DDJ CANADIAN HIGH YIELD FUND

Transcription

1 This prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities. No securities commission or similar authority in Canada has in any way passed upon the merits of the securities offered hereunder and any representation to the contrary is an offence. These securities have not been and will not be registered under the United States Securities Act of 1933, as amended, or the securities laws of any state of the United States and, subject to certain exceptions, may not be offered or sold in the United States. Initial Public Offering August 15, 1997 DDJ CANADIAN HIGH YIELD FUND $250,000,000 (maximum) Offering of 10,000,000 Units (maximum) Each unit (a Unit ) consisting of one Trust Unit and one Warrant (Represented by Instalment Receipts) The Fund: DDJ Canadian High Yield Fund (the Fund ), a closed-end investment trust established under the laws of the Province of Ontario, proposes to issue Units at a price of $25.00 per Unit, payable on an instalment basis (the Offering ). Each Unit consists of one trust unit (a Trust Unit ) and one warrant (a Warrant ). Each Trust Unit is a transferable, non-redeemable trust unit representing an equal undivided interest in the assets of the Fund. Each Warrant will entitle the holder thereof to acquire one Trust Unit (subject to adjustment in certain events) for an exercise price of $ Warrants may be exercised on or after the Separation Date for a period of two years. Under the terms of the Warrant Indenture respecting the Warrants, a Unit must trade as a unit until 5:00 p.m. (Toronto time) on that date which is 14 days after the Final Instalment Date (the Separation Date ). An initial payment of $12.50 per Unit (the Initial Instalment ) is payable on the closing of the Offering and the final instalment of $12.50 per Unit (the Final Instalment ) is payable on or before August 31, 1998 (the Final Instalment Date ). Prior to the Final Instalment Date, beneficial ownership of the Units will be represented by instalment receipts (the Instalment Receipts ). This prospectus qualifies the distribution of the Trust Units and the Warrants. If a beneficial holder of an Instalment Receipt does not pay the Final Instalment on or before the Final Instalment Date, the Units represented by such beneficial holder s Instalment Receipt may, at the Fund s option, upon compliance with applicable law, be acquired by the Fund in full satisfaction of the beneficial holder s obligation to pay the Final Instalment or such Units may be sold in which case the beneficial holder will remain liable for any deficiency in the proceeds of such sale. See The Fund, Trust Agreement and Description of Units and Details of the Offering Instalment Receipts. Investment Objectives: The Fund s primary investment objective is to provide investors with a high level of current income distributed quarterly over the ten year life of the Fund while preserving capital for distribution to Unitholders upon termination of the Fund. The Fund will also seek capital appreciation through investing in securities with potential for appreciation. Investment Strategy: The Fund will invest the net proceeds of the Offering in a diversified portfolio consisting primarily of high yield debt securities issued in the United States market by Canadian corporations. Up to 20% of the assets of the Fund may be invested in high yield debt and other securities of U.S. and other foreign corporate and government issuers. Initially, the Fund s portfolio will primarily be comprised of U.S. dollar denominated securities. The Fund s investments may include publicly traded and privately placed debt, preferred shares and convertible securities. The Manager: C.I. Mutual Funds Inc. (the Manager ) is the Manager of the Fund. The Manager will, among other things, provide all the general management and administrative services for and monitor the investment portfolio of the Fund to ensure the Fund s compliance with certain investment restrictions set out in the Trust Agreement (the Investment Guidelines ). See Investment Guidelines and The Manager. The Investment Advisor: The Manager has retained DDJ Capital Management, LLC (the Investment Advisor ) to provide investment advisory and portfolio management services to the Fund. The Investment Advisor will, for and on behalf of the Fund, invest the assets of the Fund in accordance with the terms of the investment advisory agreement to be entered into between the Fund, the Manager and the Investment Advisor (the Investment Advisory Agreement ). The Investment Advisor provides investment advisory and portfolio management services to a number of private investment funds. As at June 30, 1997, the Investment Advisor had approximately $1.3 billion of assets under management or advisory arrangements. Eligibility for Investment: The Trust Units and Warrants will be qualified investments under the Income Tax Act (Canada) for trusts governed by registered retirement savings plans, deferred profit sharing plans and registered retirement income funds under the circumstances described under Eligibility for Investment. There is currently no market for the Units, the Trust Units or the Warrants. Prospective investors should carefully review the objectives and strategy of the Fund and consider their ability to assume the risks involved before making an investment in the Fund. Depending on the Net Asset Value per Trust Unit, the exercise of Warrants may have a dilutive effect to the Net Asset Value per Trust Unit. There is no guarantee that an investment in the Fund will earn any positive returns in the short or long term. As the Fund s portfolio will initially be comprised of U.S. dollar denominated securities, the Fund s net asset value will be adversely affected by an increase in the value of the Canadian dollar relative to the U.S. dollar. See Risk Factors for a discussion of certain factors that should be considered by prospective investors in Units. The Trust Units are not deposits within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under the provisions of that Act or any other legislation. Price: $25.00 per Unit ($12.50 on date of subscription, $12.50 on August 31, 1998) Minimum Subscription: 100 Units First Instalment Final Instalment Price to Public and due on the Closing Date due on August 31, 1998 Proceeds to the Fund (1) Per Unit... $12.50 $12.50 $25.00 Maximum Offering (2)(3)... $125,000,000 $125,000,000 $250,000,000 Note: (1) The expenses of the Offering estimated at $750,000 and the Agents fees of $1.375 per Unit, will be paid by a special loan ( Special Loan ) to the Fund. The Special Loan ensures that all of the proceeds from the Offering will be available to the Fund for investment purposes and that the Net Asset Value per Unit equals the issue price at the Closing Date as defined herein. The Agents fee and the expenses of the Offering will be capitalized and included in the net assets of the Fund and will be amortized over the life of the Fund. (2) The Fund has granted the Agents an option (the Over-Allotment Option ) exercisable for a period of 30 days from the closing of the Offering, to offer up to 1,500,000 additional Units on the same terms as set forth above, which additional Units are qualified for sale hereunder. If the Over-Allotment Option is exercised in full, the proceeds raised under the maximum offering will be $287,500,000. This prospectus also qualifies the distribution of the Over-Allotment Option and the Units issuable upon exercise of the Over-Allotment Option. See Plan of Distribution. (3) The maximum offering assumes that 10,000,000 Units are sold. (4) The Fund has allocated $23.10 of the $25.00 purchase price to each Trust Unit and $1.90 thereof to each Warrant. See Plan of Distribution and Canadian Federal Income Tax Considerations.

2 The Instalment Receipts, Trust Units and Warrants, have not been registered under the United States Securities Act of 1933 and are not being offered and may not be offered, sold or delivered directly or indirectly in the United States or to U.S. persons. As used herein, United States means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction and U.S. person means a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States, or an estate or trust the income of which is subject to United States federal income taxation regardless of its source, other than any such person or entity who is resident in Canada. Nesbitt Burns Inc., CIBC Wood Gundy Securities Inc., Midland Walwyn Capital Inc., RBC Dominion Securities Inc., ScotiaMcLeod Inc., Lévesque Beaubien Geoffrion Inc. and TD Securities Inc. (collectively, the Agents ), as agents, conditionally offer the Units for sale, on a best efforts basis, subject to prior sale, if, as and when issued and delivered by the Manager on behalf of the Fund in accordance with the conditions contained in the Agency Agreement referred to under Plan of Distribution and subject to approval of certain legal matters on behalf of the Fund and the Manager by Borden & Elliot and on behalf of the Agents by Aird & Berlis. The Toronto Stock Exchange has conditionally approved the listing of the Trust Units and Warrants to trade initially in the form of Units, represented by Instalment Receipts. Listing is subject to the Fund fulfilling all of the requirements of The Toronto Stock Exchange on or before November 12, 1997, including distribution of these securities to a minimum number of Unitholders. The Fund will terminate on or about August 15, 2007 (the Termination Date ) and the net assets will be distributed on a pro rata basis to the Unitholders unless an alternative later termination date is approved by the Unitholders as provided herein. If an alternative termination date is so approved, all Unitholders wishing to dispose of their Units will have the right to require the Fund to redeem their Units for a price equal to the Net Asset Value (as hereinafter defined) of their Units on the Termination Date. See Trust Agreement and Description of Units Termination of the Fund and Net Asset Value. Closing will take place on August 28, 1997, or such later date as may be agreed to but, in any event, not after September 16, 1997 (the Closing Date ). The right is reserved to close the subscription books at any time without notice and to reject or allot in whole or in part subscriptions received. Registration of interests in the Units will be made in CDS depository service. Beneficial holders of Units will receive only a customer confirmation from the registered dealer who is a CDS participant (a Participant ) and from or through whom Units are purchased. See Plan of Distribution and Details of the Offering.

3 TABLE OF CONTENTS Page ELIGIBILITY FOR INVESTMENT... 3 The Trustee PROSPECTUS SUMMARY... 4 Additional Arrangements THE FUND TRUST AGREEMENT AND INVESTMENT GUIDELINES DESCRIPTION OF UNITS Investment Objectives DISTRIBUTIONS AND Investment Strategy REINVESTMENTS Borrowing LOAN FACILITY Hedging NET ASSET VALUE Investment Restrictions DETAILS OF THE OFFERING THE HIGH YIELD SECURITIES USE OF PROCEEDS MARKET PLAN OF DISTRIBUTION Overview of the High Yield Market CONDITIONS OF CLOSING Performance of High Yield Securities CANADIAN FEDERAL INCOME TAX THE MANAGER CONSIDERATIONS C.I. Mutual Funds Inc RISK FACTORS Duties and Services to be Provided by the Manager CUSTODIAN OF SECURITIES Accounting and Reporting LEGAL MATTERS Directors and Senior Officers of the MATERIAL CONTRACTS Manager AUDITORS, TRANSFER AGENT, THE INVESTMENT ADVISOR REGISTRAR AND DEPOSITARY DDJ Capital Management, LLC PROMOTER Directors and Senior Officers of the PURCHASERS STATUTORY RIGHTS Investment Advisor AUDITORS REPORT Services to be Provided by the Investment CERTIFICATES Advisor CERTIFICATE OF THE AGENTS The Investment Advisory Agreement APPENDIX A Page ELIGIBILITY FOR INVESTMENT In the opinion of Borden & Elliot, counsel to the Fund and Aird & Berlis, counsel to the Agents, provided that the Fund qualifies as a mutual fund trust or is a registered investment within the meaning of the Income Tax Act (Canada), the Units will be qualified investments under the Income Tax Act (Canada) for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans. In the opinion of such counsel, if the Fund is a registered investment within the meaning of the Income Tax Act (Canada), or is a mutual fund trust within the meaning of the Income Tax Act (Canada) and restricts its investments as described under Investment Guidelines, the Units will not constitute foreign property to such plans. 3

4 PROSPECTUS SUMMARY The following is a summary only and is qualified in its entirety by and should be read in conjunction with the more detailed information appearing elsewhere in this prospectus. The Fund: The Offering: Size of Offering: DDJ Canadian High Yield Fund (the Fund ) is a closed-end investment trust established under the laws of the Province of Ontario. This Offering consists of transferable, non-redeemable units (the Units ) of the Fund, each Unit consisting of a transferable, non-redeemable trust unit (a Trust Unit ) and a warrant ( Warrant ). Each Warrant will entitle the holder thereof to acquire one Trust Unit for an exercise price of $ Warrants may be exercised on or after the Separation Date (as defined hereunder) until 5:00 p.m. (Toronto time) on that date which is two years from the Final Instalment Date. The Warrants will be issued pursuant to and governed by the terms of an indenture to be dated as of the Closing Date (the Warrant Indenture ) to be entered into between the Manager, on behalf of the Fund, and The Trust Company of Bank of Montreal as warrant agent. Under the terms of the Warrant Indenture, a Unit must trade as a unit until that date which is 14 days after the Final Instalment Date (the Separation Date ). A book entry only certificate representing the Instalment Receipts will be issued and registered to The Canadian Depository for Securities Limited ( CDS ) or its nominee and will be deposited with CDS on the Closing Date. Unit, Trust Unit or Warrant certificates will not be issued to purchasers of the Units except in certain limited circumstances. Maximum: $250,000,000 (10,000,000 Units) (not including the Over-Allotment Option). Price: $25.00 per Unit (the Offering Price ) payable on an instalment basis (the Offering ). An initial payment of $12.50 per Unit (the Initial Instalment ) is payable on closing (the Closing ) of the Offering and $12.50 per Unit (the Final Instalment ) is payable on or before August 31, 1998 (the Final Instalment Date ). The Fund has allocated $23.10 and $1.90 of the Offering Price, respectively, to the Trust Unit and to the Warrant comprising each Unit. Minimum Subscription: 100 Units ($2,500). Investment Objectives: Investment Strategy: The Fund s primary investment objective is to provide investors with a high level of current income distributed quarterly over the ten year life of the Fund while preserving capital for distribution to Unitholders upon termination of the Fund. The Fund will also seek capital appreciation through investing in securities with potential for appreciation. The Fund will invest the net proceeds of the Offering in a diversified portfolio consisting primarily of high yield debt securities issued in the United States market by Canadian corporations. Up to 20% of the assets of the Fund may be invested in high yield debt and other securities of U.S. and other foreign corporate and government issuers. Initially, the Fund s portfolio will primarily be comprised of U.S. dollar denominated securities. The Fund s investments may include publicly traded and privately placed debt, preferred shares and convertible securities. The Investment Advisor will use its proprietary financial analysis and research to identify undervalued investments in the market. The analytical approach generally used by the Investment Advisor focuses on an issuer s financial condition relative to comparable companies and its potential for success in light of its current financial situation, industry position, economic conditions, and interest rate trends. Generally, the Investment Advisor will use cash flow based models to analyze credit 4

5 quality of debt issuers and will also value the underlying collateral when investing in secured debt. In this regard, the Investment Advisor will review an issuer s credit statistics, including detailed ratio analysis, liquidity needs over future anticipated business cycles and its relative competitive position in its industry. The Investment Advisor will seek to diversify the Fund s portfolio by investing across industry sectors and by investing in varying types of the securities listed above. The following table provides certain information with respect to the contemplated initial portfolio of the Fund. The table below is for illustrative purposes only. The Fund s actual investment portfolio may initially and thereafter be structured differently from the weightings shown in the table based on the Investment Advisor s assessment of the prevailing or anticipated market conditions at the time of investment. Approximate Type of Security Current Annual Yield (1)(2) Weightings High Yield Debt Securities (3) BB-Rated % to 9.5% 30% to 50% B-Rated % to 12.5% 30% to 50% Below B-Rated... Variable 5% to 15% Other Securities... Variable 5% to 15% Notes: (1) Information relating to these pre-tax annual yields (excluding capital gains and losses) has been extracted from publicly available information and is not intended to be, nor should it be construed to be, an indication of future yields. (2) The actual yield on the Trust Units may be different from the yields indicated above for various reasons, including the effects of leverage (see Loan Facility and Risk Factors Borrowing ), fees and expenses associated with the Offering, management fees and operating expenses (see Use of Proceeds ). The Manager: The Investment Advisor: Trustee: (3) Listed by S&P rating class (see Appendix A Credit Ratings ). The Fund is permitted to borrow to, among other things, increase the amount of investments. The Investment Advisor intends to use the borrowing capability of the Fund in part to increase the yield of the Fund by taking advantage of the spread between the income on an investment and the cost of borrowing as well as to purchase higher rated securities (generally BB+ or better) for the Fund where the cost of borrowing is lower than the expected yield of the higher rated securities. C.I. Mutual Funds Inc. (the Manager ) is the Manager of the Fund. The Manager will, among other things, provide all of the general management and administrative services for the Fund and monitor the investment portfolio of the Fund to ensure the Fund s compliance with the Investment Guidelines. The Manager has retained DDJ Capital Management, LLC (the Investment Advisor ) to provide investment advisory and portfolio management services to the Fund. The Investment Advisor will, for and on behalf of the Fund, invest the assets of the Fund in accordance with the Investment Advisory Agreement. The Investment Advisor provides investment advisory and portfolio management services to a number of private investment funds. As at June 30, 1997, the Investment Advisor had approximately $1.3 billion of assets under management or advisory arrangements. The Trust Company of Bank of Montreal is the trustee of the Fund. 5

6 Features of the Fund: The Fund has been structured to encourage the marketability and liquidity of the Units and includes the following features: Gross Proceeds of Offering Fully Invested: The expenses of the Offering, including the Agents fees in connection with the Offering, will be paid by a special loan to the Fund ( Special Loan ). The Agents fee and the expenses of the Offering will be capitalized and included in the net assets of the Fund and will be amortized over the life of the Fund. In addition, as a result of the Fund s ability to borrow an amount equal to the aggregate of all Final Instalments due from holders of Instalment Receipts prior to the Final Instalment Date, an amount equal to the gross proceeds of the Offering will be available to the Fund for investment purposes. As a result, the opening net asset value per Trust Unit will be equal to the issue price per Unit on the Closing Date. Market Repurchase Plan: The Manager will have the ability to repurchase up to 5% of the outstanding Units per calendar year if the Units trade at a price below 90% of Net Asset Value per Trust Unit. Defined Life: The Fund will terminate on August 15, 2007 (the Termination Date ) and its net assets will be distributed to Unitholders unless an alternative to termination is approved by Unitholders as provided herein. See Termination. Distribution Reinvestment Plan: Subject to obtaining any necessary regulatory approvals, the Fund intends to establish a distribution reinvestment plan pursuant to which Unitholders, other than those who elect not to participate in the plan, may reinvest cash distributions in additional Units of the Fund. The Plan Agent will purchase Trust Units from the Fund or in the market. Purchases made in the market pursuant to the Reinvestment Plan will be made by the Plan Agent during the 20 business days following the relevant Distribution Date, on any day when the Market Price is less than the Net Asset Value per Trust Unit as at such date. Upon the expiration of such period, the unused part, if any, of the distribution attributable to the Plan Participants will be used to purchase Trust Units from the Fund. See Distribution and Reinvestment Reinvestment of Distributions and Canadian Federal Income Tax Considerations. Use of Proceeds: The proceeds of the Offering, being approximately $250,000,000 (assuming the maximum offering), without giving effect to the exercise of the Over-Allotment Option, if any, will be invested in accordance with the Fund s Investment Guidelines and will be used to fund the ongoing fees and expenses of the Fund as described herein. Instalment Payment The purchase price for the Units is payable on an instalment basis. The Initial Arrangements: Instalment is payable at Closing and the Final Instalment is payable August 31, 1998 (not later than 5:00 p.m. (Toronto time)). Under the Instalment Receipt Agreement (as defined under Details of the Offering ), if a beneficial holder of an Instalment Receipt does not pay the Final Instalment on or before the Final Instalment Date, the Units represented by such Instalment Receipt may, at the Fund s option, upon compliance with applicable law, be acquired by the Fund in full satisfaction of the beneficial holder s obligation to pay the Final Instalment. Alternatively, such Units may be sold by or on behalf of the Fund and the beneficial holder shall remain liable for any deficiency if the proceeds of such sale are less than the amount of the Final Instalment and the costs of sale. 6

7 Unitholders: Distributions and Reinvestments: Borrowing Limits: Termination of the Fund: Beneficial holders of Trust Units ( Unitholders ) are investors whose subscriptions for Units have been accepted, who are not in default of their obligations to pay the Initial Instalment or the Final Instalment for their Units and who continue to beneficially hold their Units or Trust Units, as the case may be, and include beneficial holders of Instalment Receipts prior to the Final Instalment Date. The Fund intends to distribute all of its net income and net realized capital gains (less capital loss carry forwards, if any) so that the Fund will not be liable for income tax thereon. Commencing with the quarter ending December 31, 1997, the Fund will make quarterly distributions to Unitholders of all of its net income for tax purposes. Unitholders will also receive annual distributions of all of the Fund s net realized capital gains for the year (less capital loss carry forwards, if any). Subject to obtaining any necessary regulatory approvals, the Fund will make available to Unitholders the opportunity to reinvest distributions from the Fund in additional Trust Units by participating in a distribution reinvestment plan. The Fund may incur indebtedness to, among other things, make additional investments in accordance with the Investment Guidelines, and to this end, the Fund anticipates entering into a loan agreement (the Loan Agreement ) with a financial institution. ScotiaMcLeod Inc., one of the Agents (as defined under Plan of Distribution ), is a wholly-owned subsidiary of the Lender. None of the net proceeds of the Offering will be applied for the benefit of ScotiaMcLeod Inc. See Details of the Offering and Use of Proceeds. From time to time, the Fund may also borrow to effect market purchases of Trust Units and to maintain liquidity. Indebtedness of the Fund may consist of amounts borrowed under the Loan Agreement or pursuant to other loan arrangements, amounts borrowed when securities are purchased on margin and amounts received pursuant to repurchase agreements. Prior to the Final Instalment Date, the Fund may borrow up to an amount equal to the aggregate of Final Instalments due from holders of Instalment Receipts and the Special Loan. After the Final Instalment Date, the Fund may borrow up to an amount equal to 33% of the total assets of the Fund together with amounts outstanding under the Special Loan. Indebtedness incurred may be in either Canadian or U.S. dollars. On or about August 15, 2007 (the Termination Date ), the Fund will be terminated and the Unitholders will receive their pro rata share of the net assets of the Fund unless an alternative later termination is approved by the Unitholders as described herein or the Fund is terminated earlier in accordance with the terms of the Trust Agreement. Prior to the Termination Date, the assets of the Fund will be converted to cash to the extent practicable. The Manager, in its discretion, may extend the Termination Date by a maximum of three months if all of the Fund s assets have not been converted to cash. If the Investment Advisor determines the liquidation of certain investments is not practicable, or if the Investment Advisor determines that such liquidation is not appropriate prior to the Termination Date, such securities may be distributed to Unitholders in specie. Not less than thirteen months nor more than fifteen months prior to the Termination Date, the Manager may present a proposal to the Unitholders providing for an alternative to the dissolution of the Fund on the Termination Date. If an alternative later dissolution date is so approved by the requisite majority of the Unitholders, all Unitholders wishing to dispose of their Trust Units will have the right to require the Fund to redeem their Trust Units for a price equal to the Net Asset Value per Unit of their Trust Units on the Termination Date. 7

8 Fees and Expenses: Canadian Federal Income Tax Considerations: Risk Factors: The Fund will pay the Manager an annual management fee of 1.10% of the Fund s Net Asset Value (the Base Fee ), calculated and payable monthly plus a performance fee (the Performance Fee ) equal to 20% of the amount by which the percentage increase in Net Asset Value of the Fund (as adjusted) exceeds a threshold annualized increase of 8%. To the extent that the increase in Net Asset Value of the Fund does not exceed the threshold, then the amount by which such increase falls below the threshold will be carried forward on a cumulative basis and deducted from the amount of any increase in Net Asset Value of the Fund on which the Performance Fee is calculated in subsequent years. A portion of the Base Fee and all of the Performance Fee will be paid by the Manager to the Investment Advisor. Except as described under The Investment Advisor The Investment Advisory Agreement, the Fund will not be responsible for the payout of any fees or expenses to the Investment Advisor. A Special Loan will be taken out by the Fund to finance the expenses of the Offering including the Agents fee. The Fund will be responsible for all expenses relating to the operation of the Fund. The Trustee and the Manager estimate that the administration and operating costs, exclusive of debt service costs, expenses relating to portfolio transactions and transaction costs related to any market purchases of Trust Units by the Fund, will be approximately $300,000 if the maximum number of Units are sold under the Offering (excluding Units issued on exercise of the Over-Allotment Option). See Ongoing Expenses. The Agents will receive a fee of $1.375 per Unit sold. Purchasers must allocate the price paid for a Unit on a reasonable basis between the Trust Unit and the Warrant in order to determine their respective costs. Unitholders will generally be required to include, in computing income, the amount of income of the Fund for tax purposes, including net taxable capital gains, if any, paid or payable to them by the Fund. No gain or loss will be realized by a holder of Warrants (a Warrantholder ) upon the exercise of a Warrant. A Unitholder who disposes of Trust Units or Warrants held as capital property will realize a capital gain to the extent that the proceeds of disposition of the Trust Units or Warrants, net of any costs of disposition, exceed the adjusted cost base of the Trust Units or Warrants. Where a Unit is accepted by the Fund in full satisfaction of the obligation of a Unitholder to pay the Final Instalment, as a consequence of the Unitholder s failure to pay the Final Instalment, the Unitholder will be subject to certain specific rules contained in the Income Tax Act (Canada). Where the collateral is sold as a consequence of the Unitholder s failure to pay the Final Instalment, the amount realized, net of any costs of disposition, will constitute proceeds of disposition to the Unitholder. See Canadian Federal Income Tax Considerations. Each subscriber should satisfy himself or herself as to the federal and provincial tax consequences of an investment in Units by obtaining advice from his or her tax advisor. There are risks associated with an investment in the Units that should be considered by prospective purchasers. Investors should consider the following risk factors (see Risk Factors ) before subscribing for Units: (i) an investment in Units is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment; (ii) there is no guarantee that an investment in Units will earn any positive return in the short or long term; (iii) changes in foreign currency exchange rates could affect the Net Asset Value of the Fund; (iv) the Fund will be entitled to, and intends to, incur indebtedness to purchase securities and there can be no assurance that such a strategy will enhance returns and may reduce returns; (v) the Fund will invest in high yield securities which involve greater risks than investment grade securities, including risks of default in the payment of interest and principal and price changes due to such factors as general economic conditions and 8

9 the issuer s credit worthiness; (vi) there can be no assurance that all Unitholders will honour their obligations to pay the Final Instalment, which may result in a reduction in the Net Asset Value of the Fund and in the Fund s portfolio being less diversified than anticipated; (vii) certain of the investments made by the Fund may be subject to legal or contractual restrictions on resale by the Fund and/or the market in which they trade may be illiquid; (viii) although the high yield market has been expanding, the number of Canadian participants in such market is currently limited which may affect the ability of the Investment Advisor to diversify the Fund s portfolio; (ix) investors are relying on the expertise of the Manager and the Investment Advisor; (x) securities of closed-end investment trusts may trade at a discount to net asset value, but in certain instances have traded above net asset value and the Fund cannot predict whether the Trust Units, Warrants or, prior to the Final Instalment Date, the Instalment Receipts, will trade above, at or below Net Asset Value; (xi) the value of specific securities owned by the Fund may, from time to time, be adversely affected by such factors as investor demand, resale restrictions, general market trends and regulatory restrictions; (xii) there may be less or no publicly available information about private issuers; (xiii) the value of the assets of the Fund will decline with increases in interest rates; (xiv) investments by the Fund in foreign jurisdictions may be subject to certain taxes and political risks which may reduce the returns from those investments; (xv) there can be no assurance that the Fund s hedging strategies will be effective as the Fund, among other things, is subject to the credit risk that its counterparty in certain hedging and investment strategies may be unable to meet its obligations; (xvi) in certain circumstances, a Unitholder could be held personally liable for certain contractual liabilities and obligations of the Fund, including obligations for borrowed funds, to the extent that a claim is not satisfied by the Fund; (xvii) the Fund is not a mutual fund as defined under applicable securities laws; (xviii) the risks associated with securities lending; and (xix) the Fund may be subject to various conflicts of interest due to the fact that the Trustee, the Manager, the Investment Advisor and their associates and affiliates are engaged in a range of management, advisory, securities trading and other business activities. 9

10 THE FUND DDJ Canadian High Yield Fund (the Fund ) is a closed-end investment trust created under the laws of the Province of Ontario by a Trust Agreement dated August 15, 1997 (the Trust Agreement ) made between C.I. Mutual Funds Inc. and The Trust Company of Bank of Montreal, as trustee (the Trustee ). The head office and principal office of the Fund is at the office of the Manager at 151 Yonge Street, 7th Floor, Toronto, Ontario, M5C 2W7. Where any reference is made in this prospectus to an act to be performed by or for or on behalf of the Fund or to any restriction or prohibition placed on the Fund, such reference shall be construed and applied for all purposes as if it referred to an act performed by the Fund or the Manager or to a restriction or prohibition placed on the Trustee or the Manager, as the case may be, having regard to the powers and duties assigned to the Trustee and the powers and duties reserved by the Manager under the Trust Agreement. The beneficial interest in the net assets and net income of the Fund is divided into trust units of equal value (the Trust Units ). Prior to August 31, 1998 (the Final Instalment Date ), beneficial interest in the Units (which interest is subject to the security interest of the Fund) offered by this prospectus, which includes the Trust Units and Warrants, will be represented by instalment receipts (the Instalment Receipts ). INVESTMENT GUIDELINES Investment Objectives The Fund s primary investment objective is to provide investors with a high level of current income distributed quarterly over the ten year life of the Fund while preserving capital for distribution to Unitholders upon termination of the Fund. The Fund will also seek capital appreciation through investing in securities with potential for appreciation. Investment Strategy The Fund will invest the net proceeds of the Offering in a diversified portfolio consisting primarily of high yield debt securities issued in the United States market by Canadian corporations. Up to 20% of the assets of the Fund may be invested in high yield debt and other securities of U.S. and other foreign corporate and government issuers. Initially, the Fund s portfolio will primarily be comprised of U.S. dollar denominated securities. The Fund s investments may include publicly traded and privately placed debt, preferred shares and convertible securities. The Fund may also purchase warrants and loan participations and assignments. In certain circumstances, the Fund may acquire common shares. Interest on high yield securities may be paid in cash, in kind, or at maturity (for example, zero coupon securities). The Investment Advisor may also seek to generate capital gains for the Fund by investing in securities that have potential for ratings upgrade and in defaulted or distressed securities that the Investment Advisor believes have significant capital appreciation potential. See Investment Restrictions. When evaluating the credit quality of a security, the Investment Advisor will perform its own analysis and as such will not rely solely on published ratings. The Investment Advisor will consider, among other things, the price of the security and the history, condition, prospects and management of an issuer in selecting securities for the Fund. The following table provides certain information with respect to the contemplated initial portfolio of the Fund. The table below is for illustrative purposes only. The Fund s actual investment portfolio may initially and 10

11 thereafter be structured differently from the weightings shown in the table based on the Investment Advisor s assessment of the prevailing or anticipated market conditions at the time of investment. Approximate Type of Security Current Annual Yield (1)(2) Weightings High Yield Debt Securities (3) BB-Rated % to 9.5% 30% to 50% B-Rated % to 12.5% 30% to 50% Below B-Rated... Variable 5% to 15% Other Securities... Variable 5% to 15% Notes: (1) Information relating to these pre-tax annual yields (excluding capital gains and losses) has been extracted from publicly available information and is not intended to be, nor should it be construed to be, an indication of future yields. (2) The actual yield on the Trust Units may be different from the yields indicated above for various reasons, including the effects of leverage (see Loan Facility and Risk Factors Borrowing ), fees and expenses associated with the Offering, management and advisory fees and operating expenses (see Use of Proceeds ). (3) Listed by S&P rating class (see Appendix A Credit Ratings ). It is anticipated that the average credit rating of securities held by the Fund will range, over time, from B to BB (each a Standard & Poor s Corporation ( S&P ) rating class) depending on a variety of factors, including, among other things, market factors, prevailing economic conditions and trends, and general interest rate levels and trends. It is anticipated that initially the Fund will invest in securities of Canadian issuers with an average credit rating of BB- (an S&P rating class) and securities of United States issuers with an average credit rating of B (also an S&P rating class). S&P describes an obligation rated BB as less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor s inadequate capacity to meet its financial commitment on the obligation. S&P defines an obligation rated B as more vulnerable to non-payment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor s capacity or willingness to meet its financial commitment on the obligation. See Appendix A Credit Ratings. In selecting convertible securities and preferred shares for investment, the Investment Advisor will use a similar analytical approach to that used for the rest of the Fund s portfolio. The Investment Advisor will use its proprietary financial analysis and research to identify undervalued investments in the market. The analytical approach generally used by the Investment Advisor focuses on an issuer s financial condition relative to comparable companies and its potential for success in light of its current financial situation, its industry position, economic conditions, and interest rate trends. Generally, the Investment Advisor will use cash flow based models to analyze credit quality of debt issuers and will also value the underlying collateral when investing in secured debt. In this regard, the Investment Advisor will review an issuer s credit statistics, including detailed ratio analysis, liquidity needs over future anticipated business cycles, and its relative competitive position in its industry. The Investment Advisor will seek to diversify the Fund s portfolio by investing across industry sectors and by investing in varying types of the securities listed above. The Investment Advisor may seek to lower interest rate fluctuation risk by investing in variable interest rate securities such as loan participations or assignments. The Investment Advisor may also seek diversification and potential yield enhancement through selected investments in private securities and loan participations and assignments. In addition, from time to time, the Investment Advisor may also seek to take advantage of market inefficiencies through purchasing senior securities and short selling junior securities of an issuer (referred to as intra-capital arbitrage ). Up to 20% of the property of the Fund may be invested in securities of United States and other foreign issuers. The Investment Advisor intends to use this basket in part to further diversify the Fund s portfolio by investing in industry sectors that are not represented by Canadian issuers and to increase the yield of the Fund 11

12 by buying securities from the greater selection of higher yielding securities in the United States and other markets. The Fund is permitted to borrow to, among other things, increase the amount of investments. The Investment Advisor intends to use the borrowing capability of the Fund in part to increase the yield of the Fund by taking advantage of the spread between the income on an investment and the cost of the borrowing as well as to purchase higher rated securities (generally BB+ (S&P) or better) for the Fund where the cost of borrowing is lower than the expected yield of the higher rated securities. See Borrowing. The Fund may, for temporary defensive purposes, reduce its holding in high yield securities and invest part or all of its total assets in cash or short-term money market securities of Canadian corporate and government issuers. Borrowing The Fund may incur indebtedness to (i) make additional investments in accordance with the Investment Guidelines, (ii) enhance yield, (iii) further diversify investments of the Fund, (iv) effect market purchases of Trust Units as described under Trust Agreement and Description of Units Market Purchases and (v) maintain liquidity and, to this end, anticipates entering into a loan agreement (the Loan Agreement ) with a financial institution (the Lender ). ScotiaMcLeod Inc., one of the Agents (as defined under Plan of Distribution ), is a wholly-owned subsidiary of the Lender. None of the net proceeds of the Offering will be applied for the benefit of ScotiaMcLeod Inc. See Details of the Offering and Use of Proceeds. Indebtedness of the Fund may consist of amounts borrowed under the Loan Agreement or pursuant to other loan arrangements, including the Special Loan, amounts borrowed when securities are purchased on margin and amounts received pursuant to repurchase agreements. Under a repurchase agreement, the Fund would sell securities and agree to repurchase them at a mutually agreed date and price. Prior to the Final Instalment Date the Fund may borrow up to an amount equal to the aggregate of Final Instalments due from holders of Instalment Receipts and the Special Loan. Subsequent to the Final Instalment Date, the Fund is authorized to borrow money from banks and other entities in an amount equal to up to 33% of the Fund s total assets together with amounts outstanding under the Special Loan. It is anticipated that the interest payments on any borrowings generally will reflect short-term interest rates, and the net return on the Fund s portfolio, including the proceeds of any borrowings, should exceed the interest applicable to such borrowings. Indebtedness incurred may be in either Canadian or U.S. dollars. Whether to borrow and the terms of, and the timing of, borrowing will be determined by the Investment Advisor. There can be no assurance that the Fund will engage in any leveraging techniques. The cost of borrowing will be borne by the Fund. See Loan Facility and Risk Factors Borrowing. Hedging The Fund is authorized to use various hedging and investment strategies described below to hedge various market risks (such as movements in interest and currency exchange rates and fluctuations in the securities markets), to manage the effective maturity or duration of debt instruments held by the Fund or to seek to increase the Fund s income or gain from its investments. The Fund will use such strategies to the extent deemed appropriate by the Investment Advisor, in its discretion. As part of its hedging strategies, the Fund is permitted to purchase and sell financial futures contracts, purchase and sell (or write) exchange listed and over-the-counter put and call options on securities, financial futures contracts and fixed income indices and other financial instruments and enter into forward contracts, interest rate transactions and currency transactions, hedge through intra-capital arbitrage, or establish a position in the derivatives markets as a temporary substitute for purchasing or selling particular securities (collectively, these transactions are referred to in this prospectus as Hedging ). The Fund s interest rate transactions may take the form of swaps, caps, floors and collars. The Fund may also engage in industry arbitrage which entails purchasing securities of one issuer in an industry and short selling securities of another issuer in the same industry. Short sales may be used for other hedging purposes. The ability of the Fund to utilize Hedging successfully will depend on the Investment Advisor s ability to predict pertinent market movements, which cannot be assured. These skills are different from those needed to select portfolio securities. The Fund is not a 12

13 commodity pool and hedging involving financial futures and options on financial futures will be purchased, sold or entered into, if at all, only for bona fide hedging, risk management or other appropriate portfolio management purposes and not for speculative purposes. The ability of the Fund to use hedging may be limited by the laws of certain foreign jurisdictions including the United States. The use of Hedging in certain circumstances may require the Fund to post collateral including cash, securities or other assets to the extent the Fund s obligations are not otherwise covered through ownership of the underlying security or financial instrument. Investment Restrictions The Fund is subject to certain investment restrictions set out in the Trust Agreement (the Investment Guidelines ), which are described below. These restrictions may not be changed without the approval of the Unitholders. If a percentage restriction on investment or use of assets set forth below is adhered to at the time a transaction is effected, later changes to the market value or rating of the investment or the Net Asset Value of the Fund will not be considered a violation of the restriction (except for the restriction listed in paragraph (xii) below which must be complied with at all times and which may necessitate the selling of securities from time to time). Also, if the Fund receives from an issuer of securities held by the Fund subscription rights to purchase securities of that issuer, and if the Fund exercises such subscription rights at a time when the Fund s portfolio holdings of securities of that issuer would otherwise exceed the limits set forth below, it will not constitute a violation if, prior to receipt of securities upon exercise of such rights, and after announcement of such rights, the Fund has sold at least as many securities of the same class and value as it would receive on exercise of such rights. These investment restrictions provide as follows: (i) Limited investment in any industry. The Fund will not invest 25% or more of its total assets in any securities of issuers which are included in the same industry group as defined by the sub-indices of the TSE 300 Composite Index. (ii) Investment in rated debt instruments. The Fund will not invest 20% or more of its total assets in securities rated less than Ca by Moody s Investor Services ( Moody s ) or CC by Standard & Poor s ( S&P ) or securities which have not been rated but which the Investment Advisor reasonably believes would, if rated, have a rating less than such ratings; however not more than 10% of the Fund s total assets may be invested in securities which are not current in the payment of interest at the time of investment for such securities which provide for the payment of interest. (iii) Foreign investment. The Fund will maintain its investment portfolio so that at all times the cost amount to the Fund of the foreign property (as those terms are defined in the Income Tax Act (Canada)) held by it will not exceed 20% (or such other percentage specified from time to time for the purposes of Part XI of the Income Tax Act (Canada)) of the cost amount of all property held by it. (iv) No mutual funds. The Fund will not purchase the securities of any mutual fund (as defined under the Securities Act (Ontario) and regulated by and not exempted from the requirements of National Policy Statement No. 39). (v) Investment in real estate. The Fund will not directly purchase real estate or real estate limited partnership interests. (vi) No control positions. The Fund will not invest for the purpose of exercising control over management of any issuer. (vii) Limit on hedging. The Fund will only use hedging strategies as set out under Hedging above. (viii) Restrictions on underwriting. The Fund will not act as underwriter except to the extent that the Fund may be deemed to be an underwriter in connection with the sale of securities in its portfolio. (ix) Restriction of short sales. The Fund will not make short sales of securities or maintain a short position in any security except in accordance with the Fund s policy on the use of hedging strategies (See Hedging ). 13