As filed with the Securities and Exchange Commission on September 22, 1995
1940 Act File No. 811-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]
(Check appropriate box or boxes)
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Equitable Real Estate Hyperion Capital Advisors, L.L.C.
520 Madison Avenue, New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 980-8400
Clifford E. Lai
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
520 Madison Avenue
New York, New York 10022
(Name and Address of Agent for Service)
Copy to: MICHAEL R. ROSELLA, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
275060.1
<PAGE>
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
Registration Statement on Form N-2
-----------------------
CROSS REFERENCE SHEET -
Pursuant to Rule 495(a)
-----------------------
Part A
Form N-2 Item No. Prospectus Heading
1. Outside Front Cover...............*
2. Inside Front and Outside Back
Cover Page........................*
3. Fee Table and Synopsis............Prospectus Summary; Summary of the
Fund's Expenses
4. Financial Highlights..............*
5. Plan of Distribution..............*
6. Selling Shareholders .............*
7. Use of Proceeds ..................Use of Proceeds; The Fund and its
Investment Objective, Policies and Risks
8. General Description of the
Registrant .......................Cover of Prospectus; Prospectus Summary;
The Fund and its Investment Objective,
Policies and Risks; Capital Stock of the
Fund
9. Management........................Management of the Fund
10. Capital Stock, Long-Term Debt,
and Other Securities..............Capital Stock of the Fund; Taxes
11. Defaults and Arrears on Senior
Securities........................*
12. Legal Proceedings.................*
13. Table of Contents of the
Statement of Additional
Information.......................Table of Contents of the Statement of
Additional Information
--------------------
* Not Applicable
275060.1
<PAGE>
Part B
Item No. Caption in Statement of Additional
Information
14. Cover Page........................Cover Page
15. Table of Contents.................Contents
General Information and
History...........................Management of the Fund
17. Investment Objectives and
Policies..........................Investment Objective, Policies and Risks
18. Management........................Management of the Fund
19. Control Persons and Principal
Holders of Securities.............Management of the Fund
20. Investment Advisory and
Other Services....................Management of the Fund; Custodian,
Transfer Agent and Dividend Agent;
Expense Limitation
21. Brokerage Allocation and
Other Practices...................Investment Objectives, Policies, Risks
and Restrictions
22. Tax Status........................Tax Status
23. Financial Statements..............Independent Account's Report; Statement
of Net Assets; Statement of Operations;
Statement of Changes in Net Assets; Notes
to Financial Statements
Responses to Items 1, 2, 3.2, 4, 5 and 6
of Part A and Items 24.2.h, 24.2.l, 24.2.n
and 24.2.o have been omitted pursuant to
paragraph 3 of instruction G of the
General Instructions to Form N-2.
275060.1
<PAGE>
PRIVATE PLACEMENT MEMORANDUM NAME OF OFFEREE _______________________
September 22, 1995
__________ Shares
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
Common Stock
---------------------------------------------------------------------------
Equitable Real Estate Hyperion High-Yield Commercial Mortgage Fund,
Inc. (the "Fund") is a non-diversified closed-end management investment company
whose investment objective is to provide high total return primarily from
current income. The Fund will seek to achieve its objective by investing, under
normal circumstances, at least 65% of its assets in "high-yielding" commercial
mortgage-backed securities that are rated below investment grade by a nationally
recognized statistical rating organization or that are unrated. Such investments
are commonly referred to as "junk" and are considered to be speculative and may
be subject to special risks, including a greater risk of loss of principal and
non-payment of interest. There is no assurance that the Fund will achieve its
investment objective. The Fund expects to distribute substantially all of its
net assets on or shortly before December 31, 2005, and thereafter to terminate,
unless the Board of Directors determines that it is in the best interests of the
shareholders to extend the life of the Fund for a period of two years. Investors
should carefully assess the risks associated with an investment in the Fund
including the risk that the Fund may acquire rights of equity in real estate
through its holdings. The management and disposition of these equity interests
may pose additional risks to the principal investments of the Fund. Investment
in the Fund involves a high degree of risk and is suitable only for qualified
investors of substantial financial resources who have no need for liquidity in
their investment and who can bear the risk of losing their investment. See
"Private Placement Memorandum Summary" and "The Fund and its Objective,
Policies, and Risks".
Equitable Real Estate Hyperion Capital Advisors, L.L.C. is the Fund's
investment adviser and administrator (the "Adviser" and "Administrator"). The
Adviser is a registered investment adviser. The address of the Fund and the
Adviser is 520 Madison Ave., New York, New York 10022 and its telephone number
is (212) 980-8400.
The minimum purchase in the offering is $1 million (100,000 shares).
The minimum offering size of the Fund is $40 million and the maximum offering
size is $250 million. The shares of the Fund will be offered and sold by the
Fund. The Fund may also offer and sell its shares through broker-dealers,
including Hyperion Distributors, Inc., that are members of the National
Association of Securities Dealers, Inc. No fees or commissions will be paid for
selling Fund shares.
<TABLE>
<CAPTION>
=============================================================================================================================
Price to Sales Proceeds to
Public Load Fund(1)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share . . . . . $10.00 $ 0 $10.00
-----------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . $250,000,000.00 $ 0 $250,000,000.00
=============================================================================================================================
</TABLE>
(1) Before deducting offering and organizational expenses payable by the Fund
estimated at $100,000. These expenses will be amortized and charged as
expenses against the income of the Fund. See "Use of Proceeds."
The Private Placement Memorandum sets forth concisely information about
the Fund that a prospective investor ought to know before investing. Investors
are advised to read this Private Placement Memorandum carefully and retain it
for future reference. A Statement of Additional Information dated September 22,
1995 ("SAI") about the Fund has been filed with the Securities and Exchange
Commission and is available, without charge, upon writing or calling the Fund at
the above location. The SAI has been incorporated by reference into this Private
Placement Memorandum. The table of contents of the SAI appears on page 37 of
this Private Placement Memorandum.
274828.8
<PAGE>
THIS PRIVATE PLACEMENT MEMORANUDM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY OR TO ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. THIS PRIVATE PLACEMENT MEMORANDUM CONSTITUTES AN OFFER ONLY TO NAMED,
QUALIFIED OFFEREES.
Table of Contents Page
Pricate Placement Memorandum Summary........................... 3
Risk Considerations............................................ 4
Summary of the Fund's Expenses................................. 7
Use of Proceeds................................................ 8
The Fund and its Objective, Policies
and Risks............................................................. 8
Risk Considerations....................................................16
Management of the Fund......................................... 27
Dividends and Distributions..............................................29
Determination of Net Asset Value.........................................30
Capital Stock of the Fund...................................... 30
Taxes ...................................................................33
Validity of Shares............................................. 36
Experts........................................................ 36
Reports to Stockholders........................................ 36
Further Information............................................ 37
Description of Ratings................................. Appendix A
-----------
THE SHARES OF COMMON STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "1933 ACT"), IN RELIANCE UPON THE EXEMPTION
PROVIDED BY SECTION 4(2) OF THE ACT AND REGULATION D THEREUNDER. THE SHARES
OF COMMON STOCK HAVE NOT BEEN REGISTERED UNDER ANY STATE SECURITIES LAWS
IN RELIANCE UPON VARIOUS EXEMPTIONS PROVIDED BY THOSE LAWS. THE SHARES
HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY REGULATORY AUTHORITY NOR
HAS ANY REGULATORY AUTHORITY PASSED ON THE MERITS OF THIS OFFERING OR THE
ACCURACY OR ADEQUACY OF THIS PRIVATE PLACEMENT MEMORANDUM. THE SHARES
ARE BEING OFFERED TO A LIMITED NUMBER OF QUALIFIED PERSONS WHO WILL
PURCHASE THE SHARES FOR THEIR OWN ACCOUNTS, PRIMARILY "ACCREDITED
INVESTORS" PURSUANT TO REGULATION D OF THE 1933 ACT, AND OTHER SIMILARLY
QUALIFIED INVESTORS. THE SHARES MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE 1933 ACT AND THE SECURITIES LAWS OF THE STATES IN WHICH
THE SHARES ARE SOLD PURSUANT TO REGISTRATION UNDER THE 1933 ACT OR SUCH
LAWS OR EXEMPTIONS THEREFROM. NO PUBLIC MARKET FOR THE SHARES NOW EXISTS
OR IS ANTICIPATED TO DEVELOP. AN INVESTMENT IN THE SHARES IS NOT SUITABLE FOR
ANY PERSON REQUIRING INVESTMENT LIQUIDITY.
-----------
FOR RESIDENTS OF ALL STATES:
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF
THE EQUITABLE REAL ESTATE HYPERION HIGH-YIELD COMMERCIAL MORTGAGE FUND, INC. AND
THE TERMS OF THIS OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE SHARES
OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES
COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE
NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS MEMORANDUM. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-2-
274828.8
<PAGE>
THE SHARES OFFERED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR
AN INDEFINITE PERIOD OF TIME.
-----------
FOR FLORIDA RESIDENTS:
THE SHARES OFFERED HEREBY WILL BE SOLD TO, AND ACQUIRED BY, THE PURCHASER IN A
TRANSACTION EXEMPT UNDER SECTION 517.061(11) OF THE FLORIDA SECURITIES AND
INVESTOR PROTECTION ACT. THAT SECTION PROVIDES THAT WHEN SALES ARE MADE TO FIVE
OR MORE PERSONS, ANY SALE MADE PURSUANT TO SUCH SECTION IS VOIDABLE AT THE
OPTION OF THE PURCHASER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF
CONSIDERATION IS MADE BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER,
OR AN ESCROW AGENT OR WITHIN THREE (3) DAYS AFTER THE AVAILABILITY OF THAT
PRIVILEGE IS COMMUNICATED TO SUCH PURCHASER, WHICHEVER OCCURS LATER.
-----------
FOR NEW HAMPSHIRE RESIDENTS:
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE
HAS BEEN FILED NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A
PERSON IS LICENSED CONSTITUTES A FINDING BY THE DIRECTOR OF THE OFFICE OF
SECURITIES REGULATION THAT ANY DOCUMENT FILED UNDER THIS CHAPTER IS TRUE,
COMPLETE, AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN
EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT
THE DIRECTOR OF THE OFFICE OF SECURITIES REGULATION HAS PASSED IN ANY WAY UPON
THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY
PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO
ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT
WITH THE PROVISIONS OF THIS SECTION.
-----------
-3-
274828.8
<PAGE>
PRIVATE PLACEMENT MEMORANDUM SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Private Placement
Memorandum. Investors should carefully consider the information set forth under
the heading "Risk Considerations" in this Private Placement Memorandum Summary.
The Fund Equitable Real Estate Hyperion High-Yield
Commercial Mortgage Fund, Inc. (the "Fund")
is a newly organized non-diversified
closed-end management investment company.
The Fund expects to distribute substantially
all of its net assets on or shortly before
December 31, 2005, and thereafter to
terminate. The Board of Directors, however,
may at its sole discretion extend such date
two years until December 31, 2007 if it
determines that such extension is in the
best interests of the Fund and its
shareholders. See "The Fund and its
Objective, Policies and Risks."
The Offering The Fund is offering 25 million shares of
common stock at an offering price of $10.00
per share. The Fund has adopted, as a
fundamental policy, a prohibition on the
offering of additional Fund shares following
the close of the offering. Approval of a
majority of the Fund's shareholders, as
defined in the Investment Company Act of
1940, is required prior to the offering of
additional shares of the Fund. See
"Dividends and Distribution" and " Capital
Stock of the Fund."
Investment Objective
and Policies The Fund's investment objective is to
provide high total return primarily from
current income. No assurance can be given
that the Fund's objective will be achieved.
See "Investment Objective."
The Fund will seek to achieve its objective
by investing, under normal circumstances,
primarily in "high-yielding" commercial
mortgage-backed securities that are rated
"BB" or below by a nationally recognized
statistical rating organization or are
unrated and which represent interests in or
are secured by mortgage loans on commercial
real property, such as industrial and
warehouse properties, office buildings,
retail space and shopping malls, single and
multifamily properties and cooperative
apartments, hotels and motels, nursing
homes, hospitals and senior living centers,
mobile home parks and manufactured home
communities ("Commercial Mortgage-Backed
Securities"). Under current market
conditions, at least 65% of the Fund's
assets will be invested in such Commercial
Mortgage-Backed Securities. The Fund's
portfolio is expected to consist primarily
of securities with stated maturities of 2-20
years. See "Commercial Mortgage-Backed
Securities."
The Fund may also invest in other
mortgage-related securities or assets,
including commercial mortgage loans
("Commercial Mortgage Loans"), mezzanine
capital in real estate financed transactions
("Mezzanine Capital"), collateralized
mortgage obligations, mortgage pass-through
certificates and debt securities of real
estate investment trusts, as well as
securities issued by the U.S. Government or
its agencies and instrumentalities.
Additionally, the Fund reserves the right to
invest without limitation in
investment-grade mortgage-related securities
and money market instruments for temporary
defensive purposes.
-4-
274828.8
<PAGE>
Investment Adviser Equitable Real Estate Hyperion Capital
Advisors, L.L.C. (the "Adviser") will act as
the Fund's investment adviser. The Fund will
pay the Adviser a monthly fee at an annual
rate of .65% of the average weekly net asset
value of the Fund. See "Management of the
Fund."
Administrator Equitable Real Estate Hyperion Capital
Advisors, L.L.C., Inc. will act as the
Fund's administrator (the "Administrator").
The Fund will pay the Administrator a
monthly fee at an annual rate of .20% of the
average weekly net assets of the Fund. See
"Management of the Fund."
Distributions The Fund intends to distribute monthly all
or substantially all of its net investment
income to holders of the Fund's Common
Stock. It is expected that the initial
dividend on shares of the Fund's Common
Stock will be declared approximately 45 days
and paid approximately 60 days after
completion of this offering. See "Taxes."
Estimated Expenses The Fund's annual operating expenses,
including advisory and administrative fees
and other expenses (excluding interest
expenses), are estimated to be approximately
1.0% in its first full year of operations.
Estimated offering expenses of $15,000 will
be charged to capital upon completion of the
offering of the common stock. Organizational
expenses are estimated to be $85,000 and
will be amortized over a period not to
exceed 60 months from the date the Fund
commences operations. See "Summary of the
Fund's Expenses" and "Management of the
Fund."
Repurchase of Shares Beginning three years after this offering,
the Board of Directors of the Fund may, in
its sole discretion and from time to time,
consider share repurchases pursuant to rules
of the Securities and Exchange Commission
which permit discretionary tender offers and
repurchase offers. There can be no assurance
that the Fund will in fact redeem any of its
Shares. See "Discretionary Tender Offers and
Repurchase Offers".
Listing The Shares will not be listed on a stock
exchange. It is not anticipated that a
market for the Shares will develop.
Fund Termination The Fund expects to distribute substantially
all of its net assets on or prior to
December 31, 2005, unless extended for two
years until December 31, 2007 by the Board
of Directors. Prior thereto, the Fund's
Board of Directors will determine whether it
is in the best interests of the shareholders
to permit the Fund to terminate
automatically in accordance with its charter
by considering such factors as the
expectations of shareholders, current market
conditions and the then current net asset
value of the Fund. Shareholders will be
notified in advance of such termination of
procedures for receiving the final
liquidating distribution. The Fund expects
that no fee will be imposed in connection
with its termination and liquidation.
Risk Considerations Investment in the Fund involves special
considerations as the Fund is a closed-end
investment company with no history of
operations and invests in securities with
special risk characteristics. Currently the
only other investment company client of the
Adviser is Equitable Real Estate Hyperion
Mortgage Opportunity Fund, Inc., an open-end
management investment company. For its
investors, the Fund is intended to be a
long-term investment. No trading market
exists or is expected to exist for the
Shares.
-5-
274828.8
<PAGE>
Non-diversification. An investment in the
Fund's Common Stock cannot be considered a
complete investment program. Because the
Fund's investment portfolio will be
non-diversified, the shares may be subject
to greater risk than the shares of a
closed-end investment company whose
portfolio is diversified.
Commercial Mortgage-Backed Securities. The
Fund will invest primarily in below
investment grade or unrated Commercial
Mortgage-Backed Securities. Investors should
consider the risks associated with investing
in Commercial Mortgage-Backed Securities and
other mortgage-related securities which may
involve the risks of delinquent payments of
interest and principal, early prepayments
and potential unrecoverable principal loss
from the sale of foreclosed property.
Additionally, by investing in Commercial
Mortgage Loans, the Fund may acquire rights
of equity in real estate through its
holdings. See "Taxes" for a discussion of
the federal tax implications of such
holdings. The management and disposition of
these equity interests may pose additional
risks to the principal investments of the
Fund. See "Risk Considerations."
Investing in Lower Credit Quality
Securities. Investors should recognize that
below investment-grade and unrated
Commercial Mortgage-Backed Securities and
other mortgage-related securities in which
the Fund will invest have speculative
characteristics. The prices of lower credit
quality securities have been found to be
less sensitive to interest rate changes than
more highly rated investments, but more
sensitive to adverse economic downturns or
individual issuer developments. A projection
of an economic downturn or of a period of
rising interest rates, for example, could
cause a decline in the price of lower credit
quality securities because the advent of a
recession could lessen the ability of
obligors of mortgages underlying such
investments to make principal and interest
payments. In such event, existing credit
supports may be insufficient to protect loss
of principal.
Illiquid Securities. The Fund may invest in
securities such as below investment grade
Commercial Mortgage-Backed Securities that
generally lack an established secondary
trading market or are otherwise considered
illiquid. Liquidity of a security refers to
the ability to easily dispose of securities
and the price to be obtained, and does not
necessarily relate to the credit risk or
likelihood of receipt of cash at maturity.
Illiquid securities may trade at a discount
from comparable, more liquid investments.
The Commercial Mortgage-Backed Securities
and other mortgage-related securities which
the Fund intends to acquire may be less
marketable or in some instances illiquid
because of the absence of registration under
the federal securities laws, contractual
restrictions on transfer and the small size
of the issue (relative to the issues of
comparable interests). There is no limit on
the percentage of the Fund's assets that may
be invested in illiquid securities. See
"Risk Considerations."
Other Investment Management Techniques. The
Fund may use various other investment
management techniques that also involve
special considerations including engaging in
hedging transactions, calls and puts,
options, futures contracts, when-issued
purchases and making forward commitments,
entering into repurchase agreements, reverse
repurchase agreements and dollar rolls and
may engage in short sales and other hedging
transactions. For further
-6-
274828.8
<PAGE>
discussion of these practices and the
associated risks and special considerations,
see "Risk Considerations."
Market Value of Assets. The market values of
the Fund's assets will generally fluctuate
inversely with changes in prevailing
interests rates and directly with the
perceived credit quality of such assets. To
the extent the various hedging techniques
and active portfolio management employed by
the Fund do not offset these changes, the
net asset value of the Fund's Shares will
also fluctuate in relation to these changes.
The various investment techniques employed
by the Fund and the different
characteristics of particular securities in
which the Fund may invest make it difficult
to predict precisely the impact of interest
rate and credit quality changes on the net
asset value of the Shares. Market value may
also be impaired by actual principal losses
resulting from collateral foreclosures and
sales.
-7-
274828.8
<PAGE>
-----------------------------------------------------------------------------
SUMMARY OF THE FUND'S EXPENSES
-----------------------------------------------------------------------------
The expense summary below was developed to help you make your
investment decisions. You should consider this expense information along with
other important information in this Private Placement Memorandum. including the
Fund's investment objective.
Estimated Annual Fund Expenses
(as a percentage of average daily net assets)
Investment Advisory Fees .65%
Other Expenses .35%
(including Administration Fees .20%)
Total Annual Fund Operating Expenses 1.00%
Example:
A shareholder would pay the following expenses on a $1,000 investment
in the Fund, assuming a 5% annual return:
1 Year 3 Years
$10 $31.50
The purpose of the expense table provided above is to assist investors
in understanding the various costs and expenses that an investor in the
Fund would bear directly or indirectly. The expenses reflected above
are estimates of the expenses the Fund will incur during its first
fiscal year. For a further discussion of these fees, see "Management of
the Fund."
The "Example" set forth above should not be considered a representation
of future expenses; actual expenses may be greater or lesser than those
shown.
-8-
274828.8
<PAGE>
------------------------------------------------------------------------------
USE OF PROCEEDS
------------------------------------------------------------------------------
The net proceeds of this offering, after deduction of the
organizational and offering expenses (estimated to be $100,000), will be
invested in accordance with the policies set forth under "Investment Policies."
A portion of the organization and offering expenses of the Fund has been
advanced by the Adviser and may be repaid by the Fund upon closing of this
offering.
The Fund estimates that the net proceeds of this offering will be fully
invested in accordance with the Fund's investment objective and policies within
six months to one year of the initial offering. Pending such investment, the
proceeds may be invested in U.S. Government securities or short-term investment
grade debt obligations or money market instruments. See "Investment Policies."
-----------------------------------------------------------------------------
THE FUND AND ITS OBJECTIVE, POLICIES AND RISKS
-----------------------------------------------------------------------------
The Fund
The Fund is a closed-end, non-diversified management investment company
that was incorporated on September 12, 1995 under the laws of the State of
Maryland. The Fund intends to allocate the net proceeds of the offering in
accordance with the investment objective and policies as described below. The
investment adviser believes that the Fund will fully invest the proceeds of the
offering within one year depending on market conditions. The Fund expects to
distribute substantially all of its net assets on or shortly before December 31,
2005, and thereafter to terminate, unless extended by the Board of Directors for
two years until December 31, 2007 upon determining that such extension is in the
best interests of the shareholders. The distribution and termination may require
shareholder approval.
Investment Objective
The Fund's primary investment objective is to provide high total return
primarily from current income. The Fund will seek to achieve its objective by
investing, under normal circumstances, primarily in "high-yielding" Commercial
Mortgage-Backed Securities that are rated below investment grade (e.g., BB or
below) by a nationally recognized statistical rating organization or that are
unrated. The Fund may also invest in other mortgage-related securities or assets
including Commercial Mortgage Loans, Mezzanine Capital, collateralized mortgage
obligations, mortgage pass-through certificates and debt securities of real
estate investment trusts, as well as securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. See "Risk Considerations -
Lower Rated and Unrated Securities." The investment objective of the Fund is
fundamental and may not be changed without approval by the shareholders of the
Fund. The Fund's investment policies indicated below (unlike its investment
objective) are not fundamental and may be changed by the Fund's Board of
Directors without shareholder approval. The Fund will give notice to
shareholders thirty days in advance of a change in a non-fundamental investment
policy. Under current market conditions, at least 65% of the Fund's assets will
be invested in below investment grade or unrated Commercial Mortgage-Backed
Securities. No assurance can be given that the Fund's objective will be
achieved. Like all investors in interest bearing securities, the Fund is exposed
to risk that the prices of individual securities held by the portfolio may
fluctuate, in some cases significantly, in response to changes in credit
conditions and prevailing levels of interest rates.
See "Risk Considerations."
Investment Policies
The Fund seeks to achieve its investment objective by
investing, under normal circumstances, primarily in "high-yielding" Commercial
Mortgage-Backed Securities that are rated below investment grade or
-9-
274828.8
<PAGE>
that are unrated. Under normal market conditions, the Fund will have at least
65% of its assets invested in such Commercial Mortgage-Backed Securities. The
other securities in which the Fund may invest include Commercial Mortgage Loans,
Mezzanine Capital, obligations of the U.S. Government and its agencies and
instrumentalities, collateralized mortgage obligations ("CMOs"), asset-backed
securities, other mortgage pass-through certificates, and debt securities of
real estate investment trusts. The majority of assets in which the Fund will
invest are expected to be rated BB or below. Investments in lower rated
securities or unrated securities of equivalent credit quality are subject to
special risks, including a greater risk of loss of principal and non-payment of
interest. An investor should carefully consider these factors before purchasing
shares of Common Stock of the Fund.
In determining which mortgage-backed securities the Fund will purchase,
the Adviser will consider, among other factors, the following: creditworthiness
of the borrower, characteristics of the underlying mortgage loan, including the
loan-to-value ratio ("LTV") and debt service coverage ratio, loan seasoning, and
refinancing risk; characteristics of the underlying property, including
diversity of the loan pool, occupancy and leasing, and competitiveness in the
pertinent market; economic, environmental and local considerations; deal
structure, including historical performance of the originator, subordination
percentages and reserve fund balances; and structural participants such as
administrators and servicers.
In addition to examining the relative value of the investments as
indicated above, the Adviser's disciplined approach to investments for the
Fund's portfolio will include considerable interaction with rating agencies,
servicers and special servicers, conducting its own real estate due diligence,
reviewing third party due diligence of the underlying mortgage securities,
extensive review of due diligence by underwriters and rating agencies,
confirmation of debt service coverage ratios and stress testing of security cash
flows. The Adviser also will select investments which will vary the portfolio by
underlying property types and geographic regions.
The Fund may invest its assets without limitation in (i) cash,
(ii) short-term, investment-grade debt obligations or money market instruments
or (iii) securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities for the following cash management reasons: (1) liquidation
of Fund assets and pending reinvestment of the proceeds in accordance with the
Fund's investment objective and policies; (2) to pay distributions to
shareholders and operating expenses; and (3) to meet its obligations under any
tender offer or share repurchases. In addition, the Fund may take a temporary
defensive posture and invest without limitation in the securities listed above
at such times as the Adviser, in its sole discretion, believes that it is in the
best interest of the Fund's shareholders to assume such a defensive posture. To
the extent that the Fund invests in such instruments, it may not achieve its
investment objective.
The Fund may also employ various hedging techniques, including
interest rate transactions, that will affect the Fund's average duration. (See
"Risk Considerations -- Hedging Transactions.") In addition, the Fund may use
various techniques and investments to increase or decrease its exposure to
changing security prices, interest rates or other factors that affect security
values. These techniques and investments may involve derivative transactions
such as buying and selling options and futures contracts, selling securities
short and investments in mortgage-backed securities. The Fund may use these
practices to adjust the risk and return characteristics of the Fund's portfolio.
However, these techniques or investments may result in a loss, regardless of
whether the intent was to reduce risk or increase return, with unexpected
changes in market conditions or if the counterparty to the transaction does not
perform as promised. In addition, these techniques or investments may increase
the volatility of the Fund and may involve a small investment of cash relative
to the magnitude of the risk assumed.
The following is a discussion of the various investments
eligible to be purchased by the Fund and the investment techniques anticipated
to be employed by the Fund.
(1) Commercial Mortgage-Backed Securities -- Commercial
Mortgage-Backed Securities are generally multi-class debt or pass-through
securities backed by a mortgage loan or pool of mortgage loans secured by
commercial property, such as industrial and warehouse properties, office
buildings, retail centers and shopping malls, multi-family properties and
cooperative apartments, hotels and motels, nursing homes, hospitals, senior
living centers, manufactured living communities and mobile home parks. Assets
underlying
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<PAGE>
Commercial Mortgage-Backed Securities may relate to many properties, only a few
properties, or to a single property. Each commercial mortgage loan that
underlies Commercial Mortgage-Backed Securities has certain distinct
characteristics.
Commercial mortgage loans are sometimes not amortizing and
often not fully amortizing. At their maturity date, repayment of the remaining
principal balance or "balloon" is due and is repaid through the attainment of an
additional loan, the sale of the property or the contribution of additional
capital. Unlike most single family residential mortgages, commercial real
property loans often contain provisions that substantially reduce the likelihood
that they will be prepaid. The provisions generally impose significant
prepayment penalties on loans and, in some cases, there may be prohibitions on
principal prepayments for several years following origination. This difference
in prepayment exposure is significant due to the extraordinarily high levels of
refinancing of traditional residential mortgages experienced over the past years
when mortgage rates reached a 25 year low. Changing real estate markets may
adversely affect both the value of the underlying collateral and the borrower's
ability to meet contractual obligations, either of which may lead to
delinquencies, defaults, modifications or foreclosure that in turn may lead to
the realization of credit losses in the Commercial Mortgage-Backed Security. See
"Risk Considerations."
Commercial Mortgage-Backed Securities have been issued in
public and private transactions by a variety of public and private issuers.
Non-governmental entities that have issued or sponsored Commercial
Mortgage-Backed Securities offerings include owners of commercial properties,
originators of, and investors in, mortgage loans, savings and loan associations,
mortgage banks, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. The Fund may from time to time
purchase Commercial Mortgage-Backed Securities directly from issuers in
negotiated or non-negotiated transactions or from a holder of such Commercial
Mortgage-Backed Securities in the secondary market.
Commercial mortgage securitization generally are
senior/subordinated structures. The senior class investors are deemed to be
protected against potential losses on the underlying mortgage loans by the
subordinated class investors who take the first loss if there are defaults on
the underlying commercial mortgage loans. The Fund may, from time to time, but
does not under normal circumstances intend to invest in investment grade senior
classes of Commercial Mortgage-Backed Securities. Other protections, which may
benefit all of the classes including the subordinated classes may include issuer
guarantees, reserve funds, additional subordinated securities,
cross-collateralization, over-collateralization and the equity investor in the
underlying properties.
By adjusting the priority of interest and principal payments
on each class of a given Commercial Mortgage-Backed Security, issuers are able
to create senior investment grade securities and lower rated or unrated
subordinated securities tailored to meet the needs of sophisticated
institutional investors. In general, subordinated classes of Commercial
Mortgage-Backed Securities are entitled to receive repayment of principal only
after all required principal payments have been made to more senior classes and
have subordinate rights as to receipt of interest distributions. Such
subordinated classes are subject to a substantially greater risk of nonpayment
than are senior classes of Commercial Mortgage-Backed Securities. Even within a
class of subordinated securities, most Commercial Mortgage-Backed Securities are
structured with a hierarchy of levels (or "loss positions"). Loss positions
determine the order in which nonrecoverable losses of principal are applied to
the securities within a given structure. For instance, a first loss subordinated
security will absorb any principal losses before any higher loss subordinate
position. This type of structure allows a number of classes of securities to be
created with varying degrees of credit exposure, prepayment exposure and
potential total return. The Fund will invest in subordinated class securities
and may invest in first loss subordinated securities which may be unrated
securities.
The following table sets forth an example of the
prioritization of the payments to each class as well as the order of absorption
of credit losses, if any, on the underlying mortgage loans. The table provides a
general example of the current Commercial Mortgage-Backed Securities Structures,
however, the actual ratings, cash flows and loss absorption priorities of the
Commercial Mortgage-Backed Securities in which the Fund will invest may differ.
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<PAGE>
General Examples Of Commercial Mortgage-Backed Securities Structures
<TABLE>
<CAPTION>
Excess
Principal Loss
Typical Cash Flow Absorption
Class Rating Priority Priority
<S> <C> <C> <C>
Senior A-1 "AAA" 1st 8
Senior A-2 "AA" 2nd 7
Subordinated B-1 "A","BBB" 3rd, 4th 6
(The Fund will invest in the following classes.)
Subordinated B-2 "BB" 5th 5
Subordinated B-3 "B" 6th 4
Subordinated B-4 Unrated 7th 3
Reserve Fund/Letter of Credit N/A N/A 2
Equity Holder N/A N/A 1
</TABLE>
The Fund will only invest, under normal circumstances, in
those classes listed above with credit quality ratings at the time of investment
of BB or lower. See "Risk Considerations."
The rating assigned to a given issue and class of Commercial
Mortgage-Backed Securities is a product of many factors, including, but not
limited to, the structure of the security, the level of subordination, the
quality and adequacy of the collateral, projected losses from the collateral and
the past performance of the originators and servicing companies. The rating of
any Commercial Mortgage-Backed Security is determined to a substantial degree by
the debt service coverage ratio (i.e., the ratio of current net operating income
from the commercial properties, in the aggregate, to the current debt service
obligations on the properties) and the loan-to-value ("LTV") ratio of the pooled
properties. The amount of the securities issued in any one rating category is
determined by the rating agencies after a rigorous credit rating process which
includes analysis of the issuer, servicer and property manager, as well as
verification of the LTV and debt service coverage ratios. LTV ratios may be
particularly important in the case of commercial mortgages because most
commercial mortgage loans generally provide that the lender's sole remedy in the
event of a default is against the mortgaged property, and the lender is not
permitted to pursue remedies with respect to other assets of the borrower.
(2) Commercial Mortgage Loans -- A Commercial Mortgage Loan is
a legal instrument for pledging a described property interest for the repayment
of a loan under certain terms and conditions, and constitutes a lien on the
interest pledged. Commercial Mortgage Loans supply most of the capital employed
in real estate investments. A borrower gives a lender a lien on real estate as
assurance that the loan will be repaid. If the borrower fails to make payment,
the lender can foreclose the lien and acquire the real estate, thereby
offsetting the loss.
Under normal market conditions, the Fund will invest in
Commercial Mortgage Loans, which involve loans to a single obligor on a single
asset. Commercial Mortgage Loans, also known as whole loans, are nonrecourse to
the borrower and therefore repayment of a Commercial Mortgage Loan will be
dependent solely on the cash flow derived from, and the market or liquidation
value of, the underlying property. Other assets of the borrower, if any, would
generally not be available to the lender for payment of the Commercial Mortgage
Loan. Commercial real estate lending can be affected significantly by the
condition of the property, supply and demand in the market for the type of
property securing a Commercial Mortgage Loan and adverse economic conditions.
Market values may vary as a result of economic events or governmental
regulations outside the control of the borrower or lender, which events may
impact the future cash flow of the property.
A borrower may pledge real estate to more than one lender,
thereby creating several liens; in such cases, the order of the liens is
important. The first loan contract executed and recorded is the first Mortgage,
which has priority over all subsequent transactions. Second and third Mortgages
are sometimes
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<PAGE>
referred to as junior liens because they involve more lending risk than first
Mortgages, higher rates of interest are charged for secondary financing.
(3) Mezzanine Capital - Mezzanine Capital investments, which
may take the form of a subordinate mortgage or a preferred equity position,
represent the middle "tier" of a three (or more) tier commercial real estate
capital structure. Mezzanine Capital investments are subordinate to first
mortgage loans with respect to principal and interest payments and senior to the
equity ownership position with respect to principal and interest payments and/or
preferred cash flows. Capital losses experienced at the property level are
absorbed in reverse order of seniority, first by the equity ownership position,
second by the Mezzanine Capital position, and finally by the first mortgage
position. Typically, the equity ownership position will comprise 5-25% of the
capital structure, the Mezzanine Capital position 5-50%, and the first mortgage
position 40-75%. Mezzanine Capital positions often receive attractive current
income returns and high total return. See "Risk Considerations."
(4) Debt Securities Issued by Real Estate Investment Trusts --
The Fund intends to invest in debt securities issued by real estate investment
trusts ("REITs") ("REIT Debt Securities"). REITs are pooled investment vehicles
which invest primarily in income producing real estate or real estate related
loans or interests. Generally, REITs can be classified as equity REITs, mortgage
REITs, or hybrid REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest
payments. Hybrid REITs combine the characteristics of both equity REITs and
mortgage REITs.
REIT Debt Securities, for the most part, are general and
unsecured obligations. These securities typically have corporate bond features
such as semi-annual interest coupons, no amortization and strong prepayment
protection. Additionally, real estate related unsecured debt generally contains
covenants restricting the level of secured and total debt and requires a minimum
debt service coverage ratio and net worth level. See "Risk Considerations."
(5) Collateralized Mortgage Obligations -- Collateralized
mortgage obligations ("CMOs") are debt obligations or multi-class pass-through
certificates issued by agencies or instrumentalities of the U.S. Government or
by private originators or investors in mortgage loans. They are backed by
mortgage pass-through securities or pools of Commercial Loans (all such assets,
the "Mortgage Assets") and are evidenced by a series of bonds or certificates
issued in multiple classes or "tranches." The principal and interest on the
underlying Mortgage Assets may be allocated among the several classes of a
series of CMOs in many ways.
CMOs may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. CMOs that
are issued by a private governmental agency or instrumentality are generally
structured with one or more of the types of credit enhancements described below
under "Risk Considerations -- Credit Support." CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more of the types of credit enhancement described under
"Credit Support." In addition, CMOs issued by private sector entities may be
illiquid. See "Risk Considerations -- Restricted and Illiquid Securities." An
issuer of CMOs may elect to be treated, for federal income tax purposes, as a
Real Estate Mortgage Investment Conduit ("REMIC"). An issuer of CMOs issued
after 1991 generally must elect to be treated as a REMIC or it will be taxable
as a corporation under rules regarding taxable mortgage pools.
In a CMO, a series of bonds or certificates are issued in
multiple classes. Each class of CMOs, often referred to as a "tranche," may be
issued with a specific fixed or floating coupon rate and has a stated maturity
or final scheduled distribution date. Principal prepayments on the underlying
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final scheduled distribution dates. Interest is paid
or accrues on CMOs on a monthly, quarterly or semi-annual basis. The principal
of, and interest on, the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. The
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<PAGE>
general goal in allocating cash flows on Mortgage Assets to the various classes
of a CMO is to create certain tranches on which the expected cash flows have a
higher degree of predictability than the underlying Mortgage Assets. As a
general matter, the more predictable the cash flow is on a particular CMO
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on certain other Mortgage-Backed
Securities. As part of the process of creating more predictable cash flows on
certain tranches of a CMO, one or more tranches generally must be created that
absorb most of the changes in the cash flows on the underlying Mortgage Assets.
The yields on these tranches are generally higher than prevailing market yields
on Mortgage-Backed Securities with similar average lives. Because of the
uncertainty of the cash flows on these tranches, the market prices of, and
yields on, these tranches are more volatile. The Fund may purchase CMOs that
have been sold in public offerings registered under the 1933 Act or in private
placements. CMOs acquired in private placements will be subject to certain
restrictions on resale and accordingly will have limited marketability.
Subordinated CMOs. The Fund intends to invest in subordinated
tranches of CMOs. Subordinated tranches of CMOs are multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with defaults on the underlying assets
being borne first by the holders of the most subordinated class. Subordinated
tranches are entitled to receive repayment of principal only after all required
principal payments have been made on more senior tranches and also have
subordinate rights as to receipt of interest distributions. Such subordinated
tranches are subject to greater risk of non-payment than are more senior
tranches or CMOs backed by third party credit enhancement which may have limited
marketability. See "Risk Considerations."
CMOs Backed by Mortgages on Multi-Family Dwellings. The Fund
also intends to invest in CMOs backed by mortgages on multi-family dwellings.
Multi-family dwellings are residential properties consisting of five or more
units. Investment in CMOs backed by mortgages on multi-family dwellings involves
different investment considerations than investment in Mortgage-Backed
Securities backed by single-family homes due to such factors as the investment
character of the underlying asset and regulatory requirements. CMOs backed by
multi-family dwelling mortgages are subject to risks generally not associated
with mortgages on single family homes, including vacancy rates, increases in
operating expenses, regulatory requirements and environmental liability issues.
In addition, such CMOs may have limited marketability. See "Risk
Considerations."
"Planned Amortization Class" Bonds. Also included within the
category of CMOs are "Planned Amortization Class" ("PAC") Bonds. PAC Bonds are a
type of CMO tranche or series designed to provide relatively predictable
payments of principal provided that, among other things, the actual prepayment
experience on the underlying mortgage loans falls within a predefined range.
Because of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of Mortgage-Backed Securities. However, if the
actual prepayment experience on the underlying mortgage loans is at a rate
faster or slower than the predefined range or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted.
(6) Adjustable Rate Mortgage Securities ("ARMS") -- The Fund
intends to invest in ARMS which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates, ARMS can be
U.S. Government Agency Mortgage-Backed Securities, Agency Mortgage-Backed
Securities (which are securities backed by U.S. Government Agency
Mortgage-Backed Securities), or privately-issued Mortgage-Backed Securities
(which represent an interest in, or are collateralized by, a pool of mortgage
loans with variable rates of interest). Holding ARMS allows the Fund to
participate in increases in interest rates through periodic adjustments in the
interest rates underlying the mortgages, resulting in both higher current yields
and lower price fluctuations. However, the Fund will not benefit from such
increases if rates rise to the point where they would cause increases in the
interest rates on the mortgages underlying ARMS to exceed the maximum allowable
annual or lifetime reset limits. In addition, in periods of declining interest
rates, ARMS will experience declining yields.
Adjustable rate mortgages generally provide that the mortgage
interest rate may not be adjusted above or below a specified applicable lifetime
maximum or minimum rate. In addition, certain adjustable rate mortgages provide
for limitations on the maximum amount by which the mortgage interest rate may
adjust for
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<PAGE>
any single adjustment period. Other adjustable rate mortgages provide instead
for limitations on changes in the required monthly payment. In the event that a
monthly payment is not sufficient to pay the interest accruing on such an
adjustable rate mortgage, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
In the event that a monthly payment exceeds the sum of the interest accrued at
the applicable mortgage interest rate and the principal payment necessary to
amortize the outstanding principal balance over the remaining term of the loan,
the excess further reduces the principal balance of the adjustable rate
mortgages in the same manner as a prepayment. See "Risk Considerations."
(7) High Coupon Agency Mortgage-Backed Securities -- The Fund
may invest in High Coupon Agency Mortgage-Backed Securities which provide the
holder with a coupon that is higher at the time of purchase than the then
prevailing market rate yield. Such securities are purchased at a price greater
than their par value because the coupon is higher than the market rate. The
Adviser believes that High Coupon Agency Mortgage-Backed Securities offer
greater price stability than other Agency Mortgage-Backed Securities. Because of
shorter duration, the prices of High Coupon Agency Mortgage-Backed Securities
generally do not tend to rise as rapidly as those of traditional fixed rate
securities in declining interest rate environments and also tend to decline more
slowly in increasing interest rate environments until the point at which
prevailing mortgage interest rates are equal to the rates on the underlying
mortgage loans. Because the Fund may purchase High Coupon Agency Mortgage-Backed
Securities at a premium, a prepayment rate that is faster than expected will
reduce both market value and income from that which was anticipated and may
result in a loss of a portion of the amount invested, while a prepayment rate
that is slower than expected will have the opposite effect of increasing income
and market value. High Coupon Agency Mortgage-Backed Securities have a greater
probability of prepayment than lower coupon agency mortgage-backed securities
and the risk of prepayment is greater in a declining interest rate environment.
(8) U.S. Government Agency Mortgage-Backed Certificates --
These are obligations issued or guaranteed by the United States Government or
one of its agencies or instrumentalities, such as the Government National
Mortgage Association ("Ginnie Mae" or "GNMA"), the Federal National Mortgage
Association ("Fannie Mae" or "FNMA") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac" or "FHLMC"). FNMA and FHLMC obligations are not
backed by the full faith and credit of the U.S. Government as GNMA certificates
are, but FHLMC securities are supported by the instrumentality's limited right
to borrow from the United States Treasury, and obligations of the FNMA are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations. No assurance can be given that the U.S. Government
will provide financial support in the future to U.S. Government Agencies,
authorities or instrumentalities that are not supported by the full faith and
credit of the United States. U.S. Government Agency Mortgage-Backed Certificates
provide for the pass-through to investors of their pro-rata share of monthly
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans. Each of GNMA, FNMA and FHLMC
guarantees timely distributions of interest to certificate holders. GNMA and
FNMA guarantee timely distributions of scheduled principal. FHLMC has in the
past guaranteed only the ultimate collection of principal of the underlying
mortgage loan; however, FHLMC now issues Mortgage-Backed Securities ("FHLMC Gold
PCs") which also guarantee timely payment of scheduled monthly principal
reductions.
(9) U.S. Government Securities -- These include issues of the
U.S. Treasury, such as bills, certificates of indebtedness, notes and bonds, and
obligations of agencies and instrumentalities of the U.S. Government. U.S.
Treasury Securities are backed by the full faith and credit of the U.S.
Government, while other U.S. Government Securities are generally not.
(10) U.S. Government Agency Multi-Class Pass-Through
Securities -- Unlike CMOs, U.S. Government Agency Multi-Class Pass-Through
Securities, which include FNMA Guaranteed REMIC Pass-Through Certificates and
FHLMC Multi-Class Mortgage Participation Certificates, are ownership interests
in a pool of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multi-class pass-through securities.
(11) Asset-Backed Securities -- The securitization techniques
used to develop Mortgage- Backed Securities are now being applied to a broad
range of assets. Through the use of trusts and special
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<PAGE>
purpose corporations, various types of assets, primarily automobile and credit
card receivables, are being securitized in pass-through structures similar to
the mortgage pass-through structure or in a pay-through structure similar to the
CMO structure. The Fund may invest in these and other types of Asset-Backed
Securities that may be developed in the future. These investments will be
disclosed to shareholders in the Fund's annual, semi-annual and other reports.
In general, the collateral supporting Asset-Backed Securities
is of shorter maturity than mortgage loans and historically has been less likely
to experience substantial prepayments. Furthermore, the effect of prepayments on
securities that have shorter maturities, such as Asset-Backed Securities, is
much smaller than the effect of prepayments on securities having longer
maturities, such as Mortgage-Backed Securities. As with Mortgage-Backed
Securities, Asset-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties and use similar
credit enhancement techniques.
The Fund may invest in Asset-Backed Securities that at the
time of investment have ratings as low as B/B by any of the nationally
recognized statistical rating agencies. Securities rated B/B are considered
speculative and considered more susceptible to the adverse effects of changes in
economic conditions or to impairment in the future than are higher rated
securities.
Asset-Backed Securities present certain risks that are not
presented by Mortgage-Backed Securities. Primarily, these securities do not have
the benefit of the same type of security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to avoid payments of certain amounts owned on
the credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivable. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on the securities.
Investment Restrictions
The Fund has adopted the following fundamental investment
restrictions which may not be changed unless approved by a majority of the
outstanding shares of the Fund that would be affected by such change. The Fund
is subject to further investment restrictions that are set forth in the
Statement of Additional Information. The Fund may not:
1. Borrow money for the purpose of purchasing additional
investments (commonly referred to as "leverage").
This restriction shall not apply to (i) entering into
reverse repurchase agreements or dollar roll
agreements or issue senior securities in the form of
indebtedness or preferred stock or borrow money,
other than for the temporary purposes permitted by
the 1940 Act, in the aggregate in excess of 33 1/3%
(50% in the case of preferred stock) of the Fund's
total assets (after giving effect to any such
leveraging) and (ii) hedging techniques described in
the Private Placement Memorandum which may be deemed
to be borrowings. While borrowings (excluding items
in (ii) above) exceed 5% of the value of the Fund's
total assets, the Fund will not make any investments.
Interest paid on borrowings will reduce net income.
2. Pledge, hypothecate, mortgage or otherwise encumber
its assets other than to secure such issuances or
borrowings as set forth in restriction No. 1 above or
in connection with, to the extent permitted under the
1940 Act, good faith hedging transactions (including
interest rate swaps), reverse repurchase agreements,
dollar roll agreements, when issued and forward
commitment transactions.
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<PAGE>
3. Invest in securities of other investment companies,
except that (i) the Fund may purchase unit investment
trust securities where such unit investment trusts
meet the investment objective of the Fund and then
only up to 5% of the Fund's net assets, except as
they may be acquired as part of a merger,
consolidation or acquisition of assets and (ii) as
permitted by Section 12(d) of the Investment Company
Act of 1940 (the "1940 Act").
Risk Considerations
Lower Rated and Unrated Securities (commonly referred to as
"Junk") - Generally, lower rated or unrated securities of equivalent credit
quality offer a higher return potential than higher rated securities but involve
greater volatility of price and greater risk of loss of income and principal,
including the possibility of a default or bankruptcy of the issuers of such
securities. Lower rated securities and comparable unrated securities will likely
have larger uncertainties or major risk exposure to adverse conditions and are
predominantly speculative. The occurrence of adverse conditions and
uncertainties would likely reduce the value of securities held by the Fund, with
a commensurate effect on the value of the Fund's shares. While the market values
of lower rated securities and unrated securities of equivalent credit quality
tend to react less to fluctuations in interest rate levels than do those of
higher-rated securities, the market value of certain of these securities also
tend to be more sensitive to changes in economic conditions including interest
rate fluctuations, unemployment rates, inflation rates and negative investor
perception than higher-rated securities. In addition, lower rated securities and
unrated securities of equivalent credit quality generally present a higher
degree of credit risk. The Fund may incur additional expenses to the extent that
it is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings.
The weighted average credit quality of the Fund once it is fully
invested is expected to be B-BB. Securities which are rated Ba by Moody's, BB by
S&P, BB by Duff & Phelps Credit Rating Corporation ("D&P") or BB by Fitch
Investors Service, Inc. ("Fitch") (collectively referred to as the "Rating
Agencies") have speculative characteristics with respect to capacity to pay
interest and repay principal. Securities which are rated B generally lack
characteristics of a desirable investment, and assurance of interest and
principal payments over any long period of time may be small. Securities which
are rated Caa or CCC or below are of poor standing and highly speculative. Those
issues may be in default or present elements of danger with respect to principal
or interest. Securities rated C by Moody's, D by S&P, or the equivalent by D&P
or Fitch are in the lowest rating class. Such ratings indicate that payments are
in default, or that a bankruptcy petition has been filed with respect to the
issuer or that the issuer is regarded as having extremely poor prospects. A
general description of the ratings of Moody's, S&P, D&P and Fitch are set forth
in Appendix A. It is unlikely that future payments of principal or interest will
be made to the Fund with respect to these highly speculative securities other
than as a result of the sale of the securities or the foreclosure or other forms
of liquidation of the collateral underlying the securities.
In general, the ratings of the Rating Agencies represent the opinions
of these agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. It is possible that
an agency might not change its rating of a particular issue to reflect
subsequent events. These ratings will be used by the Fund as data in the
selection of portfolio securities, but the Fund also will rely upon the
independent advice of the Adviser to evaluate potential investments.
In order to calculate the average credit quality of the Fund, the Fund
will assign sequential numbers to each of the 10 rating categories from BB (Ba)
to Unrated, multiply the value of each instrument by the rating equivalent
number assigned to its lowest rating, sum all of such products, divide the
aggregate by the net asset value of the Portfolio and convert the number back to
its equivalent rating symbol. All securities rated less than B-, except for
securities rated D, shall have the same rating number. Securities rated D will
have a rating number of 0.
Tax Risks -- A discussion of tax risks attributable to the
Fund's anticipated acquisition of lower rated or unrated securities is included
in "Taxes."
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<PAGE>
Commercial Mortgage-Backed Securities -- Investments in
Commercial Mortgage-Backed Securities involve the credit risk of delinquency and
default. Delinquency refers to interruptions in the payment of interest and
principal. Default refers to the potential for unrecoverable principal loss from
the sale of foreclosed property. These risks include the risks inherent in the
commercial mortgage loans which support such Commercial Mortgage-Backed
Securities and the risks associated with direct ownership of real estate. This
may be especially true in the case of Commercial Mortgage-Backed Securities
secured by, or evidencing an interest in, a relatively small or less diverse
pool of commercial mortgage loans. The factors contributing to these risks
include the effects of general and local economic conditions on real estate
values, the conditions of specific industry segments, the ability of tenants to
make lease payments and the ability of a property to attract and retain tenants,
which in turn may be affected by local conditions such as oversupply of space or
a reduction of available space, the ability of the owner to provide adequate
maintenance and insurance, changes in management of the underlying commercial
property, energy costs, government regulations with respect to environmental,
zoning, rent control, bankruptcy and other matters, real estate and other taxes,
and prepayments of the underlying commercial mortgage loans (although such
prepayments generally occur less frequently than prepayments on residential
mortgage loans).
While the credit quality of the securities in which the Fund
invests will reflect the perceived appropriateness of future cash flows to meet
operating expenses, the underlying commercial properties may not be able to
continue to generate income to meet their operating expenses (mainly debt
services, lease payments, capital expenditures and tenant improvements) as a
result of any of the factors mentioned above. Consequently, the obligors under
commercial mortgages may be unable to make payments of principal and interest in
a timely fashion, increasing the risk of default on a related Commercial
Mortgage-Backed Security. In addition, the repayment of the commercial mortgage
loans underlying Commercial Mortgage-Backed Securities will typically depend
upon the future availability of financing and the stability of real estate
property values.
Most commercial mortgage loans are non-recourse obligations of
the borrower, meaning that the sole remedy of the lender in the event of a
default is to foreclose upon the collateral. As a result, in the event of
default by a borrower, recourse may be had only against the specific property
pledged to secure the loan and not against the borrower's other assets. If
borrowers are not able or willing to refinance or dispose of the property to pay
the principal balance due at maturity, payments on the subordinated classes of
the related Commercial Mortgage-Backed Securities are likely to be adversely
affected. The ultimate extent of the loss, if any, to the subordinated classes
may only be determined after a foreclosure of the mortgage encumbering the
property and if the mortgagee takes title to the property upon liquidation of
the property. Factors such as the title to the property, its physical conditions
and financial performance, as well as governmental disclosure requirements with
respect to the condition of the property, may make a third party unwilling to
purchase the property at a foreclosure sale or for a price sufficient to satisfy
the obligations with respect to the related Commercial Mortgage-Backed
Securities. The condition of a property may deteriorate during foreclosure
proceedings. Certain obligors on underlying mortgages may become subject to
bankruptcy proceedings, in which case the amount and timing of amounts due under
the related Commercial Mortgage-Backed Securities may be materially adversely
affected.
In general, any losses on a given property, the lien on which
is included in a Commercial Mortgage-Backed Security, will be absorbed first by
the equity holder of the property, then by a cash reserve fund or letter of
credit, if any, and then by the "first loss" subordinated security holder to the
extent of its principal balance. Because the Fund intends to invest in both
senior classes and subordinated classes of Commercial Mortgage-Backed
Securities, in the event of default the equity support, the reserve fund and any
debt classes junior to those in which the Fund invests will bear losses prior to
the Fund. However, there can be no assurance that the Fund will be able to
recover all of its investments in the securities it purchases. In addition, if
the underlying mortgage portfolio has been overvalued by the originator, or if
the values subsequently decline, the Fund may bear significant losses.
Commercial Mortgage Loans -- Commercial Mortgage Loans
generally lack standardized terms, which may complicate their structure.
Commercial properties themselves tend to be unique and are more difficult to
value than single family residential properties. Commercial Mortgage Loans also
tend to have shorter maturities than residential mortgage loans and may not be
fully amortizing, meaning that they may have a significant principal balance, or
"balloon," due on maturity.
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The timely payment of interest and principal on a Commercial
Mortgage Loan is secured by an income producing property and, therefore, is
dependent upon performance and payments by the lessees under the related leases
and the successful operation of the underlying property, rather than its
liquidation value. If the net operating income from the underlying property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
Commercial Mortgage Loan may be impaired. Furthermore, the liquidation value of
the property may be adversely affected by risks generally incident to interests
in real property, including changes in general or local economic conditions
and/or specific industry segments; declines in real estate values; declines in
rental or occupancy rates; increases in interest rates, real estate tax rates
and other operating expenses including energy costs; changes in governmental
rules, regulations and fiscal policies, including environmental legislation;
acts of God; and other factors which are beyond the borrower's, the lender's or
the property manager's control. Additionally, the borrower may be obligated to
cause standard hazard insurance to be maintained with respect to an underlying
property. Insurance with respect to extraordinary hazards such as earthquakes is
not always required, and insurance may not be available (or is available only at
prohibitively expensive rates) with respect to many other risks, including those
listed above. In addition, there is no assurance that any loss incurred will not
exceed the limits of policies obtained.
In addition, the borrower's ability to make payments in
respect of a Commercial Mortgage Loan largely depends on the ability of tenants
to perform under their rental obligations under existing leases and the ability
of the borrower to continue to lease a substantial portion of the property upon
terms which do not adversely affect the property's cash flow. As the leases
expire or lessees default, the demand for, and supply of, rental space in
general, from time to time, may affect the property's occupancy rate and the
rental rates obtained and concessions, if any, granted on new leases or
re-leases of space, which may cause fluctuations in the cash flow from the
operation of the property. Such fluctuations, may affect the amount and timing
of payments on the Commercial Mortgage Loan.
Furthermore, Commercial Mortgage Loans with balloon payments
involve a greater degree of risk of payment because the ability of a borrower to
make a balloon payment will depend upon its ability to either refinance the loan
or to sell the related property. The ability and desire of the borrower to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage rates at the time of sale or
refinancing, the borrower's equity in the property, the physical and financial
condition and operating history of the property, tax laws, prevailing general
economic and market conditions and the availability of credit for commercial
real estate projects, generally. In addition, the value of commercial properties
depends, in part, on the fitness of such properties for a particular purpose.
Thus, no assurance can be given that other parties will find such property
sufficient for the purpose for which it is currently being used.
Mezzanine Capital -- Investments in Mezzanine Capital involve
similar risks associated with investments in real estate and subordinated
mortgage investments. Such risks which are commonly associated with the general
and local economic conditions affecting the real estate market and the credit
risks of delinquency and default are discussed in "Risk
Considerations--Commercial Mortgage-Backed Securities" and "Risk
Considerations--Commercial Mortgage Loans" herein.
General Characteristics of Agency Mortgage-Backed Securities
-- The investment characteristics of Agency Mortgage-Backed Securities differ
from traditional debt securities because the volatility of Agency
Mortgage-Backed Securities is affected by changes in both prepayment rates and
interest rates. Interest payments and principal repayments on Agency
Mortgage-Backed Securities are made more frequently (usually monthly), and
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if the Fund
purchases Agency Mortgage-Backed Securities at a premium, a prepayment rate that
is faster than expected will reduce both the market value and income from that
which was anticipated, while a prepayment rate that is slower than expected will
have the opposite effect of increasing income and market value. Conversely, if
the Fund purchases Agency Mortgage-Backed Securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, income and market value. The Adviser will seek to reduce prepayment and
interest rate risks (and increase potential benefits) by investing in a variety
of such securities and by using hedging techniques.
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Prepayments on a pool of mortgage loans are influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, death, mortgagors' net
equity in the mortgaged properties and servicing decisions. Generally,
prepayments on fixed rate mortgage loans will increase during a period of
falling mortgage interest rates and decrease during a period of rising mortgage
interest rates. Accordingly, amounts available for reinvestment by the Fund are
likely to be greater during a period of declining mortgage interest rates and,
if general interest rates also decline, are likely to be reinvested at lower
interest rates than the Portfolio was earning on the Agency Mortgage-Backed
Securities that were prepaid.
All of the Agency Mortgage-Backed Securities in which the Fund
invests are traded in over-the-counter markets rather than on exchanges. The
size of spreads between bid and asked prices in over-the-counter markets for
Agency Mortgage-Backed Securities depends upon a number of factors, including
the outstanding principal amount of the particular security, the number of
dealers making markets in the security, the length of time that a particular
type of security has been trading in the market and the perceived volatility of
the price of the security. Some of the Agency Mortgage-Backed Securities in
which the Fund invests, in particular U.S. Government Agency Mortgaged-Backed
Securities backed by fixed rate mortgages having interest rates above current
market rates ("High Coupon Agency Mortgage-Backed Securities") and Stripped
Agency Mortgage Backed Securities, may trade with a wider spread between the bid
and asked quotations than do other fixed-income securities, such as U.S.
Government Securities or U.S. Government Agency Mortgage-Backed Securities
backed by fixed-rate mortgages having current market interest rates.
The spread between the bid and asked quotations is taken into
account, among other things, in the determination of the value of each security
held by the Fund and, therefore, in the determination of the net asset value per
share of the Fund. See "Determination of Net Asset Value; Valuation of Portfolio
Securities" in the Statement of Additional Information. If the Fund is forced on
short notice to sell a security for which the spread between bid and asked
quotations is wide, as a result of requests for redemption of a large number of
shares or for some other reason, the Fund might not be able to obtain the same
price for such security as it would if it were able to take a longer period of
time to seek the most efficient execution of its proposed sale.
Adjustable Rate Mortgage Securities ("ARMS") -- Unlike
investments in pools of fixed-income mortgages which decline in value during
periods of rising interest rates, investments in ARMS allow the Fund to
participate in increases in interest rates through periodic adjustments in the
interest rates on the underlying mortgages, resulting in both higher current
yields and lower price fluctuations. However, the Fund will not benefit from
increases in interest rates if interest rates rise to the point where they would
cause increases in the interest rates on the adjustable rate mortgages
underlying its ARMS to exceed the maximum allowable annual or lifetime reset
limits, which are described more fully below, for particular mortgages.
Adjustable rate mortgages eligible for inclusion in a mortgage
pool usually provide for a fixed initial mortgage interest rate for either the
first three, six, twelve or thirteen scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment, based, subject to the
applicable limitations discussed below, on changes in an applicable index.
Adjustable rate mortgages provide that the mortgage interest
rate may not be adjusted above some applicable lifetime maximum rate or below
some applicable lifetime minimum rate. In addition, certain adjustable rate
mortgages provide for limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Other adjustable rate
mortgages provide instead for limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an adjustable rate mortgage, any such excess interest is
added to the principal balance of the mortgage loan, which is repaid through
future monthly payments. In the event that a monthly payment exceeds the sum of
the interest accrued at the applicable mortgage interest rate and the principal
payment necessary to amortize the outstanding principal balance over the
remaining term of the loan, the excess further reduces the principal balance of
the adjustable rate mortgage in the same manner as a partial prepayment.
The index applicable to adjustable rate mortgages will
normally be either the One Year Treasury Index, the Cost of Funds Index or the
London Interbank Offered Rate ("LIBOR"), which are discussed further in the
Fund's SAI.
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<PAGE>
CMOs (Agency/Private Label) -- Each class of CMOs, often
referred to as a "tranche," may be issued with a specific fixed or floating
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on the Mortgage Assets may cause CMOs to be retired substantially
earlier than their stated maturities or final distribution dates. Interest is
paid or accrued on CMOs on a monthly, quarterly or semi-annual basis. The
principal of, and interest on, the Mortgage Assets may be allocated among the
several classes of a series of a CMO in many ways. The general goal sought to be
achieved in allocating cash flows on Mortgage Assets to the various classes of a
series of CMOs is to create certain tranches on which the expected cash flows
have a higher degree of predictability than the underlying Mortgage Assets. As a
general matter, the more predictable the cash flows are on a CMO tranche, the
lower the anticipated yield will be on that tranche at the time of issuance
relative to prevailing market yields on Agency Mortgage-Backed Securities. As
part of the process of creating more predictable cash flows on most of the
tranches in a series of CMOs, one or more tranches generally must be created
that absorb most of the volatility in the cash flows on the underlying Mortgage
Assets. The yields on these tranches are generally higher than prevailing market
yields on Agency Mortgage-Backed Securities with similar average lives. Because
of the uncertainty of the cash flows on these tranches, and the sensitivity
thereof to changes in prepayment rates on the underlying Mortgage Assets, the
market prices of, and yields on, these tranches tend to be highly volatile.
Subordinated Tranches of CMOs. The Fund may invest to a
significant degree in subordinated tranches of CMOs. Subordinated tranches of
CMOs are entitled to receive repayment of principal only after all required
principal payments have been made to more senior tranches and also have
subordinate rights as to receipt of interest distributions. Such subordinated
tranches are subject to a greater risk of nonpayment than are senior tranches or
CMOs backed by third party credit enhancement. In addition, an active secondary
market for such securities is not as well developed as the market for certain
other Mortgage-Backed Securities. Accordingly, such subordinated CMOs may have
limited marketability and there can be no assurance that a more efficient
secondary market will develop.
CMOs Backed by Mortgages on Multi-Family Dwellings. The Fund
may invest to a significant degree in CMOs backed by mortgages on multi-family
dwellings. Such mortgages are subject to risks generally not associated with
mortgages on single family homes, including vacancy rates, increases in
operating expenses, regulatory requirements and environmental liability
concerns. In addition, such securities may have limited marketability and there
can be no assurance that a more efficient secondary market will develop.
Multi-family dwellings can be affected significantly by supply and demand in the
market for the type of property securing the loan and therefore may be subject
to adverse economic conditions. Market values may vary as a result of economic
events or governmental regulations outside the control of the borrower or
lender, such as rent control laws, which impact the future cash flow of the
property. Mortgages on multi-family and commercial real estate properties often
are structured so that a substantial portion of the loan principal is to be
repaid at maturity. Repayment of such principal may depend on the ability of the
borrower to obtain new financing. CMOs backed by mortgages on multi-family
dwelling may be backed by fewer mortgages involving fewer borrowers than is the
case for Mortgage-Backed Securities backed by mortgages on single-family homes.
Accordingly, the event of a single default or insolvency of a single borrower
may have a greater adverse impact than would be the case for Mortgage-Backed
Securities backed by mortgages on single-family homes. Mortgages on multi-family
dwellings are often non-recourse to the borrower.
Credit Support. Mortgage-Backed Securities and Asset-Backed
Securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, such securities may contain elements of
credit support. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the pass-through of payments due on the underlying pool occurs in
a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Fund will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
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<PAGE>
The ratings of Mortgage-Backed Securities and Asset-Backed
Securities for which third-party credit enhancement provides liquidity
protection or protection against losses from default are generally dependent
upon the continued creditworthiness of the provider of the credit enhancement.
The ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such a security.
Restricted and Illiquid Securities -- Liquidity relates to the
ability of the Fund to readily dispose of securities and the price to be paid
therefor, but does not generally relate to credit risk or the likelihood of
receipt of cash at maturity. Illiquid securities are subject to legal or
contractual restrictions on disposition or lack an established secondary trading
market. The sale of restricted and illiquid securities often requires more time
and results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. If it qualifies, the Fund may purchase certain
restricted securities eligible for sale to qualified institutional buyers as
contemplated by Rule 144A under the 1933 Act or restricted securities eligible
for sale to institutional accredited investors under Regulation D under the 1933
Act.
REIT Debt Securities -- Investing in REIT Debt Securities
involves certain unique risks in addition to those risks associated with
investing in the real estate industry in general which include, among other
things, possible declines in the value of real estate; risks related to general
and local economic conditions; possible lack of availability of mortgage funds;
over-building; extended vacancies of properties; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs resulting
from the clean-up of, and liability to, third parties for damages resulting
from, environmental problems; casualty or condemnation losses; uninsured damages
from flood, earthquakes or other natural disasters; limitations on and
variations in rents; dependency on property management skill; the appeal of
properties to tenants; and changes in interest rates. Equity REITs may be
affected by changes in the value of the underlying property owned by the REITs
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified, and are subject
to the risks of financing projects. The Fund may invest in the debt securities
of new or unseasoned REIT issuers and it, therefore, may be difficult or
impossible for the Adviser to ascertain the value of each of such REITs'
underlying assets, management capabilities and growth prospects. In addition,
REITs are subject to heavy cash flow dependency, default by borrowers,
self-liquidation, and the possibilities of failing to qualify for the exemption
from tax or distributed income under the Internal Revenue Code of 1986, as
amended (the "Code") and failing to maintain their exemptions from the 1940 Act.
REITs whose underlying assets include long-term health care properties, such as
nursing, retirement and assisted-living homes, may be affected by federal
regulations concerning the health care industry.
REITs (especially mortgage REITs) and REIT Debt Securities are
subject to interest rate risks. When interest rates decline, the value of a REIT
investment in fixed rate obligations usually rises. Conversely, when interest
rates rise, the value of a REIT investment in fixed rate obligations can be
expected to decline. In contrast, as interest rates on adjustable rate mortgage
loans are reset periodically, yields on a REIT investment in such loans will
gradually align themselves to reflect changes in market interest rates, causing
the value of such investments to fluctuate less dramatically in response to
interest rate fluctuations than would investments in fixed rate obligations.
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<PAGE>
Repurchase Agreements -- The Fund may invest temporarily,
without limitation, in repurchase agreements, which are agreements pursuant to
which securities are acquired by the Fund from a third party with the commitment
that they will be repurchased by the seller at a fixed price on an agreed date.
These agreements may be made with respect to any of the portfolio securities in
which the Fund is authorized to invest. Repurchase agreements may be
characterized as loans by the Fund to the other party to the agreement that are
secured by the underlying securities. Repurchase agreements facilitate portfolio
management and allow the Fund to earn additional revenue. The Fund may enter
into repurchase agreements with (i) member banks of the Federal Reserve System
having total assets in excess of $500 million and (ii) securities dealers,
provided that such banks or dealers meet the creditworthiness standards
established by the Fund's Board of Directors ("Qualified Institutions"). The
Adviser will monitor the continued creditworthiness of Qualified Institutions,
subject to the oversight of the Fund's Board of Directors. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. The
collateral will be marked to market daily. Such agreements permit the Fund to
keep all its assets earning interest while retaining overnight flexibility in
pursuit of investments of a longer-term nature.
The use of repurchase agreements involves certain risks. For
example, if the seller of securities under a repurchase agreement defaults on
its obligation to repurchase the underlying securities, as a result of its
bankruptcy or otherwise, the Fund will seek to dispose of such securities, which
action could involve costs or delays. If the seller becomes insolvent and
subject to liquidation or reorganization under applicable bankruptcy or other
laws, the Fund's ability to dispose of the underlying securities may be
restricted. Also, it is possible that the Fund may not be able to substantiate
its interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by a custodian at all times in
an amount at least equal to the repurchase price, including accrued interest. If
the seller fails to repurchase the securities, the Fund may suffer a loss to the
extent proceeds from the sale of the underlying securities are less than the
repurchase price.
Lending of Securities -- The Fund may lend its portfolio
securities to Qualified Institutions. By lending its portfolio securities, the
Fund attempts to increase its income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that may
occur during the term of the loan will be for the account of the Fund.
The Fund will not lend portfolio securities if, as a result,
the aggregate of such loans exceeds 331/3% of the value of the Fund's total
assets (including such loans). All relevant facts and circumstances, including
the creditworthiness of the Qualified Institution, will be monitored by the
Adviser, and will be considered in making decisions with respect to lending of
securities, subject to review by the Fund's Board of Directors. The Fund may pay
reasonable negotiated fees in connection with loaned securities, so long as such
fees are set forth in a written contract and their reasonableness is determined
by the Fund's Board of Directors.
Borrowing - The Fund is authorized to borrow for emergency or
temporary purposes or for stock repurchases. The Fund will only borrow when the
Adviser believes that such borrowings will benefit the Fund after taking into
account considerations such as interest income and possible gains or losses upon
liquidation.
Hedging Transactions -- The Fund may enter into various
hedging transactions, such as interest rate swaps and the purchase or sale of
interest rate collars, caps and floors, to preserve a return or spread on a
particular investment within the portfolio or its entire portfolio and to manage
the effective maturity or interest rate sensitivity of its portfolio. Hedging
transactions may also be used to attempt to protect against possible declines in
the market value of the Fund's assets resulting from downward trends in the debt
securities markets (generally due to a rise in interest rates), to protect any
unrealized gains in the value of the Fund's portfolio securities, to facilitate
the sale of such securities or to establish a position in the securities markets
as a temporary substitute for purchasing particular securities. Any or all of
these techniques may be used at any time. There is no particular strategy that
requires use of one technique rather than another. Use of any particular hedging
transaction is a function of market conditions. Further hedging transactions may
be used by the Fund in the future as they are developed or deemed by the Board
of Directors of the Fund to be appropriate and in the best interest of investors
in the Fund. The Fund intends to use these transactions as a hedge against
market fluctuations and not as speculative investments. The Fund may also
purchase and sell (or write) options
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<PAGE>
on securities or indices of securities and may purchase or sell futures
contracts or options on futures contracts, as described below.
The Fund may employ a variety of hedging transactions as
described below and there can be no assurance that any such transaction used
will succeed. The principal risks relating to the use of hedging transactions
are: (a) possible imperfect correlation between changes in the value of the
hedging instrument and the changes in the market value of the underlying
securities; (b) possible lack of a liquid secondary market for closing out or
offsetting a hedging position; (c) losses on hedging positions resulting from
general movements in securities prices or interest rate movements not
anticipated by the Adviser, and (d) the possibility that the Fund could be
obligated to pay variation margin on a hedging position at a time when it would
be disadvantageous to do so. While the use of hedging transactions should tend
to minimize the risk of loss resulting from a decline in the value of hedged
portfolio securities, these transactions will tend to limit any potential that
could result from an increase in the value of these securities. Such
transactions also are subject to the risk that, if the Adviser is incorrect in
its forecast of interest rates, market values or other economic factors
affecting such a transaction, the Fund would have been better off if it had not
entered into the transaction.
Reverse Repurchase Agreements and Dollar Roll Agreements. The
Fund may enter into reverse repurchase agreements and dollar roll agreements
with the same parties with whom it may enter into repurchase agreements. Under a
reverse repurchase agreement or a dollar roll agreement, the Fund sells
securities and agrees to repurchase them, or substantially similar securities in
the case of a dollar roll agreement, at a mutually agreed upon date and price.
Under generally accepted accounting principles, reverse repurchase agreements
and dollar roll agreements are generally regarded as a form of borrowing. At the
time the Fund enters into a reverse repurchase agreement or a dollar roll
agreement, it will establish and maintain a segregated account with its
custodian containing securities from its portfolio having a value not less than
the repurchase price (including accrued interest). The Fund's ability to enter
into reverse repurchase agreements and dollar roll agreements is not limited
except by the requirement to maintain assets in segregated accounts. Reverse
repurchase agreements and dollar roll agreements involve the risk that the
market value of the securities retained in lieu of their sale by the Fund may
decline below the price of the securities the portfolio has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement or a dollar roll 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 or the dollar roll agreement may effectively be restricted pending
such decision. Investors should be aware that the Fund will enter into reverse
repurchase agreements, which may be considered to be a form of borrowing and,
therefore, involve the use of leverage. The use of leverage involves special
risks in that, while providing increased opportunities for income, the use of
leverage also means that any losses will be magnified. The use of reverse
repurchase agreements also involves certain fees and costs to the Fund.
When-Issued Purchases and Forward Commitments. The Fund may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When such transactions are negotiated, the
price is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date, which can be a month or more after
the date of the transaction. At the time the Fund makes the commitment to
purchase securities on a when-issued or forward commitment basis, it will record
the transaction and thereafter reflect the value of such securities in
determining its net asset value. At the time the Fund enters into a transaction
on a when-issued or forward commitment basis, a segregated account consisting of
cash or liquid securities equal to the value of the when-issued or forward
commitment securities will be established and maintained with a custodian and
will be marked-to-market daily. On the delivery date, the Fund will meet its
obligations from securities that are then maturing or sales of the securities
held in the segregated asset account and/or from then available cash flow.
When-issued securities and forward commitments may be sold prior to the
settlement date which can result in a gain or loss due to market fluctuation
subsequent to the time when the commitment was originally made. There is always
a risk that the securities may not be delivered and that the Fund may incur a
loss or will have lost the opportunity to invest the amount set aside for such
transaction in the segregated asset account. Settlements in the ordinary course,
which may take substantially more than five business days for mortgage-related
securities, are not treated by the Fund as when-issued or forward commitment
transactions and, accordingly, are not subject to the foregoing limitations even
though some of the risks described above may be present in such transactions.
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Short Sales. The Fund may also make short sales of securities
as a form of hedging to offset potential declines in long positions in similar
securities. A short sale is a transaction in which the Fund sells a security it
does not own in anticipation that the market price of that security will
decline.
When the Fund makes a short sale, it must borrow the security
sold short and deliver it to the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and is
obligated to return any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash, U.S.
Government securities or other highly liquid securities. The Fund will also be
required to deposit similar collateral with its Custodian to the extent, if any,
necessary so that the value of both collateral deposits in the aggregate is at
all times equal to at least 100% of the current market value of the security
sold short. Additionally, the Fund is due to receive any interest payments on
the deposited collateral during the term of the borrowing.
If the price of the security sold short increases between the
time of the short sale and the time the Fund replaces the borrowed security, the
Fund will incur a loss; conversely, if the price declines, the Fund will realize
a capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. Although the Fund's gain is limited to the
price at which it sold the security short, its potential loss is theoretically
unlimited.
The Fund will not make a short sale if, after giving effect
to such sale, the market value of all securities sold short exceeds 20% of the
value of its total assets or the Fund's aggregate short sales of a particular
class of securities exceeds 25% of the outstanding securities of that class. The
Fund may also make short sales "against the box" without regard to such
limitations. In this type of short sale, at the time of the sale, the Fund owns
or has the immediate and unconditional right to acquire at no additional cost
the identical securities.
Calls and Puts on Securities and Related Options. The Fund may
engage in various put and call transactions. The Fund may hedge through the use
of call options ("calls") on U.S. Treasury securities and Mortgage-Backed
Securities that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets. The Fund may purchase and sell calls on these
securities or indices thereof. Sales of calls will be "covered" while the call
is outstanding (i.e., the seller owns the securities subject to the call or
other securities acceptable for applicable escrow requirements). Some contracts
are "cash settled" (i.e., the seller pays the difference between the call and
market price in cash when the market price is higher). Cash-settled calls also
may be covered. The Fund does not intend to sell any cash-settled calls that are
not covered. If a call sold by the Fund is exercised, the Fund forgoes any
possible profit from an increase in the market price of the underlying security
over the exercise price.
The Fund may hedge through the use of put options ("puts")
that relate to U.S. Treasury securities and Commercial Mortgage-Backed
Securities (whether or not it holds such securities in its portfolio) or on
indices of securities. The Fund may purchase puts on these securities and may
also sell puts on these securities or indices if such puts are secured by
segregated liquid assets. The Fund will not sell puts if, as a result, more than
50% of the Fund's assets would be required to be segregated liquid assets. In
selling puts, there is a risk that the Fund may be required to buy the
underlying security at a disadvantageous price.
A put option gives the purchaser of the option the right to
sell and the writer, if the purchaser exercises his right, the obligation to buy
the underlying security at the exercise price during the option period. A call
option gives the purchaser of the option the right to buy and the writer, if the
purchaser exercises his right, the obligation to sell the underlying security at
the exercise price during the option period. The Fund is authorized to purchase
and sell exchange listed options and over-the-counter options ("OTC Options").
Listed options are issued by the Options Clearing Corporation ("OCC") which
guarantees the performance of the obligations of the parties to such options.
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<PAGE>
The purchaser of an option risks losing his entire investment
in a short period of time. If an option is not sold while it has remaining
value, or if during the life of an option the underlying security does not
appreciate, in the case of a call option, or depreciate, in the case of a put
option, the purchaser of such option may lose his entire investment. On the
other hand, given the same market conditions, if the potential purchaser of a
call option purchases the underlying security directly instead of purchasing a
call option or if the potential purchaser of a put option decides not to
purchase the put option but to sell the underlying security, such potential
option purchaser might have less of a loss. An option purchaser does not have
the choice of "waiting out" an unexpected decrease or increase in the underlying
securities' price beyond the expiration date of the option. The more that an
option is out-of-the-money and the shorter its remaining term to expiration, the
greater the risk that a purchaser of the option will lose all or part of his
investment. Further, except where the value of the remaining life of an option
may be realized in the secondary market, for an option purchase to be profitable
the market price of the underlying interest must exceed or be below the exercise
price by more than the premium and transaction costs paid in connection with the
purchase of the option and its sale or exercise.
The writer of an option assumes an obligation to deliver or
purchase the underlying interest represented by the option upon the assignment
to him of an exercise notice. The writer is subject to being assigned an
exercise notice at any time after he has written the option until the option
expires or until he has closed out his position by the offsetting purchase of an
identical option.
The Fund's ability to close out its position as a writer or
purchaser of an exchange-listed option is dependent upon the existence of a
liquid secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options) in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
listed by the OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms. OTC Options are
purchased from or sold to dealers or financial institutions which have entered
into direct agreement with the Fund. With OTC Options, such variables as
expiration date, exercise price and premium will be agreed upon between the Fund
and the transacting dealer, without the intermediation of a third party such as
the OCC. If the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option as written, the Fund would lose the premium paid for the option as
well as any anticipated benefit of the transaction. OTC Options and their
underlying securities may be considered illiquid. The Fund will engage in OTC
Option transactions only with primary United States Government securities
dealers recognized by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
Futures Contracts and Related Options. The Fund may buy or
sell financial futures contracts or purchase options on such futures as a hedge
against anticipated interest rate changes. A futures contract sale creates an
obligation by the Fund, as seller, to deliver the specified type of financial
instrument called for in the contract at a specified future time for a specified
price or, in "cash settlement" futures contracts, to pay to (or receive from)
the buyer in cash the difference between the price in the futures contract and
the market price of the instrument on the specified date, if the market price is
higher (or lower, as the case may be). Options on futures contracts are similar
to options on securities except that an option on a futures contract gives the
purchaser the right for the premium paid to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put).
The Fund's use of futures and options on futures will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading
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<PAGE>
Commission ("CFTC") with which the Fund must comply in order not to be deemed a
commodity pool operator within the meaning and intent of the Commodity Exchange
Act and the regulations promulgated thereunder.
Typically, an investment in a futures contract requires the
Fund to deposit with the applicable exchange or other specified financial
intermediary as security for its obligations an amount of cash or other
specified debt securities which initially is 1% to 5% of the face amount of the
contract and which thereafter fluctuates on a periodic basis as the value of the
contract fluctuates. An investment in options involves payment of a premium for
the option without any further obligation on the part of the Fund.
Regulations of the CFTC applicable to the Fund currently
require that all of the Fund's futures and options on futures transactions
constitute bona fide hedging transactions or be undertaken incidental to the
Fund's activities in the securities markets. In accordance with CFTC
regulations, the Fund may not purchase or sell futures contracts or options
thereon if immediately thereafter the sum of the amounts of initial margin
deposits on the Fund's existing futures positions and premiums paid for options
on futures would exceed 5% of the fair market value of the Fund's total assets.
The Adviser reserves the right to comply with such different standard as may be
established by CFTC rules and regulations with respect to the purchase or sale
of futures contracts or options thereon.
The variable degree of correlation between price movements of
futures contracts and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Fund's position. In addition, futures and futures option markets may not be
liquid in all circumstances. As a result, in volatile markets, the Fund may not
be able to close out a transaction without incurring losses substantially
greater than the initial deposit. Although the contemplated use of these
contracts should tend to minimize the risk of loss due to a decline in the value
of the hedge position, at the same time they tend to limit any potential gain
which might result from an increase in the value of such position. The ability
of the Fund to hedge successfully will depend on the Adviser's ability to
forecast pertinent market movements, which cannot be assured. Finally, the daily
deposit requirements in futures contracts create an ongoing greater potential
financial risk than do options purchased by the Fund, where the exposure is
limited to the cost of the initial premium. Losses due to hedging transactions
will reduce net asset value. Income earned by the Fund from its hedging
activities generally will be treated as capital gains.
Interest Rate Transactions. Interest rate swaps involve the
exchange with another party of commitments to pay or receive interest (e.g., an
exchange of floating rate payments for fixed rate payments). The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such interest
rate floor. An interest rate collar combines the elements of purchasing a cap
and selling a floor. The collar protects against an interest rate rise above the
maximum amount but gives up the benefits of an interest rate decline below the
minimum amount. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued on
a daily basis and an amount of cash or liquid securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's Custodian. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant to
the agreements related to the transactions.
The Fund may enter into interest rate transactions to preserve
a return or spread on a particular investment or portion of its portfolio, to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date, to effectively fix the rate of interest that it pays
on one or more borrowings or series of borrowings or to manage the effective
maturity or interest rate sensitivity of its portfolio. The Fund would use these
transactions as a hedge and not as a speculative investment. Interest rate
transactions are subject to risks comparable to those described above with
respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars and
floors on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Fund receiving or
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<PAGE>
paying, as the case may be, only the net amount of the two payments. Inasmuch as
these interest rate transactions are entered into for good faith hedging
purposes, and inasmuch as segregated accounts will be established with respect
to such transactions, the Adviser and the Fund believe such obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to its borrowing restrictions. The net amount of the excess, if any, of
the Fund's obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis and an amount of cash, U.S. Government
securities or other liquid high grade debt obligations having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by a custodian that satisfies the requirements of the 1940
Act. The Fund also will establish and maintain such segregated accounts with
respect to its total obligations under any interest rate swaps that are not
entered into on a net basis and with respect to any interest rate caps, collars
and floors that are written by the Fund.
The Fund will enter into interest rate transactions only with
banks and recognized securities dealers believed by the Adviser to present
minimal credit risks in accordance with guidelines established by the Fund's
Board of Directors. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements
related to the transaction.
Subordinated Securities -- Credit enhancement in the form of
subordination provides for the issuance of a senior class of certificates which
are generally rated at least AA/Aa by any of the Rating Agencies and one or more
classes of subordinated certificates which bear ratings lower than the senior
certificates or are non-rated. Holders of either the senior or the subordinated
certificates will ordinarily be entitled to a pro-rata share of distributions of
principal and interest. However, in the event that delinquencies and defaults on
the underlying mortgage loans cause a shortfall in the distributions to the
senior certificates, distributions otherwise payable to the subordinated
certificates will be distributed to the senior certificates to the extent
required. The characteristics of the mortgage loans and other credit enhancement
features will determine the size of the subordinated interest required to obtain
the desired rating on the senior securities.
The Fund may invest in subordinated certificates. To
compensate for the greater risk of loss on, and illiquidity of, the subordinated
certificates, the yields on subordinated certificates are generally
substantially higher than those available on senior certificates. To the extent
that actual delinquency and loss experience is greater than anticipated, the
return on the subordinated certificates will be adversely affected and, in
extreme cases, a portion of the principal could be lost; to the extent that such
experience is more favorable than anticipated, the return on the subordinated
certificates will be increased.
Non-Diversification -- As a non-diversified investment
company, the Fund is not subject to any statutory restriction under the 1940 Act
with respect to investing its assets in one or relatively few issuers.
Non-diversification may present greater risks for the Fund than in the case of a
diversified company. However, the Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Code. The Fund will be restricted
in that at the close of each quarter of the taxable year, at least 50% of the
value of its total assets must be represented by cash items (including
receivables), U.S. Government securities, regulated investment company
securities and other securities limited in respect of any one issuer to not more
than 5% in value of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of such issuer. In addition, at the close of each
quarter of any taxable year, not more than 25% in value of the Fund's total
assets may be invested in securities (other than regulated investment companies
or U.S. Government Securities) of any one issuer or of two or more issuers which
the Fund controls and which are engaged in the same or similar or related trades
or business. The limitations described in this paragraph regarding qualification
under Subchapter M of the Code as a "regulated investment company" are not
fundamental policies and may be revised to the extent applicable Federal income
tax requirements are revised. (See "Taxes" herein).
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<PAGE>
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MANAGEMENT OF THE FUND
-------------------------------------------------------------------------------
The Fund's Board of Directors, which is responsible for the
overall management and supervision of the Fund, has employed Equitable Real
Estate Hyperion Capital Advisors, L.L.C. to serve as investment adviser of the
Fund. For information about the Directors and Officers of the Fund, see
"Management of the Fund" in the Statement of Additional Information.
Investment Adviser
The Adviser provides advice to the Fund pursuant to an
Investment Advisory Agreement (the "Advisory Agreement"). Subject to such
policies as the Board of Directors of the Fund may determine, the Adviser makes
investment decisions for the Fund. For its services under the Advisory
Agreement, the Adviser receives from the Fund a fee accrued and paid monthly at
an annual rate equal to 0.65% of the Fund's average weekly net assets.
The Adviser is a limited liability corporation formed under
the Delaware Limited Liability Company Act and provides investment advisory,
administrative, distribution, financial and clerical services to clients whose
principal investment objective is to invest in Commercial Mortgage-Backed
Securities. The Adviser is owned equally by Equitable Real Estate Investment
Management, Inc. and Hyperion Capital Management, Inc. The Fund's primary
day-to-day investment management decisions will be made by an investment
committee, and no one person is primarily responsible for making recommendations
to that committee. Information regarding the Fund's performance is set forth in
the Fund's Annual Report, which will be available without charge, upon request,
from the Fund.
Equitable Real Estate Investment Management, Inc. ("EREIM"), a
subsidiary of The Equitable Life Assurance Society of the United States
("Equitable"), is a full service investment adviser with experience in investing
and managing commercial real estate assets for institutional lenders and owners.
As of December 31, 1994, EREIM managed approximately $35 billion in real estate
and mortgage investments for its clients, which include pensions funds,
international investors, insurance companies and other financial institutions.
EREIM also is one of the nation's leading advisors to pension funds regarding
investments in U.S. real estate. As of December 31, 1994, EREIM managed
approximately $11.0 billion in tax-exempt equity assets. The business address of
EREIM is 1150 Lake Hearn Drive, N.E., Suite 400, Atlanta, Georgia 30342-1152.
EREIM is headquartered in Atlanta, Georgia and has 14 regional
offices located throughout the United States. Through its network of regional
offices, EREIM manages more than 228 million square feet of retail, office,
industrial and apartment properties nationwide. The firm's regional operations
are full service offices with accounting, valuation and leasing professionals,
asset and property managers, and acquisition and disposition specialists.
EREIM's regional office system is designed to allow the company to monitor
buy-sell opportunities closely and act quickly on opportunities.
Hyperion Capital Management, Inc. ("HCM") is a wholly-owned
subsidiary of Hyperion Partners. Hyperion Partners primarily seeks investments
in the financial services, housing and real estate industries and assists in the
development of the properties in which it invests. The sole general partner of
Hyperion Partners is Hyperion Ventures, L.P., a Delaware limited partnership
("Hyperion Ventures"). Corporations owned principally by Lewis S. Ranieri,
Salvatore A. Ranieri and Scott A. Shay are the general partners of Hyperion
Ventures. Lewis S. Ranieri, a former Vice-Chairman of Salomon Brothers Inc., is
the Chairman of the Board of the Adviser and a Director of the Fund. Messrs.
Salvatore Ranieri and Shay are principally engaged in the management of the
affairs of Hyperion Ventures and its affiliated entities. Hyperion Capital
Management, Inc. as of April 30, 1995 acts as investment manager for clients
with assets in excess of $4 billion. The business address of HCM is 520 Madison
Avenue, New York, New York 10022.
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<PAGE>
The Adviser provides persons satisfactory to the Fund's Board
of Directors to serve as officers of the Fund. Such officers, as well as certain
other employees and directors of the Fund, may be directors and officers of
EREIM or HCM. The Statement of Additional Information contains general
background information regarding each director and principal officer of the
Fund, In addition, the Adviser provides the Fund with the unique expertise of
its two owners. With respect to the Adviser, EREIM's personnel provide
investment research, acquisition and asset management services to assist the
Adviser in underwriting, due diligence and portfolio management activities with
respect to the commercial real estate collateral underlying the Fund's
investments and provides the Adviser with personnel to perform real estate
evaluation services used in developing credit evaluation and pricing models. HCM
provides personnel to the Adviser to provide quantitative research, trading,
portfolio management, administration, compliance and finance services to the
Adviser in connection with its underwriting, due diligence and portfolio
management activities with respect to the securities in which the Fund may
invest. Further, HCM personnel provide quantitative modeling services to the
Adviser to assist in developing credit evaluation and pricing models.
Certain affiliates of the Adviser engage in real
estate-related activities, including but not limited to acting as the servicer
of a pool of Commercial Mortgage-Backed Securities; underwriting and issuing
Commercial Mortgage-Backed Securities; serving as market-maker of Commercial
Mortgage-Backed Securities; originating loans that underlie Commercial
Mortgage-Backed Securities; acting as the borrower of a mortgage that underlies
Commercial Mortgage-Backed Securities; and purchasing Commercial Mortgage-Backed
Securities for their own accounts or accounts over which they have control.
Because the 1940 Act prohibits certain affiliated transactions involving the
Fund and certain affiliates of the Fund, in the absence of exemptive relief, the
Fund may be prohibited from purchasing Commercial Mortgage-Backed Securities
with respect to which an affiliate of the Adviser acted in one or more of the
above capacities. The Adviser does not anticipate that this restriction will
have any significant adverse effect on its ability to manage the Fund. However,
the Adviser may seek exemptive relief to permit the Fund to engage in certain
transactions involving affiliates under conditions designed to eliminate or
minimize any potential conflict of interest.
Administrator
Pursuant to an Administrative Services Agreement, the Adviser
supervises the overall administration of the Fund, including, among other
responsibilities, the negotiation of contracts and fees with, and the monitoring
of performance and billings of, the independent contractors and agents of the
Fund; the preparation and filing of all documents required for compliance by the
Fund with applicable laws and regulations; and arranging for the maintenance of
books and records of the Fund. The Adviser provides persons satisfactory to the
Board of Directors of the Fund to serve as certain officers of the Fund. Such
officers may be directors, officers or employees of the Adviser or its
affiliates. For its administrative services to the Fund, the Advisers receives a
fee from the Fund at a rate equal, on an annual basis, to 0.20% of the average
weekly net assets of the Fund.
Expenses
The Fund will bear the expenses of its offering and organization, which
are not expected to exceed $100,000, including legal and accounting fees
relating to its organization and the costs of preparing solicitation materials.
Organizational expenses will be capitalized and amortized over a period of five
years. In addition to the expenses to be paid to the investment adviser,
administrator, transfer agent, dividend paying agent and custodian discussed
within this private placement memorandum, the Fund will pay all other ongoing
expenses, including but not limited to legal fees, accounting fees for
preparation of financial statements and tax returns, annual audits, brokerage
commissions, transfer taxes and other clearing, settlement and transactional
charges.
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<PAGE>
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DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------
The Fund will distribute to shareholders monthly dividends of all or a
portion of its net investment income. The Fund's initial dividend is expected to
be declared approximately 45 days after the date of the original issuance of the
Shares and to be paid approximately 60 days after the date of original issuance
of the Shares. For federal income tax purposes, the Fund will be required to
distribute at least 90% of its net investment income for each calendar year. The
Fund intends to distribute all or a portion of net capital gain (i.e., the
excess of net long-term capital gain over net short-term capital loss), if any,
at least once annually. "Net investment income," as used herein, includes all
dividends, interest, other ordinary income earned by the Fund on its portfolio
holdings and net short-term capital gains, net of the Fund's expenses. The
Fund's investment in below grade and non-rated securities incrementally
increases the risk of nonpayment or of significant delay in payments on such
securities, which non-payment or delay may have an adverse effect on the Fund's
income and distributions. In addition, in certain circumstances because of the
timing of recognition of capital gains and capital losses on dispositions of
securities, the Fund may be required to distribute all or a portion of capital
gains prior to its termination date.
Monthly notices as to the source or sources from which any dividend is
paid if not paid from net investment income will be provided in accordance with
Section 19(a) of the 1940 Act. The Fund expects that a final liquidating
distribution to shareholders of the net assets of the Fund will be made on, or
shortly before, the termination of the Fund. Such distribution and termination
may require shareholder approval.
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DETERMINATION OF NET ASSET VALUE
-------------------------------------------------------------------------------
The net asset value per Share will be determined as of the
time of the close of the New York Stock Exchange on the last day in each week on
which the New York Stock Exchange is open. For purposes of determining the net
asset value per Share, the value of the Fund's assets (less the Fund's
liabilities) will be divided by the number of outstanding Shares. See the
Statement of Additional Information for a discussion of the methodology used to
value the Fund's assets.
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CAPITAL STOCK OF THE FUND
-------------------------------------------------------------------------------
Description of Shares,
Voting Rights and Liabilities
Equitable Real Estate Hyperion High-Yield Commercial Mortgage
Fund, Inc. was incorporated in Maryland on September 12, 1995. The authorized
capital stock consists of one hundred million shares of common stock having a
par value of one-tenth of one cent ($.001) per share.
Shares have no preference, preemptive, conversion or similar
rights. Each share has equal voting, dividend, distribution and liquidation
rights. Shares when issued are fully paid and non-assessable, except as set
forth below. Shareholders are entitled to one vote for each share held on
matters on which they are entitled to vote. The Fund is not required, and has no
current intention, to hold annual meetings of
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<PAGE>
shareholders, although the Fund will hold special meetings of shareholders when
in the judgment of the Board of Directors it is necessary or desirable to submit
matters for a shareholder vote. Shareholders also have under certain
circumstances (e.g., upon application and submission of certain specified
documents to the Board of Directors by a specified number of shareholders) the
right to remove one or more Directors of the Fund. Shareholders also have the
right to remove one or more Directors without a meeting by a declaration in
writing by a specified number of shareholders. Upon liquidation or dissolution
of the Fund, shareholders would be entitled to share pro rata in the net assets
available for distribution to shareholders.
The Fund's charter provides that the Fund will terminate
automatically on December 31, 2005 unless extended by the Board of Directors for
two years until December 31, 2007 provided such extension is determined to be in
the best interests of the shareholders. In connection with such termination, the
Fund will liquidate all of its assets and distribute to Shareholders the net
proceeds therefrom after making appropriate provision for any liabilities of the
Fund. Prior thereto, the Fund's Board of Directors will determine whether it is
in the best interests of the shareholders to permit the Fund to terminate
automatically in accordance with its charter by considering such factors as the
expectations of shareholders, current market conditions and the then current net
asset value of the Fund. In the event that the Board of Directors determines
that under the circumstances, automatic termination and a consequent liquidation
of the Fund would not be in the best interests of shareholders, the Board of
Directors will call a special meeting of shareholders to consider an appropriate
charter amendment. The Fund's charter would require the affirmative vote of the
holders of at least 75% of outstanding shares to approve such an amendment. The
foregoing provisions of the Fund's charter are governed by the laws of the State
of Maryland and not the 1940 Act.
On September 12, 1995, Equitable Real Estate Hyperion Capital
Advisors, L.L.C. purchased $100,000 of the Fund's shares at an initial
subscription price of $10.00 per share. Based on the foregoing share ownership,
the vote of the Adviser may be determinative of the outcome of any matters
submitted to the vote of the shareholders of the Fund. As of the date of the
Private Placement Memorandum, Equitable Real Estate Hyperion Capital Advisors,
L.L.C. owned of record and beneficially 10,000 shares, constituting 100% of the
outstanding shares, and thus, until the offering of the shares is completed,
Equitable Real Estate Hyperion Capital Advisors, L.L.C. will control the Fund.
Annual and other meetings may be required with respect to such
additional matters relating to the Fund as may be required by the 1940 Act, any
registration of the Fund with the Securities and Exchange Commission or any
state, or as the Directors may consider necessary or desirable. Each Director
serves until the next meeting of the shareholders called for the purpose of
considering the election or reelection of such Director or of a successor to
such Director, and until the election and qualification of his or her successor,
elected at such a meeting, or until such Director sooner dies, resigns, retires
or is removed by the vote of the shareholders.
For further information with respect to the Fund and the
shares offered hereby, reference is made to the Fund's registration statement
filed with the Securities and Exchange Commission, including the exhibits
thereto. The Registration Statement and the exhibits thereto may be examined at
the Commission and copies thereof may be obtained upon payment of certain
duplicating fees.
The Fund has no present intention of offering additional
shares. Other offerings of the Fund's shares, if made, will require approval of
its Board of Directors. Any additional offering will be subject to the
requirement of the 1940 Act that shares may not be sold at a price below the
then current net asset value, exclusive of sales loads, except in connection
with an offering to existing shareholders or with consent of the holders of a
majority of the Fund's outstanding voting securities.
Discretionary Tender Offers and Repurchase Offers
The Board of Directors may elect to periodically redeem Shares of the
Fund in the manner described herein or as it otherwise may be permitted under
applicable laws. Commencing three years after the date of the offering of the
Fund's Shares and periodically thereafter, the Board of Directors of the Fund
may elect to make discretionary repurchase offers to all Fund shareholders.
Pursuant to a discretionary repurchase offer, the Fund will repurchase the
Shares for cash at the net asset value determined on the repurchase pricing date
and will pay
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<PAGE>
the holders of the Fund's Shares by the repurchase payment deadline, unless the
repurchase offer is suspended or postponed.
Beginning three years after this offering, the Fund's Board of
Directors may consider at any time repurchases of Shares or a tender offer at
net asset value for all or a portion of the outstanding Shares. Under certain
circumstances, it is possible that periodic purchases of, or tender offers for,
the Fund's Shares may cause a deemed dividend distribution under the Code as
defined herein to the remaining shareholders of the Fund. Each such tender offer
is subject to approval by the Board of Directors. Subject to the Fund's
fundamental policy with respect to leverage, the Fund may borrow to finance
repurchases or tenders. See "Investment Policies" and "Investment Restrictions."
Interest on any such borrowings will reduce the Fund's net income.
The acquisition of shares by the Fund will decrease the total assets of
the Fund and therefore will have the effect of increasing the Fund's expense
ratio. Because of the nature of the Fund's investment objectives, policies and
portfolio, the Adviser does not anticipate that repurchases and tenders should
interfere with the ability of the Fund to manage its investments in order to
seek its investment objectives, and does not anticipate any material difficulty
in borrowing money or disposing of portfolio securities to consummate share
repurchases and tenders.
If a tender offer is made, it is the announced policy of the Board of
Directors of the Fund, which may be changed by the Board of Directors, not to
accept tenders or effect repurchases if (1) such transactions, if consummated,
would impair the Fund's status as a regulated investment company under the Code
(which would make the Fund a taxable entity, causing the Fund's income to be
taxed at the corporate level in addition to the taxation of shareholders who
receive dividends from the Fund); (2) the Fund would not be able to borrow money
or liquidate portfolio securities in an orderly manner to fund such purchases
without creating a negative impact on the net asset value of the Fund to the
detriment on non-tendering shareholders; or (3) there is, in the Board of
Directors' judgment, (a) any material legal action or proceeding, instituted or
threatened, challenging such transaction or otherwise materially adversely
affecting the Fund, (b) a declaration of a banking moratorium by federal or
state authorities or any suspension of payment by banks generally in the United
States or New York State, (c) a material limitation affecting the Fund or the
issuers of its portfolio securities imposed by federal or state authorities on
the extension of credit by lending institutions, (d) the commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States or (e) any other events or conditions
which would have a material adverse effect on the Fund or its shareholders if
shares were repurchased. The Board of Directors may modify these conditions in
light of experience.
Any tender offer made by the Fund will be at net asset value per share
determined at the close of business on the day the offer ends, and will be made
in such manner as may be determined by the Board of Directors in compliance with
the Securities Exchange Act of 1934, the rules promulgated thereunder and other
applicable laws and regulations. Shareholders will be notified of such tender
offer by publication or mailing or both. As of the close of business each day
during the offer, the Fund will calculate its net asset value and make its
calculation available to shareholders at the telephone number specified in the
offering statement. When a tender offer is authorized by the Fund's Board of
Directors, a shareholder wishing to accept the offer will be required to tender
all of the Shares owned by such shareholder (or attributed to the shareholder
for Federal income tax purposes under Section 318 of the Code) (the "Tender
Shares"). Failure by a shareholder to tender all such Shares could result in
adverse tax consequences of such shareholder and all other shareholders. The
Fund will purchase Tender Shares in accordance with the terms of the offer
unless it determines to accept none of them (based upon one of the conditions of
the tender offer as summarized above). Each shareholder tendering Shares will be
required to submit a check in the amount of $25.00, payable to the Transfer
Agent, which will be used to help defray the costs associated with effecting the
tender offer. The $25.00 fee will be imposed regardless of the number of Shares
purchased. The Fund expects that its cost of effecting a tender offer will
exceed the aggregate of all service charges received from shareholders who
tender their Shares.
Costs associated with the tender will be charged against capital.
Tender Shares that have been accepted and purchased by the Fund will be
held in its treasury until reissued by the Board of Directors. Treasury shares
will be recorded and reported as an offset to shareholders'
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<PAGE>
equity and accordingly will reduce the Fund's aggregate assets. If Treasury
shares are retired, issued and outstanding Shares and capital in excess of par
will be reduced.
Limited Transferability of Shares
The Fund does not intend to list its Shares on a stock exchange and
therefore it is not anticipated that a market for the Shares will develop.
Hyperion Distributors, Inc., although not obligated to do so, may in its sole
discretion, elect to assist a shareholder in the Fund to transfer his or her
interest in the Fund by matching a prospective buyer with a seller of shares.
The transfer of any such Shares will be done at the then current net asset value
of the Fund's Shares and may only be sold under an exemption from the
registration requirements of the Securities Act because the Fund's Shares have
not been registered under the Securities Act. The availability of such exemption
is dependent, in part, upon the "investment intent" of each new investor and the
suitability of such an investment for him.
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TAXES
-------------------------------------------------------------------------------
The following summary reflects the existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and other relevant federal income
tax authorities as of the date of this Private Placement Memorandum. The federal
income tax consequences described below are merely statements of general tax
principles. The discussion does not deal with the federal income tax
consequences applicable to all categories of investors, some of whom may be
subject to special rules. A shareholder in the Fund should consult his or her
own tax adviser concerning these matters.
The Fund intends to qualify and to be treated as a regulated investment
company for federal income tax purposes. Accordingly, the Fund should not be
subject to federal income tax on the portion of its investment company taxable
income (including any net capital gain) it distributes to shareholders in a
timely manner. In addition, to the extent the Fund distributes to shareholders
in a timely manner at least 98% of its taxable income (including any net capital
gain) it should not be subject to the 4% excise tax on certain undistributed
income of "regulated investment companies."
Distributions to Shareholders
The Fund intends to declare daily and distribute monthly distributions
to its shareholders of net investment income. The Fund reserves the right to
include net short-term gains, if any, in such monthly distributions. Long-term
capital gains and undistributed net short-term gains, if any, will be
distributed once annually. "Net investment income," as used above, includes all
dividends, interest and other income earned by the Fund, net of the Fund's
expenses. Notices will be provided in accordance with Section 19 of the 1940
Act.
A shareholder may elect to receive dividends and capital gain
distributions in either cash or additional shares of the Fund. Unless otherwise
specified in writing by a shareholder, all dividends and capital gain
distributions will be paid on the payment date in additional shares of the kind
having an aggregate net asset value as of the ex-dividend date of such dividend
or distribution equal to the cash amount of such distribution. An election may
be changed by notifying the Fund in writing at any time prior to the record date
for a particular dividend or distributions. There are no sales or others charges
in connection with the reinvestment of dividends and capital gains
distributions. There is no fixed dividend rate, and there can be no assurance
that the Fund will pay any dividend or realize any capital gains distributions.
Notwithstanding, the Fund currently intends to pay dividends, if any, on a
monthly basis and capital gains, if any, annually.
Distributions to shareholders attributable to the Fund's interest
income and net short-term capital gains are taxable as ordinary dividend income
whether paid in cash or reinvested in additional shares. It is not
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274828.8
<PAGE>
anticipated that any of such dividends will qualify for the dividends received
deduction for corporate shareholders. Capital gain dividends, which are
designated as distributions of net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss, if any), are taxable as
long-term capital gains, whether paid in cash or additional shares, regardless
of how long the shares have been held. Net capital gains of taxpayers who are
individuals are currently taxed at a maximum rate of 28%. Net capital gains of
corporate taxpayers are currently taxed at the same rate as is applicable to
ordinary income. The deduction of capital losses by the Fund, and the deduction
of capital losses by shareholders with respect to shares in the Fund, is subject
to limitations. Investors should consider the tax implications of buying shares
shortly before the record date of a distribution because distributions of
ordinary income or net capital gain will be taxable even though the net asset
value of shares of the Fund is reduced by the distribution.
Dividends and distributions are generally taxable to the shareholders
at the time the dividend or distribution is made (even if reinvested in
additional shares). Any dividend declared by the Fund in October, November or
December of any calendar year, however, which is payable to shareholders of
record on a specified date in such a month and which is not paid on or before
December 31 of such year, will be treated as received by the shareholders as of
December 31 of such year, provided that the dividend is paid during January of
the following year.
The amount and character of the taxable income or tax loss of the Fund
will depend upon the application of a number of complex and/or uncertain aspects
of Federal income tax law. In particular, certain securities issued or acquired
by the Fund (including regular interests in "real estate mortgage investment
conduits" within the meaning of Section 860D of the Code) may be treated as
having original issue discount ("OID") for Federal income tax purposes. A
security will be treated as having OID if its stated redemption price at
maturity exceeds its issue price by more than a statutory de minimis amount. In
the case of any security treated as having OID, the Fund would be required to
accrue a portion of the OID daily as interest income even though it would not
actually receive the cash payment of such income until a later period. A similar
problem may arise with respect to residual interests in a real estate mortgage
investment conduit.
A "market discount bond" is a security purchased at a market discount,
subject to a statutory de minimis exception. For this purpose, a purchase at a
market discount includes a purchase at or after the original issue at a price
below the stated redemption price at maturity. A portion of the securities to be
acquired by the Fund may be acquired at a market discount. Any gain from the
disposition of a security that was originated after July 18, 1984 and acquired
by the Fund at a market discount will be treated as ordinary income to the
extent the gain does not exceed the accrued market discount. Holders of market
discount securities are required to include as ordinary income any partial
principal payment on the loan, to the extent such payment does not exceed the
accrued market discount on such security, even if the holder eventually disposes
of the security prior to maturity at a loss.
Back-up Withholding. Under certain provisions of the Code, some
shareholders may be subject to a 31% "back-up withholding" on reportable
dividends, capital gains distributions and redemption payments. Generally,
shareholders subject to back-up withholding will be those for whom a taxpayer
identification number is not on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that he or she is not otherwise subject to back-up withholding. An individual's
taxpayer identification number is his or her Social Security number.
Back-up withholding is not an additional tax and may be credited
against a taxpayer's federal income tax provided the shareholder provides the
necessary information.
Investment Expenses. Investment expenses incurred by the Fund are
expected to be allowable deductions for individual shareholders only to the
extent such expenses, together with other miscellaneous itemized deductions of
the shareholder, exceed 2% of the shareholder's adjusted gross income.
Other Taxation. Dividends and capital gains distributions may also be
subject to state, local and foreign taxes.
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<PAGE>
Shareholders who are not United States citizens or residents should be
aware that distributions from the Fund will generally be subject to a
withholding tax of 30%, or a lower treaty rate, and should consult their own tax
advisers to determine whether investment in the Fund is appropriate.
Distributions may also be subject to state and local taxation and shareholders
should consult their own tax advisers in this regard.
Entities that generally qualify for an exemption from Federal income
tax, such as many pension trusts, are nevertheless taxed on "unrelated business
taxable income." A tax-exempt entity's dividend income from the Fund and gain
from the sale of shares in the Fund or the Fund's sale of securities is not
expected to constitute unrelated business income to such tax-exempt entity
unless the acquisition of the share itself is debt-financed or constitutes
dealer property in the hands of the tax-exempt entity.
Before investing in the Fund, the trustee or investment manager of an
employee benefit plan (e.g., a pension or profit sharing retirement plan) should
consider among other things (a) whether the investment is prudent under the
Employee Retirement Income Security Act of 1974 ("ERISA"), taking into account
the needs of the plan and all of the facts and circumstances of the investment
in the Fund; (b) whether the investment satisfies the diversification
requirement of Section 404(a)(1)(C) of ERISA; and (c) whether the assets of the
Fund are deemed "plan assets" under ERISA and the Department of Labor
regulations regarding the definition of "plan assets."
The Fund will send written notice to its shareholders regarding the tax
status of all distributions made during each year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations thereunder presently in effect.
These provisions are subject to change by legislative or administrative action,
and any such changes may be effective either prospectively or retroactively.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning federal, state and local income tax matters.
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VALIDITY OF SHARES
-------------------------------------------------------------------------------
The validity of the Shares offered hereby will be passed on for the
Fund by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
-------------------------------------------------------------------------------
EXPERTS
-------------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants for the Fund
and audits its annual financial statements.
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REPORTS TO SHAREHOLDERS
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<PAGE>
The Fund will send unaudited semiannual reports and audited annual
reports, including a list of investments held, to shareholders.
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FURTHER INFORMATION
-------------------------------------------------------------------------------
The Private Placement Memorandum and the SAI do not contain all of the
information set forth in the Registration Statement that the Fund has filed with
the Securities and Exchange Commission. The complete Registration Statement may
be obtained from the Securities and Exchange Commission upon payment of the
prescribed fee or inspected at the Securities and Exchange Commission's office
at no charge.
The Fund does not intend to hold annual meetings of shareholders,
except as may be required by applicable law. A special meeting of shareholders
will be called upon the Fund's receipt of the written request of the holders of
at least ten percent of the shares of the Common Stock of the Fund issued and
outstanding and entitled to vote at such meetings.
* * *
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
1. The Fund...................................................................
2. Investment Objective, Policies, Risks and Restrictions.....................
3. Determination of Net Asset Value; Valuation of Portfolio Securities........
4. Tax Status.................................................................
5. Management of the Fund.....................................................
6. Counsel and Independent Accountants........................................
7. Portfolio Transactions.....................................................
8. Description of Shares, Voting Rights and Liabilities.......................
9. Description of Ratings.....................................................
Investment Adviser and Administrator
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
520 Madison Avenue
New York, New York 10022
Distributor
Hyperion Distributors, Inc.
520 Madison Avenue
New York, New York 10022
(212) 980-8400
Transfer Agent, Custodian and Accounting Agent
State Street Bank and Trust Company
1776 Heritage Drive
Boston, Massachusetts 02171
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274828.8
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
September 22, 1995
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD COMMERCIAL MORTGAGE FUND, INC.
520 Madison Avenue, New York, New York 10022
(212) 980-8400
This Statement of Additional Information sets forth
information which may be of interest to investors but which is not necessarily
included in the Fund's Private Placement Memorandum, dated September 22, 1995
(the "Private Placement Memorandum"), through which shares of the Fund are
offered. This Statement of Additional Information should be read in conjunction
with the Private Placement Memorandum, a copy of which may be obtained by a
qualified investor without charge by calling 1-(800) Hyperion.
The Statement of Additional Information is NOT a private
placement memorandum and is authorized for distribution to prospective investors
only if preceded or accompanied by the Private Placement Memorandum.
Table of Contents Page
1. THE FUND.............................................................. 2
2. INVESTMENT OBJECTIVE, POLICIES, RISKS AND
RESTRICTIONS...................................................... 2
3. DETERMINATION OF NET ASSET VALUE; VALUATION OF
PORTFOLIO SECURITIES................................................ 6
4. TAX STATUS............................................................ 6
5. MANAGEMENT OF THE FUND ............................................... 7
6. COUNSEL AND INDEPENDENT ACCOUNTANTS .................................. 13
7. PORTFOLIO TRANSACTIONS................................................ 13
8. DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES....................................................... 13
9. DESCRIPTION OF RATINGS................................................ 14
This Statement of Additional Information 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 jurisdiction in which such an offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such jurisdiction.
299892.1
<PAGE>
1. THE FUND
Equitable Real Estate Hyperion High-Yield Commercial Mortgage
Opportunity Fund, Inc. (the "Fund"), is a non-diversified, closed-end management
investment company organized as a corporation under the laws of the State of
Maryland on September 12, 1995. The Adviser manages the investments of the Fund
from day to day in accordance with the Fund's investment objective and policies.
The selection of investments for the Fund and the way they are managed depend on
the conditions and trends in the economy and the financial marketplaces.
Equitable Real Estate Hyperion Capital Advisors, L.L.C., the
adviser and administrator of the Fund (the "Adviser" and "Administrator"),
manages the Fund and supervises the overall administration of the Fund. The
Board of Directors of the Fund provides broad supervision over the affairs of
the Fund.
2. INVESTMENT OBJECTIVE, POLICIES, RISKS AND RESTRICTIONS
Investment Objective
The investment objective of the Fund is to provide high total
return primarily from current income. There can, of course, be no assurance that
the Fund will achieve its investment objective. The investment objective of the
Fund is fundamental and may not be changed without approval by its shareholders.
Investment Policies
The Fund seeks to achieve its investment objective by
investing, under normal circumstances, primarily in "high-yielding" commercial
mortgage-backed securities that are rated below investment grade (e.g., BB or
below) by a nationally recognized statistical rating organization or that are
unrated.
The following is a discussion of the various investments of
and techniques employed by the Fund and is intended only as a supplement to the
information contained in the Private Placement Memorandum and should be read
only in conjunction with the Private Placement Memorandum. Terms defined in the
Private Placement Memorandum and not defined herein have the same meanings
herein as in the Private Placement Memorandum.
Description of the Fund's Investment Securities
U.S. Government Agency Mortgage-Backed Securities
Ginnie Mae Certificates. The Government National Mortgage
Association ("Ginnie Mae") is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie
Mae to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans insured by
the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of Veterans
Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the United States Government is pledged to the
payment of all amounts that may be required to be paid under any guaranty. In
order to meet its obligations under such guaranty, Ginnie Mae is authorized to
borrow from the United States Treasury with no limitations as to amount.
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299892.1
<PAGE>
The Ginnie Mae Certificates in which the Fund will invest will
represent a pro rata interest in one or more pools of the following types of
mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes,
(v) mortgage loans on multi-family residential properties under construction;
(vi) mortgage loans on completed multi-family projects; (vii) fixed rate
mortgage loans as to which escrowed funds are used to reduce the borrower's
monthly payments during the early years of the mortgage loans ("buydown"
mortgage loans); (viii) mortgage loans that provide for adjustments in payments
based on periodic changes in interest rates or in other payment terms of the
mortgage loans; and (ix) mortgage-backed serial notes. All of these mortgage
loans will be FHA Loans or VA Loans and, except as otherwise specified above,
will be fully-amortizing loans secured by first liens on one to four family
housing units.
Fannie Mae Certificates. The Federal National Mortgage
Association ("Fannie Mae" or "FNMA") is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of FNMA are not backed by the
full faith and credit of the United States Government.
Each Fannie Mae Certificate will represent a pro rata interest
in one or more pools of FHA Loans, VA Loans or conventional mortgage loans
(i.e., mortgage loans that are not insured or guaranteed by any governmental
agency) of the following types: (i) fixed rate level payment mortgage loans;
(ii) fixed rate growing equity mortgage loans; (iii) fixed rate graduated
payment mortgage loans; (iv) variable rate California mortgage loans; (v) other
adjustable rate mortgage loans; and (vi) fixed rate and adjustable mortgage
loans secured by multi-family projects.
Freddie Mac Certificates. The Federal Home Loan Mortgage
Corporation ("Freddie Mac") is a corporate instrumentality of the United States
created pursuant to the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). The obligations of Freddie Mac are obligations solely of Freddie
Mac and are not backed by the full faith and credit of the United States
Government.
Freddie Mac Certificates represent a pro rata interest in a
group of mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie
Mac. The mortgage loans underlying the Freddie Mac Certificates will consist of
fixed rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
Private Pass-Throughs. Pass-Throughs are Mortgage-Backed
Securities that are structured similarly to government agency pass-through
securities such as Ginnie Mae, Fannie Mae and Freddie Mac Certificates, but are
issued by private sector originators of or investors in mortgage loans. Private
Pass-Throughs can represent an interest in any of the variety of types of
mortgage loans that can back an issue of Mortgage-Backed Securities. Since
Private Pass-Throughs typically lack a guarantee by an entity having the credit
status of a governmental agency or instrumentality, they are generally
structured with one or more forms of credit enhancement. All of the Private
Pass-Throughs purchased by the Fund will have been sold in public offerings
registered under the Securities Act of 1933 and will, accordingly, not be
subject to restrictions on resale generally imposed upon privately-placed
securities.
Adjustable Rate Mortgages -- Interest Rate Indices. The One
Year Treasury Index is the figure derived from the average weekly quoted yield
on U.S. Treasury Securities adjusted to a constant maturity of one year. The
Cost of Funds Index reflects the monthly weighted average cost of funds of
savings and loan associations and savings banks whose home offices are located
in Arizona, California and Nevada (the "FHLB
-3-
299892.1
<PAGE>
Eleventh District") that are member institutions of the Federal Home Loan Bank
of San Francisco (the "FHLB of San Francisco"), as computed from statistics
tabulated and published by the FHLB of San Francisco. The FHLB of San Francisco
normally announces the Cost of Funds Index on the last working day of the month
following the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of
Funds Index and may cause the Cost of Funds Index to move in a manner different
from indices based upon specific interest rates, such as the One Year Treasury
Index. Because of the various origination dates and maturities of the
liabilities of member institutions of the FHLB Eleventh District upon which the
Cost of Funds Index is based, among other things, at any time the Cost of Funds
Index may not reflect the average prevailing market interest rates on new
liabilities of similar maturities. There can be no assurance that the Cost of
Funds Index will necessarily move in the same direction or at the same rate as
prevailing interest rates since as longer term deposits or borrowings mature and
are renewed at market interest rates, the Cost of Funds Index will rise or fall
depending upon the differential between the prior and the new rates on such
deposits and borrowings. In addition, dislocations in the thrift industry in
recent years have caused and may continue to cause the cost of funds of thrift
institutions to change for reasons unrelated to changes in general interest rate
levels. Furthermore, any movement in the Cost of Funds Index as compared to
other indices based upon specific interest rates may be affected by changes
instituted by the FHLB of San Francisco in the method used to calculate the Cost
of Funds Index. To the extent that the Cost of Funds Index may reflect interest
changes on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later than would be
produced by such other indices, and in a period of declining interest rates, the
Cost of Funds Index may remain higher than other market interest rates. This may
result in a higher level of principal prepayments on mortgage loans which adjust
in accordance with the Cost of Funds Index than mortgage loans which adjust in
accordance with other indices.
LIBOR, the London interbank offered rate, is the interest rate
that the most creditworthy international banks dealing in U.S.
dollar-denominated deposits and loans charge each other for large
dollar-denominated loans. LIBOR is also usually the base rate for large
dollar-denominated loans in the international market. LIBOR is generally quoted
for loans having rate adjustments at one, three, six or twelve month intervals.
Investment Restrictions
The Fund has adopted the following investment restrictions
which may not be changed without approval by holders of a "majority of the
outstanding voting securities" of the Fund that would be affected by such a
change. A "majority of the outstanding voting securities" as used herein means
the vote of the lesser of (i) 67% or more of the outstanding "voting securities"
of the Fund present at a meeting, if the holders of more than 50% of the
outstanding "voting securities" of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding "voting securities" of the Fund. The
term "voting securities" as used in this paragraph has the same meaning as in
the 1940 Act.
The Fund may not:
(1) Invest 25% or more of the value of the total assets of the
Fund in securities of issuers engaged in any one industry (excluding real estate
and related industries and U.S. Government securities as defined in the 1940
Act).
(2) Borrow Money. This restriction shall not apply to (i)
entering into reverse repurchase agreements or dollar roll agreements or issue
senior securities in the form of indebtedness or preferred stock or borrow
money, other than for the temporary purposes permitted by the 1940 Act, in the
aggregate in excess of 33 1/3% (50% in the case of preferred stock) of the
Fund's total assets (after giving effect to any such leveraging) and (ii)
hedging techniques described in the Private Placement Memorandum which may be
deemed
-4-
299892.1
<PAGE>
to be borrowing. While borrowings (excluding items in (ii) above) exceed 5% of
the value of the Fund's total assets, the Fund will not make any investments.
Interest paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortage or otherwise encumber its
assets other than to secure such issuances or borrowings as set forth in
restriction No. 1 above or in connection with, to the extent permitted under the
1940 Act, good faith hedging transactions (including interest rate swaps),
reverse repurchase agreements, dollar roll agreements, when issued and forward
commitment transactions.
(4) Underwrite the securities of other issuers, except insofar
as the Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
(5) Purchase securities subject to restrictions on disposition
under the Securities Act of 1933 ("restricted securities"). Subject to state law
limitations, the Fund will not invest more than an aggregate of 15% of its net
assets in a repurchase agreement maturing in more than seven days and securities
that are not readily marketable.
(6) Invest in securities of other investment companies, except
that (i) the Fund may purchase unit investment trust securities where such unit
investment trusts meet the investment objective of the Fund and then only up to
5% of the Fund's net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets and (ii) as permitted by Section 12(d) of
the 1940 Act.
(7) Issue senior securities, except insofar as the Fund may be
deemed to have issued a senior security in connection with any permitted
borrowing.
(8) Make loans of money or property to any person, except
through loans of portfolio securities to Qualified Institutions, the purchase of
debt obligations in which the Fund may invest consistently with the Fund's
investment objective and policies and investment restrictions or the temporary
investment in repurchase agreements with Qualified Institutions. The Fund may
not lend portfolio securities, if, as a result, the aggregate of such loans
exceeds 33 1/3% of the value of the Fund's total assets (including such loans).
(9) Invest for the purpose of exercising control over
management of any company.
(10) Purchase real estate or interests therein (including
limited partnership interests but excluding Mortgage-Backed Securities, Stripped
Mortgage-Backed Securities and similar instruments and REIT Debt Securities) or
interests in oil, gas or mineral leases.
(11) Purchase or sell commodities or commodity contracts
except for hedging purposes.
(12) Make any short sale of securities except for short sales
against the box and short sales made in connection with hedging transactions.
(13) Purchase or retain any securities issued by an issuer,
any of whose officers or directors, trustees or security holders is an officer
or director of the Fund, or is an officer or director of the Adviser, if after
the purchase of the securities of such issuer by the Fund one or more of such
persons who individually owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value.
Percentage and Rating Restrictions. If a percentage
restriction or a rating restriction on investment or utilization of assets set
forth above or referred to in the Private Placement Memorandum is adhered to at
the time an investment is made or assets are so utilized, a later change in
percentage resulting
-5-
299892.1
<PAGE>
from changes in the value of the securities held by the Fund or a later change
in the rating of a security held by the Fund will not be considered a violation
of policy.
However, if more than 15% of the net assets of the Fund are
invested in securities that are not readily marketable or redeemable, the Fund
will take steps to reduce the amount of such securities held by the Fund as soon
as reasonably practicable.
3. DETERMINATION OF NET ASSET VALUE;
VALUATION OF PORTFOLIO SECURITIES
The net asset value of each share of the Fund is determined as
of the time of the close of the New York Stock Exchange on the last day in each
week on which the New York Stock Exchange is open and on each day on which the
Adviser is open for business (a "Pricing Day"). As of the date of this Statement
of Additional Information, the Adviser is open for business every weekday except
for the following holidays (as observed): New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. This determination of the net asset value of shares is made once
during each Pricing Day as of 4:00 p.m., New York time, by dividing the value of
the Fund's net assets (i.e., the value of its assets less its liabilities,
including expenses payable or accrued) by the number of Fund Shares outstanding
in the Fund at the time the determination is made.
Pricing of Securities. A determination of value used in
calculating net asset value must be a fair value determination made in good
faith by or on behalf of the Fund's Board of Directors in accordance with
procedures established by such Board. While no single standard for determining
fair value exists, as a general rule, the current fair value of a security would
appear to be the amount which the Fund could expect to receive upon its current
sale. Some, but not necessarily all, of the general factors which may be
considered in determining fair value include: (i) the fundamental analytical
data relating to the investments; (ii) the nature and duration of restrictions
on disposition of the securities; and (iii) an evaluation of the forces which
influence the market in which these securities are purchased and sold. Without
limiting or including all of the specific factors which may be considered in
determining fair value, some of the specific factors include: type of security,
financial statements of the issuer, cost at date of purchase, size of holding,
discount from market value, value of unrestricted securities of the same class
at the time of purchase, special reports prepared by analysts, information as to
any transaction or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies, and other
relevant matters.
The Fund values Commercial Mortgage-Backed Securities and
other debt securities on the basis of valuations provided by dealers or by a
pricing service, approved by the Fund's Board of Directors, which uses
information with respect to transactions in such securities, quotations from
dealers, market transactions in comparable securities, various relationships
between securities and yield to maturity in determining value. Debt securities
having a remaining maturity of sixty days or less when purchased and debt
securities originally purchased with maturities in excess of sixty days but
which currently have maturities of sixty days or less are valued at cost
adjusted or amortization of premiums and accretion of discounts.
4. TAX STATUS
The Fund intends to qualify and elect to be treated as a
regulated investment company for federal income tax purposes for its fiscal year
ended July 31, 1996, and it intends to do so for future fiscal years. In order
to so qualify, the Fund must, among other things, (a) derive in each taxable
year at least 90% of its gross income from dividends, interest, payments with
respect to loans of securities, gains from the sale or other disposition of
securities or other income derived with respect to its business of investing in
such securities
-6-
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<PAGE>
(including, but not limited to, gains from options, futures or forward
contracts); (b) derive in each taxable year less than 30% of its gross income
from gains from the sale or other disposition of securities, options, futures or
forward contracts held for less than three months; and (c) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
value of the Fund's assets is represented by cash, U.S. Government securities
(as defined in the 1940 Act), securities of other regulated investment
companies, and other securities which, with respect to any one issuer, do not
represent more than 5% of the value of the Fund's assets nor more than 10% of
the voting securities of such issuer, and (ii) not more than 25% of the value of
the Fund's assets is invested in the securities of any issuer (other than U.S.
Government securities as defined in the 1940 Act or the securities of other
regulated investment companies) or of two or more issuers which the Fund
controls and which are engaged in the same or related trades or businesses. If
the Fund qualifies as a regulated investment company and satisfies a minimum
distribution requirement, the Fund will not be subject to federal income tax to
the extent that it distributes its income to its shareholders. The minimum
distribution requirement is satisfied if the Fund distributes as an ordinary
income dividend at least 90% of its investment company taxable income (generally
net investment income and the excess of net short-term capital gain over net
long-term capital loss and computed without regard to the deduction for
dividends paid) for the taxable year.
The Fund may be subject to a nondeductible 4% excise tax which
will be imposed if, and to the extent that, the Fund does not distribute by the
end of each calendar year (or is not subjected to regular corporate tax in such
year on) an amount equal to the sum of (a) 98% of the Fund's ordinary income for
such calendar year; (b) 98% of the excess of capital gains over capital losses
for the one-year period ending on October 31 of each year; and (c) the
undistributed income and gains from the preceding years (if any) pursuant to the
calculations in (a) and (b). A distribution will be treated as having been paid
on December 31 if it is declared by the Fund in October, November or December
with a record date in such month and is paid by the Fund in January of the
following year. Such distribution will be treated as received by the
shareholders in the calendar year in which the distribution is declared.
The Fund intends to engage in various hedging transactions.
Under various provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the result of such transactions may be to change the character of
recognized gains and losses, accelerate the recognition of certain gains and
losses, and defer the recognition of certain losses.
The Fund's taxable income will in most cases be determined on
the basis of reports made to the Fund by the issuers of the securities in which
the Fund invests. The tax treatment of certain securities in which the Fund may
invest is not free from doubt and it is possible that an Internal Revenue
Service examination of the issuers of such securities or of the Fund could
result in adjustments to the income of the Fund. An upward adjustment by the
Internal Revenue Service to the income of the Fund may result in the failure of
the Fund to satisfy the minimum distribution requirement described above.
The Fund's fiscal year end is July 31.
5. MANAGEMENT OF THE FUND
The directors and officers of the Fund and their principal
occupations during the past five years are set forth below. Their titles may
have varied during this period. Asterisks indicate that those directors are
"interested persons" (as defined in the 1940 Act) of the Fund. Except for Mr.
Petersen, whose address is 500 East 85th Street, New York, New York 10028, Mr.
Walsh, whose address is 15 East 91st Street, New York, New York 10128, and
Messrs. Tibbetts, Smith, Thomas, Bartlett and Wright, whose address is 1150 Lake
Hearn Drive, N.E., Atlanta, Georgia 30342, the address of each director and
officer is 520 Madison Avenue, New York, New York 10022.
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299892.1
<PAGE>
Officers and Directors of the Fund
LEWIS S. RANIERI* - Chairman of the Board of the Adviser
Director since March 1995. Chairman and Chief
Executive Officer of Ranieri & Co.,
Director Inc. (since 1988); in
addition, President of LSR Hyperion
Corp., a general partner of the
limited partnership that is the
general partner of Hyperion Partners
L.P. ("Hyperion Partners") (since
1988). Director and Chairman of the
Board of Hyperion Capital
Management, Inc. (since 1989);
Chairman of Bank United of Texas FSB
(since 1988) and Hyperion Credit
Service Corp. (since 1992); Director
and President of Hyperion Funding
1993 Corp., the general partner of
the limited partnership that is the
general partnership that is the
general partner of Hyperion 1993
Fund L.P.; and, also Chairman and
President of various other direct
and indirect subsidiaries of
Hyperion Partners. Formerly Vice
Chairman of Salomon Brother Inc.
(until 1987). Age 48.
HARRY E. PETERSEN, JR. - Director and/or Trustee of several
Director investment companies advised by
Hyperion Capital Management, Inc.
(1992- Present). Director of
Lexington Corporate Properties, Inc.
(1993-Present). Senior Advisor to
Potomac Capital (1995- Present).
Advisory Board of Polytechic
University (1995- Present).
Consultant to Advisers Capital
Management, Inc. (1992-Present).
Consultant to Ewing Capital, Inc.
(1993- Present). Formerly Consultant
on public and private pension funds
(1991-1993). President of Lepercq
Realty Advisors (1988-1990). Age 70.
LEO M. WALSH, JR. - Director and/or Trustee of several
Director investment companies advised by
Hyperion Capital Management, Inc.
(1989- Present). Financial
Consultant for Medco Containment
Services Inc. (1994-Present).
Financial Consultant for Synetic
Inc., a manufacturer of porous
plastic materials for health care
uses (1989-1994). Formerly
President, WW Acquisition Corp.
(1989-1990); Senior Executive Vice
President and Chief Operating
Officer of The Equitable Life
Assurance Society of the United
States ("The Equitable")
(1986-1988); Director of The
Equitable and Chairman of Equitable
Investment Corporation, a holding
company for The Equitable's
investment oriented subsidiaries
(1983- 1988); Chairman and Chief
Executive Officer of
EQUICOR-Equitable HCA Corporation
(1987-1988). Age 62.
DOUGLAS A. TIBBETTS* - President and Chief Operating
Director Officer of Equitable Real Estate
Investment Management, Inc. since
1989. Director and member of various
advisory committees of professional
real estate organizations such as
National Realty Committee, Society
of Industrial & Office Realtors, and
NAIOP.
-8-
299892.1
<PAGE>
Currently serves as
Practitioner/Lecturer at The
University of Georgia, Terry College
of Business. Director of various
Equitable related companies
including: Equitable Real Estate,
Column Financial, Compass Retail,
and COMPASS Management and Leasing.
Formerly Senior Vice President in
charge of the Dallas office
(1982-1988). Age 50.
RICHARD D. SHIRK - President and Chief Executive
Director Officer of Blue Cross and Blue
Shield since April 1992. Chairman of
the Georgia U.S.O.C. Steering
Committee and Board Member of
Central Atlanta Progress, Georgia
Chamber of Commerce, Georgia
Coalition for Health, Metropolitan
Atlanta Chapter of the American Red
Cross, Board of Trustee member of
Seven Seas Series Mutual Fund,
Member of Atlanta Chamber of
Commerce Board of Advisers and
Buckhead Coalition. Formerly, Senior
Officer of Equicor (1987-1989) and
Senior Vice President of the Central
Region for CIGNA (1990-1992). Age
49.
W. BRUCE MOULTHROP Member of the Real Estate Advisory
Director Committee for New York State
Teachers' Retirement System since
1990 and serving on the Board of
Directors for Mitchell's Formalwear
Company since 1984. Formerly, Senior
Executive Vice President of
Equitable Real Estate Investment
Management, Inc. (1984-1990). Age
57.
EDWARD G. SMITH* - Senior Executive Vice President of
Director, Chairman Equitable Real Estate Investment
Management, Inc. since 1988. Member
of The Equitable Management and
Investment Committees (1993-
Present). Formerly, Executive Vice
President heading property
development, management and
administration for The Equitable
(1986-1988). Age 45.
KENNETH C. WEISS* -- Chief Executive Officer of the
Director, President Adviser since March 1995. President
and Chief Executive Officer of
Hyperion Capital Management, Inc.
(February 1992-Present). Chairman of
the Board, Director/Trustee and/or
officer of several investment
companies advised by Hyperion
Capital Management, Inc. (February
1992-Present). Formerly Director of
First Boston Asset Management
(1988-February 1992). Director of
First Boston Corporation (until
1988). Age 43.
LOUIS C. LUCIDO* -- Managing Director and Chief
Director, Secretary Operating Officer of Hyperion
Capital Management, Inc. (February
1992-Present). Formerly Senior Vice
President and Director of
Progressive Capital Management (June
1991-February 1992); Senior Vice
President and Manager at Donaldson,
Lufkin and Jenrette (1988-January
1991); Vice President of Smith
Barney, Harris Upham & Co.
Incorporated (1987-May 1988); Vice
President at Merrill Lynch, Pierce,
Fenner & Smith (1981-1987). Age 46.
-9-
299892.1
<PAGE>
CLIFFORD E. LAI -- Managing Director and Chief
Senior Vice President Investment Officer, Hyperion Capital
Management, Inc. (March
1993-Present). Formerly Managing
Director and Chief Investment
Strategist for Fixed Income, First
Boston Asset Management (1989-1993);
Vice President, Morgan Stanley & Co.
(1987-1989). Age 42.
M. ANDREW THOMAS - Executive Vice President of
Equitable Real Estate Investment
Management, Senior Vice President
Investors, Inc. since 1995. Formerly
with Equitable Real Estate's New
Business area responsible for the
new mortgage origination
(1990-1992); managed $250 million
equity portfolio for corporate
pension client (1988-1992). Age 34.
ROBERT BARTLETT - Vice President of Equitable Real
Estate Investment Management Inc.
Vice President since 1988,
responsible for developing and
implementing mortgage investment
marketing strategy with pension
funds and other institutional
investors. Co-developed the
company's CMBS program and its
marketing implementation. Formerly
portfolio manager for Gatehouse
Apartments of Florida Fund (1994-
1995) and assistant portfolio
manager (1990-1992); assistant
portfolio manager for European Fund
I (1993-1995). Age 42.
JOHN N. DUNLEVY - Director of Hyperion Capital
Vice President Management, Inc. (July 1992-
Present). Formerly, Director and
Portfolio Manager, Teachers
Insurance & Annuity Association
(1988-1992); Assistant Vice
President, Sumitomo Bank Ltd.
(1985-1988). Age 36.
KURT L. WRIGHT - Senior Vice President of Equitable
Vice President Real Estate Investment Management,
Inc. since 1995. Portfolio manager
for Buckhead Strategic Fund which
invests in distressed commercial
mortgages since 1994 and oversees
all commercial mortgage backed
securities investing for third-party
clients. Formerly with Equitable's
Investment Research, where he
performed studies of real estate
markets and investment strategies
(1990-1993); Senior Analyst at
Prudential Realty Group on PRISA
portfolio (1988-1990); Editorial
Board Real Estate Capital Markets
Report (1993- 1995) and Research
Committee-National Council Real
Estate Investment Fiduciaries
(1990-Present). Age 36.
JOSEPH W. SULLIVAN - Vice President of Hyperion Capital
Treasurer Management, Inc. (August
1995-Present). Formerly, Vice
President in Merrill Lynch & Co.'s
Investment Banking Division;
Treasurer and Chief Financial
Officer of several Merrill Lynch
subsidiaries. Responsible for all
financial reporting, accounting,
ministerial and administrative
services (1990- 1995); Assistant
Vice President of Standard & Poor's
Debt Rating Group (1988-1990);
Assistant Vice President and
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299892.1
<PAGE>
Operations Controller of Shearson
Lehman Hutton, Inc., engaged in the
identification, analysis and
financial administration of public
and private real estate investment
programs (1983-1987). A Licensed
Certified Public Accountant since
1981. Age 38.
JOSEPH TROPEANO - Vice President and Compliance
Assistant Secretary Officer of Hyperion Capital
Management, Inc. (December
1993-Present). Formerly Senior
Compliance Examiner and Staff
Accountant with the investment
management section of the Securities
& Exchange Commission's northeast
regional office (1988-1993). With
Merrill Lynch from 1980 to 1988. Age
34.
THOMAS J. VINCE - Fund Administrator of Hyperion
Assistant Secretary Capital Management, Inc. (February
1994-Present). Formerly Assistant
Treasurer with Lexington Management
Corporation (1993-1994); Mutual Fund
Manager with ABD Securities
Corporation (1990-1993); Senior Fund
Accountant with Furman Selz, Mager,
Dietz & Birney, Inc. (1988-1990).
Age 44.
JOSEPH V. ZOLOFRA - Senior Tax Manager of Hyperion
Assistant Secretary Capital Management, Inc.
(1993-Present). Formerly Tax Manager
of Ernst & Young Financial Services
Office (1988-1993); Tax Manager and
Director of Tax Accounting Services
Center of Touche Ross (1985-1988);
Senior Tax Consultant (1982-1985).
Age 36.
<TABLE>
DIRECTORS' COMPENSATION TABLE
(Estimated for the year ended July 31, 1996)
<CAPTION>
================================================================================================================================
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from Fund and
Name of Person Compensation from Accrued as Part of Benefits upon Fund Complex
--------------
Fund Fund Expenses Retirement Paid to Directors
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lewis S. Ranieri None None None None
--------------------------------------------------------------------------------------------------------------------------------
Harry E. Petersen, Jr. $7,500 None None $15,000
--------------------------------------------------------------------------------------------------------------------------------
Leo M. Walsh, Jr. $7,500 None None $15,000
--------------------------------------------------------------------------------------------------------------------------------
Edward G. Smith None None None None
--------------------------------------------------------------------------------------------------------------------------------
Kenneth C. Weiss None None None None
--------------------------------------------------------------------------------------------------------------------------------
Louis C. Lucido None None None None
--------------------------------------------------------------------------------------------------------------------------------
Richard D. Shirk $7,500 None None $15,000
--------------------------------------------------------------------------------------------------------------------------------
W. Bruce Moulthrop $7,500 None None $15,000
================================================================================================================================
</TABLE>
Each Director, who is not an interested person of the Fund, receives a
base annual fee of $7,500 which is paid by the Fund.
-11-
299892.1
<PAGE>
Adviser
Equitable Real Estate Hyperion Capital Advisors, L.L.C. (the "Adviser")
manages the Fund pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"). Subject to such policies as the Board of Directors of the Fund may
determine, the Adviser makes investment decisions for the Fund. The Adviser
furnishes at its own expense all facilities and personnel necessary in
connection with providing these services.
The Advisory Agreement was approved by the Fund's initial shareholders,
and by the Fund's board of directors, including a majority of the directors who
are not parties to the agreement or interested persons of any such party (as
such term is defined in the 1940 Act) effective September 22, 1995. The Advisory
Agreement will continue in effect for a period of two years from its effective
date, and if not sooner terminated, will continue in effect for successive
periods of 12 months thereafter, provided that each continuance is specifically
approved at least annually by both (1) the vote of a majority of the Fund's
board of directors or the vote of a majority of the outstanding voting
securities of the Fund (as such term is defined in the 1940 Act) and (2) by the
vote of a majority of the directors who are not parties to such Agreement or
interested persons (as such term is defined in the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on such approval.
The Advisory Agreement may be terminated as a whole at any time by the Fund,
without the payment of any penalty, upon the vote of a majority of the Fund's
Board of Directors or a majority of the outstanding voting securities of the
Fund on 60 days' written notice to the Adviser or by the Adviser on 60 days'
written notice to the Fund. The Agreement will terminate automatically in the
event of its assignment (as such term is defined in the 1940 Act and the rules
thereunder).
The Advisory Agreement provides that neither the Adviser nor its
personnel shall be liable for any error of judgment or mistake of law or for any
loss arising out of any investment or for any act or omission in its services to
the Fund, except for wilful misfeasance, bad faith or gross negligence or
reckless disregard of its or their obligations and duties under the Advisory
Agreement. The Advisory Agreement provides that the Adviser may render services
to others.
The Fund's Private Placement Memorandum contains additional information
regarding the Adviser and a description of fees payable to the Adviser for
services under the Advisory Agreement.
Administrator
Pursuant to the Administrative Services Agreements, the Adviser
provides the Fund with general office facilities and supervises the overall
administration of the Fund; including, among other responsibilities, the
negotiation of contracts and fees with, and the monitoring of performance and
billings of, the independent contractors and agents of the Fund; the preparation
and filing of all documents required for compliance by the Fund with applicable
laws and regulations; and arranging for the maintenance of books and records of
the Fund. The Administrator provides persons satisfactory to the Board of
Directors of the Fund to serve as officers of the Fund. Such officers may be
directors, officers or employees of the Administrator or its affiliates.
The Fund's Private Placement Memorandum contains a description of the
fees payable to the Administrator under the Administrative Services Agreement.
The Administrative Services Agreement was approved by the Fund's Board of
Directors effective September 22, 1995 and terminates automatically if it is
assigned and may be terminated without penalty by majority vote of the
shareholders of the Fund in the case of the Fund or by either party on not more
than 60 days' nor less than 30 days' written notice.
Transfer Agent, Custodian and Accounting Agent
The Fund has entered into a Transfer Agent and Registrar Services Fee
Agreement with State Street Bank & Trust Company ("State Street") which acts as
transfer and accounting agent for the Fund. Pursuant to a
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299892.1
<PAGE>
Custodian Agreement, State Street also acts as the custodian of the Funds's
assets. For its services, the Custodian will receive compensation as may from
time to time be agreed upon by it and the Fund. The Fund's transfer and
accounting agent and custodian do not assist in, and are not responsible for,
investment decisions involving assets of the Fund.
6. COUNSEL AND INDEPENDENT ACCOUNTANTS
Legal matters in connection with the issuance of shares of stock of the
Fund are passed upon by Messrs. Battle Fowler LLP. Price Waterhouse LLP are the
independent accountants for the Fund, providing audit services, tax return
preparation, and assistance and consultation with respect to the preparation of
filings with the Securities and Exchange Commission.
7. PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of securities usually are principal
transactions. Securities are normally purchased directly from the issuer or from
an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Fund does not
anticipate paying brokerage commissions on its securities purchases, although it
may pay such commissions on futures transactions. Any transaction for which the
Fund pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and
asked price.
Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser in its best judgment and in a manner deemed
to be in the best interest of the investors in the Fund rather than by any
formula. The primary consideration is prompt execution of orders in an effective
manner at the most favorable price.
Investment decisions for the Fund will be made independently from those
for any other account or investment company that is or may in the future become
managed by the Adviser or its affiliates. If, however, the Fund and other
investment companies or accounts managed by the Adviser are contemporaneously
engaged in the purchase or sale of the same security, the transactions may be
averaged as to price and allocated equitably to each account. In some cases,
this policy might adversely affect the price paid or received by the Fund or the
size of the position obtainable for the Fund. In addition, when purchases or
sales of the same security for the Fund and for other investment companies
managed by the Adviser occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales. Furthermore, in certain circumstances
affiliates of the Adviser whose investment portfolios are managed internally,
rather than by the Adviser, might seek to purchase or sell the same type of
investments at the same time as the Portfolio. Such an event might also
adversely affect the Fund.
8. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The authorized capital stock of the Company, which was incorporated on
September 12, 1995 in the State of Maryland, consists of one hundred million
shares of stock having a par value of one tenth of one cent ($.001) per share.
Each share when issued will have identical voting rights, equal dividend,
distribution and liquidation rights and each fractional share has those rights
in proportion to the percentage that the fractional share represents of a whole
share. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. All shares, when
issued in accordance with the terms of the offering, will be fully paid and
nonassessable. Shares are redeemable at net asset value, at the
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299892.1
<PAGE>
option of the shareholder. On September 12, 1995, Equitable Real Estate
Hyperion Capital Advisers, L.L.C. purchased $100,000 of the Fund's shares at an
initial subscription price of $10 per share.
The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares outstanding voting for the
election of directors can elect 100% of the directors if the holders choose to
do so, and, in the event, the holders of the remaining shares will not be able
to elect any person or persons to the Board of Directors. The Fund will not
issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings of
the Fund's shareholders. This is because the By-Laws of the Company provide for
any meetings only (a) for the election of directors, (b) approval of revised
investment advisory contracts with respect to a particular class or series of
stock, (c) approval of revisions to the Fund's distribution agreement with
respect to a particular class or series of stock, and (d) upon the written
request of holders of shares entitled to cast not less than 25% of all those
votes entitled to be cast at such meeting. Annual and other meetings may be
required with respect to such additional matters relating to the Fund as may be
required by the Act, including the removal of Company directors(s) and
communication among shareholders, any registration of the Fund with the
Securities and Exchange Commission or any state, or as the Directors may
consider necessary or desirable. Each Director serves until the next meeting of
the shareholders called for the purpose of considering the election or
reelection of such Director or of a successor to such Director, and until the
election and qualification of his or her successor, elected at such meeting, or
until such Director sooner dies, resigns, retires or is removed by the vote of
the shareholders.
9. DESCRIPTION OF RATINGS
See Appendix A.
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<PAGE>
APPENDIX A
Description of Moody's Investors Service, Inc.'s
Below Investment Grade Debt Ratings:
Ba -- Securities 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
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes securities in this class.
B -- Securities which are rated B generally lack
characteristics of a 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 -- Securities which are rated Caa are of poor standing.
Such issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca -- Securities which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Securities which are rated C are the lowest rated class
of securities by Moody's Investors Service and issues so rated can be regarded
as having extremely poor prospects of ever attaining any real investment
standing.
NR -- Indicates that the Security is not rated.
Con-Securities for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are debt obligations secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operating experience,
(c) rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Rating denotes probable credit stature
upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B (i.e., two categories below Baa)
in its securities rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category, the modifier 2 indicates
a mid-range ranking, and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Description of Standard & Poor Corporation's
Below Investment Grade Debt Ratings:
BB, B, CCC, CC -- Securities rated BB, B, and CCC are
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation. While such securities will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C, CI -- The C rating is applied to debt subordinated to
senior debt which is assigned an actual or implied CCC - Debt rating. The CI
rating is reserved for income securities on which no interest is being paid.
-15-
299892.1
<PAGE>
D -- Securities rated D are in default, or are expected to
default upon maturity or payment date, and payment of interest and/or repayment
of principal is in arrears
Provisional Ratings -- (Prov.) following a rating indicates
the rating is provisional, which assumes the successful completion of the
project being financed by the issuance of the securities being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This rating,
however, which addresses credit quality subsequent to completion, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. Accordingly, the investor should exercise his own judgment with
respect to such likelihood and risk.
Plus (+) or Minus (-): The ratings from AA to CCC (i.e., three
categories below BBB) may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
NR: Securities may lack a S&P rating because no public rating
has been requested, because there is insufficient information on which to base a
rating, or because S&P does not rate a particular type of obligation as a matter
of policy.
Description of Fitch Investors Service, Inc.'s
Below Investment Grade Debt Ratings:
BB: Securities are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.
B: Securities are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue.
CCC: Securities have certain identifiable characteristics
that, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC: Securities are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Securities are in imminent default in payment of interest
or principal.
DDD, DD, and D: Securities are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. 'DDD' represents the highest potential for
recovery on these securities, and 'D' represents the lowest potential for
recovery.
Plus (+) or Minus (-): The ratings from AA to C (i.e. five
categories below BBB) may be modified by the addition of a plus or minus sign to
indicate the relative position of a credit within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the
successful completion of a project or the occurrence of a specific event.
-16-
299892.1
<PAGE>
Description of Duff & Phelps Credit Rating Co.'s
Below Investment Grade Debt Ratings:
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP: Preferred stock with dividend arrearages.
Plus (+) or Minus (-): The ratings from AA to C (i.e. five
categories below BBB) may be modified by the addition of a plus or minus sign to
indicate the relative position of a credit within the rating category.
Notes with Respect to All Ratings:
Securities which are unrated expose the investor to risks with
respect to capacity to pay interest or repay principal that are similar to the
risks of lower-rated securities. The Fund is dependent on Fund management's
judgment, analysis and experience in the evaluation of such securities.
Investors should note that the assignment of a rating to a
security by a rating service may not reflect the effect of recent developments
on the issuer's ability to make interest and principal payments.
-17-
299892.1
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(1) Not applicable. To be filed by Amendment.
(2) Exhibits
(a) Articles of Incorporation of the Registrant.
(b) By-Laws of the Registrant.
(c) Not applicable.
(d) Not applicable.
(e) Not Applicable.
(g) Investment Management Contract between the
Registrant and Equitable Real Estate Hyperion
Capital Advisors, L.L.C.
(h) Not applicable.
(i) Not applicable.
(j) Custodian Contract and Transfer Agent and Registrar
Services Fee Agreement between the Registrant and
State Street Bank & Trust Company.
(k) Administrative Services Agreement between the
Registrant and Equitable Real Estate Hyperion
Capital Advisors, L.L.C.
(l) Not Applicable.
(m) Written assurance of Equitable Real Estate Hyperion
Capital Advisers, L.L.C. that its purchased shares
of the registrant was for investment purposes
without any present intention of redeeming or
reselling.
(n) Not Applicable.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Not Applicable.
Item 25. Marketing Arrangements.
Not Applicable.
Item 26. Other Expense of Issuance and Distribution.
The following table sets forth the estimated expenses in
connection with the issuance and distribution of the securities covered by this
Registration Statement:
Securities and Exchange Commission fee........... $ 1,000.00
Accountants' fees and expenses................... -0-
Blue Sky fees and expenses....................... -0-
Cost of Stock Certificates....................... -0-
Printing......................................... 5,000.00
Marketing expenses............................... 35,000.00
Legal fees and expenses.......................... 50,000.00
Miscellaneous.................................... 9,000.00
Total............................................ $100,000.00
275060.1
<PAGE>
Item 27. Persons controlled by or Under Common Control with Registrant.
None.
Item 28. Number of Holders of Securities.
Number of Record Holders
Title of Class as of September 22, 1995
--------------- ------------------------
Shares of Common Stock 10,000
Item 29. Indemnification.
In accordance with Section 2-418 of the General
Corporation Law of the State of Maryland, Article NINTH of the
Registrant's Articles of Incorporation provides as follows:
"NINTH: (1) The Corporation shall indemnify (i) its
currently acting and former directors and officers, whether
serving the Corporation or at its request any other entity, to
the fullest extent required or permitted by the General Laws of
the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the fullest
extent permitted by law, and (ii) other employees and agents to
such extent as shall be authorized by the Board of Directors or
the By-Laws and as permitted by law. Nothing contained herein
shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The foregoing rights of indemnification shall not be exclusive of
any other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is
necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time
such by-laws, resolutions or contracts implementing such
provisions or such indemnification arrangements as may be
permitted by law. No amendment of the charter of the Corporation
or repeal of any of its provisions shall limit or eliminate the
right of indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal.
(2) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment
Company Act of 1940, no director or officer of the Corporation
shall be personally liable to the Corporation or its stockholders
for money damages; provided, however, that nothing herein shall
be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. No
amendment of the charter of the Corporation or repeal of any of
its provisions shall limit or eliminate the limitation of
liability provided to directors and officers hereunder with
respect to any act or omission occurring prior to such amendment
or repeal."
In Section 7 of the Distribution Agreement relating to the
securities being offered hereby, the Registrant agrees to
indemnify Equitable Real Estate Hyperion High-Yield Commercial
Mortgage Fund, Inc. and any person who controls Equitable Real
Estate Hyperion High-Yield Commercial Mortgage Fund, Inc., within
the meaning of the Securities
275060.1
<PAGE>
Act of 1933, against certain types of civil liabilities arising
in connection with the Registration Statement or Prospectus.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Securities Act") may be
permitted to directors, officers and controlling persons of the
Registrant 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 Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than a payment by
the Registrant of expenses incurred or paid by a director,
officer or the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities 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 of
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Insofar as the Investment Company Act of 1940 may be
concerned, in the event that a claim for indemnification is
asserted by a director, officer or controlling person of the
Registrant in connection with the securities being registered,
the Registrant will not make such indemnification unless (i) the
Registrant has submitted, before a court or other body, the
question of whether the person to be indemnified was liable by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of duties, and has obtained a final decision
on the merits that such person was not liable by reason of such
conduct or (ii) in the absence of such decision, the Registrant
shall have obtained a reasonable determination, based upon a
review of the facts, that such person was not liable by virtue of
such conduct, by (a) the vote of a majority of directors who are
neither interested persons as such term is defined in the
Investment Company Act of 1940, nor parties to the proceeding or
(b) an independent legal counsel in a written opinion.
The Registrant will not advance attorneys' fees or other
expenses incurred by the person to be indemnified unless the
Registrant shall have (i) received an undertaking by or on behalf
of such person to repay the advance unless it is ultimately
determined that such person is entitled to indemnification and
one of the following conditions shall have occurred: (x) such
person shall provide security for his undertaking, (y) the
Registrant shall be insured against losses arising by reason of
any lawful advances or (z) a majority of the disinterested,
non-party directors of the Registrant, or an independent legal
counsel in a written opinion, shall have determined that based on
a review of readily available facts there is reason to believe
that such person ultimately will be found entitled to
indemnification.
Item 30. Business and Other Connections of Investment Adviser.
The description of the Equitable Real Estate Hyperion Capital
Advisors, L.L.C. under the caption "Management of the Fund" in the Prospectus
and "Management and Investment Management Contract" in the Statement of
Additional Information constituting parts A and B, respectively, of the
Registration Statement are incorporated herein by reference.
Registrant's investment adviser, Equitable Real Estate Hyperion
Capital Advisors, L.L.C, is a registered investment adviser. Equitable Real
Estate Hyperion Capital Advisors, L.L.C.'s investment advisory clients include
Equitable Real Estate Hyperion Mortgage Opportunity Fund, Inc., a registered
investment company whose address is
275060.1
<PAGE>
520 Madison Avenue, New York, New York 10022, which invest principally in
commercial mortgage-backed securities.
Item 31. Location of Accounts and Records.
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Registrant at Equitable
Real Estate Hyperion Capital Advisors, L.L.C., 520 Madison Avenue, New York, New
York 10022 the Registrant's Manager; State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, the Registrant's transfer agent,
custodian and accounting agent.
Item 32. Management Services.
Not Applicable.
Item 33. Undertakings.
Not Applicable.
275060.1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of
1940, the Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, the 22nd day of September, 1995.
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
By:/s/ Louis C. Lucido
<PAGE>
Exhibit Index
(a) Articles of Incorporation of the Registrant.
(b) By-Laws of the Registrant.
(c) Not Applicable.
(d) Not Applicable.
(e) Not Applicable.
(f) Not Applicable.
(g) Investment Management Contract between the Registrant and
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
(h) Not Applicable.
(i) Not Applicable.
(j) Custodian Contract and Transfer Agent and Registrar Services
Fee Agreement between the Registrant and State Street Bank &
Trust Company.
(k) Administrative Services Agreement between the Registrant and
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
(l) Not Applicable.
(m) Written assurance of Equitable Real Estate Hyperion
Capital Advisers, L.L.C. that its purchased shares
of the registrant was for investment purposes
without any present intention of redeeming or
reselling.
(n) Not Applicable.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Not Applicable.
275060.1
ARTICLES OF INCORPORATION
OF
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
FIRST: (1) The name of the incorporator is Ann M.
Smith.
(2) The incorporator's post office address
is 75 East 55th Street, New York, New York 10022.
(3) The incorporator is over eighteen years
of age.
(4) The incorporator is forming the
corporation named in these Articles of Incorporation under the General
Corporation Law of the State of Maryland.
SECOND: The name of the corporation (hereinafter
called the "Corporation") is Equitable Real Estate Hyperion High-
Yield Commercial Mortgage Fund, Inc.
THIRD: The purposes for which the Corporation is
formed are:
(1) to conduct, operate and carry on the
business of an investment company;
(2) to subscribe for, invest in, reinvest
in, purchase or otherwise acquire, hold, pledge, sell, assign,
transfer, exchange, distribute or otherwise dispose of notes,
bills, bonds, debentures and other negotiable or
non-negotiable instruments, obligations and evidences of
indebtedness issued or guaranteed as to principal and interest
by the United States Government, or any agency or
instrumentality thereof, any State or local government, or any
agency or instrumentality thereof, or any other securities of
any kind issued by any corporation or other issuer organized
under the laws of the United States or any State, territory or
possession thereof or any foreign country or any subdivision
thereof or otherwise, to pay for the same in cash or by the
issue of stock, including treasury stock, bonds and notes of
the Corporation or otherwise; and to exercise any and all
rights, powers and privileges of ownership or interest in
respect of any and all such investments of every kind and
description, including and without limitation, the right to
consent and otherwise act with respect
C/M: 11212.0012 275064.2
<PAGE>
thereto, with power to designate one or more persons, firms,
associations or corporations to exercise any of said rights,
powers and privileges in respect of any said investments;
(3) to conduct research and investigations
in respect of securities, organizations, business and general
business and financial conditions in the United States of
America and elsewhere for the purpose of obtaining information
pertinent to the investment and employment of the assets of
the Corporation and to procure any and all of the foregoing to
be done by others as independent contractors and to pay
compensation therefor;
(4) to borrow money or otherwise obtain
credit and to secure the same by mortgaging, pledging or
otherwise subjecting as security the assets of the
Corporation, and to endorse, guarantee or undertake the
performance of any obligation, contract or engagement of any
other person, firm, association or corporation;
(5) to issue, sell, distribute, repurchase,
redeem, retire, cancel, acquire, hold, resell, reissue,
dispose of, transfer, and otherwise deal in, shares of stock
of the Corporation, including shares of stock of the
Corporation in fractional denominations, and to apply to any
such repurchase, redemption, retirement, cancellation or
acquisition of shares of stock of the Corporation, any funds
or property of the Corporation, whether capital or surplus or
otherwise, to the full extent now or hereafter permitted by
the laws of the State of Maryland and by these Articles of
Incorporation;
(6) to conduct its business, promote its
purposes, and carry on its operations in any and all of its
branches and maintain offices both within and without the
State of Maryland, in any and all States of the United States
of America, in the District of Columbia, and in any or all
commonwealths, territories, dependencies, colonies,
possessions, agencies, or instrumentalities of the United
States of America and of foreign governments;
(7) to carry out all or any part of the
foregoing purposes or objects as principal or agent, or in
conjunction with any other person, firm, association,
corporation or other entity, or as a partner or member of a
partnership, syndicate or joint venture or otherwise, and in
any part of the world to
-2-
C/M: 11212.0012 275064.2
<PAGE>
the same extent and as fully as natural persons might
or could do;
(8) to have and exercise all of the powers
and privileges conferred by the laws of the State of Maryland
upon corporations formed under the laws of such State; and
(9) to do any and all such further acts and
things and to exercise any and all such further powers and
privileges as may be necessary, incidental, relative,
conducive, appropriate or desirable for the foregoing
purposes.
The enumeration herein of the objects and purposes of the
Corporation shall be construed as powers as well as objects and purposes and
shall not be deemed to exclude by inference any powers, objects or purposes
which the Corporation is empowered to exercise, whether expressly by force of
the laws of the State of Maryland now or hereafter in effect, or impliedly by
the reasonable construction of the said law.
FOURTH: The post office address of the principal
office of the Corporation within the State of Maryland is 11 East
Chase Street, Baltimore City, Maryland 21202.
FIFTH: The resident agent of the Corporation in the
State of Maryland is The Prentice-Hall Corporation System,
Maryland, at 11 East Chase Street, Baltimore, Maryland 21202.
SIXTH: (1) The total number of shares of stock of all classes
and series which the Corporation initially has authority to issue is one hundred
million (100,000,000) shares of capital stock (par value of One Tenth of One
Cent $.001 per share), amounting in aggregate par value to $100,000. All of such
shares are classified as "Common Stock".
(2) The Board of Directors may classify or reclassify any
unissued shares of capital stock from time to time by setting or changing in any
one or more respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such shares of stock.
(3) Unless otherwise prohibited by law, so long as the
Corporation is registered as a closed-end management company under the
Investment Company Act of 1940, the Board of Directors shall have the power and
authority, without the approval of the holders of any outstanding shares, to
increase or decrease the number of shares of capital stock or the number of
shares of capital stock of any class that the Corporation has authority to
issue.
-3-
C/M: 11212.0012 275064.2
<PAGE>
(4) The following is a description of the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption of the shares
of Common Stock of the Corporation:
(a) Asset Belonging to Classes. All consideration
received by the Corporation from the issue or sale of shares
of a particular class, together with all assets in which such
consideration is invested or reinvested, all income, earnings,
profits and proceeds thereof, including any proceeds derived
from the sale, exchange or liquidation of such assets, and any
funds or payments derived from any investment or reinvestment
of such proceeds in whatever form the same may be, shall
irrevocably belong to that class for all purposes, subject
only to the rights of creditors, and shall be so recorded upon
the books of account of the Corporation. Such consideration,
assets, income, earnings, profits and proceeds, together with
any General Items allocated to that class as provided in the
following sentence, are herein referred to collectively as
"assets belonging to" that class. In the event that there are
any assets, income, earnings, profits or proceeds which are
not readily identifiable as belonging to any particular class
(collectively, "General Items"), such General Items shall be
allocated by or under the supervision of the Board of
Directors to and among any one or more of the classes
established and designated from time to time in such manner
and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable; and any General Items so
allocated to a particular class shall belong to that class.
Each such allocation by the Board of Directors shall be
conclusive and binding for all purposes.
(b) Liabilities of Class. The assets belonging to
each particular class shall be charged with the liabilities of
the Corporation in respect of that class and all expenses,
costs, charges and reserves attributable to that class, and
any general liabilities, expenses, costs, charges or reserves
of the Corporation which are not readily identifiable as
pertaining to any particular class, shall be allocated and
charged by or under the supervision of the Board of Directors
to and among any one or more of the Series established and
designated from time to time in such manner and on such basis
as the Board of Directors, in its sole discretion, deems fair
and equitable. The liabilities, expenses, costs, charges and
reserves allocated and so charged to a class are herein
referred
-4-
C/M: 11212.0012 275064.2
<PAGE>
to collectively as "liabilities of" that class. Each
allocation of liabilities, expenses, costs, charges and
reserves by or under the supervision of the Board of Directors
shall be conclusive and binding for all purposes.
(c) Dividends and Distributions. Dividends and
capital gains distributions on shares may be paid with such
frequency, in such form and in such amount as the Board of
Directors may determine by resolution adopted from time to
time, or pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Board of
Directors may determine, after providing for actual and
accrued liabilities of that class. All dividends on shares
shall be paid only out of the income belonging to that class
and all capital gains distributions on shares of a particular
series shall be paid only out of the capital gains belonging
to that class. All dividends and distributions on shares of a
particular class shall be distributed pro rata to the holders
of that class in proportion to the number of shares of that
class held by such holders at the date and time of record
established for the payment of such dividends or
distributions, except that in connection with any dividend or
distribution program or procedure, the Board of Directors may
determine that no dividend or distribution shall be payable on
shares as to which the stockholder's purchase order and/or
payment have not been received by the time or times
established by the Board of Directors under such program or
procedure.
Dividends and distributions may be paid in cash,
property or additional shares of the same as determined by the
Board of Directors or pursuant to any program that the Board
of Directors may have in effect at the time for the election
by stockholders of the form in which dividends or
distributions are to be paid. Any such dividend or
distribution paid in shares shall be paid at the current net
asset value thereof.
(d) Voting. On each matter submitted to a vote of the
stockholders, each holder of shares shall be entitled to one
vote for each share standing in his name on the books of the
Corporation.
(e) Liquidation. In the event of the liquidation, the
stockholders of the class shall be entitled to receive, when
and as declared by the Board of Directors, the excess of the
assets over the liabilities. The holders of shares shall not
be entitled thereby to any distribution upon liquidation
-5-
C/M: 11212.0012 275064.2
<PAGE>
of any other Shares. The assets so distributable to the
stockholders shall be distributed among such stockholders in
proportion to the number of shares held by them and recorded
on the books of the Corporation. The liquidation may be
authorized by vote of a majority of the Board of Directors
then in office, subject to the approval of a majority of the
outstanding voting securities class, as defined in the
Investment Company Act of 1940, and without the vote of the
holders of shares of any other class. The liquidation of a
particular class may be accomplished, in whole or in part, by
the transfer of assets of such class to another class or by
the exchange of shares for the shares of another Class.
(f) Net Asset Value Per Share. The net asset value
per share shall be the quotient obtained by dividing the value
of the net assets (being the value of the assets less the
liabilities) by the total number of shares outstanding, all as
determined by or under the direction of the Board of Directors
in accordance with generally accepted accounting principles
and the Investment Company Act of 1940. Subject to the
applicable provisions of the Investment Company Act of 1940,
the Board of Directors, in its sole discretion, may prescribe
and shall set forth in the By-Laws of the Corporation or in a
duly adopted resolution of the Board of Directors such bases
and times for determining the value of the assets belonging
to, and the net asset value per share of outstanding shares,
or the net income attributable to such shares, as the Board of
Directors deems necessary or desirable. The Board of Directors
shall have full discretion, to the extent not inconsistent
with the Maryland General Corporation Law and the Investment
Company Act of 1940, to determine which item shall be treated
as income and which items as capital and whether any item of
expense shall be charged to income or capital. Each such
determination and allocation shall be conclusive and binding
for all purposes.
(5) All Shares of Common Stock of the Corporation shall
represent the same interest in the Corporation and have identical voting,
dividend, liquidation and other rights with any other shares of Common Stock;
provided, however, that notwithstanding anything in the charter of the
Corporation to the contrary:
(a) Any class of shares may be subject to such sales
loads, contingent deferred sales charges, Rule 12b-1 fees,
administrative fees, service fees, or other fees, however
designated, in such amounts as may
-6-
C/M: 11212.0012 275064.2
<PAGE>
be established by the Board of Directors from time to time in
accordance with the Investment Company Act of 1940.
(b) Expenses related solely to a particular class
(including, without limitation, distribution expenses under a
Rule 12b-1 plan and administrative expenses under an
administration or service agreement, plan or other
arrangement, however designated) shall be borne by that class
and shall be appropriately reflected (in the manner determined
by the Board of Directors) in the net asset value, dividends,
distributions and liquidation rights of the shares of that
class.
(c) As to any matter with respect to which a separate
vote of any class is required by the Investment Company Act of
1940 or by the Maryland General Corporation Law (including,
without limitation, approval of any plan, agreement or other
arrangement referred to in subsection (b) above), such
requirement as to a separate vote by that class shall apply in
lieu of Single Class Voting. As to any matter which does not
affect the interest of a particular class, only the holders of
shares of the affected classes shall be entitled to vote.
(6) The Corporation may issue and sell fractions of shares of
capital stock having pro rata all the rights of full shares, including, without
limitation, the right to vote and to receive dividends, and wherever the words
"share" or "shares" are used in the charter or By-Laws of the Corporation, they
shall be deemed to include fractions of shares where the context does not
clearly indicate that only full shares are intended.
(7) The Corporation shall not be obligated to issue
certificates representing shares of any class of capital stock. At the time of
issue or transfer of shares without certificates, the Corporation shall provide
the stockholder with such information as may be required under the Maryland
General Corporation Law.
(8) No holder of any shares of stock of the Corporation shall
be entitled as of right to subscribe for, purchase, or otherwise acquire any
such shares which the Corporation shall issue or propose to issue; and any and
all of the shares of stock of the Corporation, whether now or hereafter
authorized, may be issued, or may be reissued or transferred if the same have
been reacquired and have treasury status, by the Board of Directors to such
persons, firms, corporations and associations, and for such lawful
consideration, and on such terms, as the Board of Directors in its discretion
may determine, without first offering same, or any thereof, to any said holder.
-7-
C/M: 11212.0012 275064.2
<PAGE>
(9) All persons who shall acquire stock or other securities of
the Corporation shall acquire the same subject to the provisions of these
Articles of Incorporation, as from time to time amended.
SEVENTH: The number of directors of the Corporation, until
such number shall be increased pursuant to the By-Laws of the Corporation, shall
be two. The number of directors shall never be less than the number prescribed
by the General Corporation Law of the State of Maryland and shall never be more
than twenty. The names of the persons who shall act as directors of the
Corporation until their successors are duly chosen and qualify are Kenneth C.
Weiss and Louis C. Lucido.
EIGHTH: The following provisions are inserted for the
purpose of defining, limiting and regulating the powers of the
Corporation and of the Board of Directors and stockholders.
(1) The business and affairs of the Corporation shall be
managed under the direction of the Board of Directors which shall have and may
exercise all powers of the Corporation except those powers which are by law, by
these Articles of Incorporation or by the By-Laws conferred upon or reserved to
the stockholders. In furtherance and not in limitation of the powers conferred
by law, the Board of Directors shall have power:
(a) to make, alter and repeal the By-Laws of the
Corporation;
(b) to issue and sell, from time to time, shares of
any class or series of the Corporation's stock in such amounts
and on such terms and conditions, and for such amount and kind
of consideration, as the Board of Directors shall determine,
provided that the consideration per share to be received by
the Corporation shall be not less than the greater of the net
asset value per share of that class of stock at such time
computed in accordance with Article SIXTH hereof or the par
value thereof;
(c) from time to time to set apart out of any
assets of the Corporation otherwise available for dividends a
reserve or reserves for working capital or for any other
proper purpose or purposes, and to reduce, abolish or add to
any such reserve or reserves from time to time as said Board
of Directors may deem to be in the best interests of the
Corporation; and to determine in its discretion what part of
the assets of the Corporation available for dividends in
excess of such reserve or reserves shall be declared in
dividends and paid to the stockholders of the Corporation; and
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(d) from time to time to determine to what extent
and at what times and places and under what conditions and
regulations the accounts, books and records of the
Corporation, or any of them, shall be open to the inspection
of the stockholders; and no stockholder shall have any right
to inspect any account or book or document of the Corporation,
except as conferred by the laws of the State of Maryland,
unless and until authorized to do so by resolution of the
Board of Directors or of the stockholders of the Corporation.
(2) Notwithstanding any provision of the General Corporation
Law of the State of Maryland requiring a greater proportion than a majority of
the votes of all classes or of any class of the Corporation's stock entitled to
be cast in order to take or authorize any action, any such action may be taken
or authorized upon the concurrence of a majority of the aggregate number of
votes entitled to be cast thereon subject to any applicable requirements of the
Investment Company Act of 1940, as from time to time in effect, or rules or
orders of the Securities and Exchange Commission or any successor thereto.
(3) Except as may otherwise be expressly provided by
applicable statutes or regulatory requirements, the presence in person or by
proxy of the holders of one-third of the shares of stock of the Corporation
entitled to vote shall constitute a quorum at any meeting of the stockholders.
(4) Any determination made in good faith and, so far as
accounting matters are involved, in accordance with generally accepted
accounting principles by or pursuant to the discretion of the Board of
Directors, as to the amount of the assets, debts, obligations, or liabilities of
the Corporation, as to the amount of any reserves or charges set up and the
propriety thereof, as to the time of or purposes for creating such reserves or
charges, as to the use, alteration or cancellation of any reserves or charges
(whether or not any debt, obligation or liability for which such reserves or
charges shall have been created shall have been paid or discharged or shall by
then or thereafter required to be paid or discharged), as to the value of or the
method of valuing any investment owned or held by the Corporation, as to the
market value or fair value of any investment or fair value of any other asset of
the Corporation, as to the allocation of any asset of the Corporation to a
particular class or classes of the Corporation's stock, as to the charging of
any liability of the Corporation to a particular class or classes of the
Corporation's stock, as to the number of shares of the Corporation outstanding,
as to the estimated expense to the Corporation in connection with purchases of
its shares, as to the ability to liquidate investments in orderly fashion, or as
to any other matters relating to the issue, sale, purchase and/or other
acquisition or disposition of investments or shares of the Corporation, shall be
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final and conclusive and shall be binding upon the Corporation and all holders
of its shares, past, present and future, and shares of the Corporation are
issued and sold on the condition and understanding that any and all such
determinations shall be binding as aforesaid.
(5) Except to the extent prohibited by the Investment Company
Act of 1940, as amended, or rules, regulations or orders thereunder promulgated
by the Securities and Exchange Commission or any successor thereto or by the
By-Laws of the Corporation, a director, officer or employee of the Corporation
shall not be disqualified by his position from dealing or contracting with the
Corporation, nor shall any transaction or contract of the Corporation be void or
voidable by reason of the fact that any director, officer or employee or any
firm of which any director, officer or employee is a member or any corporation
of which any director, officer or employee is a stockholder, officer or
director, is in any way interested in such transaction or contract; provided
that in case a director, or a firm or corporation of which a director is a
member, stockholder, officer or director, is so interested, such fact shall be
disclosed to or shall have been known by the Board of Directors or a majority
thereof; and any director of the Corporation who is so interested, or who is a
member, stockholder, officer or director of such firm or corporation, may be
counted in determining the existence of a quorum at any meeting of the Board of
Directors of the Corporation which shall authorize any such transaction or
contract, with like force and effect as if he were not such director, or member,
stockholder, officer or director of such firm or corporation.
(6) Specifically and without limitation of the foregoing
subsection (e) but subject to the exception therein prescribed, the Corporation
may enter into management or advisory, underwriting, distribution and
administration contracts and other contracts, and may otherwise do business,
with Equitable Real Estate Hyperion Capital Advisors, L.L.C., and any parent,
subsidiary, partner, or affiliate of such firm or any affiliates of any such
affiliate, or the stockholders, members, directors, officers, partners and
employees thereof, and may deal freely with one another notwithstanding that the
Board of Directors of the Corporation may be composed in part of directors,
officers, partners or employees of such firm and/or its parents, subsidiaries or
affiliates and that officers of the Corporation may have been, be or become
directors, officers, or employees of such firm, and/or its parents, subsidiaries
or affiliates, and neither such management or advisory, underwriting,
distribution or administration contracts nor any other contract or transaction
between the Corporation and such firm and/or its parents, subsidiaries or
affiliates shall be invalidated or in any way affected thereby, nor shall any
director or officer of the Corporation be liable to the
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Corporation or to any stockholder or creditor thereof or to any person for any
loss incurred by it or him under or by reason of such contract or transaction;
provided that nothing herein shall protect any director or officer of the
Corporation against any liability to the Corporation or to its security holders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office; and provided always that such contract or transaction
shall have been on terms that were not unfair to the Corporation at the time at
which it was entered into.
(7) The duration of the Corporation's existence will terminate
on December 31, 2005, however, the Board of Directors, at their sole discretion
may extend such date two years until December 31, 2007 if it determines that
such extension is in the best interests of the Shareholders.
NINTH: (1) The Corporation shall indemnify (i) its currently
acting and former directors and officers, whether serving the Corporation or at
its request any other entity, to the fullest extent required or permitted by the
General Laws of the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the fullest extent permitted by
law, and (ii) other employees and agents to such extent as shall be authorized
by the Board of Directors or the By-Laws and as permitted by law. Nothing
contained herein shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its security holders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The foregoing rights of indemnification shall not be exclusive of
any other rights to which those seeking indemnification may be entitled. The
Board of Directors may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt, approve and
amend from time to time such by-laws, resolutions or contracts implementing such
provisions or such indemnification arrangements as may be permitted by law. No
amendment of the charter of the Corporation or repeal of any of its provisions
shall limit or eliminate the right of indemnification provided hereunder with
respect to acts or omissions occurring prior to such amendment or repeal.
(2) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment Company Act of
1940, no director or officer of the Corporation shall be personally liable to
the Corporation or its stockholders for money damages; provided, however, that
nothing herein shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its security holders to
which he would otherwise be subject by reason
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of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office. No amendment of the charter of
the Corporation or repeal of any of its provisions shall limit or eliminate the
limitation of liability provided to directors and officers hereunder with
respect to any act or omission occurring prior to such amendment or repeal.
TENTH: The Corporation reserves the right to amend, alter,
change or repeal any provision contained in these Articles of Incorporation or
in any amendment hereto in the manner now or hereafter prescribed by the laws of
the State of Maryland and all rights conferred upon stockholders herein are
granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned, being the incorporator of
the Corporation, has adopted and signed these Articles of Incorporation for the
purpose of forming the corporation described herein pursuant to the General
Corporation law of the State of Maryland and does hereby acknowledge that said
adoption and signing are her act.
_______________________
Ann M. Smith
Dated: September 8, 1995
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BY-LAWS
OF
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
a Maryland corporation
ARTICLE I
Offices
Section 1. Principal Office in Maryland. The
Corporation shall have a principal office in the City of
Baltimore, State of Maryland.
Section 2. Other Offices. The Corporation may have offices
also at such other places within and without the State of Maryland as the Board
of Directors may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
Meetings of Stockholders
Section 1. Place of Meeting. Meetings of stockholders shall be
held at such place, either within the State of Maryland or at such other place
within the United States, as shall be fixed from time to time by the Board of
Directors.
Section 2. Annual Meetings. The Corporation shall not be
required to hold an annual meeting of its stockholders in any year in which none
of the following is required to be acted on by the holders of any class or
series of stock under the Investment Company Act of 1940: (a) election of the
directors, (b) approval of the Corporation's investment advisory agreement with
respect to a particular class or series; (c) ratification of the selection of
independent public accountants; and (d) approval of the Corporation's
distribution agreement with respect to a particular class or series. In the
event that the Corporation shall be required to hold an annual meeting of
stockholders by the Investment Company Act of 1940, such meeting of stockholders
shall be held on a date fixed from time to time by the Board of Directors not
less than ninety nor more than one hundred twenty days following the end of such
fiscal year of the Corporation.
Section 3. Notice of Annual Meeting. Written or
printed notice of an annual meeting, stating the place, date and
hour thereof, shall be given to each stockholder entitled to vote
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thereat not less than ten nor more than ninety days before the date of the
meeting.
Section 4. Special Meetings. Special meetings of stockholders
may be called by the chairman, the president or by the Board of Directors and
shall be called by the secretary upon the written request of holders of shares
entitled to cast not less than twenty-five percent of all the votes entitled to
be cast at such meeting. Such request shall state the purpose or purposes of
such meeting and the matters proposed to be acted on thereat. In the case of
such request for a special meeting, upon payment by such stockholders to the
Corporation of the estimated reasonable cost of preparing and mailing a notice
of such meeting, the secretary shall give the notice of such meeting. The
secretary shall not be required to call a special meeting to consider any matter
which is substantially the same as a matter acted upon at any special meeting of
stockholders held within the preceding twelve months unless requested to do so
by the holders of shares entitled to cast not less than a majority of all votes
entitled to be cast at such meeting.
Section 5. Notice of Special Meeting. Written or printed
notice of a special meeting of stockholders, stating the place, date, hour and
purpose thereof, shall be given by the secretary to each stockholder entitled to
vote thereat not less than ten nor more than ninety days before the date fixed
for the meeting.
Section 6. Business of Special Meetings. Business
transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice thereof.
Section 7. Quorum. Except as may otherwise be expressly
provided by applicable statutes or regulations, the holders of one-third of the
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business.
Section 8. Voting. When a quorum is present at any meeting,
the affirmative vote of a majority of the votes cast shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of the Investment Company Act of 1940, as from time to time in effect,
or other statutes or rules or orders of the Securities and Exchange Commission
or any successor thereto or of the Articles of Incorporation, a different vote
is required, in which case such express provision shall govern and control the
decision of such question.
Section 9. Proxies. Each stockholder shall at every
meeting of stockholders be entitled to one vote in person or by
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proxy for each share of the stock having voting power held by such stockholder,
but no proxy shall be voted after eleven months from its date, unless otherwise
provided in the proxy.
Section 10. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, to express consent to corporate action
in writing without a meeting, or to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date
which shall be not more than ninety days and, in the case of a meeting of
stockholders, not less than ten days prior to the date on which the particular
action requiring such determination of stockholders is to be taken. In lieu of
fixing a record date, the Board of Directors may provide that the stock transfer
books shall be closed for a stated period, but not to exceed, in any case,
twenty days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten days immediately
preceding such meeting. If no record date is fixed and the stock transfer books
are not closed for the determination of stockholders: (1) the record date for
the determination of stockholders entitled to notice of, or to vote at, a
meeting of stockholders shall be at the close of business on the day on which
notice of the meeting of stockholders is mailed or the day thirty days before
the meeting, whichever is the closer date to the meeting; and (2) the record
date for the determination of stockholders entitled to receive payment of a
dividend or an allotment of any rights shall be at the close of business on the
day on which the resolution of the Board of Directors, declaring the dividend or
allotment of rights, is adopted, provided that the payment or allotment date
shall not be more than ninety days after the date of the adoption of such
resolution.
Section 11. Inspectors of Election. The directors, in advance
of any meeting, may, but need not, appoint one or more inspectors to act at the
meeting or any adjournment thereof. If an inspector or inspectors are not
appointed, the person presiding at the meeting may, but need not, appoint one or
more inspectors. In case any person who may be appointed as an inspector fails
to appear or act, the vacancy may be filled by appointment made by the directors
in advance of the meeting or at the meeting by the person presiding thereat.
Each inspector, if any, before entering upon the discharge of his or her duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his or her
ability. The inspectors, if any, shall determine the number of shares
outstanding and the voting power
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of each, the shares represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine the
result, and do such acts as are proper to conduct the election or vote with
fairness to all stockholders. On request of the person presiding at the meeting
or any stockholder, the inspector or inspectors, if any, shall make a report in
writing of any challenge, question or matter determined by him or her or them
and execute a certificate of any fact found by him or her or them.
Section 12. Informal Action by Stockholders. Except to the
extent prohibited by the Investment Company Act of 1940, as from time to time in
effect, or rules or orders of the Securities and Exchange Commission or any
successor thereto, any action required or permitted to be taken at any meeting
of stockholders may be taken without a meeting if a consent in writing, setting
forth such action, is signed by all the stockholders entitled to vote on the
subject matter thereof and any other stockholders entitled to notice of a
meeting of stockholders (but not to vote thereat) have waived in writing any
rights which they may have to dissent from such action, and such consent and
waiver are filed with the records of the Corporation.
ARTICLE III
Board of Directors
Section 1. Number of Directors. The number of directors shall
be fixed at no less than two nor more than twenty. Within the limits specified
above, the number of directors shall be fixed from time to time by the Board of
Directors, but the tenure of office of a director in office at the time of any
decrease in the number of directors shall not be affected as a result thereof.
The directors shall be elected to hold office at the annual meeting of
stockholders, except as provided in Section 2 of this Article, and each director
shall hold office until the next annual meeting of stockholders or until his
successor is elected and qualified. Any director may resign at any time upon
written notice to the Corporation. Any director may be removed, either with or
without cause, at any meeting of stockholders duly called and at which a quorum
is present by the affirmative vote of the majority of the votes entitled to be
cast thereon, and the vacancy in the Board of Directors caused by such removal
may be filled by the stockholders at the time of such removal. Directors need
not be stockholders.
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Section 2. Vacancies and Newly Created Directorships. Any
vacancy occurring in the Board of Directors for any cause, including an increase
in the number of directors, may be filled by the stockholders or by a majority
of the remaining members of the Board of Directors even if such majority is less
than a quorum. So long as the Corporation is a registered investment company
under the Investment Company Act of 1940, vacancies in the Board of Directors
may be filled by a majority of the remaining members of the Board of Directors
only if, immediately after filing any such vacancy, at least two-thirds of the
directors then holding office shall have been elected to such office at a
meeting of stockholders. A director elected by the Board of Directors to fill a
vacancy shall be elected to hold office until the next annual meeting of
stockholders or until his successor is elected and qualifies.
Section 3. Powers. The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors which shall
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Articles of Incorporation or by these
By-Laws conferred upon or reserved to the stockholders.
Section 4. Annual Meeting. The first meeting of each newly
elected Board of Directors shall be held immediately following the adjournment
of the annual meeting of stockholders and at the place thereof. No notice of
such meeting to the directors shall be necessary in order legally to constitute
the meeting, provided a quorum shall be present. In the event such meeting is
not so held, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors.
Section 5. Other Meetings. The Board of Directors of the
Corporation or any committee thereof may hold meetings, both regular and
special, either within or without the State of Maryland. Regular meetings of the
Board of Directors may be held without notice at such time and at such place as
shall from time to time be determined by the Board of Directors. Special
meetings of the Board of Directors may be called by the chairman, the president
or by two or more directors. Notice of special meetings of the Board of
Directors shall be given by the secretary to each director at least three days
before the meeting if by mail or at least 24 hours before the meeting if given
in person or by telephone or by telegraph. The notice need not specify the
business to be transacted.
Section 6. Quorum and Voting. At meetings of the
Board of Directors, two of the directors in office at the time,
but in no event less than one-third of the entire Board of
Directors, shall constitute a quorum for the transaction of
business. When required pursuant to Section 15(c) under the
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Investment Company Act of 1940 or Rule 12b-1 thereunder a quorum shall also
require the presence in person of a majority of directors who are not parties to
a contract or agreement to be voted upon or interested persons of any such
party. The action of a majority of the directors present at a meeting at which a
quorum is present shall be the action of the Board of Directors. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
Section 7. Committees. The Board of Directors may, by
resolution passed by a majority of the entire Board of Directors, appoint from
among its members an executive committee and other committees of the Board of
Directors, each committee to be composed of two or more of the directors of the
Corporation. The Board of Directors may, to the extent provided in the
resolution, delegate to such committees, in the intervals between meetings of
the Board of Directors, any or all of the powers of the Board of Directors in
the management of the business and affairs of the Corporation, except the power
to declare dividends, to issue stock, to recommend to stockholders any action
requiring stockholders' approval, to amend the By-Laws or to approve any merger
or share exchange which does not require stockholders' approval. Such committee
or committees shall have the name or names as may be determined from time to
time by resolution adopted by the Board of Directors. Unless the Board of
Directors designates one or more directors as alternate members of any
committee, who may replace an absent or disqualified member at any meeting of
the committee, the members of any such committee present at any meeting and not
disqualified from voting may, whether or not they constitute a quorum,
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member of such committee. At
meetings of any such committee, a majority of the members or alternate members
of such committee shall constitute a quorum for the transaction of business and
the act of a majority of the members or alternate members present at any meeting
at which a quorum is present shall be the act of the committee.
Section 8. Minutes of Committee Meetings. The
committees shall keep regular minutes of their proceedings.
Section 9. Informal Action by Board of Directors and
Committees. Any action, except approving the Rule 12b-1 Plan and the Advisory
Agreement, required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if a
written consent thereto is signed by all members of the Board of Directors or of
such committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board of Directors or committee.
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Section 10. Meetings by Conference Telephone. Except
to the extent prohibited by the Investment Company Act of 1940,
as from time to time in effect, or rules or orders of the
Securities and Exchange Commission or any successor thereto, the
members of the Board of Directors or any committee thereof may
participate in a meeting of the Board of Directors or committee
by means of a conference telephone or similar communications
equipment by means of which all persons participating in the
meeting can hear each other at the same time and such
participation shall constitute presence in person at such
meeting.
Section 11. Fees and Expenses. The directors may be paid their
expenses of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like reimbursement and
compensation for attending committee meetings.
ARTICLE IV
Notices
Section 1. General. Notices to directors and stockholders
mailed to them at their post office addresses appearing on the books of the
Corporation shall be deemed to be given at the time when deposited in the United
States mail.
Section 2. Waiver of Notice. Whenever any notice is required
to be given under the provisions of the statutes, of the Articles of
Incorporation or of these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed the equivalent of notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting except when the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
ARTICLE V
Officers
Section 1. General. The officers of the Corporation
shall be chosen by the Board of Directors at its first meeting
after each annual meeting of stockholders and shall be a chairman
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of the Board of Directors, a president, a secretary and a treasurer. The Board
of Directors may also choose such vice presidents and additional officers or
assistant officers as it may deem advisable. Any number of offices, except the
offices of president and vice president, may be held by the same person. No
officer shall execute, acknowledge or verify any instrument in more than one
capacity if such instrument is required by law to be executed, acknowledged or
verified by two or more officers.
Section 2. Other Officers and Agents. The Board of Directors
may appoint such other officers and agents as it desires who shall hold their
offices for such terms and shall exercise such power and perform such duties as
shall be determined from time to time by the Board of Directors.
Section 3. Tenure of Officers. The officers of the Corporation
shall hold office at the pleasure of the Board of Directors. Each officer shall
hold his or her office until his or her successor is elected and qualifies or
until his or her earlier resignation or removal. Any officer may resign at any
time upon written notice to the Corporation. Any officer elected or appointed by
the Board of Directors may be removed at any time by the Board of Directors
when, in its judgment, the best interests of the Corporation will be served
thereby. Any vacancy occurring in any office of the Corporation by death,
resignation, removal or otherwise shall be filled by the Board of Directors.
Section 4. Chairman of the Board of Directors. The
chairman of the Board of Directors shall be the chief executive
officer of the Corporation, shall preside at all meetings of the
stockholders and of the Board of Directors, shall have general
and active management of the business of the Corporation and
shall see that all orders and resolutions of the Board of
Directors are carried into effect. The chairman shall execute on
behalf of the Corporation, and may affix the seal or cause the
seal to be affixed to, all instruments requiring such execution
except to the extent that signing and execution thereof shall be
expressly delegated by the Board of Directors to some other
officer or agent of the Corporation.
Section 5. President. The president shall, in the absence of
the chairman of the Board of Directors, preside at all meetings of the
stockholders or of the Board of Directors. The president shall have general and
active management of the business of the Corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect. The
president shall execute bonds, mortgages and other contracts requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation.
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Section 6. Vice Presidents. The vice presidents shall act
under the direction of the president and in the absence or disability of the
president shall perform the duties and exercise the power of the president. They
shall perform such other duties and have such other powers as the president or
the Board of Directors may from time to time prescribe. The Board of Directors
may designate one or more executive vice presidents or may otherwise specify the
order of seniority of the vice presidents and, in that event, the duties and
powers of the president shall descend to the vice presidents in the specified
order of seniority.
Section 7. Secretary. The secretary shall act under the
direction of the president. Subject to the direction of the president, the
secretary shall attend all meetings of the Board of Directors and all meetings
of stockholders and record the proceedings in a book to be kept for that purpose
and shall perform like duties for the committees designated by the Board of
Directors when required. The secretary shall give, or cause to be given, notice
of all meetings of stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the president or the
Board of Directors. The secretary shall keep in safe custody the seal of the
Corporation and shall affix the seal or cause it to be affixed to any instrument
requiring it.
Section 8. Assistant Secretaries. The assistant secretaries in
the order of their seniority, unless otherwise determined by the president or
the Board of Directors, shall, in the absence or disability of the secretary,
perform the duties and exercise the powers of the secretary. They shall perform
such other duties and have such other powers as the president or the Board of
Directors may from time to time prescribe.
Section 9. Treasurer. The treasurer shall act under the
direction of the president. Subject to the direction of the president he shall
have the custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all monies and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors. The treasurer shall disburse the funds of the
Corporation as may be ordered by the president or the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the president and
the Board of Directors, at its regular meetings, or when the Board of Directors
so requires, an account of all his or her transactions as treasurer and of the
financial condition of the Corporation.
Section 10. Assistant Treasurers. The assistant
treasurers in the order of their seniority, unless otherwise
determined by the president or the Board of Directors, shall, in
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<PAGE>
the absence or disability of the treasurer, perform the duties and exercise the
powers of the treasurer. They shall perform such other duties and have such
other powers as the president or the Board of Directors may from time to time
prescribe.
ARTICLE VI
Certificates of Stock
Section 1. General. Every holder of stock of the Corporation
who has made full payment of the consideration for such stock shall be entitled
upon request to have a certificate, signed by, or in the name of the Corporation
by, the president or a vice president and countersigned by the treasurer or an
assistant treasurer or the secretary or an assistant secretary of the
Corporation, certifying the number and class of whole shares of stock owned by
such holder in the Corporation.
Section 2. Fractional Share Interests or Scrip. The
Corporation may, but shall not be obliged to, issue fractions of
a share of stock, arrange for the disposition of fractional
interests by those entitled thereto, pay in cash the fair value
of fractions of a share of stock as of the time when those
entitled to receive such fractions are determined, or issue scrip
or other evidence of ownership which shall entitle the holder to
receive a certificate for a full share of stock upon the
surrender of such scrip or other evidence of ownership
aggregating a full share. Fractional shares of stock shall have
proportionately to the respective fractions represented thereby
all the rights of whole shares, including the right to vote, the
right to receive dividends and distributions and the right to
participate upon liquidation of the Corporation, excluding,
however, the right to receive a stock certificate representing
such fractional shares. The Board of Directors may cause such
scrip or evidence of ownership to be issued subject to the
condition that it shall become void if not exchanged for
certificates representing full shares of stock before a specified
date or subject to the condition that the shares of stock for
which such scrip or evidence of ownership is exchangeable may be
sold by the Corporation and the proceeds thereof distributed to
the holders of such scrip or evidence of ownership, or subject to
any other reasonable conditions which the Board of Director shall
deem advisable, including provision for forfeiture of such
proceeds to the Corporation if not claimed within a period of not
less than three years after the date of the original issuance of
scrip certificates.
Section 3. Signatures on Certificates. Any of or all
the signatures on a certificate may be a facsimile. In case any
officer who has signed or whose facsimile signature has been
placed upon a certificate shall cease to be such officer before
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<PAGE>
such certificate is issued, it may be issued with the same effect as if he or
she were such officer at the date of issue. The seal of the Corporation or a
facsimile thereof may, but need not, be affixed to certificates of stock.
Section 4. Lost, Stolen or Destroyed Certificates. The Board
of Directors may direct a new certificate or certificates to be issued in place
of any certificate or certificates theretofore issued by the Corporation alleged
to have been lost, stolen or destroyed, upon the making of any affidavit of that
fact by the person claiming the certificate or certificates to be lost, stolen
or destroyed. When authorizing such issue of a new certificate or certificates,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his or her legal representative, to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate or
certificates alleged to have been lost, stolen or destroyed.
Section 5. Transfer of Shares. Upon request by the registered
owner of shares, and if a certificate has been issued to represent such shares
upon surrender to the Corporation or a transfer agent of the Corporation of a
certificate for shares of stock duly endorsed or accompanied by proper evidence
of succession, assignment or authority to transfer, subject to the Corporation's
rights to redeem or purchase such shares, it shall be the duty of the
Corporation, if it is satisfied that all provisions of the Articles of
Incorporation, of the By-Laws and of the law regarding the transfer of shares
have been duly complied with, to record the transactions upon its books, issue a
new certificate to the person entitled thereto upon request for such
certificate, and cancel the old certificate, if any.
Section 6. Registered Owners. The Corporation shall be
entitled to recognize the person registered on its books as the owner of shares
to be the exclusive owner for all purposes including, redemption, voting and
dividends, and the Corporation shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Maryland.
ARTICLE VII
Miscellaneous
Section 1. Reserves. There may be set aside out of
any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in their
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<PAGE>
absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for repairing or maintaining any property of the Corporation,
or for the purchase of additional property, or for such other purpose as the
Board of Directors shall think conducive to the interest of the Corporation, and
the Board of Directors may modify or abolish any such reserve.
Section 2. Dividends. Dividends upon the stock of the
Corporation may, subject to the provisions of the Articles of Incorporation and
of the provisions of applicable law, be declared by the Board of Directors at
any time. Dividends may be paid in cash, in property or in shares of the
Corporation's stock, subject to the provisions of the Articles of Incorporation
and of applicable law.
Section 3. Capital Gains Distributions. The amount and number
of capital gains distributions paid to the stockholders during each fiscal year
shall be determined by the Board of Directors. Each such payment shall be
accompanied by a statement as to the source of such payment, to the extent
required by law.
Section 4. Checks. All checks or demands for money and notes
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 5. Fiscal Year. The fiscal year of the
Corporation shall be fixed by resolution of the Board of
Directors.
Section 6. Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words,
"Corporate Seal, Maryland". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in another manner reproduced.
Section 7. Filing of By-Laws. A certified copy of the
By-Laws, including all amendments, shall be kept at the principal
office of the Corporation in the State of Maryland.
Section 8. Annual Report. The books of account of the
Corporation shall be examined by an independent firm of public accountants at
the close of each annual fiscal period of the Corporation and at such other
times, if any, as may be directed by the Board of Directors of the Corporation.
Within one hundred and twenty days of the close of each annual fiscal period a
report based upon such examination at the close of that fiscal period shall be
mailed to each stockholder of the Corporation of record at the close of such
annual fiscal period, unless the Board of Directors shall set another record
date, at his address as the same appears on the books of the Corporation. Each
such
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<PAGE>
report shall contain such information as is required to be set forth therein by
the Investment Company Act of 1940 and the rules and regulations promulgated by
the Securities and Exchange Commission thereunder. Such report shall also be
submitted at the annual meeting of the stockholders and filed within twenty days
thereafter at the principal office of the Corporation in the State of Maryland.
Section 9. Stock Ledger. The Corporation shall maintain at its
principal office outside of the State of Maryland an original or duplicate stock
ledger containing the names and addresses of all stockholders and the number of
shares of stock hold by each stockholder. Such stock ledger may be in written
form or in any other form capable of being converted into written form within a
reasonable time for visual inspection.
Section 10. Ratification of Accountants by Stockholders. At
every annual meeting of the stockholders of the Corporation otherwise called
there shall be submitted for ratification or rejection the name of the firm of
independent public accountants which has been selected for the current fiscal
year in which such annual meeting is held by a majority of those members of the
Board of Directors who are not investment advisers of, or interested person (as
defined in the Investment Company Act of 1940) of an investment adviser of, or
officers or employees of, the Corporation.
Section 11. Custodian. All securities and similar investments
owned by the Corporation shall be held by a custodian which shall be either a
trust company or a national bank of good standing, having a capital surplus and
undivided profits aggregating not less than two million dollars ($2,000,000), or
a member firm of the New York Stock Exchange, Inc. The terms of custody of such
securities and cash shall include such provisions required to be contained
therein by the Investment Company Act of 1940 and the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
Upon the resignation or inability to serve of any such
custodian the Corporation shall (a) use its best efforts to
obtain a successor custodian, (b) require the cash and securities
of the Corporation held by the custodian to be delivered directly
to the successor custodian, and (c) in the event that no
successor custodian can be found, submit to the stockholders of
the Corporation, before permitting delivery of such cash and
securities to anyone other than a successor custodian, the
question whether the Corporation shall be dissolved or shall
function without a custodian; provided, however, that nothing
herein contained shall prevent the termination of any agreement
between the Corporation and any such custodian by the affirmative
vote of the holders of a majority of all the stock of the
Corporation at the time outstanding and entitled to vote. Upon
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<PAGE>
its resignation or inability to serve and pending action by the Corporation as
set forth in this section, the custodian may deliver any assets of the
Corporation held by it to a qualified bank or trust company in the City of New
York, or to a member firm of the New York Stock Exchange, Inc. selected by it,
such assets to be held subject to the terms of custody which governed such
retiring custodian.
Section 12. Investment Advisers. The Corporation may enter
into one or more management or advisory, underwriting, distribution or
administration contract with any person, firm, partnership, association or
corporation but such contract or contracts shall continue in effect only so long
as such continuance is specifically approved annually by a majority of the Board
of Directors or by vote of the holders of a majority of the voting securities of
the Corporation, and in either case by vote of a majority of the directors who
are not parties to such contracts or interested persons (as defined in the
Investment Company Act of 1940) of any such party cast in person at a meeting
called for the purpose of voting on such approval.
ARTICLE VIII
Amendments
The Board of Directors shall have the power, by a majority
vote of the entire Board of Directors at any meeting thereof, to make, alter and
repeal By-Laws of the Corporation.
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275065.1
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
INVESTMENT ADVISORY AGREEMENT
AGREEMENT dated as of September [__], 1995 between Equitable
Real Estate Hyperion High-Yield Commercial Mortgage Fund, Inc. (the "Fund"), a
Maryland corporation, and Equitable Real Estate Hyperion Capital Advisors,
L.L.C. (the "Adviser"), a Delaware limited liability corporation.
WHEREAS, the Fund is engaged in business as a non-diversified,
closed-end management investment company registered under the Investment Company
Act of 1940 (collectively, with the rules and regulations promulgated
thereunder, the "1940 Act");
WHEREAS, the Adviser is a registered investment adviser under
the Investment Adviser's Act of 1940, with the rules and regulations promulgated
thereunder;
NOW, THEREFORE, in consideration of the mutual promises and
agreements herein contained and other good and valuable consideration, the
receipt of which is hereby acknowledged, it is agreed by and between the parties
hereto as follows:
1. In General
The Adviser agrees, all as more fully set forth herein, to act
as investment adviser to the Fund with respect to the investment and the
reinvestment of the Fund's assets.
2. Duties and Obligations of the Adviser with Respect to
Investments of Assets of the Fund
(a) Subject to the succeeding provisions of this paragraph and
subject to the direction and general control of the Fund's Board of Directors,
the Adviser shall act as investment adviser for and supervise and manage the
investment and reinvestment of the portfolio's assets and in connection
therewith have complete discretion in purchasing and selling securities and
other assets for the Fund and in voting and exercising all other rights
appertaining to such securities and other assets on behalf of the Fund. To carry
out such decisions, the Adviser is hereby authorized, as agent for the Fund and
attorney-in-fact for the Fund's account and at the Fund's risk and in the Fund's
name, to place such orders for the investment and reinvestment of the Fund's
assets.
(b) In the performance of its duties under this Agreement, the
Adviser shall at all times conform to, and act in accordance with, any
requirements imposed by (i) the provisions of the 1940 Act, and of any rules or
regulations in force thereunder; (ii) any other applicable provision of law;
(iii) the provisions of the Articles of Incorporation and By-Laws
299812.1
<PAGE>
of the Fund, as such documents are amended from time to time; (iv) the Fund's
Registration Statement filed with the 1940 Act and the Securities Act of 1933,
including the Prospectus and Statement of Additional Information forming a part
thereof (the "Registration Statement"); and (v) any policies and determinations
established by the Board of Directors of the Fund.
(c) The Adviser shall report to the Fund's Board of Directors
at each meeting thereof all changes in the Fund's portfolio and will also keep
the Fund in touch with important developments affecting the portfolio and, on
the Adviser's initiative, will furnish the Fund from time to time with such
information as the Adviser may believe appropriate for this purpose, whether
concerning the individual entities whose securities are included in the
portfolio, the activities in which such entities engage, Federal income tax
policies applicable to the Fund's investments, or the conditions prevailing in
the financial markets or the economy generally. The Adviser shall also furnish
the Fund with such statistical and analytical information with respect to the
portfolio securities as it may believe appropriate or as the Fund may reasonably
request.
(d) The Adviser may from time to time employ, subcontract with
or otherwise associate itself with entirely at its expense, such persons as it
believes to be particularly fitted to assist it in the execution of its duties
hereunder.
(e) The Adviser will bear all costs and expenses of its
partners and employees and any overhead incurred in connection with its duties
hereunder and shall bear the costs of any salaries or directors' fees of any
officers or directors of the Fund who are affiliated persons (as defined in the
Act) of the Adviser.
(f) The Adviser shall give the Fund the benefit of its best
judgment and effort in rendering services hereunder, but the Adviser shall not
be liable for any act or omission or for any loss sustained by the Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement.
(g) Nothing in this Agreement shall prevent the Adviser or any
director, officer, employee or other affiliate thereof from acting as investment
adviser for any other person, firm or corporation, or from engaging in any other
lawful activity, and shall not in any way limit or restrict the Adviser or any
of its partners, officers, employees or agents from buying, selling or trading
any securities for its or their own accounts or for the accounts of others for
whom it or they may be acting, provided, however, that the Adviser will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations under this Agreement.
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299812.1
<PAGE>
3. Fund Transactions and Brokerage
The Adviser is authorized, for the purchase and sale of the
Fund's portfolio securities, to employ such securities dealers as may, in the
judgment of the Adviser, implement the investment objectives and policies of the
Fund to obtain the best net results taking into account such factors as price,
including dealer spread, the size, type and difficulty of the transaction
involved, the firm's general execution and operational facilities and the firm's
risk in positioning the securities involved. Consistent with these investment
objectives and policies, the Adviser is authorized to direct the execution of
the Fund's portfolio transactions to dealers and brokers furnishing statistical
information or research deemed by the Adviser to be useful or valuable to the
performance of its investment advisory functions for the Fund.
It is understood that the Adviser will not be deemed to have
acted unlawfully, or to have breached a fiduciary duty to the Fund or be in
breach of any obligation owing to the Fund under this Agreement, or otherwise,
solely by reason of its having directed a securities transaction on behalf of
the Fund to a broker-dealer in compliance with the provisions of Section 28(e)
of the Securities Exchange Act of 1934.
4. Compensation of the Adviser
(a) The Fund agrees to pay to the Adviser for all services
rendered a fee computed and payable monthly in an amount equal to 0.65% of the
Fund's average daily net assets on an annualized basis, for the then-current
fiscal year. For any period less than a month during which this Agreement is in
effect, the fee shall be prorated according to the proportion which such period
bears to a full month of 28, 29, 30 or 31 days, as the case may be. The Adviser
may use any portion of this fee for distribution of Fund shares or for making
servicing payments to organizations whose customers or clients are Fund
shareholders. The Adviser may waive its right to any fee to which it is entitled
hereunder, provided such waiver is delivered to the Fund in writing. Any
reimbursement of expenses to which the Fund may become entitled to pursuant to
paragraph 2(c) hereof, will be paid to the Fund at the same time as the Fund
pays the Adviser hereunder.
(b) For purposes of this Agreement, the average daily net
assets of the Fund shall mean the average daily value of the total assets of the
Fund, minus the accrued liabilities (including accrued expenses) of the Fund.
The average daily net assets of the Fund shall be calculated as set forth in the
current prospectus or pursuant to the procedures adopted by resolutions of the
Fund's Board of Directors for calculating the net asset value of the Fund's
shares or delegating such calculations to third parties.
5. Duration and Termination
(a) This Agreement will become effective on the date hereof
and shall continue in effect until August , 1997 and thereafter for successive
twelve-month periods
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<PAGE>
(computed from each August ), provided that such continuation is specifically
approved at least annually by the Board of Directors or by a majority vote of
the holders of the Fund's outstanding voting securities, as defined in the 1940
Act and the rules thereunder, and, in either case, by a majority of those
directors who are neither party to this Agreement nor, other than by their
service as directors of the Fund, interested persons, as defined in the 1940 Act
and the rules thereunder, of any such person who is party to this Agreement.
Upon the effectiveness of this Agreement, it shall supersede all previous
agreements between the Adviser and the Fund covering the subject matter hereof.
This Agreement may be terminated at any time, without the payment of any
penalty, (i) by vote of a majority of the Fund's outstanding voting securities,
as defined in the 1940 Act and the rules thereunder, or (ii) by a vote of a
majority of the entire Board of Directors, on sixty days' written notice to the
Adviser, or (iii) by the Adviser on sixty days' written notice to the Fund.
(b) This Agreement may not be transferred, assigned, sold or
in any manner hypothecated or pledged by either party and this Agreement shall
terminate automatically in the event of any such transfer, assignment, sale,
hypothecation or pledge by either party. The terms "transfer", "assignment" and
"sale" as used in this paragraph shall have the meanings ascribed thereto by
governing law and in applicable rules or regulations of the Securities and
Exchange Commission.
6. Notices
Any notice under this Agreement shall be in writing to the
other party at such address as the other party may designate from time to time
for the receipt of such notice and shall be deemed to be received on the earlier
of the date actually received or on the fourth day after the postmark if such
notice is mailed first class postage prepaid.
7. Governing Law
This Agreement shall be construed in accordance with the laws
of the State of New York and in accordance with the applicable provisions of the
1940 Act.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the
foregoing instrument to be executed by their duly authorized officers and their
respective seals to be hereunto affixed, all as of the day and the year first
above written.
[SEAL] EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
By:
Name:
Title:
[SEAL] EQUITABLE REAL ESTATE HYPERION CAPITAL ADVISORS,
L.L.C.
By:
Name:
Title:
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299812.1
CUSTODIAN CONTRACT
Between
EQUITABLE REAL ESTATE HYPERION
HIGH YIELD COMMERCIAL MORTGAGE FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
C/M 11212.0012 304365.1
<PAGE>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held by It.......... 1
2. Duties of the Custodian with Respect to Property of the
Fund Held by the Custodian..................................... 1
2.1 Holding Securities.................................... 1
2.2 Delivery of Securities................................ 2
2.3 Registration of Securities............................ 4
2.4 Bank Accounts......................................... 4
2.5 Availability of Federal Funds......................... 5
2.6 Collection of Income.................................. 5
2.7 Payment of Fund Monies................................ 5
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased.................................. 7
2.9 Appointment of Agents................................. 7
2.10 Deposit of Fund Assets in Securities Systems.......... 7
2.11 Fund Assets Held in the Custodian's Direct Paper
System................................................ 8
2.12 Segregated Account.................................... 9
2.13 Ownership Certificates for Tax Purposes............... 10
2.14 Proxies............................................... 10
2.15 Communications Relating to Portfolio Securities....... 10
2.16 Reports to Fund by Independent Public Accountants..... 11
3. Proper Instructions............................................ 11
4. Actions Permitted Without Express Authority.................... 11
5. Evidence of Authority.......................................... 12
6. Duties of Custodian With Respect to the Books of
Account and Calculation of Net Asset Value and Net
Income......................................................... 12
7. Records........................................................ 12
8. Opinion of Fund's Independent Accountants...................... 13
9. Compensation of Custodian...................................... 13
10. Responsibility of Custodian.................................... 13
11. Effective Period, Termination and Amendment.................... 14
12. Successor Custodian............................................ 15
C/M 11212.0012 304365.1
<PAGE>
Page
13. Interpretive and Additional Provisions......................... 15
14. Massachusetts Law to Apply..................................... 16
15. Prior Contracts................................................ 16
16. Shareholder Communications Election............................ 16
-ii-
C/M 11212.0012 304365.1
<PAGE>
CUSTODIAN CONTRACT
This Contract between Equitable Real Estate Hyperion High Yield
Commercial Mortgage Fund, Inc., a corporation organized and existing under the
laws of the State of Maryland, having its principal place of business at 520
Madison Avenue, New York, New York 10022, hereinafter called the "Fund", and
State Street Bank and Trust Company, a Massachusetts trust company, having its
principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants
and agreements hereinafter contained, the parties hereto agree as
follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets
pursuant to the provisions of the Articles of Incorporation. The Fund agrees to
deliver to the Custodian all securities and cash owned by it, and all payments
of income, payments of principal or capital distributions received by it with
respect to all securities owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares of capital stock, $
.001 par value, ("Shares") of the Fund as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of the Fund held
or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
3), the Custodian shall from time to time employ one or more sub-custodians, but
only in accordance with an applicable vote by the Board of Directors of the
Fund, and provided that the Custodian shall have no more or less responsibility
or liability to the Fund on account of any actions or omissions of any
sub-custodian so employed than any such sub-custodian has to the Custodian.
2. Duties of the Custodian with Respect to Property of the Fund
Held by the Custodian
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property,
including all securities owned by the Fund, other than
(a) securities which are maintained pursuant to Section 2.10
in a clearing agency which acts as a securities depository
or in a book-entry system authorized by the U.S. Department
of the Treasury, collectively referred to herein as
"Securities System" and (b) commercial paper of an issuer
for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited
C/M 11212.0012 304365.1
<PAGE>
and/or maintained in the Direct Paper System of the
Custodian pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and
deliver securities owned by the Fund held by the Custodian
or in a Securities System account of the Custodian or in the
Custodian's Direct Paper book entry system account ("Direct
Paper System Account") only upon receipt of Proper
Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following
cases:
1) Upon sale of such securities for the account of the
Fund and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered
into by the Fund;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of
Section 2.10 hereof;
4) To the depository agent in connection with tender or
other similar offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become
payable; provided that, in any such case, the cash or
other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into
the name of the Fund or into the name of any nominee or
nominees of the Custodian or into the name or nominee
name of any agent appointed pursuant to Section 2.9 or
into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a
different number of bonds, certificates or other
evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the
new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Fund, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street
delivery" custom; provided that in any such case, the
Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities
prior to receiving payment for such securities except
as may arise from the Custodian's own negligence or
willful misconduct;
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C/M 11212.0012 304365.1
<PAGE>
8) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization, reorganization
or readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the
new securities and cash, if any, are to be delivered to
the Custodian;
9) In the case of warrants, rights or similar securities,
the surrender thereof in the exercise of such warrants,
rights or similar securities or the surrender of
interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
10) For delivery in connection with any loans of securities
made by the Fund, but only against receipt of adequate
collateral as agreed upon from time to time by the
Custodian and the Fund, which may be in the form of
cash or obligations issued by the United States
government, its agencies or instrumentalities, except
that in connection with any loans for which collateral
is to be credited to the Custodian's account in the
book-entry system authorized by the U.S. Department of
the Treasury, the Custodian will not be held liable or
responsible for the delivery of securities owned by the
Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-
dealer registered under the Securities Exchange Act of
1934 (the "Exchange Act") and a member of The National
Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options
Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements
in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or
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organizations, regarding account deposits in connection
with transactions by the Fund;
14) For any other proper corporate purpose, but only upon
receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board of
Directors or of the Executive Committee signed by an
officer and certified by the Secretary or an Assistant
Secretary, specifying the securities of the Fund to be
delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be
made.
2.3 Registration of Securities. Securities held by the
Custodian (other than bearer securities) shall be registered
in the name of the Fund or in the name of any nominee of the
Fund or of any nominee of the Custodian which nominee shall
be assigned exclusively to the Fund, unless the Fund has
authorized in writing the appointment of a nominee to be
used in common with other registered investment companies
having the same investment adviser as the Fund, or in the
name or nominee name of any agent appointed pursuant to
Section 2.9 or in the name or nominee name of any sub-
custodian appointed pursuant to Article 1. All securities
accepted by the Custodian on behalf of the Fund under the
terms of this Contract shall be in "street name" or other
good delivery form. If, however, the Fund directs the
Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely
collect income due the Fund on such securities and to notify
the Fund on a best efforts basis only of relevant corporate
actions including, without limitation, penitency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the name of the Fund,
subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in
such account or accounts, subject to the provisions hereof,
all cash received by it from or for the account of the Fund,
other than cash maintained by the Fund in a bank account
established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian
for the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its
discretion deem necessary or desirable; provided, however,
that every such bank or trust company shall be qualified to
act as a custodian under the Investment Company Act of 1940
and that each such bank or trust company and the funds to be
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deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Fund. Such funds
shall be deposited by the Custodian in its capacity as Custodian and
shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement
between the Fund and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions, make federal funds
available to the Fund as of specified times agreed upon from
time to time by the Fund and the Custodian in the amount of
checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of
Section 2.3, the Custodian shall collect on a timely basis
all income and other payments with respect to registered
securities held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all
income and other payments with respect to bearer securities
if, on the date of payment by the issuer, such securities
are held by the Custodian or its agent thereof and shall
credit such income, as collected, to the Fund's custodian
account. Without limiting the generality of the foregoing,
the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on
securities held hereunder. Income due the Fund on
securities loaned pursuant to the provisions of Section 2.2
(10) shall be the responsibility of the Fund. The Custodian
will have no duty or responsibility in connection therewith,
other than to provide the Fund with such information or data
as may be necessary to assist the Fund in arranging for the
timely delivery to the Custodian of the income to which the
Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper
Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay
out monies of the Fund in the following cases only:
1) Upon the purchase of securities, options, futures
contracts or options on futures contracts for the
account of the Fund but only (a) against the delivery
of such securities or evidence of title to such
options, futures contracts or options on futures
contracts to the Custodian (or any bank, banking firm
or trust company doing business in the United States or
abroad which is qualified under the Investment Company
Act of 1940, as amended, to act as a custodian and has
been designated by the Custodian as its agent for this
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purpose) registered in the name of the Fund or in the name of
a nominee of the Custodian referred to in Section 2.3 hereof
or in proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.11; (d) in the case
of repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank;
such transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable bank pursuant
to Proper Instructions as defined in Section 3;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section
2.2 hereof,
3) For the payment of any expense or liability incurred by
the Fund, including but not limited to the following
payments for the account of the Fund: interest, taxes,
management, accounting, transfer agent and legal fees,
and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or
treated as deferred expenses;
4) For the payment of any dividends declared pursuant to
the governing documents of the Fund;
5) For payment of the amount of dividends received in
respect of securities sold short;
6) For any other proper purpose, but only upon receipt of,
in addition to Proper Instructions, a certified copy of
a resolution of the Board of Directors or of the
Executive Committee of the Fund signed by an officer of
the Fund and certified by its Secretary or an Assistant
Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to
be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment
is to be made.
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2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this
Contract, in any and every case where payment for purchase
of securities for the account of the Fund is made by the
Custodian in advance of receipt of the securities purchased
in the absence of specific written instructions from the
Fund to so pay in advance, the Custodian shall be absolutely
liable to the Fund for such securities to the same extent as
if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or
times in its discretion appoint (and may at any time remove)
any other bank or trust company which is itself qualified
under the Investment Company Act of 1940, as amended, to act
as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time
to time direct; provided, however, that the appointment of
any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian
may deposit and/or maintain securities owned by the Fund in
a clearing agency registered with the Securities and
Exchange Commission under Section 17A of the Securities
Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities System" in
accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if
any, and subject to the following provisions:
1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to securities
of the Fund which are maintained in a Securities System
shall identify by book-entry those securities belonging
to the Fund;
3) The Custodian shall pay for securities purchased for
the account of the Fund upon (i) receipt of advice from
the Securities System that such securities have been
transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The
Custodian shall transfer securities sold for the
account of the Fund upon (i) receipt of advice from the
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<PAGE>
Securities System that payment for such securities has been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices
from the Securities System of transfers of securities for the
account of the Fund shall identify the Fund, be maintained for
the Fund by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the
Fund in the form of a written advice or notice and shall
furnish to the Fund copies of daily transaction sheets
reflecting each day's transactions in the Securities System
for the account of the Fund;
4) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and
procedures for safeguarding securities deposited in the
Securities System;
5) The Custodian shall have received the initial
certificate required by Article 12 hereof;
6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to the
Fund for any loss or damage to the Fund resulting from
use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian
or any of its agents or of any of its or their
employees or from failure of the Custodian or any such
agent to enforce effectively such rights as it may have
against the Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim
against the Securities System or any other person which
the Custodian may have as a consequence of any such
loss or damage if and to the extent that the Fund has
not been made whole for any such loss or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System.
The Custodian may deposit and/or maintain securities owned by the Fund
in the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of Proper
Instructions;
2) The Custodian may keep securities of the Fund in the
Direct Paper System only if such securities are
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<PAGE>
represented in an account ("Account") of the Custodian in the
Direct Paper System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to securities
of the Fund which are maintained in the Direct Paper
System shall identify by book-entry those securities
belonging to the Fund;
4) The Custodian shall pay for securities purchased for
the account of the Fund upon the making of an entry on
the records of the Custodian to reflect such payment
and transfer of securities to the account of the Fund.
The Custodian shall transfer securities sold for the
account of the Fund upon the making of an entry on the
records of the Custodian to reflect such transfer and
receipt of payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund, in
the form of a written advice or notice, of Direct Paper
on the next business day following such transfer and
shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transaction in the
Securities System for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of
Proper Instructions establish and maintain a segregated
account or accounts for and on behalf of the Fund, into
which account or accounts may be transferred cash and/or
securities, including securities maintained in an account by
the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the
Fund, the Custodian and a broker-dealer registered under the
Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any
similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or
written by the Fund or commodity futures contracts or
options thereon purchased or sold by the Fund, (iii) for the
purposes of compliance by the Fund with the procedures
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<PAGE>
required by Investment Company Act Release No. 10666, or any subsequent
release or releases of the Securities and Exchange Commission relating
to the maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in
the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of
Directors or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to securities of the Fund held by it and in
connection with transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the
securities held hereunder, cause to be promptly executed by
the registered holder of such securities, if the securities
are registered otherwise than in the name of the Fund or a
nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall
promptly deliver to the Fund such proxies, all proxy
soliciting materials and all notices relating to such
securities.
2.15 Communications Relating to Fund Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit
promptly to the Fund all written information (including,
without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith
and notices of exercise of call and put options written by
the Fund and the maturity of futures contracts purchased or
sold by the Fund) received by the Custodian from issuers of
the securities being held for the Fund. With respect to
tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the
Custodian from issuers of the securities whose tender or
exchange is sought and from the party (or his agents) making
the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or
any other similar transaction, the Fund shall notify the
Custodian at least three business days prior to the date on
which the Custodian is to take such action.
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2.16 Reports to Fund by Independent Public Accountants.
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on
the accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a
Securities System, relating to the services provided by the Custodian
under this Contract; such reports, shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund, to
provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies,
the reports shall so state.
3. Proper Instructions
Proper Instructions as used herein means a writing signed or initialed
by one or more person or persons as the Board of Directors shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of transaction involved, including a specific statement of the purpose
for which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Upon receipt of a certificate of the Secretary or an Assistant Secretary as to
the authorization by the Board of Directors of the Fund accompanied by a
detailed description of procedures approved by the Board of Directors, Proper
Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Board of Directors
and the Custodian are satisfied that such procedures afford adequate safeguards
for the Fund's assets. For purposes of this Section, Proper Instructions shall
include instructions received by the Custodian pursuant to any three-party
agreement which requires a segregated asset account in accordance with Section
2.12.
4. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to
its duties under this Contract, provided that all such
payments shall be accounted for to the Fund;
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<PAGE>
2) surrender securities in temporary form for securities
in definitive form;
3) endorse for collection, in the name of the Fund,
checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of
Directors of the Fund.
5. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant to the Articles of Incorporation as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
6. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors of the Fund to keep
the books of account of the Fund and/or compute the net asset value per share of
the outstanding shares of the Fund or, if directed in writing to do so by the
Fund, shall itself keep such books of account and/or compute such net asset
value per share. If so directed, the Custodian shall also calculate weekly the
net income of the Fund as described in the Fund's currently effective prospectus
and shall advise the Fund and the Transfer Agent weekly of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the weekly income of the Fund shall be made at the time or times
described from time to time in the Fund's currently effective prospectus.
7. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to
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<PAGE>
Section 31 thereof and Rules 31a-1 and 3la-2 thereunder. All such records shall
be the property of the Fund and shall at all times during the regular business
hours of the Custodian be open for inspection by duly authorized officers,
employees or agents of the Fund and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
8. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-2, and Form N-SAR or other
annual reports to the Securities and Exchange Commission and with respect to any
other requirements of such Commission.
9. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
10. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable
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<PAGE>
for the payment of money or incurring liability of some other form, the Fund, as
a prerequisite to requiring the Custodian to take such action, shall provide
indemnity to the Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements and assumed settlement) or in the event that the
Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the Fund shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund's assets to the
extent necessary to obtain reimbursement.
11. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors of the Fund has approved the initial use
of a particular Securities System, as required by Rule 17f-4 under the
Investment Company Act of 1940, as amended and that the Custodian shall not act
under Section 2.11 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board of Directors has approved
the initial use of the Direct Paper System; provided further, however, that the
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation, and further provided, that the Fund may at any time by action of
its Board of Directors (i) substitute another bank or trust company for the
Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the
Custodian such compensation as may be due as of the date of such
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<PAGE>
termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
12. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors
of the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
13. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund, may from time to time agree on such provisions interpretive of or in
addition to the provisions of
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<PAGE>
this Contract as may in their joint opinion be consistent with the general tenor
of this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Articles of Incorporation
of the Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
14. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
15. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
16. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's
name, address, and share positions.
NO [ ] The Custodian is not authorized to release the
Fund's name, address, and share positions.
-16-
C/M 11212.0012 304365.1
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of , 1995.
ATTEST EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
_______________ By:______________________________________
Title:___________________________________
ATTEST STATE STREET BANK AND TRUST COMPANY
_______________ By:______________________________________
Title: Executive Vice President
-17-
C/M 11212.0012 304365.1
<PAGE>
STATE STREET BANK AND TRUST COMPANY
EQUITABLE REAL ESTATE HYPERION HIGH YIELD COMMERCIAL MORTGAGE
FUND, INC.
CUSTODY AND ACCOUNTING FEE SCHEDULE
I. CUSTODY, PORTFOLIO AND FUND ACCOUNTING
Custody: Maintain custody of fund assets. Settle portfolio
purchases and sales. Report buy and sell fails. Determine
and collect portfolio income. Make cash disbursements and
report cash transactions. Monitor corporate actions.
Report portfolio positions.
Portfolio and Fund Accounting: Maintain investment ledgers, provide
selected portfolio transactions, position and income reports. Maintain
general ledger and capital stock accounts. Prepare daily trial balance.
Calculate net asset value. Provide selected general ledger reports.
Securities yield or market value quotations will be provided by State
Street's Automated Pricing System or by the Fund.
The fee shown below is an annual charge, billed and payable monthly,
based on average monthly net assets.
ANNUAL FEES PER PORTFOLIO
Custody, Portfolio
Fund Net Assets and Fund Accounting
First $20 Million 1/15 of 1%
Next $80 Million 1/30 of 1%
Excess 1/100 of 1%
Minimum Monthly Charges $3,000
II. PORTFOLIO TRANSACTIONS
State Street Bank Repos $7.00
DTC or Fed Book Entry $12.00
New York Physical Settlements $25.00
Maturity Collections $8.00
PTC Purchase, Sale, Deposit or Withdrawal $20.00
Per paydown $2.00
All Other Trades $25.00
C/M 11212.0012 304365.1
<PAGE>
III. FUTURES AND OPTIONS
Option charge for each option written or
closing contract, per issue, per broker $25.00
Option expiration or exercised charge,
per issue, per broker $15.00
Futures transactions -- no security movement $8.00
IV. HOLDINGS CHARGE
For each issue maintained -- monthly charge $5.00
V. NAVIGATOR AUTOMATED PRICING
Monthly Base Charge $175.00
Monthly Quote Charge:
Municipal Bonds via Kenny/S & P/Muller Data $16.00
Fixed Income Securities via IDSI $13.00
Government or Corporate Bonds via Kenny/
S & P or Muller $11.00
Fixed Income Securities via Merrill Lynch $11.00
Foreign Bonds via Extel $10.00
Options, Futures, and Private Placements $6.00
Listed and OTC Equities (Domestic & Foreign) $6.00
For billing purposes, the monthly quote charge will be based on the
average number of positions in the portfolio at month end.
VI. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security shipments and
the preparation of special reports will be subject to negotiation. Fees
for fund administration activities, self directed securities lending
transactions, SaFiRe financial reporting, multiple class and
master/feeder accounting, and other special items will be negotiated
separately.
C/M 11212.0012 304365.1
<PAGE>
VII. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but
are not limited to the following:
- Telephone - Transfer Fees
- Wire Charges ($5.25 in and $5 out) - Sub-custodian Charges
- Postage and Insurance - Price Waterhouse Audit
- Courier Service Letter
- Duplicating - Federal Reserve Fee for
- Legal Fees Return Check items over
- Supplies Related to Fund Records $2,500 ($4.25 each)
- Rush Transfer ($8 each) - GNMA Transfer ($15
- Items held in Street name over each)
record date at the request - PTC Deposit/Withdrawal
of traders ($50 each) for same day turnaround
($50 each)
EQUITABLE REAL ESTATE HYPERION
HIGH YIELD COMMERCIAL STATE STREET BANK
MORTGAGE FUND, INC. & TRUST COMPANY
By ___________________________ By ___________________________
Title ________________________ Title ________________________
Date _________________________ Date _________________________
C/M 11212.0012 304365.1
<PAGE>
STATE STREET BANK AND TRUST COMPANY
Transfer Agent and Registrar Services
Fee Agreement for
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
ONGOING TRANSFER AGENT FEES
$9.00 per shareholder account per annum. Includes the issuance and registration
of the first 2,000 credit certificates in a calendar year. Excess credits beyond
2,000 to be billed at $1.25 each within a calendar year.
For each dividend reinvestment per participant $.75
For each optional cash infusion $.75
TRANSFER AGENT SERVICES
ACCOUNT MAINTENANCE SERVICES
- Establishing new accounts
- Preparation and mailing of W-9 solicitation to new accounts
without T.I.N.s.
- Address changes
- Processing T.I.N. changes
- Processing routine and non-routine transfers of ownership
- Issuance of credit certificates (see limits)
- Posting debit and credit transactions
- Providing a daily transfer journal of ownership changes
- Responding to written shareholder communications
- Responding to shareholder telephone inquiries; toll-free
number
- Placing and releasing stop transfers
- Replacing lost certificates
- Registration of credit certificates (see limits)
C/M 11212.0012 304365.1
<PAGE>
Equitable Real Estate Hyperion High-Yield
Commercial Mortgage Fund, Inc.
Page: 2
DIVIDEND DISBURSEMENT SERVICES
- Generate and mail twelve dividend cheeks with one enclosure
- Replace lost dividend checks
- Processing of backup withholding and remittance
- Preparation and filing of Federal Tax Forms 1099 and 1042
- Preparation and filing of State Tax information as directed
- Processing of non-resident alien withholding and remittance
- Preparation of escheatment information (shares and
dividends)
DIVIDEND REINVESTMENT SERVICES PROVIDED
- Processing optional cash investments and acknowledging same
- The reinvestment of dividend proceeds for participants
- Participant withdrawal or sell requests
- Preparation, mailing and filing of Federal Tax Form 1099B
for sales
- Preparation and mailing of monthly reinvestment statements
ANNUAL MEETING SERVICES
- Coordination of mailing of proxies, proxy statement, annual report and
business reply envelope (out-of-pocket expenses such as typesetting of
proxy card, envelopes, and postage will be billed as incurred)
- Providing one set of labels of banks, brokers and nominees
for broker search
- Providing record date list
- Tabulation of returned proxies
- Daily reporting of tabulation results
C/M 11212.0012 304365.1
<PAGE>
Equitable Real Estate Hyperion High-Yield
Commercial Mortgage Fund, Inc.
Page: 3
- Interface support during solicitation effort
- Providing one inspector of election at annual meeting (out-
of-pocket expenses billed at cost as incurred)
- Providing an annual meeting voted list
ADDRESSING AND MAILING SERVICES
- Preparation for the mailing of three (3) quarterly reports
- Addressing and mailing new shareholder welcome materials on
a biweekly basis or as agreed
INFORMATION SERVICES PROVIDED
- One complete statistical report per calendar year
- shareholders by state
- shareholders by classification code
- shareholders by share grouping
TERMS OF FEE AGREEMENT
- Minimum $1,000 per month
- Escalation Clause - The per account annual fee in upon renewal shall be
equal to the current fee increased by the lesser of (i) 6% or, (ii) the
percentage increase in the U.S. Department of Labor national index of
"Cost of Services Less Rent" for the period current at renewal.
MISCELLANEOUS
- All out-of-pocket expenses such as postage, stationery, etc.
will be billed as incurred.
C/M 11212.0012 304365.1
<PAGE>
ADDITIONAL SERVICES
- Services over and above this Fee Schedule will be invoiced in
accordance with our current Schedule of Services or priced by
appraisal.
EQUITABLE REAL ESTATE HYPERION
HIGH-YIELD COMMERCIAL STATE STREET BANK
MORTGAGE FUND, INC. AND TRUST CO.
By ___________________________ By ___________________________
Title ________________________ Title ________________________
Date _________________________ Date _________________________
C/M 11212.0012 304365.1
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
ADMINISTRATIVE SERVICES CONTRACT
AGREEMENT dated as of September [ ], 1995 between Equitable
Real Estate Hyperion High-Yield Commercial Mortgage Fund, Inc. (the "Fund"), a
Maryland corporation, and Equitable Real Estate Hyperion Capital Advisors,
L.L.C. (the "Administrator"), a Delaware limited liability corporation.
WHEREAS, the Fund is engaged in business as a non-diversified,
closed-end management investment company registered under the Investment Company
Act of 1940 (collectively, with the rules and regulations promulgated
thereunder, the "1940 Act");
WHEREAS, Equitable Real Estate Hyperion Capital Advisors,
L.L.C. has entered into an Investment Advisory Agreement with the Fund as of
September , 1995 to engage in the business of investing and reinvesting the
Fund's assets in securities of the type, and in accordance with the limitations,
specified in the Fund's Articles of Incorporation, By-Laws and Registration
Statement filed with the Securities and Exchange Commission under the 1940 Act
and the Securities Act of 1933, including the Prospectus forming a part thereof
(the "Registration Statement"), all as from time to time in effect, and in such
manner and to such extent as may from time to time be authorized by the Board of
Directors;
NOW, THEREFORE, in consideration of the mutual promises and
agreements herein contained and other good and valuable consideration, the
receipt of which is hereby acknowledged, it is agreed by and between the parties
hereto as follows:
1. In General
The Administrator agrees, all as more fully set forth herein,
to act as admistrator to the Fund with respect to the investment and the
reinvestment of the Fund's assets.
2. Duties and Obligations of the Administrator
(a) Subject to the succeeding provisions of this paragraph and
subject to the direction and general control of the Fund's Board of Directors,
the Administrator shall act as administrator to provide all management and
administrative services reasonably necessary for the Fund's operation, other
than those services Equitable Real Estate Hyperion Capital Advisors, L.L.C.
provides to the Fund pursuant to the Investment Management Contract. The
services to be provided by the Administrator shall include but not be limited to
those enumerated on Exhibit A hereto. The personnel providing these services may
be the Administrator's employees or employees of its affiliates or of other
organizations. The
299815.1
<PAGE>
Administrator shall make periodic reports to the Fund's Board of Directors in
the performance of its obligations under this Agreement.
(b) The Administrator may from time to time employ,
subcontract with or otherwise associate itself with entirely at its expense,
such persons as it believes to be particularly fitted to assist it in the
execution of its duties hereunder. While this agreement is in effect, the
Administrator or persons or its affiliates other than the Fund ("the
affiliates"), will provide persons satisfactory to Board of Directors to be
elected or appointed officers or employees of the Fund. These shall be a
president, a secretary, a treasurer, and such additional officers and employees
as may be necessary for the conduct of Fund business.
(c) The Administrator or its affiliates will also provide
persons, who may be Fund officers, to (i) supervise the performance of
bookkeeping and related services and calculation of net asset value and yield by
the Fund bookkeeping agent, (ii) prepare reports to and the filings with
regulatory authorities, and (iii) perform such clerical, other office and
shareholder services for the Fund as it may from time to time request. Such
personnel may be employees of the Administrator or employees of the
Administrator affiliates or of other organizations. Notwithstanding the
preceding, the Administrator shall not be required to perform any accounting
services not expressly provided for herein. The Fund will pay to the
Administrator the cost of such personnel for rendering such services at such
rates as shall from time to time be agreed upon between the parties, provided
that the Fund shall not bear or pay any costs in respect of any services
performed for the Fund by officers of the Administrator's affiliates.
(d) The Administrator or its affiliates will also furnish the
Fund such administrative and management supervision and assistance and such
office facilities as it may believe appropriate or as the Fund may reasonably
request subject to the requirements of any applicable regulatory authority. The
Administrator or its affiliates will also pay the expenses of promoting the sale
of Fund shares (other than the costs of preparing, printing and filing the
Registration Statement, printing copies of the prospectus contained therein and
complying with other applicable regulatory requirements), except to the extent
that the Fund is permitted to bear such expenses under a plan that may in the
future be adopted pursuant to Rule 12b-1 under the 1940 Act or a similar rule.
(e) The Administrator shall give the Fund the benefit of its
best judgment and efforts in rendering these services hereunder but the
Administrator shall not be liable hereunder for any mistake of judgment or for
any other cause, provided that nothing herein shall protect the Administrator
against any liability to the Fund or to its security holders by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties hereunder, or by reason of its reckless disregard of its obligations and
duties hereunder.
(f) Nothing in this Agreement shall prevent the Administrator
or any director, officer, employee or other affiliate thereof from acting as
administrator for any other person, firm or corporation, or from engaging in any
other lawful activity, and shall not in any way
299815.1
2
<PAGE>
limit or restrict the Administrator or any of its partners, officers, employees
or agents from buying, selling or trading any securities for its or their own
accounts or for the accounts of others for whom it or they may be acting,
provided, however, that the Administrator will undertake no activities which, in
its judgment, will adversely affect the performance of its obligations under
this Agreement.
3. Compensation of the Administrator
The Fund agrees to pay the Administrator a fee of .20% of the
Fund's average daily net assets. The Administrator's fee will be accrued daily,
and will be payable on the last day of each calendar month for services
performed hereunder during that month or on such other schedule as may be used
may be agreed in writing. Any portion of this fee may be used for distribution
of Fund shares, or for making servicing payments to organizations whose
customers or clients are Fund shareholders. The Administrator may waive its
right to any fee to which it is entitled hereunder, provided such waiver is
delivered to the Fund in writing.
4. Duration and Termination
(a) This Agreement will become effective on the date hereof
and will remain in effect thereafter for successive twelve-month periods
(computed from each August ), provided that such continuation is specifically
approved at least annually by the Board of Directors and by a majority of those
of the directors who are neither party to this Agreement nor, other than by
their service as directors of the Fund, interested persons, as defined in the
1940 Act, of any such person who is party to this Agreement. This Agreement may
be terminated at any time, without the payment of any penalty, (i) by vote of a
majority of the Fund's outstanding voting securities, as defined in the 1940
Act, or (ii) by a vote of a majority of the entire Board of Directors on sixty
days' written notice to the Administrator, or (iii) by the Administrator on
sixty days' written notice to the Fund.
(b) This Agreement may not be transferred, assigned, sold or
in any manner hypothecated or pledged by either party and this Agreement shall
terminate automatically in the event of any such transfer, assignment, sale,
hypothecation or pledge. The terms "transfer", "assignment" and "sale" as used
in this paragraph shall have the meanings ascribed thereto by governing law and
in applicable rules or regulations of the Securities and Exchange Commission.
5. Notices
Any notice under this Agreement shall be in writing to the
other party at such address as the other party may designate from time to time
for the receipt of such notice and shall be deemed to be received on the earlier
of the date actually received or on the fourth day after the postmark if such
notice is mailed first class postage prepaid.
299815.1
3
<PAGE>
6. Governing Law
This Agreement shall be construed in accordance with the laws
of the State of New York and in accordance with the applicable provisions of the
1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused the
foregoing instrument to be executed by their duly authorized officers and their
respective seals to be hereunto affixed, all as of the day and the year first
above written.
[SEAL] EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
By:
Name:
Title:
[SEAL] EQUITABLE REAL ESTATE HYPERION CAPITAL
ADVISORS, L.L.C.
By:
Name:
Title:
299815.1
4
<PAGE>
Exhibit A
Administration Services To Be Performed
By Equitable Real Estate Hyperion Capital Advisors, L.L.C.
Administration Services
1. In conjunction with Fund counsel, prepare and file all
Post-Effective Amendments to the Registration Statement, all
state and federal tax returns and all other required
regulatory filings.
2. In conjunction with Fund counsel, prepare and file all Blue Sky
filings, reports and renewals.
3. Coordinate, but not pay for, required Fidelity Bond and
Directors and Officers Insurance (if any) and monitor their
compliance with Investment Company Act.
4. Coordinate the preparation and distribution of all materials for
Directors, including the agenda for meetings and all exhibits thereto,
and actual and projected quarterly summaries.
5. Coordinate the activities of the Fund's Manager, Custodian, Legal
Counsel and Independent Accountants.
6. Prepare and file all periodic reports to shareholders and proxies and
provide support for shareholder meetings.
7. Monitor daily and periodic compliance with respect to all requirements
and restrictions of the Investment Company Act, the Internal Revenue
Code and the Prospectus.
8. Monitor daily the Fund's bookkeeping services agent's calculation of
all income and expense accruals, sales and redemptions of capital
shares outstanding.
9. Evaluate expenses, project future expenses, and process payments of
expenses.
10. Monitor and evaluate performance of accounting and accounting related
services by Fund's bookkeeping services agent. Nothing herein shall be
construed to require you to perform any accounting services not
expressly provided for in this Agreement.
299815.1
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
520 Madison Avenue
New York, New York 10020
September 12, 1995
Board of Directors of
Equitable Real Estate Hyperion High-Yield
Commercial Mortgage Fund, Inc.
520 Madison Avenue
New York, New York 10022
Ladies and Gentlemen:
I hereby subscribe for 10,000 shares of Common Stock, $0.001 par value
per share, of Equitable Real Estate Hyperion High-Yield Commercial Mortgage
Fund, Inc., a Maryland corporation (the "Fund"), at $10.00 per share for an
aggregate purchase price of $100,000. My payment in full is confirmed.
I hereby represent and agree that I am purchasing these shares of stock
for investment purposes, for my own account and risk and not with a view to any
sale, division or other distribution thereof within the meaning of the
Securities Act of 1933 as amended, nor with any present intention of
distributing or selling such shares. I further agree that if any of such shares
are redeemed during the period that the deferred organizational expenses of the
Fund are being amortized, I will reimburse the Fund the then unamortized
organizational expenses in the same ratio as the number of shares redeemed bears
to the number of such shares held at the time of redemption.
Very truly yours,
EQUITABLE REAL ESTATE HYPERION
CAPITAL ADVISORS, L.L.C.
By:__________________________
Confirmed and Accepted:
EQUITABLE REAL ESTATE HYPERION HIGH-YIELD
COMMERCIAL MORTGAGE FUND, INC.
By:___________________________
275092.1
