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As filed with the Securities and Exchange Commission
on October 12, 2000
Registration No. 811-10013
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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
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/ X / REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
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/ X / AMENDMENT NO.1
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Cathay Securities Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
777 North Broadway
Los Angeles, California 90012
(Address of Principal Executive Offices)
(213) 625-4758
(Registrant's Telephone Number, including Area Code)
Elena Chan
777 North Broadway
Los Angeles, California 90012
(Name and Address of Agent for Service)
Copies to:
MARTIN E. LYBECKER, ESQ.
ROPES & GRAY
ONE FRANKLIN SQUARE
1301 K STREET, N.W.
SUITE 800 EAST
WASHINGTON, D.C. 20005
Approximate Date of Proposed Public Offering: Not Applicable
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended (the "1940 Act").
However, common stock in the Registrant is not being registered under the
Securities Act of 1933, as amended (the "1933 Act") since such stock will be
issued solely in private placement transactions which do not involve any "public
offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the
Registrant may only be made by "accredited investors" within the meaning of
Regulation D under the 1933 Act which generally includes institutional
investors. This Registration Statement does not constitute an offer to sell, or
the solicitation of an offer to buy, any common stock of the Registrant.
Pursuant to General Instruction G3 of Form N-2, a registration statement filed
under only the 1940 Act shall consist of the facing sheet of the Form, responses
to all items of Parts A and B except Items 1, 2, 3.2, 4, 5, 6 and 7 of Part A
thereof, responses to all items of Part C except Items 24.2h, 24.2l, 24.2n and
24.2o required or which the Registrant may file as part of the registration
statement.
PART A
ITEM 1. OUTSIDE FRONT COVER
Not Applicable.
ITEM 2. COVER PAGES; OTHER OFFERING INFORMATION
Not Applicable.
ITEM 3. FEE TABLE AND SYNOPSIS
3.1. Expense Information
<TABLE>
<S> <C>
Shareholder Transaction Expenses
--------------------------------
Sales Load (as a percentage of offering price).................................None
Dividend Reinvestment and Cash Purchase Plan Fees..............................None
Annual Expenses
---------------
Management Fees................................................................None
Other expenses(1)...........................................................0.2004%
Total Annual Expenses ......................................................0.2004%
</TABLE>
(1) "Other expenses" are based on estimated amounts for the current fiscal year.
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<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Example 1 year 3 years 5 years 10 years
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the
following expenses
on a $1,000 investment,
assuming a 5% annual
return: $2.00 $6.31 $11.03 $24.97
</TABLE>
The purpose of the preceding table is to assist the investor in
understanding the various costs and expenses that an investor in Cathay
Securities Fund, Inc. (the "Fund") will bear directly or indirectly.
The example above should not be considered a representation of future
expenses, which may be higher or lower.
3.2. Not Applicable.
3.3. Not Applicable.
ITEM 4. FINANCIAL HIGHLIGHTS
Not Applicable.
ITEM 5. PLAN OF DISTRIBUTION
Not Applicable.
ITEM 6. SELLING SHAREHOLDERS
Not Applicable.
ITEM 7. USE OF PROCEEDS
Not Applicable.
ITEM 8. GENERAL DESCRIPTION OF THE REGISTRANT
8.1. General
The Fund was incorporated under the laws of the State of Maryland on
July 10, 2000, and is a non-diversified closed-end management investment company
registered under the Investment Company Act of 1940, as amended.
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8.2. Investment Objectives and Policies
The Fund's investment objective is to seek current income consistent
with preservation of capital.
The Fund intends to achieve its objective by investing in a portfolio
of medium to high quality debt securities which the Managers believe does not
involve undue risk to income or principal. Under normal market conditions, the
Fund will invest substantially all of its assets in (i) Construction and
Development Loans, (ii) Mortgage-Backed Securities, (iii) Collateralized
Mortgage Obligations ("CMOs"), (iv) Asset-Backed Securities, (v) Corporate Debt
Securities, (vi) U.S. Government Agency Securities, (vii) U.S. Treasury
Securities, (viii) Residential Mortgage Loans, (ix) Commercial Loans, (x)
International Loans, and (xi) Limited Liability Companies that invest in such
obligations. (Construction and Development Loans, Residential Mortgage Loans,
Commercial Loans and International Loans are collectively referred to as "Whole
Loans.") It is anticipated that substantially all of the Fund's assets will be
contributed by Shareholders of the Fund in exchange for Shares of the Fund. Each
of the Whole Loans will have been originated or purchased by Cathay Bank
pursuant to its underwriting procedures and guidelines. The Fund also expects to
invest in Limited Liability Companies that make new advances on the Whole Loans
they hold and that fund new Whole Loans. The Managers will seek to balance the
risk and return potential of the Fund's investments in a manner that attempts to
maximize return while minimizing the risk of losses to the Fund through defaults
on portfolio securities. An investment in the Fund may not be appropriate for
all investors and there is no assurance that the Fund will achieve its
investment objective. The Fund is designed primarily as a long-term investment
and not as a trading vehicle.
The discussion below describes in greater detail the principal
categories of securities in which the Fund intends to invest.
Whole Loans. Whole Loans include Construction and Development Loans,
Residential Mortgage Loans, Commercial Loans and International Loans that Cathay
Bank either originated or purchased. Construction and Development Loans are
short-term real estate loans to finance building costs. The funds are typically
disbursed as needed or in accordance with a prearranged plan, and the money is
repaid on completion of the project, usually from the proceeds of a mortgage
loan. Residential Mortgage Loans are entire ownership interests in mortgage
loans on residential property. Commercial Loans are short-term loans to finance
the seasonal working capital needs of a business, such as inventory or
production and distribution of goods. International Loans are typically loans
made to foreign borrowers or to domestic borrowers for foreign activities,
including accounts receivable financing and inventory financing and letters of
credit.
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Mortgage-Backed Securities are securities that, directly or indirectly,
represent participations in, or are secured by and payable from, loans secured
by real property including pass-through securities such as Ginnie Mae, Fannie
Mae and Freddie Mac Certificates, private pass-through securities, commercial
mortgage-backed securities and certain collateralized mortgage obligations.
Mortgage-Backed Securities may have fixed or adjustable interest rates. There
are currently three basic types of Mortgage-Backed Securities: (i) those issued
or guaranteed by the United States Government or one of its agencies or
instrumentalities, such as Ginnie Mae, Fannie Mae and Freddie Mac; (ii) those
issued by non-governmental issuers that represent interests in, or are
collateralized by, Mortgage-Backed Securities issued or guaranteed by the United
States Government or one of its agencies or instrumentalities; and (iii) those
issued by non-governmental issuers that represent an interest in, or are
collateralized by, whole mortgage loans or Mortgage-backed Securities without a
government guarantee but usually with over-collateralization or some other form
of private credit enhancement. Non-governmental issuers referred to in (ii) and
(iii) above include originators of and investors in mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks investment
banks and special purpose subsidiaries of the foregoing.
Stripped Mortgage-Backed Securities. Stripped Mortgage-Backed
Securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the United States 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.
There are generally two types of classes of SMBS, one of which (the "IO
class") entitles the holders thereof to receive distributions consisting solely
or primarily of all or a portion of the interest an the underlying pool of
mortgage loans or Mortgage-Backed Securities ("Mortgage-Assets") and the other
of which (the "PO class") entitles the holders thereof to receive distributions
consisting solely or primarily of all or a portion of the principal of the
underlying pool of Mortgage Assets. The cash flows and yields on IO and PO
classes are extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying Mortgage Assets. For example, a rapid or
slow rate of principal payments may have a material adverse effect on the yield
to maturity of IOs or POs, respectively. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, an investor may
incur substantial losses, even if the IO class is rated AAA. Conversely, if the
underlying Mortgage Assets experience slower than anticipated prepayments of
principal, the yield on a PO class will be affected more severely than would be
the case with a traditional Mortgage-Backed Security.
CMOs. Collateralized Mortgage obligations ("CMOs") are debt instruments
issued by special purpose entities which are secured by pools of mortgage loans
or other Mortgage-Backed Securities. Payments of principal and interest on
underlying collateral provide the funds to pay debt service on the CMO. CMOs may
be issued by agencies or instrumentalities of the United States Government or by
private organizations. The Fund may not invest in CMOs issued by private
organizations.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specified coupon rate and has a stated
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maturity or final distribution date. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than the
stated maturities or final distribution dates. Interest is paid or accrues on
all classes of a CMO on a monthly, quarterly or semi-annual basis. The principal
and interest on the underlying mortgages may be allocated among the several
classes of a series or a CMO in many ways. In a common structure, payments of
principal, including any principal prepayments, on the underlying mortgages are
applied to the classes of the series of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of principal
will be made on any class of a CMO until all other classes having an earlier
stated maturity or final distribution date have been paid in full.
The Fund may also invest in inverse or reverse floating CMOs. Inverse
or reverse floating CMOs constitute a tranche of a CMO with a coupon rate that
moves in the reverse direction to an applicable index such as the London
Interbank Offered Rate ("LIBOR"). Accordingly, the coupon rate thereon will
increase as interest rates decrease. Inverse or reverse floating CMOs are
typically more volatile than fixed or adjustable rate tranches of CMOs.
Investments in inverse or reverse floating CMOs would be purchased by the Fund
to attempt to protect against a reduction in the income earned on the Fund's
investments due to a decline in interest rates. The Fund would be adversely
affected by the purchase of such CMOs in the event of an increase in interest
rates since the coupon rate thereon will decrease as interest rates increase,
and, like other Mortgage-Backed Securities, the value will decrease as interest
rates increase.
U.S. Government Securities. U.S. Government Securities are obligations
issued or guaranteed by the United States Government, its agencies, authorities
or instrumentalities. Securities issued by the U.S. Government, such as United
States Treasury bills, Treasury notes and Treasury bonds (collectively, "U.S.
Treasury Securities"), which differ only in their interest rates, maturities and
times of issuance, are supported by the full faith and credit in the United
States. U.S. Government Agency Securities, which are securities issued by
agencies and instrumentalities of the U.S. Government such as Ginnie Mae, Fannie
Mae, SBA and Freddie Mac, are supported by: (i) the full faith and credit of the
United States, such as securities issued by Ginnie Mae and SBA; (ii) the right
of the issuer to borrow from the United States Treasury, such as securities of
the Federal Home Loan Banks; or (iii) only the credit of the issuer, such as
securities of the Student Loan Marketing Association.
U.S. Government Securities may include zero coupon securities that are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the security will accrue and compound
over the period until maturity or the particular interest payment date at a rate
of interest reflecting the market rate of the security at the time of issuance.
Zero coupon U.S. Government Securities do not require the periodic payment of
interest. These investments may experience greater volatility in market value
than U.S. Government Securities that make regular payments of interest.
INVESTMENT RESTRICTIONS
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The Fund has adopted the following investment restrictions which may
not be changed without the affirmative vote of a "majority of the outstanding
voting securities" of the Fund, which is defined in the 1940 Act to mean the
affirmative vote of the lesser of (1) more than 50% of the outstanding Shares of
the Fund, or (2) 67% or more of the Shares present at the meeting in person or
by proxy. The Fund:
1. May not concentrate investments in a particular industry or
group of industries, as concentration is defined under the 1940 Act, or
the rules and regulations thereunder, as such statute, rules or
regulations may be amended from time to time, except that the Fund will
concentrate in securities which represent interests in mortgages on
real property.
2. May issue senior securities to the extent permitted by the
1940 Act, or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
3. May lend or borrow money to the extent permitted by the
1940 Act, or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
4. May purchase or sell commodities, commodities contracts,
futures contracts, or real estate to the extent permitted by the 1940
Act, or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
5. May underwrite securities to the extent permitted by the
1940 Act, or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
6. May pledge, mortgage or hypothecate any of its assets to
the extent permitted by the 1940 Act, or the rules or regulations
thereunder, as such statute, rules or regulations may be amended from
time to time.
The fundamental limitations of the Fund have been adopted to avoid
wherever possible the necessity of shareholder meetings otherwise required by
the 1940 Act. This recognizes the need to react quickly to changes in the law or
new investment opportunities in the securities markets and the cost and time
involved in obtaining shareholder approvals for diversely held investment
companies. However, the Fund also has adopted non-fundamental limitations, set
forth below, which in some instances may be more restrictive than the
fundamental limitations. Any changes in the Fund's non-fundamental limitations
will be communicated to the Fund's shareholders prior to effectiveness.
The following investment limitations of the fund are non-fundamental policies.
The Fund may not:
1. Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than
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5% of the Fund's total assets would then be invested in securities of a
single issuer or if as a result the Fund would hold more than 10% of
the outstanding voting securities of any single issuer; provided that,
with respect to 50% of the Fund's assets, the Fund may invest up to 25%
of its assets in the securities of any one issuer. For purposes of this
restriction, the term issuer includes both the borrower under a loan
agreement and the lender selling a participation to the Fund together
with any other persons interpositioned between such lender and the Fund
with respect to a participation.
2. Make investments for the purpose of exercising control or
participation in management, except to the extent that exercise by the
Fund of its rights under loan agreements would be deemed to constitute
such control or participation.
3. Borrow money, except for temporary or emergency purposes
and then only in an amount not exceeding one-third of the value of
total assets and except that a Fund may borrow from banks or enter into
reverse repurchase agreements for temporary emergency purposes in
amounts up to 15% of the value of its total assets at the time of such
borrowing.
4. Pledge, mortgage or hypothecate assets except to secure
temporary borrowings permitted by (3) above in aggregate amounts not to
exceed 15% of total assets taken at current value at the time of the
incurrence of such loan, except as permitted with respect to securities
lending.
5. Invest more than 25% of its total assets in the securities
of issuers in any one industry; provided that this limitation shall not
apply with respect to obligations issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities; and provided
further that the Fund shall, under normal market conditions, invest
more than 25% and up to 100% of its assets in securities which
represent interests in mortgages on real property.
6. Make short sales of securities, maintain a short position
or purchase securities on margin, except that the Fund may obtain
short-term credits as necessary for the clearance of security
transactions.
7. Act as an underwriter of securities of other issuers except
as it may be deemed an underwriter in selling a Fund security.
8. Issue senior securities, as defined in the 1940 Act, other
than (i) preferred shares which immediately after issuance will have
asset coverage of at least 200%, (ii) indebtedness which immediately
after issuance will have asset coverage of at least 300%, or (iii) the
borrowings permitted by investment restriction 3 above.
All percentage limitations on investments described in this
Registration Statement will apply at the time of investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment. The other investment policies
described in this Registration Statement are also not fundamental and may be
changed by approval of the Fund's Directors.
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SELECTION OF INVESTMENTS
Initially, substantially all of the Fund's assets will be contributed
by Shareholders of the Fund in connection with this offering. Subsequently, the
Managers will buy and sell securities for the Fund's portfolio with a view to
seeking a high level of current income, and will select investments which the
Managers believe do not involve undue risk to income or principal considered in
relation to the particular investment policies of the Fund. At the time of
making investments in the categories discussed above, the Managers will consider
the quality of the securities in which the Fund may invest. All investments must
be in securities that are medium to high quality. As a result, the Fund will not
necessarily invest in the highest yielding investments permitted by its
investment policies if the Managers determine that market risks or credit risks
associated with such investments would subject the Fund's portfolio to excessive
risk. The potential for realization of capital gains resulting from possible
changes in interest rates will not be a major consideration. The Managers will
be free to take full advantage of the entire range of maturities offered by
fixed-income securities and may adjust the average maturity of the Fund's
portfolio from time to time, depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
Investors should also note that new types of mortgage-related assets,
and other securities in which the Fund may invest are developed and marketed
from time to time and that, consistent with its investment limitations, the Fund
expects to invest in those securities and instruments that the Managers believe
may assist the Fund in achieving its investment objectives. These investments
will be disclosed to shareholders in the Fund's annual and semi-annual reports.
The Managers seek to minimize the risks involved in investing in
mortgage-related assets and other fixed-income securities through careful
investment analysis. It should be noted, however, that the amount of information
about the financial condition of an issuer of securities may not be as extensive
as that which is made available by corporations whose securities are publicly
traded.
PORTFOLIO TURNOVER AND SHORT TERM TRADING
The Managers may buy and sell securities for the Fund to accomplish its
investment objective. Although it is impossible to predict portfolio turnover
rate, the Managers expect that the annual portfolio turnover rate of the Fund
will be low and should not exceed 30%. Portfolio turnover generally involves
some expense to the Fund, including transaction costs on the sale of securities
and reinvestment in other securities, and may result in realization of ordinary
income or capital gains.
The Fund believes that in general the secondary market for some
fixed-income securities is less liquid than that for other fixed-income
securities. Also, there may be limited liquidity for certain fixed income
securities, such as Whole Loans, that the Fund may purchase or hold.
Accordingly, the ability of the Fund to buy and sell securities may, at any
particular time and with respect to any particular securities, be limited.
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8.3. Risk Factors
a. General
No Operating History; Reliance on Management. The Fund is newly
organized and does not have an investment track record. It is anticipated that
initially all of the Fund's assets will be contributed by Shareholders of the
Fund. Subsequently, the Fund will be wholly dependent for the selection,
structuring, closing, and monitoring of its investments on the diligence and
skill of its Managers, acting under the supervision of the Board. The Managers,
Dennis C. Kwok and Elena Chan, will have responsibility for the selection of
investments, the negotiation of the terms of such investments, and the
monitoring of such investments after they are made. There can be no assurance
that Mr. Kwok or Ms. Chan will remain associated with the Fund or that, in the
event he or she ceased to be associated with the Fund, the Fund would be able to
find a qualified person or persons to fill his or her position. See Item 9 -
Management.
Limited Transferability of Shares. The Fund has been organized to make
investments in illiquid debt securities. The Shares will not be registered under
the federal or state securities laws and are subject to substantial restrictions
on transfer. There will be no trading market for the Shares. Fund shares,
subject to Board and shareholder approval, are expected to be subject to
redemption from time to time as discussed in Item 10 - Capital Stock: Repurchase
of Shares.
The Shares will not be registered under the 1933 Act or under the
securities laws of the various states (except as necessary to claim a limited
offering exemption) on the grounds that their issuance and sale is exempt from
such registration requirements as not involving a public offering pursuant to
Section 4(2) of the 1933 Act and applicable provisions of the securities laws of
the various states.
Because the Shares will be acquired by investors in transactions not
involving a public offering, they will be "restricted securities" and may be
required to be held indefinitely. Shares may not be sold, transferred, assigned,
pledged, or otherwise disposed of without registration under applicable federal
or state securities laws or pursuant to an exemption from registration (in which
case the Shareholder will at the option of the Fund be required to provide the
Fund with a legal opinion, in form and substance satisfactory to the Fund, that
registration is not required). Accordingly, an investor must be willing to bear
the economic risk of investment in the Shares until Shares are redeemed or the
Fund is liquidated. No sale, transfer, assignment, pledge, or other disposition,
whether voluntary or involuntary, of the Shares may be made except by
registration by the transfer agent on the Fund's books. Each transferee will be
required to execute an instrument agreeing to be bound by these restrictions and
to execute such other instruments or certifications as are reasonably required
by the Fund or the transfer agent. The Fund may withhold consent to such an
assumption at its absolute discretion.
Illiquidity of Investments. From time to time, the Fund's investments
in fixed-income securities may include securities as to which the Fund, by
itself or together with other funds or accounts managed by the Managers or
Cathay Bank, holds a major portion or all of an issue of such securities.
Because there may be relatively few potential purchasers for such investments
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and, in some cases, there may be contractual restrictions on resales, the Fund
may find it more difficult to sell such securities at a time when the Managers
believe it is advisable to do so. In addition, in order to enforce its rights in
the event of a default in the payment of interest or repayment of principal, or
both, the Fund may be required to take possession of and manage the assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the net asset value of the Fund.
In addition, the Fund's intention to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended, may limit the extent to
which the Fund may exercise its rights by taking possession of such assets,
because as a regulated investment company the Fund is subject to certain
limitations on its investments and on the nature of its income. See Item 10.4 -
Taxes.
Non-Diversified Status. The Fund is classified as non-diversified
within the meaning of the 1940 Act, which means that the Fund is not limited by
the 1940 Act in the proportion of its assets that it may invest in securities of
a single issuer. Because the Fund may invest a larger portion of its assets in
the securities of a single issuer than a diversified fund, an investment in the
Fund may be subject to greater fluctuations in value than an investment in a
diversified fund.
Tax Status. The Fund must meet a number of requirements, described
under Item 10.4 - Taxes, to qualify as a RIC and, if qualified, to continue to
qualify. If the Fund experiences difficulty in meeting the diversification
requirement for any fiscal quarter, it might accelerate capital calls or
borrowings in order to increase the portion of the Fund's total assets
represented by cash, cash items, and U.S. government securities as of the close
of the following fiscal quarter and thus attempt to meet the diversification
requirement. However, the Fund would incur additional interest and other
expenses in connection with any such accelerated borrowings, and increased
investments by the Fund in cash, cash items, and U.S. government securities
(whether the funds to make such investments are derived from called equity
capital or from accelerated borrowings) are likely to reduce the Fund's return
to investors. Furthermore, there can be no assurance that the Fund would be able
to meet the diversification requirements through such actions. Failure to
qualify as a RIC would subject the Fund's distributed and undistributed income
to federal income taxation, and in a year in which the Fund has taxable income
or net realized gain, would have a significant adverse effect on the return to
investors. See Item 10.4 - Taxes.
Risks of Whole Loans. While Whole Loans in which the Fund will invest
generally will have a higher yield than Mortgage-Backed Securities, holders of
such interests may bear a greater risk of loss arising from a default on the
part of the borrower of the underlying loans than do holders of Mortgage-Backed
Securities. This is because Whole Loans, unlike most Mortgage-Backed Securities,
generally are not backed by any government guarantee or private credit
enhancement. Such risk may be greater during a period of declining or stagnant
real estate values. In addition, individual loans underlying Whole Loans may be
larger than those underlying Mortgage-Backed Securities. There may be certain
costs and delays in the event of a foreclosure, and there is no assurance that
the subsequent sale of the property will produce an amount equal to the sum of
the unpaid principal balance of the loan as of the date the borrower went into
default, accrued but unpaid interest and all foreclosure expenses, in which case
the Fund may suffer a loss.
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The Managers will themselves or through third parties hired on their
behalf, with respect to the Fund's investments in Whole Loans, review to the
extent practicable the documents generated in connection with the underlying
loans with a view towards determining, among other things, that: (i) the Fund
upon purchase or acquisition thereof will acquire valid loans (or interests
therein) and a perfected security interest in the property securing the loans;
(ii) there are no claims to the property superior to that of the underlying
mortgage or contract holder (except, in the case of second mortgage loans, those
of the first mortgage holders); and (iii) the Fund's purchase or acquisition
will not give rise to rights on the part of third parties, the exercise of which
could adversely affect the Fund. It may, however, be impracticable for the
Managers to examine prior to purchase every relevant document within the limited
due diligence period afforded by the financial institution selling or
contributing the loans, and in some cases the document files may not be
well-maintained and important documents or contracts may be missing. The
Managers will make certain assumptions regarding the rate and severity of
defaults on the mortgages or installment sales contracts underlying Whole Loans
purchased by the Fund and will determine the acquisition price for such
investments accordingly. There can be no assurance, however, that the actual
rate and/or severity of defaults will not be greater than that anticipated by
the Managers.
Interest Rate Risk. Because the prices of the Fund's assets will
fluctuate with changes in prevailing interest rates, the net asset value of the
Fund's Shares can also fluctuate in relation to interest rate changes. When
interest rates decline, the value of a portfolio invested substantially in fixed
income securities can be expected to rise. Conversely, when interest rates rise,
the value of a portfolio invested substantially in fixed-income securities can
be expected to decline. The values of securities rated in the lower rating
categories generally fluctuate more than those of securities rated on the higher
rating category.
Prepayment Risk. The yield characteristics of mortgage-related assets
differ from traditional debt securities. The major differences typically include
more frequent interest and principal payments (usually monthly) the possibility
that prepayments of principal may be made at any time. As a result, if the Fund
purchases a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity while a prepayment rate that is slower
than expected will increase yield to maturity. Conversely, if the Fund purchases
the securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, yield to maturity.
Prepayment rates are influenced by changes in current interest rates and a
variety of other economic, geographic, social and other factors.
Amounts available for reinvestment by the Fund are likely to be greater
during a period of declining interest rates than during a period of rising
interest rates as prepayments on the loans or other collateral underlying the
securities in which the Fund has invested result in prepayments of the Fund's
securities. The yield on the securities in which such amounts are reinvested is
likely to be lower than the yield on the securities that were prepaid or the
yield that could be achieved if such amounts were reinvested during a time of
rising interest rates. Mortgage-Related Assets may decrease in value as a result
of increases in interest rates and may benefit less than other fixed income
securities from declining interest rates because of the risk of prepayment.
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Credit Risk. All investments purchased by the Fund will be high
quality. Credit risk is the possibility that the issuer of a security, or the
counterparty to a contract, will default or otherwise become unable to honor a
financial obligation. Generally speaking, the lower a security's credit rating,
the higher its credit risk. If a security's credit rating is downgraded, its
price tends to decline sharply, especially as it becomes more probable that the
issuer will default. Although credit risk for the Fund should generally be low,
there can be no assurance that the credit rating of an investment will remain
unchanged over the period of the Fund's ownership of that investment.
b. Effects of Leverage
Not applicable.
8.4. Other Policies
The Fund may also invest in the following types of securities:
Asset-Backed Securities. Asset-Backed Securities are securities that
directly or indirectly represent a participation in or are secured by and
payable from a pool of assets representing the obligation of a number of
different parties.
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 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 structures described above or in
a pay-through structure similar to the CMO structure.
In general, the collateral supporting Asset-Backed Securities is of
shorter maturity than mortgage loans and is 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.
Asset-Backed Securities do not have the benefit of the same security
interest in the related collateral as do Mortgage-Backed Securities. 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 set off certain amounts owed 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 receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
13
<PAGE> 14
laws, the trustee for the holders of the automobile receivables may not have a
perfected 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 these securities.
Corporate Debt Securities. Corporate Debt Securities are fixed income
securities of United States corporations, which securities, at the time of
investment, are rated BBB or higher by S&P or, if unrated, determined by the
Managers to be of comparable quality. Securities rated in the four highest
categories as assigned by S&P (BBB or higher) are considered "investment grade;"
however, securities rated "BBB" have speculative characteristics. S&P's
description of securities rated "BBB" states that whereas such securities
"normally exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories."
The values of Corporate Debt Securities typically will fluctuate in
response to general economic conditions, to changes in interest rates and, to a
greater extent than the values of Mortgage-Backed Securities, to business
conditions affecting the specific industries in which the issuers are engaged.
Corporate Debt Securities will decrease in value as a result of increases in
interest rates.
Money Market Mutual Funds. The Fund may invest in the securities of
money market mutual funds to the extent permitted by the 1940 Act. Currently,
the 1940 Act permits a Fund to invest up to 5% of its total assets in the shares
of one investment company, but it may not own more than 3% of the securities of
any one registered investment company or invest more than 10% of its assets in
the securities of other investment companies.
Municipal Securities. The Fund may invest in municipal securities,
which are interest-paying debt securities issued by municipal issuers. The
income from municipal securities is generally exempt from federal taxation,
which causes such securities to have lower yields than taxable securities of
comparable quality and maturity. The Fund does not intend to purchase municipal
securities the income from which is not exempt from federal income tax.
There are variations in the credit quality of municipal obligations,
depending on numerous factors. The yields and market values of municipal
obligations are dependent on a variety of factors, including general economic
and monetary conditions, money market factors, conditions of the municipal
obligation market, the size of a particular offering, the maturity of the
obligation and the rating of the issue.
Other Investments. From time to time, the Fund may also invest in other
investments, not previously listed, that a California state chartered
non-Federal Reserve member bank may invest in, including, but not limited to,
bullion and mint certificates, obligations of foreign governments and their
political sub-divisions, and railroad bonds.
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<PAGE> 15
OTHER INVESTMENT PRACTICES
The following discussion describes in greater detail some of the other
investment management practices that the Fund may employ from time to time to
earn income, facilitate portfolio management and mitigate risk.
Derivative Instruments - Interest Rate Transactions. To preserve a
return or spread on a particular investment or portion of its portfolio, or for
other non-speculative purposes, the Fund may enter into interest rate swaps and
the purchase or sale of interest rate caps and floors. The Fund does not intend
to use these transactions for speculative purposes. Interest rate swaps involve
the exchange by the Fund with another party of their respective 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 contractually-based 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
contractually-based principal amount from the party selling such interest rate
floor.
The Fund may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending upon 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 paying, as the case may be, only the net amount of the two
payments. The Fund will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims paying ability of the
other party thereto is rated at least A by S&P or, if unrated, determined by the
Managers to be of comparable quality. The Managers will monitor the
creditworthiness of counterparties on an ongoing basis. 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 transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. The Managers have determined that, as a result, the swap
market has become relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Fund. These transactions do not involve the delivery
of securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the other
party to an interest rate swap defaults, the Fund's risk of loss consists of the
net amount of interest payments that the Fund contractually is entitled to
receive. The aggregate purchase price of caps and floors held by the Fund may
not exceed 5% of the Fund's total assets.
Forward Commitments. The Fund may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments") if it holds, and maintains until the settlement date in a
segregated account, cash or high-grade debt obligations in
15
<PAGE> 16
an amount sufficient to meet the purchase price, or if it enters into offsetting
contracts for the forward sale of other securities it owns. Forward commitments
may be considered securities in themselves, and involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the Fund's other
assets. Where such purchases are made through dealers, the Fund relies on the
dealer to consummate the sale. The dealer's failure to do so may result in the
loss to the Fund of an advantageous yield or price. Although the Fund will
generally enter into forward commitments with the intention of acquiring
fixed-income securities for its portfolio or for delivery pursuant to options
contracts it has entered into, the Fund may dispose of a commitment prior to
settlement if the Managers deem it appropriate to do so. The Fund may realize
short-term capital gains or losses upon the sale of forward commitments.
Repurchase Agreements. The Fund may enter into repurchase agreements
with respect to up to 25% of its total assets (taken at current value). A
repurchase agreement is a contract under which the Fund acquires a security for
a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). It is the
Fund's present intention to enter into repurchase agreements only with
commercial banks and registered broker-dealers. Repurchase agreements may also
be viewed as loans made by the Fund which are collateralized by the securities
subject to repurchase. The Managers will monitor such transactions to ensure
that the value of the underlying securities will be at least equal at all times
to the total amount of the repurchase obligations, including the interest
factor. If the seller defaults, the Fund could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale including accrued
interest are less than the resale price provided in the agreement including
interest. In addition, if the seller should be involved in bankruptcy or
insolvency proceedings, the Fund may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if the Fund
is treated as an unsecured creditor and required to return the underlying
collateral to the seller's estate.
Reverse Repurchase Agreements. Under a reverse repurchase agreement,
the Fund sells securities and agrees to repurchase them at a mutually agreed
upon date and price. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale by the Fund may decline
more than or appreciate less than the securities the Fund has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities and the Fund's use of
the proceeds of the reverse repurchase agreement may effectively be restricted
pending such decisions. Reverse repurchase agreements create leverage, a
speculative factor, and will be considered borrowings for purposes of the Fund's
limitation on borrowing.
DEFENSIVE STRATEGIES
16
<PAGE> 17
At times the Managers may judge that conditions in the markets for
mortgage-related assets and other fixed-income securities make pursuing the
Fund's basic investment strategy inconsistent with the best interests of its
Shareholders. At such times the Managers may use alternative strategies,
primarily designed to reduce fluctuations in the value of the Fund's assets. In
implementing these "defensive" strategies, the Fund may invest substantially all
of its assets in high-quality fixed-income obligations such as U.S. Treasury
Securities; commercial paper; certificates of deposit and bankers' acceptances;
repurchase agreements with respect to any of the foregoing investments; or any
other fixed-income securities that the Managers consider consistent with such
strategy including the use of interest rate derivative transactions. It is
impossible to predict when, or for how long, the Fund will use these alternative
strategies.
8.5. Share Price Data
Not Applicable.
8.6. Business Development Companies
Not Applicable.
ITEM 9. MANAGEMENT
9.1. General
(a) BOARD OF DIRECTORS. The Directors set broad policies for the Fund
and choose its officers. The Fund has five (5) Directors. Under the Bylaws,
which the Directors may amend, and except for the initial Board of Directors,
the Board of Directors shall consist of not fewer than three (3) nor more than
nine (9) Directors, as specified by a resolution of a majority of the entire
Board of Directors. No more than 60% of the Directors are "interested persons"
of the Fund, as defined in the 1940 Act.
(b) INVESTMENT MANAGER. The Fund's investment managers are Dennis C.
Kwok and Elena Chan, employees of the Fund and of Cathay Bank. Mr. Kwok has been
Vice President-Investments of Cathay Bank since June 1999. From April 1996 to
June 1999, Mr. Kwok was self-employed managing his own investment portfolio.
From May 1995 to April 1996, Mr. Kwok was General Manager (Trading and Sales) at
Tokai Asia Limited and from November 1993 to May 1995, he was a Vice President
at Union Bank of Switzerland. Prior to joining Union Bank of Switzerland, Mr.
Kwok was a Director at Schroders Asia Limited. In total, Mr. Kwok has over 21
years of experience managing fixed income securities. Mr. Kwok received a
bachelors degree in business administration and commerce (with distinction and
first honors) from the University of Alberta, Edmonton, Alberta.
Ms. Chan has been a Senior Vice President and Chief Financial Officer
of Cathay Bank since December 1992. Ms. Chan has been with Cathay Bank since
1985. In total, Ms. Chan has over 8 years of experience in commercial banking
and in managing structured investment portfolios. Ms. Chan received a B.S.
degree in accounting from the California State University at Los Angeles.
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<PAGE> 18
There is no management contract between the Fund and the Managers.
Subject to such policies as the Directors may determine, the Managers, at their
own expense, furnish continuously an investment program for the Fund and make
investment decisions on behalf of the Fund. Subject to the control of the
Directors, the Managers also manage, supervise, and conduct the other affairs
and business of the Fund, furnish office space and equipment, provide
bookkeeping and clerical services (including determination of the Fund's net
asset value, but excluding transfer agency services), and place all orders for
the purchase and sale of the Fund's portfolio securities.
The Fund will not pay the Managers any compensation for the services
rendered, facilities furnished, and expenses borne by the Managers.
As an employee of the Fund, the Managers shall not be subject to any
liability to the Fund or to any shareholder of the Fund for any act or omission
in the course of or connected with rendering services to the Fund in the absence
of the Managers' willful misfeasance, bad faith, gross negligence, or reckless
disregard of its duties.
The Managers may be terminated without penalty by vote of the Directors
or the Shareholders of the Fund. The continuance of the Managers will be
considered at least annually by vote of either the Directors or the
Shareholders, and, in either case, by a majority of the Directors who are not
"interested persons" of the Fund.
(c) PORTFOLIO MANAGER. The Fund's portfolio managers will be Dennis C.
Kwok and Elena Chan. See Item 9.1 (b) above.
(d) ADMINISTRATOR. Not Applicable.
(e) CUSTODIAN. Cathay Bank (the "Bank"), located at 777 North Broadway,
Los Angeles, California 90012, will serve as the Fund's custodian, transfer
agent, and dividend disbursing agent.
The Bank will serve as custodian for the Fund's portfolio of all
securities and cash, and in such capacity, maintains certain financial and
accounting books and records pursuant to agreements with the Fund. For these
services, the Bank receives a fee of $120,000 per month. All fees are to be
accrued daily and paid monthly.
As transfer agent and dividend disbursing agent, the Bank is
responsible for, among other things, establishing and maintaining accounts of
Shareholders, monitoring the number of Shares issued and outstanding from time
to time and effecting payments of dividends or distributions declared from time
to time by the Directors with respect to the Shares. For these services, the
Bank receives a fee from the Fund in the amount of $600,000 per year plus the
Bank's reasonable out-of-pocket expenses incurred in the performance of its
services.
(f) EXPENSES
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<PAGE> 19
The Fund's service providers bear all expenses in connection with the
performance of their respective services, except that the Fund will bear the
following expenses relating to its operations: taxes, interest, brokerage fees
and commissions, if any, fees and travel expenses of Directors who are not
partners, officers, directors, shareholders or employees of Cathay Bancorp,
Inc. or any of its subsidiaries, Securities and Exchange Commission fees and
state fees and expenses, certain insurance premiums, outside and, to the extent
authorized by the Fund, inside auditing and legal fees and expenses, fees and
reasonable out-of-pocket expenses of the custodian and transfer agent, expenses
incurred for pricing securities owned by the Fund, costs of maintenance of
corporate existence, costs and expenses of Shareholders' and Directors' reports
and meetings and any extraordinary expenses.
(g) AFFILIATED BROKERAGES
None.
9.2. Non-resident Managers
Not Applicable.
9.3. Control Persons
As of October 3, 2000, Cathay Bank, a wholly owned subsidiary of Cathay
Bancorp, Inc., owned 100% of the outstanding Shares of the Fund.
ITEM 10. CAPITAL STOCK, LONG-TERM DEBT, AND OTHER SECURITIES
10.1. Capital Stock
The Fund is authorized to issue 30,000,000 shares of common stock,
$0.001 par value ("Shares"). The Fund's Shares have no preemptive, conversion,
exchange or redemption rights. Each Share has equal voting rights. Shareholders
are entitled to one vote per Share. All voting rights for the election of
Directors are non-cumulative, which means that the holders of more than 50% of
the Shares can elect 100% of the Directors then nominated for election if they
choose to do so and, in such event, the holders of the remaining Fund's Shares
will not be able to elect any Directors. The Fund's Shares outstanding are and
those offered hereby, when issued, will be fully paid and non-assessable. The
rights of the Fund's shares with respect to dividends and distributions are
described under this Item 10.1 under "Dividends and Distributions". Each Share
is entitled to participate equally in the net distributable assets of the Fund
upon liquidation or termination.
This offering of the Shares has been approved by the Board of Directors
of the Fund. The Fund may from time to time sell additional Shares. Any
additional offering will be subject to the requirements of the 1940 Act that
Shares may not be sold at a price below the then current net asset value,
exclusive of sales loads and commissions, 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.
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<PAGE> 20
REPURCHASE OF SHARES
Since the Fund is a closed-end investment company, Shareholders of the
Fund do not, and will not, have the right to redeem their Shares. It is not
expected that any trading market in Shares of the Fund will ever emerge.
Although the Fund has no present intention to do so, the Fund may, from
time to time, consider repurchasing its Shares or to tender for its Shares at
their net asset value. The Fund currently has no established tender offer or
share repurchase program, and no established schedule for considering the
adoption of such programs. No assurance can be given that the Fund will, in
fact, decide to undertake any tender offers or share repurchases in the future.
Subject to the Fund's investment restrictions with respect to
borrowings and subject to the Fund's compliance with the 1940 Act, the Fund may
incur debt to finance repurchases and/or tenders. See Item 8.2 - Investment
Objectives and Policies: Investment Restrictions. Interest on any such
borrowings will reduce the Fund's net investment income.
Although share repurchases and tenders could have a favorable effect
for the owners of the Fund's Shares, it should be recognized that the
acquisition of Shares by the Fund will decrease the total assets of the Fund
and, therefore, will have the effect of increasing the Fund's expense ratio.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to make annual distributions to Shareholders from net
investment income. Net investment income of the Fund consists of all interest
and other income (excluding capital gains and losses) accrued on portfolio
assets less all expenses of the Fund allocable thereto. Expenses of the Fund are
accrued each day. It is currently anticipated that amounts which economically
represent net realized long-term capital gains, if any, will be distributed to
Shareholders at least annually.
To permit the Fund to maintain a more stable annual distribution, the
Fund may from time to time pay out less than the entire amount of available net
investment income and net realized short-term capital gains to Shareholders
earned in any particular period. Any such amount retained by the Fund would be
available to stabilize future distributions. As a result, the distributions made
by the Fund for any particular period may be more or less than the amount of net
investment income and net realized short-term capital gains actually earned by
the Fund during such period. For information concerning the tax treatment of
such dividends and distributions to Shareholders, see Item 10.4 - Taxes. The
Fund intends, however, to make such distributions as are necessary for it to
qualify as a regulated investment company that is not subject to federal tax.
10.2. Long-Term Debt
None.
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<PAGE> 21
10.3. General
None.
10.4. Taxes
The following discussion is based on the advice of KPMG LLP, and
reflects provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing Treasury regulations and IRS published rulings, as of the date
of this Registration Statement.
The following is a general summary of certain of the United States
federal income tax laws relating to the Fund. This discussion is based on the
Internal Revenue Code, regulations thereunder, published rulings, procedures and
announcements and court decisions as of the date hereof. The tax law, as well as
the implementation thereof, is subject to change, and any such change might
interfere with the Fund's ability to qualify as a RIC or, if the Fund so
qualifies, to maintain such qualification. This discussion does not purport to
deal with all of the United States federal income tax consequences applicable to
the Fund or to all categories of investors, some of whom may be subject to
special rules. In addition, it does not address state, local, foreign or other
taxes to which the Fund or its investors may be subject, or any proposed changes
in applicable tax laws. Investors should consult their tax advisers with respect
to an investment in Fund Shares, including in particular with respect to the new
regulations concerning disclosure of arrangements a significant effect of which
is to reduce corporate federal income tax liability.
Taxation of the Fund as an Ordinary Corporation.
It is anticipated that the Fund will seek to meet the requirements to
qualify for the special pass-through status available to RICs under the Internal
Revenue Code, and thus to be relieved of federal income tax on that part of its
net investment income and realized capital gains that it distributes to
shareholders. If the Fund's status as a RIC is not respected, it should be taxed
as an ordinary corporation on its taxable income for that year and assuming
certain ownership requirements are met, should be included in the Federal
consolidated return of its corporate shareholder. There is no assurance that the
Fund will meet the requirements to qualify as a RIC, or that the shareholders
will be entitled to the benefits of ownership of shares of a RIC.
21
<PAGE> 22
TAXATION OF THE FUND AS A RIC
RIC Qualification Requirements. To qualify as a RIC, the Fund must be
registered under the 1940 Act as an investment company (which in the opinion of
Fund counsel, Ropes & Gray, the Fund became so registered upon the filing of
its Form N-8A with the U.S. Securities and Exchange Commission on July 12,
2000). The Fund must also distribute to its shareholders for each taxable year
at least 90% of its investment company taxable income (consisting generally of
net investment income and net short-term capital gain) and must meet several
additional requirements. It should be noted that a distribution of warrants or
equity investments of the Fund will be treated as a sale by the Fund of such
assets with the excess of the fair market value of those assets over their tax
basis being the amount of the income or gain to the Fund. Among the
requirements are the following: (a) the Fund must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to loans of securities and gains from the sale or other disposition of
securities or other income derived with respect to its business of investing in
securities; (b) the Fund must diversify its assets so that, at the close of
each quarter of the Fund's taxable year, (i) not more than 25% of the market
value of its total assets is invested in the securities of a single issuer, or
in the securities of two or more issuers that the Fund controls and that are
engaged in the same or similar trades or businesses or related trades or
businesses, and (ii) at least 50% of the market value of its total assets is
represented by cash, cash items, government securities, securities of other
RICs and other securities (with each investment in such other securities
limited so that not more than 5% of the market value of the Fund's total assets
is invested in the securities of a single issuer and the Fund does not own more
than 10% of the outstanding voting securities of a single issuer); and (c) the
Fund must file an election to be treated as a RIC. If, after initially
qualifying as a RIC, the Fund fails to qualify for treatment as a RIC for a
taxable year, it would be taxed as an ordinary corporation on its taxable
income for that year and, assuming certain ownership requirements are met, it
should be included in the Federal consolidated return of its corporate
shareholder. In such a case, there could be substantial tax and other costs
associated with re-qualifying as a RIC. However, under the final version of the
applicable regulations expected to be adopted, the foregoing should not apply
upon requalification so long as the Fund had qualified as a RIC for at least
one taxable year period prior to such disqualification, and had remained
disqualified for only one taxable year.
The Fund will be subject to a non-deductible 4% excise tax to the
extent it fails to distribute by the end of any calendar year at least 98% of
its ordinary income for such calendar year and 98% of its capital gain net
income for the one-year period ending on October 31 of such calendar year, plus
certain other amounts. For these purposes, any taxable income retained by the
Fund, and on which it pays federal income tax, will be treated as having been
distributed.
The Fund currently intends to distribute in each year for which it
qualifies as a RIC substantially all of its net investment income and capital
gain net income so as to not be subject to federal income or excise taxes.
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<PAGE> 23
TAXATION OF THE FUND'S SHAREHOLDERS IF THE FUND QUALIFIES AS A RIC
General. Dividends paid to shareholders that are attributable to the
Fund's net investment income will be taxable to shareholders as ordinary income.
Capital gain distributions are taxable as long-term capital gains regardless of
how long the shareholder has held the shares. It is not anticipated that any
portion of the Fund's dividends will qualify for the dividends-received
deduction for shareholders in respect of their Fund dividends.
Distributions are generally taxable to shareholders at the time the
distribution is received. Any distribution, however, declared by the Fund in
October, November or December, made payable to shareholders of record in such a
month and paid the following January, is deemed paid by the Fund and received by
shareholders on December 31 of the year declared. This will prevent the
application of the excise tax, discussed above, to the Fund as a result of the
delay in the payment of the dividends.
If, for any calendar year, the Fund's total distributions exceed its
net investment income and net capital gains, the excess will generally be
considered a tax-free return of capital to a shareholder to the extent of the
shareholder's adjusted tax basis in its shares and then as capital gain. The
amount treated as tax-free return of capital will reduce the adjusted tax basis
of a shareholder's shares, thereby increasing the potential gain or reducing the
potential loss on the sale of the shares.
In general, upon the sale or other disposition of shares of the Fund by
a shareholder, the shareholder will recognize a gain or loss equal to the
difference between the amount realized on the sale and the seller's adjusted tax
basis in the shares. Any loss realized will be disallowed to the extent the
seller has acquired (or entered into a contract to acquire) substantially
identical shares within a period beginning 30 days before the disposition of
shares and ending 30 days after the disposition. In such case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Gain or loss
realized upon sale of shares or interest generally will be treated as a capital
gain or loss. The gain or loss will be a long-term capital gain or loss if the
shares were held for more than one year. In addition, if the shares sold by a
shareholder were not held for more than six months, any loss on the sale will be
treated as long-term capital loss to the extent of any capital gain dividend
received by the shareholder with respect to such shares.
The Fund is required to withhold 31% of reportable payments (which may
include dividends and capital gain distributions) to individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number or who otherwise are subject to backup
withholding. The certification of a shareholder's taxpayer identification number
will be provided to the Fund.
Federal withholding taxes at a rate of 30% (or a lesser treaty rate)
may apply to distributions to shareholders of the Fund who are nonresident
aliens or foreign limited liability companies, trust or corporations. The rules
governing United Sates federal income taxation of foreign shareholders and
members of a partnership are complex, and prospective non-U.S. owners should
consult with their own tax advisors to determine the impact of federal, state
and
23
<PAGE> 24
local income tax laws with regard to an investment in shares, including any
reporting requirements.
Individuals and certain other persons who are shareholders will be
required to include in their gross income an amount of certain Fund expenses
relating to the production of gross income that are allocable to the Fund. These
shareholders, therefore, will be deemed to receive gross income from the Fund in
excess of the distributions they actually receive. Such allocated expenses may
be deductible by an individual shareholder as a miscellaneous itemized
deduction, subject to the limitation on miscellaneous itemized deductions not
exceeding 2% of adjusted gross income.
The Fund will notify its shareholders following the end of each
calendar year of the amounts of dividends and capital gain distributions paid or
deemed paid during the year.
In certain circumstances the IRS may disallow the federal income tax
benefits provided by a particular arrangement when the arrangement significantly
reduces or postpones corporate tax liability, or when tax avoidance is a
significant purpose of the arrangement. Shareholders should consult their tax
advisers about the availability of the benefits anticipated through investment
in the Fund, and possible disclosure obligations relating to that investment.
10.5. Outstanding Securities
<TABLE>
<CAPTION>
Amount Held by Amount Outstanding Exclusive
Amount Registrant or for its of Amount Shown Under
Title of Class Authorized Account Previous Column
<S> <C> <C> <C>
Common Stock 30,000,000 None 12,443,828
</TABLE>
10.6. Securities Ratings
None.
ITEM 11. DEFAULTS AND ARREARS ON SENIOR SECURITIES
11.1. None.
11.2. None.
ITEM 12. LEGAL PROCEEDINGS.
None.
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PART B
ITEM 16. GENERAL INFORMATION AND HISTORY
Not Applicable.
ITEM 17. INVESTMENT OBJECTIVE AND POLICIES
See Item 8.2 Investment Objective and Policies.
ITEM 18. MANAGEMENT
18.1 through 18.3. Management Information
DIRECTORS AND OFFICERS
The Directors of the Fund are responsible for the general oversight of
the Fund's business. The initial Directors and executive officers of the Fund
and their principal occupations during the last five years are set forth below.
The mailing address of each of the officers and Directors is 777 North Broadway,
Los Angeles, California 90012, unless otherwise indicated.
<TABLE>
<CAPTION>
Present principal occupation and principal
Name Position with Fund occupation during the past five years
---- ------------------ -------------------------------------
<S> <C> <C>
*Dunson K. Cheng Director and From 1994 to present, Chairman of the Board of
Age: 55 President Cathay Bancorp, Cathay Bank and Cathay Investment
Corporation. From 1990 to present, President,
Cathay Bancorp. From 1985 to present, President,
Cathay Bank.
*Anthony M. Tang Director, Vice President From 1994 to present, Executive Vice President,
Age: 46 and Chief Financial Officer Cathay Bancorp. From 1991 to present, Assistant
Secretary, Cathay Bancorp. From 1990 to present,
Chief Financial Officer and Treasurer, Cathay
Bancorp.
*Donald Cheng Director From July 1997 to present, self-employed. From
Age: 49 1995 to June 1997, Controller, Trading Company -
2752 West 24th Avenue Hong Kong.
Vancouver, BC V6L 1R1
Canada
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C>
Hubert Y. Hui Director From January 2000 to present, retired. From 1990
Age: 56 to January 2000, Occupational Hygiene Officer,
303--8880 Cook Road Worker's Compensation Board of British Columbia.
Richmond, BC V6Y 2Y4
Canada
George Lee Director From July 1999 to present, retired. From 1995 to
Age: 67 June 1999, Chairman, First Central Bank.
213 Los Laureles
South Pasadena, CA 91030
Elena Chan Secretary From 1992 to present, Senior Vice President and
Age: 49 Chief Financial Officer, Cathay Bank
</TABLE>
-----------------------------
* Directors who are "interested persons" (as defined in the 1940 Act)
of the Fund or Cathay Bancorp, Inc.
Except as stated below, the principal occupations of the officers and
Directors for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
None of the Directors are directors of any other funds associated with
Cathay Bank. Each Director of the Fund that is not an interested person will
receive an annual fee, initially expected to be $2,000 and an additional fee of
$500 for each Directors' meeting attended. It is anticipated that there will be
at least four meetings each year.
The Articles of Incorporation of the Fund provides that the Fund will
indemnify its Directors and officers against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Fund, unless it is determined in the manner specified in the
Articles of Incorporation that they have not acted in good faith in the
reasonable belief that their actions were in the best interests of the Fund or
that such indemnification would relieve any officer or Director of any liability
to the Fund or its shareholders by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of his or her duties. The Fund, at its
expense, provides liability insurance for the benefit of its Directors and
officers.
26
<PAGE> 27
18.4 Compensation Information
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Estimated Total
Aggregate Accrued Annual Compensation
Compensation As Part of Benefits Upon From the Fund
NAME, POSITION From Fund Fund Expenses Retirement Paid to Directors
-------------- --------- ------------- ---------- -----------------
<S> <C> <C> <C> <C>
Dunson K. Cheng None None None None
Director
Anthony M. Tang None None None None
Director
Donald Cheng None None None None
Director
Hubert Y. Hui $3,000 None None $3,000
Director
George Lee $3,000 None None $3,000
Director
</TABLE>
(1) Figures are estimated amounts for the Fund's fiscal year ending December,
31, 2000.
18.5 Code of Ethics
The Fund has adopted a Code of Ethics ("Code") under Rule 17j-1 of the
Investment Company Act, and this Code permits personnel subject to the Code to
invest in securities, including securities that may be purchased or held by the
Fund.
This Code can be reviewed and copied at the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at (202) 942-8090. This
Code is available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov. Copies of this Code may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.
ITEM 19. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
19.1. As of October 3, 2000, Cathay Bank, a California banking
corporation whose principal office is located at 777 North Broadway, Los
Angeles, California 90012, owns 100% of
27
<PAGE> 28
the voting shares of the Registrant. Cathay Bank is a wholly owned subsidiary
of Cathay Bancorp, Inc., a financial holding company that is a Delaware
corporation whose principal office is located at 777 North Broadway, Los
Angeles, California 90012. As of June 30, 2000, Cathay Bancorp, Inc. had assets
of approximately $2,144,153,00.
19.2. See 19.1 above.
19.3. None.
ITEM 20. INVESTMENT ADVISORY AND OTHER SERVICES
1-6. See Item 9 - Management.
7. The Fund will provide audited annual financial statements to its
Shareholders. For the Fund's first fiscal year, the independent auditors engaged
to audit the Fund's financial statements are KPMG LLP, 355 S. Grand Ave., Suite
2000, Los Angeles, California 90071; thereafter the selection of independent
auditors by the Fund's directors will be ratified annually by Shareholders at
the Fund's annual meeting.
8. See Item 9 - Management.
ITEM 21. BROKERAGE ALLOCATION AND OTHER PRACTICES
INVESTMENT DECISIONS
Investment decisions for the Fund are made with a view to achieving its
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
particular security may be bought or sold by the Managers even though it could
have been bought or sold for Cathay Bank at the same time. Likewise, a
particular security may be bought by the Managers when Cathay Bank is selling
the security. There may be circumstances when purchases or sales of portfolio
securities by the Managers for Cathay Bank will have an adverse effect on the
Fund.
BROKERAGE AND RESEARCH SERVICES
Whole Loans, mortgage-related assets and other fixed-income securities
will generally be acquired by the Fund from the issuer thereof in
privately-negotiated transactions not involving payment of brokerage
commissions. The Fund may occasionally pay a commission or other fee to an
unaffiliated third party for brokerage or referral services. Some fixed-income
securities may be purchased through dealers on a "net" basis without a stated
commission.
ITEM 22. TAX STATUS
See Item 10.4 - Taxes.
28
<PAGE> 29
ITEM 23. FINANCIAL STATEMENTS
29
<PAGE> 30
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholder
Cathay Securities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of Cathay
Securities Fund, Inc. as of July 14, 2000. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the statement of
assets and liabilities is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
that statement of assets and liabilities. An audit of a statement of assets and
liabilities also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit of
the statement of assets and liabilities provides a reasonable basis for our
opinion.
In our opinion, the statement of assets and liabilities referred to above
present fairly, in all material respects, the financial position of Cathay
Securities Fund, Inc. as of July 14, 2000 in conformity with accounting
principles generally accepted in the United States of America.
Los Angeles, California
October 4, 2000
30
<PAGE> 31
CATHAY SECURITIES FUND, INC.
Statement of Assets and Liabilities
July 14, 2000
<TABLE>
<S> <C>
Assets - cash $1,000
======
Net assets represented by common stock $1,000
======
Shares outstanding ($100 per share) 10
======
Net asset value $ 100
======
</TABLE>
See accompanying note to statement of assets and liabilities.
31
<PAGE> 32
CATHAY SECURITIES FUND, INC.
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 4, 2000
(1) Organization
Cathay Securities Fund, Inc. (the Fund), a Maryland corporation, is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as a
nondiversified closed-end management investment company. The Fund is an
indirect wholly owned subsidiary of Cathay Bancorp, Inc. As of the date of this
report, operations of the Fund have been limited to organizational matters and
the issuance of initial shares. All organization costs have been borne by
Cathay Bancorp, Inc.
(2) Subsequent event
Subsequent to the Fund's formation, the staff of the U.S. Securities and
Exchange Commission (the "SEC") completed an examination of certain books and
records of the Fund pursuant to Section 31(b) of the 1940 Act and Section 204 of
the Investment Advisors Act of 1940. On September 11, 2000, the Fund was
notified by the SEC of the examination findings including the identification of
possible violations or failures to meet certain statutory requirements of the
1940 Act in a substantial manner and the identification of numerous other
unspecified violations of rules and regulations under the 1940 Act.
As a result of the findings of the examination, the SEC determined that the Fund
was not eligible to register with the SEC and requested that the Fund complete
and file a Form N-8F within 30 days of September 11, 2000. Management intends to
respond to the matters raised by the SEC and presently believes such matters
will not have a material adverse effect on the financial position of the Fund.
32
<PAGE> 33
[Intentionally Left Blank]
33
<PAGE> 34
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
(a) Included in Part A
None.
(b) Included in Part B Statement of Assets and Liabilities as of
July 14, 2000
(2) (a) Articles of Incorporation of Cathay Securities Fund, Inc.
dated July 10, 2000 are filed herewith.
(b) Bylaws of Cathay Securities Fund, Inc. dated July 7, 2000 are
filed herewith.
(c) None.
(d) The following portions of the Fund's Articles and Bylaws
filed as exhibits 2(a) and 2(b) hereto, define the rights of
shareholders:
SIXTH: Shares of Stock:
B. Stockholders shall not have preemptive or preferential rights
to acquire any shares of the capital stock of the Corporation, and any or all of
such shares, whenever authorized, may be issued, or may be reissued and
transferred if such shares have been reacquired and have treasury status, to any
person, firm, corporation, trust, partnership, association or other entity for
such lawful consideration and on such terms as the Board of Directors determines
in its discretion without first offering the shares to any such holder.
D. The Board of Directors of the Corporation may, by adoption of
a resolution or Bylaw, impose restrictions upon the transferability by
shareholders of shares of the Corporation's capital stock.
E. No shares of the Corporation's capital stock shall have any
conversion or exchange rights or privileges or have cumulative voting rights.
F. Except as otherwise required under the 1940 Act, voting power
for the election of directors and for all other purposes shall be vested
exclusively in the holders of the Common Stock. Each holder of a full or
fractional share of Common Stock shall be entitled, in the case of full shares,
to one vote for each such share and, in the case of fractional shares, to a
fraction of one vote corresponding to the fractional amount of each such
fractional share, in each case based upon the number of shares registered in
such holder's name on the books of the Corporation.
G. In the event of the liquidation or dissolution of the
Corporation, the holders of the Common Stock shall be entitled to receive all
the net assets of the Corporation. The assets so
34
<PAGE> 35
distributed to the stockholders shall be distributed among such stockholders, in
cash or in kind at the option of the directors, in proportion to the number of
full and fractional shares of Common Stock held by them and recorded on the
books of the Corporation.
H. Each holder of shares of capital stock shall, upon demand,
disclose to the Corporation such information with respect to direct or indirect
holdings of such shares as the directors or any officer or agent of the
Corporation designated by the directors deem necessary to comply with provisions
of the Internal Revenue Code of 1986 applicable to the Corporation, to comply
with requirements of any other appropriate taxing authority, or to comply with
the provisions of the 1940 Act or of the Employee Retirement Income Security Act
of 1974, as any of said laws may be amended from time to time.
EIGHTH: Management of the Affairs of the Corporation.
C. The Board of Directors shall have the power to determine
whether and to what extent, and at what times and places, and under what
conditions and regulations, the accounts and books of the Corporation (other
than the stock ledger) shall be open to inspection by stockholders. No
stockholder shall have any right to inspect any account, book, or document of
the Corporation except to the extent permitted by statute or the Bylaws.
NINTH: Stockholder Liability. The stockholders shall not be liable to any extent
for the payment of any debt of the Corporation.
TENTH: Majority of Votes. Except as otherwise provided in these Articles, under
the 1940 Act, or under any provision of Maryland law requiring approval by a
greater proportion than a majority of the votes entitled to be cast in order to
take or authorize any action, any action may be taken or authorized by the
Corporation upon the affirmative vote of a majority of the votes entitled to be
cast thereon.
THIRTEENTH: Right of Amendment. Any provision of these Articles may be amended,
altered, or repealed upon the affirmative vote of a two-thirds of all the votes
entitled to be cast on the matter.
BYLAWS
ARTICLE II
SHAREHOLDERS
Section 1. Annual Meetings. It will not be the policy of the corporation to have
an annual meeting unless required by the holders of 10% of outstanding voting
securities or scheduled by the Board of Directors. If required, the annual
meeting of shareholders shall be held during the month of March, at which they
shall elect a Board of Directors and transact such other business as may be
required by law or these bylaws or as may properly come before the meeting.
35
<PAGE> 36
Section 2. Special Meetings. Special meetings of shareholders may be called at
any time by the Chairman of the Board, or President, or by a majority of the
Board of Directors, and shall be held at such time and place as may be stated in
the notice of the meeting.
Special meetings of the shareholders may be called by the Secretary
upon the written request of the holders of shares entitled to vote not less than
twenty-five percent of all the votes entitled to be cast at such meeting,
provided that (1) such request shall state the purposes of such meeting and the
matters proposed to be acted on, and (2) the shareholders requesting such
meeting shall have paid to the Corporation the reasonably estimated cost of
preparing and mailing the notice thereof, which the Secretary shall determine
and specify to such shareholders. No special meeting shall be called upon the
request of shareholders to consider any matter which is substantially the same
as a matter voted upon at any special meeting of the shareholders held during
the preceding twelve months, unless requested by the holders of a majority of
all shares entitled to be voted at such meeting.
Section 3. Notice of Meetings. The Secretary shall cause notice of the place,
date, and hour, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, to be mailed, postage prepaid, not less than
ten nor more than ninety days before the date of the meeting, to each
shareholder entitled to vote at such meeting at his or her address as it appears
on the records of the Corporation at the time of such mailing. Notice shall be
deemed to be given when deposited in the United States mail addressed to the
shareholders as aforesaid. Notice of any shareholders' meeting need not be given
to any shareholder who shall sign a written waiver of such notice whether before
or after the time of such meeting, or to any shareholder who is present at such
meeting in person or by proxy. Notice of adjournment of a shareholders' meeting
to another time or place need not be given if such time and place are announced
at the meeting. Irregularities in the notice of any meeting to, or the
nonreceipt of any such notice by, any of the shareholders shall not invalidate
any action otherwise properly taken by or at any such meeting.
Section 4. Quorum and Adjournment of Meetings. The presence at any shareholders'
meeting, in person, by telephone conference, or by proxy, of shareholders
entitled to cast a majority of the votes shall be necessary and sufficient to
constitute a quorum for the transaction of business. In the absence of a quorum,
the holders of a majority of shares entitled to vote at the meeting and present
in person or by proxy, or, if no shareholder entitled to vote is present in
person or by proxy, any officer present entitled to preside or act as secretary
of such meeting may adjourn the meeting without determining the date of the new
meeting or from time to time without further notice to a date not more than 120
days after the original record date. Any business that might have been
transacted at the meeting originally called may be transacted at any such
adjourned meeting at which a quorum is present.
Section 5. Voting. Except as otherwise provided in the Articles of Incorporation
or by applicable law, at each shareholders' meeting each shareholder shall be
entitled to one vote for each share of stock of the Corporation validly issued
and outstanding and registered in his or her name on the books of the
Corporation on the record date fixed in accordance with Section 5 of Article VI
hereof, either in person or by proxy appointed by instrument in writing
subscribed by such shareholder or his or her duly authorized attorney, except
that no shares held by the Corporation shall be entitled to a vote.
36
<PAGE> 37
Except as otherwise provided in the Articles of Incorporation, these
Bylaws, as required by provisions of the Investment Company Act of 1940, as
amended ("1940 Act") or as required under Maryland law, all matters shall be
decided by a vote of the majority of the votes validly cast. The vote upon any
question shall be by ballot whenever requested by any person entitled to vote,
but, unless such a request is made, voting may be conducted in any way approved
at the meeting.
At any meeting at which there is an election of Directors, the Chairman
of the meeting may, and upon the request of the holders of ten percent of the
stock entitled to vote at such election shall, appoint two inspectors of
election who shall first subscribe an oath or affirmation to execute faithfully
the duties of inspectors at such election with strict impartiality and according
to the best of their ability, and shall, after the election, make a certificate
of the result of the vote taken. No candidate for the office of Director shall
be appointed as an inspector.
Section 6. Validity of Proxies. The right to vote by proxy shall exist only if
the instrument authorizing such proxy to act shall have been signed by the
shareholder or by his or her duly authorized attorney. Unless a proxy provides
otherwise, it shall not be valid more than eleven months after its date. All
proxies shall be delivered to the Secretary of the Corporation or to the person
acting as Secretary of the meeting before being voted, who shall decide all
questions concerning qualification of voters, the validity of proxies, and the
acceptance or rejection of votes. If inspectors of election have been appointed
by the Chairman of the meeting, such inspectors shall decide all such questions.
A proxy with respect to stock held in the name of two or more persons shall be
valid if executed by one of them unless at or prior to exercise of such proxy
the Corporation receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a shareholder
shall be deemed valid unless challenged at or prior to its exercise.
Section 7. Stock Ledger and List of Shareholders. It shall be the duty of the
Secretary or Assistant Secretary of the Corporation to cause an original or
duplicate stock ledger to be maintained at the office of the Corporation's
transfer agent. Such stock ledger may be in written form or any other form
capable of being converted into written form within a reasonable time for visual
inspection.
Any one or more persons, each of whom has been a shareholder of record
of the Corporation for more than six months next preceding such request, who
owns in the aggregate five percent or more of the outstanding capital stock of
the Corporation, may submit (unless the Corporation at the time of the request
maintains a duplicate stock ledger at its principal office in Maryland) a
written request to any officer of the Corporation or its resident agent in
Maryland for a list of the shareholders of the Corporation. Within twenty days
after such a request, there shall be prepared and filed at the Corporation's
principal office in Maryland a list containing the names and addresses of all
shareholders of the Corporation and the number of shares of each class held by
each shareholder, certified as correct by an officer of the Corporation, by its
stock transfer agent, or by its registrar.
37
<PAGE> 38
Section 8. Action Without Meeting. Any action required or permitted to be taken
by shareholders at a meeting of shareholders may be taken without a meeting if
(1) all shareholders entitled to vote on the matter sign a written consent to
the action, (2) all shareholders entitled to notice of the meeting but not
entitled to vote at it sign a written waiver of any right to dissent, and (3)
the consents and waivers are filed with the records of the meetings of
shareholders. Such consent shall be treated for all purposes as a vote at the
meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 3. Election. Unless otherwise required by the 1940 Act, at each annual
meeting of shareholders, Directors shall be elected by vote of the holders of a
majority of the shares present in person or by proxy and entitled to vote
thereon. A plurality of all the votes cast at a meeting at which a quorum is
present is sufficient to elect a Director.
Section 4. Vacancies and Newly Created Directorships. If any vacancies shall
occur in the Board of Directors by reason of death, resignation, removal, or
otherwise, or if the authorized number of Directors shall be increased, the
Directors then in office shall continue to act, and such vacancies (if not
previously filled by the shareholders) may be filled by a majority of the
Directors then in office, although less than a quorum, except that a newly
created Directorship may be filled only by a majority vote of the entire Board
of Directors; provided, however, that if, at any time that there are
shareholders of the Corporation, immediately after filling such vacancy at least
two-thirds (2/3) of the Directors then holding office shall have been elected to
such office by the shareholders of the Corporation. In the event that at any
time, other than the time preceding the first annual shareholders' meeting, less
than a majority of the Directors of the Corporation holding office at that time
were elected by the shareholders, a meeting of the shareholders shall be held
promptly, and in any event within sixty days, for the purpose of electing
Directors to fill any existing vacancies in the Board of Directors, unless the
Securities and Exchange Commission shall by order extend such period.
Section 5. Removal. At any shareholders' meeting duly called, provided a quorum
is present, the shareholders may remove any director from office (either with or
without cause) and may elect a successor or successors to fill any resulting
vacancies for the unexpired terms of the removed director or Directors. A
majority of all the votes entitled to be cast for the election of Directors is
sufficient to remove a Director.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates of Stock. The interest of each shareholder of the
Corporation may be evidenced by certificates for shares of stock in such form as
the Board of Directors may from time to time authorize; provided, however, the
Board of Directors may, in its discretion, authorize the issuance of
non-certificated shares. No certificate shall be valid unless it is signed by
the Chairman, Vice Chairman, President, or a Vice President and countersigned by
the
38
<PAGE> 39
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer
of the Corporation and sealed with the seal of the Corporation, or bears the
facsimile signatures of such officers and a facsimile of such seal. In case any
officer who shall have signed any such certificate, or whose facsimile signature
has been placed thereon, shall cease to be such an officer (because of death,
resignation, or otherwise) before such certificate is issued, such certificate
may be issued and delivered by the Corporation with the same effect as if he or
she were such officer at the date of issue.
In the event that the Board of Directors authorizes the issuance of
non-certificated shares of stock, the Board of Directors may, in its discretion
and at any time, discontinue the issuance of share certificates and may, by
written notice to the registered owners of each certificated share, require the
surrender of share certificates to the Corporation for cancellation. Such
surrender and cancellation shall not affect the ownership of shares of the
Corporation.
Section 2. Transfer of Shares. Subject to the provisions of the next sentence of
this Section 2 of Article VI, Shares of the Corporation shall be transferable on
the books of the Corporation by the holder of record thereof in person or by his
or her duly authorized attorney or legal representative (i) upon surrender and
cancellation of any certificate or certificates for the same number of shares of
the same class, duly endorsed or accompanied by proper instruments of assignment
and transfer, with such proof of the authenticity of the signature as the
Corporation or its agents may reasonably require, or (ii) as otherwise
prescribed by the Board of Directors. The Board of Directors may, from time to
time, adopt limitations and rules and regulations with reference to the transfer
of the shares of stock of the Corporation to comply with the requirements of the
Securities Act of 1933, as amended, or other applicable laws. The Corporation
shall be entitled to treat the holder of record of any share of stock as the
absolute owner thereof for all purposes, and accordingly shall not be bound to
recognize any legal, equitable, or other claim or interest in such share on the
part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise expressly provided by law or the statutes of the
State of Maryland.
Section 3. Stock Ledgers. The stock ledgers of the Corporation, containing the
names and addresses of the shareholders and the number of shares held by them
respectively, shall be kept at the principal offices of the Corporation or, if
the Corporation employs a transfer agent, at the offices of the transfer agent
of the Corporation.
Section 4. Transfer Agents and Registrars. The Board of Directors may from time
to time appoint or remove transfer agents and registrars of transfers for shares
of stock of the Corporation, and it may appoint the same person as both transfer
agent and registrar. Upon any such appointment being made, all certificates
representing shares of capital stock thereafter issued shall be countersigned by
one of such transfer agents or by one of such registrars or by both and shall
not be valid unless so countersigned. If the same person shall be both transfer
agent and registrar, only one countersignature by such person shall be required.
Section 5. Fixing of Record Date. The Board of Directors may fix in advance a
date as a record date for the determination of the shareholders entitled to
notice of or to vote at any shareholders' meeting or any adjournment thereof, or
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,
39
<PAGE> 40
or to exercise any rights in respect of any change, conversion, or exchange of
stock, or for the purpose of any other lawful action, provided that (1) such
record date shall be within ninety days prior to the date on which the
particular action requiring such determination will be taken, (2) the transfer
books shall not be closed for a period longer than twenty days, and (3) in the
case of a meeting of shareholders, the record date shall be at least ten days
before the date of the meeting.
Section 6. Lost, Stolen or Destroyed Certificates. Before issuing a new
certificate for stock of the Corporation alleged to have been lost, stolen, or
destroyed, the Board of Directors or any officer authorized by the Board may, in
their discretion, require the owner of the lost, stolen, or destroyed
certificate (or his or her legal representative) to give the Corporation a bond
or other indemnity, in such form and in such amount as the Board or any such
officer may direct and with such surety or sureties as may be satisfactory to
the Board or any such officer, sufficient to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft, or
destruction of any such certificate or the issuance of such new certificate.
ARTICLE VII
FISCAL YEAR AND ACCOUNTANT
Section 2. Accountant.
A. The Corporation shall employ an independent public accountant or a firm
of independent public accountants as its Accountant to examine the accounts of
the Corporation and to sign and certify financial statements filed by the
Corporation. The Accountant's certificates and reports shall be addressed both
to the Board of Directors and to the shareholders. The employment of the
Accountant shall be conditioned upon the right of the Corporation to terminate
the employment forthwith without any penalty by vote of a majority of the
outstanding voting securities at any shareholders' meeting called for that
purpose.
B. A majority of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Corporation shall
select the Accountant at any meeting held within thirty days before or after the
beginning of the fiscal year of the Corporation or before the annual
shareholders' meeting in that year. The selection shall be submitted for
ratification or rejection at the next succeeding annual shareholders' meeting.
If the selection is rejected at that meeting, the Accountant shall be selected
by majority vote of the Corporation's outstanding voting securities, either at
the meeting at which the rejection occurred, or at a subsequent meeting of
shareholders called for the purpose of selecting an Accountant.
ARTICLE VIII
CUSTODY OF SECURITIES
Section 2. Termination of Custodian Agreement. Upon termination of the agreement
for services with the Custodian or inability of the Custodian to continue to
serve, the Board of Directors shall promptly appoint a successor Custodian, but
in the event that no successor Custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors shall call as
promptly as possible a special meeting of the shareholders to determine
40
<PAGE> 41
whether the Corporation shall function without a Custodian or shall be
liquidated. If so directed by resolution of the Board of Directors, or by vote
of the holders of a majority of the outstanding shares of stock of the
Corporation, the Custodian shall deliver and pay over all property of the
Corporation held by it as specified in such vote.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
Section 1. Indemnification of Officers, Directors, Employees and Agents. The
Corporation shall indemnify its present and past Directors, officers, employees,
and agents (including any "investment adviser" or "principal underwriter," as
those terms are defined in the 1940 Act), and any persons who are serving or
have served at the request of the Corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or
enterprise, to the full extent provided and allowed by Section 2-418 of the Code
concerning corporations, as amended from time to time or any other applicable
provisions of law. Notwithstanding anything herein to the contrary, no director,
officer, investment adviser, or principal underwriter of the Corporation shall
be indemnified in violation of Sections 17(h) and (i) of the 1940 Act. Expenses
incurred by any such person in defending any proceeding to which he or she is a
party by reason of service in the above-referenced capacities shall be paid in
advance or reimbursed by the Corporation to the full extent permitted by law,
including Sections 17(h) and (i) of the 1940 Act.
Section 2. Insurance of Officers, Directors, Employees and Agents. The
Corporation may purchase and maintain insurance on behalf of any person who is
or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, against any liability asserted against that person and
incurred by that person in or arising out of his or her position, whether or not
the Corporation would have the power to indemnify him or her against such
liability. Notwithstanding the foregoing, any insurance so purchased will not
protect or purport to protect any officer or director against liabilities for
willful misfeasance, bad faith, gross negligence, or reckless disregard of duty.
Section 3. Amendment. No amendment, alteration, or repeal of this Article or the
adoption, alteration, or amendment of any other provision of the Articles of
Incorporation or Bylaws inconsistent with this Article shall adversely affect
any right or protection of any person under this Article with respect to any act
or failure to act which occurred prior to such amendment, alteration, repeal, or
adoption.
ARTICLE X
AMENDMENTS
Section 1. General. Except as provided in Section 2 of this Article X, all
Bylaws of the Corporation, whether adopted by the Board of Directors or the
shareholders, shall be subject to amendment, alteration, or repeal, and new
Bylaws may be made by the affirmative vote of a
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majority of either: (1) the holders of record of the outstanding shares of stock
of the Corporation entitled to vote, at any annual or special meeting, the
notice or waiver of notice of which shall have specified or summarized the
proposed amendment, alteration, repeal, or new Bylaw; or (2) the Directors, at
any regular or special meeting the notice or waiver of notice of which shall
have specified or summarized the proposed amendment, alteration, repeal, or new
Bylaw.
Section 2. By Shareholders Only. No amendment of any section of these Bylaws
shall be made except by the shareholders of the Corporation if the Bylaws
provide that such section may not be amended, altered, or repealed except by the
shareholders. From and after the issue of any shares of the capital stock of the
Corporation, no amendment, alteration, or repeal of this Article X shall be made
except by the affirmative vote of the holders of either: (a) more than
two-thirds of the Corporation's outstanding shares present at a meeting at which
the holders of more than fifty percent of the outstanding shares are present in
person or by proxy, or (b) more than fifty percent of the Corporation's
outstanding shares.
(e) None.
(f) None.
(g) None.
(h) Not Applicable.
(i) None.
(j) Custodian Agreement between Cathay Securities Fund, Inc. and Cathay
Bank dated as of July 11, 2000 is filed herewith.
(k) Fund Accounting Agreement between Cathay Securities Fund, Inc. and
Cathay Bank dated as of July 11, 2000 is filed herewith.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Purchase Agreement between Cathay Securities Fund, Inc. and Dunson
K. Cheng dated as of July 11, 2000 is filed herewith.
(q) None.
(r) Code of Ethics of Cathay Securities Fund, Inc. is filed herewith.
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ITEM 25. MARKETING ARRANGEMENTS
None.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
None.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Fund does not control any person.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES OF THE FUND
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock 1
ITEM 29. INDEMNIFICATION
The corporation law of the State of Maryland, under which the Fund is
incorporated, permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, subject to specified
restrictions. The law does not, however, allow the liability of directors and
officers to the corporation or its stockholders to be limited to the extent that
(1) it is proved that the person actually received an improper benefit or profit
or (2) a judgment or other final adjudication is entered in a proceeding based
on a finding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the process. The Articles of Incorporation of the Fund contain a
provision limiting the liability of the directors and officers of the Fund and
its Shareholders to the fullest extent permitted from time to time by the laws
of Maryland (but not in violation of the 1940 Act). The Maryland corporation law
also permits a corporation to indemnify its directors, officers and agents,
among others, against judgments, penalties, fines, settlements, and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other capacities
unless it is established that the act or omissions of the party seeking to be
indemnified was material to the matter giving rise to the proceeding and was
committed in bad faith or was the result of active and deliberate dishonesty, or
the party actually received an improper personal benefit, or, in the case of any
criminal proceeding, the party had reasonable cause to believe that the act or
omission was unlawful.
The Fund's Articles of Incorporation and Bylaws require the Fund to
indemnify its directors, officers and agents (including the Managers) to the
fullest extent permitted from time to time by the laws of Maryland, subject to
the limitations on indemnification under the 1940 Act. The Fund's Bylaws provide
that the Fund may purchase and maintain insurance on behalf of any person who is
or was a director, officer, or agent of the Fund against any liability asserted
43
<PAGE> 44
against that person and incurred by that person in or arising out of his or her
position, whether or not the Fund would have the power to indemnify him or her
against such liability; provided that no such insurance purchased will protect
or purport to protect any officer or director against liabilities for willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See Item 9 - Management.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
(1) Cathay Bank, 777 North Broadway, Los Angeles,
California 90012 (records relating to management of the Fund
and to Cathay Bank's function as custodian and transfer agent)
(2) Ropes & Gray, One Franklin Square, 1301 K Street,
N.W., Suite 800 East, Washington, DC 20005 (the Registrant's
Articles of Incorporation, Bylaws and Minute Books)
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
Not Applicable.
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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, thereunto duly authorized, in the City of Los
Angeles, California on the 12th day of October, 2000.
Cathay Securities Fund, Inc.
By: /s/ Dunson K. Cheng
------------------------------------
Dunson K. Cheng
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Dunson K. Cheng President and Director October 12, 2000
---------------------------
Dunson K. Cheng
/s/Anthony M. Tang Chief Financial Officer October 12, 2000
--------------------------- and Director
Anthony M. Tang
/s/Donald Cheng Director October 12, 2000
---------------------------
Donald Cheng
/s/Hubert Y. Hui Director October 12, 2000
---------------------------
Hubert Y. Hui
/s/George Lee Director October 12, 2000
---------------------------
George Lee
</TABLE>
45
