell General Counsel Skadden, Arps, Slate, Meagher & Flom LLP 450 Lexington Avenue DLJ Asset Management Group 919 Third Avenue New York, New York 10017 277 Park Avenue New York, New York 10022 New York, New York 10172
------------- Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement. 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. 9 It is proposed that this filing will become effective (check appropriate box) [ ] when declared effective pursuant to section 8(c) If appropriate, check the following box: [ ] this [post-effective] amendment designates a new effective date f or a previously filed [post-effective amendment] [registration statement]. [ ] This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is - . CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------------------------------------------- Title of Amount Being Proposed Maximum Offering Proposed Aggregate Amount of Securities Registered (1) Price Per Share(2) Maximum Offering Price(2) Registration Fee(2) Being Registered - --------------------------------------------------------------------------------------------------------------------- Common 6,666,667 $15.00 $100,000,000 $29,500 Shares of Beneficial Interest - ---------------------------------------------------------------------------------------------------------------------
(1) Includes [000,000] Common Shares of Beneficial Interest subject to the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the registration fee. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that the registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. DLJ High Yield Bond Fund Cross Reference Sheet Pursuant to Rule 404(C) Under the Securities Act of 1933
Item Number, Form N-2 Location in Prospectus - ------------ ---------------------- PART A 1. Outside Front Cover............................. Outside Front Cover 2. Inside Front and Outside Back Cover Page............................... Inside Front and Outside Back Cover Page 3. Fee Table and Synopsis.......................... Prospectus Summary; Fee Table 4. Financial Highlights............................ Not Applicable 5. Plan of Distribution............................ Cover Page; Prospectus Summary; Underwriting 6. Selling Shareholders............................ Not Applicable 7. Use of Proceeds................................. Front Cover Pages; Prospectus Summary; Use of Proceeds; Investment Restrictions 8. General Description of the Registrant............................... Front Cover Pages; Prospectus Summary; The Fund; Investment Objectives and Policies; Other Investment Prac- tices; Risk Factors and Special Considerations; Investment Restrictions; Dividends and Other Distributions; Taxes; Port- folio Transactions; Determination of Net Asset Value 9. Management...................................... Inside Front Cover; Prospectus Summary; Management of the Fund; Trustees and Officers of the Fund; Portfolio Transactions; Shareholder Servicing Agent, Custodian and Transfer and Dividend Disbursing Agent 10. Capital Stock, Long-term Debt, and Other Securities .................... Prospectus Summary; Dividends and Other Distributions; Taxes; Automatic Dividend Reinvestment Plan 11. Defaults and Arrears on Senior Securities............................... Not Applicable 12. Legal Proceedings............................... Not Applicable 13. Table of Contents of the Statement of Additional Information................ Not Applicable PART B 14. Cover Page...................................... Not Applicable 15. Table of Contents............................... Not Applicable 16. General Information and History ................ Not Applicable 17. Investment Objectives and Policies................................. Front Cover Pages; Prospectus Summary; Investment Objectives and Policies; Other Investment Practices; Risk Factors and Special Considerations; Investment Restrictions 18. Management...................................... Management of the Fund; Trustees and Officers of the Fund 19. Control Persons and Principal Holders of Securities.................... Trustees and Officers of the Fund 20. Investment Advisory and Other Services........................... Prospectus Summary; Trustees and Officers of the Fund; Management of the Fund; Portfolio Transactions; Shareholder Servicing Agent, Custodian and Transfer and Dividend Dis- bursing Agent 21. Brokerage Allocation and Other Practices................................ Portfolio Transactions 22. Tax Status...................................... Dividends and Other Distributions; Taxes; Independent Auditors' Report 23. Financial Statements............................ Statement of Assets; Liabilities and Capital
PART C The information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement. 2 - -------------------------------------------------------------------------------- Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. - -------------------------------------------------------------------------------- PROSPECTUS , 1998 SUBJECT TO COMPLETION, DATED MAY [ ], 1998 [ ] Shares DLJ High Yield Bond Fund Common Stock DLJ High Yield Bond Fund (the "Fund") is a newly organized, non-diversified, closed-end management investment company. The Fund's primary investment objective is to seek high current income. The Fund will also seek capital appreciation as a secondary objective to the extent consistent with its objective of seeking high current income. Under normal market conditions, the Fund will invest at least 65% of its total assets in fixed income securities of U.S. issuers rated below investment grade quality (lower than Baa by Moody's Investors Service, Inc. or lower than BBB by Standard & Poor's Ratings Group or comparably rated by another nationally recognized rating agency) or in unrated income securities that DLJ Investment Management Corp. ("DLJIM"), the Fund's investment manager, determines to be of comparable quality. The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies or multinational foreign currency units. There can be no assurance that the Fund will achieve its objectives. Investments in lower grade securities are subject to special risks, including greater price volatility and a greater risk of loss of principal and non-payment of interest. As a non-diversified investment company, the Fund may invest a significant portion of its assets in a small number of issuers. The Fund may engage in various portfolio strategies to seek to enhance income and hedge its portfolio against investment, interest rate and foreign currency risks, including the use of leverage and the use of derivative financial instruments. The Fund is designed for investors willing to assume additional risk in return primarily for the potential for high current income and secondarily capital appreciation. An investment in the Fund may be speculative in that it involves a high degree of risk and should not constitute a complete investment program. Investors should carefully assess the risks associated with an investment in the Fund. See "Risk Factors and Special Considerations." 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 COMM- ISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROS- PECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------------------------- Price to the Proceeds to the Public (1) Sales Charge(1)(2) Fund (3) Per Share.............................. $15.00 None $15.00 Total (4).............................. $[ ] None $[ ] - ---------------------------------------------------------------------------------------------------
(footnotes on the following page) The Shares are being offered by the Underwriters when, as and if delivered to and accepted by the Underwriters, and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of the Shares will be made against payment in New York, New York on or about 1998. Donaldson, Lufkin & Jenrette Securities Corporation CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF THE FUND. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." ---------- (continued from cover page) This Prospectus sets forth in concise form the information about the Fund that a prospective investor should know before investing in the Fund. Investors should read and retain this Prospectus for future reference. DLJIM will serve as investment manager to the Fund. The Fund's address is 277 Park Avenue, New York, New York 10172, and its telephone number is 1-888-[ ]. At times, the Fund expects to utilize financial leverage through borrowings, including the issuance of debt securities, or the issuance of preferred shares or through other transactions, such as reverse repurchase agreements, which have the effect of financial leverage. The Fund intends to utilize financial leverage in an initial amount equal to approximately [ ]% of its total assets (including the amount obtained through leverage), but the Fund may increase this percentage in the future. The Fund generally will not utilize leverage if it anticipates that the Fund's leveraged capital structure would result in a lower return to common shareholders than that obtainable over time with an unleveraged capital structure. Use of financial leverage creates an opportunity for increased income and capital appreciation for the common shareholders but, at the same time, creates special risks, and there can be no assurance that a leveraging strategy will be successful during any period in which it is employed. See "Risk Factors and Special Considerations--Leverage." The Fund is offering its shares of beneficial interest, par value $.001 per share (the "Shares"). Prior to this offering, there has been no market for the Fund's Shares. The Fund's Shares have been approved for listing on the New York Stock Exchange under the symbol "[ ]", subject to official notice of issuance. Shares of closed-end management investment companies frequently trade at discounts from their net asset values, and the Fund's Shares may also trade at a discount. The risks associated with this characteristic of closed-end management investment companies may be greater for investors expecting to sell shares of a closed-end management investment company soon after completion of an initial public offering of the company's shares. The minimum investment in this offering is 100 Shares ($1,500). (footnotes from cover page) (1) DLJIM or an affiliate (not the Fund) from its own assets will pay a commission to the Underwriters in the amount of [ ]% of the Price to the Public per Share in connection with the sale of the Shares offered hereby. See "Underwriting." (2) The Fund and DLJIM have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (3) Before deducting organizational and offering expenses payable by the Fund, including payment of $[ ] to the Underwriters in partial reimbursement of their expenses, estimated at $[ ] and $[ ], respectively. Offering expenses will be deducted from net proceeds, and organizational expenses will be [ ] (4) The Fund has granted to the Underwriters a 60-day option exercisable from time to time to purchase up to an aggregate of [ ] additional Shares solely to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public and Proceeds to the Fund will be $[ ] and $[ ], respectively. See "Underwriting." ii PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus. Investors should carefully consider information set forth under the heading "Risk Factors and Special Considerations." The Fund ............................. DLJ High Yield Bond Fund (the "Fund") is a newly organized, non-diversified, closed-end management investment company. The Fund is managed by DLJ Investment Management Corp. ("DLJIM"). See "The Fund." The Offering.......................... The Fund is offering Shares of Beneficial Interest, par value $.001 per share (the "Shares"), through a group of underwriters ("Underwriters") led by Donaldson, Lufkin & Jenrette Securities Corporation. ("DLJ"). The Underwriters have been granted a 60-day option exercisable from time to time to purchase up to an aggregate of [ ] additional Shares solely to cover over-allotments, if any. The initial public offering price is $15.00 per share. The minimum investment in the offering is 100 Shares ($1,500). See "Underwriting." No Sales Charge ...................... The Shares will be sold in the offering without any sales charge or underwriting discounts payable by investors or the Fund. DLJIM or an affiliate (not the Fund) will pay a commission from its own assets to the Underwriters in connection with sales of the Shares in the offering. See "Underwriting." Investment Objectives and Policies.... The Fund's primary investment objective is to seek high current income. The Fund will also seek capital appreciation as a secondary objective, to the extent consistent with its objective of seeking high current income. The Fund is designed for investors willing to assume additional risk in return for the potential for high current income and capital appreciation. The Fund is not intended to be a complete investment program and there can be no assurance that the Fund will achieve its objectives. Under normal market conditions, the Fund will invest at least 65% of its total assets in fixed income securities of U.S. issuers rated below investment grade quality (lower than Baa by Moody's Investors Service, Inc. ("Moody's") or lower than BBB by Standard & Poor's Ratings Group ("S&P") or comparably rated by another nationally recognized rating agency) or in unrated income securities that DLJIM determines to be of comparable quality. Lower grade income securities are commonly known as "junk bonds." The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies or multinational currency units. The Fund may also invest up to [ ]% of its total assets in securities of issuers that are the subject of bankruptcy proceedings or in securities otherwise in default or in significant risk of being in default ("Distressed Securities"). However, the Fund does not intend initially to invest in any Distressed Securities. The Fund may engage in various portfolio strategies to seek to enhance income and hedge its portfolio against investment, interest rate and foreign exchange risks, including the use of leverage and the use of derivative financial instruments. There can be no assurance that the Fund's strategies will be successful. The Fund is designed for investors willing to assume additional risk in return primarily for the potential for high current income and secondarily capital appreciation. An investment in the Fund may be speculative in that it involves a high degree of risk. At times, the Fund expects to utilize financial leverage through borrowings, including the issuance of debt securities, or the issuance of preferred shares or through other transactions, such as reverse repurchase agreements, which have the effect of financial leverage. The Fund intends to utilize financial leverage in an initial amount equal to approximately [ ]% of its total assets (50% if in the form of preferred shares), but it may use leverage up to 33a% of its total assets (in each case including the amount obtained through leverage). The Fund generally will not utilize leverage if it anticipates that the Fund's leveraged capital structure would result in a lower return to holders of Shares (the "Shareholders") than that obtainable over time with an unleveraged capital structure. Use of financial leverage creates an opportunity for increased income and capital appreciation for the Shareholders but, at the same time, creates special risks, and there can be no assurance that a leveraging strategy will be successful during any period in which it is employed. See "Risk Factors and Special Considerations--Leverage." In selecting investments for the Fund's portfolio, DLJIM will seek to identify issuers and industries that DLJIM believes are likely to experience stable or improving financial conditions. DLJIM believes that this strategy should enhance the Fund's ability to earn high current income while also providing opportunities for capital appreciation. DLJIM's analysis may include consideration of general industry trends, the issuer's managerial strength, market position, financial condition, debt maturity schedules and liquidity. DLJIM may also consider relative values based on cash flow, interest or dividend coverage, asset coverage and earnings prospects. There can be no assurances that this strategy will be successful. The Fund will seek its secondary objective of capital appreciation by investing in securities that DLJIM expects may appreciate in value as a result of favorable developments affecting the business or prospects of the issuer, which may improve the issuer's financial condition and credit rating, or as a result of declines in long-term interest rates. In certain market conditions, DLJIM may determine that securities rated investment grade (i.e., at least Baa by Moody's or BBB by S&P or comparably rated by another rating agency) offer significant opportunities for high income and capital appreciation. In such conditions, the Fund may invest less than 65% of its total assets in 2 lower grade income securities of U.S. issuers. In addition, the Fund may implement various temporary "defensive" strategies at times when DLJIM determines that conditions in the markets make pursuing the Fund's basic investment strategy inconsistent with the best interests of its Shareholders. These strategies may include investing all or a portion of the Fund's assets in higher-quality debt securities. See "Investment Objectives and Policies." Investment Manager.................... DLJIM is the Fund's investment manager and is responsible for the management of the Fund's investment portfolio, including determining the composition of the Fund's portfolio, placing all orders for the purchase and sale of securities and for other transactions, and overseeing the settlement of the Fund's securities and other portfolio transactions. For these investment management services, the Fund will pay DLJIM a monthly fee in arrears at an annual rate equal to [ ]% of the average weekly value of the Fund's total assets minus the sum of accrued liabilities (other than the aggregate indebtedness constituting financial leverage) (the "Managed Assets"). During periods in which the Fund is utilizing financial leverage, the fee, which is payable as a percentage of the Fund's Managed Assets, will be higher than if the Fund did not utilize a leveraged capital structure because the fee is calculated as a percentage of the Fund's Managed Assets including those purchased with leverage. DLJIM also provides investment management services primarily to other investment companies, institutional and corporate clients. DLJIM is a wholly-owned subsidiary of DLJ. As of [ ], 1998, aggregate assets under the management of DLJIM exceeded $[ ] billion. As of [ ], 1998, Donaldson, Lufkin & Jenrette Asset Management Group ("DLJAM"), which includes DLJIM, managed assets of approximately $[ ] billion. Administrator......................... The Fund's administrator is Wood, Struthers & Winthrop Management Corp. ("WSW"), a wholly-owned subsidiary of DLJ and a member of DLJAM. WSW is responsible for providing various services to the Fund, including, among other things, furnishing officers and office space, overseeing the provision to the Fund of custodial and accounting services, preparing or assisting in preparing materials for Shareholders and regulatory bodies and any other Shareholder servicing activities. For these administration services, the Fund will pay WSW a monthly fee at the annual rate of [ ]% of the Managed Assets. During periods in which the Fund is utilizing financial leverage, the fee, which is payable as a percentage of the Fund's Managed Assets, will be higher than if the Fund did not utilize a leveraged capital structure because the fee is calculated as a percentage of the Fund's Managed Assets including those purchased with leverage. WSW provides investment and administration services to other investment companies, institutional, corporate and individual clients. Listing............................... Prior to this offering, there has been no market for the Shares. The Fund's Shares have been approved for listing on the New York Stock 3 Exchange under the symbol "[ ]," subject to official notice of issuance. Dividends and Other Distributions..... The Fund intends to distribute monthly dividends consisting of substantially all of its net investment income to Shareholders. The initial distribution to Shareholders is expected to be paid approximately 60 days after the completion of the offering of the Fund's Shares. All net realized capital gains, if any, will be distributed to the Fund's Shareholders at least annually. See "Dividends and Other Distributions." Automatic Dividend Reinvestment Plan.................. The Fund has established an Automatic Dividend Reinvestment Plan (the "Plan"). Under the Plan, all dividend and capital gain distributions will be automatically reinvested in additional Shares of the Fund either purchased in the open market, or issued by the Fund if the Shares are trading at or above their net asset value, unless in either case the Shareholder elects to receive cash. A shareholder who intends to hold its Shares through a broker or nominee should contact its broker or nominee to determine whether or how they may participate in the Plan. See "Automatic Dividend Reinvestment Plan." Taxes ................................ The Fund intends to elect to be, and to qualify as, a regulated investment company for U.S. federal income tax purposes. For each taxable year the Fund so qualifies, the Fund (but not its Shareholders) will be relieved of U.S. federal income tax on the portion of its investment company taxable income and net capital gain that it distributes to its Shareholders. See "Taxes." Stock Repurchases and Tender Offers; Conversion to an Open-End Investment Company................. In recognition of the possibility that the Shares might trade at a discount to net asset value and that any such discount may not be in the interest of Shareholders, the Fund's Board of Trustees, in consultation with DLJIM, from time to time may consider the possibility of making open market repurchases or tender offers for Shares at net asset value. There can be no assurance that the Board of Trustees will consider or decide to undertake either of these actions or that, if undertaken, such actions would result in the Shares trading at a price equal to or close to net asset value per Share. The Board of Trustees from time to time also may consider the conversion of the Fund to an open-end investment company. Such conversion would require the affirmative consent of two-thirds of each class of Shares outstanding at that time. See "Conversion to Open-End Fund." Custodian and Transfer and Dividend Disbursing Agent....... [ ] will act as custodian for the Fund and may employ sub-custodians outside the U.S. approved by the Custodian of the Fund in accordance with regulations of the Securities and Exchange Commission. [ ] will act as the Fund's Transfer and Dividend Disbursing Agent. 4 Risk Factors and Special Considerations..................... Investors are advised to consider carefully the special risks involved in investing in the Fund. General. The Fund is a newly organized, non-diversified, closed-end management investment company and has no operating history. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. The risk of loss associated with this characteristic may be greater for investors expecting to sell their Shares in a relatively short period after completion of the public offering. Accordingly, the Shares are designed primarily for long-term investors and should not be considered a vehicle for trading purposes. The net asset value of the Fund's Shares will fluctuate with interest rate changes as well as with price changes of the Fund's portfolio securities and these fluctuations are likely to be greater during periods in which the Fund utilizes a leveraged capital structure. See "Other Investment Practices--Leverage." Lower Grade Securities. Lower grade securities are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Lower grade securities are commonly referred to as "junk bonds." Issuers of lower grade securities may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of lower grade securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During periods of economic downturn, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, the issuer's inability to meet specific projected business forecasts or the unavailability of additional financing. Therefore, there can be no assurance that in the future there will not exist a higher default rate relative to the rates currently existing in the market for lower grade securities. The risk of loss due to default by the issuer is significantly greater for the holders of lower grade securities because such securities may be unsecured and may be subordinate to other securities of the issuer. Other than with respect to Distressed Securities, discussed below, the lower grade securities in which the Fund may invest do not include instruments which, at the time of investment, are in default or the issuers of which are in bankruptcy. However, there can be no assurance that such events will not occur after the Fund purchases a particular security, in which case the Fund may experience losses and incur costs. Lower grade securities frequently have call or redemption features that would permit an issuer to repurchase the security from the Fund. 5 If a call were exercised by the issuer during a period of declining interest rates, the Fund is likely to have to replace such security with a lower yielding security, thus decreasing the net investment income to the Fund and dividends to Shareholders. Lower grade securities tend to be more volatile than higher-rated fixed-income securities, so that adverse economic events may have a greater impact on the prices of lower grade securities than on higher-rated fixed-income securities. Factors adversely affecting the market value of such securities are likely to affect adversely the Fund's net asset value. Recently, demand for lower grade securities has increased significantly and the difference between the yields paid by lower grade securities and investment grade bonds (i.e., the "spread") has narrowed. To the extent this differential increases, the value of lower grade securities in the Fund's portfolio could be adversely affected. Like higher-rated fixed-income securities, lower grade securities generally are purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in the lower grade securities market, which market may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for lower grade securities by various dealers. As a result, during periods of high demand in the lower grade securities market, it may be difficult to acquire lower grade securities appropriate for investment by the Fund. Adverse economic conditions and investor perceptions thereof (whether or not based on economic reality) may impair liquidity in the lower grade securities market and may cause the prices the Fund receives for its lower grade securities to be reduced. In addition, the Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as deterioration in the creditworthiness of the issuers. Under such conditions, judgment may play a greater role in valuing certain of the Fund's portfolio instruments than in the case of instruments trading in a more liquid market. In addition, the Fund may incur additional expense to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. See "Investment Objectives and Policies." Distressed Securities. The Fund may invest up to [ ]% of its total assets in securities that are the subject of bankruptcy proceedings or otherwise in default as to the repayment of principal and/or payment of interest at the time of acquisition by the Fund or are rated in the lower rating categories (Ca or lower by Moody's and CC or lower by S&P) or which, if unrated, are in the judgment of DLJIM of equivalent quality ("Distressed Securities"). Investment in Distressed Securities is speculative and involves significant risk. Distressed Securities frequently do not produce income while they are outstanding and may require the Fund to bear certain extraordinary expenses in order to protect and recover its investment. Therefore, to the extent 6 the Fund pursues its secondary objective of capital appreciation through investment in Distressed Securities, the Fund's ability to achieve current income for its Shareholders may be diminished. See "Investment Objectives and Policies." Leverage. The use of leverage by the Fund creates an opportunity for increased net income and capital appreciation for the Shares, but, at the same time, creates special risks. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed. The Fund intends to utilize leverage to provide the Shareholders with a potentially higher return. Leverage creates risks for Shareholders including the likelihood of greater volatility of net asset value and market price of the Shares and the risk that fluctuations in interest rates on borrowings and debt or in the dividend rates on any preferred shares may affect the return to the Shareholders. To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the Fund's return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such funds is not sufficient to cover the cost of leverage, the return to the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to Shareholders as dividends and other distributions will be reduced. In the latter case, DLJIM in its best judgment may nevertheless determine to maintain the Fund's leveraged position if it deems such action to be appropriate under the circumstances. During periods in which the Fund is utilizing financial leverage, the investment management and administration fee will be higher than if the Fund did not utilize a leveraged capital structure. Certain types of borrowings by the Fund may result in the Fund being subject to covenants in credit agreements, including those relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more Rating Agencies, which may issue ratings for the debt securities or preferred shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act of 1940, as amended (the "Investment Company Act"). It is not anticipated that these covenants or guidelines will impede DLJIM in managing the Fund's portfolio in accordance with the Fund's investment objectives and policies. The Fund at times may borrow from affiliates of DLJIM, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace. See "Other Investment Policies--Leverage." Foreign Securities. The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside of the United States or that are denominated in various foreign currencies or multinational foreign currency units. Investing in securities of foreign entities and securities denominated in foreign currencies involves certain risks not involved in domestic investments, including, but not limited to, 7 fluctuations in foreign exchange rates, future foreign political and economic developments, different legal and accounting systems and the possible imposition of exchange controls or other foreign governmental laws or restrictions. Securities prices in different countries are subject to different economic, financial, political and social factors. Since the Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the value of securities in the Fund and the unrealized appreciation or depreciation of investments. Currencies of certain countries may be volatile and therefore may affect the value of securities denominated in such currencies. The Fund may engage in certain transactions to hedge the currency-related risks of investing in non-U.S. dollar denominated securities. See "Other Investment Practices." In addition, with respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, difficulty in obtaining or enforcing a court judgment, economic, political or social instability or diplomatic developments that could affect investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position. Certain foreign investments also may be subject to foreign withholding taxes. These risks often are heightened for investments in smaller, emerging capital markets. See "Investment Objectives and Policies." As a result of these potential risks, DLJIM may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. The Fund may invest in countries in which foreign investors, including DLJIM, have had no or limited prior experience. Other Investment Management Techniques. The Fund may use various other investment management techniques that also involve special considerations, including engaging in interest rate transactions, utilization of options and futures transactions, making forward commitments and lending its portfolio securities. For further discussion of these and other practices and the associated risks and special considerations, see "Other Investment Policies." Illiquid Securities. The Fund may invest in securities for which no readily available market exists or which are otherwise illiquid. The Fund may not be able readily to dispose of such securities at prices that approximate those at which the Fund could sell such securities if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Illiquid securities generally trade at a discount. Non-Diversified Status. The Fund is classified as a "non-diversified" management investment company under the Investment Company Act, which means that the Fund may invest a greater portion of its 8 assets in a limited number of issuers than would be the case if the Fund were classified as a "diversified" management investment company. Accordingly, the Fund may be subject to greater risk with respect to its portfolio securities than a management investment company that is "diversified" because changes in the financial condition or market assessment of a single issuer may cause greater fluctuations in the net asset value of the Shares. Market Price, Discount and Net Asset Value of Shares. Shares of closed-end management investment companies in the past frequently have traded at a discount to their net asset values. The risk of loss associated with this characteristic of closed-end management investment companies may be greater for investors purchasing Shares in the initial public offering and expecting to sell the Shares soon after the completion thereof. Whether investors will realize gains or losses upon the sale of Shares will not depend directly upon the Fund's net asset value, but will depend upon the market price of the Shares at the time of sale. Since the market price of the Shares will be determined by such factors as relative demand for and supply of the Shares in the market, general market and economic conditions and other factors beyond the control of the Fund, the Fund cannot predict whether the Shares will trade at, below or above net asset value or at, below or above the initial offering price. The Shares are designed primarily for long-term investors, and investors in the Shares should not view the Fund as a vehicle for trading purposes. See "Risk Factors and Special Considerations" and "Description of Shares." Anti-Takeover Provisions. The Fund's Declaration of Trust contains provisions limiting (i) the ability of other entities or persons to acquire control of the Fund, (ii) the Fund's freedom to engage in certain transactions, and (iii) the ability of the Fund's Trustees or Shareholders to amend the Declaration of Trust. These provisions of the Declaration of Trust may be regarded as "anti-takeover" provisions. These provisions could have the effect of depriving the Shareholders of opportunities to sell their Shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. See "Investment Objectives and Policies," "Risk Factors and Special Considerations" and "Description of Shares."
9 FEE TABLE The following tables are intended to assist investors in understanding the various costs and expenses that an investor in the Fund will bear, directly or indirectly. Shareholder Transaction Expenses Sales Charge (as a percentage of offering price) ........................... None Automatic Dividend Reinvestment Plan Fees .................................. [ ] Annual Expenses (as a percentage of net assets attributable to Shares)(1) Investment Management Fee .................................................. [ ]% Administration Fee.......................................................... [ ] Interest Payments on Borrowed Funds ........................................ [ ] Other Expenses ............................................................. [ ] --------- Total Annual Expenses ...................................................... [ ]% ==========
(1) See "Management of the Fund" for additional information. In the event the Fund utilizes leverage by borrowing up to [ ]% of the Fund's total assets (including the amount obtained from the leverage), depending on economic conditions, it is estimated that, as a percentage of net assets attributable to the Shares, the Management and Administration Fee would be [ ]%, Interest Payments on Borrowed Funds (assuming an interest rate of [ ]%) would be [ ]%, Other Expenses would be [ ]% and Total Annual Expenses would be [ ]%. (See" Risk Factors and Special Considerations-- Leverage" and "Other Investment Policies--Leverage.") If the Fund issues preferred shares in an amount up to 50% of the Fund's total assets, dividends payable to the holders of preferred shares will reduce income available for distribution to common shareholders, but is not a deductible interest expense. Example The following Example demonstrates the projected dollar amount of total cumulative expense that would be incurred over various periods with respect to a hypothetical investment in the Fund. These amounts are based upon payment by the Fund of expenses at the levels set forth in the above table.
1 Year 3 Years 5 Years ------ ------- ------- An investor would directly or indirectly pay the following expenses on a $1,000 investment in the Fund, assuming (i) total annual expenses of [ ]% (assuming no leverage) and [ ]% (assuming leverage of [ ]% of the Fund's total assets) and (ii) a 5% annual return throughout the periods and reinvestment of all dividends and other distributions at net asset value: Assuming No Leverage........................... [ ] [ ] [ ] Assuming [ ]% Leverage..................... [ ] [ ] [ ]
This Example assumes that the percentage amounts listed under Total Annual Expenses remain the same in the years shown including all dividends and other distributions. The above tables and the assumption in the Example of a 5% annual return and reinvestment at net asset value are required by regulation of the Securities and Exchange Commission applicable to all investment companies; the assumed 5% annual return is not a prediction of, and does not represent, the projected or actual performance of the Shares. Actual expenses and annual rates of return may be more or less than those assumed for purposes of the Example. In addition, although the Example assumes reinvestment of all 10 dividends and other distributions at net asset value, participants in the Fund's Automatic Dividend Reinvestment Plan may receive Shares obtained by the Plan Agent at or based on the market price in effect at that time, which may be at, above or below net asset value. This Example should not be considered a representation of future expenses, and the Fund's actual expenses may be more or less than those shown. THE FUND DLJ High Yield Bond Fund is registered under the Investment Company Act as a non-diversified, closed-end management investment company. The Fund was organized as a business trust under the laws of the State of Delaware on April 30, 1998 and has no operating history. The Fund's principal office is located at 277 Park Avenue, New York, New York 10172, and its telephone number is 1-888-[ ]. DLJIM is the Fund's investment manager. The Fund has been organized as a closed-end management investment company. Closed-end management investment companies differ from open-end investment companies (commonly referred to as mutual funds) in that closed-end management investment companies do not redeem their securities at the option of the shareholder, whereas mutual funds issue securities redeemable at net asset value at any time at the option of the shareholder and typically engage in a continuous offering of their shares. Mutual funds are subject to continuous asset in-flows and out-flows that can complicate portfolio management, whereas closed-end funds generally can stay more fully invested. To facilitate redemption obligations, mutual funds are subject to more stringent regulatory limitations on certain investments, such as investments in illiquid securities, than are closed-end funds. However, shares of closed-end companies frequently trade at a discount from net asset value. This risk may be greater for investors expecting to sell their shares in a relatively short period after the completion of the public offering. USE OF PROCEEDS The proceeds of this initial public offering are estimated at $ ($ if the Underwriters' overallotment option is exercised in full) before payment of organizational and offering expenses (estimated at $ and $ , respectively). The proceeds will be invested in accordance with the Fund's investment objectives and policies during a period not to exceed six months from the closing of the initial public offering. Pending such investment, the proceeds may be invested in U.S. dollar-denominated, high quality, short-term instruments. A portion of the Fund's organizational and offering expenses has been advanced by DLJIM and will be repaid by the Fund upon completion of the initial public offering. DLJIM or its affiliates (not the Fund) from its own assets will pay a commission to the Underwriters in connection with sales of Shares in this offering. See "Underwriting." INVESTMENT OBJECTIVES AND POLICIES Investment Objectives The Fund's primary investment objective is to seek high current income. The Fund will also seek capital appreciation as a secondary objective to the extent consistent with its objective of seeking high current income. The Fund is designed for investors willing to assume additional risk in return primarily for the potential for high current income and secondarily capital appreciation. The Fund is not intended to be a complete investment program and there can be no assurance that the Fund will achieve its objectives. Investment Policies Under normal market conditions, the Fund will invest at least 65% of its total assets in fixed income securities of U.S. issuers rated below investment grade quality (lower than Baa by Moody's Investors Service, Inc. ("Moody's") or lower than BBB by Standard & Poor's Ratings Group ("S&P") or comparably rated by another nationally recognized rating agency or in unrated income securities that DLJIM determines to be of comparable quality. Lower grade income 11 securities are commonly known as "junk bonds." The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies and multinational currency units. The Fund may also invest up to [ ]% of its total assets in securities that are the subject of bankruptcy proceedings or otherwise in default or in significant risk of being in default ("Distressed Securities"). At times, the Fund expects to utilize financial leverage through borrowings, including the issuance of debt securities, or the issuance of preferred shares or through other transactions, such as reverse repurchase agreements, which have the effect of financial leverage. The Fund intends to utilize financial leverage in an initial amount equal to approximately [ ]% of its total assets, but it may use leverage up to 33a% of its total assets if borrowing and 50% through the use of preferred shares (in each case including the amount obtained through leverage). The Fund generally will not utilize leverage if it anticipates that the Fund's leveraged capital structure would result in a lower return to Shareholders than that obtainable over time with an unleveraged capital structure. Use of financial leverage creates an opportunity for increased income and capital appreciation for the Shareholders but also creates special risks. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed. Other Investment Practices--Leverage" and "Risk Factors and Special Considerations--Leverage." In certain market conditions, DLJIM may determine that securities rated investment grade (i.e., at least Baa by Moody's or BBB by S&P or comparably rated by another Rating Agency) offer significant opportunities for high income and capital appreciation. In such conditions, the Fund may invest less than 65% of its total assets in lower grade income securities of U.S. issuers. In addition, the Fund may implement various temporary "defensive" strategies at times when DLJIM determines that conditions in the markets make pursuing the Fund's basic investment strategy inconsistent with the best interests of its Shareholders. These strategies may include an increase in the portion of the Fund's assets invested in higher-quality debt securities. The Fund may invest in money market instruments consisting of U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments and repurchase agreements. Under normal market conditions, the Fund does not expect to have a substantial portion of its assets invested in money market instruments. However, when DLJIM determines that adverse market conditions exist, the Fund may adopt a temporary defensive posture and invest all or a portion of its assets in money market instruments. In selecting investments for the Fund's portfolio, DLJIM will seek to identify issuers and industries that DLJIM believes are likely to experience stable or improving financial conditions. DLJIM believes that this strategy should enhance the Fund's ability to earn high current income while also providing opportunities for capital appreciation. DLJIM's analysis may include consideration of general industry trends, the issuer's managerial strength, market position, financial condition, debt maturity schedules and liquidity. DLJIM may also consider relative values based on cash flow, interest or dividend coverage, asset coverage and earnings prospects. The Fund will seek its secondary objective of capital appreciation by investing in securities that DLJIM expects may appreciate in value as a result of favorable developments affecting the business or prospects of the issuer which may improve the issuer's financial condition and credit rating or as a result of declines in long-term interest rates. There can be no assurance the Fund's strategies will be successful. Total annual returns for the market for (i) lower-grade income securities, as measured by the DLJ High-Yield Index, (ii) investment-grade income securities, as measured by the ML Corporate Index and (iii) the U.S. Treasury Bill market, as measured by the SB U.S. Three-Month Treasury Bill Index, as well as the default rates on lower grade income securities as measured by the Altman Default Study from 1989 through 1996 and DLJ for 1997 are reflected in the chart below. The Fund will have no direct investment in, nor will its performance be indicative of, these unmanaged indices. The market of outstanding lower grade income securities has increased over the years. The outstanding principal amounts of lower grade income securities of U.S. issuers in 1984 was $56.5 billion, in 1989 was $241.8 billion, in 1994 was $282.6 billion and in 1997 was over $460 billion. The statistical information with respect to the principal amounts of outstanding securities, and with respect to historical default rates, is based on information the Fund obtained from DLJ. 12
SB U.S. DLJ High Yield ML Corporate 3-month Year Index Return Index Treaury Bill Default Rate ---- ------------ ----- ------------ ------------ 1989 0.39% 14.12% 8.73% 4.29% 1990 -6.38 7.37 8.06 10.14 1991 43.75 18.24 6.01 10.27 1992 16.66 9.12 3.74 3.40 1993 18.00 12.43 3.09 1.11 1994 -2.04 -3.34 4.06 1.45 1995 19.68 21.23 5.81 1.90 1996 13.03 3.66 5.28 1.23 1997 12.21 10.39 5.28 0.84
The Fund will invest primarily in bonds, debentures, notes and other debt instruments. The Fund's portfolio securities may have fixed or variable rates of interest and may include zero coupon securities, payment-in-kind securities or other deferred payment securities, preferred stock, convertible debt obligations and convertible preferred stock, units consisting of debt or preferred stock with warrants or other equity features, participation interests in, or assignments of, commercial loans, government securities, stripped securities, commercial paper and other short-term debt obligations. The issuers of the Fund's portfolio securities may include domestic and foreign corporations, partnerships, trusts or similar entities, and governmental entities or their political subdivisions, agencies or instrumentalities. The Fund may invest in companies in, or governments of, developing countries. The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies and multinational foreign currency units. In connection with its investments in corporate debt securities, or restructuring of investments owned by the Fund, the Fund may receive warrants or other non-income producing equity securities. The Fund may retain such securities, including equity shares received upon conversion of convertible securities, until DLJIM determines it is appropriate in light of current market conditions to dispose such securities. Portfolio Securities Lower Grade Securities. Under normal market conditions, the Fund will invest at least 65% of its total assets in fixed-income securities of U.S. issuers rated below investment grade quality (lower than Baa by Moody's or lower than BBB by S&P or comparably rated by another rating agency) or in unrated fixed-income securities that DLJIM determines to be of comparable quality. Securities rated Ba by Moody's or BB by S&P and lower are considered to have speculative elements, with higher vulnerability to default than corporate securities with higher ratings. See "Appendix A--Ratings of Corporate Bonds" for additional information concerning rating categories of Moody's and S&P. Lower grade securities, though high yielding, are characterized by high risk. They may be subject to certain risks with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated securities. The retail secondary market for lower grade securities may be less liquid than that of higher rated securities; adverse conditions could make it difficult at times for the Fund to sell certain securities or could result in lower prices than those used in calculating the Fund's net asset value. Bond prices generally are inversely related to interest rate changes; however, bond price volatility also is inversely related to coupon. Accordingly, lower grade securities may be relatively less sensitive to interest rate changes than higher quality securities of comparable maturity, because of their higher coupon. This higher coupon is what the investor receives in return for bearing greater credit risk. The higher credit risk associated with lower grade securities potentially will have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity, and will be a substantial factor in the Fund's relative Share price volatility. 13 Lower grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could disrupt severely the market for such securities and may have an adverse impact on the value of such securities. In addition, it is likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon and increase the incidence of default for such securities. The ratings of Moody's, S&P and the other rating agencies represent their opinions as to the quality of the obligations which they undertake to rate. Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Although these ratings may be an initial criterion for selection of portfolio investments, DLJIM also will evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that the Fund invests in lower grade securities that have not been rated by a rating agency, the Fund's ability to achieve its investment objectives will be more dependent on DLJIM's credit analysis than would be the case when the Fund invests in rated securities. The Fund may also invest in zero coupon, pay-in-kind or deferred payment lower grade securities. Zero coupon securities are securities that are sold at a discount to par value and on which interest payments are not made during the life of the security. Upon maturity, the holder is entitled to receive the par value of the security. While interest payments are not made on such securities, holders of such securities are deemed annually to have received "phantom income." Because the Fund will distribute this "phantom income" to Shareholders, to the extent that Shareholders elect to receive dividends in cash rather than reinvesting such dividends in additional Shares, the Fund will have fewer assets with which to purchase income-producing securities. The Fund accrues income with respect to these securities prior to the receipt of cash payments. Pay-in-kind securities are securities that have interest payable by delivery of additional securities. Upon maturity, the holder is entitled to receive the aggregate par value of the securities. Deferred payment securities are securities that remain zero coupon securities until a predetermined date, at which time the stated coupon rate becomes effective and interest becomes payable at regular intervals. Zero coupon, pay-in-kind and deferred payment securities are subject to greater fluctuation in value and may have less liquidity in the event of adverse market conditions than comparably rated securities paying cash interest at regular interest payment periods. Preferred Stock. Preferred stock represents a share of ownership in a company. Generally, preferred stock has a specified dividend and ranks after bonds but before common stock on its claim on the company's income for dividend payments and on the company's assets should the company's assets be liquidated. While most preferred stocks pay a dividend, the Fund may purchase preferred stock where the issuer has failed to pay, or is in danger of failing to pay, the dividends on such preferred stock, or may purchase preferred stock that pays a dividend in kind. Convertible Securities. Convertible securities may be converted at either a stated price or stated rate into underlying shares of common stock. Convertible securities have characteristics similar to both fixed-income and equity securities. Convertible securities generally are subordinated to other similar but non-convertible securities of the same issuer, although convertible bonds, as corporate debt obligations, enjoy seniority in right of payment to all equity securities, and convertible preferred stock is senior to shares of common stock of the same issuer. Because of the subordination feature, however, convertible securities typically have lower ratings than similar non-convertible securities. Although to a lesser extent than with fixed-income securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock. As the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same extent as the underlying common stock. When the market price of the underlying common stock increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer. Convertible securities provide for a stable stream of income with generally higher yields than common stock and offer the potential for capital appreciation through the conversion feature, which enables the holder to benefit from 14 increases in the market price of the underlying common stock. In return, however, convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. Participation Interests. The Fund may invest in corporate obligations denominated in U.S. and foreign currencies that are originated, negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift institutions, insurance companies, financial companies or other financial institutions one or more of which administer the security on behalf of the syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third parties called "Participants." The Fund may invest in such securities either by participating as a Co-Lender at origination or by acquiring an interest in the security from a Co-Lender or a Participant (collectively, "participation interests"). Co-Lenders and Participants interposed between the Fund and the corporate borrower (the "Borrower"), together with Agent Banks, are referred to herein as "Intermediate Participants." The Fund also may purchase a participation interest in a portion of the rights of an Intermediate Participant, which would not establish any direct relationship between the Fund and the Borrower. In such cases, the Fund would be required to rely on the Intermediate Participant that sold the participation interest not only for the enforcement of the Fund's rights against the Borrower but also for the receipt and processing of payments due to the Fund under the security. Because it may be necessary to assert through an Intermediate Participant such rights as may exist against the Borrower, in the event the Borrower fails to pay principal and interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would be involved if the Fund would enforce its rights directly against the Borrower. Moreover, under the terms of a participation interest, the Fund may be regarded as a creditor of the Intermediate Participant (rather than of the Borrower), so that the Fund may also be subject to the risk that the Intermediate Participant may become insolvent. Similar risks may arise with respect to the Agent Bank if, for example, assets held by the Agent Bank for the benefit of the Fund were determined by the appropriate regulatory authority or court to be subject to the claims of the Agent Bank's creditors. In such case, the Fund might incur certain costs and delays in realizing payment in connection with the participation interest or suffer a loss of principal and/or interest. Further, in the event of the bankruptcy or insolvency of the Borrower, the obligation of the Borrower to repay the loan may be subject to certain defenses that can be asserted by such Borrower as a result of improper conduct by the Agent Bank or Intermediate Participant. Distressed Securities. The Fund may invest up to [ ]% of its total assets in securities, including participation interests purchased in the secondary market, which are the subject of bankruptcy proceedings or otherwise in default as to the repayment of principal and/or payment of interest at the time of acquisition by the Fund or are rated in the lower rating categories (Ca or lower by Moody's and CC or lower by S&P) or which, if unrated, are in the judgment of DLJIM of equivalent quality ("Distressed Securities"). Investment in Distressed Securities is speculative and involves significant risk. Distressed Securities frequently do not produce income while they are outstanding and may require the Fund to bear certain extraordinary expenses in order to protect and recover its investment. Therefore, to the extent the Fund pursues its secondary objective of capital appreciation through investment in Distressed Securities, the Fund's ability to achieve current income for its Shareholders may be diminished. The Fund also will be subject to significant uncertainty as to when and in what manner and for what value the obligations evidenced by the Distressed Securities will eventually be satisfied (e.g., through a liquidation of the obligor's assets, an exchange offer or plan of reorganization involving the Distressed Securities or a payment of some amount in satisfaction of the obligation). In addition, even if an exchange offer is made or plan of reorganization is adopted with respect to Distressed Securities held by the Fund, there can be no assurance that the securities or other assets received by the Fund in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made. Moreover, any securities received by the Fund upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of the Fund's participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of Distressed Securities, the Fund may be restricted from disposing of such securities. See "Risk Factors and Special Considerations." Foreign Securities. The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside the United States or that are denominated in various foreign currencies or multinational foreign currency units. Foreign securities markets generally are not as developed or efficient as those in the United States. Securities of some foreign issuers are less liquid and more volatile than securities of comparable U.S. issuers. Similarly, volume and liquidity in 15 most foreign securities markets are less than in the United States and, at times, volatility of price can be greater than in the United States. Because evidences of ownership of such securities usually are held outside the United States, the Fund will be subject to additional risks which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect or restrict the payment of principal and interest on the foreign securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Developing countries have economic structures that are generally less diverse and mature, and political systems that are less stable, than those of developed countries. The markets of developing countries may be more volatile than the markets of more mature economies; however, such markets may provide higher rates of return to investors. Many developing countries providing investment opportunities for the Fund have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have adverse effects on the economies and securities markets of certain of these countries. Since foreign securities often are purchased with and payable in currencies of foreign countries, the value of these assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. The Fund may engage in certain transactions to hedge the currency related risks of investing in non-U.S. dollar denominated securities. See "Other Investment Practices." Variable and Floating Rate Securities. Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate. The Fund may invest in floating rate debt instruments ("floaters"). The interest rate on a floater is a variable rate which is tied to another interest rate, such as a money-market index or Treasury Bill rate. The interest rate on a floater resets periodically, typically every six months. Because of the interest rate reset feature, floaters provide the Fund with a certain degree of protection against rises in interest rates, although the Fund will participate in any declines in interest rates as well. The Fund also may invest in inverse floating rate debt instruments ("inverse floaters"). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed or inversely to a multiple of the applicable index. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of similar credit quality. U.S. Government Securities. Securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities include U.S. Treasury securities that differ in their interest rates, maturities and times of issuance. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities are supported by the full faith and credit of the U.S. Treasury; others by the right of the issuer to borrow from the Treasury; others by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others only by the credit of the agency or instrumentality. These securities bear fixed, floating or variable rates of interest. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies and instrumentalities, no assurance can be given that it will always do so since it is not so obligated by law. Foreign Government Obligations; Securities of Supranational Entities. The Fund may invest in obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions, agencies or instrumentalities that are determined by DLJIM to be of comparable quality to the other obligations in which the Fund may invest. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. 16 Stripped Securities. The Fund may invest in zero coupon U.S. Treasury securities, which are Treasury Notes and Treasury Bonds that have been stripped of their unmatured interest coupons, the coupons themselves and receipts or certificates representing interests in such stripped debt obligations and coupons. Such stripped securities also are issued by corporations and financial institutions which constitute a proportionate ownership of the issuer's pool of underlying securities. A stripped security pays no interest to its holder during its life and is sold at a discount to its face value at maturity. The market prices of such securities generally are more volatile than the market prices of securities that pay interest periodically and are likely to respond to a greater degree to changes in interest rates than coupon securities having similar maturities and credit qualities. Money Market Instruments. The Fund may invest in the following types of money market instruments. Repurchase Agreements. In a repurchase agreement, the Fund buys, and the seller agrees to repurchase, a security at a mutually agreed upon time and price (usually within seven days). The repurchase agreement thereby determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. The Fund may enter into repurchase agreements with certain banks or non-bank dealers. Bank Obligations. The Fund may purchase certificates of deposit, time deposits, bankers' acceptances and other short-term obligations issued by domestic banks, foreign subsidiaries or foreign branches of domestic banks, domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign subsidiaries or foreign branches of domestic banks, and domestic and foreign branches of foreign banks, the Fund may be subject to additional investment risks. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time (in no event longer than seven days) at a stated interest rate. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. Commercial Paper. Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by the Fund will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's or A-1 by S&P, (b) issued by companies having an outstanding unsecured debt issue currently rated at least A3 by Moody's or A- by S&P, or (c) if unrated, determined by DLJIM to be of comparable quality to those rated obligations which may be purchased by the Fund. Other Short-Term Corporate Obligations. These instruments include variable amount master demand notes, which are obligations that permit the Fund to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between the Fund, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded, and there generally is no established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Fund's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies, and the Fund may invest in them only if at the time of an investment DLJIM determines that such investment is of comparable quality to those rated obligations which may be purchased by the Fund. 17 OTHER INVESTMENT PRACTICES The Fund may utilize other investment practices and portfolio management techniques as set forth below. Leverage. At times, the Fund expects to utilize leverage through borrowings or issuance of debt securities or preferred shares. The Fund intends to utilize leverage in an initial amount equal to approximately [ ]% of its total assets (including the amount obtained from leverage); however, the Fund has the ability to utilize leverage in an amount up to 33a% of its total assets if borrowing and 50% through the use of preferred shares (in each case including the amount obtained from leverage). The Fund generally will not utilize leverage if it anticipates that the Fund's leveraged capital structure would result in a lower return to holders of the Shares than that obtainable if the Shares were unleveraged for any significant amount of time. The Fund also may borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise may require untimely dispositions of Fund securities. The Fund at times may borrow from affiliates of DLJIM, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace. The concept of leveraging is based on the premise that the cost of the assets to be obtained from leverage will be based on short-term rates which normally will be lower than the return earned by the Fund on its longer term portfolio investments. Since it is anticipated that the total assets of the Fund (including the assets obtained from leverage) will be invested in the higher yielding portfolio investments or portfolio investments with the potential for capital appreciation, the holders of Shares should be the beneficiaries of any incremental return. Should the differential between the return on the underlying assets and cost of leverage narrow, the incremental return "pick up" will be reduced. Leverage creates risks for holders of the Shares, including the likelihood of greater volatility of net asset value and market price of the Shares, and the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any preferred shares may affect the return to the holders of the Shares. To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the Fund's return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such funds is not sufficient to cover the cost of leverage, the return on the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to Shareholders as dividends and other distributions will be reduced. In the latter case, DLJIM in its best judgment nevertheless may determine to maintain the Fund's leveraged position if it deems such action to be appropriate under the circumstances. As discussed under "Management of the Fund," the fee paid to DLJIM will be calculated on the basis of the Fund's assets including proceeds from borrowings for leverage and the issuance of preferred shares. Capital raised through leverage will be subject to interest costs or dividend payments which may or may not exceed the income and appreciation on the assets purchased. The Fund, among other things, 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. The issuance of classes of preferred shares involves offering expenses and other costs and may limit the Fund's freedom to pay dividends on Shares or to engage in other activities. Borrowings and the issuance of a class of preferred shares having priority over the Fund's Shares create an opportunity for greater return per Share, but at the same time such borrowing is a speculative technique in that it will increase the Fund's exposure to capital risk. Unless the income and appreciation, if any, on assets acquired with borrowed funds or offering proceeds exceed the cost of borrowing or issuing additional classes of securities, the use of leverage will diminish the investment performance of the Fund compared with what it would have been without leverage. Certain types of borrowings may result in the Fund being subject to covenants in credit agreements, including those relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more Rating Agencies which may issue ratings for the corporate debt 18 securities or preferred shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. It is not anticipated that these covenants or guidelines will impede DLJIM from managing the Fund's portfolio in accordance with the Fund's investment objectives and policies. Under the Investment Company Act, the Fund is not permitted to incur indebtedness unless immediately after such incurrence the Fund has an asset coverage of at least 300% of the aggregate outstanding principal balance of indebtedness (i.e., such indebtedness may not exceed 33a% of the Fund's total assets). Additionally, under the Investment Company Act, the Fund may not declare any dividend or other distribution upon any class of its capital shares, or purchase any such capital shares, unless the aggregate indebtedness of the Fund has, at the time of the declaration of any such dividend or distribution or at the time of any such purchase, an asset coverage of at least 300% after deducting the amount of such dividend, distribution, or purchase price, as the case may be. Under the Investment Company Act, the Fund is not permitted to issue preferred shares unless immediately after such issuance the net asset value of the Fund's portfolio is at least 200% of the liquidation value of the outstanding preferred shares (i.e., such liquidation value may not exceed 50% of the Fund's total assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Shares unless, at the time of such declaration, the net asset value of the Fund's portfolio (determined after deducting the amount of such dividend or other distribution) is at least 200% of such liquidation value. If preferred shares are issued, the Fund intends, to the extent possible, to purchase or redeem preferred shares from time to time to maintain coverage of any preferred shares of at least 200%. The Fund's willingness to borrow money and issue new securities for investment purposes, and the amount the Fund will borrow or issue, will depend on many factors, the most important of which are investment outlook, market conditions and interest rates. Successful use of a leveraging strategy depends on DLJIM's ability to predict correctly 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. Assuming the utilization of leverage by borrowings in the amount of approximately [ ]% of the Fund's total assets, and an annual interest rate of [ ]% payable on such leverage based on market rates as of the date of this Prospectus, the annual return that the Fund's portfolio must experience (net of expenses) in order to cover such interest payments would be [ ]%. The following table is designed to illustrate the effect on the return to a Shareholder of the leverage obtained by borrowings in the amount of approximately [ ]% of the Fund's total assets, assuming hypothetical annual returns of the Fund's portfolio of minus 10% to plus 10%. As the table shows, the leverage generally increases the return to Shareholders when portfolio return is positive and greater than the cost of leverage and decreases the return when the portfolio return is negative or less than the cost of leverage. The figures appearing in the table are hypothetical and actual returns may be greater or less than those appearing in the table. Assumed Portfolio Return (net of expenses).................. (10)% (5)% 0% 5% 10% Corresponding Share Return ................................. [ ] [ ] [ ] [ ] [ ]
Until the Fund borrows or issues preferred shares, the Fund's Shares will not be leveraged, and the risks and special considerations related to leverage described in this Prospectus will not apply. Such leveraging of the Shares cannot be fully achieved until the proceeds resulting from the use of leverage have been invested in longer-term debt instruments in accordance with the Fund's investment objectives and policies. Short-Selling. In these transactions, the Fund sells a security it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the Fund must borrow the security to make delivery to the buyer. The Fund is obligated to replace the security borrowed by purchasing it subsequently at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund, which would result in a loss or gain, respectively. 19 Securities will not be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed [ ]% of the value of the Fund's net assets. The Fund may not make a short sale which results in the Fund having sold short in the aggregate more than [ ]% of the outstanding securities of any class of an issuer. The Fund also may make short sales "against the box" in which the Fund enters into a short sale of a security it owns. See "Taxes." Until the Fund closes out its short position or replaces the borrowed security, it will: (a) maintain a segregated account, containing permissible liquid assets, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position. Lending Portfolio Securities. The Fund may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. The Fund continues to be entitled to payments in amounts equal to the interest, dividends or other distributions payable on the loaned securities, which affords the Fund an opportunity to earn interest on the amount of the loan and on the loaned securities' collateral. Loans of portfolio securities may not exceed 33a% of the value of the Fund's total assets, and the Securities and Exchange Commission ("SEC") currently requires the Fund to receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. According to the SEC, such loans currently must be terminable by the Fund at any time upon specified notice. The Fund might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with the Fund. In connection with its securities lending transactions, the Fund may return to the borrower or a third party which is acting as a "placing broker," a part of the interest earned from the investment of collateral received for securities loaned. Generally, the SEC currently requires that the following conditions must be met whenever portfolio securities are loaned: (1) the Fund must receive at least 100% cash collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the Fund must be able to terminate the loan at any time; (4) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (5) the Fund may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Fund's Board must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. If the regulatory requirements pertaining to portfolio securities lending were to change, the Fund would comply with such changes as required. Illiquid Securities. The Fund may purchase securities subject to legal or contractual restriction, or that are otherwise illiquid, without limitation. When purchasing securities that have not been registered under the Securities Act of 1933, as amended, and are not readily marketable, the Fund will endeavor, to the extent practicable, to obtain the right to registration at the expense of the issuer. Generally, there will be a lapse of time between the Fund's decision to sell any such security and the registration of the security permitting sale. During any such period, the price of the securities will be subject to market fluctuations. However, where a substantial market of qualified institutional buyers has developed for certain unregistered securities purchased by the Fund pursuant to Rule 144A under the Securities Act of 1933, as amended, the Fund intends to treat such securities as liquid securities in accordance with procedures approved by the Fund's Board. Because it is not possible to predict with assurance how the market for specific restricted securities sold pursuant to Rule 144A will develop, the Fund's Board has directed DLJIM to monitor carefully the Fund's investments in such securities with particular regard to trading activity, availability of reliable price information and other relevant information. To the extent that, for a period of time, qualified institutional buyers cease purchasing restricted securities pursuant to Rule 144A, the Fund's investing in such securities may have the effect of increasing the level of illiquidity in its investment portfolio during such period. Substantial illiquid positions in the Fund could adversely impact its ability to convert to open-end status. 20 Reverse Repurchase Agreements. The Fund may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement by the Fund to repurchase the securities at an agreed upon price, date and interest payment. The use by the Fund of reverse repurchase agreements involves many of the same risks of leverage described under "Risk Factors and Special Considerations" and "--Leverage" since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. At the time the Fund enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If the Fund establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by the Fund; however, under circumstances in which the Fund does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of the Fund's limitation on borrowings. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities the Fund has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Fund in connection with the reverse repurchase agreement may decline in price. If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund's obligation to repurchase the securities, and the Fund's use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Fund would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement. Derivatives. The Fund may invest in, or use, derivatives ("Derivatives"). These are financial instruments that derive their performance, at least in part, from the performance of an underlying asset, index or interest rate. The Derivatives the Fund may use include options, futures contracts, forward contracts, securities and swaps. The Fund may invest in, or enter into, Derivatives for a variety of reasons, including to hedge certain market risks, to provide a substitute for purchasing or selling particular securities or to increase potential income gain. Derivatives may provide a cheaper, quicker or more specifically focused way for the Fund to invest than "traditional" securities would. Derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular Derivative and the portfolio as a whole. Derivatives permit the Fund to increase or decrease the level of risk, or change the character of the risk, to which its portfolio is exposed in much the same way as the Fund can increase or decrease the level of risk, or change the character of the risk, of its portfolio by purchasing or selling specific securities. Derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in Derivatives could have a large potential impact on the Fund's performance. If the Fund invests in Derivatives at inopportune times or judges market conditions incorrectly, such investments may lower the Fund's return or result in a loss. The Fund also could experience losses if its Derivatives were poorly correlated with its other investments, or if the Fund were unable to liquidate its position because of an illiquid secondary market. The market for many Derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for Derivatives. Derivatives may be purchased on established exchanges or through privately negotiated transactions referred to as over-the-counter Derivatives. Exchange-traded Derivatives generally are guaranteed by the clearing agency that is the issuer or counterparty to such Derivatives. This guarantee usually is supported by a daily payment system (i.e., variation margin requirements) operated by the clearing agency in order to reduce overall credit risk. As a result, unless the clearing agency defaults, there is relatively little counterparty credit risk associated with Derivatives purchased on an exchange. By contrast, no clearing agency guarantees over-the-counter Derivatives. Therefore, each party to an over-the-counter Derivative bears the risk that the counterparty will default. Accordingly, DLJIM will consider the creditworthiness of counterparties to over-the-counter Derivatives in the same manner as it would review the credit 21 quality of a security to be purchased by the Fund. Over-the-counter Derivatives are less liquid than exchange-traded Derivatives since the other party to the transaction may be the only investor with sufficient understanding of the Derivative to be interested in bidding for it. Futures and Options on Futures Transactions--In General. The Fund may enter into futures contracts and options on futures contracts in U.S. domestic markets, such as the Chicago Board of Trade and the International Monetary Market of the Chicago Mercantile Exchange or on exchanges located outside the United States, such as the London International Financial Futures Exchange and the Sydney Futures Exchange Limited. Foreign markets may offer advantages such as trading opportunities or arbitrage possibilities not available in the United States. Foreign markets, however, may have greater risk potential than domestic markets. For example, some foreign exchanges are principal markets so that no common clearing facility exists and an investor may look only to the broker for performance of the contract. In addition, any profits that the Fund might realize in trading could be eliminated by adverse changes in the exchange rate, or the Fund could incur losses as a result of those changes. Transactions on foreign exchanges may include both commodities which are traded on domestic exchanges and those that are not. Unlike trading on domestic commodity exchanges, trading on foreign commodity exchanges is not regulated by the Commodity Futures Trading Commission ("CFTC"). Engaging in these transactions involves risk of loss to the Fund that could adversely affect the value of the Fund's net assets. Although the Fund intends to purchase or sell futures contracts and options thereon only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract or option prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract or option prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures or option positions and potentially subjecting the Fund to substantial losses. Successful use of futures and options on futures by the Fund also is subject to the ability of DLJIM to predict correctly movements in the direction of the relevant market and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract or option thereon. For example, if the Fund uses futures to hedge against the possibility of a decline in the market value of securities held in its portfolio and the prices of such securities instead increase, the Fund will lose part or all of the benefit of the increased value of securities that it has hedged because it will have offsetting losses in its futures positions. Furthermore, if in such circumstances the Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. The Fund may have to sell such securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the Securities and Exchange Commission, the Fund may be required to segregate cash or other liquid assets in connection with its futures and options on futures transactions in an amount generally equal to the value of the underlying commodity. The segregation of such assets will have the effect of limiting the Fund's ability otherwise to invest those assets. To the extent that the Fund enters into futures contracts, options on futures contracts and options on foreign currencies traded on a CFTC-regulated exchange, that are not for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums required to establish these positions (excluding the amount by which options are "in-the-money" at the time of purchase) may not exceed [ ]% of the liquidation value of the Fund's portfolio, after taking into account unrealized profits and unrealized losses on any contracts the Fund has entered into. (In general, a call option on a futures contract is "in-the-money" if the value of the underlying futures contract exceeds the exercise ("strike") price of the call; a put option on a futures contract is "in-the-money" if the value of the underlying futures contract is exceeded by the strike price of the put.) This policy does not limit to [ ]% the percentage of the Fund's assets that are at risk in futures contracts, options on futures contracts and currency options. Specific Futures Transactions. The Fund may purchase and sell interest rate futures contracts. An interest rate future obligates the Fund to purchase or sell an amount of a specific debt security at a future date at a specific price. 22 The Fund may purchase and sell currency futures. A foreign currency future obligates the Fund to purchase or sell an amount of a specific currency at a future date at a specific price. The Fund may purchase and sell stock index and debt futures contracts. An index future obligates the Fund to pay or receive an amount of cash equal to a fixed dollar amount specified in the futures contract multiplied by the difference between the settlement price of the contract on the contract's last trading day and the value of the index based on the prices of the securities that comprise it at the opening of trading in such securities on the next business day. The Fund may also purchase and sell options on interest rate, currency and index futures. When the Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to assume a position in the futures contract at a specified exercise price at any time during the terms of the option. If the Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When the Fund purchases an option on a futures contract, it acquires the right, in return for the premium it pays, to assume a position in the futures contract (a long position if the option is a call and a short position if the option is a put). Forward Currency Contracts. The Fund may enter into forward currency contracts to purchase or sell foreign currencies for a fixed amount of U.S. dollars or another foreign currency. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (term) from the date of the forward currency contract agreed upon by the parties, at a price set at the time the forward currency contract is entered into. Forward currency contracts are traded directly between currency traders (usually large commercial banks) and their customers. The Fund may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Fund intends to acquire. The Fund may sell a forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security or a dividend or interest payment denominated in a foreign currency. The Fund may also use forward currency contracts to shift the Fund's exposure to foreign currency exchange rate changes from one currency to another. For example, if the Fund owns securities denominated in a foreign currency and DLJIM believes that currency will decline relative to another currency, it might enter into a forward currency contract to sell the appropriate amount of the first foreign currency with payment to be made in the second currency. The Fund may also purchase forward currency contracts to enhance income when DLJIM anticipates that the foreign currency will appreciate in value but securities denominated in that currency do not present attractive investment opportunities. The Fund may also use forward currency contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by entering into a forward currency contract to sell another currency expected to perform similarly to the currency in which the Fund's existing investments are denominated. This type of hedge could offer advantages in terms of cost, yield or efficiency, but may not hedge currency exposure as effectively as a simple hedge into U.S. dollars. This type of hedge may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated. The Fund may also use forward currency contracts in one currency or a basket of currencies to attempt to hedge against fluctuations in the value of securities denominated in a different currency if DLJIM anticipates that there will be a correlation between the two currencies. The cost to the Fund of engaging in forward currency contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. When the Fund enters into a forward currency contract, it relies on the counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of some or all of any expected benefit of the transaction. 23 Secondary markets generally do not exist for forward currency contracts, with the result that closing transactions generally can be made for forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurance that the Fund will in fact be able to close out a forward currency contract at a favorable price prior to maturity. In addition, in the event of insolvency of the counterparty, the Fund might be unable to close out a forward currency contract. In either event, the Fund would continue to be subject to market risk with respect to the position, and would continue to be required to maintain a position in securities denominated in the foreign currency or to maintain cash or liquid assets in a segregated account. The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the foreign currency, will change after the forward currency contract has been established. Thus, the Fund might need to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign currencies are not covered by forward currency contracts. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Interest Rate Swaps. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest (for example, an exchange of floating rate payments for fixed rate payments). The exchange commitments can involve payments to be made in the same currency or in different currencies. The use of interest rate swaps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions. If DLJIM is incorrect in its forecasts of market values, interest rates and other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these investment techniques were not used. Moreover, even if DLJIM is correct in its forecasts, there is a risk that the swap position may correlate imperfectly with the price of the asset or liability being hedged. There is no limit on the amount of interest rate swap transactions that may be entered into by the Fund. These transactions do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that the Fund is contractually obligated to make. If the other party to an interest rate swap defaults, the Fund's risk of loss consists of the net amount of interest payments that the Fund contractually is entitled to receive. Credit Derivatives. The Fund may engage in credit derivative transactions. There are two broad categories of credit derivatives: default price risk derivatives and market spread derivatives. Default price risk derivatives are linked to the price of reference securities or loans after a default by the issuer or borrower, respectively. Market spread derivatives are based on the risk that changes in market factors, such as credit spreads, can cause a decline in the value of a security, loan or index. There are three basic transactional forms for credit derivatives: swaps, options and structured instruments. The use of credit derivatives is a highly specialized activity which involves strategies and risks different from those associated with ordinary portfolio security transactions. If DLJIM is incorrect in its forecasts of default risks, market spreads or other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these techniques were not used. Moreover, even if DLJIM is correct in its forecasts, there is a risk that a credit derivative position, may correlate imperfectly with the price of the asset or liability being hedged. There is no limit on the amount of credit derivative transactions that may be entered into by the Fund. The Fund's risk of loss in a credit derivative transaction varies with the form of the transaction. For example, if the Fund purchases a default option on a security, and if no default occurs with respect to the security, the Fund's loss is limited to the premium it paid for the default option. In contrast, if there is a default by the grantor of a default option, the Fund's loss will include both the premium that it paid for the option and the decline in value of the underlying security that the default option hedged. Options--In General. The Fund may purchase and write (i.e., sell) call or put options with respect to specific securities. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security or securities at the exercise price at any time during the option period, or at a specific date. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security or securities at the exercise price at any time during the option period, or at a specific date. 24 A covered call option written by the Fund is a call option with respect to which the Fund owns the underlying security or otherwise covers the transaction by segregating cash or other liquid assets. A put option written by the Fund is covered when, among other things, cash or liquid assets having a value equal to or greater than the exercise price of the option are placed in a segregated account with the Fund's custodian to fulfill the obligation undertaken. The principal reason for writing covered call and put options is to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone. The Fund receives a premium from writing covered call or put options which it retains whether or not the option is exercised. There is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, at times have rendered certain of the clearing facilities inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that may otherwise interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If, as a covered call option writer, the Fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it otherwise covers its position. Specific Options Transactions. The Fund may purchase and sell call and put options on foreign currency. These options convey the right to buy or sell the underlying currency at a price which is expected to be lower or higher than the spot price of the currency at the time the option is exercised or expires. The Fund may purchase and sell call and put options in respect of specific securities (or groups or "baskets" of specific securities) or indices listed on national securities exchanges or traded in the over-the-counter market. An option on an index is similar to an option in respect of specific securities, except that settlement does not occur by delivery of the securities comprising the index. Instead, the option holder receives an amount of cash if the closing level of the index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. Thus, the effectiveness of purchasing or writing index options will depend upon price movements in the level of the index rather than the price of a particular security. The Fund also may purchase cash-settled options on swaps in pursuit of its investment objectives. A cash settled option on a swap gives the purchaser the right, but not the obligation, in return for the premium paid, to receive an amount of cash equal to the value of the underlying swap as of the exercise date. These options typically are purchased in privately negotiated transactions from financial institutions, including securities brokerage firms. Successful use by the Fund of options will be subject to the ability of DLJIM to predict correctly movements in the prices of individual securities, the securities markets generally, foreign currencies, or interest rates. To the extent such predictions are incorrect, the Fund may incur losses. Future Developments. The Fund may take advantage of opportunities in the area of options and futures contracts and options on futures contracts and any other Derivatives that are not presently contemplated for use by the Fund or that are not currently available but that may be developed, to the extent such opportunities are both consistent with the Fund's investment objectives and legally permissible for the Fund. Forward Commitments; When-Issued Securities. The Fund may purchase securities on a forward commitment or when-issued basis, which means that delivery and payment take place a number of days after the date of the commitment to purchase. The payment obligation and the interest rate receivable on a forward commitment or when-issued security are fixed when the Fund enters into the commitment, but the Fund does not make payment until it receives delivery from the counterparty. The Fund will commit to purchase such securities only with the intention of actually acquiring the securities, but the Fund may sell these securities before the settlement date if it is deemed advisable. The 25 Fund will set aside in a segregated account of the Fund permissible liquid assets at least equal at all times to the amount of the commitments. Securities purchased on a forward commitment or when-issued basis are subject to changes in value (generally changing in the same way, i.e., appreciating when interest rates decline and depreciating when interest rates rise) based upon the public's perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates. Securities purchased on a forward commitment or when-issued basis may expose the Fund to risks because they may experience such fluctuations prior to their actual delivery. Purchasing securities on a when-issued basis can involve the additional risk that the yield available in the market when the delivery takes place actually may be higher than that obtained in the transaction itself. Purchasing securities on a forward commitment or when-issued basis when the Fund is fully or almost fully invested may result in greater potential fluctuation in the value of the Fund's net assets and its net asset value per share. RISK FACTORS AND SPECIAL CONSIDERATIONS Investors are advised to consider carefully the special risks involved in investing in the Fund. General The Fund is a newly organized, non-diversified, closed-end management investment company and has no operating history. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. This risk may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering. Accordingly, the Shares are designed primarily for long-term investors and should not be considered a vehicle for trading purposes. The net asset value of the Fund's Shares will fluctuate with interest rate changes as well as with price changes of the Fund's portfolio securities and these fluctuations are likely to be greater in the case of a fund having a leveraged capital structure, as contemplated for the Fund. Lower Grade Securities Lower grade securities are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Lower grade securities are commonly referred to as "junk bonds." Issuers of lower grade securities may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of lower grade securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During periods of economic downturn, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, the issuer's inability to meet specific projected business forecasts or the unavailability of additional financing. Therefore, there can be no assurance that in the future there will not exist a higher default rate relative to the rates currently existing in the market for lower grade securities. The risk of loss due to default by the issuer is significantly greater for the holders of lower grade securities because such securities may be unsecured and may be subordinate to other creditors of the issuer. Other than with respect to Distressed Securities, discussed below, the lower grade securities in which the Fund may invest do not include instruments which, at the time of investment, are in default or the issuers of which are in bankruptcy. However, there can be no assurance that such events will not occur after the Fund purchases a particular security, in which case the Fund may experience losses and incur costs. Lower grade securities frequently have call or redemption features that would permit an issuer to repurchase the security from the Fund. If a call were exercised by the issuer during a period of declining interest rates, the Fund is likely to have to replace such called security with a lower yielding security, thus decreasing the net investment income to the Fund and dividends to Shareholders. 26 Lower grade securities tend to be more volatile than higher-rated fixed-income securities, so that adverse economic events may have a greater impact on the prices of lower grade securities than on higher-rated fixed income securities. Factors adversely affecting the market value of such securities are likely to affect adversely the Fund's net asset value. Recently, demand for lower grade securities has increased significantly and the difference between the yields paid by lower grade securities and investment grade bonds (i.e., the "spread") has narrowed. To the extent this differential increases, the value of lower grade securities in the Fund's portfolio could be adversely affected. Like higher-rated fixed-income securities, lower grade securities generally are purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in the lower grade securities market, which market may be less liquid than the market for higher-rated fixed-income securities, even under normal economic conditions. Also, there may be significant disparities in the prices quoted for lower grade securities by various dealers. As a result, during periods of high demand in the lower grade securities market, it may be difficult to acquire lower grade securities appropriate for investment by the Fund. Adverse economic conditions and investor perceptions thereof (whether or not based on economic reality) may impair liquidity in the lower grade securities market and may cause the prices the Fund receives for its lower grade securities to be reduced. In addition, the Fund may experience difficulty in liquidating a portion of its portfolio when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as deterioration in the creditworthiness of the issuers. Under such conditions, judgment may play a greater role in valuing certain of the Fund's portfolio instruments than in the case of instruments trading in a more liquid market. In addition, the Fund may incur additional expense to the extent that it is required to seek recovery upon a default on a portfolio holding or to participate in the restructuring of the obligation. Distressed Securities The Fund may invest up to [ ]% of its total assets in securities which are the subject of bankruptcy proceedings or otherwise in default as to the repayment of principal and/or payment of interest at the time of acquisition by the Fund or are rated in the lower rating categories (Ca or lower by Moody's and CC or lower by S&P) or which, if unrated, are in the judgment of DLJIM of equivalent quality ("Distressed Securities"). Investment in Distressed Securities is speculative and involves significant risk. Distressed Securities frequently do not produce income while they are outstanding and may require the Fund to bear certain extraordinary expenses in order to protect and recover its investment. Therefore, to the extent the Fund pursues its secondary objective of capital appreciation through investment in Distressed Securities, the Fund's ability to achieve current income for its Shareholders may be diminished. Leverage The use of leverage by the Fund creates an opportunity for increased net income and capital appreciation for the Shares, but, at the same time, creates special risks, and there can be no assurance that a leveraging strategy will be successful during any period in which it is employed. The Fund intends to utilize leverage to provide the Shareholders with a potentially higher return. Leverage creates risks for Shareholders including the likelihood of greater volatility of net asset value and market price of the Shares and the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any preferred shares may affect the return to the Shareholders. To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the Fund's return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such funds is not sufficient to cover the cost of leverage, the return to the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to Shareholders as dividends and other distributions will be reduced. In the latter case, DLJIM in its best judgment nevertheless may determine to maintain the Fund's leveraged position if it deems such action to be appropriate under the circumstances. During periods in which the Fund is utilizing financial leverage, the management and administration fee will be higher than if the Fund did not utilize a leveraged capital structure because the fee is calculated as a percentage of the Fund's Managed Assets including those purchased with leverage. Certain types of borrowings by the Fund may result in the Fund's being subject to covenants in credit agreements, including those relating to asset coverage and portfolio composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more Rating Agencies, which may issue ratings for the corporate debt securities or preferred shares issued by the Fund. 27 These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. It is not anticipated that these covenants or guidelines will impede DLJIM in managing the Fund's portfolio in accordance with the Fund's investment objectives and policies. The Fund at times may borrow from affiliates of DLJIM, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace. Foreign Securities The Fund may invest up to 30% of its total assets in securities of issuers domiciled outside of the United States or that are denominated in various foreign currencies and multinational foreign currency units. Investing in securities of foreign entities and securities denominated in foreign currencies involves certain risks not involved in domestic investments, including, but not limited to, fluctuations in foreign exchange rates, future foreign political and economic developments, different legal and accounting systems and the possible imposition of exchange controls or other foreign governmental laws or restrictions. Securities prices in different countries are subject to different economic, financial, political and social factors. Since the Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the value of securities in the Fund and the unrealized appreciation or depreciation of investments. Currencies of certain countries may be volatile and therefore may affect the value of securities denominated in such currencies. In addition, with respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, difficulty in obtaining or enforcing a court judgment, economic, political or social instability or diplomatic developments that could affect investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position. Certain foreign investments also may be subject to foreign withholding taxes. These risks often are heightened for investments in smaller, emerging capital markets. As a result of these potential risks, DLJIM may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. The Fund may invest in countries in which foreign investors, including DLJIM, have had no or limited prior experience. Illiquid Securities The Fund may invest in securities for which no readily available market exists or are otherwise considered illiquid. The Fund may not be able readily to dispose of such securities at prices that approximate those at which the Fund could sell such securities if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Non-Diversified Status The Fund is classified as a "non-diversified" management investment company under the Investment Company Act, which means that the Fund may invest a greater portion of its assets in a limited number of issuers than would be the case if the Fund were classified as a "diversified" management investment company. Accordingly, the Fund may be subject to greater risk with respect to its portfolio securities than a management investment company that is "diversified" because changes in the financial condition or market assessment of a single issuer may cause greater fluctuations in the net asset value of the Shares. Market Price, Discount and Net Asset Value of Shares Shares of closed-end management investment companies in the past frequently have traded at a discount to their net asset values. The risk of loss associated with this characteristic of closed-end management investment companies may be greater for investors purchasing Shares in the initial public offering and expecting to sell the Shares soon after the completion thereof. Whether investors will realize gains or losses upon the sale of Shares will not depend directly upon the Fund's net asset value, but will depend upon the market price of the Shares at the time of sale. Since the market 28 price of the Shares will be determined by such factors as relative demand for and supply of the Shares in the market, general market and economic conditions and other factors beyond the control of the Fund, the Fund cannot predict whether the Shares will trade at, below or above the net asset value or at, below or above the initial offering price. The Shares are designed primarily for long-term investors, and investors in the Shares should not view the Fund as a vehicle for trading purposes. Anti-Takeover Provisions The Fund's Declaration of Trust contains provisions limiting (i) the ability of other entities or persons to acquire control of the Fund, (ii) the Fund's freedom to engage in certain transactions, and (iii) the ability of the Fund's Trustees or Shareholders to amend the Declaration of Trust. These provisions of the Declaration of Trust may be regarded as "anti-takeover" provisions. These provisions could have the effect of depriving the Shareholders of opportunities to sell their Shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. Year 2000 Risks Like other investment companies, financial and business organizations and individuals around the world, the Fund could be adversely affected if the computer systems used by DLJIM and the Fund's other service providers do not properly process and calculate date-related information and data from and after January 1, 2000. This is commonly known as the "Year 2000 Problem." DLJIM is taking steps to address the Year 2000 Problem with respect to the computer systems that it uses and to obtain assurances that comparable steps are being taken by the Fund's other major service providers. At this time, however, there can be no assurance that these steps will be sufficient to avoid any adverse impact on the Fund. INVESTMENT RESTRICTIONS In addition to its investment objectives, the Fund has adopted investment restrictions numbered 1 through 6 as fundamental policies, which cannot be changed without approval by the holders of a majority (as defined in the Investment Company Act) of the Fund's outstanding voting shares. Unless expressly designated as fundamental, all other policies of the Fund may be changed by the Board of Trustees without shareholder approval. The percentage restrictions set forth below, as well as those contained elsewhere in this Prospectus, apply at the time a transaction is effected, and a subsequent change in a percentage resulting from market fluctuations or any other cause other than an action by the Fund will not require the Fund to dispose of portfolio securities or take other action to satisfy the percentage restriction. The Fund may not: 1. Invest more than 25% of the value of its total assets in the securities of issuers in a single industry, provided that there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. 2.Invest in commodities or commodity contracts, except that the Fund may purchase and sell commodities to the maximum extent permitted by regulations of the CFTC (or any successor) that would not require registration of the Fund as a commodity pool. 3. Purchase, hold or deal in real estate, or oil, gas or other mineral leases or exploration or development programs, but the Fund may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate or real estate investment trusts. If real estate is delivered as a result of foreclosure, the Fund may hold such property until it can dispose of it in an orderly manner at a reasonable price. 4. Issue senior securities or borrow money except as permitted by the Investment Company Act. 29 5. Make loans to others, except through the purchase of debt obligations and the entry into repurchase agreements. However, the Fund may lend its portfolio securities in an amount not to exceed 33a% of the value of its total assets. Any loans of portfolio securities will be made according to guidelines established by the Securities and Exchange Commission and the Fund's Board. 6. Act as an underwriter of securities of other issuers, except to the extent the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, by virtue of disposing of portfolio securities. 7. Invest in the securities of a company for the purpose of exercising management or control, but the Fund will vote the securities it owns in its portfolio as a shareholder in accordance with its views. 8. Pledge, mortgage or hypothecate its assets, except to the extent necessary to secure permitted borrowings or leverage and to the extent necessary related to the purchase of securities on a when-issued or forward commitment basis, the deposit of assets in escrow in connection with writing covered options, and collateral and initial or variation margin or similar arrangements with respect to options, forward contracts, futures contracts, options on futures contracts, swaps, caps, collars, floors and other derivative instruments. MANAGEMENT OF THE FUND Investment Manager. DLJIM, located at 277 Park Avenue, New York, New York 10172, was formed in 1996 and serves as the Fund's investment manager. DLJIM is a wholly-owned subsidiary of DLJ. As of [ ], 1998, aggregate assets under the management of DLJIM worldwide exceeded $[ ] billion. As of [ ], 1998, DLJ Asset Management Group ("DLJAM"), which includes DLJIM, managed or administered assets of approximately $[ ] billion. DLJ, a member of the New York Stock Exchange, is a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ, Inc."), a major international supplier of financial services. DLJ, Inc. is an independently operated, indirect subsidiary of The Equitable Companies Incorporated, a holding company controlled by AXA, a member of a large French insurance group. AXA is indirectly controlled by a group of four French mutual insurance companies. DLJIM supervises and assists in the overall management of the Fund's affairs under a Management Agreement with the Fund, subject to the authority of the Fund's Board in accordance with Delaware law. The Fund's primary portfolio manager is Lars M. Berkman. He has been employed by DLJIM as Senior Vice President and Director of High Yield Investments since March 1998. Previously, Mr. Berkman spent 19 years at The Prudential Insurance Company of America ("Prudential"), most recently as Managing Director in charge of High Yield in Prudential Investments, the investment management subsidiary of Prudential. In that capacity since 1992, he oversaw the management of eight high yield portfolios for mutual fund and pension fund clients. Additionally, during this period he operated as senior portfolio manager of the Prudential High Yield Fund, the largest of Prudential's bond funds. Before that, Mr. Berkman worked in various investment management business units at Prudential, primarily involved in leveraged buyout investing. In selecting investments for the Fund's portfolio, DLJIM will seek to identify issuers and industries that DLJIM believes are likely to experience stable or improving financial conditions. DLJIM believes that this strategy should enhance the Fund's ability to earn high current income while also providing opportunities for capital appreciation. DLJIM's analysis may include consideration of general industry trends, the issuer's managerial strength, market position, financial condition, debt maturity schedules and liquidity. DLJIM may also consider relative values based on cash flow, interest or dividend coverage, asset coverage and earnings prospects. The Fund will seek its secondary objective of capital appreciation by investing in securities that DLJIM expects may appreciate in value as a result of favorable developments affecting the business or prospects of the issuer which may improve the issuer's financial condition and credit rating or as a result of declines in long-term interest rates. There can be no assurance the Fund's strategies will be successful. DLJIM and its affiliates may sponsor and advise new investment vehicles with investment objectives, policies and restrictions similar or identical to those of the Fund. 30 Management and Administration Agreements. DLJIM provides investment management services pursuant to the Investment Management Agreement (the "Management Agreement") dated [ ], 1998 with the Fund. As compensation for DLJIM's management services to the Fund, the Fund has agreed to pay DLJIM a monthly investment management fee at the annual rate of [ ]% of the value of the Managed Assets. WSW provides administration services to the Fund pursuant to the Administration Services Agreement (the "Administration Agreement") dated [ ], 1998 with the Fund. As compensation for WSW's administration services to the Fund, the Fund has agreed to pay a monthly administration fee at the annual rate [ ]% of the value of the Managed Assets. During the period in which the Fund is utilizing financial leverage, the management fees payable to DLJIM and the administration fees payable to WSW will be higher than if the Fund did not utilize a leveraged capital structure because the fees are calculated as a percentage of the Fund's Managed Assets, including those purchased with leverage. The Management Agreement is subject to annual approval by (i) the Fund's Board or (ii) vote of a majority (as defined in the Investment Company Act) of the outstanding voting securities of the Fund, provided that in either event the continuance is also approved by a majority of the Board members who are not "interested persons" (as defined in the Investment Company Act) of the Fund or DLJIM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Management Agreement was approved by the Fund's Board, including a majority of the Board members who are not "interested persons" of any party to the Management Agreement, at a meeting held on [ ], 1998. The Management Agreement was approved by the Fund's initial shareholder on [ ], 1998. The Management Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board or by vote of the holders of a majority of the Fund's Shares, or, on not less than 90 days' notice, by DLJIM. The Management Agreement will terminate automatically in the event of its assignment (as defined in the Investment Company Act). The following persons are officers and/or directors of DLJIM: [To come] DLJIM manages the Fund's investments in accordance with the stated policies of the Fund, subject to the approval of the Fund's Board. DLJIM is responsible for investment decisions, and provides the Fund with portfolio managers who are authorized by the Board to execute purchases and sales of securities. DLJIM also maintains a research department with a professional staff of portfolio managers and securities analysts who provide research services for the Fund as well as for other funds and investment advisory clients advised by DLJIM. DLJIM and its affiliates may have deposit, loan and commercial banking or other relationships with the issuers of securities purchased by the Fund. DLJIM has informed the Fund that in making its investment decisions it does not obtain or use material non-public information that DLJ, or its affiliates, may possess with respect to such issuers. DLJIM maintains office facilities on behalf of the Fund, and furnishes statistical, and research data, clerical help, accounting, data processing, bookkeeping and internal auditing and certain other required services to the Fund. DLJIM also may make such advertising and promotional expenditures, using its own resources, as it deems appropriate. Expenses. All expenses incurred in the operation of the Fund are borne by the Fund, except to the extent specifically assumed by DLJIM. The expenses borne by the Fund include: organizational costs, taxes, interest, brokerage fees and commissions, if any, fees of Board members who are not officers, trustees, employees or holders of 5% or more of the outstanding voting securities of DLJIM or any of its affiliates, Securities and Exchange Commission fees, state Blue Sky qualification fees, exchange listing fees, advisory and administration fees, shareholder servicing fees, charges of custodians, transfer and dividend disbursing agents' fees, certain insurance premiums, industry association fees, outside auditing and legal expenses, costs of maintaining the Fund's existence, expenses of reacquiring Shares, expenses in connection with the Fund's Automatic Dividend Reinvestment Plan, costs of maintaining the required books and accountings (including the costs of calculating the net asset value of the Fund's Shares), costs of independent pricing services, costs attributable to investor services (including, without limitation, telephone and personnel expenses), costs of preparing and printing prospectuses, and mailing Share certificates, proxy statements and costs of Shareholders' reports and meetings, any extraordinary expenses and other expenses properly payable by the Fund. 31 TRUSTEES AND OFFICERS OF THE FUND The Fund has a Board composed of [ ] Trustees which supervises the Fund's investment activities and reviews contractual arrangements with companies that provide the Fund with services. The following lists the Trustees and officers and their positions with the Fund and their present and principal occupations during the past five years. Each Trustee who is an "interested person" of the Fund (as defined in the Investment Company Act) is indicated by an asterisk (*). Each Trustee who is not an "interested person" serves on the Audit Committee of the Board. The address of each officer of the Fund is 277 Park Avenue, New York, New York 10172. The officers and Trustees of the Fund as a group owned beneficially less than 1% of the total shares of the Fund outstanding as of [ ], 1998. No officer or employee of the Fund receives any compensation from the Fund for serving as an officer or Trustee of the Fund. The Fund pays each Trustee who is not an "interested person" $[ ] per annum and $[ ] per Board meeting attended and reimburses each Trustee for travel and out-of-pocket expenses.
Total Pension or Estimated Compensation Retirement Annual from the Fund Aggregate Benefits Benefits Complex Paid Compensation Accrued as Part upon to Board Name of Board Member from Fund of Fund Expenses Retirement Member -------------------- --------- ---------------- ---------- ------
PORTFOLIO TRANSACTIONS DLJIM assumes general supervision over placing orders on behalf of the Fund for the purchase or sale of portfolio securities. Allocation of brokerage transactions, including their frequency is made in the best judgment of DLJIM and in a manner deemed fair and reasonable to shareholders. The primary consideration is prompt execution of orders at the most favorable net price. Subject to this consideration, the brokers selected will include those that supplement DLJIM's research facilities with statistical data, investment information, economic facts and opinions. Information so received is in addition to and not in lieu of services required to be performed by DLJIM and DLJIM's fees are not reduced as a consequence of the receipt of such supplemental information. Such information may be useful to DLJIM in serving both the Fund and other investment advisory clients and funds which it advises and, conversely, supplemental information obtained by the placement of business of other clients may be useful to DLJIM in carrying out its obligations to the Fund. In allocating brokerage transactions, DLJIM seeks to obtain the best execution of orders at the most favorable net price. Subject to this determination, DLJIM may consider, among other things, the receipt of research services and/or the sale of other funds managed, advised or administered by DLJIM or its affiliates as factors in the selection of broker-dealers to execute portfolio transactions for the Fund. The Fund has no obligation to deal with any broker or dealer in execution of transactions. While DLJIM generally seeks reasonably competitive fees, commissions or spreads, the Fund does not necessarily pay the lowest fee, commission or spread available. DLJIM may allocate brokerage transactions to DLJ pursuant to procedures adopted by the Board of Trustees which comply with the Investment Company Act of 1940. Such procedures state that any commissions charged by DLJ will be fair and reasonable and will not exceed their usual and customarily charged commissions. 32 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 those circumstances where better prices and execution are available elsewhere. Because of the affiliation of DLJ with the Fund, the Fund is prohibited from engaging in certain transactions involving DLJ and its affiliates except pursuant to an exemptive order or otherwise in compliance with the provisions of the Investment Company Act and the rules and regulations promulgated thereunder. Included among such restricted transactions will be purchases from or sales to DLJ and its affiliates of securities in transactions in which it acts as principal. The Fund may purchase securities for the Fund during the existence of any underwriting syndicate of which DLJ is a member pursuant to procedures approved by the Board of Trustees which comply with the rules adopted by the SEC. Brokers will be selected because of their ability to handle special executions such as are involved in large block trades or broad distributions, provided the primary consideration is met. Large block trades may, in certain cases, result from two or more funds or investment advisory clients advised by DLJIM or its affiliates being engaged simultaneously in the purchase or sale of the same security. Certain of the Fund's transactions in securities of foreign issuers may not benefit from the negotiated commission rates available to the Fund for transactions in securities of domestic issuers. When transactions are executed in the over-the-counter market, the Fund will deal with the primary market makers unless a more favorable price or execution otherwise is obtainable. Foreign exchange transactions are made with banks or institutions in the interbank market at prices reflecting a mark-up or mark-down and/or commission. Portfolio turnover may vary from year to year as well as within a year. It is anticipated that in any fiscal year the turnover rate may approach the 300% level for the Fund. In periods in which extraordinary market conditions prevail, DLJIM will not be deterred from changing the Fund's investment strategy as rapidly as needed, in which case higher turnover rates can be anticipated which would result in greater brokerage expenses. The overall reasonableness of brokerage commissions paid is evaluated by DLJIM based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. A turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of a year. Higher portfolio turnover rates usually generate additional brokerage commissions and expenses, and the short-term gains realized from these transactions are taxable to Shareholders as ordinary income when distributed to them. Investment decisions for the Fund are made independently from those of other investment companies and investment advisory clients advised by DLJIM. If, however, such other investment companies or investment advisory clients desire to invest in, or dispose of, the same securities as the Fund, available investments or opportunities for sales will be allocated equitably to each investment company and investment advisory client. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Fund or the price paid or received by the Fund. Securities held by the Fund also may be held by or be appropriate investments for other funds or investment advisory clients for which DLJIM or an affiliate acts as an adviser. Because of different investment objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If purchases or sales of securities for the Fund or other funds for which DLJIM or an affiliate acts as investment adviser or for their advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. DETERMINATION OF NET ASSET VALUE The Fund's investments are valued after the close of regular trading on the New York Stock Exchange on the last business day of each week, using available market quotations or at fair value. For purposes of determining the net asset value, the value of the securities held by the Fund plus any cash or other assets (including interest accrued but not yet received) minus all liabilities (including accrued expenses) is divided by the total number of shares outstanding at such time. The Fund determines and makes available for publication the net asset value of its shares weekly. Currently, 33 the net values of shares of publicly traded closed-end investment companies investing in debt securities are published in Barron's, the Monday edition of The Wall Street Journal and the Monday and Saturday editions of The New York Times. Substantially all of the Fund's fixed-income investments (excluding short-term investments) are valued by one or more independent pricing services (the "Service") approved by the Board. Securities valued by the Service for which quoted bid prices in the judgment of the Service are readily available and are representative of the bid side of the market are valued at the mean between the quoted bid prices (as obtained by the Service from dealers in such securities) and asked prices (as calculated by the Service based upon its evaluation of the market for such securities). Other investments valued by the Service are carried at fair value as determined by the Service, based on methods which include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. Short-term investments are not valued by the Service and are valued at the mean price or yield equivalent for such securities or for securities of comparable maturity, quality and type as obtained from market makers. Other investments that are not valued by the Service are valued at the last sales price for securities traded primarily on an exchange or the national securities market or otherwise at the average of the most recent bid and asked prices. Bid price is used when no asked price is available. Any assets or liabilities initially expressed in terms of foreign currency will be translated into U.S. dollars at the prevailing rates of exchange or, if no such rate is quoted on such date, at the exchange rate utilized on the previous business day or at such other quoted market exchange rate as may be determined to be appropriate by DLJIM. Expenses and fees, including the management and administration fee, are accrued weekly and taken into account for the purpose of determining the net asset value of the Fund's Shares. Restricted securities, as well as securities or other assets for which recent market quotations are not readily available, or are not valued by the Service, are valued at fair value as determined in good faith by the Board of Trustees. The Board will review the method of valuation on a current basis. In making their good faith valuation of restricted securities, the Board members generally will take the following factors into consideration: restricted securities which are, or are convertible into, securities of the same class of securities for which a public market exists usually will be valued at market value less the same percentage discount at which such securities were purchased. This discount will be revised periodically by the Board if it believes that the discount no longer reflects the value of the restricted securities. Restricted securities not of the same class as securities for which a public market exists usually will be valued initially at cost. Any subsequent adjustment from cost will be based upon considerations deemed relevant by the Board. The holidays (as observed) on which the New York Stock Exchange is closed currently are: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. DIVIDENDS AND OTHER DISTRIBUTIONS The Fund intends to distribute substantially all of its net investment income monthly. All net realized capital gains, if any, either will be distributed to the Fund's Shareholders at least annually or will be retained by the Fund, and subject to Fund-level associated tax liabilities thereon. The Fund will distribute to the Shareholders at least annually all net realized gains from foreign currency transactions, if any. The Fund may make additional distributions if necessary to avoid a 4% excise tax on certain undistributed income and capital gain. See "Taxes." The Fund may change the foregoing distribution policy if its experience indicates, or its Board of Trustees for any reason determines, that changes are desirable. Under the Investment Company Act, the Fund is not permitted to incur indebtedness unless after such incurrence the Fund has an asset coverage of at least 300% of the aggregate outstanding principal balance of indebtedness. Additionally, under the Investment Company Act, the Fund may not declare any dividend or other distribution upon any class of its capital shares, or purchase any such capital shares, unless the aggregate indebtedness of the Fund has, at the time of the declaration of any such dividend or other distribution or at the time of any such purchase, an asset coverage of at least 300% after deducting the amount of such dividend, other distribution, or purchase price, as the case may be. While any preferred shares are outstanding, the Fund may not declare any cash dividend or other distribution on its Shares, unless at the time of such declaration, (1) all accumulated preferred share dividends have been paid and (2) the net asset value of the Fund's portfolio (determined after deducting the amount of such dividend or other distribution) is 34 at least 200% of the liquidation value of the outstanding preferred shares (expected to be equal to the original purchase price per share plus any accumulated and unpaid dividends thereon). In addition to the limitations imposed by the Investment Company Act as described in this paragraph certain lenders may impose additional restrictions on the payment of dividends or other distributions on the Fund's Shares in the event of a default on the Fund's borrowings. Any limitation on the Fund's ability to make distributions on its Shares could in certain circumstances impair the ability of the Fund to maintain its qualification for taxation as a regulated investment company. See "Other Investment Practices--Leverage" and "Taxes." See "Automatic Dividend Reinvestment Plan" for information concerning the manner in which dividends and other distributions to Shareholders may be automatically reinvested in Shares of the Fund. Dividends and other distributions will be taxable to Shareholders whether they are reinvested in Shares of the Fund or received in cash. The Fund expects that it will commence paying dividends within 60 days of the date of this Prospectus. AUTOMATIC DIVIDEND REINVESTMENT PLAN Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"), unless a Shareholder otherwise elects, all dividends and capital gain distributions will be automatically reinvested by [ ] as agent for Shareholders in administering the Plan (the "Plan Agent"), in additional Shares of the Fund. Shareholders who elect not to participate in the Plan will receive all dividends and other distributions in cash paid by check mailed directly to the shareholder of record (or, if the Shares are held in street or other nominee name, then to such nominee) by [ ] as dividend disbursing agent. Such participants may elect not to participate in the Plan and to receive all dividends and capital gain distributions in cash by sending written instructions to [ ], as dividend disbursing agent, at the address set forth below. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by written notice if received by the Plan Agent not less than ten days prior to any dividend record date; otherwise such termination will be effective with respect to any subsequently declared dividend or other distribution. Whenever the Fund declares an income dividend or a capital gain distribution (collectively referred to as "dividends") payable either in Shares or in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in Shares. The Shares will be acquired by the Plan Agent for the participants' accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized Shares from the Fund ("newly issued shares") or (ii) by purchase of outstanding Shares on the open market ("open-market purchases") on the NYSE or elsewhere. If on the payment date for the dividend, the net asset value per Share is equal to or less than the market price per Share plus estimated brokerage commissions (such condition being referred to herein as "market premium"), the Plan Agent will invest the dividend amount in newly issued Shares on behalf of the participants. The number of newly issued Shares to be credited to each participant's account will be determined by dividing the dollar amount of the dividend by the net asset value per Share on the date the Shares are issued, provided that the maximum discount from the then current market price per Share on the date of issuance may not exceed 5%. If on the dividend payment date the net asset value per Share is greater than the market value (such condition being referred to herein as "market discount"), the Plan Agent will invest the dividend amount in Shares acquired on behalf of the participants in open-market purchases. In the event of a market discount on the dividend payment date, the Plan Agent will have until the last business day before the next date on which the Shares trade on an "ex-dividend" basis or in no event more than 30 days after the dividend payment date (the "last purchase date") to invest the dividend amount in Shares acquired in open-market purchases. It is contemplated that the Fund will pay monthly income dividends. Therefore, the period during which open-market purchases can be made will exist only from the payment date of the dividend through the date before the next "ex-dividend" date which typically will be approximately ten days. If, before the Plan Agent has completed its open-market purchases, the market price of a Share exceeds the net asset value per Share, the average per Share purchase price paid by the Plan Agent may exceed the net asset value of the Fund's Shares, resulting in the acquisition of fewer Shares than if the dividend had been paid in newly issued Shares on the dividend payment date. Because of the foregoing difficulty with respect to open market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend 35 amount in open market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent will cease making open-market purchases and will invest the uninvested portion of the dividend amount in newly issued Shares at the close of business on the last purchase date. The Plan Agent maintains all Shareholders' accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by Shareholders for tax records. Shares in the account of each Plan participant will be held by the Plan Agent on behalf of the Plan participant, and each Shareholder proxy will include those Shares purchased or received pursuant to the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote proxies for Shares held pursuant to the Plan in accordance with the instructions of the participants. In the case of Shareholders such as banks, brokers or nominees that hold Shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Shares certified from time to time by the record Shareholder and held for the account of beneficial owners who participate in the Plan. There will be no brokerage charges with respect to Shares issued directly by the Fund as a result of dividends or capital gains distributions payable either in Shares or in cash. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open-market purchases in connection with the reinvestment of dividends. The automatic reinvestment of dividends will not relieve participants of any Federal, state or local income tax that may be payable (or required to be withheld) on such dividends. See "Taxes." Shareholders participating in the Plan may receive benefits not available to Shareholders not participating in the Plan. If the market price (plus commissions) of the Fund's Shares is above their net asset value, participants in the Plan will receive Shares of the Fund at less than they could otherwise purchase them and will have Shares with a cash value greater than the value of any cash distribution they would have received on their Shares. If the market price plus commissions is below the net asset value, participants will receive distributions in Shares with a net asset value greater than the value of any cash distribution they would have received on their Shares. However, there may be insufficient Shares available in the market to make distributions in Shares at prices below the net asset value. Also, since the Fund does not redeem its Shares, the price on resale may be more or less than the net asset value. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. All correspondence concerning the Plan should be directed to the Plan Agent at [ ]. TAXES The following discussion is a general summary of certain U.S. federal income tax considerations relating to the Fund and to an investment in the Shares of the Fund. The discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations and administrative rulings and pronouncements of the Internal Revenue Service, all as in effect on the date hereof and which are subject to change, possibly retroactively. This summary does not purport to discuss all of the income tax consequences applicable to the Fund or to all categories of investors, some of whom may be subject to special rules (including dealers in securities, insurance companies, tax-exempt entities and non-U.S. persons). Prospective investors are urged to consult their tax advisors regarding the federal income tax consequences of ownership of the Shares of the Fund, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. The Fund intends to elect to be, and to qualify to be treated as, a regulated investment company ("RIC") under the Code. For each taxable year that the Fund so qualifies, the Fund (but not its Shareholders) will be relieved of federal income tax on that part of its investment company taxable income (consisting generally of net investment income, net 36 short-term capital gain and net gains from certain foreign currency transactions) and net capital gain that is distributed to its Shareholders. In order to qualify for treatment as a RIC under the Code, the Fund must make an election to be so treated and must distribute to its Shareholders for each taxable year at least 90% of its investment company taxable income ("Distribution Requirement") and must meet several additional requirements. These requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures or forward contracts) derived with respect to its business of investing in securities or those currencies ("Income Requirement"); (2) at the close of each quarter of the Fund's taxable year, at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities that are limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Fund's total assets and that does not represent more than 10% of the issuer's outstanding voting securities; and (3) at the close of each quarter of the Fund's taxable year, not more than 25% of the value of its total assets may be invested in securities (other than U.S. government securities or the securities of other RICs) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same or related trades or businesses. The Fund will be subject to a non-deductible 4% excise tax ("Excise Tax") to the extent that it fails to distribute by the end of any calendar year substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31st of that year, plus certain other amounts. For these purposes, any such income retained by the Fund, and on which it pays federal income tax, will be treated as having been distributed. Nature of the Fund's Investments. Some of the investment practices that may be employed by the Fund will be subject to special provisions that, among other things, may defer the use of certain losses of the Fund and affect the holding period of the securities held by the Fund and, particularly in the case of transactions in or with respect to foreign currencies, the character of the gains or losses realized. These provisions may also require the Fund to mark-to-market some of the positions in their respective portfolios (i.e., treat as sold for their fair market value) or to accrue original issue discount, both of which may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the Distribution Requirement and avoid imposition of the Excise Tax. Moreover, the Fund will be required to include in its gross income each year any "interest" distributed in the form of additional securities on payment-in-kind securities. In order to satisfy the Distribution Requirement and avoid the Excise Tax, the Fund may be required to liquidate portfolio securities or borrow funds. The Fund intends to monitor its transactions and may make certain elections in order to mitigate the effect of these rules and prevent disqualification of the Fund as a regulated investment company. The Fund intends to invest in, among other things, foreign securities. If, in connection with such investments, the Fund owns shares of stock in certain foreign investment entities, referred to as passive foreign investment companies ("PFICs"), the Fund may be subject to U.S. federal income tax, and additional charges in the nature of interest, on a portion of any "excess distribution" from such company or gain from the disposition of such shares, even if the entire distribution or gain is distributed by the Fund to its shareholders. If the Fund were able and elected to treat a PFIC as a "qualified electing fund," in lieu of the treatment described above, the Fund would be required each year to include in income, the Fund's pro rata share of the ordinary earnings and net capital gains of the company, whether or not actually received by the Fund. Proposed Treasury Regulations and newly enacted provisions of the Code would each allow certain regulated investment companies to elect to mark-to-market their stock in certain PFICs at the end of each taxable year, whereby the Fund would include in its taxable income each year any unrealized gain on such PFIC investments. In order to satisfy the Distribution Requirement under either election, maintain its qualification as a regulated investment company, and avoid income taxes and the Excise Tax, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold. In the case of the proposed Treasury Regulations, there can be no assurance that these regulations will be finalized in the form proposed or as to the effective date of any such final regulations. Income received by the Fund from investments in foreign securities may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions. Such taxes will not be deductible or creditable by 37 Shareholders, and may be withheld at a higher rate than that which would be applicable if the underlying securities had been held directly by a Shareholder. Tax conventions between certain countries and the United States may reduce or eliminate those taxes. Taxation of Shareholders. Dividends from the Fund's investment company taxable income (whether received in cash or reinvested in additional Fund Shares) generally are taxable to its Shareholders as ordinary income to the extent of the Fund's earnings and profits. Distributions of the Fund's net capital gain (whether received in cash or reinvested in additional Fund Shares), when designated as such, are taxable to its Shareholders as long-term capital gain, regardless of how long they have held their Fund Shares. See below for a summary of the tax rates applicable to capital gain distributions. A participant in the Automatic Dividend Reinvestment Plan will be treated as having received a distribution in the amount of the cash used to purchase Shares on his or her behalf, including a pro rata portion of the brokerage fees incurred by the Transfer Agent. Distributions by the Fund to its Shareholders in any year that exceed the Fund's earnings and profits generally may be applied by each Shareholder against his or her basis for the Shares and will be taxable at capital gains rates (assuming the Shares are held as capital assets) to any Shareholder only to the extent the distributions to the Shareholder exceed the Shareholder's basis for his or her Shares. The Fund may retain for investment its net capital gain. However, if the Fund does so, it will be subject to a tax of 35% on the amount retained. In that event, the Fund expects to designate the retained amount as undistributed capital gain in a notice to its Shareholders, who (i) will be required to include in income for tax purposes, as long-term capital gain, their proportionate shares of such undistributed amount, (ii) will be entitled to credit their proportionate shares of the 35% tax paid by the Fund against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds those liabilities, and (iii) will increase the tax basis of their Fund Shares by an amount equal to the difference between the amount of undistributed capital gain included in their gross income and the tax deemed paid by such shareholders. The Fund will notify its Shareholders following the end of each calendar year of the amounts of dividends and capital gain distributions paid (or deemed paid) that year and undistributed capital gain designated for that year. The information regarding capital gain distributions and undistributed capital gain will designate the portion thereof subject to the different maximum rates of tax applicable to noncorporate taxpayers' net capital gain indicated below. Dividends and other distributions declared by the Fund in October, November or December of any year and payable to Shareholders of record on a specified date in such a month will be deemed to have been paid by the Fund and received by the Shareholders on December 31st if the distributions are paid by the Fund during the following January. Accordingly, those distributions will be taxed to Shareholders for the year in which that December 31st falls. An investor should be aware that, if Shares are purchased shortly before the record date for any dividend or other distribution, the investor will pay full price for the Shares and will receive some portion of the purchase price back as a taxable distribution. Upon the sale or exchange of Shares (including a sale pursuant to a Share repurchase or tender offer by the Fund), a Shareholder generally will recognize a taxable gain or loss equal to the difference between his or her adjusted basis for the Shares and the amount received. Any such gain or loss will be treated as a capital gain or loss if the Shares constitute capital assets in the Shareholder's hands and will be long-term capital gain or loss if the Shares have been held for more than one year. See below for a discussion of the tax rates applicable to capital gains. Any loss recognized on a sale or exchange of Shares that were held for six months or less will be treated as long-term, rather than short-term, capital loss to the extent of any capital gain distributions previously received (or deemed to be received) thereon. A loss realized on a sale or exchange of Shares will be disallowed to the extent those Shares are replaced by other Shares within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the Shares (which could occur, for example, as a result of participation in the Automatic Dividend Reinvestment Plan). In that event, the basis of the replacement Shares will be adjusted to reflect the disallowed loss. Under the Taxpayer Relief Act of 1997 ("1997 Tax Act"), the maximum tax rates applicable to net capital gains recognized by individuals and other non-corporate taxpayers are (i) the same as ordinary income tax rates for capital assets held for one year or less; (ii) 28% for capital assets held for more than one year but not more than 18 months and 38 (iii) 20% (10% for taxpayers in the 15% marginal tax bracket) for capital assets held for more than 18 months. The 1997 Tax Act did not affect the maximum net capital gain tax rate for corporations, which remains at 35%. The tax rates described above will apply to distributions of net capital gain by the Fund (if, as expected, the Fund designates net capital gain distributions as 28% rate gain distributions or 20% rate gain distributions, in accordance with its holding periods for the securities it sold that generated the distributed gains) as well as to sales and exchanges of Shares. With respect to capital losses recognized on dispositions of Shares held six months or less where such losses are treated as long-term capital losses to the extent of prior capital gain distributions received thereon (see discussion in the preceding paragraph), it is unclear how such capital losses offset the capital gains referred to above. Shareholders should consult their own tax advisers as to the application of the new capital gains rates to their particular circumstances. The Fund is required to withhold 31% of all dividends, capital gain distributions and repurchase proceeds payable to any individual Shareholders and certain other non-corporate Shareholders who do not provide the Fund with a correct taxpayer identification number. The Fund is also required to withhold 31% of all dividends and capital gain distributions payable to such Shareholders who otherwise are subject to backup withholding. The foregoing is only a brief summary of some of the important federal income tax considerations generally affecting the Fund and its Shareholders. There may be other federal, state, local or foreign tax considerations applicable to a particular investor. Prospective investors are urged to consult their tax advisers regarding the specific federal income tax consequences of purchasing, holding and disposing of Shares, as well as the effects of state, local and foreign tax laws and any proposed tax law changes. UNDERWRITING Subject to the terms and conditions of an Underwriting Agreement, dated [ ], 1998 (the "Underwriting Agreement"), the Underwriters named below, who are represented by DLJ (the "Representatives"), have severally agreed to purchase from the Fund the respective number of Shares set forth opposite their names below
Number of Underwriters Shares ---------------------------------------------------------------------- ---------------- Donaldson, Lufkin & Jenrette Securities Corporation................ ---------------- Total................................................ ================
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the Shares hereby are subject to approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery of all the Shares offered hereby (other than those Shares covered by the over-allotment option described below) if any are purchased. The Underwriters initially propose to offer the Shares in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain dealers (including the Underwriters) at such price less a concession not in excess of $[selling concession] per share. The Underwriters may allow, and such dealers may re-allow, to certain other dealers a concession not in excess of $[reallowance] per share. After the initial offering of the Shares, the public offering price and other selling terms may be changed by the Representatives at any time without notice. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Fund has granted to the Underwriters an option, exercisable within [60] days after the date of this Prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of [ ] additional Shares at the initial public offering price less underwriting discounts and commissions. The Underwriters may exercise such option solely to cover overallotments, if any, made in connection with the offering. To the extent that the Underwriters exercise 39 such option, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage underwriting commitment as indicated in the preceding table. The Fund has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Fund has agreed not to offer or sell any additional shares of beneficial interest of the Fund, other than as contemplated by this Prospectus, for a period of 180 days after the date of the Underwriting Agreement without the prior written consent of DLJ. Prior to the offering, there has been no established trading market for the Shares. The initial public offering price for the Shares offered hereby has been determined by negotiation among the Fund and the Representatives. There can be no assurance, however, that the price at which the Shares will sell in the public market after the offering will not be lower then the price at which they are sold by the Underwriters. The Shares have been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol [" "], subject to official notice of issuance. In order to meet the requirements for listing the Shares on the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. Other than in the United States, no action has been taken by the Fund or the Underwriters that would permit a public offering of the Shares offered hereby in any jurisdiction where action for that purpose is required. The Shares offered hereby may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such Shares be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering of Shares and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any Shares offered hereby in any jurisdiction in which such an offer or a solicitation is unlawful. In connection with the offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Shares. Specifically, the Underwriters may overallot the offering, creating a syndicate short position. The Underwriters may bid for and purchase Shares in the open market to cover such syndicate short position or to stabilize the price of the Shares. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members if the syndicate repurchases previously distributed Shares in syndicate covering transactions, in stabilization transactions or otherwise. These activities may stabilize or maintain the market price of the Shares above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Fund anticipates that the Representative and certain other Underwriters may from time to time act as brokers or dealers in connection with the execution of its portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as such brokers while they are Underwriters. See "Management of the Fund." DESCRIPTION OF SHARES The Fund is a newly organized unincorporated business trust under the laws of the State of Delaware created pursuant to a Declaration of Trust (the "Trust Agreement") dated [ ], 1998. The Fund is authorized to issue an unlimited number of shares of beneficial interest, par value $.001 per share. Each Share has one vote and, when issued and paid for in accordance with the terms of the offering, will be fully paid and non-assessable. Fund Shares are of one class and have equal rights as to dividends and in liquidation. Shares have no preemptive, subscription or conversion rights and are freely transferable. The Fund will send annual and semi-annual financial statements to all its Shareholders, 40 The Trust Agreement provides for indemnification from the Fund's property for all losses and expenses of any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund itself would be unable to meet its obligations, a possibility which management believes is remote. Upon payment of any liability incurred by the Fund, the shareholder paying such liability will be entitled to reimbursement from the general assets of the Fund. The Fund intends to conduct its operations in such a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Fund. The Fund has no present intention of offering additional Shares, except as described herein and under the Automatic Dividend Reinvestment Plan, as it may be amended from time to time. See "Automatic Dividend Reinvestment Plan." Other offerings of its Shares, if made, will require approval of the Fund's Board of Trustees. The Board of Trustees is authorized, however, to classify and reclassify any unissued shares of stock into one or more additional or other classes or series as may be established from time to time by setting or changing in any one or more respects the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares of stock and pursuant to such classification or reclassification to increase or decrease the number of authorized shares of any existing class or series. The Fund may reclassify an amount of unissued stock as preferred stock and at that time offer shares of preferred stock representing up to approximately [ ]% of the Fund's total assets immediately after the issuance of such preferred stock. Any additional offering will not be sold at a price per Share below the then current net asset value (exclusive of underwriting discounts and commissions) except in connection with an offering to existing Shareholders or with the consent of a majority of the Fund's outstanding Shares. Anti-Takeover Provisions in the Declaration of Trust The Fund's Declaration of Trust includes 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 Trustees, 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. These provisions may have the effect of discouraging attempts to acquire control of the Fund, which attempts could have the effect of increasing the expenses of the Fund and interfering with the normal operation of the Fund. The Board of Trustees is divided into three classes, with the terms of one class expiring at each annual meeting of Shareholders. At each annual meeting, one class of Trustees is elected to a three-year term. This provision could delay for up to two years the replacement of a majority of the Board of Trustees. A Trustee may be removed from office for any reason or for no reason by a written instrument signed by at least two-thirds of the remaining Trustees or by a vote of the holders of at least two-thirds of the Shares. In addition, the Declaration of Trust requires the favorable vote of the holders of at least 80% of the outstanding Shares of each class of the Fund, voting as a class, then entitled to vote to approve, adopt or authorize certain transactions with 5%-or-greater holders of a class of Shares and their associates, unless the Board of Trustees shall by resolution have approved a memorandum of understanding with such holders, in which case normal voting requirements would be in effect. For purposes of these provisions, a 5%-or-greater holder of a class of Shares (a "Principal Shareholder") refers to any person who, whether directly or indirectly and whether alone or together with its affiliates and associates, beneficially owns 5% or more of the outstanding shares of any class of beneficial interest of the Fund. The transactions subject to these special approval requirements are: (i) the merger or consolidation of the Fund or any subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance of any securities of the Fund to any Principal Shareholder for cash (except pursuant to the Automatic Dividend Reinvestment Plan); (iii) the sale, lease or exchange of all or any substantial part of the assets of the Fund to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period); or (iv) the sale, lease or exchange to the Fund or any subsidiary thereof, in exchange for securities of the Fund, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period). 41 The Board of Trustees has determined that provisions with respect to the Board of Trustees and the 80% voting requirements described above which voting requirements are greater than the minimum requirements under Delaware law or the Investment Company Act, are in the best interests of Shareholders generally. Reference should be made to the Declaration of Trust on file with the Securities and Exchange Commission for the full text of these provisions. Repurchase of Shares Shares of closed-end management investment companies often trade at a discount to their net asset values, and the Fund's Shares may likewise trade at a discount to their net asset value, although it is possible that they may trade at a premium above net asset value. The market price of the Fund's Shares will be determined by such factors as relative demand for and supply of such Shares in the market, the Fund's net asset value, general market and economic conditions and other factors beyond the control of the Fund. See "Determination of Net Asset Value." Although the Fund's Shareholders will not have the right to redeem their Shares, the Fund may take action to repurchase Shares in the open market or make tender offers for its Shares at their net asset value. This may have the effect of reducing any market discount from net asset value. There is no assurance that if action is undertaken to repurchase or tender for Shares, such action will result in the Shares' trading at a price which approximates their net asset value. Although Share repurchases and tenders could have a favorable effect on the market price of the Fund's Shares, it should be recognized that the acquisition of Shares by the Fund will decrease the total assets of the Fund and, therefore, have the effect of increasing the Fund's expense ratio. Any Share repurchases or tender offers will be made in accordance with requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act. CONVERSION TO OPEN-END FUND The Fund may be converted to an open-end investment company at any time by an amendment to the Declaration of Trust. The Declaration of Trust provides that such an amendment would require the approval of two-thirds of each of the Fund's outstanding classes of shares (including any preferred shares) outstanding at that time entitled to vote on the matter (or a majority of such shares if the amendment previously was approved, adopted or authorized by at least two-thirds of the total number of Trustees). Such a vote also would satisfy a separate requirement in the Investment Company Act that the change be approved by the shareholders. If approved in the foregoing manner, conversion of the Fund could not occur until at least 90 days after the Shareholders' meeting at which such conversion was approved and could take significantly longer and would also require at least 30 days' prior notice to all Shareholders. Conversion of the Fund to an open-end investment company would require the redemption of any outstanding preferred shares and any indebtedness not constituting bank loans, which could eliminate or alter the leveraged capital structure of the Fund with respect to the Shares. Thus, preferred shareholders, if any, would generally not have an incentive to consent to such conversion. Following any such conversion, it is also possible that certain of the Fund's investment policies and strategies would have to be modified to assure sufficient portfolio liquidity. Such requirement could also cause the Fund to dispose of portfolio securities or other assets at a time when it is not advantageous to do so, and could adversely affect the ability of the Fund to meet its investment objectives. In the event of conversion, the Shares would cease to be listed on the New York Stock Exchange or other national securities exchange or market system. Shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the Investment Company Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. The Fund expects to pay all such redemption requests in cash, but intends to reserve the right to pay redemption requests in a combination of cash or securities. If a payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If the Fund were converted to an open-end fund, it is likely that new common shares would be sold at net asset value plus a sales charge. OTHER INFORMATION Prior to the registration statement becoming effective, the Underwriters or other appropriate party may distribute advertising or other solicitation material which discusses (i) economic and market conditions and trends generally; (ii) 42 historical and current conditions and trends in the lower grade securities market, and risk and reward potential in such market; (iii) comparative information, including statistical analysis and performance-related information, related to lower grade securities generally and investing in lower grade securities; (iv) the special considerations and potential benefits of investing in closed-end management investment companies; and (v) information about DLJIM and the Fund's portfolio manager, biographical information about the Fund's portfolio manager, including honors or awards received, and information and commentary on investment strategy or other matters of general interest to investors. LEGAL OPINIONS Certain legal matters in connection with the Shares offered hereby will be passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom LLP and for the Underwriters by Davis Polk & Wardwell. EXPERTS The statement of assets, liabilities and capital of the Fund included in this Prospectus has been so included in reliance upon the report of [ ], independent auditors, and on their authority as experts in auditing and accounting. 43 INDEPENDENT AUDITORS' REPORT The Board of Trustees and Shareholder of DLJ High Yield Bond Fund We have audited the accompanying statement of assets and liabilities of DLJ High Yield Bond Fund (the "Fund") as of [ ], 1998. This financial statement is the responsibility of the Fund's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of the Fund as of [ ], 1998, in conformity with generally accepted accounting principles. [ ] [ ], 1998 44 DLJ High Yield Bond Fund Statement of Assets, Liabilities and Capital [ ], 1998 ASSETS Cash........................................................................... $ Other Assets Total Assets................................................................. LIABILITIES Accrued expenses (Note 1)...................................................... ------------- NET ASSETS....................................................................... $ ============= CAPITAL Common Stock, par value $[ ] per share; shares authorized; shares issued and outstanding (Note 1)....................................... $ Paid in Capital in excess of par............................................... ------------- Total Capital--Equivalent of $[ ] net asset value per share of common stock (Note 1)............................................... $ =============
Notes to Statement of Assets, Liabilities and Capital Note 1. Organization The Fund was organized as a business trust under the laws of the State of Delaware on April , 1998 and is a closed-end, non-diversified management investment company and has had no operations other than the sale to DLJ Investment Management Corp. (the "Investment Manager") of an aggregate of shares for $ on [ ], 1998. Note 2. Management and Administration Arrangements The Fund has engaged the Investment Manager to provide investment management services to the Fund. The Investment Manager will receive a monthly fee for advisory services at an annual rate equal to [ ]% of the Fund's average weekly value of the Managed Assets. The Fund has also engaged the Administrator to provide administration services to the Fund. The Administrator will receive a monthly fee for such services at an annual rate equal to [ ]% of the Fund's average weekly value of the Managed Assets. Note 3. Federal Income Taxes The Fund intends to qualify as a "regulated investment company" and as such (and by complying with the applicable provisions of the Internal Revenue Code of 1986, as amended) will not be subject to Federal income tax on taxable income (including realized capital gains) that is distributed to shareholders. 45 Appendix A RATINGS OF CORPORATE BONDS Description of Corporate Bond Ratings of Standard & Poor's Ratings Group: AAA--Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA--Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree. A--Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. BBB--Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. BB--Bonds rated BB have less near-term vulnerability to default than other speculative grade debt. However, they face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. B--Bonds rated B have a greater vulnerability to default but presently have the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. CCC--Bonds rated CCC have a current identifiable vulnerability to default and are dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayment of principal. In the event of adverse business, financial or economic conditions, they are not likely to have the capacity to pay interest and repay principal. CC--The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating. C--The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. D--Bonds rated D are in default, and payment of interest and/or repayment of principal is in arrears. S&P's letter ratings may be modified by the addition of a plus (+) or a minus (-) sign designation, which is used to show relative standing within the major rating categories, except in the AAA (Prime Grade) category. Description of Bond Ratings of Moody's Investors Service, Inc. Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issuers. A-1 Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what generally are known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and, therefore, not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa--Bonds which are rated Caa are of poor standing. Such issuers may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds which are rated Ca present obligations which are speculative in a high degree. Such issuers are often in default or have other marked shortcomings. C--Bonds which are rated C are the lowest rated class of bonds, and issuers so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies the numerical modifiers 1, 2 and 3 to show relative standing within the major rating categories, except in the Aaa category and in the categories below B. The modifier 1 indicates a ranking for the security in the higher end of a rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of a rating category. A-2 No person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Fund Shares or the Underwriters. Neither the delivery of this Prospectus nor any sale made hereunder shall, in any circumstances, create any implication that there has been no change in the affairs of the Fund since the date hereof or that the information contained herein is correct as of any time subsequent to its date. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the registered securities to which it relates. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy in any circumstances in which such offer or solicitation is unlawful.
TABLE OF CONTENTS Page ---- Prospectus Summary...................... 1 Fee Table............................... 10 The Fund................................ 11 Use of Proceeds......................... 11 Investment Objectives and Policies...... 11 Other Investment Practices.............. 18 Risk Factors and Special Considerations. 26 Investment Restrictions................. 29 Management of the Fund.................. 30 Trustees and Officers of the Fund....... 31 Portfolio Transactions.................. 32 Determination of Net Asset Value........ 33 Dividends and Other Distributions....... 34 Automatic Dividend Reinvestment Plan.... 35 Taxes................................... 36 Underwriting............................ 39 Description of Shares................... 40 Conversion to Open-End Fund............. 42 Other Information....................... 42 Legal Opinions.......................... 42 Experts................................. 43 Independent Auditors' Report............ 44 Statement of Assets, Liabilities and Capital........................... 45 Appendix A.............................. A-1
Until , 1998 all dealers effecting transactions in the Shares, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. [ ] Shares DLJ HIGH YIELD BOND FUND ---------- PROSPECTUS ---------- Donaldson, Lufkin & Jenrette Securities Corporation , 1998 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (1) Financial Statements: The Selected Financial Information, Statement of Operations, Statement of Changes in Net Assets, and any Schedules thereto are omitted because the required information is included in the financial statement included in Part A or Part B, or because the conditions requiring their filing do not exist. (2) Exhibits (a) Declaration of Trust* (b) Bylaws* (c) Not Applicable (d) Form of Specimen Certificate Representing Shares of Beneficial Interest* (e) (1) Form of Terms and Conditions of Automatic Dividend Reinvestment Plan* (2) Form of Dividend Reinvestment Plan Agency Agreement* (f) Not Applicable (g) Form of Investment Management Agreement* (h) (1) Form of Master Agreement Among Underwriters* (2) Form of Underwriting Agreement* (3) Form of Master Selected Dealers Agreement* (i) Not Applicable (j) Form of Custodian and Transfer and Dividend Disbursing Agent Agreement* (k) Form of Administration Agreement* (l) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP* (m) Not Applicable (n) Consent of Independent Auditors* (o) Not Applicable (p) Initial Capital Agreement* (q) Not Applicable (r) Financial Data Schedule * Form of Power of Attorney
- ----------------- * To be filed by amendment ITEM 25. MARKETING ARRANGEMENTS See Exhibit h in Item 24(2) of this Registration Statement. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Securities and Exchange Commission Fees .............................. $29,500 National Association of Securities Dealers, Inc. Fees ................ $31,500 New York Stock Exchange Listing Fee .................................. Printing and Engraving Expenses* ..................................... Accounting Fees and Expenses* ........................................ Trustee's Fees........................................................ Legal Fees* .......................................................... Custodian and Transfer and Dividend Disbursing Agent's Fees*.......... Blue Sky Fees and Expenses* .......................................... Miscellaneous* ....................................................... -------- Total $ ======== * Estimates
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Not Applicable. ITEM 28. NUMBER OF RECORD HOLDERS OF SECURITIES [TO COME] ITEM 29. INDEMNIFICATION [Summary of provisions from Declaration of Trust] Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant [and the Advisor and any underwriter] pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer, or controlling person or the Registrant and the principal underwriter in connection with the successful defense of any action, suit or proceeding) is asserted against the Registrant by such trustee, officer or controlling person or the Distributor in connection with the Shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjusdication of such issue. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER For information as to the business, profession, vocation or employment of a substantial nature of each of the officers and directors of the Advisor, reference is made to the Advisor's current Form ADV (File No. ________) filed under the Investment Advisers Act of 1940, as amended, incorporated herein by reference. ITEM 31. LOCATION OF ACCOUNTS AND RECORDS All accounts, books and other documents required by Section 31(a) of the Investment Company Act of 1940 and the rules thereunder to be maintained (i) by the Registrant will be maintained at its offices, located at 277 Park Avenue, New York, New York, 10172; (ii) by the Advisor will be maintained at its offices, located at 277 Park Aenue, New York, New York 10172; and (iii) all such accounts, books and other documents required to be maintained by the principal underwriter will be maintained by Donaldson, Lufkin & Jenrette Securities Corporation. 5 ITEM 32. MANAGEMENT SERVICES Not Applicable ITEM 33. UNDERTAKINGS (1) The Registrant undertakes to suspend offering of its Shares until it amends its prospectus if (1) subsequent to the effective date of its Registration Statement, the net asset value declines more than 10 percent from its net asset value as of the effective date of the Registration Statement, or (2) the net asset value increases to an amount greater than its net proceeds as stated in the prospectus. (2) Not Applicable (3) Not Applicable (4) Not Applicable (5) If applicable: (a) For the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 42(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective. (b) For the purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating or 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. (6) Not Applicable 6 SIGNATURES Pursuant to the requirement of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on behalf of the undersigned, thereto duly authorized, in the City of New York, and the State of New York on the 11th day of May, 1998. DLJ HIGH YIELD BOND FUND By:/s/ G. MOFFETT COCHRAN ----------------------------------- Name: G. Moffett Cochran Title: Chief Executive Officer and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on the 11th day of May, 1998. Signature Title --------- ----- /s/ G. MOFFETT COCHRAN Trustee, Chief Executive Officer and - ---------------------- Chief Financial Officer 7 POWER OF ATTORNEY The undersigned, being officers and trustees of DLJ High Yield Bond Fund, a Delaware business trust (the "Trust"), do hereby, in the capacities shown below, individually appoint G. Moffett Cochran and Martin Jaffe, of DLJ Asset Management Group, as the agents and attorneys-in-fact with full power of substitution and resubstitution, for each of the undersigned, to execute and deliver, for and on behalf of the undersigned, a Certificate of Trustees and any corresponding documents with regard to the name changes of the trust and all amendments thereto, upon the advice of counsel, filed by the Trust with the State of Delaware and any other regulating entity pursuant to the provisions of the Securities Act of 1933 and the Investment Company Act of 1940. This Power of Attorney may be executd in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument. Dated: [ ], 1998 Signature Title --------- ----- - ------------------------- Trustee - ------------------------- Trustee - ------------------------- Trustee - ------------------------- Trustee 8 -----END PRIVACY-ENHANCED MESSAGE-----