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As filed with the Securities and Exchange Commission
on October 20, 2000
Registration No. 811-10029
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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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East West Securities Company, Inc.
(Exact Name of Registrant as Specified in Charter)
415 Huntington Drive
San Marino, California 91108
(Address of Principal Executive Offices)
(626) 799-5700
(Registrant's Telephone Number, including Area Code)
Douglas P. Krause
415 Huntington Drive
San Marino, California 91108
(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 signatures, and all other documents that are 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).............................................0.10%
Total Annual Expenses ........................................0.10%
</TABLE>
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(1) "Other expenses" are based on estimated amounts for the current fiscal
year.
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<TABLE>
<CAPTION>
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Example 1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C>
You would pay the
following expenses
on a $1,000 investment,
assuming a 5% annual
return: $ 1.02 $ 3.23 $ 5.65 $12.83
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</TABLE>
The purpose of the preceding table is to assist the investor in
understanding the various costs and expenses that an investor in East West
Securities Company, 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
13, 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 Manager believes 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 Real Estate
Loans, (x) Commercial Business Loans (xi) International Loans, and (xii)
Limited Liability Companies that invest in such obligations. (Construction and
Development Loans, Residential Mortgage Loans, Commercial Real Estate Loans,
Commercial Business 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
East West 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 Manager 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 Real Estate Loans, Commercial Business
Loans, and International Loans that East West 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 Real Estate Loans are entire ownership interests in loans on
commercial property. Commercial Business 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 in 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. 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 maturity or final distribution date.
Principal prepayments on collateral underlying a CMO may
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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
Manager 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
Manager believes 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 Manager 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 Manager determines 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
Manager 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.
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 Manager believes 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 Manager seeks 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 Manager may buy and sell securities for the Fund to accomplish its
investment objective. Although it is impossible to predict portfolio turnover
rate, the Manager expects 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 Manager, acting under the supervision of the Board. The Manager,
Julia Gouw, 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 Ms. Gouw will
remain associated with the Fund or that, in the event she ceased to be
associated with the Fund, the Fund would be able to find a qualified person or
persons to fill 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 Manager or East
West Bank, holds a major portion or all of an issue of such securities. Because
there may be relatively few potential purchasers for such investments and, in
some cases, there may be contractual restrictions on resales, the Fund may find
it more
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difficult to sell such securities at a time when the Manager believes 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 Manager will herself or through third parties hired on her 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 Manager 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 Manager 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 Manager.
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) and 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 medium to
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
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
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<PAGE> 14
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
Manager 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 Manager to be of comparable quality. The Manager 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 Manager has 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 an amount
sufficient to meet the purchase price, or if it enters into offsetting
contracts for the
15
<PAGE> 16
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 Manager deems 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 Manager 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
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<PAGE> 17
At times the Manager 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 Manager 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 Manager considers
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 manager is Julia Gouw, an
employee of the Fund and of East West Bank. Ms. Gouw has been Executive Vice
President, Chief Financial Officer and a director of East West Bank since 1998.
From 1997 to 1998, she was Senior Vice President, Chief Financial Officer and a
director of East West Bank; from 1994 to 1997, she was Senior Vice President and
Chief Financial Officer of East West Bank; from 1991 to 1994, she was Senior
Vice President and Controller of East West Bank; and from 1989 to 1991, she was
Vice President and Controller of East West Bank. In total, Ms. Gouw has over 10
years of experience managing fixed income securities. Ms. Gouw received a
bachelors degree in accounting from the University of Illinois.
There is no management contract between the Fund and the Manager.
Subject to such policies as the Directors may determine, the Manager, at her own
expense, furnishes continuously an investment program for the Fund and makes
investment decisions on behalf of the Fund. Subject to the control of the
Directors, the Manager also manages, supervises, and conducts the other affairs
and business of the Fund (including determination of the Fund's net asset
17
<PAGE> 18
value, but excluding transfer agency services), and places all orders for the
purchase and sale of the Fund's portfolio securities.
The Fund will not pay the Manager any compensation for the services
rendered and expenses borne by the Manager.
As an employee of the Fund, the Manager 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 Manager's willful misfeasance, bad faith, gross negligence, or
reckless disregard of its duties.
The Manager may be terminated without penalty by vote of the Directors
or the Shareholders of the Fund. The continuance of the Manager 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 manager will be Julia
Gouw. See Item 9.1 (b) above.
(d) ADMINISTRATOR. Not Applicable.
(e) CUSTODIAN. East West Bank (the "Bank"), located at 415 Huntington
Drive, San Marino, California 91108, will serve as the Fund's custodian, fund
accountant, 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 0.02% of the Fund's average daily total
assets. There is no additional fee under the Custodian Contract for custody
services relating to LLC interests held by the Fund.
As fund accountant, 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 an annual fee from the Fund in
the amount of 0.05% of the Fund's average daily total assets plus the Bank's
reasonable out-of-pocket expenses incurred in the performance of its services.
(f) EXPENSES
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 East West Bancorp
or any of its subsidiaries other than the Fund, Securities and Exchange
Commission fees
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<PAGE> 19
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 13, 2000, EWSC Holdings, LLC, a wholly-owned subsidiary
of East West Bank, which is a wholly-owned subsidiary of East West Bancorp,
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 20,000,000 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 monthly. 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
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 regulated investment company
("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.
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 25,
2000). The Fund also must 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 by 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
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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 or 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.
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.
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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 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
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<PAGE> 24
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 20,000,000 None 8,123,942.0426
</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 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 415 Huntington Drive,
San Marino, California 91108, unless otherwise indicated.
<TABLE>
<CAPTION>
Present principal occupation and principal
Name Position with Fund occupation during the past five years
---- ------------------ -------------------------------------
<S> <C> <C>
From 1998 to present, Director, Executive Vice
*Julia Gouw Director, President, Chief President, Chief Financial Officer, from 1997 to
Age: 41 Financial Officer and 1998, Director, Senior Vice President, Chief
Manager Financial Officer, from 1994 to 1997, Senior Vice
President, Chief Financial Officer, East West Bank.
*Douglas P. Krause Director, Executive Vice From 2000 to present, Executive Vice President,
Age: 43 President and Secretary Secretary and General Counsel, and from 1996 to
2000, Senior Vice President, Secretary and General
Counsel, East West Bank. From 1991 to 1996,
Corporate Senior Vice President and General
Counsel, Metrobank.
Marina Wang Director Investor. From 1997 to 2000, President, Trust
Age: 56 Bank. From 1994 to 1996, President, First Public
c/o East West Bank Bank.
415 Huntington Drive
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C>
San Marino, CA 91108
Scott Eisner Director From 1987 to present, shareholder, Block, Plant,
Age: 43 Eisner, Fiorito & Belak-Berger (accounting firm).
c/o Block, Plant, Eisner, Fiorito
& Belak-Berger
16542 Ventura Blvd., Suite 300
Encino, CA 91436
*Jeff Haas Director From 1993 to present, partner, and from 1987 to
Age: 38 1993, associate, Elias, Matz, Tiernan, & Herrick,
c/o Elias, Matz, Tiernan & L.L.P. (law firm).
Herrick, L.L.P.
734 15th Street, NW, 8th Floor
Washington, DC 20005
Liz Mendoza First Vice President From 1997 to present, First Vice
Age: 34 President/Controller, from 1994 to 1997, Vice
President/Controller, East West Bank.
</TABLE>
------------------------
* Directors who are "interested persons" (as defined in the 1940 Act)
of the Fund or East West Bancorp.
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
East West Bancorp. Each Director of the Fund that is not an interested person
will receive an annual retainer of $5,000 and additional fees of $500 per
meeting. 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
26
<PAGE> 27
of her duties. The Fund, at its expense, provides liability insurance for the
benefit of its Directors and officers.
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>
Julia Gouw None None None None
Director
Douglas P. Krause None None None None
Director
Marina Wang $7,000 None None $7,000
Director
Scott Eisner $7,000 None None $7,000
Director
Jeffrey Haas None None None None
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:
27
<PAGE> 28
[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 13, 2000, EWSC Holdings, LLC, a California limited
liability company, whose principal office is located at 415 Huntington Drive,
San Marino, California 91108, owns 100% of the voting shares of the Registrant.
EWSC Holdings, LLC is a wholly-owned subsidiary of East West Bank, which is a
wholly-owned subsidiary of East West Bancorp, a financial holding company that
is a Delaware corporation whose principal office is located at 415 Huntington
Drive, San Marino, California 91108. As of June 30, 2000, East West Bancorp had
assets of approximately $2,358,000,000.
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 Deloitte & Touche, LLP,
350 South Grand Avenue, 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 Manager even though it could
have been bought or sold for East West Bank at the same time. Likewise, a
particular security may be bought by the Manager when East West Bank is selling
the security. There may be circumstances when purchases or sales of portfolio
securities by the Manager for East West 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
28
<PAGE> 29
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.
29
<PAGE> 30
ITEM 23. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
East West Securities Company, Inc.:
We have audited the accompanying statement of assets and liabilities of East
West Securities Company, Inc. [the "Fund"] as of July 25, 2000. This statement
of assets and liabilities is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with 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 financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of East West Securities Company,
Inc., as of July 25, 2000 in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
Los Angeles, California
October 11, 2000
30
<PAGE> 31
EAST WEST SECURITIES COMPANY, INC.
Statement of Assets and Liabilities
July 25, 2000
<TABLE>
<S> <C>
Assets:
Cash $1,000
=======
Stockholder's Equity:
Common stock (par value of $0.001 per share)
Authorized - 20,000,000 shares
Issued and outstanding - 10 shares $ --
Additional paid in capital 1,000
------
Total stockholder's equity $1,000
======
</TABLE>
See accompanying notes to statement of assets and liabilities.
EAST WEST SECURITIES COMPANY, INC.
Notes to Statement of Assets and Liabilities
July 25, 2000
Note 1 - Organization
East West Securities Company, Inc. (the "Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940 as a non-diversified
closed-end management investment company. The Fund is an indirect subsidiary of
East West Bank (the "Bank"). As of the date of this report, operations of the
Fund have been limited to organizational matters and the issuance of initial
shares.
Note 2 - Administrative Fees and Services
East West Bank will serve as custodian for the Fund's portfolio of 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
Fund will pay the Bank an annual fee of 0.02% of the Fund's average daily total
assets. All fees are accrued monthly and paid quarterly.
East West Bank will also serve as fund accountant, transfer agent and dividend
disbursing agent for the Fund pursuant to a Fund Accounting Agreement. Services
provided by the Bank in this capacity include, but are not limited to:
maintenance of books and records required to be
31
<PAGE> 32
maintained by the Fund; performance of certain accounting services, including a
monthly download of various financial statements; preparation of special
reports and performance of special services that may be requested by the Fund;
establishing and maintaining accounts of shareholders; periodically monitoring
the number of shares issued and outstanding; and effecting payments of
dividends or distributions declared by the Board of Directors (the "Board").
For these services, the Fund will pay the Bank an annual fee of 0.05% of the
Fund's average daily total assets plus the Bank's reasonable out-of-pocket
expenses incurred in the performance of its services. All fees are accrued
monthly and paid quarterly.
The Fund's investment and portfolio manager ("Manager") is an employee of the
Fund and the Bank. There is no management contract between the Fund and the
Manager. In this capacity, subject to policies determined by the Board, the
Manager may furnish continuously an investment program for the Fund and make
investment decisions on behalf of the Fund. Additionally, subject to the control
of the Board, the Manager also manages, supervises, and conducts the other
affairs and business of the Fund and places all orders for the purchase and sale
of the Fund's portfolio securities. The Fund does not pay the Manager any
compensation for the services rendered and expenses borne by the Manager.
Note 3 - Federal Taxes
The Fund has elected and intends to qualify each year as a "regulated
investment company" under Subchapter M of the Internal Revenue Code. The Fund
will not be subject to federal income tax to the extent it distributes its net
income to shareholders.
32
<PAGE> 33
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
25, 2000
(2) (a) Articles of Incorporation of East West Securities Company, Inc.
dated as of July 12, 2000 are filed herewith.
(b) Bylaws of East West Securities Company, Inc. dated as of July 13,
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.
33
<PAGE> 34
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 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.
34
<PAGE> 35
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
35
<PAGE> 36
such shareholder or his or her duly authorized attorney, except that no shares
held by the Corporation shall be entitled to a vote.
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.
36
<PAGE> 37
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
37
<PAGE> 38
by the Chairman, Vice Chairman, President, or a Vice President and
countersigned by the 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
38
<PAGE> 39
a meeting, or to receive payment of any dividend or other distribution or
allotment of any rights, 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
39
<PAGE> 40
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 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
40
<PAGE> 41
amendment, alteration, or repeal, and new Bylaws may be made by the affirmative
vote of a 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 East West Securities Company, Inc. and
East West Bank dated as of July 14, 2000 is filed herewith.
(k) Fund Accounting Agreement between East West Securities Company,
Inc. and East West Bank dated as of July 14, 2000 is filed
herewith.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Purchase Agreement between East West Securities Company, Inc. and
Douglas P. Krause dated as of July 24, 2000 is filed herewith.
(q) None.
(r) Code of Ethics of East West Securities Company, Inc. is filed
herewith.
41
<PAGE> 42
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
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Stock 1
</TABLE>
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 Manager) 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
42
<PAGE> 43
person who is or was a director, officer, or agent of the Fund against any
liability asserted against that person and incurred by that person in or
arising out of 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) East West Bank, 415 Huntington Drive, San Marino,
California 91108 (records relating to management of the Fund
and to East West 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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<PAGE> 44
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 San
Marino, California on the 20th day of October, 2000.
East West Securities Company, Inc.
By: /s/ Julia Gouw
-------------------------------------
Julia Gouw
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/ Julia Gouw President, Director and October 20, 2000
--------------------------- Chief Financial Officer
Julia Gouw
/s/Douglas P. Krause Director, Executive Vice October 20, 2000
--------------------------- President and Secretary
Douglas P. Krause
/s/Marina Wang Director October 20, 2000
---------------------------
Marina Wang
/s/Scott Eisner Director October 20, 2000
---------------------------
Scott Eisner
/s/Jeffrey Haas Director October 20, 2000
---------------------------
Jeffrey Haas
</TABLE>
44
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------
<S> <C>
(2)(a) Articles of Incorporation of East West Securities Company, Inc.
dated as of July 14, 2000.
(2)(b) Bylaws of East West Securities Company, Inc. dated as of July 13,
2000.
(2)(j) Custodian Agreement between East West Securities Company, Inc.
and East West Bank dated as of July 14, 2000.
(2)(k) Fund Accounting Agreement between East West Securities Company,
Inc. and East West Bank dated as of July 14, 2000.
(2)(p) Purchase Agreement between East West Securities Company, Inc. and
Douglas P. Krause dated as of July 24, 2000.
(2)(r) Code of Ethics of East West Securities Company, Inc.
</TABLE>
