As filed with the Securities and Exchange Commission on August 31, 1995
Registration No. 33-60019
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1 [X]
(Check appropriate box or boxes)
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Equitable Real Estate Hyperion Capital Advisors, L.L.C.
520 Madison Avenue, New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 980-8400
Clifford E. Lai
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
520 Madison Avenue
New York, New York 10022
(Name and Address of Agent for Service)
Copy to: MICHAEL R. ROSELLA, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ____________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
The Registrant declares that an indefinite amount of its shares of beneficial
interest is being registered by this Registration Statement pursuant to
Section 24(f) under the Investment Company Act of 1940, as amended, and Rule
24f-2 thereunder.
294743.2
<PAGE>
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
Registration Statement on Form N-1A
-----------------------
CROSS REFERENCE SHEET -
Pursuant to Rule 404(c)
-----------------------
Part A
Item No. Prospectus Heading
1. Cover Page...................... Cover Page
2. Synopsis........................ Prospectus Summary
3. Condensed Financial
Information..................... Expense Summary
4. General Description of
Registrant...................... The Fund; Investment Objective and
Policies; Other Information Concerning
Shares of the Fund
5. Management of the Fund.......... Management of the Fund; Transfer Agent,
Custodian and Accounting Agent;
Distribution and Tax Matters
5A. Management's Discussion
of Fund Performance............ Management of the Fund
6. Capital Stock and Other
Securities...................... Purchases and Redemptions of Shares;
Other Information Concerning Shares of
the Fund; Distribution and Tax Matters
7. Purchase of Securities Being
Offered......................... Purchases and Redemptions of Shares;
Other Information Concerning Shares of
the Fund; Distribution and Tax Matters
8. Redemption or Repurchase........ Purchases and Redemptions of Shares
9. Legal Proceedings............... *
- --------
* Not applicable.
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<PAGE>
Part B
Item No. Caption in Statement of Additional
Information
10. Cover Page..................... Cover Page
11. Table of Contents.............. Cover Page
12. General Information and
History........................ The Fund; Management of the Fund;
Description of Shares, Voting Rights and
Liabilities
13. Investment Objectives and
Policies....................... Investment Objective, Policies, Risks and
Restrictions
14. Management of the Fund......... Management of the Fund
15. Control Persons and
Principal Holders of
Securities..................... Management of the Fund
16. Investment Advisory and
Other Services................. Management of the Fund; Transfer Agent,
Custodian, and Accounting Agent
17. Brokerage Allocation........... Investment Objective, Policies, Risks and
Restrictions; Portfolio Transactions
18. Capital Stock and Other
Securities..................... Description of Shares, Voting Rights and
Liabilities; Portfolio Transactions
19. Purchase, Redemption and
Pricing of Securities
Being Offered.................. How to Purchase and Redeem Shares;
Description of Shares, Voting Rights and
Liabilities
20. Tax Status..................... Tax Status
21. Underwriters................... Management of the Fund
22. Calculations of Yield
Quotations of Money Market
Funds.......................... *
23. Financial Statements........... Financial Statements
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* Not applicable.
-3-
294743.2
<PAGE>
Subject to Completion dated August __, 1995
PROSPECTUS September __, 1995
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
SERIES A-1995
Series A-1995 (the "Fund") is a series of Equitable Real
Estate Hyperion Mortgage Opportunity Fund, Inc. (the "Company"), a
non-diversified, open-end management investment company whose investment
objective is to seek to provide high total return from (i) both short and long
term capital gains and (ii) a high level of current income. The Fund seeks to
achieve its investment objective by investing, under normal circumstances, in
a portfolio consisting primarily of commercial mortgage-backed
securities ("Commercial Mortgage-Backed Securities"). The Fund will invest
only in securities which at the time of purchase are investment grade quality.
Commercial Mortgage-Backed Securities are securities that directly or
indirectly represent participations in, or are secured by and payable from, a
pool of mortgage loans secured by commercial real estate property. The
securities in which the Fund invests, and not the shares of the Fund, may be
secured by commercial real estate property. There is no assurance that the
Fund will be able to achieve its investment objective.
The investment adviser of the Fund is Equitable Real Estate
Hyperion Capital Advisors, L.L.C. (the "Adviser"). Hyperion Distributors, Inc.
is the distributor (the "Distributor") of shares of the Fund. The Adviser is a
registered investment adviser and the Distributor is a registered broker
dealer and a member of the National Association of Securities Dealers, Inc.
This Prospectus sets forth concisely the information
concerning the Fund that a prospective investor ought to know before
investing. The Company has filed with the Securities and Exchange Commission a
Statement of Additional Information, with respect to the Fund dated August ,
1995, which contains more detailed information about the Fund and is
incorporated into this Prospectus by reference. An investor may obtain a copy
of the Statement of Additional Information without charge by contacting the
Distributor (see back cover for address and phone number).
Shares of the Fund are neither insured nor guaranteed by the
U.S. Government. Shares of the Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank, and the shares are not federally insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or
any other agency.
Investors should read this Prospectus and retain it for
future reference.
THESE ARE SPECULATIVE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Information contained herein is subject to completion or
amendment. A registration statement relating to these Securities has been
filed with the Securities and Exchange Commission. The
259369.9
<PAGE>
Securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Prospectus shall not
constitute an offer to sell or solicitation of any offer to buy nor shall
there be any sale of these Securities in any state in which said offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the Securities Laws of any state.
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<PAGE>
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PROSPECTUS SUMMARY
- -------------------------------------------------------------------------------
The following summary is qualified in its entirety by the
more detailed information appearing in this Prospectus.
The Fund: Series A-1995 (the "Fund") is a series of
Equitable Real Estate Hyperion Mortgage Opportunity Fund, Inc. (the
"Company"), a newly-formed, non-diversified, open-end management investment
company.
Investment Objective: The Fund's investment objective is to
seek to provide high total return from (i) both short and long term capital
gains and (ii) a high level of current income. The Fund seeks to achieve its
investment objective by investing, under normal circumstances, in a
portfolio consisting primarily of commercial mortgage-backed securities
("Commercial Mortgage-Backed Securities"). The Fund will invest only in
securities which at the time of purchase are investment grade quality. See
"Investment Objective and Policies." However, the value of the Fund's
securities may fluctuate, in some cases significantly, in response to interest
rate changes. See "Risk Considerations." There is no assurance that the Fund
will achieve its investment objective. The investment objective of the Fund
and its investment restrictions described in the Statement of Additional
Information are fundamental and may not be changed without shareholder
approval.
Management and Fees: Equitable Real Estate Hyperion Capital
Advisors, L.L.C. (the "Adviser") serves as the Fund's investment adviser and
administrator and is compensated for its advisory and administrative services
at an annual rate of .35% and .20% of the Fund's average daily net assets,
respectively. The Fund is currently the only open-end investment company
advisory client of the Adviser. Hyperion Distributors, Inc. (the
"Distributor") will act as Distributor for the Fund's shares.
How to Purchase Shares: Shares of the Fund may be purchased
at the net asset value per share next determined after receipt of an order by
the Fund's Distributor or transfer agent in proper form with accompanying
check or other bank wire payment arrangements satisfactory to the Fund. The
minimum initial investment is $100,000. The minimum for subsequent investments
is $5,000. Such minimum initial and subsequent investments may be waived for
employees of the Adviser, Hyperion Capital Management, Inc. and Equitable Real
Estate Investment Management, Inc. See "Purchases and Redemptions of Shares."
Risk Considerations: Investors should consider the risks
associated with investing in Commercial Mortgage-Backed Securities and other
mortgage-backed securities which may involve the risks of delinquent payments
of interest and principal, early prepayments and potential unrecoverable
principal loss from the sale of foreclosed property. Additionally, investors
should consider the risk of the Fund's concentration in Commercial
Mortgage-Backed Securities versus the safety that comes with a less
concentrated investment portfolio and should compare yields available for more
diversified portfolios before making an investment decision. The Fund may
invest in repurchase agreements, reverse repurchase agreements and dollar
rolls, whenissued purchases and forward commitments, calls and puts, options
and futures contracts and may engage in short sales and other hedging
transactions. The Fund may not invest more than 15% of its net assets in
illiquid securities. For the risks associated with these investments see
"Investment Objective and Policies" and "Risk Considerations." Investors
should also consider that currently the Fund is the Adviser's only open-end
investment company advisory client.
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<PAGE>
How to Sell Shares: Shares of the Fund may be redeemed by
the shareholder at any time at the net asset value per share next determined
after the redemption request is received by the Fund in proper order. See
"Purchases and Redemptions of Shares."
Dividends and Reinvestment: Each dividend and capital gains
distribution, if any, declared by the Fund on its outstanding shares will,
unless a shareholder elects otherwise, be paid on the payment date in
additional shares of the Fund having an aggregate net asset value as of the
ex-dividend date of such dividend or distribution equal to the cash amount of
such distribution. An election may be changed by notifying the Fund in writing
at any time prior to the record date for a particular dividend or
distribution. There are no sales or other charges in connection with the
reinvestment of dividends and capital gains distributions. There is no fixed
dividend rate, and there can be no assurance that the Fund will pay any
dividends or realize any capital gains. However, the Fund currently intends to
pay dividends, if any, on a monthly basis and capital gains, if any, annually.
See "Distributions and Tax Matters."
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<PAGE>
EXPENSE SUMMARY
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Investment Advisory Fees 0.35%
12b-1 Fees None
Other Expenses 0.35%
(including Administration Fees 0.20%)
======
Total Fund Operating Expenses .70%
Example:
A shareholder of the Fund would pay the following expenses on a
$1,000 investment in the Fund assuming a 5% annual return reinvested in shares
of the Fund and redemption at the end of each time period:
Year 1 Year 3
$7 $22
- -------------------------------------------------------------------------------
The purpose of the expense table provided above is to assist
investors in understanding the various costs and expenses that a shareholder
will bear directly or indirectly. For a further discussion of these fees see
"Management of the Fund." The Adviser has voluntarily agreed to waive all or a
portion of its Investment Advisory Fee or Administration Fee, and to
voluntarily reimburse the Fund's other operating expenses to the extent
necessary to maintain the Annual Total Fund Operating Expenses at not more
than .70% of the Fund's average net assets. The expenses reflected above are
estimates of the expenses the Fund will incur during its first fiscal year.
The "Example" set forth above should not be considered a representation of
past or future expenses; actual expenses may be greater or less than those
shown.
- -------------------------------------------------------------------------------
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<PAGE>
- -------------------------------------------------------------------------------
THE FUND
- -------------------------------------------------------------------------------
The Fund, a non-diversified, open-end management investment
company, is a series of Equitable Real Estate Hyperion Mortgage Opportunity
Fund, Inc. organized as a corporation under the laws of the State of Maryland
on May 30, 1995. The Fund offers to buy back (redeem) shares from shareholders
at any time at the Fund's then current net asset value. Shares of the Fund are
continuously sold by Hyperion Distributors, Inc., the Fund's distributor (the
"Distributor"). The minimum initial investment is $100,000. The minimum
additional investment is $5,000. The minimum initial and subsequent
investments may be available to employees of the Adviser, Hyperion Capital
Management, Inc. and Equitable Real Estate Investment Management, Inc.
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- -------------------------------------------------------------------------------
Investment Objective
The investment objective of the Fund is to seek to provide
high total return from (i) both short and long term capital gains and (ii) a
high level of current income. The investment objective of the Fund is
fundamental and may not be changed without approval by the shareholders of the
Fund. The Fund expects there will be fluctuations in its net asset value per
share. The Fund's investment policies indicated below (unlike its investment
objective) are not fundamental and may be changed by the Fund's Board of
Directors without shareholder approval.
Investment Policies
The Fund seeks to achieve its investment objective by
investing, under normal circumstances, in a portfolio consisting
primarily of Commercial Mortgage-Backed Securities. Under normal market
conditions, the Fund will have at least 65% of its total assets invested in
mortgage-backed securities. Mortgage-backed securities directly or indirectly
represent participations in, or are secured by and payable from, a pool of
mortgage loans pledged by real estate property to secure the payment of such
debt. Subject to the preceding policy, the other debt securities in which the
Fund may invest include, without limitation, obligations of the U.S.
Government and its agencies, collateralized mortgage obligations ("CMOs"),
asset backed securities, other mortgage pass-through certificates, debt
securities of real estate investment trusts and certain corporate debt
securities.
The Fund may also employ various hedging techniques,
including interest rate transactions, that will affect the Fund's average
duration. (See "Risk Considerations -- Hedging Transactions.") In addition,
the Fund may use various techniques and investments to increase or decrease
its exposure to changing security prices, interest rates or other factors that
affect security values. These techniques and investments may involve
derivative transactions such as buying and selling options and futures
contracts, selling securities short and investments in mortgage-backed
securities. The Fund may use these practices to adjust the risk and return
characteristics of the Fund's portfolio. However, these techniques or
investments may result in a loss, regardless of whether the intent was to
reduce risk or increase return, with unexpected changes in market conditions
or if the counterparty to the transaction does not perform as promised.
Additionally, these techniques
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<PAGE>
or investments may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed.
The Adviser, depending upon market conditions, will seek to
manage the Fund's assets such that the interest rate sensitivity of such
assets will be equivalent to 80% to 120% of U.S. Treasury securities having a
maturity of ten years. The Fund will only purchase securities if they are of
investment grade quality at the time of purchase (i.e. rated within the four
highest ratings categories by a nationally-recognized statistical rating
organization, e.g. BBB and above, by Standard & Poor's Corporation ("S&P"),
Baa and above by Moody's Investor Services Inc. ("Moody's"), BBB and above by
Fitch Investors Services, Inc. ("Fitch") or BBB and above by Duff & Phelps
Credit Rating Co. ("Duff & Phelps"), collectively known as the "Rating
Agencies"). There can, of course, be no assurance that the investment
objective of the Fund will be achieved. Like all investors in interest bearing
securities, the Fund is exposed to risk that the prices of individual
securities held by the portfolio may fluctuate, in some cases significantly,
in response to changes in credit conditions and prevailing levels of interest
rates. See "Risk Considerations."
The following is a discussion of the various investments
eligible to be purchased by the Fund and the investment techniques anticipated
to be employed by the Fund.
(1) Commercial Mortgage-Backed Securities -- Commercial
Mortgage-Backed Securities are generally multi-class debt or pass-through
securities backed by a mortgage loan or pool of mortgage loans secured by
commercial property, such as industrial and warehouse properties, office
buildings, retail centers and shopping malls, multi-family properties and
cooperative apartments, hotels and motels, nursing homes, hospitals, senior
living centers, manufactured living communities and mobile home parks. Assets
underlying Commercial Mortgage-Backed Securities may relate to many
properties, only a few properties, or to a single property. Each commercial
mortgage loan that underlies Commercial Mortgage-Backed Securities has certain
distinct characteristics.
Commercial mortgage loans are often not amortizing or not
fully amortizing. At their maturity date, repayment of the remaining principal
balance or "balloon" is due and is repaid through the attainment of an
additional loan, the sale of the property or contribution of additional
capital. Unlike most single family residential mortgages, commercial real
property loans often contain provisions which substantially reduce the
likelihood that they will be prepaid. The provisions generally impose
significant prepayment penalties on loans and, in some cases, there may be
prohibitions on principal prepayments for several years following origination.
This difference in prepayment exposure is significant due to extraordinarily
high levels of refinancing of traditional residential mortgages experienced
over the past years when mortgage rates reached a 25 year low. Changing real
estate markets may adversely impact both the value of the underlying
collateral and the borrower's ability to meet contractual obligations, either
of which may lead to delinquencies, defaults, modifications or foreclosure
that in turn may lead to the realization of credit losses in the Commercial
Mortgage-Backed Security. See "Risk Considerations."
Commercial Mortgage-Backed Securities have been issued in
public and private transactions by a variety of public and private issuers.
Non-governmental entities that have issued or sponsored Commercial
Mortgage-Backed Securities offerings include owners of commercial properties,
originators of and investors in mortgage loans, savings and loan associations,
mortgage banks, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. The Fund may from time to time
purchase Commercial Mortgage-Backed Securities directly from issuers in
negotiated or non-negotiated transactions or from a holder of such Commercial
Mortgage-Backed Securities in the secondary market.
Commercial mortgage securitizations generally are
senior/subordinated structures. The senior class investors are deemed to be
protected against potential losses on the underlying mortgage loans by the
subordinated class investors who take the first loss if there are defaults on
the underlying commercial mortgage loans. Other protections, which may benefit
all of the classes including the subordinated classes, may include
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<PAGE>
issuer guarantees, reserve funds, additional subordinated securities,
cross-collateralization, over-collateralization and the equity investor in the
underlying properties.
By adjusting the priority of interest and principal payments
on each class of a given Commercial Mortgage-Backed Security, issuers are able
to create senior investment grade securities and lower rated or unrated
subordinated securities tailored to meet the needs of sophisticated
institutional investors. In general, subordinated classes of Commercial
Mortgage-Backed Securities are entitled to receive repayment of principal only
after all required principal payments have been made to more senior classes
and have subordinate rights as to receipt of interest distributions. Such
subordinated classes are subject to a substantially greater risk of nonpayment
than are senior classes of Commercial Mortgage-Backed Securities. Even within
a class of subordinated securities, most Commercial Mortgage-Backed Securities
are structured with a hierarchy of levels (or "loss positions"). Loss
positions are the order in which nonrecoverable losses of principal are
applied to the securities within a given structure. For instance, a first loss
subordinate security will absorb any principal losses before any higher loss
subordinate position. This type of structure allows a number of classes of
securities to be created with varying degrees of credit exposure, prepayment
exposure and potential total return. The Fund will invest in subordinated
class securities but will not invest in first loss subordinated securities or
non-rated securities regardless of implied ratings.
The Fund also intends to invest in investment grade senior
classes of Commercial Mortgage-Backed Securities. As discussed above, from a
credit perspective, they are structured to absorb any credit-related losses
after losses have been absorbed by the subordinated classes. The following
table sets forth an example of the prioritization of the payments to each
class as well as the order of absorption of credit losses, if any, on the
underlying mortgage loans. The table provides a general example of the current
Commercial Mortgage-Backed Securities Structures, however, the actual ratings,
cash flows and loss absorption priorities of the Commercial Mortgage-Backed
Securities in which the Fund will invest may differ.
General Examples Of Commercial Mortgage-Backed Securities Structures
<TABLE>
<CAPTION>
Excess
Principal Loss
Typical Cash Flow Absorption
Class Rating Priority Priority
<S> <C> <C> <C>
Senior A-1 "AAA" 1st 8
Senior A-2 "AA" 2nd 7
Subordinated B-1 "A","BBB' 3rd, 4th 6
(The Fund will not invest in the following classes.)
Subordinated B-2 "BB" 5th 5
Subordinated B-3 "B" 6th 4
Subordinated B-4 Unrated 7th 3
Reserve Fund/Letter of Credit N/A N/A 2
Equity Holder N/A N/A 1
</TABLE>
The Fund will only invest in those classes listed above with
credit quality ratings at the time of investment of BBB or higher. See "Risk
Considerations."
The rating assigned to a given issue and class of Commercial
Mortgage-Backed Securities is a product of many factors, including, but not
limited to, the structure of the security, the level of subordination, the
quality and adequacy of the collateral, projected losses from the collateral
and the past performance of the originators and servicing companies. The
rating of any Commercial Mortgage-Backed Security is determined to
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<PAGE>
a substantial degree by the debt service coverage ratio (i.e., the ratio of
current net operating income from the commercial properties, in the aggregate,
to the current debt service obligations on the properties) and the
loan-to-value ("LTV") ratio of the pooled properties. The amount of the
securities issued in any one rating category is determined by the rating
agencies after a rigorous credit rating process which includes analysis of the
issuer, servicer and property manager, as well as verification of the LTV and
debt service coverage ratios. LTV ratios may be particularly important in the
case of commercial mortgages because most commercial mortgage loans generally
provide that the lender's sole remedy in the event of a default is against the
mortgaged property, and the lender is not permitted to pursue remedies with
respect to other assets of the borrower.
(2) U.S. Government Agency Mortgage-Backed Certificates --
These are obligations issued or guaranteed by the United States Government or
one of its agencies or instrumentalities, such as the Government National
Mortgage Association ("Ginnie Mae" or GNMA"), the Federal National Mortgage
Association ("Fannie Mae" or "FNMA") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac" or "FHLMC"). FNMA and FHLMC obligations are not
backed by the full faith and credit of the U.S. Government as GNMA
certificates are, but FHLMC securities are supported by the instrumentality's
limited right to borrow from the United States Treasury, and obligations of
the FNMA are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations. No assurance can be given
that the U.S. Government will provide financial support in the future to U.S.
Government Agencies, authorities or instrumentalities that are not supported
by the full faith and credit of the United States. U.S. Government Agency
Mortgage-Backed Certificates provide for the pass-through to investors of
their pro-rata share of monthly payments (including any prepayments) made by
the individual borrowers on the pooled mortgage loans, net of any fees paid to
the guarantor of such securities and the servicer of the underlying mortgage
loans. Each of GNMA, FNMA and FHLMC guarantees timely distributions of
interest to certificate holders. GNMA and FNMA guarantee timely distributions
of scheduled principal. FHLMC has in the past guaranteed only the ultimate
collection of principal of the underlying mortgage loan; however, FHLMC now
issues Mortgage-Backed Securities ("FHLMC Gold PCs") which also guarantee
timely payment of scheduled monthly principal reductions.
(3) U.S. Government Securities -- These include issues of
the U.S. Treasury, such as bills, certificates of indebtedness, notes and
bonds, and obligations of agencies and instrumentalities of the U.S.
Government. U.S. Treasury Securities are backed by the full faith and credit
of the U.S. Government, while other U.S. Government Securities are generally
not.
(4) Collateralized Mortgage Obligations -- Collateralized
mortgage obligations ("CMOs") are debt obligations or multi-class pass-through
certificates issued by agencies or instrumentalities of the U.S. Government or
by private originators or investors in mortgage loans. They are backed by
Mortgage Pass-Through Securities or pools of whole loans (all such assets, the
"Mortgage Assets") and are evidenced by a series of bonds or certificates
issued in multiple classes or "tranches." The principal and interest on the
underlying Mortgage Assets may be allocated among the several classes of a
series of CMOs in many ways.
CMOs may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage bankers, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
CMOs that are issued by a private governmental agency or instrumentality are
generally structured with one or more of the types of credit enhancements
described below under "Risk Considerations -- Credit Support." CMOs that are
issued by private sector entities and are backed by assets lacking a guarantee
of an entity having the credit status of a governmental agency or
instrumentality are generally structured with one or more of the types of
credit enhancement described under "Credit Support." In addition, CMOs issued
by private sector entities may be illiquid. See "Risk Considerations -- Less
Marketable and Illiquid Securities." An issuer of CMOs may elect to be
treated, for federal income tax purposes, as a Real Estate Mortgage Investment
Conduit ("REMIC"). An issuer of CMOs issued after 1991 generally must elect to
be treated as a REMIC or it will be taxable as a corporation under rules
regarding taxable mortgage pools.
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In a CMO, a series of bonds or certificates are issued in
multiple classes. Each class of CMOs, often referred to as a "tranche," may be
issued with a specific fixed or floating coupon rate and has a stated maturity
or final scheduled distribution date. Principal prepayments on the underlying
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final scheduled distribution dates. Interest is
paid or accrues on CMOs on a monthly, quarterly or semi-annual basis. The
principal of, and interest on, the Mortgage Assets may be allocated among the
several classes of a CMO in many ways. The general goal in allocating cash
flows on Mortgage Assets to the various classes of a CMO is to create certain
tranches on which the expected cash flows have a higher degree of
predictability than the underlying Mortgage Assets. As a general matter, the
more predictable the cash flow is on a particular CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on certain other Mortgage-Backed Securities. As part
of the process of creating more predictable cash flows on certain tranches of
a CMO, one or more tranches generally must be created that absorb most of the
changes in the cash flows on the underlying Mortgage Assets. The yields on
these tranches are generally higher than prevailing market yields on
Mortgage-Backed Securities with similar average lives. Because of the
uncertainty of the cash flows on these tranches, the market prices of and
yields on these tranches are more volatile. The Fund may purchase CMOs that
have been sold in public offerings registered under the Securities Act of 1933
or in private placements. CMOs acquired in private placements will be subject
to certain restrictions on resale and accordingly will have limited
marketability.
Subordinated CMOs. The Fund intends to invest in
subordinated tranches of CMOs. Subordinated tranches of CMOs are multiple
class securities with one or more classes subordinate to other classes as to
the payment of principal thereof and interest thereon, with defaults on the
underlying assets being borne first by the holders of the most subordinated
class. The Fund will not invest in first loss classes of subordinated CMOs.
Subordinated tranches are entitled to receive repayment of principal only
after all required principal payments have been made on more senior tranches
and also have subordinate rights as to receipt of interest distributions. Such
subordinated tranches are subject to greater risk of non-payment than are more
senior tranches or CMOs backed by third party credit enhancement which may
have limited marketability. See "Risk Considerations."
CMOs Backed by Mortgages on Multi-Family Dwelling. The Fund
also intends to invest in CMOs backed by mortgages on multi-family dwellings.
Multi-family dwellings are residential properties consisting of five or more
units. Investment in CMOs backed by mortgages on multi-family dwellings
involves different investment considerations than investment in
Mortgage-Backed Securities backed by single-family homes due to such factors
as the investment character of the underlying asset and regulatory
requirements. CMOs backed by multi-family dwelling mortgages are subject to
risks generally not associated with mortgages on single family homes,
including vacancy rates, increases in operating expenses, regulatory
requirements and environmental liability issues. In addition, such CMOs may
have limited marketability. See "Risk Considerations."
"Planned Amortization Class" Bonds. Also included within the
category of CMOs are "Planned Amortization Class" ("PAC") Bonds. PAC Bonds are
a type of CMO tranche or series designed to provide relatively predictable
payments of principal provided that, among other things, the actual prepayment
experience on the underlying mortgage loans falls within a predefined range.
Because of these features, PAC Bonds generally are less subject to the risks
of prepayment than are other types of Mortgage-Backed Securities. However, if
the actual prepayment experience on the underlying mortgage loans is at a rate
faster or slower than the predefined range or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted.
(5) U.S. Government Agency Multi-Class Pass-Through
Securities -- Unlike CMOs, U.S. Government Agency Multi-Class Pass-Through
Securities, which include FNMA Guaranteed REMIC Pass- Through Certificates and
FHLMC Multi-Class Mortgage Participation Certificates, are ownership interests
in a
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pool of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multi-class pass-through securities.
(6) Asset-Backed Securities -- The securitization techniques
used to develop Mortgage-Backed Securities are now being applied to a broad
range of assets. Through the use of trusts and special purpose corporations,
various types of assets, primarily automobile and credit card receivables, are
being securitized in pass-through structures similar to the mortgage
pass-through structure or in a pay-through structure similar to the CMO
Structure. The Fund may invest in these and other types of Asset-Backed
Securities that may be developed in the future. These investments will be
disclosed to shareholders in the Fund's annual, semi-annual and other reports.
In general, the collateral supporting Asset-Backed
Securities is of shorter maturity than mortgage loans and historically has
been less likely to experience substantial prepayments. Furthermore, the
effect of prepayments on securities that have shorter maturities, such as
Asset-Backed Securities, is much smaller than the effect of prepayments on
securities having longer maturities, such as Mortgage-Backed Securities. As
with Mortgage-Backed Securities, Asset-Backed Securities are often backed by a
pool of assets representing the obligations of a number of different parties
and use similar credit enhancement techniques.
To the extent that it invests in Asset-Backed Securities,
the Fund will place primary emphasis on securities rated AAA/Aaa or AA/Aa by
any of the Rating Agencies. However, the Fund may invest in Asset-Backed
Securities that at the time of investment have ratings as low as A/A by any of
the Rating Agencies. Securities rated A/A are considered more susceptible to
the adverse effects of changes in economic conditions or to impairment in the
future than are higher rated securities.
Asset-Backed Securities present certain risks that are not
presented by Mortgage-Backed Securities. Primarily, these securities do not
have the benefit of the same type of security interest in the related
collateral. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to avoid payments of
certain amounts owned on the credit cards, thereby reducing the balance due.
Most issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivable. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on the securities.
(7) Adjustable Rate Mortgage Securities ("ARMS") -- The Fund
intends to invest in ARMS which can be U.S. Government Agency Mortgage-Backed
Securities, Agency Mortgage-Backed Securities (which are securities backed by
U.S. Government Agency Mortgage-Backed Securities), or privately-issued
Mortgage-Backed Securities (which represent an interest in, or are
collateralized by, a pool of mortgage loans with variable rates of interest).
Holding ARMS allows the Fund to participate in increases in interest rates
through periodic adjustments in the interest rates underlying the mortgages,
resulting in both higher current yields and lower price fluctuations. However,
the Fund will not benefit from such increases if rates rise to the point where
they would cause increases in the interest rates on the mortgages underlying
ARMS to exceed the maximum allowable annual or lifetime reset limits. In
addition, in periods of declining interest rates ARMS will experience
declining yields.
Adjustable rate mortgages generally provide that the
mortgage interest rate may not be adjusted above or below a specified
applicable lifetime maximum or minimum rate. In addition, certain adjustable
rate mortgages provide for limitations on the maximum amount by which the
mortgage interest rate may adjust for any single adjustment period. Other
adjustable rate mortgages provide instead for limitations on changes in the
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required monthly payment. In the event that a monthly payment is not
sufficient to pay the interest accruing on such an adjustable rate mortgage,
any such excess interest is added to the principal balance of the mortgage
loan, which is repaid through future monthly payments. In the event that a
monthly payment exceeds the sum of the interest accrued at the applicable
mortgage interest rate and the principal payment necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
further reduces the principal balance of the adjustable rate mortgages in the
same manner as a prepayment. See "Risk Considerations."
(8) High Coupon Agency Mortgage-Backed Securities -- The
Fund intends to invest in High Coupon Agency Mortgage-Backed Securities which
provide the holder with a coupon that is higher at the time of purchase than
the then prevailing market rate yield. Such securities are purchased at a
price greater than their par value because the coupon is higher than the
market rate. The Adviser believes that High Coupon Agency Mortgage-Backed
Securities offer greater price stability than other Agency Mortgage-Backed
Securities. Because of shorter duration, the prices of High Coupon Agency
Mortgage-Backed Securities generally do not tend to rise as rapidly as those
of traditional fixed rate securities in declining interest rate environments
and also tend to decline more slowly in increasing interest rate environments
until the point at which prevailing mortgage interest rates are equal to the
rates on the underlying mortgage loans. Because the Fund may purchase High
Coupon Agency Mortgage-Backed Securities at a premium, a prepayment rate that
is faster than expected will reduce both market value and income from that
which was anticipated and may result in a loss of a portion of the amount
invested, while a prepayment rate that is slower than expected will have the
opposite effect of increasing income and market value. High Coupon Agency
Mortgage-Backed Securities have a greater probability of prepayment than lower
coupon agency mortgage-backed securities and the risk of prepayment is greater
in a declining interest rate environment.
(9) Debt Securities Issued by Real Estate Investment Trusts
- -- The Fund intends to invest in debt securities issued by real estate
investment trusts ("REITs") ("REIT Debt Securities"). REITs are pooled
investment vehicles which invest primarily in income producing real estate or
real estate related loans or interests. Generally, REITs can be classified as
equity REITs, mortgage REITs, or hybrid REITs. Equity REITs invest the
majority of their assets directly in real property and derive income primarily
from the collection of rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive income from the
collection of interest payments. Hybrid REITs combine the characteristics of
both equity REITs and mortgage REITs.
REIT Debt Securities, for the most part, are general and
unsecured obligations. These securities typically have corporate bond features
such as semi-annual interest coupons, no amortization and strong prepayment
protection. Additionally, real estate related unsecured debt generally
contains covenants restricting the level of secured and total debt and
requires a minimum debt service coverage ratio and net worth level. The Fund
will only purchase unsecured debt that has an investment grade rating of A or
higher. Debt covenants for A-rated unsecured debt generally restrict debts to
50% of total capitalization and secured debt to 35% of total capitalization.
See "Risk Considerations."
(10) Whole Loans -- Under normal market conditions, the Fund
does not anticipate investing in Whole Loans, however, under certain
conditions, the Board of Directors of the Fund may determine that it is
advisable to invest in Whole Loans. A Whole Loan is a loan to a single obligor
on a single asset. Whole Loans are nonrecourse to the borrower and therefore
repayment of a Whole Loan will be dependent solely on the cash flow derived
from, and the market or liquidation value of, the underlying property. Other
assets of the borrower, if any, would generally not be available for payment
of the Whole Loan. Commercial real estate lending can be affected
significantly by the condition of the property and by supply and demand in the
market for the type of property securing a Whole Loan. Market values may vary
as a result of economic events or governmental regulations outside the control
of the borrower or issuer, which events may impact the future cash flow of the
property. See "Risk Considerations."
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Investment Restrictions
The Fund has adopted the following fundamental investment
restrictions which may not be changed unless approved by a majority of the
outstanding shares of the Fund that would be affected by such change. The Fund
is subject to further investment restrictions that are set forth in the
Statement of Additional Information. The Fund may not:
1. Borrow Money. This restriction shall not apply to (i)
borrowing from banks for temporary or emergency (not
leveraging) purposes, including the meeting of
redemption requests that might otherwise require the
untimely disposition of securities, in an amount up to
15% of the value of the Fund's total assets (including
the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the
borrowing was made and (ii) hedging techniques described
in the Prospectus which may be deemed to be borrowings.
While borrowings (excluding items in (ii) above) exceed
5% of the value of the Fund's total assets, the Fund
will not make any investments. Interest paid on
borrowings will reduce net income.
2. Pledge, hypothecate, mortgage or otherwise encumber
its assets, except in an amount up to 15% of the
value of its total assets and only to secure
borrowings for temporary or emergency purposes.
3. Purchase securities subject to restrictions on
disposition under the Securities Act of 1933
("restricted securities"). Subject to state law
limitations, the Fund will not invest more than an
aggregate of 15% of its net assets in repurchase
agreements maturing in more than seven days and
securities that are not readily marketable.
4. Invest in securities of other investment companies,
except that (i) the Fund may purchase unit investment
trust securities where such unit investment trusts meet
the investment objective of the Fund and then only up to
5% of the Fund's net assets, except as they may be
acquired as part of a merger, consolidation or
acquisition of assets and (ii) as permitted by Section
12(d) of the Investment Company Act of 1940 (the "1940
Act").
Portfolio Turnover
Purchases and sales are made for the Fund whenever
necessary, in the Adviser's opinion, to meet the Fund's objective. Portfolio
turnover may involve the payment by the Fund of dealer spreads or underwriting
commissions, and other transaction costs, on the sale of securities, as well
as on the reinvestment of the proceeds in other securities. The greater the
portfolio turnover the greater the transaction costs to the Fund which will
increase the Fund's total operating expenses. In order to qualify as a
regulated investment company, less than 30% of the Fund's gross income must be
derived from the sale or other disposition of stock, securities or certain
other investments held for less than three months. Although increased
portfolio turnover may increase the likelihood of additional capital gains for
the Fund, the Fund expects to satisfy the 30% income test. The Adviser expects
that the annual turnover of the portfolio should not exceed 100%.
- -------------------------------------------------------------------------------
RISK CONSIDERATIONS
- -------------------------------------------------------------------------------
Commercial Mortgage-Backed Securities -- Investments in
Commercial Mortgage-Backed Securities involve the credit risk of delinquency
and default. Delinquency refers to interruptions in the payment
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of interest and principal. Default refers to the potential for unrecoverable
principal loss from the sale of foreclosed property. These risks include the
risks inherent in the commercial mortgage loans which support such Commercial
Mortgage-Backed Securities and the risks associated with direct ownership of
real estate. This may be especially true in the case of Commercial
Mortgage-Backed Securities secured by, or evidencing an interest in, a
relatively small or less diverse pool of commercial mortgage loans. The
factors contributing to these risks include the effects of general and local
economic conditions on real estate values, the conditions of specific industry
segments, the ability of tenants to make lease payments and the ability of a
property to attract and retain tenants, which in turn may be affected by local
conditions such as oversupply of space or a reduction of available space, the
ability of the owner to provide adequate maintenance and insurance, changes in
management of the underlying commercial property, energy costs, government
regulations with respect to environmental, zoning, rent control, bankruptcy
and other matters, real estate and other taxes, and prepayments of the
underlying commercial mortgage loans (although such prepayments generally
occur less frequently than prepayments on residential mortgage loans).
While the credit quality of the securities in which the Fund
invests will reflect the perceived appropriateness of future cash flows to
meet operating expenses, the underlying commercial properties may not be able
to continue to generate income to meet their operating expenses (mainly debt
services, lease payments, capital expenditures and tenant improvements) as a
result of any of the factors mentioned above. Consequently, the obligors under
commercial mortgages may be unable to make payments of principal and interest
in a timely fashion, increasing the risk of default on a related Commercial
Mortgage-Backed Security. In addition, the repayment of the commercial
mortgage loans underlying Commercial Mortgage-Backed Securities will typically
depend upon the future availability of financing and the stability of real
estate property values.
Most commercial mortgage loans are non-recourse obligations
of the borrower, meaning that the sole remedy of the lender in the event of a
default is to foreclose upon the collateral. As a result, in the event of
default by a borrower, recourse may be had only against the specific property
pledged to secure the loan and not against the borrower's other assets. If
borrowers are not able or willing to refinance or dispose of the property to
pay the principal balance due at maturity, payments on the subordinated
classes of the related Commercial Mortgage-Backed Securities are likely to be
adversely affected. The ultimate extent of the loss, if any, to the
subordinated classes may only be determined after a foreclosure of the
mortgage encumbering the property and if the mortgagee takes title to the
property upon liquidation of the property. Factors such as the title to the
property, its physical condition, and financial performance, as well as
governmental disclosure requirements with respect to the condition of the
property, may make a third party unwilling to purchase the property at a
foreclosure sale or for a price sufficient to satisfy the obligations with
respect to the related Commercial Mortgage-Backed Securities. The condition of
a property may deteriorate during foreclosure proceedings. Certain obligors on
underlying mortgages may become subject to bankruptcy proceedings, in which
case the amount and timing of amounts due under the related Commercial
Mortgage-Backed Securities may be materially adversely affected.
In general, any losses on a given property, the lien on
which is included in a Commercial Mortgage-Backed Security, will be absorbed
first by the equity holder of the property, then by a cash reserve fund or
letter of credit, if any, and then by the "first loss" subordinated security
holder to the extent of its principal balance. Because the Fund intends to
invest in both senior classes and subordinated classes of Commercial
Mortgage-Backed Securities, in the event of default, the equity support, the
reserve fund and any debt classes junior to those in which the Fund invests
will bear losses prior to the Fund. However, there can be no assurance that
the Fund will be able to recover all of its investments in the securities it
purchases. In addition, if the underlying mortgage portfolio has been
overvalued by the originator, or if the values subsequently decline, the Fund
may bear significant losses.
General Characteristics of Agency Mortgage-Backed Securities
- -- The investment characteristics of Agency Mortgage-Backed Securities differ
from traditional debt securities because the volatility of Agency
Mortgage-Backed Securities is affected by changes in both prepayment rates and
interest
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<PAGE>
rates. Interest payments and principal repayments on Agency Mortgage-Backed
Securities are made more frequently (usually monthly), and principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if the Fund purchases
Agency Mortgage-Backed Securities at a premium, a prepayment rate that is
faster than expected will reduce both the market value and income from that
which was anticipated, while a prepayment rate that is slower than expected
will have the opposite effect of increasing income and market value.
Conversely, if the Fund purchases Agency Mortgage-Backed Securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, income and market value. The Adviser will
seek to reduce prepayment and interest rate risks (and increase potential
benefits) by investing in a variety of such securities and by using hedging
techniques.
Prepayments on a pool of mortgage loans are influenced by a
variety of economic, geographic, social and other factors, including changes
in mortgagors' housing needs, job transfers, unemployment, death, mortgagors'
net equity in the mortgaged properties and servicing decisions. Generally,
prepayments on fixed rate mortgage loans will increase during a period of
falling mortgage interest rates and decrease during a period of rising
mortgage interest rates. Accordingly, amounts available for reinvestment by
the Fund are likely to be greater during a period of declining mortgage
interest rates and, if general interest rates also decline, are likely to be
reinvested at lower interest rates than the Portfolio was earning on the
Agency Mortgage-Backed Securities that were prepaid.
All of the Agency Mortgage-Backed Securities in which the
Fund invests are traded in over-the-counter markets rather than on exchanges.
The size of spreads between bid and asked prices in over-the-counter markets
for Agency Mortgage-Backed Securities depends upon a number of factors,
including the outstanding principal amount of the particular security, the
number of dealers making markets in the security, the length of time that a
particular type of security has been trading in the market and the perceived
volatility of the price of the security. Some of the Agency Mortgage-Backed
Securities in which the Fund invests, in particular U.S. Government Agency
Mortgage-Backed Securities backed by fixed rate mortgages having interest
rates above current market rates ("High Coupon Agency Mortgage-Backed
Securities"), may trade with a wider spread between the bid and asked
quotations than do other fixed-income securities, such as U.S. Government
Securities or U.S. Government Agency Mortgage-Backed Securities backed by
fixed-rate mortgages having current market interest rates.
The spread between the bid and asked quotations is taken
into account, among other things, in the determination of the value of each
security held by the Fund and, therefore, in the determination of the net
asset value per share of the Fund. See "Determination of Net Asset Value;
Valuation of Portfolio Securities" in the Statement of Additional Information.
If the Fund is forced on short notice to sell a security for which the spread
between bid and asked quotations is wide, as a result of requests for
redemption of a large number of shares or for some other reason, the Fund
might not be able to obtain the same price for such security as it would if it
were able to take a longer period of time to seek the most efficient execution
of its proposed sale.
Adjustable Rate Mortgage Securities ("ARMS") -- Unlike
investments in pools of fixed-income mortgages which decline in value during
periods of rising interest rates, investments in ARMS allow the Fund to
participate in increases in interest rates through periodic adjustments in the
interest rates on the underlying mortgages, resulting in both higher current
yields and lower price fluctuations. However, the Fund will not benefit from
increases in interest rates if interest rates rise to the point where they
would cause increases in the interest rates on the adjustable rate mortgages
underlying its ARMS to exceed the maximum allowable annual or lifetime reset
limits, which are described more fully below, for particular mortgages.
Adjustable rate mortgages eligible for inclusion in a
mortgage pool usually provide for a fixed initial mortgage interest rate for
either the first three, six, twelve or thirteen scheduled monthly payments.
Thereafter, the interest rates are subject to periodic adjustment, based,
subject to the applicable limitations discussed below, on changes in an
applicable index.
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Adjustable rate mortgages provide that the mortgage interest
rate may not be adjusted above some applicable lifetime maximum rate or below
some applicable lifetime minimum rate. In addition, certain adjustable rate
mortgages provide for limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Other adjustable
rate mortgages provide instead for limitations on changes in the required
monthly payment. In the event that a monthly payment is not sufficient to pay
the interest accruing on an adjustable rate mortgage, any such excess interest
is added to the principal balance of the mortgage loan, which is repaid
through future monthly payments. In the event that a monthly payment exceeds
the sum of the interest accrued at the applicable mortgage interest rate and
the principal payment necessary to amortize the outstanding principal balance
over the remaining term of the loan, the excess further reduces the principal
balance of the adjustable rate mortgage in the same manner as a partial
prepayment.
The index applicable to adjustable rate mortgages will
normally be either the One Year Treasury Index, the Cost of Funds Index or the
London Interbank Offered Rate ("LIBOR"), which are discussed further in the
Fund's Statement of Additional Information.
CMOs (Agency/Private Label) -- Each class of CMOs, often
referred to as a "tranche," may be issued with a specific fixed or floating
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on the Mortgage Assets may cause CMOs to be retired substantially
earlier than their stated maturities or final distribution dates. Interest is
paid or accrued on CMOs on a monthly, quarterly or semi-annual basis. The
principal of, and interest on, the Mortgage Assets may be allocated among the
several classes of a series of a CMO in many ways. The general goal sought to
be achieved in allocating cash flows on Mortgage Assets to the various classes
of a series of CMOs is to create certain tranches on which the expected cash
flows have a higher degree of predictability than the underlying Mortgage
Assets. As a general matter, the more predictable the cash flows are on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time
of issuance relative to prevailing market yields on Agency Mortgage-Backed
Securities. As part of the process of creating more predictable cash flows on
most of the tranches in a series of CMOs, one or more tranches generally must
be created that absorb most of the volatility in the cash flows on the
underlying Mortgage Assets. The yields on these tranches are generally higher
than prevailing market yields on Agency Mortgage-Backed Securities with
similar average lives. Because of the uncertainty of the cash flows on these
tranches, and the sensitivity thereof to changes in prepayment rates on the
underlying Mortgage Assets, the market prices of, and yields on, these
tranches tend to be highly volatile.
Subordinated Tranches of CMOs. The Fund may invest to a
significant degree in subordinated tranches of CMOs. Subordinated tranches of
CMOs are entitled to receive repayment of principal only after all required
principal payments have been made to more senior tranches and also have
subordinate rights as to receipt of interest distributions. Such subordinated
tranches are subject to a greater risk of nonpayment than are senior tranches
or CMOs backed by third party credit enhancement. In addition, an active
secondary market for such securities is not as well developed as the market
for certain other Mortgage-Backed Securities. Accordingly, such subordinated
CMOs may have limited marketability and there can be no assurance that a more
efficient secondary market will develop.
CMOs Backed by Mortgages on Multi-Family Dwellings. The Fund
may invest to a significant degree in CMOs backed by mortgages on multi-family
dwellings. Such mortgages are subject to risks generally not associated with
mortgages on single family homes, including vacancy rates, increases in
operating expenses, regulatory requirements and environmental liability
concerns. In addition, such securities may have limited marketability and
there can be no assurance that a more efficient secondary market will develop.
Multi-family dwellings can be affected significantly by supply and demand in
the market for the type of property securing the loan and therefore may be
subject to adverse economic conditions. Market values may vary as a result of
economic events or governmental regulations outside the control of the
borrower or lender, such as rent control laws, which impact the future cash
flow of the property. Mortgages on multi-family and commercial real estate
properties often are structured so that a substantial portion of the loan
principal is to be repaid at maturity.
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Repayment of such principal may depend on the ability of the borrower to
obtain new financing. CMOs backed by mortgages on multi-family dwelling may be
backed by fewer mortgages involving fewer borrowers than is the case for
Mortgage-Backed Securities backed by mortgages on single-family homes.
Accordingly, the event of a single default or insolvency of a single borrower
may have a greater adverse impact than would be the case for Mortgage-Backed
Securities backed by mortgages on single-family homes. Mortgages on
multi-family dwellings are often non-recourse to the borrower.
Credit Support. Mortgage-Backed Securities and Asset-Backed
Securities are often backed by a pool of assets representing the obligations
of a number of different parties. To lessen the effect of failures by obligors
on underlying assets to make payments, such securities may contain elements of
credit support. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of
assets, to ensure that the pass-through of payments due on the underlying pool
occurs in a timely fashion. Protection against losses resulting from ultimate
default enhances the likelihood of ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund will not pay
any additional fees for such credit support, although the existence of credit
support may increase the price of a security.
The ratings of Mortgage-Backed Securities and Asset-Backed
Securities for which third-party credit enhancement provides liquidity
protection or protection against losses from default are generally dependent
upon the continued creditworthiness of the provider of the credit enhancement.
The ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even
in cases where the delinquency and loss experience on the underlying pool of
assets is better than expected.
Examples of credit support arising out of the structure of
the transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets
exceed those required to make payment of the securities and pay any servicing
or other fees). The degree of credit support provided for each issue is
generally based on historical information with respect to the level of credit
risk associated with the underlying assets. Delinquency or loss in excess of
that which is anticipated could adversely affect the return on an investment
in such a security.
Whole Loans -- The timely payment of interest and principal
on a Whole Loan is secured by an income producing property and, therefore, is
dependent upon performance and payments by the lessees under the related
leases and the successful operation of the underlying property, rather than
its liquidation value. If the net operating income from the underlying
property is reduced (for example, if rental or occupancy rates decline or real
estate tax rates or other operating expenses increase), the borrower's ability
to repay the Whole Loan may be impaired. Furthermore, the liquidation value of
the property may be adversely affected by risks generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real
estate tax rates and other operating expenses including energy costs; changes
in governmental rules, regulations and fiscal policies, including
environmental legislation; acts of God; and other factors which are beyond the
borrower's, the issuer's, or the property manager's control. Additionally, the
borrower may be obligated to cause standard hazard insurance to be maintained
with respect to an underlying property. Insurance with respect to
extraordinary hazards such as earthquakes is not always required, and
insurance may not be
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available (or is available only at prohibitively expensive rates) with respect
to many other risks, including those listed above. In addition, there is no
assurance that any loss incurred will not exceed the limits of policies
obtained.
In addition, the borrower's ability to make payments in
respect of a Whole Loan largely depends on the ability of tenants to perform
on their rental obligations under existing leases and the ability of the
borrower to continue to lease a substantial portion of the property upon terms
which do not adversely affect the property's cash flow. As the leases expire
or lessees default, the demand for, and supply of, rental space in general
from time to time may affect the property's occupancy rate and the rental
rates obtained and concessions, if any, granted on new leases or re-leases of
space, which may cause fluctuations in the cash flow from the operation of the
property. Such fluctuations may affect the amount and timing of payments on
the Whole Loan.
Furthermore, Whole Loans with balloon payments involve a
greater degree of risk of payment because the ability of a borrower to make a
balloon payment will depend upon its ability to either refinance the loan or
to sell the related property. The ability and desire of the borrower to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage rates at the time of sale or
refinancing, the borrower's equity in the property, the physical and financial
condition and operating history of the property, tax laws, prevailing general
economic and market conditions and the availability of credit for commercial
real estate projects, generally. In addition, the value of commercial
properties depends, in part, on the fitness of such properties for a
particular purpose. Thus, no assurance can be given that other parties will
find such property sufficient for the purpose for which it is currently being
used.
REIT Debt Securities -- Investing in REIT Debt Securities
involves certain unique risks in addition to those risks associated with
investing in the real estate industry in general which include, among other
things, possible declines in the value of real estate; risks related to
general and local economic conditions; possible lack of availability of
mortgage funds; over-building; extended vacancies of properties; increases in
competition, property taxes and operating expenses; changes in zoning laws;
costs resulting from the clean-up of, and liability to third parties for
damages resulting from, environmental problems; casualty or condemnation
losses; uninsured damages from flood, earthquakes or other natural disasters;
limitations on and variations in rents; dependency on property management
skill; the appeal of properties to tenants; and changes in interest rates.
Equity REITs may be affected by changes in the value of the underlying
property owned by the REITs while mortgage REITs may be affected by the
quality of any credit extended. REITs are dependent upon management skills,
are not diversified, and are subject to the risks of financing projects. The
Fund may invest in the debt securities of new or unseasoned REIT issuers and
it, therefore, may be difficult or impossible for the Adviser to ascertain the
value of each of such REITs' underlying assets, management capabilities and
growth prospects. In addition, REITs are subject to heavy cash flow
dependency, default by borrowers, self-liquidation, and the possibilities of
failing to qualify for the exemption from tax or distributed income under the
Internal Revenue Code of 1986, as amended (the "Code") and failing to maintain
their exemptions from the 1940 Act. REITs whose underlying assets include
long-term health care properties, such as nursing, retirement and
assisted-living homes, may be affected by federal regulations concerning the
health care industry.
REITs (especially mortgage REITs) and REIT Debt Securities
are subject to interest rate risks. When interest rates decline, the value of
a REIT's investment in fixed rate obligations usually rises. Conversely, when
interest rates rise, the value of a REIT's investment in fixed rate
obligations can be expected to decline. In contrast, as interest rates on
adjustable rate mortgage loans are reset periodically, yields on a REIT's
investment in such loans will gradually align themselves to reflect changes in
market interest rates, causing the value of such investments to fluctuate less
dramatically in response to interest rate fluctuations than would investments
in fixed rate obligations.
Less Marketable and Illiquid Securities -- The Fund may not
invest more than 15% of its net assets in securities for which the secondary
trading market is not as well developed as the markets for certain
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Mortgage-Backed Securities or that are otherwise considered less marketable or
illiquid. Liquidity relates to the ability of the Fund to readily dispose of
securities and the price to be paid therefor, but does not generally relate to
credit risk or the likelihood of receipt of cash at maturity. Securities which
have limited marketability or which may be regarded as illiquid under current
guidelines of the staff of the Securities and Exchange Commission may include
certain subordinated CMO tranches, certain CMOs backed by mortgages on
multi-family dwellings, certain hedging instruments, including interest rate
collars, caps and floors, forward commitments, over-the-counter options,
mortgage swaps and futures and options on Mortgage-Backed Securities.
Securities may be less marketable or illiquid because of the absence of
registration under the Securities Act of 1933, contractual restrictions on
transfer, the small size of the issue (relative to issues of comparable
securities) or, particularly in the case of recently developed securities,
undeveloped or partially developed trading markets. Investment in illiquid
securities may expose the Fund to greater risks or costs. The Fund may not be
able to sell less marketable or illiquid instruments when the Adviser
considers it desirable to do so or may have to sell them at a price lower than
could be obtained if they were more marketable. These factors may have an
adverse impact on net asset value. Less marketable and illiquid securities may
be more difficult to value due to the unavailability of reliable market
quotations. Also, the sale of less marketable securities may require more time
and result in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of more marketable securities.
Investment Grade Securities -- The ratings assigned to
securities by a Rating Agency reflect such Agency's assessment of the issuer's
creditworthiness, ability to make timely repayments of principal and interest
and the nature and quality of the collateral underlying the obligation.
Securities rated in the fourth highest rating category by a Rating Agency are
investment grade but have certain speculative characteristics. For example,
securities rated BBB by S&P are regarded as having an adequate capacity to pay
interest and repay principal. Such securities normally exhibit adequate
parameters, but adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal than
for debt in higher rated categories. Moody's states that securities rated Baa
are considered medium grade obligations. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. Such securities lack outstanding investment characteristics and in fact
have speculative characteristics as well. Securities rated BBB by Fitch are
considered to be investment grade and of satisfactory credit quality.
Securities rated BBB by Duff & Phelps have below average protection but are
still considered investment grade securities. The Fund's investment in
securities rated at the time of investment in the second, third or fourth
highest rating category by a Rating Agency incrementally increases the risk of
nonpayment and of significant delay in payment on such securities. Nonpayment
or delay could have an adverse impact on the net income and dividends of the
Fund. The Fund may retain in its portfolio securities whose ratings have been
downgraded to below the fourth highest rating category by a Rating Agency,
although the Fund anticipates that not more than 5% of its total assets, if
any, will consist of securities whose ratings have been so downgraded. Rating
downgrades may adversely affect the value of a security and may have an
adverse effect on the net asset value of the Fund.
Repurchase Agreements -- The Fund may invest temporarily,
without limitation, in repurchase agreements, which are agreements pursuant to
which securities are acquired by the Fund from a third party with the
commitment that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Fund is authorized to invest. Repurchase agreements
may be characterized as loans by the Fund to the other party to the agreement
that are secured by the underlying securities. Repurchase agreements
facilitate portfolio management and allow the Fund to earn additional revenue.
The Fund may enter into repurchase agreements with (i) member banks of the
Federal Reserve System having total assets in excess of $500 million and (ii)
securities dealers, provided that such banks or dealers meet the
creditworthiness standards established by the Fund's Board of Directors
("Qualified Institutions"). The Adviser will monitor the continued
creditworthiness of Qualified Institutions, subject to the oversight of the
Fund's Board of Directors. The resale price reflects the purchase price plus
an agreed upon market rate of interest which is unrelated to the coupon rate
or date of maturity of the purchased
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security. The collateral will be marked to market daily. Such agreements
permit the Fund to keep all its assets earning interest while retaining
overnight flexibility in pursuit of investments of a longer-term nature.
The use of repurchase agreements involves certain risks. For
example, if the seller of securities under a repurchase agreement defaults on
its obligation to repurchase the underlying securities, as a result of its
bankruptcy or otherwise, the Fund will seek to dispose of such securities,
which action could involve costs or delays. If the seller becomes insolvent
and subject to liquidation or reorganization under applicable bankruptcy or
other laws, the Fund's ability to dispose of the underlying securities may be
restricted. Also, it is possible that the Fund may not be able to substantiate
its interest in the underlying securities. To minimize this risk, the
securities underlying the repurchase agreement will be held by a custodian at
all times in an amount at least equal to the repurchase price, including
accrued interest. If the seller fails to repurchase the securities, the Fund
may suffer a loss to the extent proceeds from the sale of the underlying
securities are less than the repurchase price.
Lending of Securities -- The Fund may lend its portfolio
securities to Qualified Institutions. By lending its portfolio securities, the
Fund attempts to increase its income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that may
occur during the term of the loan will be for the account of the Fund.
The Fund will not lend portfolio securities if, as a result,
the aggregate of such loans exceeds 331/3% of the value of the Fund's total
assets (including such loans). The lending of portfolio securities involves
certain risks arising out of an extension of credit. All relevant facts and
circumstances, including the creditworthiness of the Qualified Institution,
will be monitored by the Adviser, and will be considered in making decisions
with respect to lending of securities, subject to review by the Fund's Board
of Directors. The Fund may pay reasonable negotiated fees in connection with
loaned securities, so long as such fees are set forth in a written contract
and their reasonableness is determined by the Fund's Board of Directors.
Borrowing - The Fund is authorized to borrow for temporary
or emergency purposes such as the meeting of redemption requests that might
otherwise require the untimely disposition of securities or for hedging
purposes. The Fund will only borrow when the Adviser believes that such
borrowings will benefit the Fund.
Hedging Transactions -- The Fund may enter into various
hedging transactions, such as interest rate swaps and the purchase or sale of
interest rate collars, caps and floors, to preserve a return or spread on a
particular investment within the portfolio or its entire portfolio and to
manage the effective maturity or interest rate sensitivity of its portfolio.
Hedging transactions may also be used to attempt to protect against possible
declines in the market value of the Fund's assets resulting from downward
trends in the debt securities markets (generally due to a rise in interest
rates), to protect any unrealized gains in the value of the Fund's portfolio
securities, to facilitate the sale of such securities or to establish a
position in the securities markets as a temporary substitute for purchasing
particular securities. Any or all of these techniques may be used at any time.
There is no particular strategy that requires use of one technique rather than
another. Use of any particular hedging transaction is a function of market
conditions. Further hedging transactions may be used by the Fund in the future
as they are developed or deemed by the Board of Directors of the Fund to be
appropriate and in the best interest of investors in the Fund. The Fund
intends to use these transactions as a hedge against market fluctuations and
not as speculative investments. The Fund may also purchase and sell (or write)
options on securities or indices of securities and may purchase or sell
futures contracts or options on futures contracts, as described below.
The Fund may employ a variety of hedging transactions as
described below and there can be no assurance that any such transaction used
will succeed. The principal risks relating to the use of hedging transactions
are: (a) possible imperfect correlation between changes in the value of the
hedging instrument and the changes in the market value of the underlying
securities; (b) possible lack of a liquid secondary market for
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closing out or offsetting a hedging position; (c) losses on hedging positions
resulting from general movements in securities prices or interest rate
movements not anticipated by the Adviser, and (d) the possibility that the
Fund could be obligated to pay variation margin on a hedging position at a
time when it would be disadvantageous to do so. While the use of hedging
transactions should tend to minimize the risk of loss resulting from a decline
in the value of hedged portfolio securities, these transactions will tend to
limit any potential that could result from an increase in the value of these
securities. Such transactions also are subject to the risk that, if the
Adviser is incorrect in its forecast of interest rates, market values or other
economic factors affecting such a transaction, the Fund would have been better
off if it had not entered into the transaction.
Reverse Repurchase Agreements and Dollar Roll Agreements.
The Fund may enter into reverse repurchase agreements and dollar roll
agreements with the same parties with whom it may enter into repurchase
agreements. Under a reverse repurchase agreement or a dollar roll agreement,
the Fund sells securities and agrees to repurchase them, or substantially
similar securities in the case of a dollar roll agreement, at a mutually
agreed upon date and price. Under generally accepted accounting principles,
reverse repurchase agreements and dollar roll agreements are generally
regarded as a form of borrowing. At the time the Fund enters into a reverse
repurchase agreement or a dollar roll agreement, it will establish and
maintain a segregated account with its custodian containing securities from
its portfolio having a value not less than the repurchase price (including
accrued interest). The Fund's ability to enter into reverse repurchase
agreements and dollar roll agreements is not limited except by the requirement
to maintain assets in segregated accounts. Reverse repurchase agreements and
dollar roll agreements involve the risk that the market value of the
securities retained in lieu of their sale by the Fund may decline below the
price of the securities the portfolio has sold but is obligated to repurchase.
In the event the buyer of securities under a reverse repurchase agreement or a
dollar roll agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether
to enforce the Fund's obligation to repurchase the securities, and the Fund's
use of the proceeds of the reverse repurchase agreement or the dollar roll
agreement may effectively be restricted pending such decision. Investors
should be aware that the Fund will enter into reverse repurchase agreements,
which may be considered to be a form of borrowing and, therefore, involve the
use of leverage. The use of leverage involves special risks in that, while
providing increased opportunities for income, the use of leverage also means
that any losses will be magnified. The use of reverse repurchase agreements
also involves certain fees and costs to the Fund.
When-Issued Purchases and Forward Commitments. The Fund may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. When such transactions are
negotiated, the price is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, which can
be a month or more after the date of the transaction. At the time the Fund
makes the commitment to purchase securities on a when-issued or forward
commitment basis, it will record the transaction and thereafter reflect the
value of such securities in determining its net asset value. At the time the
Fund enters into a transaction on a when-issued or forward commitment basis, a
segregated account consisting of cash or high grade liquid debt securities
equal to the value of the when-issued or forward commitment securities will be
established and maintained with a custodian and will be marked-to-market
daily. On the delivery date, the Fund will meet its obligations from
securities that are then maturing or sales of the securities held in the
segregated asset account and/or from then available cash flow. When-issued
securities and forward commitments may be sold prior to the settlement date
which can result in a gain or loss due to market fluctuation subsequent to the
time when the commitment was originally made. There is always a risk that the
securities may not be delivered and that the Fund may incur a loss or will
have lost the opportunity to invest the amount set aside for such transaction
in the segregated asset account. Settlements in the ordinary course, which may
take substantially more than five business days for mortgage-related
securities, are not treated by the Fund as when-issued or forward commitment
transactions and, accordingly, are not subject to the foregoing limitations
even though some of the risks described above may be present in such
transactions.
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<PAGE>
Short Sales. The Fund may also make short sales of
securities as a form of hedging to offset potential declines in long positions
in similar securities. A short sale is a transaction in which the Fund sells a
security it does not own in anticipation that the market price of that
security will decline.
When the Fund makes a short sale, it must borrow the
security sold short and deliver it to the broker-dealer through which it made
the short sale as collateral for its obligation to deliver the security upon
conclusion of the sale. Such borrowings may expose the Fund to increased risks
or costs. The Fund may have to pay a fee to borrow particular securities and
is obligated to return any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will
be secured by collateral deposited with the broker-dealer, usually cash, U.S.
Government securities or other highly liquid securities. The Fund will also be
required to deposit similar collateral with its Custodian to the extent, if
any, necessary so that the value of both collateral deposits in the aggregate
is at all times equal to at least 100% of the current market value of the
security sold short. The Fund is due to receive only interest payments on the
deposited collateral during the term of the borrowing.
If the price of the security sold short increases between
the time of the short sale and the time the Fund replaces the borrowed
security, the Fund will incur a loss; conversely, if the price declines, the
Fund will realize a capital gain. Any gain will be decreased, and any loss
increased, by the transaction costs described above. Although the Fund's gain
is limited to the price at which it sold the security short, its potential
loss is theoretically unlimited.
The Fund will not make a short sale if, after giving effect
to such sale, the market value of all securities sold short exceeds 20% of the
value of its total assets or the Fund's aggregate short sales of a particular
class of securities exceeds 25% of the outstanding securities of that class.
The Fund may also make short sales "against the box" without regard to such
limitations. In this type of short sale, at the time of the sale, the Fund
owns or has the immediate and unconditional right to acquire at no additional
cost the identical securities.
Calls and Puts on Securities and Related Options. The Fund
may engage in various put and call transactions. The Fund may hedge through
the use of call options ("calls") on U.S. Treasury securities and
Mortgage-Backed Securities that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets. The Fund may purchase and sell
calls on these securities or indices thereof. Sales of calls will be "covered"
while the call is outstanding (i.e., the seller owns the securities subject to
the call or other securities acceptable for applicable escrow requirements).
Some contracts are "cash settled" (i.e., the seller pays the difference
between the call and market price in cash when the market price is higher).
Cash-settled calls also may be covered. The Fund does not intend to sell any
cash-settled calls that are not covered. If a call sold by the Fund is
exercised, the Fund forgoes any possible profit from an increase in the market
price of the underlying security over the exercise price.
The Fund may hedge through the use of put options ("puts")
that relate to U.S. Treasury securities and Mortgage-Backed Securities
(whether or not it holds such securities in its portfolio) or on indices of
securities. The Fund may purchase puts on these securities and may also sell
puts on these securities or indices if such puts are secured by segregated
liquid assets. The Fund will not sell puts if, as a result, more than 50% of
the Fund's assets would be required to be segregated liquid assets. In selling
puts, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price.
A put option gives the purchaser of the option the right to
sell and the writer, if the purchaser exercises his right, the obligation to
buy the underlying security at the exercise price during the option period. A
call option gives the purchaser of the option the right to buy and the writer,
if the purchaser exercises his
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<PAGE>
right, the obligation to sell the underlying security at the exercise price
during the option period. The Fund is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC Options"). Listed options
are issued by the Options Clearing Corporation ("OCC") which guarantees the
performance of the obligations of the parties to such options.
The purchaser of an option risks losing his entire
investment in a short period of time. If an option is not sold while it has
remaining value, or if during the life of an option the underlying security
does not appreciate, in the case of a call option, or depreciate, in the case
of a put option, the purchaser of such option may lose his entire investment.
On the other hand, given the same market conditions, if the potential
purchaser of a call option purchases the underlying security directly instead
of purchasing a call option or if the potential purchaser of a put option
decides not to purchase the put option, but to sell the underlying security,
such potential option purchaser might have less of a loss. An option purchaser
does not have the choice of "waiting out" an unexpected decrease or increase
in the price of the underlying fixed income security beyond the expiration
date of the option. The more that an option is out-of-the-money and the
shorter its remaining term to expiration, the greater the risk that a
purchaser of the option will lose all or part of his investment. Further,
except where the value of the remaining life of an option may be realized in
the secondary market, for an option purchase to be profitable the market price
of the underlying interest must exceed or be below the exercise price by more
than the premium and transaction costs paid in connection with the purchase of
the option and its sale or exercise.
The writer of an option assumes an obligation to deliver or
purchase the underlying interest represented by the option upon the assignment
to him of an exercise notice. The writer is subject to being assigned an
exercise notice at any time after he has written the option until the option
expires or until he has closed out his position by the offsetting purchase of
an identical option.
The Fund's ability to close out its position as a writer or
purchaser of an exchange-listed option is dependent upon the existence of a
liquid secondary market on option exchanges. Among the possible reasons for
the absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options) in which event the
secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been listed by the OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms. OTC Options are
purchased from or sold to dealers or financial institutions which have entered
into direct agreement with the Fund. With OTC Options, such variables as
expiration date, exercise price and premium will be agreed upon between the
Fund and the transacting dealer, without the intermediation of a third party
such as the OCC. If the transacting dealer fails to make or take delivery of
the securities underlying an option it has written, in accordance with the
terms of that option as written, the Fund would lose the premium paid for the
option as well as any anticipated benefit of the transaction. OTC Options and
their underlying securities are considered illiquid. The Fund will engage in
OTC Option transactions only with primary United States Government securities
dealers recognized by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
Futures Contracts and Related Options. The Fund may buy or
sell financial futures contracts or purchase options on such futures as a
hedge against anticipated interest rate changes. A futures contract sale
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<PAGE>
creates an obligation by the Fund, as seller, to deliver the specified type of
financial instrument called for in the contract at a specified future time for
a specified price or, in "cash settlement" futures contracts, to pay to (or
receive from) the buyer in cash the difference between the price in the
futures contract and the market price of the instrument on the specified date,
if the market price is higher (or lower, as the case may be). Options on
futures contracts are similar to options on securities except that an option
on a futures contract gives the purchaser the right for the premium paid to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put).
The Fund's use of futures and options on futures will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission ("CFTC")
with which the Fund must comply in order not to be deemed a commodity pool
operator within the meaning and intent of the Commodity Exchange Act and the
regulations promulgated thereunder.
Typically, an investment in a futures contract requires the
Fund to deposit with the applicable exchange or other specified financial
intermediary as security for its obligations an amount of cash or other
specified debt securities which initially is 1% to 5% of the face amount of
the contract and which thereafter fluctuates on a periodic basis as the value
of the contract fluctuates. An investment in options involves payment of a
premium for the option without any further obligation on the part of the Fund.
Regulations of the CFTC applicable to the Fund currently
require that all of the Fund's futures and options on futures transactions
constitute bona fide hedging transactions or be undertaken incidental to the
Fund's activities in the securities markets. In accordance with CFTC
regulations, the Fund may not purchase or sell futures contracts or options
thereon if immediately thereafter the sum of the amounts of initial margin
deposits on the Fund's existing futures positions and premiums paid for
options on futures would exceed 5% of the fair market value of the Fund's
total assets. The Adviser reserves the right to comply with such different
standard as may be established by CFTC rules and regulations with respect to
the purchase or sale of futures contracts or options thereon.
The variable degree of correlation between price movements
of futures contracts and price movements in the position being hedged creates
the possibility that losses on the hedge may be greater than gains in the
value of the Fund's position. In addition, futures and futures option markets
may not be liquid in all circumstances. As a result, in volatile markets, the
Fund may not be able to close out a transaction without incurring losses
substantially greater than the initial deposit. Although the contemplated use
of these contracts should tend to minimize the risk of loss due to a decline
in the value of the hedge position, at the same time they tend to limit any
potential gain which might result from an increase in the value of such
position. The ability of the Fund to hedge successfully will depend on the
Adviser's ability to forecast pertinent market movements, which cannot be
assured. Finally, the daily deposit requirements in futures contracts create
an ongoing greater potential financial risk than do options purchased by the
Fund, where the exposure is limited to the cost of the initial premium. Losses
due to hedging transactions will reduce net asset value. Income earned by the
Fund from its hedging activities generally will be treated as capital gains.
Eurodollar Futures Contracts and Related Options. The Fund
may make investments in Eurodollar futures contracts and options thereon for
hedging purposes only and, in each case, in accordance with the rules and
regulations of the CFTC. Eurodollar futures contracts and options thereon are
essentially U.S. dollar-denominated futures contracts or options thereon which
are linked to LIBOR. Eurodollar futures contracts enable purchasers to obtain
a fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund intends to use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps,
short-term borrowings and floating rate securities are linked. When the Fund
enters into a futures contract, it makes a deposit of initial margin and
thereafter will be required to pay or entitled to receive variation margin in
an amount equal to the change in the value of the contract from the preceding
day.
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Interest Rate Transactions. Interest rate swaps involve the
exchange with another party of commitments to pay or receive interest (e.g.,
an exchange of floating rate payments for fixed rate payments). The purchase
of an interest rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate cap.
The purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling
such interest rate floor. An interest rate collar combines the elements of
purchasing a cap and selling a floor. The collar protects against an interest
rate rise above the maximum amount but gives up the benefits of an interest
rate decline below the minimum amount. The net amount of the excess, if any,
of the Fund's obligations over its entitlements with respect to each interest
rate swap will be accrued on a daily basis and an amount of cash or liquid
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's Custodian. If
there is a default by the other party to such a transaction, the Fund will
have contractual remedies pursuant to the agreements related to the
transactions.
The Fund may enter into interest rate transactions to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date, to effectively fix the rate of
interest that it pays on one or more borrowings or series of borrowings or to
manage the effective maturity or interest rate sensitivity of its portfolio.
The Fund would use these transactions as a hedge and not as a speculative
investment. Interest rate transactions are subject to risks comparable to
those described above with respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars
and floors on either an asset-based or liability-based basis, depending on
whether it is hedging its assets or its liabilities, and will usually enter
into interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Fund receiving or paying, as the case may be, only the
net amount of the two payments. Inasmuch as these interest rate transactions
are entered into for good faith hedging purposes, and inasmuch as segregated
accounts will be established with respect to such transactions, the Adviser
and the Fund believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis and an amount of cash, U.S. Government securities or other
liquid high grade debt obligations having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account
by a custodian that satisfies the requirements of the 1940 Act. The Fund also
will establish and maintain such segregated accounts with respect to its total
obligations under any interest rate swaps that are not entered into on a net
basis and with respect to any interest rate caps, collars and floors that are
written by the Fund.
The Fund will enter into interest rate transactions only
with banks and recognized securities dealers believed by the Adviser to
present minimal credit risks in accordance with guidelines established by the
Fund's Board of Directors. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
Subordinated Securities -- Credit enhancement in the form of
subordination provides for the issuance of a senior class of certificates
which are generally rated at least AA/Aa by any of the Rating Agencies and one
or more classes of subordinated certificates which bear ratings lower than the
senior certificates or are non-rated. Holders of either the senior or the
subordinated certificates will ordinarily be entitled to a pro-rata share of
distributions of principal and interest. However, in the event that
delinquencies and defaults on the underlying mortgage loans cause a shortfall
in the distributions to the senior certificates, distributions otherwise
payable to the subordinated certificates will be distributed to the senior
certificates to the extent required. The
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characteristics of the mortgage loans and other credit enhancement features
will determine the size of the subordinated interest required to obtain the
desired rating on the senior securities.
The Fund may invest in subordinated certificates. To
compensate for the greater risk of loss on, and illiquidity of, the
subordinated certificates, the yields on subordinated certificates are
generally substantially higher than those available on senior certificates. To
the extent that actual delinquency and loss experience is greater than
anticipated, the return on the subordinated certificates will be adversely
affected and, in extreme cases, a portion of the principal could be lost; to
the extent that such experience is more favorable than anticipated, the return
on the subordinated certificates will be increased.
Non-Diversification -- As a non-diversified investment
company, the Fund is not subject to any statutory restriction under the 1940
Act with respect to investing its assets in one or relatively few issuers.
Non-diversification may present greater risks for the Fund than in the case of
a diversified company. However, the Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Code. The Fund will be
restricted in that at the close of each quarter of the taxable year, at least
50% of the value of its total assets must be represented by cash, U.S.
Government securities, investment company securities and other securities
limited in respect of any one issuer to not more than 5% in value of the total
assets of the Fund and to not more than 10% of the outstanding voting
securities of such issuer. In addition, at the close of each quarter of any
taxable year, not more than 25% in value of the Fund's total assets may be
invested in securities (other than Government Securities or the Securities of
other regulated investment companies) of one issuer or of two more issuers
which the Fund controls and which are engaged in the same or similar or
related trades or businesses. The limitations described in this paragraph
regarding qualification under Subchapter M of the Code as a "regulated
investment company" are not fundamental policies and may be revised to the
extent applicable Federal income tax requirements are revised. (See
"Distribution and Tax Matters" herein).
PURCHASES AND REDEMPTIONS OF SHARES
Distributor
Hyperion Distributors, Inc. (the "Distributor") serves as
the exclusive distributor of the shares of the Fund pursuant to its
Distribution Agreement with the Fund. Investors may open accounts in the Fund
only through the exclusive Distributor for the Fund. Under the Distribution
Agreement, the Distributor, for nominal consideration and as agent for the
Fund, will solicit orders for the purchase of Fund shares, provided that any
subscriptions and orders will not be binding on the Fund until accepted by the
Fund as principal. The Adviser pays the expenses incurred in the distribution
of the Fund's shares.
Purchase and Sales of Shares
The Fund's shares are sold on a continuous basis and may be
purchased upon receipt of a purchase order by the Distributor at the current
net asset value of such shares which is computed daily. The minimum initial
investment in the Fund is $100,000. The minimum additional investment is
$5,000. The minimum initial and subsequent investments may be waived for
employees of the Adviser, Hyperion Capital Management, Inc. and Equitable Real
Estate Investment Management, Inc. Shares of the Fund may be purchased at the
public offering price, which is the net asset value next determined after the
purchase order is transmitted to and accepted by the Distributor. Payment may
be made by check, but shares are issued only upon receipt of full payment. No
exchange privilege is currently available between the Fund and any other Fund.
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<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
METHOD THROUGH INITIAL (MINIMUM) INVESTMENT ADDITIONAL (MINIMUM) INVESTMENT
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
By Mail:
---------------------------------------------------------------------------------------------------------------
State Street Bank Complete application and mail with check Mail check made payable to "Equitable Real
made payable to "Equitable Real Estate Estate Hyperion Mortgage Opportunity Fund,
Hyperion Mortgage Opportunity Fund, Inc."
Inc." to:
[the Fund, c/o State Street Bank] Include account number on check
- -----------------------------------------------------------------------------------------------------------------------------
By Wire:
---------------------------------------------------------------------------------------------------------------
State Street Bank $100,000 $5,000
Contact Marissa Hickey at (617) 985-7183
to Contact your bank and request it to
wire federal obtain a Shareholder
Account Number. funds as specified
below. You must provide all Then
contact your bank and request it to
information requested below.
wire federal funds as specified below.
You must provide all information
requested below. Investors making
initial investments by wire must
promptly complete a Purchase
Application and mail it to State Street
Bank and Trust Company, Attn: Equitable
Real Estate Hyperion Mortgage
Opportunity Fund, Inc.
at the address on the back cover. The
application may also be sent via
facsimile.
- -----------------------------------------------------------------------------------------------------------------------------
Wire federal funds to: State Street Bank & Trust Co., ABA #011000028, Account
Number 21966700, for Equitable Real Estate Hyperion Mortgage Opportunity Fund,
Inc. Include your name, Shareholder Account Number and social security number.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Distributor, at its expense, may from time to time
provide promotional incentives to dealers who sell shares of the Fund. In some
instances, these incentives may be offered only to certain dealers who have
sold or may sell significant numbers of shares of the Fund. Shares of the Fund
may be purchased at the public offering price through a securities broker or
bank or other financial institution (a "Dealer") which has a sales or agency
agreement with the Distributor.
Redemptions
A shareholder may redeem all or any portion of the shares in
its account at any time at the net asset value next determined after a
redemption request in proper form is received and accepted by the Distributor.
The proceeds of an effective redemption request will be paid within seven
days. In some cases the Fund may require the furnishing of additional
documents. A shareholder will be charged a fee for a wire redemption
(currently $8) equal to the fee charged for such redemption by the Fund's
Custodian.
The Fund will not make redemption proceeds available until a
shareholder's check (including a certified or cashier's check) received for
purchase of those shares being redeemed has been cleared by the bank on which
it is drawn, which could take up to fifteen days. A Fund shareholder may avoid
any delay in redemption proceeds being available by purchasing shares by
federal funds wire.
The Fund has the right at its option and currently intends
to redeem all of the shares in any account in which there are fewer than a
specified minimum number of shares (currently 50 shares or 20 for an IRA).
Written notice of at least 60 days will be given to a shareholder before any
such redemption is effected, but no redemption will occur if the shareholder
increases the number of shares to the specified number of shares by the end of
the notice period.
The value of shares redeemed may be more or less than the
shareholder's cost, depending on the Fund's performance during the period the
shareholder owned its shares. Redemptions of shares are taxable events on
which the shareholder may recognize a gain or a loss. The Fund will not make
redemptions in kind.
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<PAGE>
Distribution Options
A Shareholder may elect to receive dividends and capital
gain distributions in either cash or additional shares of the Fund. Unless
otherwise specified in writing by a shareholder, all dividends and capital
gain distributions will be reinvested in additional shares. For further
information on distributions, see "Distributions and Taxes."
PERFORMANCE INFORMATION
Performance information concerning the Fund may from time to
time be used in advertisements, shareholder reports or other communications to
shareholders. The Fund may provide period and average annualized "total
return." The "total return" refers to the change in the value of an investment
over a stated period, reflects any change in net asset value per share, and
includes the value of any shares purchasable with any dividends or capital
gains distributions declared during such period. Period total rates of return
may be annualized. An annualized total return is a compounded total rate of
return which assumes that the period total rate of return is generated over a
number of 52-week periods, and that all dividends and capital gain
distributions are reinvested.
The Fund may provide annualized "yield" quotations. The
"yield" of the Fund refers to the income generated by an investment over a
30-day or one-month period (which period shall be stated in any advertisement
or communications with a shareholder). This income is then annualized, that
is, the amount of income generated by the investment over the period is
assumed to be generated over a 52-week period and is shown as a percentage of
investment. A yield quotation, unlike a total return quotation, does not
reflect changes in net asset value. Because yield accounting methods differ
from the methods used for other accounting purposes, the Fund's yield may not
equal its "distribution rate," which reflects all dividends paid (including
returns of capital, if any), or the income reported in the Fund's financial
statements.
From time to time the Fund may also use comparative
performance information in such an advertisement or communication, including
data from Lipper Analytical Services, Inc., Bank Rate Monitor(C) and other
industry publications. The Fund may also compare its performance to the
current interest rate paid on a ten year U.S. Treasury Note.
See the Statement of Additional Information of the Fund for
further information concerning the calculation of yield and any total rate of
return quotations.
MANAGEMENT OF THE FUND
The Fund's Board of Directors which is responsible for the
overall management and supervision of the Fund has employed Equitable Real
Estate Hyperion Capital Advisors, L.L.C. to serve as investment adviser of the
Fund. For information about the Directors and Officers of the Fund, see
"Management of the Fund" in the Statement of Additional Information.
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259369.9
<PAGE>
Investment Adviser
The Adviser provides advice to the Fund pursuant to an
Investment Advisory Agreement (the "Advisory Agreement"). Subject to such
policies as the Board of Directors of the Fund may determine, the Adviser
makes investment decisions for the Fund. For its services under the Advisory
Agreement, the Adviser receives from the Fund a fee accrued daily and paid
monthly at an annual rate equal to 0.35% of the Fund's average daily net
assets.
The Adviser is a limited liability corporation formed under
the Delaware Limited Liability Company Act and provides investment advisory,
administrative, distribution, financial and clerical services to clients whose
principal investment objective is to invest in Commercial Mortgage-Backed
Securities. The Adviser is owned equally by Equitable Real Estate Investment
Management, Inc. and Hyperion Capital Management, Inc. The Fund is currently
the only open-end investment company advisory client of the Adviser. The
Fund's primary day-to-day investment management decisions will be made by an
investment committee, and no person(s) is primarily responsible for making
recommendations to that committee. Information regarding the Fund's
performance is set forth in the Fund's Annual Report, which will be available
without charge, upon request, from the Fund.
Hyperion Capital Management, Inc. ("HCM") is a wholly-owned
subsidiary of Hyperion Partners. Hyperion Partners primarily seeks investments
in the financial services, housing and real estate industries and assists in
the development of the properties in which it invests. The sole general
partner of Hyperion Partners is Hyperion Ventures, L.P., a Delaware limited
partnership ("Hyperion Ventures"). Corporations owned principally by Lewis S.
Ranieri, Salvatore A. Ranieri and Scott A. Shay are the general partners of
Hyperion Ventures. Lewis S. Ranieri, a former Vice-Chairman of Salomon
Brothers Inc., is the Chairman of the Board of the Adviser and a Director of
the Fund. Messrs. Salvatore Ranieri and Shay are principally engaged in the
management of the affairs of Hyperion Ventures and its affiliated entities. As
of April 30, 1995, HCM acts as investment manager for clients with assets in
excess of $4 billion. The business address of HCM is 520 Madison Avenue, New
York, New York 10022.
Equitable Real Estate Investment Management, Inc. ("EREIM"),
a subsidiary of The Equitable Life Assurance Society of the United States
("Equitable"), is a full service investment adviser with experience in
investing and managing commercial real estate assets for institutional lenders
and owners. As of December 31, 1994, EREIM managed approximately $35 billion
in real estate and mortgage investments for its clients, which include
pensions funds, international investors, insurance companies and other
financial institutions. EREIM also is one of the nation's leading advisors to
pension funds regarding investments in U.S. real estate. As of December 31,
1994, EREIM managed approximately $11.0 billion in tax-exempt equity assets.
EREIM is headquartered in Atlanta, Georgia and has 14
regional offices located throughout the United States. Through its network of
regional offices, EREIM manages more than 228 million square feet of retail,
office, industrial and apartment properties nationwide. The firm's regional
operations are full service offices with accounting, valuation and leasing
professionals, asset and property managers, and acquisition and disposition
specialists. EREIM's regional office system is designed to allow the company
to monitor buy-sell opportunities closely and act quickly on opportunities.
The Adviser provides persons satisfactory to the Fund's
Board of Directors to serve as officers of the Fund. Such officers, as well as
certain other employees and directors of the Fund, may be directors and
officers of EREIM or HCM. The Statement of Additional Information contains
general background information regarding each director and principal officer
of the Fund. In addition, the Adviser provides the Fund with the unique
expertise of its two owners. With respect to the Adviser, EREIM's personnel
provide investment research, acquisition and asset management services to
assist the Adviser in underwriting, due diligence and portfolio management
activities with respect to the commercial real estate collateral underlying
the Fund's
-29-
259369.9
<PAGE>
investments and provides the Adviser with personnel to perform real estate
evaluation services used in developing credit evaluation and pricing models.
HCM provides personnel to the Adviser to provide quantitative research,
trading, portfolio management, administration, compliance and finance services
to the Adviser in connection with its underwriting, due diligence and
portfolio management activities with respect to the securities in which the
Fund may invest. Further, HCM personnel provide quantitative modeling services
to the Adviser to assist in developing credit evaluation and pricing models.
Certain affiliates of the Adviser engage in real
estate-related activities, including but not limited to acting as the servicer
of a pool of Commercial Mortgage-Backed Securities; underwriting and issuing
Commercial Mortgage-Backed Securities; serving as market-maker of Commercial
Mortgage-Backed Securities; originating loans that underlie Commercial
Mortgage-Backed Securities; acting as the borrower of a mortgage that
underlies Commercial Mortgage-Backed Securities; and purchasing Commercial
Mortgage-Backed Securities for their own accounts or accounts over which they
have control. Because the 1940 Act prohibits certain affiliated transactions
involving the Fund and certain affiliates of the Fund, in the absence of
exemptive relief, the Fund may be prohibited from purchasing Commercial
Mortgage-Backed Securities with respect to which an affiliate of the Adviser
acted in one or more of the above capacities. The Adviser does not anticipate
that this restriction will have any significant adverse effect on its ability
to manage the Fund. However, the Adviser may seek exemptive relief to permit
the Fund to engage in certain transactions involving affiliates under
conditions designed to eliminate or minimize any potential conflict of
interest.
Administrator
Pursuant to an Administrative Services Agreement, the
Adviser supervises the overall administration of the Fund, including, among
other responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Fund; the preparation and filing of all documents required for
compliance by the Fund with applicable laws and regulations; and arranging for
the maintenance of books and records of the Fund. The Adviser provides persons
satisfactory to the Board of Directors of the Fund to serve as certain
officers of the Fund. Such officers may be directors, officers or employees of
the Adviser or its affiliates. For its administrative services to the Fund,
the Adviser receives a fee from the Fund at a rate equal, on an annual basis,
to 0.20% of the average daily net assets of the Fund.
DISTRIBUTIONS AND TAX MATTERS
The Fund intends to qualify and be treated as a regulated
investment company for federal income tax purposes. Accordingly, the Fund
should not be subject to federal income tax on the portion of its investment
company taxable income (including any net capital gain) it distributes to
shareholders in a timely manner. In addition, to the extent the Fund
distributes to shareholders in a timely manner at least 98% of its taxable
income (including any net capital gain) it should not be subject to the 4%
excise tax on certain undistributed income of "regulated investment
companies."
Distributions to Shareholders
The Fund intends to declare daily and distribute monthly
distributions to its shareholders of net investment income. The Fund reserves
the right to include net short-term gains, if any, in such monthly
distributions. Long-term capital gains and undistributed net short-term gains,
if any, will be distributed once
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259369.9
<PAGE>
annually. "Net investment income," as used above, includes all dividends,
interest and other income earned by the Fund, net of the Fund's expenses.
Notices will be provided in accordance with Section 19 of the 1940 Act.
A shareholder may elect to receive dividends and capital
gain distributions in either cash or additional shares of the Fund. Unless
otherwise specified in writing by a shareholder, all dividends and capital
gain distributions will be paid on the payment date in additional shares of
the Fund having an aggregate net asset value as of the ex-dividend date of
such dividend or distribution equal to the cash amount of such distribution.
An election may be changed by notifying the Fund in writing at any time prior
to the record date for a particular dividend or distribution. There are no
sales or other charges in connection with the reinvestment of dividends and
capital gains distribution. There is no fixed dividend rate, and there can be
no assurance that the Fund will pay any dividend or realize any capital gains
distributions. Notwithstanding, the Fund currently intends to pay dividends,
if any, on a monthly basis and capital gains, if any, annually.
Distributions to shareholders attributable to the Fund's
interest income and net short-term capital gains are taxable as ordinary
dividend income whether paid in cash or reinvested in additional shares. It is
not anticipated that any of such dividends will qualify for the dividends
received deduction for corporate shareholders. Capital gain dividends, which
are designated as distributions of net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss, if any), are taxable
as long-term capital gains, whether paid in cash or additional shares,
regardless of how long the shares have been held. Net capital gains of
taxpayers who are individuals are currently taxed at a maximum rate of 28%.
Net capital gains of corporate taxpayers are currently taxed at the same rate
as is applicable to ordinary income. The deduction of capital losses by the
Fund, and the deduction of capital losses by the shareholders with respect to
shares in the Fund, is subject to limitations. Investors should consider the
tax implications of buying shares shortly before the record date of a
distribution because distributions of ordinary income or net capital gain will
be taxable even though the net asset value of shares of the Fund is reduced by
the distribution.
Dividends and distributions are generally taxable to the
shareholders at the time the dividend or distribution is made (even if
reinvested in additional shares). Any dividend declared by the Fund in
October, November or December of any calendar year, however, which is payable
to shareholders of record on a specified date in such a month and which is not
paid on or before December 31 of such year, will be treated as received by the
shareholders as of December 31 of such year, provided that the dividend is
paid during January of the following year.
The amount and character of the taxable income or tax loss
of the Fund will depend upon the application of a number of complex and/or
uncertain aspects of Federal income tax law. In particular, certain
securities issued or acquired by the Fund (including regular interests in
"real estate mortgage investment conduits" within the meaning of Section 860D
of the Code) may be treated as having original issue discount ("OID") for
Federal income tax purposes. A security will be treated as having OID if its
stated redemption price at maturity exceeds its issue price by more than a
statutory de minimis amount. In the case of any security treated as having
OID, the Fund would be required to accrue a portion of the OID daily as
interest income even though it would not actually receive the cash payment of
such income until a later period. A similar problem may arise with respect
to residual interests in a real estate mortgage investment conduit.
A "market discount bond" is a security purchased at a market
discount, subject to a statutory de minimis exception. For this purpose, a
purchase at a market discount includes a purchase at or after the original
issue at a price below the stated redemption price at maturity. A portion of
the securities to be acquired by the Fund may be acquired at a market discount.
Any gain from the disposition of a security that was originated after July 18,
1984 and acquired by the Fund at a market discount will be treated as ordinary
income to the extent the gain does not exceed the accrued market discount.
Holders of market discount securities are required to include as ordinary
income any partial principal payment on the loan, to the extent such payment
does not exceed the accrued market discount on such security, even if the
holder eventually disposes of the security prior to maturity at a loss.
Back-up Withholding. Under certain provisions of the Code,
some shareholders may be subject to a 30% "back-up withholding" on reportable
dividends, capital gains distributions and redemption payments. Generally,
shareholders subject to back-up withholding will be those for whom a taxpayer
identification number is not on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that he or she is not otherwise subject to back-up withholding. An
individual's taxpayer identification number is his or her Social Security
number
Back-up withholding is not an additional tax and may be
credited against a taxpayer's federal income provided that the shareholder
provides the necessary information.
Investment Expenses. Investment expenses incurred by the
Fund are expected to be allowable deductions for individual shareholders only
to the extent such expenses, together with other miscellaneous itemized
deductions of the shareholder, exceed 2% of the shareholder's adjusted gross
income.
Other Taxation. Dividends and capital gains distributions
may also be subject to state, local and foreign taxes.
Shareholders who are not United States citizens or
residents should be aware that distributions from the Fund will generally be
subject to a withholding tax of 30%, or a lower treaty rate, and should
consult their own tax advisers to determine whether investment in the Fund is
appropriate. Distributions may also be subject to state and local taxation and
shareholders should consult their own tax advisers in this regard.
Entities that generally qualify for an exemption from
Federal income tax, such as many pension trusts, are nevertheless taxed on
"unrelated business taxable income." A tax-exempt entity's dividend income
from the Fund and gain from the sale of shares in the Fund or the Fund's sale
of securities is not expected to constitute unrelated business income to such
tax-exempt entity unless the acquisition of the share itself is debt-financed
or constitutes dealer property in the hands of the tax-exempt entity.
Before investing in the Fund, the trustee or investment
manager of an employee benefit plan (e.g., a pension or profit sharing
retirement plan) should consider among other things (a) whether the investment
is prudent under the Employee Retirement Income Security Act of 1974
("ERISA"), taking into account the needs of the plan and all of the facts and
circumstances of the investment in the Fund; (b) whether the investment
satisfies the diversification requirement of Section 404(a)(1)(C) of ERISA;
and (c) whether the assets of the Fund are deemed "plan assets" under ERISA
and the Department of Labor regulations regarding the definition of "plan
assets."
Prospective tax-exempt investors are urged to consult their
own tax advisers prior to investing in the Fund.
The Fund will send written notice to its shareholders
regarding the tax status of all distributions made during each year.
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259369.9
<PAGE>
OTHER INFORMATION CONCERNING SHARES OF THE FUND
Net Asset Value
The Fund determines the net asset value of each of its
shares on each day that the Adviser is open for business (a "Pricing Day"). A
list of those days appears in the Statement of Additional Information. This
determination is made once during each Pricing Day as of 4:00 p.m. (4:15 p.m.
for options), New York time, by deducting the amount of the Fund's liabilities
from the value of its assets and dividing the difference by the number of
shares of the Fund outstanding.
The Fund values each of its securities based on a variety of
factors including the current bid and asked price. See "Determination of Net
Asset Value; Valuation of Portfolio Securities" in the Statement of Additional
Information.
The Fund values any securities for which market quotations
are not readily available at their fair value as determined in good faith,
utilizing procedures approved by the Board of Directors of the Fund on the
basis of valuations provided by dealers. Debt securities having a remaining
maturity of sixty days or less when purchased and debt securities originally
purchased with maturities in excess of sixty days but which currently have
maturities of sixty days or less are valued at cost adjusted for amortization
of premiums and accretion of discounts.
Expenses
The Fund pays all of its expenses, including the
compensation of its respective Directors who are not "interested persons" (as
defined in the 1940 Act) of the Adviser; governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel and of any
transfer agent, custodian, registrar or dividend disbursing agent of the Fund;
insurance premiums; amortization of organizational expenses; and expenses of
calculating the net asset value of the shares of the Fund.
The Fund will also pay all expenses of issuing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, reports, notices, proxy statements and reports to
shareholders and to governmental officers and commissions; expenses of
shareholder and Board of Directors' meetings; and expenses relating to the
registration and qualification of shares of the Fund. The Distributor will pay
all expenses of distributing shares and all expenses of printing and mailing
prospectuses and sales literature to prospective investors.
The Fund will also pay the expenses connected with the
execution, recording and settlement of security transactions; fees and
expenses of the Fund's Custodian including safekeeping of funds and securities
and maintaining required books and accounts; expenses of preparing and mailing
reports to investors and to governmental officers and commissions; expenses of
meetings of investors; and the advisory and administrative fees payable to the
Adviser under the Advisory Agreement and the Administrative Services
Agreement, respectively.
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<PAGE>
Description of Shares,
Voting Rights and Liabilities
Equitable Real Estate Hyperion Mortgage Opportunity Fund,
Inc. was incorporated in Maryland on May 30, 1995. The authorized capital
stock consists of twenty billion shares of common stock having a par value of
one-tenth of one cent ($.001) per share. The Fund is currently the only
series. The Articles of Incorporation provide for the creation of separate
classes of outstanding common stock.
Each share of a series represents an interest in the series
represented by each other share in the series. Shares have no preference,
preemptive, conversion or similar rights. Shares when issued are fully paid
and non-assessable, except as set forth below. Shareholders are entitled to
one vote for each share held on matters on which they are entitled to vote.
The Fund is not required to and has no current intention to hold annual
meetings of shareholders, although the Fund will hold special meetings of
shareholders when in the judgment of the Board of Directors it is necessary or
desirable to submit matters for a shareholder vote. Shareholders also have
under certain circumstances (e.g., upon application and submission of certain
specified documents to the Board of Directors by a specified number of
shareholders) the right to remove one or more Directors of the Fund.
Shareholders also have the right to remove one or more Directors without a
meeting by a declaration in writing by a specified number of shareholders.
Upon liquidation or dissolution of the Fund, shareholders would be entitled to
share pro rata in the net assets of the respective series available for
distribution to shareholders.
On August 1, 1995, Equitable Real Estate Hyperion Capital
Advisors, L.L.C. purchased $100,000 of the Fund's shares at an initial
subscription price of $10.00 per share. Based on the foregoing share
ownership, the vote of the Adviser may be determinative of the outcome of any
matters submitted to the vote of the shareholders of the Fund.
Annual and other meetings may be required with respect to
such additional matters relating to the Fund as may be required by the 1940
Act, any registration of the Fund with the Securities and Exchange Commission
or any state, or as the Directors may consider necessary or desirable. Each
Director serves until the next meeting of the shareholders called for the
purpose of considering the election or reelection of such Director or of a
successor to such Director, and until the election and qualification of his or
her successor, elected at such a meeting, or until such Director sooner dies,
resigns, retires or is removed by the vote of the shareholders.
For further information with respect to the Fund and the
shares offered hereby, reference is made to the Fund's registration statement
filed with the Securities and Exchange Commission, including the exhibits
thereto. The Registration Statement and the exhibits thereto may be examined
at the Commission and copies thereof may be obtained upon payment of certain
duplicating fees.
TRANSFER AGENT, CUSTODIAN AND ACCOUNTING AGENT
The Fund has entered into a Transfer Agency and Service
Agreement with State Street Bank and Trust Company ("State Street") which acts
as transfer and accounting agent for the Trust (the "Transfer and Accounting
Agent"). The Transfer and Accounting Agent maintains an account for each
shareholder of the Fund, performs other transfer agency functions and acts as
dividend disbursing agent for the Fund. Pursuant to a Custodian Agreement,
State Street also acts as the custodian of the Fund's assets. The Custodian's
responsibilities include safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities, determining
income and collecting interest on the Fund's investments, maintaining books
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<PAGE>
of original entry for Fund accounting and other required books and accounts,
and calculating the daily net asset value of shares of the Fund. Securities
held by the Fund may be deposited into certain securities depositaries. The
Custodian does not determine the investment policies of the Fund or decide
which securities the Fund will buy or sell. The Fund may, however, invest in
securities of the Custodian and may deal with the Custodian as principal in
securities transactions. For its services, the Custodian will receive such
compensation as may from time to time be agreed upon by it and the Fund.
The Fund's Statement of Additional Information, dated August
, 1995, contains more detailed information about the Fund, including
information related to (i) the Fund's investment policies and restrictions,
(ii) the Directors, officers and administrator of the Fund, (iii) securities
transactions, (iv) the Fund's shares, including rights and liabilities of
shareholders, (v) additional performance information, including the method
used to calculate yield and total rate of return quotations of the Fund and
(vi) the determination of the net asset value of shares of the Fund.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Legal matters in connection with the issuance of shares of
stock of the Fund are passed upon by Messrs. Battle Fowler LLP, 75 East 55th
Street, New York, New York 10022. Price Waterhouse LLP, 1177 Avenue of the
Americas, New York, New York 10036, have been selected as independent
accountants for the Fund.
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<PAGE>
<TABLE>
<CAPTION>
HYPERION
A mutual fund seeking high total return including short-
and long-term capital gains and high current EQUITABLE REAL ESTATE
income HYPERION MORTGAGE
OPPORTUNITY FUND, INC.
SERIES A-1995
Table of Contents Page
<S> <C>
Prospectus Summary........................................
Expense Summary........................................... Investment Adviser and Administrator
The Fund..................................................
Investment Objectives and Policies........................ Equitable Real Estate Hyperion Capital Advisors,
Risk Considerations ...................................... L.L.C.
Purchases and Redemptions of Shares....................... 520 Madison Avenue
Performance Information................................... New York, New York 10022
Management of the Fund....................................
Distributions and Tax Matters............................. Distributor
Other Information Concerning Shares of the
Fund................................................... Hyperion Distributors, Inc.
Transfer Agent, Custodian and Accounting Agent............ 520 Madison Avenue
Counsel and Independent Accountants....................... New York, New York 10022
(212) 980-8400
Transfer Agent, Custodian and Accounting
Agent
State Street Bank and Trust Company
1776 Heritage Drive
Boston, Massachusetts 02171
PROSPECTUS September __, 1995
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259369.9
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STATEMENT OF ADDITIONAL INFORMATION
September __, 1995
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
SERIES A - 1995
520 Madison Avenue, New York, New York 10022
(212) 980-8400
This Statement of Additional Information sets forth
information which may be of interest to investors but which is not necessarily
included in the Fund's Prospectus, dated September , 1995 (the "Prospectus"),
through which shares of the Fund are offered. This Statement of Additional
Information should be read in conjunction with the Prospectus, a copy of which
may be obtained by an investor without charge by contacting Hyperion
Distributors, Inc., which is the distributor of shares of the Fund at [1-(800)
Hyperion].
The Statement of Additional Information is NOT a prospectus
and is authorized for distribution to prospective investors only if preceded
or accompanied by the Prospectus.
Table of Contents Page
1. THE FUND........................................................... 2
2. INVESTMENT OBJECTIVE, POLICIES, RISKS AND
RESTRICTIONS..................................................... 2
3. PERFORMANCE INFORMATION............................................ 6
4. DETERMINATION OF NET ASSET VALUE; VALUATION
OF PORTFOLIO SECURITIES.......................................... 6
5. TAX STATUS......................................................... 6
6. MANAGEMENT OF THE FUND ............................................ 7
7. COUNSEL AND INDEPENDENT ACCOUNTANTS ............................... 12
8. PORTFOLIO TRANSACTIONS............................................. 13
9. HOW TO PURCHASE AND REDEEM SHARES.................................. 13
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES...................................................... 13
11. DESCRIPTION OF RATINGS............................................. 14
12. FINANCIAL STATEMENTS............................................... 14
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1. THE FUND
Series A-1995 (the "Fund") is a series of Equitable Real
Estate Hyperion Mortgage Opportunity Fund, Inc. (the "Company"), a
non-diversified, open-end management investment company. Equitable Real Estate
Hyperion Mortgage Opportunity Fund, Inc. was organized as a corporation under
the laws of the State of Maryland on May 30, 1995. The Adviser manages the
investments of the Fund from day to day in accordance with the Fund's
investment objective and policies. The selection of investments for the Fund
and the way they are managed depend on the conditions and trends in the
economy and the financial marketplaces.
Equitable Real Estate Hyperion Capital Advisors, L.L.C., the
adviser and administrator of the Fund (the "Adviser" and "Administrator"),
manages the Fund and supervises the overall administration of the Fund. The
Board of Directors of the Fund provides broad supervision over the affairs of
the Fund. Shares of the Fund are continuously sold by Hyperion Distributors,
Inc., the Fund's distributor (the "Distributor").
2. INVESTMENT OBJECTIVE, POLICIES, RISKS AND RESTRICTIONS
Investment Objective
The investment objective of the Fund is to seek to provide
high total return from (i) both short and long term capital gains and (ii) a
high level of current income. There can, of course, be no assurance that the
Fund will achieve its investment objective. The investment objective of the
Fund is fundamental and may not be changed without approval by its
shareholders.
Investment Policies
The Fund seeks to achieve its investment objective by
investing, under normal circumstances, in a portfolio consisting
primarily of a variety of different types of commercial mortgage backed
securities ("Commercial Mortgage-Backed Securities"). The Fund will invest
only in securities which at the time of purchase are investment grade quality.
The following is a discussion of the various investments of
and techniques employed by the Fund and is intended only as a supplement to
the information contained in the Prospectus and should be read only in
conjunction with the Prospectus. Terms defined in the Prospectus and not
defined herein have the same meanings herein as in the Prospectus.
Description of the Fund's Investment Securities
U.S. Government Agency Mortgage-Backed Securities
Ginnie Mae Certificates. The Government National Mortgage
Association ("Ginnie Mae") is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes
Ginnie Mae to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans insured
by the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of Veterans
Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act
provides that the full faith and credit of the United States Government is
pledged to the payment of all amounts that may be required to be paid under
any guaranty. In order to meet its obligations under such guaranty, Ginnie Mae
is authorized to borrow from the United States Treasury with no limitations as
to amount.
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The Ginnie Mae Certificates in which the Fund will invest
will represent a pro rata interest in one or more pools of the following types
of mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed
rate graduated payment mortgage loans; (iii) fixed rate growing equity
mortgage loans; (iv) fixed rate mortgage loans secured by manufactured
(mobile) homes, (v) mortgage loans on multi-family residential properties
under construction; (vi) mortgage loans on completed multi-family projects;
(vii) fixed rate mortgage loans as to which escrowed funds are used to reduce
the borrower's monthly payments during the early years of the mortgage loans
("buydown" mortgage loans); (viii) mortgage loans that provide for adjustments
in payments based on periodic changes in interest rates or in other payment
terms of the mortgage loans; and (ix) mortgage-backed serial notes. All of
these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one
to four family housing units.
Fannie Mae Certificates. The Federal National Mortgage
Association ("Fannie Mae" or "FNMA") is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of FNMA are not backed by the
full faith and credit of the United States Government.
Each Fannie Mae Certificate will represent a pro rata
interest in one or more pools of FHA Loans, VA Loans or conventional mortgage
loans (i.e., mortgage loans that are not insured or guaranteed by any
governmental agency) of the following types: (i) fixed rate level payment
mortgage loans; (ii) fixed rate growing equity mortgage loans; (iii) fixed
rate graduated payment mortgage loans; (iv) variable rate California mortgage
loans; (v) other adjustable rate mortgage loans; and (vi) fixed rate and
adjustable mortgage loans secured by multi-family projects.
Freddie Mac Certificates. The Federal Home Loan Mortgage
Corporation ("Freddie Mac") is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). The obligations of Freddie Mac are obligations solely of
Freddie Mac and are not backed by the full faith and credit of the United
States Government.
Freddie Mac Certificates represent a pro rata interest in a
group of mortgage loans (a "Freddie Mac Certificate group") purchased by
Freddie Mac. The mortgage loans underlying the Freddie Mac Certificates will
consist of fixed rate or adjustable rate mortgage loans with original terms to
maturity of between ten and thirty years, substantially all of which are
secured by first liens on one- to four-family residential properties or
multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the FHLMC Act. A Freddie Mac Certificate group may include whole
loans, participation interests in whole loans and undivided interests in whole
loans and participations comprising another Freddie Mac Certificate group.
Private Pass-Throughs. Pass-Throughs are Mortgage-Backed
Securities that are structured similarly to government agency pass-through
securities such as Ginnie Mae, Fannie Mae and Freddie Mac Certificates, but
are issued by private sector originators of or investors in mortgage loans.
Private Pass- Throughs can represent an interest in any of the variety of
types of mortgage loans that can back an issue of Mortgage-Backed Securities.
Since Private Pass-Throughs typically lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality, they are generally
structured with one or more forms of credit enhancement. All of the Private
Pass-Throughs purchased by the Fund will have been sold in public offerings
registered under the Securities Act of 1933 and will, accordingly, not be
subject to restrictions on resale generally imposed upon privately-placed
securities.
Adjustable Rate Mortgages -- Interest Rate Indices. The One
Year Treasury Index is the figure derived from the average weekly quoted yield
on U.S. Treasury Securities adjusted to a constant maturity of one year. The
Cost of Funds Index reflects the monthly weighted average cost of funds of
savings and loan associations and savings banks whose home offices are located
in Arizona, California and Nevada (the "FHLB
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Eleventh District") that are member institutions of the Federal Home Loan Bank
of San Francisco (the "FHLB of San Francisco"), as computed from statistics
tabulated and published by the FHLB of San Francisco. The FHLB of San
Francisco normally announces the Cost of Funds Index on the last working day
of the month following the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of
Funds Index and may cause the Cost of Funds Index to move in a manner
different from indices based upon specific interest rates, such as the One
Year Treasury Index. Because of the various origination dates and maturities
of the liabilities of member institutions of the FHLB Eleventh District upon
which the Cost of Funds Index is based, among other things, at any time the
Cost of Funds Index may not reflect the average prevailing market interest
rates on new liabilities of similar maturities. There can be no assurance that
the Cost of Funds Index will necessarily move in the same direction or at the
same rate as prevailing interest rates since as longer term deposits or
borrowings mature and are renewed at market interest rates, the Cost of Funds
Index will rise or fall depending upon the differential between the prior and
the new rates on such deposits and borrowings. In addition, dislocations in
the thrift industry in recent years have caused and may continue to cause the
cost of funds of thrift institutions to change for reasons unrelated to
changes in general interest rate levels. Furthermore, any movement in the Cost
of Funds Index as compared to other indices based upon specific interest rates
may be affected by changes instituted by the FHLB of San Francisco in the
method used to calculate the Cost of Funds Index. To the extent that the Cost
of Funds Index may reflect interest changes on a more delayed basis than other
indices, in a period of rising interest rates, any increase may produce a
higher yield later than would be produced by such other indices, and in a
period of declining interest rates, the Cost of Funds Index may remain higher
than other market interest rates. This may result in a higher level of
principal prepayments on mortgage loans which adjust in accordance with the
Cost of Funds Index than mortgage loans which adjust in accordance with other
indices.
LIBOR, the London interbank offered rate, is the interest
rate that the most creditworthy international banks dealing in U.S.
dollar-denominated deposits and loans charge each other for large
dollar-denominated loans. LIBOR is also usually the base rate for large
dollar-denominated loans in the international market. LIBOR is generally
quoted for loans having rate adjustments at one, three, six or twelve month
intervals.
Investment Restrictions
The Fund has adopted the following investment restrictions
which may not be changed without approval by holders of a "majority of the
outstanding voting securities" of the Fund that would be affected by such a
change. A "majority of the outstanding voting securities" as used herein
means the vote of the lesser of (i) 67% or more of the outstanding "voting
securities" of the Fund present at a meeting, if the holders of more than
50% of the outstanding "voting securities" of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding "voting
securities" of the Fund. The term "voting securities" as used in this
paragraph has the same meaning as in the 1940 Act.
The Fund may not:
(1) Invest 25% or more of the value of the total assets of
the Fund in securities of issuers engaged in any one industry (excluding real
estate and related industries and U.S. Government securities as defined in the
1940 Act).
(2) Borrow Money. This restriction shall not apply to (i)
borrowing from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests that might otherwise require the
untimely disposition of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing was
made and (ii) hedging techniques described in the Prospectus which may be
deemed
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<PAGE>
to be borrowing. While borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any investments. Interest paid on borrowings
will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber its
assets, except in an amount up to 15% of the value of its total assets and
only to secure borrowings for temporary or emergency purposes.
(4) Underwrite the securities of other issuers, except
insofar as the Fund may be deemed an underwriter under the Securities Act of
1933 in disposing of a portfolio security.
(5) Purchase securities subject to restrictions on
disposition under the Securities Act of 1933 ("restricted securities").
Subject to state law limitations, the Fund will not invest more than an
aggregate of 15% of its net assets in a repurchase agreement maturing in more
than seven days and securities that are not readily marketable.
(6) Invest in securities of other investment companies,
except that (i) the Fund may purchase unit investment trust securities where
such unit investment trusts meet the investment objective of the Fund and then
only up to 5% of the Fund's net assets, except as they may be acquired as part
of a merger, consolidation or acquisition of assets and (ii) as permitted by
Section 12(d) of the 1940 Act.
(7) Issue senior securities, except insofar as the Fund may
be deemed to have issued a senior security in connection with any permitted
borrowing.
(8) Make loans of money or property to any person, except
through loans of portfolio securities to Qualified Institutions, the purchase
of debt obligations in which the Fund may invest consistently with the Fund's
investment objective and policies and investment restrictions or the temporary
investment in repurchase agreements with Qualified Institutions. The Fund may
not lend portfolio securities, if, as a result, the aggregate of such loans
exceeds 33 1/3% of the value of the Fund's total assets (including such
loans).
(9) Invest for the purpose of exercising control over
management of any company.
(10) Purchase real estate or interests therein (including
limited partnership interests but excluding Mortgage-Backed Securities,
Stripped Mortgage-Backed Securities and similar instruments and REIT Debt
Securities) or interests in oil, gas or mineral leases.
(11) Purchase or sell commodities or commodity contracts
except for hedging purposes.
(12) Make any short sale of securities except for short
sales against the box and short sales made in connection with hedging
transactions.
(13) Purchase or retain any securities issued by an issuer,
any of whose officers or directors, trustees or security holders is an officer
or director of the Fund, or is an officer or director of the Adviser, if after
the purchase of the securities of such issuer by the Fund one or more of such
persons who individually owns beneficially more than 1/2 of 1% of the shares
or securities, or both, all taken at market value, of such issuer, together
own beneficially more than 5% of such shares or securities, or both, all taken
at market value.
Percentage and Rating Restrictions. If a percentage
restriction or a rating restriction on investment or utilization of assets set
forth above or referred to in the Prospectus is adhered to at the time an
investment is made or assets are so utilized, a later change in percentage
resulting from changes in the value of the securities held by the Fund or a
later change in the rating of a security held by the Fund will not be
considered a violation of policy.
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<PAGE>
However, if more than 15% of the net assets of the Fund are
invested in securities that are not readily marketable or redeemable, the Fund
will take steps to reduce the amount of such securities held by the Fund as
soon as reasonably practicable.
3. PERFORMANCE INFORMATION
The material relating to the purchase and redemption of
shares in the Prospectus is herein incorporated by reference.
4. DETERMINATION OF NET ASSET VALUE;
VALUATION OF PORTFOLIO SECURITIES
The net asset value of each share of the Fund is determined
on each day on which the Adviser is open for business (a "Pricing Day"). As of
the date of this Statement of Additional Information, the Adviser is open for
business every weekday except for the following holidays (as observed): New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. This determination of the net
asset value of shares is made once during each Pricing Day as of 4:00 p.m.
(4:15 p.m. for options), New York time, by dividing the value of the Fund's
net assets (i.e., the value of its assets less its liabilities, including
expenses payable or accrued) by the number of Fund shares outstanding in the
Fund at the time the determination is made.
Pricing of Securities. A determination of value used in
calculating net asset value must be a fair value determination made in good
faith by or on behalf of the Fund's Board of Directors in accordance with
procedures established by such Board. While no single standard for determining
fair value exists, as a general rule, the current fair value of a security
would appear to be the amount which the Fund could expect to receive upon its
current sale. Some, but not necessarily all, of the general factors which may
be considered in determining fair value include: (i) the fundamental
analytical data relating to the investments; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include:
type of security, financial statements of the issuer, cost at date of
purchase, size of holding, discount from market value, value of unrestricted
securities of the same class at the time of purchase, special reports prepared
by analysts, information as to any transaction or offers with respect to the
security, existence of merger proposals or tender offers affecting the
securities, price and extent of public trading in similar securities of the
issuer or comparable companies, and other relevant matters.
5. TAX STATUS
The Fund intends to qualify and elect to be treated as a
regulated investment company for federal income tax purposes for its fiscal year
ended July 31, 1996, and it intends to do so for future fiscal years. In order
to so qualify, the Fund must, among other things, (a) derive in each taxable
year at least 90% of its gross income from dividends, interest, payments with
respect to loans of securities, gains from the sale or other disposition of
securities or other income derived with respect to its business of investing in
such securities (including, but not limited to, gains from options, futures or
forward contracts); (b) derive in each taxable year less than 30% of its gross
income from gains from the sale or other disposition of securities, options,
futures or forward contracts held for less than three months; and (c) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
value of the Fund's assets is represented by cash, U.S. Government securities
(as defined in the 1940 Act), securities of other regulated investment
companies, and other securities which, with respect to any one issuer, do not
represent more than 5% of the value of the Fund's assets nor more than 10% of
the voting securities of such issuer, and (ii) not more than 25% of the value of
the Fund's assets is invested in the securities of any issuer (other than U.S.
Government securities as defined in the 1940 Act or the securities of
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<PAGE>
other regulated investment companies) or of two or more issuers which the Fund
controls and which are engaged in the same or realted trades or businesses. If
the Fund qualifies as a regulated investment company and satisfies a minimum
distribution requirement, the Fund will not be subject to federal income tax
to the extent that it distributes its income to its shareholders. The minimum
distribution requirement is satisfied if the Fund distributes as an ordinary
income dividend at least 90% of its investment company taxable income
(generally net investment income and the excess of net short-term capital gain
over net long-term capital loss and computed without regard to the deduction
for dividends paid) for the taxable year.
The Fund may be subject to a nondeductible 4% excise tax
which will be imposed if, and to the extent that, the Fund does not distribute
by the end of each calendar year (or is not subjected to regular corporate tax
in such year on) an amount equal to the sum of (a) 98% of the Fund's ordinary
income for such calendar year; (b) 98% of the excess of capital gains over
capital losses for the one-year period ending on October 31 of each year; and
(c) the undistributed income and gains from the preceding years (if any)
pursuant to the calculations in (a) and (b). A distribution will be treated as
having been paid on December 31 if it is declared by the Fund in October,
November or December with a record date in such month and is paid by the Fund
in January of the following year. Such distribution will be treated as
received by the shareholders in the calendar year in which the distribution is
declared.
The Fund intends to engage in various hedging transactions.
Under various provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the result of such transactions may be to change the character of
recognized gains and losses, accelerate the recognition of certain gains and
losses, and defer the recognition of certain losses.
The Fund's taxable income will in most cases be determined
on the basis of reports made to the Fund by the issuers of the securities in
which the Fund invests. The tax treatment of certain securities in which the
Fund may invest is not free from doubt and it is possible that an Internal
Revenue Service examination of the issuers of such securities or of the Fund
could result in adjustments to the income of the Fund. An upward adjustment by
the Internal Revenue Service to the income of the Fund may result in the
failure of the Fund to satisfy the minimum distribution requirement described
above.
The Fund's fiscal year end is July 31.
6. MANAGEMENT OF THE FUND
The directors and officers of the Fund and their
principal occupations during the past five years are set forth below. Their
titles may have varied during this period. Asterisks indicate that those
directors are "interested persons" (as defined in the 1940 Act) of the Fund.
Except for Mr. Petersen, whose address is 1290 Avenue of the Americas, New
York, New York 10104, Mr. Walsh, whose address is 15 East 91st Street, New
York, New York 10128, and Messrs. Tibbets, Smith, Thomas, Bartlett and Wright,
whose address is 1150 Lake Hearn Drive, N.E., Atlanta, Georgia 30342, the
address of each director and officer is 520 Madison Avenue, New York, New York
10022.
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Officers and Directors of the Fund
LEWIS S. RANIERI* - Chairman of the Board of the Adviser since March
Director 1995. Chairman and Chief Executive Officer of Ranieri
& Co., Director Inc. (since 1988); in addition,
President of LSR Hyperion Corp., a general partner
of the limited partnership that is the general
partner of Hyperion Partners L.P. ("Hyperion
Partners") (since 1988). Director and Chairman of
the Board of Hyperion Capital Management, Inc.
(since 1989); Chairman of Bank United of Texas FSB
(since 1988) and Hyperion Credit Service Corp.
(since 1992); Director and President of Hyperion
Funding 1993 Corp., the general partner of the
limited partnership that is the general partnership
that is the general partner of Hyperion 1993 Fund
L.P.; and, also Chairman and President of various
other direct and indirect subsidiaries of Hyperion
Partners. Formerly Vice Chairman of Salomon Brother
Inc. (until 1987). Age 48.
HARRY E. PETERSEN, JR. - Director and/or Trustee of several investment
Director companies advised by Hyperion Capital Management,
Inc. (1992-Present). Director of Lexington Corporate
Properties, Inc. (1993-Present). Consultant to
Advisers Capital Management, Inc. (1992-Present).
Consultant to Ewing Capital, Inc. (1993-Present).
Formerly Consultant on public and private pension
funds (1991-1993). President of Lepercq Realty
Advisors (1988-1990). Age 70.
LEO M. WALSH, JR. - Director and/or Trustee of several investment
Director companies advised by Hyperion Capital Management,
Inc. (1989-Present). Financial Consultant for Medco
Containment Services Inc. (1994-Present). Financial
Consultant for Synetic Inc., a manufacturer of
porous plastic materials for health care uses
(1989-1994). Formerly President, WW Acquisition
Corp. (1989-1990); Senior Executive Vice President
and Chief Operating Officer of The Equitable Life
Assurance Society of the United States ("The
Equitable") (1986-1988); Director of The Equitable
and Chairman of Equitable Investment Corporation, a
holding company for The Equitable's investment
oriented subsidiaries (1983- 1988); Chairman and
Chief Executive Officer of EQUICOR-Equitable HCA
Corporation (1987-1988). Age 62.
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DOUGLAS A. TIBBETS* - President and Chief Operating Officer of Equitable
Director Real Estate Mortgage Investors, Inc. since 1989.
Director and member of various advisory committees
of professional real estate organizations such as
National Realty Committee, Society of Industrial &
Office Realtors, and NAIOP. Currently serves as
Practitioner/Lecturer at The University of Georgia,
Terry College of Business. Director of various
Equitable related companies including: Equitable
Real Estate, Column Financial, Compass Retail, and
COMPASS Management and Leasing. Formerly Senior Vice
President in charge of the Dallas office
(1982-1988). Age 49.
EDWARD G. SMITH* - Senior Executive Vice President of Equitable Real
Director, Chairman Estate Mortgage Investors, Inc. since 1988. Member
of The Equitable Management and Investment
Committees ( - Present). Formerly, Executive Vice
President heading property development, management
and administration for The Equitable (1986-1988).
Age 45.
KENNETH C. WEISS* -- Chief Executive Officer of the Adviser since March
Director, President 1995. President and Chief Executive Officer of
Hyperion Capital Management, Inc. (February
1992-Present). Chairman of the Board,
Director/Trustee and/or officer of several
investment companies advised by Hyperion Capital
Management, Inc. (February 1992-Present). Formerly
Director of First Boston Asset Management
(1988-February 1992). Director of First Boston
Corporation (until 1988). Age 43.
LOUIS C. LUCIDO* -- Managing Director and Chief Operating Officer of
Director, Secretary Hyperion Capital Management, Inc. (February
1992-Present). Formerly Senior Vice President and
Director of Progressive Capital Management (June
1991-February 1992); Senior Vice President and
Manager at Donaldson, Lufkin and Jenrette
(1988-January 1991); Vice President of Smith Barney,
Harris Upham & Co. Incorporated (1987-May 1988);
Vice President at Merrill Lynch, Pierce, Fenner &
Smith (1981-1987). Age 46.
CLIFFORD E. LAI -- Managing Director and Chief Investment Officer,
Senior Vice President Hyperion Capital Management, Inc. (March
1993-Present). Formerly Managing Director and Chief
Investment Strategist for Fixed Income, First Boston
Asset Management (1989-1993); Vice President, Morgan
Stanley & Co. (1987-1989). Age 42.
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M. ANDREW THOMAS - Executive Vice President of Equitable Real Estate
Senior Vice President Mortgage Investors, Inc. since 19__. Formerly with
Equitable Real Estate's New Business area
responsible for the new mortgage origination
(19__-19__); managed $250 million equity portfolio
for corporate pension client (19__-19__). Age 34.
ROBERT BARTLETT - Vice President of Equitable Real Estate Mortgage
Vice President Investors, Inc. since 1988, responsible for
developing and implementing mortgage investment
marketing strategy with pension funds and other
institutional investors. Co- developed the company's
CMBS program and its marketing implementation.
Formerly portfolio manager Gatehouse Apartments of
Florida Fund (1994-1995) and assistant portfolio
manager (1990-1992); assistant portfolio manager for
European Fund I (1993-1995). Age 42.
JOHN N. DUNLEVY - Director of Hyperion Capital Management, Inc. (July
Vice President 1992-Present). Formerly, Director and Portfolio
Manager, Teachers Insurance & Annuity Association
(1988-1992); Assistant Vice President, Sumitomo Bank
Ltd. (1985-1988). Age 36.
KURT L. WRIGHT - Senior Vice President of Equitable Real Estate
Vice President Mortgage Investors, Inc. since 19__. Portfolio
manager for Buckhead Strategic Fund which invests in
distressed commercial mortgages since 19__ and
oversees all commercial mortgage backed securities
investing for third-party clients. Formerly with
Equitable's Investment Research, where he performed
studies of real estate markets and investment
strategies (1990-19__); Senior Analyst at Prudential
Realty Group on PRISA portfolio (19__-19__);
Editorial Board Real Estate Capital Markets Report
and Research Committee-National Council Real Estate
Investment Fiduciaries (19__-19__). Age 36.
JOSEPH W. SULLIVAN - Vice President of Hyperion Capital Management, Inc.
Treasurer (August 1995-Present). Formerly, Vice President in
Merrill Lynch & Co.'s Investment Banking Division;
Treasurer and Chief Financial Officer of several
Merrill Lynch subsidiaries. Responsible for all
financial reporting, accounting, ministerial and
administrative services (1990- 1995); Assistant Vice
President of Standard & Poor's Debt Rating Group
(1988-1990); Assistant Vice President and Operations
Controller of Shearson Lehman Hutton, Inc., engaged
in the identification, analysis and financial
administration of public and private real estate
investment programs (1983-1987). A Licensed
Certified Public Accountant since 1981. Age 38.
JOSEPH TROPEANO - Vice President and Compliance Officer of Hyperion
Capital
-10-
C/M: 11212.0010 268397.8
<PAGE>
Assistant Secretary Management, Inc. (December 1993-Present). Formerly
Senior Compliance Examiner and Staff Accountant with
the investment management section of the Securities
& Exchange Commission's northeast regional office
(1988-1993). With Merrill Lynch from 1980 to 1988.
Age 34.
THOMAS J. VINCE - Fund Administrator of Hyperion Capital Management,
Assistant Treasurer Inc. (February 1994-Present). Formerly Assistant
Treasurer with Lexington Management Corporation
(1993-1994); Mutual Fund Manager with ABD Securities
Corporation (1990-1993); Senior Fund Accountant with
Furman Selz, Mager, Dietz & Birney, Inc.
(1988-1990). Age 44.
JOSEPH V. ZOLOFRA - Senior Tax Manager of Hyperion Capital Management,
Assistant Treasurer Inc. (1993-Present). Formerly Tax Manager of Ernst &
Young Financial Services Office (1988-1993); Tax
Manager and Director of Tax Accounting Services
Center of Touche Ross (1985-1988); Senior Tax
Consultant (1982-1985). Age 36.
DIRECTORS' COMPENSATION TABLE
(Estimated for the year ended July 31, 1996)
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from Fund and
Name of Person Compensation from Accrued as Part of Benefits upon Fund Complex
Fund Fund Expenses Retirement Paid to Directors
<S> <C> <C> <C> <C>
Lewis S. Ranieri None None None None
Harry E. Petersen, Jr. $7,500 None None [ ]
Leo M. Walsh, Jr. $7,500 None None [ ]
Edward Smith None None None None
Kenneth C. Weiss None None None None
Louis C. Lucido None None None None
</TABLE>
Each Director, who is not an interested person of the Fund,
receives a base annual fee of $7,500 which is paid by the Fund.
Adviser
Equitable Real Estate Hyperion Capital Advisors, L.L.C. (the
"Adviser") manages the Fund pursuant to an Investment Advisory Agreement (the
"Advisory Agreement"). Subject to such policies as the Board of Directors of
the Fund may determine, the Adviser makes investment decisions for the Fund.
The Adviser furnishes at its own expense all facilities and personnel
necessary in connection with providing these services. The Advisory Agreement
will continue in effect if such continuance is specifically approved at least
-11-
C/M: 11212.0010 268397.8
<PAGE>
annually by the Fund's Board of Directors or by a majority vote of the Fund
and by a majority of the Fund's Directors who are not parties to the Advisory
Agreement or interested persons of any such party, at a meeting called for the
purpose of voting on the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render
services to others. The Advisory Agreement is terminable without penalty on
not more than 60 days' nor less than 30 days' written notice by the Fund when
authorized either by majority vote of the directors and of the other investors
in the Fund (with the vote of each being in proportion to the amount of its
investment) or by a vote of majority of the Fund's Board of Directors, or by
the Adviser, and will automatically terminate in the event of its assignment.
The Advisory Agreement provides that neither the Adviser nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in its services to
the Fund, except for wilful misfeasance, bad faith or gross negligence or
reckless disregard of its or their obligations and duties under the Advisory
Agreement.
The Fund's Prospectus contains additional information
regarding the Adviser and a description of fees payable to the Adviser for
services under the Advisory Agreement.
Administrator
Pursuant to the Administrative Services Agreements, the
Adviser provides the Fund with general office facilities and supervises the
overall administration of the Fund; including, among other responsibilities,
the negotiation of contracts and fees with, and the monitoring of performance
and billings of, the independent contractors and agents of the Fund; the
preparation and filing of all documents required for compliance by the Fund
with applicable laws and regulations; and arranging for the maintenance of
books and records of the Fund. The Administrator provides persons satisfactory
to the Board of Directors of the Fund to serve as officers of the Fund. Such
officers may be directors, officers or employees of the Administrator or its
affiliates.
The Fund's Prospectus contains a description of the fees
payable to the Administrator under the Administrative Services Agreement. The
Administrative Services Agreement terminates automatically if it is assigned
and may be terminated without penalty by majority vote of the shareholders of
the Fund in the case of the Fund or by either party on not more than 60 days'
nor less than 30 days' written notice.
Transfer Agent, Custodian and Accounting Agent
The Fund has entered into a Transfer Agency and Service
Agreement with State Street Bank & Trust Company ("State Street") which acts
as transfer and accounting agent for the Fund. Pursuant to a Custodian
Agreement, State Street also acts as the custodian of the Funds's assets. For
its services, the Custodian will receive compensation as may from time to time
be agreed upon by it and the Fund. The Fund's transfer and accounting agent
and custodian do not assist in, and are not responsible for, investment
decisions involving assets of the Fund.
7. COUNSEL AND INDEPENDENT ACCOUNTANTS
Legal matters in connection with the issuance of shares of
stock of the Fund are passed upon by Messrs. Battle Fowler LLP. Price
Waterhouse LLP are the independent accountants for the Fund, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the Securities and Exchange Commission.
-12-
C/M: 11212.0010 268397.8
<PAGE>
8. PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of securities usually are
principal transactions. Securities are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. There
usually are no brokerage commissions paid for such purchases and, therefore,
the Fund does not anticipate paying brokerage commissions on its securities
purchases, although it may pay such commissions on futures transactions. Any
transaction for which the Fund pays a brokerage commission will be effected at
the best price and execution available. Purchases from underwriters of
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price.
Allocation of transactions, including their frequency, to
various dealers is determined by the Adviser in its best judgment and in a
manner deemed to be in the best interest of the investors in the Fund rather
than by any formula. The primary consideration is prompt execution of orders
in an effective manner at the most favorable price.
Investment decisions for the Fund will be made independently
from those for any other account or investment company that is or may in the
future become managed by the Adviser or its affiliates. If, however, the Fund
and other investment companies or accounts managed by the Adviser are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by the Fund or the size of the position obtainable for the Fund. In
addition, when purchases or sales of the same security for the Fund and for
other investment companies managed by the Adviser occur contemporaneously, the
purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales. Furthermore, in
certain circumstances affiliates of the Adviser whose investment portfolios
are managed internally, rather than by the Adviser, might seek to purchase or
sell the same type of investments at the same time as the Portfolio. Such an
event might also adversely affect the Fund.
9. HOW TO PURCHASE AND REDEEM SHARES
The material relating to the purchase and redemption of
shares in the Prospectus is herein incorporated by reference.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The authorized capital stock of the Company, which was
incorporated on May 30, 1995 in the State of Maryland, consists of twenty
billion shares of stock having a par value of one tenth of one cent ($.001)
per share. The Board of Directors is authorized to divide the shares into
separate series of stock, one for each of the portfolios that may be created.
Each share of any series of shares when issued will have equal dividend,
distribution and liquidation rights within the series for which it was issued
and each fractional share has those rights in proportion to the percentage
that the fractional share represents of a whole share. Shares of all series
have identical voting rights, except where, by law, certain matters must be
approved by a majority of the shares of the unaffected series. Shares will be
voted in the aggregate. There are no conversion or preemptive rights in
connection with any shares of the Fund. All shares, when issued in accordance
with the terms of the offering, will be fully paid and nonassessable. Shares
are redeemable at net asset value, at the option of the shareholder. On August
1, 1995, Equitable Real Estate Hyperion Capital Advisers, L.L.C. purchased
$100,000 of the Fund's shares at an initial subscription price of $10 per
share.
Under the Company's Articles of Incorporation, the Fund has
the right to redeem for cash shares of stock owned by any shareholder to the
extent and at such times as the Board of Directors determines to be necessary
or appropriate to prevent an undue concentration of stock ownership which
should cause the
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C/M: 11212.0010 268397.8
<PAGE>
Fund to become a "personal holding company" for Federal income tax purposes.
In this regard, the Fund may also exercise its right to reject purchase
orders.
The shares of the Fund have non-cumulative voting rights,
which means that the holders of more than 50% of the shares outstanding voting
for the election of directors can elect 100% of the directors if the holders
choose to do so, and, in the event, the holders of the remaining shares will
not be able to elect any person or persons to the Board of Directors. The Fund
will not issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other
meetings of the Fund's shareholders. This is because the By-Laws of the
Company provide for any meetings only (a) for the election of directors, (b)
approval of revised investment advisory contracts with respect to a particular
class or series of stock, (c) approval of revisions to the Fund's distribution
agreement with respect to a particular class or series of stock, and (d) upon
the written request of holders of shares entitled to cast not less than 25% of
all those votes entitled to be cast at such meeting. Annual and other meetings
may be required with respect to such additional matters relating to the Fund
as may be required by the Act, including the removal of Company directors(s)
and communication among shareholders, any registration of the Fund with the
Securities and Exchange Commission or any state, or as the Directors may
consider necessary or desirable. Each Director serves until the next meeting
of the shareholders called for the purpose of considering the election or
reelection of such Director or of a successor to such Director, and until the
election and qualification of his or her successor, elected at such meeting,
or until such Director sooner dies, resigns retires or is removed by the vote
of the shareholders.
11. DESCRIPTION OF RATINGS
See Appendix A.
12. FINANCIAL STATEMENTS
The financial statements included herein have been audited
by Price Waterhouse LLP, independent accountants, as stated in their reports
appearing herein, and are included in reliance upon the report of such firm
given upon their authority, as experts in accounting and auditing.
<PAGE>
Report of Independent Accountants
To the Shareholder and Board of Directors of Equitable Real Estate Hyperion
Mortgage Opportunity Fund, Inc.
In our opinion, the accompanying statement of assets and
liabilities presents fairly, in all material respects, the financial position of
Equitable Real Estate Hyperion Mortgage Opportunity Fund, Inc. (the "Fund") at
August 29, 1995, in conformity with generally accepted accounting principles.
This financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
August 31, 1995
299360.1
<PAGE>
Equitable Real Estate Hyperion Mortgage Opportunity Fund, Inc.
STATEMENT OF ASSETS AND LIABILITIES
August 29, 1995
Assets:
Cash ................................. $ 100,000
Deferred organization expenses (Note 2)... 100,000
Total Assets..................... 200,000
Liabilities:
Organization expenses payable (Note 2).... 100,000
Total Liabilities................ 100,000
Net Assets (10,000 shares of $.001 par value
shares of common stock issued and outstanding;
20,000,000,000 shares authorized).................. $ 100,000
Net asset value per share.......................... $ 10
Notes to Financial Statement
NOTE 1
The Equitable Real Estate Hyperion Mortgage Opportunity
Fund, Inc. (the "Fund") was incorporated as a Maryland corporation on May 30,
1995 and has had no operations to date other than matters relating to its
organization and registration as a non-diversified, open-end management
investment company under the Investment Company Act of 1940, as amended, and
the sale and issuance to Equitable Real Estate Hyperion Capital Advisors,
L.L.C. (the "Investment Adviser") of 10,000 shares of its common stock for an
aggregate purchase price of $100,000. The books and records of the Fund will
be maintained in U.S. Dollars.
NOTE 2
Organization expenses relating to the Fund incurred and to
be incurred by the Investment Adviser will be reimbursed by the Fund. Such
expenses, estimated at $100,000, will be deferred and amortized on a straight-
line basis for a five year period beginning at the commencement of operations
of the Fund. In the event that, at any time during the five year period
beginning with the date of the commencement of operations, the initial shares
acquired by the Investment Adviser prior to such date are redeemed, by any
holder thereof, the redemption proceeds payable in respect of such shares will
be reduced by the pro rata share (based on the proportionate share of the
initial shares redeemed to the total number of original shares outstanding at
the time of redemption) of the then unamortized deferred organization
expenses as of the date of such redemption. In the event that the Fund
liquidates before the deferred organization expenses are fully amortized,
the Investment Adviser shall bear such unamortized deferred organization
expenses.
NOTE 3
The Fund intends to enter into an advisory agreement with
the Investment Adviser, a Delaware Limited Liability Company equally owned
by Equitable Real Estate Investment Management, Inc. and Hyperion Capital
Management, Inc., pursuant to which the Investment Adviser will, among other
things, supervise the Fund's investment program, and provide investment
advisory services to the Fund, and will be responsible for the management
of the Fund's portfolio in accordance with the Fund's investment policies,
and for making decisions to buy, sell, or hold particular securities, and
monitor the performance of the Fund's service providers.
The Investment Adviser will also serve as the Fund's
administrator (the "Administrator") pursuant to an administration agreement to
be entered into between the Fund and the Administrator.
The Fund will pay the Investment Adviser a monthly fee for
its management services at an annual rate of 0.35% of the Fund's average
daily net assets. The Fund will pay the Administrator a monthly fee for its
administration services at an annual rate of 0.20% of the Fund's average
daily net assets.
The Fund intends to enter into a distribution agreement
with Hyperion Distributors, Inc. (the "Distributor"). The Distributor will
serve as the exclusive distributor of the shares of the Fund pursuant to its
distribution agreement with the Fund. Investors may open accounts in the
Fund only through the exclusive distributor for the Fund. Under the
distribution agreement, the Distributor, for nominal consideration of one
dollar, and as agent for the Fund, will solicit orders for the purchase of
Fund shares, provided that any subscriptions and orders will not be binding
on the Fund until accepted by the Fund as principal. The Investment Adviser
pays the expenses incurred in the distribution of the Fund's shares.
Certain officers and/or directors of the Fund are officers
and/or directors of the Investment Adviser.
299360.1
C/M: 11212.0010 268397.8
<PAGE>
APPENDIX A
Description of Moody's Investors Service, Inc.'s
Four Highest Debt Ratings:
Aaa: Securities which are rated Aaa are judged to be the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt-edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa: Securities which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A: Securities which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Securities which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B (i.e., two categories
below Baa) in its bond rating system. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category, the modifier
2 indicates a mid-range ranking, and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
Description of Standard & Poor Corporation's
Four Highest Debt Ratings:
AAA: Securities rated AAA have the highest rating assigned
by S&P to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA: Securities rated AA have a very strong capacity to pay
interest; and repay principal and differ from the higher rated issues only in
small degree.
A: Securities rated A have a strong capacity to pay interest
and repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in
higher rated categories.
BBB: Securities rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for securities in this category than for securities in
higher rated categories.
C/M: 11212.0010 268397.8
<PAGE>
Plus (+) or Minus (-): The ratings from AA to CCC (i.e.,
three categories below BBB) may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
NR: Securities may lack a S&P rating because no public
rating has been requested, because there is insufficient information on which
to base a rating, or because S&P does not rate a particular type of obligation
as a matter of policy.
Description of Fitch Investors Service, Inc.'s
Four Highest Debt Ratings:
AAA: Securities in this category are considered to be
investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA: Securities in this category are considered to be
investment grade and of very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not quite as strong as
securities rated "AAA." As securities rated in the "AAA" and "AA" categories
are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-l+."
A: Securities in this category are considered to be
investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
securities with higher ratings.
BBB: Securities in this category are considered to be
investment grade and of satisfactory quality. The obligor's ability to pay
interest and repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore, impair timely payment.
Plus (+) or Minus (-): The ratings from AA to C (i.e. five
categories below BBB) may be modified by the addition of a plus or minus sign
to indicate the relative position of a credit within the rating category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the
successful completion of a project or the occurrence of a specific event.
Description of Duff & Phelps Credit Rating Co.'s
Four Highest Debt Ratings:
AAA: Highest credit quality. The risk factors are
negligible, being only slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.
A: Protection factors are average but adequate. However,
risk factors are more variable and greater in periods of economic stress.
BBB: Below-average protection factors but within the
definition of investment grade securities but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
-ii-
C/M: 11212.0010 268397.8
<PAGE>
Plus (+) or Minus (-): The ratings from AA to C (i.e. five
categories below BBB) may be modified by the addition of a plus or minus sign
to indicate the relative position of a credit within the rating category.
Notes with Respect to All Ratings:
Securities which are unrated expose the investor to risks
with respect to capacity to pay interest or repay principal that are similar
to the risks of lower-rated securities. The Fund is dependent on Fund
management's judgment, analysis and experience in the evaluation of such
securities.
Investors should note that the assignment of a rating to a
security by a rating service may not reflect the effect of recent developments
on the issuer's ability to make interest and principal payments.
-iii-
C/M: 11212.0010 268397.8
<PAGE>
PART C - OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Included in Prospectus:
(1) Expense Summary
(2) Selected Financial Information
Included in Statement of Additional Information:
(1) Report of Price Waterhouse LLP, independent accountants,
dated August 31, 1995; and
(2) Statement of Assets and Liabilities.
(B) EXHIBITS
(1) Articles of Incorporation, as amended, of the Registrant.
(2) By-Laws of the Registrant.
(3) Not Applicable.
(4) Not Applicable.
(5) Investment Advisory Agreement between the Registrant and
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
(6) Distribution Agreement between the Registrant and Hyperion
Distributors, Inc.
(7) Not Applicable.
(8) Custodian Contract between the Registrant and State Street
Bank & Trust Company.
(9.1) Administrative Services Contract between the Registrant
and Equitable Real Estate Hyperion Capital Advisors,
L.L.C.
(9.2) Transfer Agency and Service Agreement between the
Registrant and State Street Bank & Trust Company.
(10) Consent of Messrs. Battle Fowler LLP as to the
legality of the securities being registered,
including their consent to the filing thereof and
as to the use of their name under the heading
"Counsel and Auditors" in the Prospectus and
in the Statement of Additional Information.
(11) Consent of Independent Accountants filed as Exhibit 11
herein.
(12) Not Applicable
(13) Written assurance of Equitable Real Estate Hyperion
Capital Advisors, L.L.C. that its purchase of shares of
the registrant was for investment purposes without any
present intention of redeeming or reselling.
(14) Not Applicable
(15) Not Applicable.
(16) Not Applicable.
-4-
294743.2
<PAGE>
(17) Financial Data Schedule (for EDGAR filing only).
(18) Not Applicable.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
Number of Record Holders
Title of Class as of August 29, 1995
Shares of Beneficial
Interest 1
Item 27. INDEMNIFICATION.
(a) In accordance with Section 2-418 of the General Corporation
Law of the State of Maryland, Article NINTH of the Registrant's
Articles of Incorporation provides as follows:
"NINTH: (1) The Corporation shall indemnify (i) its
currently acting and former directors and officers, whether
serving the Corporation or at its request any other entity, to
the fullest extent required or permitted by the General Laws of
the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the fullest
extent permitted by law, and (ii) other employees and agents to
such extent as shall be authorized by the Board of Directors or
the By-Laws and as permitted by law. Nothing contained herein
shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his
office. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking
indemnification may be entitled. The Board of Directors may
take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such by-laws, resolutions
or contracts implementing such provisions or such
indemnification arrangements as may be permitted by law. No
amendment of the charter of the Corporation or repeal of any of
its provisions shall limit or eliminate the right of
indemnification provided hereunder with respect to acts or
omissions occurring prior to such amendment or repeal.
(2) To the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted, and the
Investment Company Act of 1940, no director or officer of the
Corporation shall be personally liable to the Corporation or
its stockholders for money damages; provided, however, that
nothing herein shall be construed to protect any director or
officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office. No amendment of the charter of the
Corporation or repeal of any of its provisions shall limit or
eliminate the limitation of liability provided to directors and
officers hereunder with respect to any act or omission
occurring prior to such amendment or repeal."
(b) In Section 3 of the Distribution Agreement relating to the
securities being offered hereby, the Registrant agrees to
indemnify and hold harmless any person who controls Hyperion
Distributors, Inc., within the meaning of the Securities Act of
1933, against
-5-
294743.2
<PAGE>
certain types of civil liabilities arising in connection with
the Registration Statement or Prospectus.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The description of the Registrant's adviser, Equitable Real
Estate Hyperion Capital Advisors, L.L.C., under the caption "Management of the
Fund" in the Prospectus and "Management of the Fund" in the Statement of
Additional Information constituting parts A and B, respectively, of the
Registration Statement are incorporated herein by reference.
Item 29. PRINCIPAL UNDERWRITERS.
(a) Hyperion Distributors, Inc. located at 520 Madison Avenue,
New York, New York 10022 is the Registrant's Distributor and does not
currently serve as distributor or underwriter for other firms.
(b) The following are the directors and officers of Hyperion
Distributors, Inc. The principal business address of each of these persons is
520 Madison Avenue, New York, New York 10022:
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name With the Distributor With Registrant
- ---- --------------------- ---------------------
<S> <C> <C>
Kenneth C. Weiss Vice President and Secretary President and Director
Louis C. Lucido President and Director Secretary and Director
Francis R. Spark Treasurer ---
Clifford E. Lai Director ---
Paul Jacob Director ---
</TABLE>
(c) Not applicable
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained in the physical possession of Registrant
at Equitable Real Estate Hyperion Capital Advisors, L.L.C., 520 Madison
Avenue, New York, New York 10022, the Registrant's Manager; State Street Bank
and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, the
Registrant's transfer agent, custodian and accounting agent.
Item 31. MANAGEMENT SERVICES.
Not Applicable.
Item 32. UNDERTAKINGS.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective
amendment, using financial statements which need not
be certified, within four to six months from the
effective date of its Securities Act Registration
Statement.
(c) The Registrant undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
registrants latest annual report to shareholders, upon
request and without charge.
-6-
294743.2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, the 31st
day of August, 1995.
EQUITABLE REAL ESTATE HYPERION MORTGAGE
OPPORTUNITY FUND, INC.
By: /s/Kenneth C. Weiss
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons in
the capacities indicated below on August 31, 1995.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C> <C>
(1) Principal Executive Officer:
By: /s/Kenneth C. Weiss Director August 31, 1995
-----------------------------------------
Kenneth C. Weiss
(2) Majority of Directors
Kenneth C. Weiss Director
By: /s/ Kenneth C. Weiss August 31, 1995
----------------------------
Louis C. Lucido Director
By: /s/ Louis C. Lucido August 31, 1995
----------------------------
</TABLE>
<PAGE>
Exhibit Index
(1) Articles of Incorporation, as amended, of the
Registrant.
(2) By-Laws of the Registrant.
(3) Not applicable.
(4) Not applicable.
(5) Investment Advisory Agreement between the Registrant
and Equitable Real Estate Hyperion Capital Advisors,
L.L.C.
(6) Distribution Agreement between the Registrant and
Hyperion Distributors, Inc.
(7) Not applicable.
(8) Form of Custodian Contract between the Registrant and
State Street Bank & Trust Company.
(9.1) Administrative Services Contract between the
Registrant and Equitable Real Estate Hyperion Capital
Advisors, L.L.C.
(9.2) Transfer Agency and Service Agreement between the
Registrant and State Street Bank & Trust Company.
(10) Consent of Messrs. Battle Fowler LLP as to the
legality of the securities being registered,
including their consent to the filing thereof and as
to the use of their name under the heading
"Counsel and Auditors" in the Prospectus and in the
Statement of Additional Information.
(11) Consent of Independent Accountants.
(12) Not applicable.
(13) Written assurance of Equitable Real Estate Hyperion
Capital Advisors, L.L.C.that its purchase of shares
of the registrant was for investment purposes without
any present intention of redeeming or reselling.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
(17) Financial Data Schedule (for EDGAR filing only).
(18) Not applicable.
-11-
294743.2
AMENDED ARTICLES OF INCORPORATION
OF
EQUITABLE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
FIRST: The Amended Articles of Incorporation as set forth herein
below are made prior to the first meeting of the Board of Directors.
SECOND: (1) The name of the incorporator is Ann M. Smith.
(2) The incorporator's post office address is 75 East
5th Street, New York, New York 10022.
(3) The incorporator is over eighteen years of age.
(4) The incorporator is forming the corporation named in
these Articles of Incorporation under the General Corporation Law of the
State of Maryland.
THIRD: The name of the corporation (hereinafter called the
"Corporation") is Equitable Real Estate Hyperion Mortgage Opportunity Fund,
Inc.
FOURTH: The purposes for which the Corporation is formed are:
(1) to conduct, operate and carry on the business of an
investment company;
(2) to subscribe for, invest in, reinvest in, purchase
or otherwise acquire, hold, pledge, sell, assign, transfer,
exchange, distribute or otherwise dispose of notes, bills, bonds,
debentures and other negotiable or non-negotiable instruments,
obligations and evidences of indebtedness issued or guaranteed as
to principal and interest by the United States Government, or any
agency or instrumentality thereof, any State or local government,
or any agency or instrumentality thereof, or any other securities
of any kind issued by any corporation or other issuer organized
under the laws of the United States or any State, territory or
possession thereof or any foreign country or any subdivision
thereof or otherwise, to pay for the same in cash or by the issue
of stock, including treasury stock, bonds and notes of the
Corporation or otherwise; and to exercise any and all rights,
powers and privileges of ownership or interest
294067.1
<PAGE>
in respect of any and all such investments of every kind and
description, including and without limitation, the right to
consent and otherwise act with respect thereto, with power to
designate one or more persons, firms, associations or corporations
to exercise any of said rights, powers and privileges in respect
of any said investments;
(3) to conduct research and investigations in respect of
securities, organizations, business and general business and
financial conditions in the United States of America and elsewhere
for the purpose of obtaining information pertinent to the
investment and employment of the assets of the Corporation and to
procure any and all of the foregoing to be done by others as
independent contractors and to pay compensation therefor;
(4) to borrow money or otherwise obtain credit and to
secure the same by mortgaging, pledging or otherwise subjecting as
security the assets of the Corporation, and to endorse, guarantee
or undertake the performance of any obligation, contract or
engagement of any other person, firm, association or corporation;
(5) to issue, sell, distribute, repurchase, redeem,
retire, cancel, acquire, hold, resell, reissue, dispose of,
transfer, and otherwise deal in, shares of stock of the
Corporation, including shares of stock of the Corporation in
fractional denominations, and to apply to any such repurchase,
redemption, retirement, cancellation or acquisition of shares of
stock of the Corporation, any funds or property of the
Corporation, whether capital or surplus or otherwise, to the full
extent now or hereafter permitted by the laws of the State of
Maryland and by these Articles of Incorporation;
(6) to conduct its business, promote its purposes, and
carry on its operations in any and all of its branches and
maintain offices both within and without the State of Maryland, in
any and all States of the United States of America, in the
District of Columbia, and in any or all commonwealths,
territories, dependencies, colonies, possessions, agencies, or
instrumentalities of the United States of America and of foreign
governments;
(7) to carry out all or any part of the foregoing
purposes or objects as principal or agent, or in conjunction with
any other person, firm, association, corporation or other entity,
or as a
-2-
294067.1
<PAGE>
partner or member of a partnership, syndicate or joint venture or
otherwise, and in any part of the world to the same extent and as
fully as natural persons might or could do;
(8) to have and exercise all of the powers and
privileges conferred by the laws of the State of Maryland upon
corporations formed under the laws of such State; and
(9) to do any and all such further acts and things and
to exercise any and all such further powers and privileges as may
be necessary, incidental, relative, conducive, appropriate or
desirable for the foregoing purposes.
The enumeration herein of the objects and purposes of the
Corporation shall be construed as powers as well as objects and purposes and
shall not be deemed to exclude by inference any powers, objects or purposes
which the Corporation is empowered to exercise, whether expressly by force
of the laws of the State of Maryland now or hereafter in effect, or
impliedly by the reasonable construction of the said law.
FIFTH: The post office address of the principal office of the
Corporation within the State of Maryland is 11 East Chase Street, Baltimore
City, Maryland 21202.
SIXTH: The resident agent of the Corporation in the State of
Maryland is The Prentice-Hall Corporation System, Maryland, at 11 East Chase
Street, Baltimore, Maryland 21202.
SEVENTH: (1) The total number of shares of stock of all classes
and series which the Corporation initially has authority to issue is twenty
billion (20,000,000,000) shares of capital stock (par value of One Tenth of
One Cent $.001 per share), amounting in aggregate par value to $20,000,000.
All of such shares are classified as "Common Stock".
(2) The Board of Directors may classify or reclassify any
authorized but unissued shares of capital stock (whether or not such shares
have been previously classified or reclassified) from time to time by
setting or changing in any one or more respects the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of such shares of
stock.
(3) Unless otherwise prohibited by law, so long as the Corporation
is registered as an open-end management company under the Investment Company
Act of 1940, the Board of Directors shall have the power and authority,
without the approval of the holders
-3-
294067.1
<PAGE>
of any outstanding shares, to increase or decrease the number of shares of
capital stock or the number of shares of capital stock of any class or
series that the Corporation has authority to issue.
(4) Until such time as the Board of Directors shall provide
otherwise in accordance with Section (2) of this Article SIXTH, four billion
(4,000,000,000) shares of the authorized shares of stock of the Corporation
shall be allocated to the following series of Common Stock: Series A - 1995
Common Stock. The balance of sixteen billion ($16,000,000,000) shares of
such stock may be issued in this series, or in any new series each
comprising such number of shares and having such designations, limitations
and restrictions thereof as shall be fixed and determined from time to time
by resolution or resolutions providing for the issuance of such stock
adopted by the Board of Directors.
(5) Any series of Common Stock shall be referred to herein
individually as a "Series" and collectively, together with any further
series from time to time established, as the "Series".
(6) The following is a description of the preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of
Common Stock of the Corporation (unless provided otherwise by the Board of
Directors with respect to any such additional Series at the time it is
established and designated):
(a) Asset Belonging to Series. All consideration
received by the Corporation from the issue or sale of shares of a
particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings,
profits and proceeds thereof, including any proceeds derived from
the sale, exchange or liquidation of such assets, and any funds or
payments derived from any investment or reinvestment of such
proceeds in whatever form the same may be, shall irrevocably
belong to that Series for all purposes, subject only to the rights
of creditors, and shall be so recorded upon the books of account
of the Corporation. Such consideration, assets, income, earnings,
profits and proceeds, together with any General Items allocated to
that Series as provided in the following sentence, are herein
referred to collectively as "assets belonging to" that Series. In
the event that there are any assets, income, earnings, profits or
proceeds which are not readily identifiable as belonging to any
particular Series (collectively, "General Items"), such General
Items shall be allocated
-4-
294067.1
<PAGE>
by or under the supervision of the Board of Directors to and among
any one or more of the Series established and designated from time
to time in such manner and on such basis as the Board of
Directors, in its sole discretion, deems fair and equitable; and
any General Items so allocated to a particular Series shall belong
to that Series. Each such allocation by the Board of Directors
shall be conclusive and binding for all purposes.
(b) Liabilities of Series. The assets belonging to each
particular Series shall be charged with the liabilities of the
Corporation in respect of that Series and all expenses, costs,
charges and reserves attributable to that Series, and any general
liabilities, expenses, costs, charges or reserves of the
Corporation which are not readily identifiable as pertaining to
any particular Series, shall be allocated and charged by or under
the supervision of the Board of Directors to and among any one or
more of the Series established and designated from time to time in
such manner and on such basis as the Board of Directors, in its
sole discretion, deems fair and equitable. The liabilities,
expenses, costs, charges and reserves allocated and so charged to
a Series are herein referred to collectively as "liabilities of"
that Series. Each allocation of liabilities, expenses, costs,
charges and reserves by or under the supervision of the Board of
Directors shall be conclusive and binding for all purposes.
(c) Dividends and Distributions. Dividends and capital
gains distributions on shares of a particular Series may be paid
with such frequency, in such form and in such amount as the Board
of Directors may determine by resolution adopted from time to
time, or pursuant to a standing resolution or resolutions adopted
only once or with such frequency as the Board of Directors may
determine, after providing for actual and accrued liabilities of
that Series. All dividends on shares of a particular Series shall
be paid only out of the income belonging to that Series and all
capital gains distributions on shares of a particular series shall
be paid only out of the capital gains belonging to that Series.
All dividends and distributions on shares of a particular Series
shall be distributed pro rata to the holders of that Series in
proportion to the number of shares of that Series held by such
holders at the date and time of record established for the payment
of such dividends or distributions, except that in connection with
any dividend or distribution program or procedure, the Board of
Directors may determine that no
-5-
294067.1
<PAGE>
dividend or distribution shall be payable on shares as to which
the stockholder's purchase order and/or payment have not been
received by the time or times established by the Board of
Directors under such program or procedure.
Dividends and distributions may be paid in cash,
property or additional shares of the same or another Series, or a
combination thereof, as determined by the Board of Directors or
pursuant to any program that the Board of Directors may have in
effect at the time for the election by stockholders of the form in
which dividends or distributions are to be paid. Any such dividend
or distribution paid in shares shall be paid at the current net
asset value thereof.
(d) Voting. On each matter submitted to a vote of the
stockholders, each holder of shares shall be entitled to one vote
for each share standing in his name on the books of the
Corporation, irrespective of the Series thereof, and all shares of
all Series shall vote as a single class ("Single Class Voting");
provided, however, that (i) as to any matter with respect to which
a separate vote of any Series is required by the Investment
Company Act of 1940 or by the Maryland General Corporation Law,
such requirement as to a separate vote by that Series shall apply
in lieu of Single Class Voting; (ii) in the event that the
separate vote requirement referred to in clause (i) above applies
with respect to one or more Series, then, subject to clause (iii)
below, the shares of all other Series shall vote as a single
class; and (iii) as to any matter which does not affect the
interest of a particular Series, including liquidation of another
Series as described in subsection (7) below, only the holders of
shares of the one or more affected Series shall be entitled to
vote.
(e) Redemption by Stockholders. Each holder of shares of
a particular Series shall have the right at such times as may be
permitted by the Corporation to require the Corporation to redeem
all or any part of his shares of that Series, at a redemption
price per share equal to the net asset value per share or that
Series next determined after the shares are properly tendered for
redemption, less such redemption fee or sales charge, if any, as
may be established from time to time by the Board of Directors in
its sole discretion. Payment of the redemption price shall be in
cash; provided, however, that if the Board of Directors
determines, which determination shall be conclusive, that
conditions exist which make payment
-6-
294067.1
<PAGE>
wholly in cash unwise or undesirable, the Corporation may, to the
extent and in the manner permitted by the Investment Company Act
of 1940, make payment wholly or partly in securities or other
assets belonging to the Series of which the shares being redeemed
are a part, at the value of such securities or assets used in such
determination of net asset value.
Payment by the Corporation for shares of stock of the
Corporation surrendered to it for redemption shall be made by the
Corporation within such period from surrender as may be required
under the Investment Company Act and the rules and regulations
thereunder. Notwithstanding the foregoing, the Corporation may
postpone payment of the redemption price and may suspend the right
of the holders of shares of any Series to require the Corporation
to redeem shares of that Series during any period or at any time
when and to the extent permissible under the Investment Company
Act of 1940.
(f) Redemption by Corporation. The Board of Directors
may cause the Corporation to redeem at their net asset value the
shares of any Series held in an account having, because of
redemptions or exchanges, a net asset value on the date of the
notice of redemption less than the Minimum Amount, as defined
below, in that Series specified by the Board of Directors from
time to time in its sole discretion, provided that at least 30
days prior written notice of the proposed redemption has been
given to the holder of any such account by first class mail,
postage prepaid, at the address contained in the books and records
of the Corporation and such holder has been given an opportunity
to purchase the required value of additional shares.
(i) The term "Minimum Amount" when used herein
shall mean One Thousand Dollars ($1,000) unless
otherwise fixed by the Board of Directors from time to
time, provided that the Minimum Amount may not in any
event exceed Twenty-Five Thousand Dollars ($25,000). The
Board of Directors may establish differing Minimum
Amounts for each class and series of the Corporation's
stock and for holders of shares of each such class and
series of stock based on such criteria as the Board of
Directors may deem appropriate.
(ii) The Corporation shall be entitled but not
required to redeem shares of stock from any stockholder
or stockholders, as provided in this subsection (6), to
the extent and at such times as
-7-
294067.1
<PAGE>
the Board of Directors shall, in its absolute
discretion, determine to be necessary or advisable to
prevent the Corporation from qualifying as a "personal
holding company", within the meaning of the Internal
Revenue Code of 1986, as amended from time to time.
(g) Liquidation. In the event of the liquidation of a
particular Series, the stockholders of the Series that is being
liquidated shall be entitled to receive, as a class, when and as
declared by the Board of Directors, the excess of the assets
belonging to that Series over the liabilities of that Series. The
holders of shares of any particular Series shall not be entitled
thereby to any distribution upon liquidation of any other Series.
The assets so distributable to the stockholders of any particular
Series shall be distributed among such stockholders in proportion
to the number of shares of that Series held by them and recorded
on the books of the Corporation. The liquidation of any particular
Series in which there are shares then outstanding may be
authorized by vote of a majority of the Board of Directors then in
office, subject to the approval of a majority of the outstanding
voting securities of that Series, as defined in the Investment
Company Act of 1940, and without the vote of the holders of shares
of any other Series. The liquidation of a particular Series may be
accomplished, in whole or in part, by the transfer of assets of
such Series to another Series or by the exchange of shares of
Series for the shares of another Series.
(h) Net Asset Value Per Share. The net asset value per
share of any Series shall be the quotient obtained by dividing the
value of the net assets of that Series (being the value of the
assets belonging to that Series less the liabilities of that
Series) by the total number of shares of that Series outstanding,
all as determined by or under the direction of the Board of
Directors in accordance with generally accepted accounting
principles and the Investment Company Act of 1940. Subject to the
applicable provisions of the Investment Company Act of 1940, the
Board of Directors, in its sole discretion, may prescribe and
shall set forth in the By-Laws of the Corporation or in a duly
adopted resolution of the Board of Directors such bases and times
for determining the value of the assets belonging to, and the net
asset value per share of outstanding shares of, each Series, or
the net income attributable to such shares, as the Board of
Directors deems necessary or desirable. The Board of Directors
-8-
294067.1
<PAGE>
shall have full discretion, to the extent not inconsistent with
the Maryland General Corporation Law and the Investment Company
Act of 1940, to determine which item shall be treated as income
and which items as capital and whether any item of expense shall
be charged to income or capital. Each such determination and
allocation shall be conclusive and binding for all purposes.
The Board of Directors may determine to maintain the net
asset value per share of any Series at a designated constant
dollar amount and in connection therewith may adopt procedures not
inconsistent with the Investment Company Act of 1940 for the
continuing declaration of income attributable to that Series as
dividends and for the handling of any losses attributable to that
Series. Such procedures may provide that in the event of any loss,
each stockholder shall be deemed to have contributed to the
capital of the Corporation attributable to that Series his pro
rata portion of the total number of shares required to be canceled
in order to permit the net asset value per share of that Series to
be maintained, after reflecting such loss, at the designated
constant dollar amount. Each stockholder of the Corporation shall
be deemed to have agreed, by his investment in any Series with
respect to which the Board of Directors shall have adopted any
such procedure, to make the contribution referred to in the
preceding sentence in the event of any such loss.
(i) Equality. All shares of each particular Series shall
represent an equal proportionate interest in the assets belonging
to that Series (subject to the liabilities of that Series), and
each share of any particular Series shall be equal to each other
share of that Series. The Board of Directors may from time to time
divide or combine the shares of any particular Series into a
greater or lesser number of shares of that series without thereby
changing the proportionate interest in the assets belonging to
that Series or in any way affecting the rights of holders of
shares of any other Series.
(j) Conversion or Exchange Rights. Subject to compliance
with the requirements of the Investment Company Act of 1940, the
Board of Directors shall have the authority to provide that
holders of shares of any Series shall have the right to convert or
exchange said shares into shares of one or more other Series of
shares in accordance with such requirements and
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294067.1
<PAGE>
procedures as may be established by the Board of Directors.
(7) The Board of Directors may, from time to time and without
stockholder action, classify shares of a particular Series into one or more
additional classes of that Series, the voting, dividend, liquidation and
other rights of which shall differ from the classes of common stock of that
Series to the extent provided in Articles Supplementary for such additional
class, such Articles to be filed for record with the appropriate authorities
of the State of Maryland. Each class so created shall consist, until further
changed, of the lesser of (x) the number of shares classified in Section (5)
of this Article SIXTH or (y) the number of shares that could be issued by
issuing all of the shares of that Series currently or hereafter classified
less the total number of shares of all classes of such Series then issued
and outstanding. Any class of a Series of Common Stock shall be referred to
herein individually as a "Class" and collectively, together with any further
class or classes of such Series from time to time established, as the
"Classes".
(8) All Classes of a particular Series of Common Stock of the
Corporation shall represent the same interest in the Corporation and have
identical voting, dividend, liquidation and other rights with any other
shares of Common Stock of that Series; provided, however, that
notwithstanding anything in the charter of the Corporation to the contrary:
(a) Any class of shares may be subject to such sales
loads, contingent deferred sales charges, Rule 12b-1 fees,
administrative fees, service fees, or other fees, however
designated, in such amounts as may be established by the Board of
Directors from time to time in accordance with the Investment
Company Act of 1940.
(b) Expenses related solely to a particular Class of a
Series (including, without limitation, distribution expenses under
a Rule 12b-1 plan and administrative expenses under an
administration or service agreement, plan or other arrangement,
however designated) shall be borne by that Class and shall be
appropriately reflected (in the manner determined by the Board of
Directors) in the net asset value, dividends, distributions and
liquidation rights of the shares of that Class.
(c) As to any matter with respect to which a separate
vote of any Class of a Series is required by the Investment
Company Act of 1940 or by the Maryland General Corporation Law
(including, without limitation, approval of any plan, agreement or
other arrangement
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<PAGE>
referred to in subsection (b) above), such requirement as to a
separate vote by that Class shall apply in lieu of Single Class
Voting, and if permitted by the Investment Company Act of 1940 or
the Maryland General Corporation Law, the Classes of more than one
Series shall vote together as a single class on any such matter
which shall have the same effect on each such Class. As to any
matter which does not affect the interest of a particular Class of
a Series, only the holders of shares of the affected Classes of
that Series shall be entitled to vote.
(9) The Corporation may issue and sell fractions of shares of
capital stock having pro rata all the rights of full shares, including,
without limitation, the right to vote and to receive dividends, and wherever
the words "share" or "shares" are used in the charter or By-Laws of the
Corporation, they shall be deemed to include fractions of shares where the
context does not clearly indicate that only full shares are intended.
(10) The Corporation shall not be obligated to issue certificates
representing shares of any Class or Series of capital stock. At the time of
issue or transfer of shares without certificates, the Corporation shall
provide the stockholder with such information as may be required under the
Maryland General Corporation Law.
(11) No holder of any shares of stock of the Corporation shall be
entitled as of right to subscribe for, purchase, or otherwise acquire any
such shares which the Corporation shall issue or propose to issue; and any
and all of the shares of stock of the Corporation, whether now or hereafter
authorized, may be issued, or may be reissued or transferred if the same
have been reacquired and have treasury status, by the Board of Directors to
such persons, firms, corporations and associations, and for such lawful
consideration, and on such terms, as the Board of Directors in its
discretion may determine, without first offering same, or any thereof, to
any said holder.
(12) All persons who shall acquire stock or other securities of
the Corporation shall acquire the same subject to the provisions of these
Articles of Incorporation and the Bylaws of the Corporation, as from time to
time amended.
EIGHTH: The number of directors of the Corporation, until such
number shall be increased pursuant to the By-Laws of the Corporation, shall
be two. The number of directors shall never be less than the number
prescribed by the General Corporation Law of the State of Maryland and shall
never be more than twenty. The names of the persons who shall act as
directors of the Corporation until their successors are duly chosen and
qualified are Kenneth C. Weiss and Louis C. Lucido.
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<PAGE>
NINTH: The following provisions are inserted for the purpose of
defining, limiting and regulating the powers of the Corporation and of the
Board of Directors and stockholders.
(1) The business and affairs of the Corporation shall be managed
under the direction of the Board of Directors which shall have and may
exercise all powers of the Corporation except those powers which are by law,
by these Articles of Incorporation or by the By-Laws conferred upon or
reserved to the stockholders. In furtherance and not in limitation of the
powers conferred by law, the Board of Directors shall have power:
(a) to make, alter and repeal the By-Laws of the
Corporation;
(b) to issue and sell, from time to time, shares of any
class or series of the Corporation's stock in such amounts and on
such terms and conditions, and for such amount and kind of
consideration, as the Board of Directors shall determine, provided
that the consideration per share to be received by the Corporation
shall be not less than the greater of the net asset value per
share of that class of stock at such time computed in accordance
with Article SIXTH hereof or the par value thereof;
(c) from time to time to set apart out of any assets of
the Corporation otherwise available for dividends a reserve or
reserves for working capital or for any other proper purpose or
purposes, and to reduce, abolish or add to any such reserve or
reserves from time to time as said Board of Directors may deem to
be in the best interests of the Corporation; and to determine in
its discretion what part of the assets of the Corporation
available for dividends in excess of such reserve or reserves
shall be declared in dividends and paid to the stockholders of the
Corporation; and
(d) from time to time to determine to what extent and at
what times and places and under what conditions and regulations
the accounts, books and records of the Corporation, or any of
them, shall be open to the inspection of the stockholders; and no
stockholder shall have any right to inspect any account or book or
document of the Corporation, except as conferred by the laws of
the State of Maryland, unless and until authorized to do so by
resolution of the Board of Directors or of the stockholders of the
Corporation.
(2) Notwithstanding any provision of the General Corporation Law
of the State of Maryland requiring a greater proportion than a majority of
the votes of all classes or of any
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<PAGE>
class of the Corporation's stock entitled to be cast in order to take or
authorize any action, any such action may be taken or authorized upon the
concurrence of a majority of the aggregate number of votes entitled to be
cast thereon subject to any applicable requirements of the Investment
Company Act of 1940, as from time to time in effect, or rules or orders of
the Securities and Exchange Commission or any successor thereto.
(3) Except as may otherwise be expressly provided by applicable
statutes or regulatory requirements, the presence in person or by proxy of
the holders of one-third of the shares of stock of the Corporation entitled
to vote shall constitute a quorum at any meeting of the stockholders.
(4) Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted accounting
principles by or pursuant to the discretion of the Board of Directors, as to
the amount of the assets, debts, obligations, or liabilities of the
Corporation, as to the amount of any reserves or charges set up and the
propriety thereof, as to the time of or purposes for creating such reserves
or charges, as to the use, alteration or cancellation of any reserves or
charges (whether or not any debt, obligation or liability for which such
reserves or charges shall have been created shall have been paid or
discharged or shall by then or thereafter required to be paid or
discharged), as to the value of or the method of valuing any investment
owned or held by the Corporation, as to the market value or fair value of
any investment or fair value of any other asset of the Corporation, as to
the allocation of any asset of the Corporation to a particular class or
classes of the Corporation's stock, as to the charging of any liability of
the Corporation to a particular class or classes of the Corporation's stock,
as to the number of shares of the Corporation outstanding, as to the
estimated expense to the Corporation in connection with purchases of its
shares, as to the ability to liquidate investments in orderly fashion, or as
to any other matters relating to the issue, sale, purchase and/or other
acquisition or disposition of investments or shares of the Corporation,
shall be final and conclusive and shall be binding upon the Corporation and
all holders of its shares, past, present and future, and shares of the
Corporation are issued and sold on the condition and understanding that any
and all such determinations shall be binding as aforesaid.
(5) Except to the extent prohibited by the Investment Company Act
of 1940, as amended, or rules, regulations or orders thereunder promulgated
by the Securities and Exchange Commission or any successor thereto or by the
By-Laws of the Corporation, a director, officer or employee of the
Corporation shall not be disqualified by his position from dealing or
contracting with the Corporation, nor shall any transaction or contract of
the Corporation be void or voidable by reason of the fact that any
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director, officer or employee or any firm of which any director, officer or
employee is a member or any corporation of which any director, officer or
employee is a stockholder, officer or director, is in any way interested in
such transaction or contract; provided that in case a director, or a firm or
corporation of which a director is a member, stockholder, officer or
director, is so interested, such fact shall be disclosed to or shall have
been known by the Board of Directors or a majority thereof; and any director
of the Corporation who is so interested, or who is a member, stockholder,
officer or director of such firm or corporation, may be counted in
determining the existence of a quorum at any meeting of the Board of
Directors of the Corporation which shall authorize any such transaction or
contract, with like force and effect as if he were not such director, or
member, stockholder, officer or director of such firm or corporation.
(6) Specifically and without limitation of the foregoing
subsection (e) but subject to the exception therein prescribed, the
Corporation may enter into management or advisory, underwriting,
distribution and administration contracts and other contracts, and may
otherwise do business, with Equitable Real Estate Hyperion Capital Advisors,
L.L.C., and any parent, subsidiary, partner, or affiliate of such firm or
any affiliates of any such affiliate, or the stockholders, members,
directors, officers, partners and employees thereof, and may deal freely
with one another notwithstanding that the Board of Directors of the
Corporation may be composed in part of directors, officers, partners or
employees of such firm and/or its parents, subsidiaries or affiliates and
that officers of the Corporation may have been, be or become directors,
officers, or employees of such firm, and/or its parents, subsidiaries or
affiliates, and neither such management or advisory, underwriting,
distribution or administration contracts nor any other contract or
transaction between the Corporation and such firm and/or its parents,
subsidiaries or affiliates shall be invalidated or in any way affected
thereby, nor shall any director or officer of the Corporation be liable to
the Corporation or to any stockholder or creditor thereof or to any person
for any loss incurred by it or him under or by reason of such contract or
transaction; provided that nothing herein shall protect any director or
officer of the Corporation against any liability to the Corporation or to
its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office; and provided always that
such contract or transaction shall have been on terms that were not unfair
to the Corporation at the time at which it was entered into.
TENTH: (1) The Corporation shall indemnify (i) its currently
acting and former directors and officers, whether
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serving the Corporation or at its request any other entity, to the fullest
extent required or permitted by the General Laws of the State of Maryland
now or hereafter in force, including the advance of expenses under the
procedures and to the fullest extent permitted by law, and (ii) other
employees and agents to such extent as shall be authorized by the Board of
Directors or the By-Laws and as permitted by law. Nothing contained herein
shall be construed to protect any director or officer of the Corporation
against any liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the
conduct of his office. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is necessary to
carry out these indemnification provisions and is expressly empowered to
adopt, approve and amend from time to time such by-laws, resolutions or
contracts implementing such provisions or such indemnification arrangements
as may be permitted by law. No amendment of the charter of the Corporation
or repeal of any of its provisions shall limit or eliminate the right of
indemnification provided hereunder with respect to acts or omissions
occurring prior to such amendment or repeal.
(2) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment Company Act of
1940, no director or officer of the Corporation shall be personally liable
to the Corporation or its stockholders for money damages; provided, however,
that nothing herein shall be construed to protect any director or officer of
the Corporation against any liability to the Corporation or its security
holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office. No amendment of the charter of
the Corporation or repeal of any of its provisions shall limit or eliminate
the limitation of liability provided to directors and officers hereunder
with respect to any act or omission occurring prior to such amendment or
repeal.
ELEVENTH: The Corporation reserves the right to amend, alter,
change or repeal any provision contained in these Articles of Incorporation
or in any amendment hereto in the manner now or hereafter prescribed by the
laws of the State of Maryland and all rights conferred upon stockholders
herein are granted subject to this reservation.
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IN WITNESS WHEREOF, the undersigned, being the incorporator of the
Corporation, has adopted and signed these Articles of Incorporation for the
purpose of forming the corporation described herein pursuant to the General
Corporation law of the State of Maryland and does hereby acknowledge that
said adoption and signing are her act.
Ann M. Smith
Dated: August 18, 1995
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BY-LAWS
OF
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
a Maryland corporation
ARTICLE I
Offices
Section 1. Principal Office in Maryland. The Corporation shall
have a principal office in the City of Baltimore, State of Maryland.
Section 2. Other Offices. The Corporation may have offices also at
such other places within and without the State of Maryland as the Board of
Directors may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
Meetings of Stockholders
Section 1. Place of Meeting. Meetings of stockholders shall be
held at such place, either within the State of Maryland or at such other place
within the United States, as shall be fixed from time to time by the Board of
Directors.
Section 2. Annual Meetings. The Corporation shall not be required
to hold an annual meeting of its stockholders in any year in which none of the
following is required to be acted on by the holders of any class or series of
stock under the Investment Company Act of 1940: (a) election of the directors,
(b) approval of the Corporation's investment advisory agreement with respect
to a particular class or series; (c) ratification of the selection of
independent public accountants; and (d) approval of the Corporation's
distribution agreement with respect to a particular class or series. In the
event that the Corporation shall be required to hold an annual meeting of
stockholders by the Investment Company Act of 1940, such meeting of
stockholders shall be held on a date fixed from time to time by the Board of
Directors not less than ninety nor more than one hundred twenty days following
the end of such fiscal year of the Corporation.
Section 3. Notice of Annual Meeting. Written or
printed notice of an annual meeting, stating the place, date and
hour thereof, shall be given to each stockholder entitled to vote
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thereat not less than ten nor more than ninety days before the date of the
meeting.
Section 4. Special Meetings. Special meetings of stockholders may
be called by the chairman, the president or by the Board of Directors and
shall be called by the secretary upon the written request of holders of shares
entitled to cast not less than twenty-five percent of all the votes entitled
to be cast at such meeting. Such request shall state the purpose or purposes
of such meeting and the matters proposed to be acted on thereat. In the case
of such request for a special meeting, upon payment by such stockholders to
the Corporation of the estimated reasonable cost of preparing and mailing a
notice of such meeting, the secretary shall give the notice of such meeting.
The secretary shall not be required to call a special meeting to consider any
matter which is substantially the same as a matter acted upon at any special
meeting of stockholders held within the preceding twelve months unless
requested to do so by the holders of shares entitled to cast not less than a
majority of all votes entitled to be cast at such meeting.
Section 5. Notice of Special Meeting. Written or printed notice of
a special meeting of stockholders, stating the place, date, hour and purpose
thereof, shall be given by the secretary to each stockholder entitled to vote
thereat not less than ten nor more than ninety days before the date fixed for
the meeting.
Section 6. Business of Special Meetings. Business
transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice thereof.
Section 7. Quorum. Except as may otherwise be expressly provided
by applicable statutes or regulations, the holders of one-third of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business.
Section 8. Voting. When a quorum is present at any meeting, the
affirmative vote of a majority of the votes cast shall decide any question
brought before such meeting, unless the question is one upon which, by express
provision of the Investment Company Act of 1940, as from time to time in
effect, or other statutes or rules or orders of the Securities and Exchange
Commission or any successor thereto or of the Articles of Incorporation, a
different vote is required, in which case such express provision shall govern
and control the decision of such question.
Section 9. Proxies. Each stockholder shall at every
meeting of stockholders be entitled to one vote in person or by
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proxy for each share of the stock having voting power held by such
stockholder, but no proxy shall be voted after eleven months from its date,
unless otherwise provided in the proxy.
Section 10. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, to express consent to corporate
action in writing without a meeting, or to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date which shall be not more than ninety days and, in the
case of a meeting of stockholders, not less than ten days prior to the date on
which the particular action requiring such determination of stockholders is to
be taken. In lieu of fixing a record date, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period, but not to
exceed, in any case, twenty days. If the stock transfer books are closed for
the purpose of determining stockholders entitled to notice of or to vote at a
meeting of stockholders, such books shall be closed for at least ten days
immediately preceding such meeting. If no record date is fixed and the stock
transfer books are not closed for the determination of stockholders: (1) the
record date for the determination of stockholders entitled to notice of, or to
vote at, a meeting of stockholders shall be at the close of business on the
day on which notice of the meeting of stockholders is mailed or the day thirty
days before the meeting, whichever is the closer date to the meeting; and (2)
the record date for the determination of stockholders entitled to receive
payment of a dividend or an allotment of any rights shall be at the close of
business on the day on which the resolution of the Board of Directors,
declaring the dividend or allotment of rights, is adopted, provided that the
payment or allotment date shall not be more than ninety days after the date of
the adoption of such resolution.
Section 11. Inspectors of Election. The directors, in advance of
any meeting, may, but need not, appoint one or more inspectors to act at the
meeting or any adjournment thereof. If an inspector or inspectors are not
appointed, the person presiding at the meeting may, but need not, appoint one
or more inspectors. In case any person who may be appointed as an inspector
fails to appear or act, the vacancy may be filled by appointment made by the
directors in advance of the meeting or at the meeting by the person presiding
thereat. Each inspector, if any, before entering upon the discharge of his or
her duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best
of his or her ability. The inspectors, if any, shall determine the number of
shares outstanding and the voting power
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of each, the shares represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine
the result, and do such acts as are proper to conduct the election or vote
with fairness to all stockholders. On request of the person presiding at the
meeting or any stockholder, the inspector or inspectors, if any, shall make a
report in writing of any challenge, question or matter determined by him or
her or them and execute a certificate of any fact found by him or her or them.
Section 12. Informal Action by Stockholders. Except to the extent
prohibited by the Investment Company Act of 1940, as from time to time in
effect, or rules or orders of the Securities and Exchange Commission or any
successor thereto, any action required or permitted to be taken at any meeting
of stockholders may be taken without a meeting if a consent in writing,
setting forth such action, is signed by all the stockholders entitled to vote
on the subject matter thereof and any other stockholders entitled to notice of
a meeting of stockholders (but not to vote thereat) have waived in writing any
rights which they may have to dissent from such action, and such consent and
waiver are filed with the records of the Corporation.
ARTICLE III
Board of Directors
Section 1. Number of Directors. The number of directors shall be
fixed at no less than two nor more than twenty. Within the limits specified
above, the number of directors shall be fixed from time to time by the Board
of Directors, but the tenure of office of a director in office at the time of
any decrease in the number of directors shall not be affected as a result
thereof. The directors shall be elected to hold office at the annual meeting
of stockholders, except as provided in Section 2 of this Article, and each
director shall hold office until the next annual meeting of stockholders or
until his successor is elected and qualified. Any director may resign at any
time upon written notice to the Corporation. Any director may be removed,
either with or without cause, at any meeting of stockholders duly called and
at which a quorum is present by the affirmative vote of the majority of the
votes entitled to be cast thereon, and the vacancy in the Board of Directors
caused by such removal may be filled by the stockholders at the time of such
removal. Directors need not be stockholders.
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Section 2. Vacancies and Newly Created Directorships. Any vacancy
occurring in the Board of Directors for any cause, including an increase in
the number of directors, may be filled by the stockholders or by a majority of
the remaining members of the Board of Directors even if such majority is less
than a quorum. So long as the Corporation is a registered investment company
under the Investment Company Act of 1940, vacancies in the Board of Directors
may be filled by a majority of the remaining members of the Board of Directors
only if, immediately after filing any such vacancy, at least two-thirds of the
directors then holding office shall have been elected to such office at a
meeting of stockholders. A director elected by the Board of Directors to fill
a vacancy shall be elected to hold office until the next annual meeting of
stockholders or until his successor is elected and qualifies.
Section 3. Powers. The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors which shall
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Articles of Incorporation or by these
By-Laws conferred upon or reserved to the stockholders.
Section 4. Annual Meeting. The first meeting of each newly elected
Board of Directors shall be held immediately following the adjournment of the
annual meeting of stockholders and at the place thereof. No notice of such
meeting to the directors shall be necessary in order legally to constitute the
meeting, provided a quorum shall be present. In the event such meeting is not
so held, the meeting may be held at such time and place as shall be specified
in a notice given as hereinafter provided for special meetings of the Board of
Directors.
Section 5. Other Meetings. The Board of Directors of the
Corporation or any committee thereof may hold meetings, both regular and
special, either within or without the State of Maryland. Regular meetings of
the Board of Directors may be held without notice at such time and at such
place as shall from time to time be determined by the Board of Directors.
Special meetings of the Board of Directors may be called by the chairman, the
president or by two or more directors. Notice of special meetings of the Board
of Directors shall be given by the secretary to each director at least three
days before the meeting if by mail or at least 24 hours before the meeting if
given in person or by telephone or by telegraph. The notice need not specify
the business to be transacted.
Section 6. Quorum and Voting. At meetings of the
Board of Directors, two of the directors in office at the time,
but in no event less than one-third of the entire Board of
Directors, shall constitute a quorum for the transaction of
business. When required pursuant to Section 15(c) under the
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Investment Company Act of 1940 or Rule 12b-1 thereunder a quorum shall also
require the presence in person of a majority of directors who are not parties
to a contract or agreement to be voted upon or interested persons of any such
party. The action of a majority of the directors present at a meeting at which
a quorum is present shall be the action of the Board of Directors. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present.
Section 7. Committees. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, appoint from among its
members an executive committee and other committees of the Board of Directors,
each committee to be composed of two or more of the directors of the
Corporation. The Board of Directors may, to the extent provided in the
resolution, delegate to such committees, in the intervals between meetings of
the Board of Directors, any or all of the powers of the Board of Directors in
the management of the business and affairs of the Corporation, except the
power to declare dividends, to issue stock, to recommend to stockholders any
action requiring stockholders' approval, to amend the By-Laws or to approve
any merger or share exchange which does not require stockholders' approval.
Such committee or committees shall have the name or names as may be determined
from time to time by resolution adopted by the Board of Directors. Unless the
Board of Directors designates one or more directors as alternate members of
any committee, who may replace an absent or disqualified member at any meeting
of the committee, the members of any such committee present at any meeting and
not disqualified from voting may, whether or not they constitute a quorum,
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member of such committee.
At meetings of any such committee, a majority of the members or alternate
members of such committee shall constitute a quorum for the transaction of
business and the act of a majority of the members or alternate members present
at any meeting at which a quorum is present shall be the act of the committee.
Section 8. Minutes of Committee Meetings. The committees shall
keep regular minutes of their proceedings.
Section 9. Informal Action by Board of Directors and Committees.
Any action, except approving the Rule 12b-1 Plan and the Advisory Agreement,
required or permitted to be taken at any meeting of the Board of Directors or
of any committee thereof may be taken without a meeting if a written consent
thereto is signed by all members of the Board of Directors or of such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board of Directors or committee.
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Section 10. Meetings by Conference Telephone. Except to the extent
prohibited by the Investment Company Act of 1940, as from time to time in
effect, or rules or orders of the Securities and Exchange Commission or any
successor thereto, the members of the Board of Directors or any committee
thereof may participate in a meeting of the Board of Directors or committee by
means of a conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other at the
same time and such participation shall constitute presence in person at such
meeting.
Section 11. Fees and Expenses. The directors may be paid their
expenses of attendance at each meeting of the Board of Directors and may be
paid a fixed sum for attendance at each meeting of the Board of Directors or a
stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
reimbursement and compensation for attending committee meetings.
ARTICLE IV
Notices
Section 1. General. Notices to directors and stockholders mailed
to them at their post office addresses appearing on the books of the
Corporation shall be deemed to be given at the time when deposited in the
United States mail.
Section 2. Waiver of Notice. Whenever any notice is required to be
given under the provisions of the statutes, of the Articles of Incorporation
or of these By-Laws, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed the equivalent of notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting except when the
person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
ARTICLE V
Officers
Section 1. General. The officers of the Corporation
shall be chosen by the Board of Directors at its first meeting
after each annual meeting of stockholders and shall be a chairman
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of the Board of Directors, a president, a secretary and a treasurer. The Board
of Directors may also choose such vice presidents and additional officers or
assistant officers as it may deem advisable. Any number of offices, except the
offices of president and vice president, may be held by the same person. No
officer shall execute, acknowledge or verify any instrument in more than one
capacity if such instrument is required by law to be executed, acknowledged or
verified by two or more officers.
Section 2. Other Officers and Agents. The Board of Directors may
appoint such other officers and agents as it desires who shall hold their
offices for such terms and shall exercise such power and perform such duties
as shall be determined from time to time by the Board of Directors.
Section 3. Tenure of Officers. The officers of the Corporation
shall hold office at the pleasure of the Board of Directors. Each officer
shall hold his or her office until his or her successor is elected and
qualifies or until his or her earlier resignation or removal. Any officer may
resign at any time upon written notice to the Corporation. Any officer elected
or appointed by the Board of Directors may be removed at any time by the Board
of Directors when, in its judgment, the best interests of the Corporation will
be served thereby. Any vacancy occurring in any office of the Corporation by
death, resignation, removal or otherwise shall be filled by the Board of
Directors.
Section 4. Chairman of the Board of Directors. The chairman of the
Board of Directors shall be the chief executive officer of the Corporation,
shall preside at all meetings of the stockholders and of the Board of
Directors, shall have general and active management of the business of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. The chairman shall execute on behalf of the
Corporation, and may affix the seal or cause the seal to be affixed to, all
instruments requiring such execution except to the extent that signing and
execution thereof shall be expressly delegated by the Board of Directors to
some other officer or agent of the Corporation.
Section 5. President. The president shall, in the absence of the
chairman of the Board of Directors, preside at all meetings of the
stockholders or of the Board of Directors. The president shall have general
and active management of the business of the Corporation and shall see that
all orders and resolutions of the Board of Directors are carried into effect.
The president shall execute bonds, mortgages and other contracts requiring a
seal, under the seal of the Corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to
some other officer or agent of the Corporation.
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Section 6. Vice Presidents. The vice presidents shall act under
the direction of the president and in the absence or disability of the
president shall perform the duties and exercise the power of the president.
They shall perform such other duties and have such other powers as the
president or the Board of Directors may from time to time prescribe. The Board
of Directors may designate one or more executive vice presidents or may
otherwise specify the order of seniority of the vice presidents and, in that
event, the duties and powers of the president shall descend to the vice
presidents in the specified order of seniority.
Section 7. Secretary. The secretary shall act under the direction
of the president. Subject to the direction of the president, the secretary
shall attend all meetings of the Board of Directors and all meetings of
stockholders and record the proceedings in a book to be kept for that purpose
and shall perform like duties for the committees designated by the Board of
Directors when required. The secretary shall give, or cause to be given,
notice of all meetings of stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the
president or the Board of Directors. The secretary shall keep in safe custody
the seal of the Corporation and shall affix the seal or cause it to be affixed
to any instrument requiring it.
Section 8. Assistant Secretaries. The assistant secretaries in the
order of their seniority, unless otherwise determined by the president or the
Board of Directors, shall, in the absence or disability of the secretary,
perform the duties and exercise the powers of the secretary. They shall
perform such other duties and have such other powers as the president or the
Board of Directors may from time to time prescribe.
Section 9. Treasurer. The treasurer shall act under the direction
of the president. Subject to the direction of the president he shall have the
custody of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation
and shall deposit all monies and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the
Board of Directors. The treasurer shall disburse the funds of the Corporation
as may be ordered by the president or the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the president and the
Board of Directors, at its regular meetings, or when the Board of Directors so
requires, an account of all his or her transactions as treasurer and of the
financial condition of the Corporation.
Section 10. Assistant Treasurers. The assistant
treasurers in the order of their seniority, unless otherwise
determined by the president or the Board of Directors, shall, in
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the absence or disability of the treasurer, perform the duties and exercise
the powers of the treasurer. They shall perform such other duties and have
such other powers as the president or the Board of Directors may from time to
time prescribe.
Section 11. Surety Bonds. The Board of Directors may require any
officer agent of the Corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940, as
amended, and the rules and regulations of the Securities and Exchange
Commission) to the Corporation in such sum and with such surety or sureties as
the Board of Directors may determine, conditioned upon the faithful
performance of his duties to the Corporation, including responsibility for
negligence and for the accounting of any of the Corporations property, funds
or securities that may come into his hands.
ARTICLE VI
Certificates of Stock
Section 1. General. Every holder of stock of the Corporation who
has made full payment of the consideration for such stock shall be entitled
upon request to have a certificate, signed by, or in the name of the
Corporation by, the president or a vice president and countersigned by the
treasurer or an assistant treasurer or the secretary or an assistant secretary
of the Corporation, certifying the number and class of whole shares of stock
owned by such holder in the Corporation.
Section 2. Fractional Share Interests or Scrip. The Corporation
may, but shall not be obliged to, issue fractions of a share of stock, arrange
for the disposition of fractional interests by those entitled thereto, pay in
cash the fair value of fractions of a share of stock as of the time when those
entitled to receive such fractions are determined, or issue scrip or other
evidence of ownership which shall entitle the holder to receive a certificate
for a full share of stock upon the surrender of such scrip or other evidence
of ownership aggregating a full share. Fractional shares of stock shall have
proportionately to the respective fractions represented thereby all the rights
of whole shares, including the right to vote, the right to receive dividends
and distributions and the right to participate upon liquidation of the
Corporation, excluding, however, the right to receive a stock certificate
representing such fractional shares. The Board of Directors may cause such
scrip or evidence of ownership to be issued subject to the condition that it
shall become void if not exchanged for certificates representing full shares
of stock before a specified date or subject to the condition that the shares
of stock for which such scrip or evidence of ownership is exchangeable may be
sold by the Corporation and the proceeds thereof distributed to
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the holders of such scrip or evidence of ownership, or subject to any other
reasonable conditions which the Board of Director shall deem advisable,
including provision for forfeiture of such proceeds to the Corporation if not
claimed within a period of not less than three years after the date of the
original issuance of scrip certificates.
Section 3. Signatures on Certificates. Any of or all the
signatures on a certificate may be a facsimile. In case any officer who has
signed or whose facsimile signature has been placed upon a certificate shall
cease to be such officer before such certificate is issued, it may be issued
with the same effect as if he or she were such officer at the date of issue.
The seal of the Corporation or a facsimile thereof may, but need not, be
affixed to certificates of stock.
Section 4. Lost, Stolen or Destroyed Certificates. The Board of
Directors may direct a new certificate or certificates to be issued in place
of any certificate or certificates theretofore issued by the Corporation
alleged to have been lost, stolen or destroyed, upon the making of any
affidavit of that fact by the person claiming the certificate or certificates
to be lost, stolen or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his or her legal
representative, to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate or certificates alleged to have been lost, stolen
or destroyed.
Section 5. Transfer of Shares. Upon request by the registered
owner of shares, and if a certificate has been issued to represent such shares
upon surrender to the Corporation or a transfer agent of the Corporation of a
certificate for shares of stock duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, subject to the
Corporation's rights to redeem or purchase such shares, it shall be the duty
of the Corporation, if it is satisfied that all provisions of the Articles of
Incorporation, of the By-Laws and of the law regarding the transfer of shares
have been duly complied with, to record the transactions upon its books, issue
a new certificate to the person entitled thereto upon request for such
certificate, and cancel the old certificate, if any.
Section 6. Registered Owners. The Corporation shall be entitled to
recognize the person registered on its books as the owner of shares to be the
exclusive owner for all purposes including, redemption, voting and dividends,
and the Corporation shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other
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person, whether or not it shall have express or other notice thereof, except
as otherwise provided by the laws of Maryland.
ARTICLE VII
Miscellaneous
Section 1. Reserves. There may be set aside out of any funds of
the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for repairing or maintaining any
property of the Corporation, or for the purchase of additional property, or
for such other purpose as the Board of Directors shall think conducive to the
interest of the Corporation, and the Board of Directors may modify or abolish
any such reserve.
Section 2. Dividends. Dividends upon the stock of the Corporation
may, subject to the provisions of the Articles of Incorporation and of the
provisions of applicable law, be declared by the Board of Directors at any
time. Dividends may be paid in cash, in property or in shares of the
Corporation's stock, subject to the provisions of the Articles of
Incorporation and of applicable law.
Section 3. Capital Gains Distributions. The amount and number of
capital gains distributions paid to the stockholders during each fiscal year
shall be determined by the Board of Directors. Each such payment shall be
accompanied by a statement as to the source of such payment, to the extent
required by law.
Section 4. Checks. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 5. Fiscal Year. The fiscal year of the
Corporation shall be fixed by resolution of the Board of
Directors.
Section 6. Seal. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words,
"Corporate Seal, Maryland". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in another manner reproduced.
Section 7. Filing of By-Laws. A certified copy of the
By-Laws, including all amendments, shall be kept at the principal
office of the Corporation in the State of Maryland.
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Section 8. Annual Report. The books of account of the Corporation
shall be examined by an independent firm of public accountants at the close of
each annual fiscal period of the Corporation and at such other times, if any,
as may be directed by the Board of Directors of the Corporation. Within one
hundred and twenty days of the close of each annual fiscal period a report
based upon such examination at the close of that fiscal period shall be mailed
to each stockholder of the Corporation of record at the close of such annual
fiscal period, unless the Board of Directors shall set another record date, at
his address as the same appears on the books of the Corporation. Each such
report shall contain such information as is required to be set forth therein
by the Investment Company Act of 1940 and the rules and regulations
promulgated by the Securities and Exchange Commission thereunder. Such report
shall also be submitted at the annual meeting of the stockholders and filed
within twenty days thereafter at the principal office of the Corporation in
the State of Maryland.
Section 9. Stock Ledger. The Corporation shall maintain at its
principal office outside of the State of Maryland an original or duplicate
stock ledger containing the names and addresses of all stockholders and the
number of shares of stock hold by each stockholder. Such stock ledger may be
in written form or in any other form capable of being converted into written
form within a reasonable time for visual inspection.
Section 10. Ratification of Accountants by Stockholders. At every
annual meeting of the stockholders of the Corporation otherwise called there
shall be submitted for ratification or rejection the name of the firm of
independent public accountants which has been selected for the current fiscal
year in which such annual meeting is held by a majority of those members of
the Board of Directors who are not investment advisers of, or interested
person (as defined in the Investment Company Act of 1940) of an investment
adviser of, or officers or employees of, the Corporation.
Section 11. Custodian. All securities and similar investments
owned by the Corporation shall be held by a custodian which shall be either a
trust company or a national bank of good standing, having a capital surplus
and undivided profits aggregating not less than two million dollars
($2,000,000), or a member firm of the New York Stock Exchange, Inc. The terms
of custody of such securities and cash shall include such provisions required
to be contained therein by the Investment Company Act of 1940 and the rules
and regulations promulgated thereunder by the Securities and Exchange
Commission.
Upon the resignation or inability to serve of any such custodian
the Corporation shall (a) use its best efforts to obtain a successor
custodian, (b) require the cash and securities
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of the Corporation held by the custodian to be delivered directly to the
successor custodian, and (c) in the event that no successor custodian can be
found, submit to the stockholders of the Corporation, before permitting
delivery of such cash and securities to anyone other than a successor
custodian, the question whether the Corporation shall be dissolved or shall
function without a custodian; provided, however, that nothing herein contained
shall prevent the termination of any agreement between the Corporation and any
such custodian by the affirmative vote of the holders of a majority of all the
stock of the Corporation at the time outstanding and entitled to vote. Upon
its resignation or inability to serve and pending action by the Corporation as
set forth in this section, the custodian may deliver any assets of the
Corporation held by it to a qualified bank or trust company in the City of New
York, or to a member firm of the New York Stock Exchange, Inc. selected by it,
such assets to be held subject to the terms of custody which governed such
retiring custodian.
Section 12. Investment Advisers. The Corporation may enter into
one or more management or advisory, underwriting, distribution or
administration contract with any person, firm, partnership, association or
corporation but such contract or contracts shall continue in effect only so
long as such continuance is specifically approved annually by a majority of
the Board of Directors or by vote of the holders of a majority of the voting
securities of the Corporation, and in either case by vote of a majority of the
directors who are not parties to such contracts or interested persons (as
defined in the Investment Company Act of 1940) of any such party cast in
person at a meeting called for the purpose of voting on such approval.
Section 13. Indemnity. (a) The Company shall indemnify its
directors to the fullest extent that indemnification of directors is permitted
by the Maryland General Corporation Law. The Company shall indemnify its
officers to the same extent as its directors and to such further extent as is
consistent with law. The Company shall indemnify its directors and officers
who, while serving as directors or officers, also serve at the request of the
Company as a director, officer, partner, trustee, employee, agent or fiduciary
of another corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan to the fullest extent consistent with law. The
indemnification and other rights provided by this Article shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such a person. This
Article shall not protect any such person against any liability to the Company
or any Stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office ("disabling
conduct").
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<PAGE>
(b) Any current or former director or officer of the Company seeking
indemnification within the scope of this Article shall be entitled to advances
from the Company for payment of the reasonable expenses incurred by him in
connection with the matter as to which he is seeking indemnification in the
manner and to the fullest extent permissible under the Maryland General
Corporation Law. The person seeking indemnification shall provide to the
Company a written affirmation of his good faith belief that the standard of
conduct necessary for indemnification by the Company has been met and a
written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (i) the person
seeking indemnification shall provide security in form and amount acceptable
to the Company for his undertaking; (ii) the Company is insured against losses
arising by reason of the advance; or (iii) a majority of a quorum of Directors
of the Company who are neither "interested persons" as defined in Section
2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the
proceeding ("disinterested non-party directors"), or independent legal
counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Company at the time the advance is proposed to
be made, that there is reason to believe that the person seeking
indemnification will ultimately be found to be entitled to indemnification.
(c) At the request of any person claiming indemnification under this
Article, the Board of Directors shall determine, or cause to be determined, in
a manner consistent with the Maryland General Corporation Law, whether the
standards required by this Article have been met. Indemnification shall be
made only following: (i) a final decision on the merits by a court or other
body before whom the proceeding was brought that the person to be indemnified
was not liable by reason of disabling conduct or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that
the person to be indemnified was not liable by reason of disabling conduct by
(i) the vote of a majority of a quorum of disinterested non-party directors or
(ii) an independent legal counsel in a written opinion.
(d) Employees and agents who are not officers or directors of the
Company may be indemnified, and reasonable expenses may be advanced to such
employees or agents, as may be provided by action of the Board of Directors or
by contract, subject to any limitations imposed by the Investment Company Act
of 1940.
(e) The Board of Directors may make further provision consistent with
law for indemnification and advance of expenses to directors, officers,
employees and agents by resolution, agreement or otherwise. The
indemnification provided by this
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<PAGE>
Article shall not be deemed exclusive of any other right, with respect to
indemnification or otherwise, to which those seeking indemnification may be
entitled under any insurance or other agreement or resolution of stockholders
or disinterested directors or otherwise.
(f) References in this Article are to the Maryland General Corporation
Law and to the Investment Company Act of 1940, as from time to time amended.
No amendment of these Bylaws shall affect any right of any person under this
Article based on any event, omission or proceeding prior to the amendment.
ARTICLE VIII
Amendments
The Board of Directors shall have the power, by a majority vote of
the entire Board of Directors at any meeting thereof, to make, alter and
repeal By-Laws of the Corporation.
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EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
INVESTMENT ADVISORY AGREEMENT
AGREEMENT dated as of August [__], 1995 between Equitable Real
Estate Hyperion Mortgage Opportunity Fund, Inc. (the "Fund"), a Maryland
corporation, and Equitable Real Estate Hyperion Capital Advisors, L.L.C. (the
"Adviser"), a Delaware limited liability corporation.
WHEREAS, the Fund is engaged in business as a non-diversified,
open-end management investment company registered under the Investment Company
Act of 1940 (collectively, with the rules and regulations promulgated
thereunder, the "1940 Act");
WHEREAS, the Adviser is a registered investment adviser under the
Investment Adviser's Act of 1940, with the rules and regulations promulgated
thereunder;
NOW, THEREFORE, in consideration of the mutual promises and
agreements herein contained and other good and valuable consideration, the
receipt of which is hereby acknowledged, it is agreed by and between the
parties hereto as follows:
1. In General
The Adviser agrees, all as more fully set forth herein, to act as
investment adviser to the Fund with respect to the investment and the
reinvestment of the Fund's assets.
2. Duties and Obligations of the Adviser with Respect to
Investments of Assets of the Fund
(a) Subject to the succeeding provisions of this paragraph and
subject to the direction and general control of the Fund's Board of Directors,
the Adviser shall act as investment adviser for and supervise and manage the
investment and reinvestment of the portfolio's assets and in connection
therewith have complete discretion in purchasing and selling securities and
other assets for the Fund and in voting and exercising all other rights
appertaining to such securities and other assets on behalf of the Fund. To
carry out such decisions, the Adviser is hereby authorized, as agent for the
Fund and attorney-in-fact for the Fund's account and at the Fund's risk and in
the Fund's name, to place such orders for the investment and reinvestment of
the Fund's assets.
(b) In the performance of its duties under this Agreement, the
Adviser shall at all times conform to, and act in accordance with, any
requirements imposed by (i) the provisions of the 1940 Act, and of any rules
or regulations in force thereunder; (ii) any other applicable provision of
law; (iii) the provisions of the Articles of Incorporation and By-Laws
285649.3
<PAGE>
of the Fund, as such documents are amended from time to time; (iv) the Fund's
Registration Statement filed with the 1940 Act and the Securities Act of 1933,
including the Prospectus and Statement of Additional Information forming a
part thereof (the "Registration Statement"); and (v) any policies and
determinations established by the Board of Directors of the Fund.
(c) The Adviser shall report to the Fund's Board of Directors at
each meeting thereof all changes in the Fund's portfolio and will also keep
the Fund in touch with important developments affecting the portfolio and, on
the Adviser's initiative, will furnish the Fund from time to time with such
information as the Adviser may believe appropriate for this purpose, whether
concerning the individual entities whose securities are included in the
portfolio, the activities in which such entities engage, Federal income tax
policies applicable to the Fund's investments, or the conditions prevailing in
the financial markets or the economy generally. The Adviser shall also furnish
the Fund with such statistical and analytical information with respect to the
portfolio securities as it may believe appropriate or as the Fund may
reasonably request.
(d) The Adviser may from time to time employ, subcontract with or
otherwise associate itself with entirely at its expense, such persons as it
believes to be particularly fitted to assist it in the execution of its duties
hereunder.
(e) The Adviser will bear all costs and expenses of its partners
and employees and any overhead incurred in connection with its duties
hereunder and shall bear the costs of any salaries or directors' fees of any
officers or directors of the Fund who are affiliated persons (as defined in
the Act) of the Adviser.
(f) The Adviser shall give the Fund the benefit of its best
judgment and effort in rendering services hereunder, but the Adviser shall not
be liable for any act or omission or for any loss sustained by the Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement.
(g) Nothing in this Agreement shall prevent the Adviser or any
director, officer, employee or other affiliate thereof from acting as
investment adviser for any other person, firm or corporation, or from engaging
in any other lawful activity, and shall not in any way limit or restrict the
Adviser or any of its partners, officers, employees or agents from buying,
selling or trading any securities for its or their own accounts or for the
accounts of others for whom it or they may be acting, provided, however, that
the Adviser will undertake no activities which, in its judgment, will
adversely affect the performance of its obligations under this Agreement.
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<PAGE>
3. Fund Transactions and Brokerage
The Adviser is authorized, for the purchase and sale of the Fund's
portfolio securities, to employ such securities dealers as may, in the
judgment of the Adviser, implement the investment objectives and policies of
the Fund to obtain the best net results taking into account such factors as
price, including dealer spread, the size, type and difficulty of the
transaction involved, the firm's general execution and operational facilities
and the firm's risk in positioning the securities involved. Consistent with
these investment objectives and policies, the Adviser is authorized to direct
the execution of the Fund's portfolio transactions to dealers and brokers
furnishing statistical information or research deemed by the Adviser to be
useful or valuable to the performance of its investment advisory functions for
the Fund.
It is understood that the Adviser will not be deemed to have acted
unlawfully, or to have breached a fiduciary duty to the Fund or be in breach
of any obligation owing to the Fund under this Agreement, or otherwise, solely
by reason of its having directed a securities transaction on behalf of the
Fund to a broker-dealer in compliance with the provisions of Section 28(e) of
the Securities Exchange Act of 1934.
4. Compensation of the Adviser
(a) The Fund agrees to pay to the Adviser for all services
rendered a fee computed and payable monthly in an amount equal to 0.35% of the
Fund's average daily net assets on an annualized basis, for the then-current
fiscal year. For any period less than a month during which this Agreement is
in effect, the fee shall be prorated according to the proportion which such
period bears to a full month of 28, 29, 30 or 31 days, as the case may be. The
Adviser may use any portion of this fee for distribution of Fund shares or for
making servicing payments to organizations whose customers or clients are Fund
shareholders. The Adviser may waive its right to any fee to which it is
entitled hereunder, provided such waiver is delivered to the Fund in writing.
Any reimbursement of expenses to which the Fund may become entitled to
pursuant to paragraph 2(c) hereof, will be paid to the Fund at the same time
as the Fund pays the Adviser hereunder.
(b) For purposes of this Agreement, the average daily net assets
of the Fund shall mean the average daily value of the total assets of the
Fund, minus the accrued liabilities (including accrued expenses) of the Fund.
The average daily net assets of the Fund shall be calculated as set forth in
the current prospectus or pursuant to the procedures adopted by resolutions of
the Fund's Board of Directors for calculating the net asset value of the
Fund's shares or delegating such calculations to third parties.
5. Duration and Termination
(a) This Agreement will become effective on the date hereof and
shall continue in effect until August , 1997 and thereafter for successive
twelve-month periods
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<PAGE>
(computed from each August ), provided that such continuation is specifically
approved at least annually by the Board of Directors or by a majority vote of
the holders of the Fund's outstanding voting securities, as defined in the
1940 Act and the rules thereunder, and, in either case, by a majority of those
directors who are neither party to this Agreement nor, other than by their
service as directors of the Fund, interested persons, as defined in the 1940
Act and the rules thereunder, of any such person who is party to this
Agreement. Upon the effectiveness of this Agreement, it shall supersede all
previous agreements between the Adviser and the Fund covering the subject
matter hereof. This Agreement may be terminated at any time, without the
payment of any penalty, (i) by vote of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act and the rules thereunder, or
(ii) by a vote of a majority of the entire Board of Directors, on sixty days'
written notice to the Adviser, or (iii) by the Adviser on sixty days' written
notice to the Fund.
(b) This Agreement may not be transferred, assigned, sold or in
any manner hypothecated or pledged by either party and this Agreement shall
terminate automatically in the event of any such transfer, assignment, sale,
hypothecation or pledge by either party. The terms "transfer", "assignment"
and "sale" as used in this paragraph shall have the meanings ascribed thereto
by governing law and in applicable rules or regulations of the Securities and
Exchange Commission.
6. Notices
Any notice under this Agreement shall be in writing to the other
party at such address as the other party may designate from time to time for
the receipt of such notice and shall be deemed to be received on the earlier
of the date actually received or on the fourth day after the postmark if such
notice is mailed first class postage prepaid.
7. Governing Law
This Agreement shall be construed in accordance with the laws of
the State of New York and in accordance with the applicable provisions of the
1940 Act.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers and their
respective seals to be hereunto affixed, all as of the day and the year first
above written.
[SEAL] EQUITABLE REAL ESTATE HYPERION MORTGAGE
OPPORTUNITY FUND, INC.
By:
Name:
Title:
[SEAL] EQUITABLE REAL ESTATE HYPERION CAPITAL ADVISORS,
L.L.C.
By:
Name:
Title:
-5-
285649.3
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
DISTRIBUTION AGREEMENT
AGREEMENT, dated as of August [ ], 1995, by and between Equitable Real
Estate Hyperion Mortgage Opportunity Fund, Inc. (the "Fund"), a Maryland
corporation and Hyperion Distributors, Inc. (the "Distributor"), a Delaware
corporation.
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as an open-end
investment company registered under the Investment Company Act of 1940
(collectively with the rules and regulations promulgated thereunder, the "1940
Act");
WHEREAS, the Fund wishes to engage the Distributor to
provide certain services with respect to the distribution of shares of common
stock (par value $.001 per share) of the Fund ("Shares"), and the Distributor
is willing to provide such services to the Fund on the terms and conditions
hereinafter set forth;
WHEREAS, the Distributor is registered as a broker-dealer
under the Exchange Act of 1934 and is a member of the National Association of
Securities Dealers in good standing;
NOW, THEREFORE, in consideration of the mutual promises and
agreements herein contained and other good and valuable consideration, the
receipt of which is hereby acknowledged, it is agreed by and between the
parties hereto as follows:
1. In General
The Distributor agrees, all as more fully set forth herein,
to act as distributor to the Fund to provide certain services with respect to
the distribution of Shares.
2. Duties and the Obligation of the Distributor
(a) The Fund grants to the Distributor the right, as agent
of the Fund, to sell the unsold portion of such number of Shares as may be
effectively registered from time to time under the Securities Act of 1933, as
amended (the "1933 Act").
(b) The Distributor shall act as Fund agent and is hereby
appointed to offer, and to solicit offers to subscribe to, the unsold balance
of Shares as shall then be effectively registered under the 1933 Act. All
subscriptions for Shares obtained by the Distributor shall be directed to the
Fund for acceptance and shall not be binding until accepted by the Fund. The
Distributor shall have no authority to make binding subscriptions on the
Fund's behalf. The Fund reserves the right to sell Shares through other
distributors or directly to investors through subscriptions received by the
Fund at its principal office in New York, New York. The right given to the
Distributor under this Agreement shall not apply to Shares issued in
connection with (a) the merger or consolidation of any other investment
company with the Fund, (b) the Fund's acquisition by purchase or otherwise of
all or substantially all of the assets or stock of any other investment
company, or (c) the reinvestment in Shares by the Fund's stockholders of
dividends or other distributions or any other offering by the Fund of
securities to Fund stockholders.
(c) The Distributor shall use its best efforts to obtain
subscriptions to Shares upon the terms and conditions contained herein and in
the Fund's Prospectus, as in effect from time to time. The Distributor shall
send to the Fund promptly all subscriptions placed with the Distributor. The
Fund shall furnish the Distributor from time to time, for use in connection
with the offering of Shares such other information with respect to the Fund
and Shares as the Distributor may reasonably request. The Fund shall supply
the Distributor with such copies of the Fund's Registration Statement and
Prospectus, as in effect from time to time, as the Distributor may request.
Except as the Fund may authorize in writing, the Distributor is not authorized
to give any information or to make any representation that is not contained in
the Registration Statement or Prospectus, as then in effect. The Distributor
may use employees, agents and other persons, at its own cost and expense, to
assist it in carrying out its obligations hereunder, but no such employee,
agent or other person shall be deemed to be the Fund's agent or have any
rights under this Agreement. The Distributor may sell Shares to or through
qualified brokers, dealers and financial institutions under selling and
servicing agreements provided that no dealer, financial institution or other
person shall be appointed or authorized to act as agent of the Fund without
written consent. All sales of Shares effected through the Distributor will be
made in compliance with all applicable federal securities laws and regulations
and the Constitution, rules and regulations of the National Association of
Securities Dealers, Inc. ("NASD").
(d) The Fund reserve the right to suspend the offering of
Shares at any time, in the absolute discretion of the Board of Directors, and
upon notice of such suspension the Distributor shall cease to offer our shares
hereunder.
(e) Both parties will cooperate with one another in taking
such action as may be necessary to qualify Shares for sale under the
securities laws of such states as the Fund may designate, provided, that the
Distributor shall not be required to register as a broker-dealer or file a
consent to service of process in any such state where the Distributor is not
now so registered. Pursuant to the Investment Management Contract in effect
between the Fund and the Adviser, the Fund will pay all fees and expenses of
registering Shares under the 1940 Act and of qualification of Shares and to
the extent necessary, the Fund's qualification under applicable state
securities laws. The Distributor will pay all expenses relating to its
broker-dealer qualification.
(f) The Fund represents to the Distributor that the
Registration Statement and Prospectus have been carefully prepared to date in
conformity with the requirements of the 1933 Act and the 1940 Act and the
rules and regulations of the Securities and Exchange Commission (the "SEC")
thereunder. The Fund represents and warrants to the Distributor, as of the
date hereof, that the Registration Statement and Prospectus contain all
statements required to be stated therein in accordance with the 1933 Act and
the 1940 Act and the SEC's rules and regulations thereunder; that all
statements of fact contained therein are or will be true and correct at the
time indicated or the effective date as the case may be; and that neither the
Registration Statement nor the Prospectus, when they shall become effective or
be authorized for use, will include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading to a purchaser of Shares. The Fund
will from time to time file such amendment or amendments to the Registration
Statement and Prospectus as, in the light of future development, shall, in the
opinion of Fund counsel, be necessary in order to have the Registration
Statement and Prospectus at all times contain all material facts required to
be stated therein or necessary to make any statements therein not misleading
to a purchaser of Shares. If the Fund shall not file such amendment or
amendments within fifteen days after the receipt of a written request from the
Distributor to do so, the Distributor may, at the Distributor's option,
terminate this agreement immediately. The Fund will not file any amendment to
the Registration Statement or Prospectus without giving the Distributor
reasonable notice thereof in advance; provided, however, that nothing in this
agreement shall in any way limit the Fund's right to file such amendments to
the Registration Statement or Prospectus, of whatever character, as the Fund
may deem advisable, such right being in all respects absolute and
unconditional. The Fund represents and warrants to the Distributor that any
amendment to the Registration Statement or Prospectus hereafter filed by the
Fund will be carefully prepared in conformity within the requirements of the
1933 Act and the 1940 Act and the SEC's rules and regulations thereunder and
will, when it becomes effective, contain all statements required to be stated
therein in accordance with the 1933 Act and the 1940 Act and the SEC's rules
and regulations thereunder; that all statements of fact contained therein
will, when the same shall become effective, be true and correct; and that no
such amendment, when it becomes effective, will include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading to a purchaser of
Shares.
3. Indemnification
(a) The Fund agrees to indemnify, defend and hold the
Distributor, and any person who controls the Distributor within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Distributor or any such controlling person may
incur, under the 1933 Act or the 1940 Act, or under common law or otherwise,
arising out of or based upon any alleged untrue statement of a material fact
contained in the Registration Statement or Prospectus in effect from time to
time or arising out of or based upon any alleged omission to state a material
fact required to be stated in either of them or necessary to make the
statements in either of them not misleading; provided, however, that in no
event shall anything herein contained be so construed as to protect the
Distributor against any liability to the Fund or its security holders to which
the Distributor would otherwise be subject by reason of willful misfeasance,
bad faith, or gross negligence in the performance of the Distributor's duties,
or by reason of the Distributor's reckless disregard of the Distributor's
obligations and duties under this Agreement. The Fund's agreement to indemnify
the Distributor and any such controlling person is expressly conditioned upon
the Fund being notified of any action brought against the Distributor or any
such controlling person, such notification to be given by letter or by
telegram addressed to the Fund at its principal office in New York, New York,
and sent to the Fund by the person against whom such action is brought within
ten days after the summons or other first legal process shall have been
served. The failure so to notify the Fund of any such action shall not relieve
the Fund from any liability which the Fund may have to the person against whom
such action is brought other than on account of the Fund's indemnity agreement
contained in this paragraph 3a. The Fund will be entitled to assume the
defense of any suit brought to enforce any such claim, and to retain counsel
of good standing chosen by the Fund and approved by the Distributor. In the
event the Fund does elect to assume the defense of any such suit and retain
counsel of good standing approved by the Distributor, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case the Fund does not elect to assume
the defense of any such suit, or in case the Distributor, in good faith, does
not approve of counsel chosen by the Fund, the Fund will reimburse the
Distributor or the controlling person or persons named as defendant or
defendants in such suit, for the fees and expenses of any counsel retained by
the Distributor or them. The Fund's indemnification agreement contained in
this paragraph 3a and its representations and warranties in this Agreement
shall remain in full force and effect regardless of any investigation made by
or on behalf of the Distributor or any controlling person and shall survive
the sale of any of Shares made pursuant to subscriptions obtained by the
Distributor. This agreement of indemnity will inure exclusively to the
Distributor's benefit, to the benefit of the Distributor's successors and
assigns, and to the benefit of any of its controlling persons and their
successors and assigns. The Fund agrees promptly to notify the Distributor of
the commencement of any litigation or proceeding against the Fund in
connection with the issue and sale of any Shares.
(b) The Distributor agrees to indemnify, defend and hold the
Fund, its several officers and trustees, and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Fund, its
officers or trustees, or any such controlling person may incur under the 1933
Act or under common law or otherwise, but only to the extent that such
liability or expense incurred by the Fund, its officers or trustees or such
controlling person shall arise out of or be based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
the Distributor to the Fund for use in the Registration Statement or
Prospectus as in effect from time to time, or shall arise out of or be based
upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus
or necessary to make such information not misleading. The Distributor's
agreement to indemnify the Fund, its officers and trustees, and any such
controlling person is expressly conditioned upon the Distributor being
notified of any action brought against the Fund, its officers or trustees or
any such controlling person, such notification to be given by letter or
telegram addressed to the Distributor at the Distributor's principal office in
New York, New York, and sent to the Distributor by the person against whom
such action is brought, within ten days after the summons or other first legal
process shall have been served. The Distributor shall have a right to control
the defense of such action, with counsel of the Distributor's own choosing,
satisfactory to the Fund, if such action is based solely upon such alleged
misstatement or omission on the Distributor part, and in any other event the
Distributor and the Fund, its officers or trustees or such controlling person
shall each have the right to participate in the defense or preparation of the
defense of any such action. The failure so to notify the Distributor of any
such action shall not relieve the Distributor from any liability which the
Distributor may have to the Fund, to its officers or trustees, or to such
controlling person other than on account of the Distributor indemnity
agreement contained in this paragraph 3b.
(c) The Fund agrees to advise the Distributor immediately:
(i) of any request by the SEC for amendments to the
Registration Statement or Prospectus or for additional information,
(ii) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or Prospectus or
the initiation of any proceedings for that purpose,
(iii) of the happening of any material event which
makes untrue any statement made in the Registration Statement or Prospectus or
which requires the making of a change in either of them in order to make the
statements therein not misleading, and
(iv) of all action of the SEC with respect to any
amendments to the Registration Statement or Prospectus.
4. Duration and Termination
(a) This Agreement will become effective on the date hereof and
will remain in effect thereafter for successive twelve-month periods (computed
from each August ), provided that such continuation is specifically approved
at least annually by vote of the Board of Directors and of a majority of those
of the directors who are not interested persons (as defined in the 1940 Act),
cast in person at a meeting called for the purpose of voting on this
Agreement. This Agreement may be terminated at any time, without the payment
of any penalty, (i) by vote of a majority of the entire Board of Directors,
and by a vote of a majority of the Directors who are not interested persons
(as defined in the 1940 Act) or (ii) by vote of a majority of the Fund's
outstanding voting securities, as defined in the Act, on sixty days' written
notice to the Distributor, or (iii) by the Distributor on sixty days' written
notice to the Fund.
(b) This Agreement may not be transferred, assigned, sold or
in any manner hypothecated or pledged by the Distributor and this Agreement
shall terminate automatically in the event of any such transfer, assignment,
sale, hypothecation or pledge by the Distributor. The terms "transfer",
"assignment" and "sale" as used in this paragraph shall have the meanings
ascribed thereto by governing law and in applicable rules or regulations of
the SEC thereunder.
5. Compensation of the Distributor and Fees Paid by the Fund.
(a) The Fund will pay, or cause to be paid--
(i) all costs and expenses of the Fund, including
fees and disbursements of its counsel, in connection with the preparation and
filing of the Registration Statement, Prospectus and Statement of Additional
Information, and preparing and mailing to shareholders Prospectuses,
Statements of Additional Information with respect to Shares, statements and
confirmations and periodic reports (including the expense of setting in type
the Registration Statement, Prospectus and Statement of Additional Information
or any periodic report with respect to Shares);
(ii) the cost of preparing temporary or permanent
certificates for Shares;
(iii) the cost and expenses of delivering to the
Distributor at its office in New York all Shares purchased through it as agent
hereunder;
(iv) a nominal fee to the Distributor of $1.00;
(v) all fees and disbursements of the Transfer Agent
and Custodian with respect to the Fund;
(vi) a fee to the Administrator of the Fund (pursuant
to the Administrative Services Agreement); and
(vii) a fee to the Adviser of the Fund (pursuant to
the investment advisory agreement with such investment adviser).
(b) The Distributor agrees that with respect to the sale of
Shares, subject to the Fund's obligations under clause (iv) above, (a) after
the Prospectus and Statement of Additional Information and periodic reports
with respect to the Fund have been set in type, it will bear the expense
(other than the cost of mailing to shareholders of the Fund) of printing and
distributing any copies thereof ordered by it which are to be used in
connection with the offering or sale of Shares to any dealer or prospective
investor, (b) it will bear the expenses of preparing, printing and
distributing any other literature used by the Distributor or furnished by it
for use by any dealer in connection with the offering of Shares for sale to
the public and any expense of sending confirmations and statements to any
dealer having a sales agreement with the Distributor.
6. Notices
Any notice under this Agreement shall be in writing to the
other party at such address as the other party may designate from time to time
for the receipt of such notice and shall be deemed to be received on the
earlier of the date actually received or on the fourth day after the postmark
if such notice is mailed first class postage prepaid.
7. Governing Law
This Agreement shall be construed in accordance with the
laws of the State of New York and in accordance with the applicable provisions
of the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers and their
respective seals to be hereto affixed, all as of the day and year first above
written.
[SEAL] EQUITABLE REAL ESTATE HYPERION
MORTGAGE OPPORTUNITY FUND, INC.
By
Name:
Title:
[SEAL] HYPERION DISTRIBUTORS, INC.
By
Name:
Title:
291556.1
CUSTODIAN CONTRACT
Between
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
292701.1
<PAGE>
CUSTODIAN CONTRACT
This Contract between Equitable Real Estate Hyperion Mortgage
Opportunity Fund, Inc., a corporation organized and existing under the laws of
the State of Maryland and having its principal place of business at 520 Madison
Avenue, New York, New York 10022 (the "Fund"), and State Street Bank and Trust
Company, a Massachusetts trust company, having its principal place of business
at 225 Franklin Street, Boston, Massachusetts 02110 (the "Custodian"),
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate
series, with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in one
series, the Series A-1995 (such series together with all other series
subsequently established by the Fund and made subject to this Contract in
accordance with Article 17, being herein referred to as the "Portfolio(s)");
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto do hereby agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the
assets of the Portfolios of the Fund, including securities which the Fund, on
behalf of the applicable Portfolio desires to be held in places within the
United States of America ("domestic securities") and securities it desires to be
held outside the United States of America ("foreign securities") pursuant to the
provisions of the Fund's articles of incorporation (the "Articles of
Incorporation"). The Fund on behalf of the Portfolio(s) agrees to deliver to the
Custodian all securities and cash of the Portfolios, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Fund representing interests in the Portfolios ("Shares") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of a Portfolio held or received by the Fund on behalf of the
Portfolio and not delivered to the Custodian.
292701.1
<PAGE>
Upon receipt of "Proper Instructions" (as such term is defined
in Article 5 of this Contract), the Custodian shall on behalf of the applicable
Portfolio(s) from time to time employ one or more sub-custodians located in the
United States of America, including any state or political subdivision thereof
and any territory over which its political sovereignty extends (the "United
States" or "U.S."), but only in accordance with an applicable vote by the board
of directors of the Fund (the "Board of Directors") on behalf of the applicable
Portfolio(s) and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian. The Custodian may employ as sub-custodians for the Fund's foreign
securities on behalf of the applicable Portfolio(s) the foreign banking
institutions and foreign securities depositories designated in Schedule A hereto
but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the
Fund Held By the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and
physically segregate for the account of each Portfolio all non-cash property to
be held by it in the United States, including all domestic securities owned by
such Portfolio other than (a) securities which are maintained in a "U.S.
Securities System" (as such term is defined in Section 2.10 of this Contract)
and (b) commercial paper of an issuer for which State Street Bank and Trust
Company acts as issuing and paying agent ("Direct Paper") which is deposited
and/or maintained in the Custodian's Direct Paper System pursuant to Section
2.11.
2.2 Delivery of Securities. The Custodian shall release and
deliver domestic securities owned by a Portfolio and held by the Custodian or in
a U.S. Securities System account of the Custodian, which account shall not
include any assets of the Custodian other than assets held as a fiduciary,
custodian or otherwise for its customers ("U.S. Securities System Account") or
in the Custodian's Direct Paper book-entry system account, which account shall
not include any assets of the Custodian other than assets held as a fiduciary,
custodian or otherwise for its customers ("Direct Paper System Account") only
upon receipt of Proper Instructions from the Fund on behalf of the applicable
Portfolio, which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
1) Upon sale of such securities for the account
of the Portfolio and receipt of payment therefor;
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292701.1
<PAGE>
2) Upon the receipt of payment in connection with
any repurchase agreement related to such securities entered into
by the Portfolio;
3) In the case of a sale effected through a
U.S. Securities System, in accordance with the provisions of
Section 2.10 hereof;
4) To the depository agent in connection with
tender or other similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be delivered to
the Custodian;
6) To the issuer thereof, or its agent, for
transfer into the name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the
account of the Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery" custom; provided
that, in any such case, the Custodian shall have no responsibility or liability
for any loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any
plan of merger, consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new securities and cash, if any,
are to be delivered to the Custodian;
9) In the case of warrants, rights or similar
securities, the surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or temporary securities
for definitive securities; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of
securities made by the Portfolio, but only against receipt of
-3-
292701.1
<PAGE>
adequate collateral as agreed upon from time to time by the Custodian and the
Fund on behalf of the Portfolio, which may be in the form of cash or obligations
issued by the United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is to be credited
to the Custodian's U.S. Securities System Account, the Custodian will not be
held liable or responsible for the delivery of securities owned by the Portfolio
prior to the receipt of such collateral;
11) For delivery as security in connection with
any borrowings by the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only against receipt of
amounts borrowed;
12) For delivery in accordance with the provi-
sions of any agreement among the Fund on behalf of the Portfolio, the Custodian
and a broker-dealer registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Portfolio of the Fund;
13) For delivery in accordance with the
provisions of any agreement among the Fund on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of the Commodity Futures
Trading Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with transactions by the
Portfolio of the Fund;
14) Upon receipt of instructions from the
transfer agent for the Fund (the "Transfer Agent"), for delivery to such
Transfer Agent or to the holders of shares in connection with distributions in
kind, as may be described from time to time in the Fund's currently effective
prospectus and statement of additional information related to the Portfolio (the
"Prospectus"), in satisfaction of requests by holders of Shares for repurchase
or redemption; and
15) For any other proper corporate purpose, but
only upon receipt of, in addition to Proper Instructions from the Fund on behalf
of the applicable Portfolio, a certified copy of a resolution of the Board of
Directors or of the executive committee thereof signed by an officer of the Fund
and certified by the Fund's Secretary or Assistant Secretary specifying the
securities of the Portfolio to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such
-4-
292701.1
<PAGE>
purpose to be a proper corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by
the Custodian (other than bearer securities) shall be registered in the name of
the Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be assigned
exclusively to the Portfolio, unless the Fund has authorized in writing the
appointment of a nominee to be used in common with other registered investment
companies having the same investment adviser as the Portfolio, or in the name or
nominee name of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Portfolio under the terms
of this Contract shall be in "street name" or other good delivery form. If,
however, the Fund directs the Custodian to maintain securities in "street name",
the Custodian shall utilize reasonable efforts only to (i) timely collect income
due the Fund on such securities and (ii) notify the Fund of relevant corporate
actions including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the United States in the name of each
Portfolio of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940, as amended. Funds held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the banking
department of the Custodian or in such other banks or trust companies as it may
in its discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940, as amended (the "Investment Company Act") and
that each such bank or trust company and the funds to be deposited with each
such bank or trust company shall on behalf of each applicable Portfolio be
approved by vote of a majority of the Board of Directors. Such funds shall be
deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon agreement between the
Fund on behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified times
agreed upon from time to time by the Fund and the Custodian in the
-5-
292701.1
<PAGE>
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section
2.3, the Custodian shall collect on a timely basis all income and other payments
with respect to United States registered securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and other
payments with respect to domestic bearer securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to such Portfolio's account. Without
limiting the generality of the foregoing, the Custodian shall detach and present
for payment all coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on securities held
hereunder. Collection of income due each Portfolio on domestic securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the responsibility of
the Fund; the Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data in its
possession as may be necessary to assist the Fund in arranging for the timely
delivery to the Custodian of the income to which the Portfolio is properly
entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper
Instructions from the Fund on behalf of the applicable Portfolio, which may be
continuing instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities,
options, futures contracts or options on futures contracts for the account of
the Portfolio but only (a) against the delivery of such securities or evidence
of title to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the Investment Company Act to
act as a custodian and has been designated by the Custodian as its agent for
this purpose) registered in the name of the Portfolio or in the name of a
nominee of the Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a U.S. Securities
System, in accordance with the conditions set forth in Section 2.10 hereof; (c)
in the case of a purchase involving the Direct Paper System, in accordance with
the conditions set forth in Section 2.11; (d) in the case of repurchase
agreements entered into between the Fund on behalf of the Portfolio and the
Custodian, or another bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form or through an
entry crediting the Custodian's
-6-
292701.1
<PAGE>
account at the Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Portfolio of securities owned
by the Custodian along with written evidence of the agreement by the Custodian
to repurchase such securities from the Portfolio; or (e) for transfer to a time
deposit account of the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation from a broker and/or
the applicable bank pursuant to Proper Instructions from the Fund as defined in
Article 5;
2) In connection with conversion, exchange or
surrender of securities owned by the Portfolio as set forth in
Section 2.2 hereof;
3) For the redemption or repurchase of Shares
issued by the Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability
incurred by the Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes, management fees, accounting
fees, transfer agent fees, legal fees and operating expenses of the Fund whether
or not such expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends on Shares of
the Portfolio declared pursuant to the governing documents of the
Fund;
6) For payment of the amount of dividends
received in respect of securities sold short;
7) For any other proper purpose, but only upon
receipt of, in addition to Proper Instructions from the Fund on behalf of the
Portfolio, a certified copy of a resolution of the Board of Directors or of the
executive committee thereof signed by an officer of the Fund and certified by
the Fund's Secretary or an Assistant Secretary, specifying the amount of such
payment, setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the person or persons
to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the account of
a Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund on
behalf of such Portfolio to so pay in advance, the Custodian shall be absolutely
liable to the Fund for such securities to the same extent as if the securities
had been received by the Custodian.
-7-
292701.1
<PAGE>
2.9 Appointment of Agents. The Custodian may at any time or
times in its discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company Act to act
as a custodian, as its agent to carry out such of the provisions of this Article
2 as the Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of its responsibilities
or liabilities hereunder.
2.10 Deposit of Securities in U.S. Securities Systems. The
Custodian may deposit and/or maintain domestic securities owned by a Portfolio
in a clearing agency registered with the Securities and Exchange Commission (the
"SEC") under Section 17A of the Exchange Act, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies (a "U.S. Securities System") in accordance
with applicable Federal Reserve Board and SEC rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep domestic securities of
the Portfolio in a U.S. Securities System provided that such
securities are represented in a U.S. Securities System Account;
2) The records of the Custodian with respect to
securities of the Portfolio which are maintained in a U.S.
Securities System shall identify by book-entry those securities
belonging to the Portfolio;
3) The Custodian shall pay for domestic
securities purchased for the account of the Portfolio upon (i) receipt of advice
from the U.S. Securities System that such securities have been transferred to
the U.S. Securities System Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the account of
the Portfolio; the Custodian shall transfer securities sold for the account of
the Portfolio upon (i) receipt of advice from the U.S. Securities System that
payment for such securities has been transferred to the U.S. Securities System
Account and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Portfolio. Copies of
all advices from the U.S. Securities System of transfers of securities for the
account of the Portfolio shall identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio in the
form of a written advice or notice and shall furnish to the Fund on behalf of
the Portfolio copies of daily transaction sheets reflecting each day's
transactions in the U.S. Securities System for the account of the Portfolio;
-8-
292701.1
<PAGE>
4) The Custodian shall provide the Fund on behalf
of the Portfolio(s) with any report obtained by the Custodian on
the U.S. Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the U.S. Securities System;
5) The Custodian shall have received from the
Fund on behalf of the Portfolio the initial or annual
certificate, as the case may be, required by Article 14 hereof;
6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to the Fund for the benefit of
the Portfolio for any loss or damage to the Portfolio resulting from use of the
U.S. Securities System by reason of any negligence, misfeasance or misconduct of
the Custodian or any of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce effectively such rights as
it may have against the U.S. Securities System; at the election of the Fund, it
shall be entitled to be subrogated to the rights of the Custodian with respect
to any claim against the U.S. Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if and to the
extent that the Portfolio has not been made whole for any such loss or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System.
The Custodian may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the
Direct Paper System will be effected in the absence of Proper Instructions from
the Fund on behalf of the Portfolio;
2) The Custodian may keep securities of the
Portfolio in the Direct Paper System only if such securities are represented in
the Direct Paper System Account;
3) The records of the Custodian with respect to
securities of the Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities
purchased for the account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer of securities to
the account of the Portfolio. The Custodian shall transfer securities sold for
the account of the Portfolio upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for the account of the
Portfolio;
-9-
292701.1
<PAGE>
5) The Custodian shall furnish the Fund on behalf
of the Portfolio confirmation of each transfer to or from the account of the
Portfolio, in the form of a written advice or notice, of Direct Paper on the
next business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the account of the Portfolio; and
6) Upon the reasonable request of the Fund, the
Custodian shall provide the Fund with any report on the Direct Paper System's
system of internal accounting controls which had been prepared as of the time of
such request.
2.12 Segregated Account. The Custodian shall, upon receipt of
Proper Instructions from the Fund on behalf of each applicable Portfolio,
establish and maintain a segregated account or accounts for and on behalf of
each such Portfolio, into which account or accounts may be transferred cash
and/or securities, including securities maintained in a U.S. Securities System
Account by the Custodian pursuant to Section 2.10 hereof (i) in accordance with
the provisions of any agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Exchange Act and a member of
the NASD (or any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the Commodity
Futures Trading Commission or any registered Contract Market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Portfolio, (ii) for purposes of segregating
cash or government securities in connection with options purchased, sold or
written by the Portfolio or commodity futures contracts or options thereon
purchased or sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the SEC relating to the
maintenance of segregated accounts by registered investment companies and (iv)
for other proper corporate purposes, but only, in the case of this clause (iv),
upon receipt of, in addition to Proper Instructions from the Fund on behalf of
the applicable Portfolio, a certified copy of a resolution of the Board of
Directors or of the executive committee thereof signed by an officer of the Fund
and certified by the Fund's Secretary or an Assistant Secretary, setting forth
the purpose or purposes of such segregated account and declaring such purposes
to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The
Custodian shall execute ownership and other certificates and
affidavits for all federal and state tax purposes in connection
with receipt of income or other payments with respect to domestic
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securities of each Portfolio held by it and in connection with
transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the
domestic securities held hereunder, cause to be promptly executed by the
registered holder of such securities, if the securities are registered otherwise
than in the name of the Portfolio or a nominee of the Portfolio, all proxies,
without indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund on behalf of the Portfolio such proxies, all
proxy soliciting materials and all notices relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject
to the provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without limitation,
pendency of calls and maturities of domestic securities and expirations of
rights in connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian from
issuers of the securities being held for the Portfolio. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Portfolio desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three (3) business days prior to
the date on which the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the
Fund Held Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby
authorizes and instructs the Custodian to employ as sub-custodians for the
Portfolio's securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated on
Schedule A hereto (the "foreign sub-custodians"). Upon receipt of Proper
Instructions, together with a certified resolution of the Board of Directors,
the Custodian and the Fund on behalf of the Portfolio(s) may agree to amend
Schedule A hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as sub-custodian. Upon
receipt of Proper Instructions, the Fund may instruct the Custodian to cease the
employment of any one or more such foreign sub-custodians for maintaining
custody of the Portfolio's assets.
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3.2 Assets to be Held. The Custodian shall limit the
securities and other assets maintained in the custody of the foreign
sub-custodians to: (a) "foreign securities", as defined in paragraph (c)(1) of
Rule 17f-5 under the Investment Company Act and (b) cash and cash equivalents in
such amounts as the Custodian may determine to be reasonably necessary to effect
the Portfolio's foreign securities transactions.
3.3 Foreign Securities Systems. Except as may otherwise be
agreed upon in writing by the Custodian and the Fund, assets of the Portfolio(s)
shall be maintained in a clearing agency which acts as a securities depository
or in a book-entry system for the central handling of securities located outside
the United States (each a "Foreign Securities System") only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof (Foreign Securities Systems and U.S. Securities
Systems are referred to herein collectively as the "Securities Systems"). Where
possible, such arrangements shall include entry into agreements containing the
provisions set forth in Section 3.5 hereof.
3.4 Holding Securities. The Custodian may hold securities and
other non-cash property for all of its customers, including the Fund, with a
foreign sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers; provided, however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that the securities and other non-cash property so held
by the foreign sub-custodian be held separately from the assets of the foreign
sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each
agreement with a foreign banking institution shall provide that: (a) the assets
of each Portfolio will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership of the assets of each Portfolio will be
freely transferable without the payment of money or value other than for custody
or administration; (c) adequate records will be maintained identifying the
assets as belonging to the Custodian on behalf of its customers; (d) officers of
or auditors employed by, or other representatives of the Custodian, including to
the extent permitted under applicable law the independent public accountants for
the Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Custodian; and
(e) assets of the Portfolios held by the foreign
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sub-custodian will be subject only to the instructions of the
Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon
request of the Fund, the Custodian will use reasonable efforts to arrange for
the independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such foreign
banking institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the
Fund from time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Portfolio(s) held by foreign sub-custodians,
including but not limited to an identification of entities having possession of
Portfolio securities and other assets and advices or notifications of any
transfers of securities to or from each custodial account maintained by a
foreign banking institution for the Custodian on behalf of its customers
indicating, as to securities acquired for a Portfolio, the identity of the
entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as
otherwise provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis, to the
foreign securities of the Portfolio(s) held outside the United States by
foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the
contrary, settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the account of
each applicable Portfolio may be effected in accordance with the customary
established securities trading or securities processing practices and procedures
in the jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's nominee to the same
extent as set forth in Section 2.3 of this Contract, and the Fund agrees to hold
any such nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each
agreement pursuant to which the Custodian employs a foreign
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banking institution as a foreign sub-custodian shall require the institution to
exercise reasonable care in the performance of its duties and to indemnity, and
hold harmless, the Custodian and the Fund from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the Fund on
behalf of the Portfolio, it shall be entitled to be subrogated to the rights of
the Custodian with respect to any claims against a foreign banking institution
as a consequence of any such loss, damage, cost, expense, liability or claim if
and to the extent that the Portfolio has not been made whole for any such loss,
damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for
the acts or omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by Section 3.13 hereof, the Custodian shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from nationalization,
expropriation, currency restrictions, or acts of war or terrorism or any loss
where the sub-custodian has otherwise exercised reasonable care. Notwithstanding
the foregoing provisions of this Section 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except such loss
as may result from (a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses (excluding
a bankruptcy or insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other losses under circumstances
where the Custodian and State Street London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the
Custodian to advance cash or securities for any purpose for the benefit of a
Portfolio, including the purchase or sale of foreign exchange or of contracts
for foreign exchange, or in the event that the Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except such as
may arise from its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the account of the
applicable Portfolio shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Portfolio's assets to the extent necessary
to obtain reimbursement.
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3.12 Monitoring Responsibilities. The Custodian shall furnish
annually to the Fund (during the month of June) information concerning the
foreign sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with the
initial approval of this Contract. In addition, the Custodian will promptly
inform the Fund in the event that the Custodian learns of a material adverse
change in the financial condition of a foreign sub-custodian or any material
loss of the assets of the Fund or in the case of any foreign sub-custodian not
the subject of an exemptive order from the SEC is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the local
currency equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted U.S.
accounting principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth
in this Contract, the provisions hereof shall not apply where the custody of
Portfolio assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment Company Act
meeting the qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be governed by Article 1
of this Contract.
(b) Cash held for each Portfolio of the Fund in the United
Kingdom shall be maintained in an interest bearing account established for the
Fund with the Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
3.14 Tax Law. The Custodian shall have no responsibility or
liability for any obligations now or hereafter imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of the United States. It shall
be the responsibility of the Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of the Fund by the tax law of
jurisdictions other than those mentioned in the above sentence, including
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of jurisdictions for which the Fund has provided such
information.
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4. Payments for Sales or Repurchases or Redemptions of
Shares
The Custodian shall receive from the distributor for the
Shares or from the Transfer Agent and deposit into the account of the
appropriate Portfolio such payments as are received for Shares of that Portfolio
issued or sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each Portfolio and the Transfer Agent of
any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but
subject to the limitations of the Articles of Incorporation and any applicable
votes of the Board of Directors pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares, the Custodian shall honor checks drawn on the Custodian
by a holder of Shares, which checks have been furnished by the Fund to the
holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time between
the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a
writing signed or initialled by one or more person or persons as the Board of
Directors shall have from time to time authorized. Each such writing shall set
forth the specific transaction or type of transaction involved, including a
specific statement of the purpose for which such action is requested. Oral
instructions will be considered Proper Instructions if the Custodian reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall cause all
oral instructions to be confirmed in writing. Upon receipt of a certificate of
the Secretary or an Assistant Secretary of the Fund as to the authorization by
the Board of Directors accompanied by a detailed description of procedures
approved by the Board of Directors, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board of Directors and the Custodian are satisfied
that such procedures afford adequate safeguards for Portfolio assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any
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three-party agreement which requires a segregated asset account in accordance
with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority
from the Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor
expenses of handling securities or other similar items relating to its duties
under this Contract, provided that all such payments shall be accounted for to
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for
securities in definitive form;
3) endorse for collection, in the name of the
Portfolio, checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary
details in connection with the sale, exchange, substitution, purchase, transfer
and other dealings with the securities and property of the Portfolio except as
otherwise directed by the Board of Directors.
7. Evidence of Authority
The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other instrument or paper
believed by it to be genuine and to have been properly executed by or on behalf
of the Fund. The Custodian may receive and accept a certified copy of a vote of
the Board of Directors as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant to the Articles of Incorporation as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account
and Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Board of Directors to
keep the books of account of each Portfolio and/or compute the net asset value
per share of the outstanding Shares of each Portfolio or, if directed in writing
to do so by the Fund on behalf of the Portfolio(s), shall itself keep such books
of
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account and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio(s) as
described in the Prospectus and shall advise the Fund and the Transfer Agent
daily of the total amount of such net income and, if instructed in writing by an
officer of the Fund to do so, shall advise the Transfer Agent periodically of
the division of such net income among its various components. The calculations
of the net asset value per share and the daily income of each Portfolio shall be
made at the time or times described from time to time in the Prospectus.
9. Records
The Custodian shall with respect to each Portfolio create and
maintain all records relating to its activities and obligations under this
Contract in such manner as will meet the obligations of the Fund under the
Investment Company Act, with particular attention to Section 31 thereof and
Rules 3la-1 and 3la-2 thereunder. All such records shall be the property of the
Fund and shall at all times during the regular business hours of the Custodian
be open for inspection by duly authorized officers, employees or agents of the
Fund and employees and agents of the SEC. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by each Portfolio
and held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountants
The Custodian shall take all reasonable action, as the Fund on
behalf of each applicable Portfolio may from time to time request, to obtain
from year to year favorable opinions from the Fund's independent accountants
with respect to its activities hereunder in connection with the preparation of
the Fund's Form N-lA and N-SAR or other annual reports to the SEC and with
respect to any other SEC requirements.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the
Fund may reasonably require, with reports by independent public accountants on
the accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures contracts,
including securities deposited and/or maintained in a Securities System,
relating to the services provided by the Custodian under this Contract; such
reports shall be of sufficient scope and in sufficient detail, as
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may reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for
its services and expenses as Custodian as agreed upon from time to time between
the Fund on behalf of each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of
reasonable care, the Custodian shall not be responsible for the title, validity
or genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or
willful misconduct or the negligence or willful misconduct of a sub-custodian or
agent, the Custodian shall be without liability to the Fund for any loss,
liability, claim or expense resulting from or caused by: (i) events or
circumstances beyond the reasonable control of the Custodian or any
sub-custodian or Securities System or any agent or nominee of any of the
foregoing, including, without limitation, nationalization or expropriation,
imposition of currency controls or restrictions, the interruption, suspension or
restriction of trading on or the closure of any securities markets, power or
other mechanical or technological failures or interruptions, computer viruses or
communications disruptions, acts of war or terrorism, riots, revolutions, work
stoppages, natural disasters or other similar events or acts; (ii) errors by the
Fund or its investment advisor in their instructions to the Custodian provided
such instructions have been given in accordance with this Contract; (iii) the
insolvency of or acts or omissions by a Securities System; (iv)
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any delay or failure of any broker, agent or intermediary, central bank or other
commercially prevalent payment or clearing system to deliver to the Custodian's
sub-custodian or agent securities purchased or in the remittance of payment made
in connection with securities sold; (v) any delay or failure of any company,
corporation, or other body in charge of registering or transferring securities
in the name of the Custodian, the Fund, the Custodian's sub-custodians, nominees
or agents or any consequential losses arising out of such delay or failure to
transfer such securities including non-receipt of bonus, dividends and rights
and other accretions or benefits; (vi) delays or inability to perform its duties
due to any disorder in market infrastructure with respect to any particular
security or Securities System; and (vii) any provision of any present or future
law or regulation or order of the United States, or any other country, or
political subdivision thereof or of any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a
foreign banking institution appointed pursuant to the provisions of Article 3 to
the same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Section 3.10)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by Section 3.13 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund on behalf of a Portfolio requires the Custodian to
take any action with respect to securities, which action involves the payment of
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund or the Portfolio being liable for
the payment of money or incurring liability of some other form, the Fund on
behalf of the Portfolio, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to the Custodian.
If the Fund requires the Custodian, its affiliates,
subsidiaries or agents, to advance cash or securities for any purpose
(including, but not limited to, securities settlements, the purchase or sale of
foreign exchange or of contracts for foreign exchange, and assumed settlement)
for the benefit of a Portfolio, or in the event that the Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the
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performance of this Contract, except such as may arise from its or its nominee's
own negligent action, negligent failure to act or willful misconduct, any
property at any time held for the account of the applicable Portfolio shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable hereunder for
indirect, special or consequential damages.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of the date of its
execution, shall continue in full force and effect until terminated as
hereinafter provided, may be amended at any time by mutual agreement of the
parties hereto and may be terminated by either party by an instrument in writing
delivered or mailed, postage prepaid to the other party, such termination to
take effect not sooner than thirty (30) days after the date of such delivery or
mailing; provided, however, that the Custodian shall not with respect to a
Portfolio act under Section 2.10 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Directors has approved the initial use of a particular Securities System by such
Portfolio, as required by Rule 17f-4 under the Investment Company Act and that
the Custodian shall not with respect to a Portfolio act under Section 2.11
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Directors has approved the initial use
of the Direct Paper System by such Portfolio; provided further, however, that
the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation, and further provided, that the Fund on behalf of one or more of
the Portfolios may at any time by action of the Board of Directors (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each
applicable Portfolio shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements.
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15. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors, the Custodian shall, upon termination, deliver to such successor
custodian at the offices of the Custodian, duly endorsed and in the form for
transfer, all securities of each applicable Portfolio then held by it hereunder
and shall transfer to an account of the successor custodian all of the
securities of each such Portfolio held in a Securities System. If no such
successor custodian shall be appointed, the Custodian shall, in like manner,
upon receipt of a certified copy of a vote of the Board of Directors, deliver at
the office of the Custodian and transfer such securities, funds and other
properties in accordance with such vote. In the event that no written order
designating a successor custodian or certified copy of a vote of the Board of
Directors shall have been delivered to the Custodian on or before the date when
such termination shall become effective, then the Custodian shall have the right
to deliver to a bank or trust company, which is a "bank" as defined in the
Investment Company Act, doing business in Boston, Massachusetts, or New York,
New York, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$200,000,000, all securities, funds and other properties held by the Custodian
on behalf of each applicable Portfolio and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract on behalf
of each applicable Portfolio and to transfer to an account of such successor
custodian all of the securities of each such Portfolio held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties
remain in the possession of the Custodian after the date of termination hereof
owing to failure of the Fund to procure the certified copy of the vote referred
to or of the Board of Directors to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the
Custodian and the Fund on behalf of each of the Portfolios may from time to time
agree on such provisions interpretive of or in addition to the provisions of
this Contract as may in their joint opinion be consistent with the general tenor
of this Contract.
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Any such interpretive or additional provisions shall be in a writing signed by
both parties and shall be annexed hereto, provided that no such interpretive or
additional provisions shall contravene any applicable federal or state
regulations or any provision of the Articles of Incorporation. No interpretive
or additional provisions made as provided in the preceding sentence shall be
deemed to be an amendment of this Contract.
17. Additional Funds
In the event that the Fund establishes one or more series of
Shares in addition to Series A-1995 with respect to which it desires to have the
Custodian render services as custodian under the terms hereof, it shall so
notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series of Shares shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date
hereof, all prior contracts between the Fund and the Custodian relating to the
custody of the assets of the Portfolio(s).
20. Shareholder Communications Election
SEC Rule 14b-2 requires banks which hold securities for the
account of customers to respond to requests by issuers of securities for the
names, addresses and holdings of beneficial owners of securities of that issuer
held by the bank unless the beneficial owner has expressly objected to
disclosure of this information. In order to comply with the rule, the Custodian
needs the Fund to indicate whether it authorizes the Custodian to provide the
Fund's name, address, and share position to requesting companies whose
securities the Fund owns. If the Fund tells the Custodian "no", the Custodian
will not provide this information to requesting companies. If the Fund tells the
Custodian "yes" or does not check either "yes" or "no" below, the Custodian is
required by the rule to treat the Fund as consenting to disclosure of this
information for all securities owned by the Fund or any funds or accounts
established by the Fund. For the Fund's protection, the Rule prohibits the
requesting company from
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<PAGE>
using the Fund's name and address for any purpose other than corporate
communications. Please indicate below whether the Fund consents or objects by
checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the
Fund's name, address, and share positions.
NO [ ] The Custodian is not authorized to release the
Fund's name, address, and share positions.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of August [__], 1995.
EQUITABLE REAL ESTATE HYPERION
MORTGAGE OPPORTUNITY FUND, INC.
By: ___________________________
Name:___________________________
Title:__________________________
STATE STREET BANK AND TRUST COMPANY
By:
Name: Ronald E. Logue
Title: Executive Vice President
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<PAGE>
Schedule A
The following foreign banking institutions and foreign
securities depositories have been approved by the Board of Directors of the
Equitable Real Estate Hyperion Mortgage Opportunity Fund, Inc. (the "Fund") for
use as sub-custodians for
the Fund's securities and other assets:
(Insert banks and securities depositories)
Certified:
- -------------------------
Fund's Authorized Officer
Date: August [__], 1995
292701.1
<PAGE>
DATA ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT
AGREEMENT between Equitable Real Estate Hyperion Mortgage
Opportunity Fund, Inc. (the "Customer") and State Street Bank and
Trust Company ("State Street").
PREAMBLE
WHEREAS, State Street has been appointed as custodian of certain assets
of the Customer pursuant to a certain Custodian Agreement (the "Custodian
Agreement") dated as of August [ ], 1995;
WHEREAS, State Street has developed and utilizes proprietary accounting
and other systems, including State Street's proprietary Multicurrency HORIZONR
Accounting System, in its role as custodian of the Customer, and maintains
certain Customer-related data ("Customer Data") in databases under the control
and ownership of State Street (the "Data Access Services"); and
WHEREAS, State Street makes available to the Customer certain Data
Access Services solely for the benefit of the Customer, and intends to provide
additional services, consistent with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
agree as follows:
1. SYSTEM AND DATA ACCESS SERVICES
a. System. Subject to the terms and conditions of this
Agreement, State Street hereby agrees to provide the Customer with access to
State Street's Multicurrency HORIZONR Accounting System and the other
information systems (collectively, the "System") as described in Attachment A,
on a remote basis for the purpose of obtaining reports, solely on computer
hardware, system software and telecommunication links of the Customer, as listed
in Attachment B and solely with respect to the Customer (the "Designated
Configuration") or on any designated substitute or back-up equipment
configuration with State Street's written consent, such consent not to be
unreasonably withheld.
b. Data Access Services. State Street agrees to make
available to the Customer the Data Access Services subject to the
terms and conditions of this Agreement and data access operating
292701.1
<PAGE>
standards and procedures as may be issued by State Street from time to time. The
ability of the Customer to originate electronic instructions to State Street on
behalf of the Customer in order to (i) effect the transfer or movement of cash
or securities held under custody by State Street or (ii) transmit accounting or
other information (such transactions are referred to herein as "Client
Originated Electronic Financial Instructions"), and (iii) access data for the
purpose of reporting and analysis, shall be deemed to be Data Access Services
for purposes of this Agreement.
c. Additional Services. State Street may from time to time
agree to make available to the Customer additional Systems that are not
described in the attachments to this Agreement. In the absence of any other
written agreement concerning such additional systems, the term "System" shall
include, and this Agreement shall govern, the Customer's access to and use of
any additional System made available by State Street and/or accessed by the
Customer.
2. NO USE OF THIRD PARTY SOFTWARE
State Street and the Customer acknowledge that in connection
with the Data Access Services provided under this Agreement, the Customer will
have access, through the Data Access Services, to Customer Data and to functions
of State Street's proprietary systems; provided, however, that in no event will
the Customer have direct access to any third party systems-level software that
retrieves data for, stores data from, or otherwise supports the System.
3. LIMITATION ON SCOPE OF USE
a. Designated Equipment; Designated Location. The
System and the Data Access Services shall be used and accessed
solely on and through the Designated Configuration at the offices
of the Customer located in _____________, _______________
("Designated Location").
b. Designated Configuration; Trained Personnel. State
-------------------------------------------
Street shall be responsible for supplying, installing and
maintaining the Designated Configuration at the Designated
Location. State Street and the Customer agree that each will
engage or retain the services of trained personnel to enable both
parties to perform their respective obligations under this
Agreement. State Street agrees to use commercially reasonable
efforts to maintain the System so that it remains serviceable,
provided, however, that State Street does not guarantee or assure
uninterrupted remote access use of the System.
c. Scope of Use. The Customer will use the System and
the Data Access Services only for the processing of securities
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292701.1
<PAGE>
transactions, the keeping of books of account for the Customer and accessing
data for purposes of reporting and analysis. The Customer shall not, and shall
cause its employees and agents not to (i) permit any third party to use the
System or the Data Access Services, (ii) sell, rent, license or otherwise use
the System or the Data Access Services for any purpose other than as expressly
authorized under this Agreement, (iii) allow access to the System or the Data
Access Services through terminals or any other computer or telecommunications
facilities located outside the Designated Locations, (iv) allow or cause any
information (other than portfolio holdings, valuations of portfolio holdings,
and other information reasonably necessary for the management or distribution of
the assets of the Customer) transmitted from State Street's databases, including
data from third party sources, available through use of the System or the Data
Access Services to be redistributed or retransmitted to another computer,
terminal or other device for other than use for or on behalf of the Customer or
(v) modify the System in any way, including without limitation, developing any
software for or attaching any devices or computer programs to any equipment,
system, software or database which forms a part of or is resident on the
Designated Configuration.
d. Other Locations. Except in the event of an emergency or of
a planned System shutdown, the Customer's access to services performed by the
System or to Data Access Services at the Designated Location may be transferred
to a different location only upon the prior written consent of State Street. In
the event of an emergency or System shutdown, the Customer may use any back-up
site included in the Designated Configuration or any other back-up site agreed
to by State Street, which agreement will not be unreasonably withheld. The
Customer may secure from State Street the right to access the System or the Data
Access Services through computer and telecommunications facilities or devices
complying with the Designated Configuration at additional locations only upon
the prior written consent of State Street and on terms to be mutually agreed
upon by the parties.
e. Title. Title and all ownership and proprietary
rights to the System, including any enhancements or modifications
thereto, whether or not made by State Street, are and shall
remain with State Street.
f. No Modification. Without the prior written consent of State
Street, the Customer shall not modify, enhance or otherwise create derivative
works based upon the System, nor shall the Customer reverse engineer, decompile
or otherwise attempt to secure the source code for all or any part of the
System.
g. Security Procedures. The Customer shall comply
with data access operating standards and procedures and with user
-3-
292701.1
<PAGE>
identification or other password control requirements and other security
procedures as may be issued from time to time by State Street for use of the
System on a remote basis and to access the Data Access Services. The Customer
shall have access only to the Customer Data and authorized transactions agreed
upon from time to time by State Street and, upon notice from State Street, the
Customer shall discontinue remote use of the System and access to Data Access
Services for any security reasons cited by State Street; provided, that, in such
event, State Street shall, for a period not less than 180 days (or such other
shorter period specified by the Customer) after such discontinuance, assume
responsibility to provide accounting services under the terms of the Custodian
Agreement.
h. Inspections. State Street shall have the right to inspect
the use of the System and the Data Access Services by the Customer and the
Investment Advisor to ensure compliance with this Agreement. The on-site
inspections shall be upon prior written notice to Customer and the Investment
Advisor and at reasonably convenient times and frequencies so as not to result
in an unreasonable disruption of the Customer's or the Investment Advisor's
business.
4. PROPRIETARY INFORMATION
a. Proprietary Information. The Customer acknowledges and
State Street represents that the System and the databases, computer programs,
screen formats, report formats, interactive design techniques, documentation and
other information made available to the Customer by State Street as part of the
Data Access Services and through the use of the System constitute copyrighted,
trade secret, or other proprietary information of substantial value to State
Street. Any and all such information provided by State Street to the Customer
shall be deemed proprietary and confidential information of State Street
(hereinafter "Proprietary Information"). The Customer agrees that it will hold
such Proprietary Information in confidence and secure and protect it in a manner
consistent with its own procedures for the protection of its own confidential
information and to take appropriate action by instruction or agreement with its
employees who are permitted access to the Proprietary Information to satisfy its
obligations hereunder. The Customer shall use all commercially reasonable
efforts to assist State Street in identifying and preventing any unauthorized
use, copying or disclosure of the Proprietary Information or any portions
thereof or any of the logic, formats or designs contained therein.
b. Cooperation. Without limitation of the foregoing,
the Customer shall advise State Street immediately in the event
the Customer learns or has reason to believe that any person to
whom the Customer has given access to the Proprietary
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292701.1
<PAGE>
Information, or any portion thereof, has violated or intends to violate the
terms of this Agreement, and the Customer will, at its expense, cooperate with
State Street in seeking injunctive or other equitable relief in the name of the
Customer or State Street against any such person.
c. Injunctive Relief. The Customer acknowledges that the
disclosure of any Proprietary Information, or of any information which at law or
equity ought to remain confidential, will immediately give rise to continuing
irreparable injury to State Street inadequately compensable in damages at law.
In addition, State Street shall be entitled to obtain immediate injunctive
relief against the breach or threatened breach of any of the foregoing
undertakings, in addition to any other legal remedies which may be available.
d. Survival. The provisions of this Section 4 shall
survive the termination of this Agreement.
5. LIMITATION ON LIABILITY
a. Limitation on Amount and Time for Bringing Action. The
Customer agrees any liability of State Street to the Customer or any third party
arising out of State Street's provision of Data Access Services or the System
under this Agreement shall be limited to the amount paid by the Customer for the
preceding 24 months for such services. In no event shall State Street be liable
to the Customer or any other party for any special, indirect, punitive or
consequential damages even if advised of the possibility of such damages. No
action, regardless of form, arising out of this Agreement may be brought by the
Customer more than two years after the Customer has knowledge that the cause of
action has arisen.
b. NO OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE MADE BY
STATE STREET.
c. Third-Party Data. Organizations from which State Street may
obtain certain data included in the System or the Data Access Services are
solely responsible for the contents of such data, and State Street shall have no
liability for claims arising out of the contents of such third-party data,
including, but not limited to, the accuracy thereof.
d. Regulatory Requirements. As between State Street
and the Customer, the Customer shall be solely responsible for
the accuracy of any accounting statements or reports produced
using the Data Access Services and the System and the conformity
thereof with any requirements of law.
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292701.1
<PAGE>
e. Force Majeure. Neither party shall be liable for any costs
or damages due to delay or nonperformance under this Agreement arising out of
any cause or event beyond such party's control, including without limitation,
cessation of services hereunder or any damages resulting therefrom to the other
party, or the Customer as a result of work stoppage, power or other mechanical
failure, computer virus, natural disaster, governmental action, or communication
disruption.
6. INDEMNIFICATION
The Customer agrees to indemnify and hold State Street
harmless from any loss, damage or expense including reasonable attorney's fees
(a "loss") suffered by State Street arising from (i) the negligence or willful
misconduct in the use by the Customer of the Data Access Services or the System,
including any loss incurred by State Street resulting from a security breach at
the Designated Location or committed by the Customer's employees or agents of
the Customers and (ii) any loss resulting from incorrect Client Originated
Electronic Financial Instructions. State Street shall be entitled to rely on the
validity and authenticity of Client Originated Electronic Financial Instructions
without undertaking any further inquiry as long as such instruction is
undertaken in conformity with security procedures established by State Street
from time to time.
7. FEES
Fees and charges for the use of the System and the Data Access
Services and related payment terms shall be as set forth in the Custody Fee
Schedule in effect from time to time between the parties (the "Fee Schedule").
Any tariffs, duties or taxes imposed or levied by any government or governmental
agency by reason of the transactions contemplated by this Agreement, including,
without limitation, federal, state and local taxes, use, value added and
personal property taxes (other than income, franchise or similar taxes which may
be imposed or assessed against State Street) shall be borne by the Customer. Any
claimed exemption from such tariffs, duties or taxes shall be supported by
proper documentary evidence delivered to State Street.
8. TRAINING, IMPLEMENTATION AND CONVERSION
a. Training. State Street agrees to provide training, at a
designated State Street training facility or at the Designated Location, to the
Customer's personnel in connection with the use of the System on the Designated
Configuration. The Customer agrees that it will set aside, during regular
business hours or at other times agreed upon by both parties, sufficient time to
enable all operators of the System and the Data Access
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<PAGE>
Services, designated by the Customer, to receive the training offered by State
Street pursuant to this Agreement.
b. Installation and Conversion. State Street shall be
responsible for the technical installation and conversion
("Installation and Conversion") of the Designated Configuration.
The Customer shall have the following responsibilities in
connection with Installation and Conversion of the System:
(i) The Customer shall be solely responsible for the
timely acquisition and maintenance of the hardware and software that
attach to the Designated Configuration in order to use the Data Access
Services at the Designated Location.
(ii) State Street and the Customer each agree that they
will assign qualified personnel to actively participate during the
Installation and Conversion phase of the System implementation to
enable both parties to perform their respective obligations under this
Agreement.
9. SUPPORT
During the term of this Agreement, State Street agrees to
provide the support services set out in Attachment C to this Agreement.
10. TERM OF AGREEMENT
a. Term of Agreement. This Agreement shall become
effective on the date of its execution by State Street and shall
remain in full force and effect until terminated as herein
provided.
b. Termination of Agreement. Either party may terminate this
Agreement (i) for any reason by giving the other party at least one-hundred and
eighty days' prior written notice in the case of notice of termination by State
Street to the Customer or thirty days' notice in the case of notice from the
Customer to State Street of termination; or (ii) immediately for failure of the
other party to comply with any material term and condition of the Agreement by
giving the other party written notice of termination. In the event the Customer
shall cease doing business, shall become subject to proceedings under the
bankruptcy laws (other than a petition for reorganization or similar proceeding)
or shall be adjudicated bankrupt, this Agreement and the rights granted
hereunder shall, at the option of State Street, immediately terminate with
notice to the Customer. This Agreement shall in any event terminate as to any
Customer within 90 days after the termination of the Custodian Agreement
applicable to such Customer.
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<PAGE>
c. Termination of the Right to Use. Upon termination of this
Agreement for any reason, any right to use the System and access to the Data
Access Services shall terminate and the Customer shall immediately cease use of
the System and the Data Access Services. Immediately upon termination of this
Agreement for any reason, the Customer shall return to State Street all copies
of documentation and other Proprietary Information in its possession; provided,
however, that in the event that either party terminates this Agreement or the
Custodian Agreement for any reason other than the Customer's breach, State
Street shall provide the Data Access Services for a period of time and at a
price to be agreed upon by the parties.
11. MISCELLANEOUS
a. Assignment; Successors. This Agreement and the rights and
obligations of the Customer and State Street hereunder shall not be assigned by
either party without the prior written consent of the other party, except that
State Street may assign this Agreement to a successor of all or a substantial
portion of its business, or to a party controlling, controlled by, or under
common control with State Street.
b. Survival. All provisions regarding indemnifi-
cation, warranty, liability and limits thereon, and confiden-
tiality and/or protection of proprietary rights and trade secrets
shall survive the termination of this Agreement.
c. Entire Agreement. This Agreement and the attachments hereto
constitute the entire understanding of the parties hereto with respect to the
Data Access Services and the use of the System and supersedes any and all prior
or contemporaneous representations or agreements, whether oral or written,
between the parties as such may relate to the Data Access Services or the
System, and cannot be modified or altered except in a writing duly executed by
the parties. This Agreement is not intended to supersede or modify the duties
and liabilities of the parties hereto under the Custodian Agreement or any other
agreement between the parties hereto except to the extent that any such
agreement specifically refers to the Data Access Services or the System. No
single waiver or any right hereunder shall be deemed to be a continuing waiver.
d. Severability. If any provision or provisions of
this Agreement shall be held to be invalid, unlawful, or
unenforceable, the validity, legality, and enforceability of the
remaining provisions shall not in any way be affected or
impaired.
e. Governing Law. This Agreement shall be interpreted
and construed in accordance with the internal laws of The
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<PAGE>
Commonwealth of Massachusetts without regard to the conflict of laws provisions
thereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement effective as of the date hereof.
STATE STREET BANK AND TRUST COMPANY
By:_________________________________
Title:______________________________
Date:_______________________________
EQUITABLE REAL ESTATE HYPERION MORTGAGE
OPPORTUNITY FUND, INC.
By:_________________________________
Title:______________________________
Date:_______________________________
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<PAGE>
ATTACHMENT A
System Product Description
I. Multicurrency HORIZONR Accounting System. The Multicurrency
HORIZONR Accounting System is designed to provide lot level portfolio and
general ledger accounting for SEC and ERISA type requirements and includes the
following services: 1) recording of general ledger entries; 2) calculation of
daily income and expense; 3) reconciliation of daily activity with the trial
balance; and 4) appropriate automated feeding mechanisms to (i) domestic and
international settlement systems, (ii) daily, weekly and monthly evaluation
services, (iii) portfolio performance and analytic services, (iv) customer's
internal computing systems and (v) various State Street provided information
services products.
II. GlobalQuestR. GlobalQuestR is designed to provide customer
access to the following information maintained on The Multicurrency HORIZONR
Accounting System: 1) cash transactions and balances; 2) purchases and sales; 3)
income receivables; 4) tax refund; 5) daily priced positions; 6) open trades; 7)
settlement status; 8) foreign exchange transactions; 9) trade history; and 10)
daily, weekly and monthly evaluation services.
292701.1
<PAGE>
ATTACHMENT B
Designated Configuration
292701.1
<PAGE>
ATTACHMENT C
Undertaking
The undersigned understands that in the course of its
employment as Investment Advisor to Equitable Real Estate Hyperion Mortgage
Opportunity Fund, Inc. (the "Customer") it will have access to State Street Bank
and Trust Company's ("State Street") Multicurrency HORIZONR Accounting System
and other information systems (collectively, the "System").
The undersigned acknowledges that the System and the
databases, computer programs screen formats, report formats, interactive design
techniques, documentation and other information made available to the
Undersigned by State Street as part of the Data Access Services provided to the
Customer and through the use of the System constitute copyrighted, trade secret,
or other proprietary information of substantial value to State Street. Any and
all such information provided by State Street to the Undersigned shall be deemed
proprietary and confidential information of State Street ( hereinafter
"Proprietary Information"). The Undersigned agrees that it will hold such
Proprietary Information in confidence and secure and protect it in a manner
consistent with its own procedures for the protection of its own confidential
information and to take appropriate action by instruction or agreement with its
employees who are permitted access to the Proprietary Information to satisfy its
obligations hereunder.
The Undersigned will not attempt to intercept data, gain
access to data in transmission, or attempt entry into any system or files for
which it is not authorized. It will not intentionally adversely affect the
integrity of the System through the introduction of unauthorized code or data,
or through unauthorized deletion.
Upon notice by State Street for any reason, any right to use
the System and access to the Data Access Services shall terminate and the
Undersigned shall immediately cease use of the System and the Data Access
Services. Immediately upon notice by State Street for any reason, the
Undersigned shall return to State Street all copies of documentation and other
Proprietary Information in its possession.
*[Name of Investment Advisor]
By:_______________________________
Name:_____________________________
Title:____________________________
Date:_____________________________
292701.1
<PAGE>
ATTACHMENT D
Support
During the term of this Agreement, State Street agrees to
provide the following ongoing support services:
a. Telephone Support. The Customer Designated Persons may
contact State Street's HORIZONR Help Desk and Customer Assistance Center between
the hours of 8 a.m. and 6 p.m. (Eastern time) on all business days for the
purpose of obtaining answers to questions about the use of the System, or to
report apparent problems with the System. From time to time, the Customer shall
provide to State Street a list of persons, not to exceed five in number, who
shall be permitted to contact State Street for assistance (such persons being
referred to as "the Customer Designated Persons").
b. Technical Support. State Street will provide technical
support to assist the Customer in using the System and the Data Access Services.
The total amount of technical support provided by State Street shall not exceed
10 resource days per year. State Street shall provide such additional technical
support as is expressly set forth in the fee schedule in effect from time to
time between the parties (the "Fee Schedule"). Technical support, including
during installation and testing, is subject to the fees and other terms set
forth in the Fee Schedule.
c. Maintenance Support. State Street shall use commercially
reasonable efforts to correct system functions that do not work according to the
System Product Description as set forth on Attachment A in priority order in the
next scheduled delivery release or otherwise as soon as is practicable.
d. System Enhancements. State Street will provide to the
Customer any enhancements to the System developed by State Street and made a
part of the System; provided that, sixty (60) days prior to installing any such
enhancement, State Street shall notify the Customer and shall offer the Customer
reasonable training on the enhancement. Charges for system enhancements shall be
as provided in the Fee Schedule. State Street retains the right to charge for
related systems or products that may be developed and separately made available
for use other than through the System.
e. Custom Modifications. In the event the Customer desires
custom modifications in connection with its use of the System, the Customer
shall make a written request to State Street providing specifications for the
desired modification. Any custom modifications may be undertaken by State Street
in its sole discretion in accordance with the Fee Schedule.
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<PAGE>
f. Limitation on Support. State Street shall have no
obligation to support the Customer's use of the System: (i) for
use on any computer equipment or telecommunication facilities
which does not conform to the Designated Configuration or (ii) in
the event the Customer has modified the System in breach of this
Agreement.
292701.1
<PAGE>
STATE STREET BANK AND TRUST COMPANY
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
CUSTODY AND ACCOUNTING FEE SCHEDULE
I. CUSTODY, PORTFOLIO AND FUND ACCOUNTING
Custody: Maintain custody of fund assets. Settle portfolio
purchases and sales. Report buy and sell fails. Determine and
collect portfolio income. Make cash disbursements and report
cash transactions. Monitor corporate actions. Report portfolio
positions.
Portfolio and Fund Accounting. Maintain investment ledgers, provide selected
portfolio transactions, position and income reports. Maintain general ledger and
capital stock accounts. Prepare daily trial balance. Calculate net asset value.
Provide selected general ledger reports. Securities yield or market value
quotations will be provided by State Street's Automated Pricing System or by the
Fund.
The fee shown below is an annual charge, billed and payable monthly, based on
average monthly net assets.
ANNUAL FEES PER PORTFOLIO
Custody, Portfolio
Fund Net Assets and Fund Accounting
First $20 Million 1/15 of 1%
Next $80 Million 1/30 of 1%
Excess 1/100 of 1%
Minimum Monthly Charges $3,000
II. PORTFOLIO TRANSACTIONS
State Street Bank Repos................................................ $7.00
DTC or Fed Book Entry.................................................. $12.00
New York Physical Settlements.......................................... $25.00
Maturity Collections................................................... $8.00
PTC Purchase, Sale,
Deposit or Withdrawal................................................ $20.00
Per paydown............................................................ $2.00
All Other Trades....................................................... $25.00
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<PAGE>
III. FUTURES AND OPTIONS
Option charge for each option written or
closing contract, per issue, per broker ......................... $25.00
Option expiration or exercised charge,
per issue, per broker............................................ $15.00
Futures transactions -- no security movement....................... $8.00
IV. HOLDINGS CHARGE
For each issue maintained -- monthly charge....................... $5.00
V. NAVIGATOR AUTOMATED PRICING
Monthly Base Charge................................................ $175.00
Monthly Quote Charge:
Municipal Bonds via Kenny/S & P/Muller Data........................ $16.00
Fixed Income Securities via IDSI................................... $13.00
Government or Corporate Bonds via Kenny/S & P or Muller............ $11.00
Fixed Income Securities via Merrill Lynch.......................... $11.00
Foreign Bonds via Extel ....................... $10.00
Options, Futures, and Private Placements........................... $ 6.00
Listed and OTC Equities (Domestic & Foreign)....................... $ 6.00
For billing purposes, the monthly quote charge will be based on the average
number of positions in the portfolio at month end.
VI. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund consolidations or
reorganizations, extraordinary security shipments and the preparation of special
reports will be subject to negotiation. Fees for fund administration activities,
self directed securities lending transactions, SaFiRe financial reporting,
multiple class and master/feeder accounting, and other special items will be
negotiated separately.
292701.1
<PAGE>
VII. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be made as
of the end of each month. Out-of-pocket expenses include, but are not limited
to, the following:
- - Telephone - Transfer Fees
- - Wire Charges ($5.25 in - Sub-custodian Charges
and $5 out) - Price Waterhouse Audit
- - Postage and Insurance Letter
- - Courier Service - Federal Reserve Fee for
- - Duplicating Return Check items over
- - Legal Fees $2,500 ($4.25 each)
- - Supplies Related to Fund - GNMA Transfer ($15 each)
Records - PTC Deposit/Withdrawal
- - Rush Transfer ($8 each) for same day turnaround
- - Items held in Street ($50 each)
name over record date at
the request of traders
($50 each)
EQUITABLE REAL ESTATE STATE STREET BANK AND TRUST
HYPERION MORTGAGE COMPANY
OPPORTUNITY FUND, INC.
By:_______________________ By:__________________________
Title:____________________ Title:_______________________
Date:_____________________ Date:________________________
292701.1
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
ADMINISTRATIVE SERVICES CONTRACT
AGREEMENT dated as of August [ ], 1995 between Equitable Real
Estate Hyperion Mortgage Opportunity Fund, Inc. (the "Fund"), a Maryland
corporation, and Equitable Real Estate Hyperion Capital Advisors, L.L.C. (the
"Administrator"), a Delaware limited liability corporation.
WHEREAS, the Fund is engaged in business as a non-diversified,
open-end management investment company registered under the Investment Company
Act of 1940 (collectively, with the rules and regulations promulgated
thereunder, the "1940 Act");
WHEREAS, Equitable Real Estate Hyperion Capital Advisors, L.L.C.
has entered into an Investment Advisory Agreement with the Fund as of August ,
1995 to engage in the business of investing and reinvesting the Fund's assets
in securities of the type, and in accordance with the limitations, specified
in the Fund's Articles of Incorporation, By-Laws and Registration Statement
filed with the Securities and Exchange Commission under the 1940 Act and the
Securities Act of 1933, including the Prospectus forming a part thereof (the
"Registration Statement"), all as from time to time in effect, and in such
manner and to such extent as may from time to time be authorized by the Board
of Directors;
NOW, THEREFORE, in consideration of the mutual promises and
agreements herein contained and other good and valuable consideration, the
receipt of which is hereby acknowledged, it is agreed by and between the
parties hereto as follows:
1. In General
The Administrator agrees, all as more fully set forth herein, to
act as admistrator to the Fund with respect to the investment and the
reinvestment of the Fund's assets.
2. Duties and Obligations of the Administrator
(a) Subject to the succeeding provisions of this paragraph and
subject to the direction and general control of the Fund's Board of Directors,
the Administrator shall act as administrator to provide all management and
administrative services reasonably necessary for the Fund's operation, other
than those services Equitable Real Estate Hyperion Capital Advisors, L.L.C.
provides to the Fund pursuant to the Investment Management Contract. The
services to be provided by the Administrator shall include but not be limited
to those enumerated on Exhibit A hereto. The personnel providing these
services may be the Administrator's employees or employees of its affiliates
or of other organizations. The
290958.1
<PAGE>
Administrator shall make periodic reports to the Fund's Board of Directors in
the performance of its obligations under this Agreement.
(b) The Administrator may from time to time employ, subcontract
with or otherwise associate itself with entirely at its expense, such persons
as it believes to be particularly fitted to assist it in the execution of its
duties hereunder. While this agreement is in effect, the Administrator or
persons or its affiliates other than the Fund ("the affiliates"), will provide
persons satisfactory to Board of Directors to be elected or appointed officers
or employees of the Fund. These shall be a president, a secretary, a
treasurer, and such additional officers and employees as may be necessary for
the conduct of Fund business.
(c) The Administrator or its affiliates will also provide persons,
who may be Fund officers, to (i) supervise the performance of bookkeeping and
related services and calculation of net asset value and yield by the Fund
bookkeeping agent, (ii) prepare reports to and the filings with regulatory
authorities, and (iii) perform such clerical, other office and shareholder
services for the Fund as it may from time to time request. Such personnel may
be employees of the Administrator or employees of the Administrator affiliates
or of other organizations. Notwithstanding the preceding, the Administrator
shall not be required to perform any accounting services not expressly
provided for herein. The Fund will pay to the Administrator the cost of such
personnel for rendering such services at such rates as shall from time to time
be agreed upon between the parties, provided that the Fund shall not bear or
pay any costs in respect of any services performed for the Fund by officers of
the Administrator's affiliates.
(d) The Administrator or its affiliates will also furnish the Fund
such administrative and management supervision and assistance and such office
facilities as it may believe appropriate or as the Fund may reasonably request
subject to the requirements of any applicable regulatory authority. The
Administrator or its affiliates will also pay the expenses of promoting the
sale of Fund shares (other than the costs of preparing, printing and filing
the Registration Statement, printing copies of the prospectus contained
therein and complying with other applicable regulatory requirements), except
to the extent that the Fund is permitted to bear such expenses under a plan
that may in the future be adopted pursuant to Rule 12b-1 under the 1940 Act or
a similar rule.
(e) The Administrator shall give the Fund the benefit of its best
judgment and efforts in rendering these services hereunder but the
Administrator shall not be liable hereunder for any mistake of judgment or for
any other cause, provided that nothing herein shall protect the Administrator
against any liability to the Fund or to its security holders by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties hereunder, or by reason of its reckless disregard of its obligations
and duties hereunder.
(f) Nothing in this Agreement shall prevent the Administrator or
any director, officer, employee or other affiliate thereof from acting as
administrator for any other person, firm or corporation, or from engaging in
any other lawful activity, and shall not in any way
290958.1
2
<PAGE>
limit or restrict the Administrator or any of its partners, officers,
employees or agents from buying, selling or trading any securities for its or
their own accounts or for the accounts of others for whom it or they may be
acting, provided, however, that the Administrator will undertake no activities
which, in its judgment, will adversely affect the performance of its
obligations under this Agreement.
3. Compensation of the Administrator
The Fund agrees to pay the Administrator a fee of .20% of the
Fund's average daily net assets. The Administrator's fee will be accrued
daily, and will be payable on the last day of each calendar month for services
performed hereunder during that month or on such other schedule as may be used
may be agreed in writing. Any portion of this fee may be used for distribution
of Fund shares, or for making servicing payments to organizations whose
customers or clients are Fund shareholders. The Administrator may waive its
right to any fee to which it is entitled hereunder, provided such waiver is
delivered to the Fund in writing.
4. Duration and Termination
(a) This Agreement will become effective on the date hereof and
will remain in effect thereafter for successive twelve-month periods (computed
from each August ), provided that such continuation is specifically approved
at least annually by the Board of Directors and by a majority of those of the
directors who are neither party to this Agreement nor, other than by their
service as directors of the Fund, interested persons, as defined in the 1940
Act, of any such person who is party to this Agreement. This Agreement may be
terminated at any time, without the payment of any penalty, (i) by vote of a
majority of the Fund's outstanding voting securities, as defined in the 1940
Act, or (ii) by a vote of a majority of the entire Board of Directors on sixty
days' written notice to the Administrator, or (iii) by the Administrator on
sixty days' written notice to the Fund.
(b) This Agreement may not be transferred, assigned, sold or in
any manner hypothecated or pledged by either party and this Agreement shall
terminate automatically in the event of any such transfer, assignment, sale,
hypothecation or pledge. The terms "transfer", "assignment" and "sale" as used
in this paragraph shall have the meanings ascribed thereto by governing law
and in applicable rules or regulations of the Securities and Exchange
Commission.
5. Notices
Any notice under this Agreement shall be in writing to the other
party at such address as the other party may designate from time to time for
the receipt of such notice and shall be deemed to be received on the earlier
of the date actually received or on the fourth day after the postmark if such
notice is mailed first class postage prepaid.
6. Governing Law
290958.1
3
<PAGE>
This Agreement shall be construed in accordance with the laws of
the State of New York and in accordance with the applicable provisions of the
1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers and their
respective seals to be hereunto affixed, all as of the day and the year first
above written.
[SEAL] EQUITABLE REAL ESTATE HYPERION MORTGAGE
OPPORTUNITY FUND, INC.
By:_____________________________
Name:_____________________
Title:____________________
[SEAL] EQUITABLE REAL ESTATE HYPERION CAPITAL
ADVISORS, L.L.C.
By:___________________________________
Name: _____________________________
Title:_____________________________
290958.1
4
<PAGE>
Exhibit A
Administration Services To Be Performed
By Equitable Real Estate Hyperion Capital Advisors, L.L.C.
Administration Services
1. In conjunction with Fund counsel, prepare and file all
Post-Effective Amendments to the Registration Statement, all state
and federal tax returns and all other required regulatory filings.
2. In conjunction with Fund counsel, prepare and file all Blue Sky
filings, reports and renewals.
3. Coordinate, but not pay for, required Fidelity Bond and Directors
and Officers Insurance (if any) and monitor their compliance with
Investment Company Act.
4. Coordinate the preparation and distribution of all materials for
Directors, including the agenda for meetings and all exhibits
thereto, and actual and projected quarterly summaries.
5. Coordinate the activities of the Fund's Manager, Custodian,
Legal Counsel and Independent Accountants.
6. Prepare and file all periodic reports to shareholders and
proxies and provide support for shareholder meetings.
7. Monitor daily and periodic compliance with respect to all
requirements and restrictions of the Investment Company Act, the
Internal Revenue Code and the Prospectus.
8. Monitor daily the Fund's bookkeeping services agent's calculation
of all income and expense accruals, sales and redemptions of
capital shares outstanding.
9. Evaluate expenses, project future expenses, and process
payments of expenses.
10. Monitor and evaluate performance of accounting and accounting
related services by Fund's bookkeeping services agent. Nothing
herein shall be construed to require you to perform any accounting
services not expressly provided for in this Agreement.
290958.1
TRANSFER AGENCY AND SERVICE AGREEMENT
between
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
292677.1
<PAGE>
TABLE OF CONTENTS
Page
1. Terms of Appointment; Duties of the Bank................... 1
2. Fees and Expenses.......................................... 4
3. Representations and Warranties of the Bank................. 4
4. Representations and Warranties of the Fund................. 5
5. Data Access and Proprietary Information.................... 5
6. Indemnification............................................ 7
7. Standard of Care........................................... 8
8. Covenants of the Fund and the Bank......................... 9
9. Termination of Agreement................................... 9
10. Additional Funds........................................... 10
11. Assignment................................................. 10
12. Amendment.................................................. 10
13. Massachusetts Law to Apply................................. 10
14. Force Majeure.............................................. 11
15. Consequential Damages...................................... 11
16. Merger of Agreement........................................ 11
17. Counterparts............................................... 11
<PAGE>
292677.1
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the _____ day of August, 1995, by and between EQUITABLE
REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC., a Maryland corporation,
having its principal office and place of business at 520 Madison Avenue, New
York, New York 10022 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal office and place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets;
WHEREAS, the Fund intends to initially offer shares in one series, the Series
A-1995 (each such series, together with all other series subsequently
established by the Fund and made subject to this Agreement in accordance with
Article 10, being herein referred to as a "Portfolio", and collectively as the
"Portfolios"); and
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as its
transfer agent, dividend disbursing agent, custodian of certain retirement plans
and agent in connection with certain other activities, and the Bank desires to
accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
1. Terms of Appointment; Duties of the Bank
1.1 Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby
employs and appoints the Bank to act as, and the Bank agrees
to act as its transfer agent for the Fund's authorized and
issued shares of its common stock, $_________ par value,
("Shares"), dividend disbursing agent, custodian of certain
retirement plans and agent in connection with any
accumulation, open-account or similar plans provided to the
shareholders of each of the respective Portfolios of the
Fund ("Shareholders") and set out in the currently effective
prospectus and statement of additional information
("prospectus") of the Fund on behalf of the applicable
Portfolio, including without limitation any periodic
investment plan or periodic withdrawal program.
1.2 The Bank agrees that it will perform the following services:
292677.1
<PAGE>
(a) In accordance with procedures established from time to time by
agreement between the Fund on behalf of each of the
Portfolios, as applicable and the Bank, the Bank shall:
(i) Receive for acceptance orders for the purchase of
Shares, and promptly deliver payment and appropriate
documentation thereof to the Custodian of the Fund
authorized pursuant to the Articles of Incorporation
of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate
documentation thereof to the Custodian;
(iv) In respect to the transactions in items (i), (ii) and
(iii) above, the Bank shall execute transactions
directly with broker-dealers authorized by the Fund
who shall thereby be deemed to be acting on behalf of
the Fund;
(v) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over in
the appropriate manner such monies as instructed by
the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered
owners thereof upon receipt of appropriate
instructions;
(vii) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of
the applicable Portfolio;
(viii) Issue replacement certificates for those certificates
alleged to have been lost, stolen or destroyed upon
receipt by the Bank of indemnification satisfactory
to the Bank and protecting the Bank and the Fund, and
the Bank at its option, may issue replacement
certificates in place of mutilated stock certificates
upon presentation thereof and without such indemnity;
(ix) Maintain records of account for and advise the
Fund and its Shareholders as to the foregoing; and
- 2 -
292677.1
<PAGE>
(x) Record the issuance of shares of the Fund and
maintain pursuant to SEC Rule 17Ad-10(e) a record of
the total number of shares of the Fund which are
authorized, based upon data provided to it by the
Fund, and issued and outstanding. The Bank shall also
provide the Fund on a regular basis with the total
number of shares which are authorized and issued and
outstanding and shall have no obligation, when
recording the issuance of shares, to monitor the
issuance of such shares or to take cognizance of any
laws relating to the issue or sale of such shares,
which functions shall be the sole responsibility of
the Fund.
(b) In addition to and neither in lieu nor in contravention
of the services set forth in the above paragraph (a),
the Bank shall: (i) perform the customary services of
a transfer agent, dividend disbursing agent, custodian
of certain retirement plans and, as relevant, agent in
connection with accumulation, open-account or similar
plans (including without limitation any periodic
investment plan or periodic withdrawal program),
including but not limited to: maintaining all
Shareholder accounts, preparing Shareholder meeting
lists, mailing proxies, mailing Shareholder reports and
prospectuses to current Shareholders, withholding taxes
on U.S. resident and non-resident alien accounts,
preparing and filing U.S. Treasury Department Forms
1099 and other appropriate forms required with respect
to dividends and distributions by federal authorities
for all Shareholders, preparing and mailing
confirmation forms and statements of account to
Shareholders for all purchases and redemptions of
Shares and other confirmable transactions in
Shareholder accounts, preparing and mailing activity
statements for Shareholders, and providing Shareholder
account information and (ii) provide a system which
will enable the Fund to monitor the total number of
Shares sold in each State.
(c) In addition, the Fund shall: (i) identify to the Bank
in writing those transactions and assets to be treated
as exempt from blue sky reporting for each State and
(ii) verify the establishment of transactions for each
State on the system prior to activation and thereafter
monitor the daily activity for each State. The
responsibility of the Bank for the Fund's blue sky
State registration status is solely limited to the
initial establishment of transactions subject to blue
sky compliance by the Fund and the reporting of such
transactions to the Fund as provided above.
- 3 -
292677.1
<PAGE>
(d) Procedures as to who shall provide certain of these services
in Section 1 may be established from time to time by agreement
between the Fund on behalf of each Portfolio and the Bank per
the attached service responsibility schedule. The Bank may at
times perform only a portion of these services and the Fund or
its agent may perform these services on the Fund's behalf.
(e) The Bank shall provide additional services on behalf of the
Fund (i.e., escheatment services) which may be agreed upon in
writing between the Fund and the Bank.
2. Fees and Expenses
2.1 For the performance by the Bank pursuant to this Agreement,
the Fund agrees on behalf of each of the Portfolios to pay
the Bank an annual maintenance fee for each Shareholder
account as set out in the initial fee schedule attached
hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.2 below may be changed from time
to time subject to mutual written agreement between the Fund
and the Bank.
2.2 In addition to the fee paid under Section 2.1 above, the
Fund agrees on behalf of each of the Portfolios to reimburse
the Bank for out-of-pocket expenses, including but not
limited to confirmation production, postage, forms,
telephone, microfilm, microfiche, tabulating proxies,
records storage, or advances incurred by the Bank for the
items set out in the fee schedule attached hereto. In
addition, any other expenses incurred by the Bank at the
request or with the consent of the Fund, will be reimbursed
by the Fund on behalf of the applicable Portfolio.
2.3 The Fund agrees on behalf of each of the Portfolios to pay
all fees and reimbursable expenses within five days
following the receipt of the respective billing notice.
Postage for mailing of dividends, proxies, Fund reports and
other mailings to all shareholder accounts shall be advanced
to the Bank by the Fund at least seven (7) days prior to the
mailing date of such materials.
3. Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.1 It is a trust company duly organized and existing and in good standing
under the laws of the Commonwealth of Massachusetts.
3.2 It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
- 4 -
292677.1
<PAGE>
3.3 It is empowered under applicable laws and by its Charter and By-Laws to
enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
4. Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.1 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.2 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.3 All corporate proceedings required by said Articles of Incorporation
and By-Laws have been taken to authorize it to enter into and perform
this Agreement.
4.4 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
4.5 A registration statement under the Securities Act of 1933, as amended,
on behalf of each of the Portfolios is currently effective and will
remain effective, and appropriate state securities law filings have
been made and will continue to be made, with respect to all Shares of
the Fund being offered for sale.
5. Data Access and Proprietary Information
5.1 The Fund acknowledges that the data bases, computer
programs, screen formats, report formats, interactive design
techniques, and documentation manuals furnished to the Fund
by the Bank as part of the Fund's ability to access certain
Fund-related data ("Customer Data") maintained by the Bank
on data bases under the control and ownership of the Bank or
other third party ("Data Access Services") constitute
copyrighted, trade secret, or other proprietary information
(collectively, "Proprietary Information") of substantial
value to the Bank or other third party. In no event shall
Proprietary Information be deemed Customer Data. The Fund
agrees to treat all Proprietary Information as proprietary
to the Bank and further agrees that it shall not divulge any
Proprietary Information to any person or organization except
- 5 -
292677.1
<PAGE>
as may be provided hereunder. Without limiting the
foregoing, the Fund agrees for itself and its employees and
agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in
accordance with the Bank's applicable user
documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any portion
of the Proprietary Information, and if such access is
inadvertently obtained, to inform in a timely manner of such
fact and dispose of such information in accordance with the
Bank's instructions;
(d) to refrain from causing or allowing third-party data acquired
hereunder from being retransmitted to any other computer
facility or other location, except with the prior written
consent of the Bank;
(e) that the Fund shall have access only to those
authorized transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the Bank in
Proprietary Information at common law, under federal copyright
law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 5. The obligations of this Section shall
survive any earlier termination of this Agreement.
5.2 If the Fund notifies the Bank that any of the Data Access
Services do not operate in material compliance with the most
recently issued user documentation for such services, the
Bank shall endeavor in a timely manner to correct such
failure. Organizations from which the Bank may obtain
certain data included in the Data Access Services are solely
responsible for the contents of such data and the Fund
agrees to make no claim against the Bank arising out of the
contents of such third-party data, including, but not
limited to, the accuracy thereof. DATA ACCESS SERVICES AND
ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN
CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS AVAILABLE
BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT
THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO,
- 6 -
292677.1
<PAGE>
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
5.3 If the transactions available to the Fund include the
ability to originate electronic instructions to the Bank in
order to (i) effect the transfer or movement of cash or
Shares or (ii) transmit Shareholder information or other
information, then in such event the Bank shall be entitled
to rely on the validity and authenticity of such instruction
without undertaking any further inquiry as long as such
instruction is undertaken in conformity with security
procedures established by the Bank from time to time.
6. Indemnification
6.1 The Bank shall not be responsible for, and the Fund shall on behalf of
the applicable Portfolio indemnify and hold the Bank harmless from and
against, any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that
such actions are taken in good faith and without negligence or
willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any representation
or warranty of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services
which (i) are received by the Bank or its agents or
subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other person or firm on behalf of
the Fund including but not limited to any previous transfer
agent or registrar.
(d) The reliance on or the carrying out by the Bank or its
agents or subcontractors of any instructions or
requests of the Fund on behalf of the applicable
Portfolio.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or
regulations or the securities laws or regulations of
any state that such Shares be registered in such state
or in violation of any stop order or other
determination or ruling by any federal agency or any
state with respect to the offer or sale of such Shares
in such state.
- 7 -
292677.1
<PAGE>
6.2 At any time the Bank may apply to any officer of the Fund
for instructions, and may consult with legal counsel with
respect to any matter arising in connection with the
services to be performed by the Bank under this Agreement,
and the Bank and its agents or subcontractors shall not be
liable and shall be indemnified by the Fund on behalf of the
applicable Portfolio for any action taken or omitted by it
in reliance upon such instructions or upon the opinion of
such counsel. The Bank, its agents and subcontractors shall
be protected and indemnified in acting upon any paper or
document furnished by or on behalf of the Fund, reasonably
believed to be genuine and to have been signed by the proper
person or persons, or upon any instruction, information,
data, records or documents provided the Bank or its agents
or subcontractors by machine readable input, telex, CRT data
entry or other similar means authorized by the Fund, and
shall not be held to have notice of any change of authority
of any person, until receipt of written notice thereof from
the Fund. The Bank, its agents and subcontractors shall
also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the
proper manual or facsimile signatures of the officers of the
Fund, and the proper countersignature of any former transfer
agent or former registrar, or of a co-transfer agent or
co-registrar.
6.3 In order that the indemnification provisions contained in
this Section 6 shall apply, upon the assertion of a claim
for which the Fund may be required to indemnify the Bank,
the Bank shall promptly notify the Fund of such assertion,
and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the
option to participate with the Bank in the defense of such
claim or to defend against said claim in its own name or in
the name of the Bank. The Bank shall in no case confess any
claim or make any compromise in any case in which the Fund
may be required to indemnify the Bank except with the Fund's
prior written consent.
7. Standard of Care
The Bank shall at all times act in good faith and agrees to use its
best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no responsibility
and shall not be liable for loss or damage due to errors unless said
errors are caused by its negligence, bad faith, or willful misconduct
or that of its employees.
- 8 -
292677.1
<PAGE>
8. Covenants of the Fund and the Bank
8.1 The Fund shall on behalf of each of the Portfolios promptly
furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of Directors
of the Fund authorizing the appointment of the Bank and the
execution and delivery of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of
the Fund and all amendments thereto.
8.2 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices,
if any; and for the preparation or use, and for keeping account of,
such certificates, forms and devices.
8.3 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem
advisable. To the extent required by Section 31 of the
Investment Company Act of 1940, as amended, and the Rules
thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be
performed by the Bank hereunder are the property of the Fund
and will be preserved, maintained and made available in
accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with
its request.
8.4 The Bank and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged
or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.
8.5 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to
notify the Fund and to secure instructions from an authorized
officer of the Fund as to such inspection. The Bank reserves
the right, however, to exhibit the Shareholder records to any
person whenever it is advised by its counsel that it may be
held liable for the failure to exhibit the Shareholder
records to such person.
9. Termination of Agreement
9.1 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
- 9 -
292677.1
<PAGE>
9.2 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of
records and material will be borne by the Fund on behalf of
the applicable Portfolio(s). Additionally, the Bank reserves
the right to charge for any other reasonable expenses
associated with such termination and/or a charge equivalent
to the average of three (3) months' fees.
10. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to Series A-1995 with respect to which it desires to have the
Bank render services as transfer agent under the terms hereof, it shall
so notify the Bank in writing, and if the Bank agrees in writing to
provide such services, such series of Shares shall become a Portfolio
hereunder.
11. Assignment
11.1 Except as provided in Section 11.3 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party
without the written consent of the other party.
11.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
11.3 The Bank may, without further consent on the part of the
Fund, subcontract for the performance hereof with (i) Boston
Financial Data Services, Inc., a Massachusetts corporation
("BFDS") which is duly registered as a transfer agent
pursuant to Section 17A(c)(1) of the Securities Exchange Act
of 1934, as amended ("Section 17A(c)(1) "), (ii) a BFDS
subsidiary duly registered as a transfer agent pursuant to
Section 17A(c)(1) or (iii) a BFDS affiliate; provided,
however, that the Bank shall be as fully responsible to the
Fund for the acts and omissions of any subcontractor as it is
for its own acts and omissions.
12. Amendment
This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
13. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth
of Massachusetts.
- 10 -
292677.1
<PAGE>
14. Force Majeure
In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment
or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be
liable for damages to the other for any damages resulting from such
failure to perform or otherwise from such causes.
15. Consequential Damages
Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act
hereunder.
16. Merger of Agreement
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
17. Counterparts
This Agreement may be executed by the parties hereto on any number of
counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
- 11 -
292677.1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
EQUITABLE REAL ESTATE HYPERION
MORTGAGE OPPORTUNITY FUND, INC.
BY:_____________________________
ATTEST:
____________________________
STATE STREET BANK AND TRUST COMPANY
BY:________________________________
Executive Vice President
ATTEST:
_____________________________
- 12 -
292677.1
<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility
Bank Fund
1. Receives orders for the
purchase of Shares.
2. Issue Shares and hold Shares in
Shareholders accounts.
3. Receive redemption requests.
4. Effect transactions 1-3 above
directly with broker-dealers.
5. Pay over monies to redeeming
Shareholders.
6. Effect transfers of Shares.
7. Prepare and transmit dividends
and distributions.
8. Issue Replacement Certificates.
9. Reporting of abandoned
property.
10. Maintain records of account.
11. Maintain and keep a current and
accurate control book for each
issue of securities.
12. Mail proxies.
13. Mail Shareholder reports.
14. Mail prospectuses to current
Shareholders.
15. Withhold taxes on U.S. resident
and non-resident alien
accounts.
16. Prepare and file U.S. Treasury
Department forms.
17. Prepare and mail account and
confirmation statements for
Shareholders.
18. Provide Shareholder account
information.
19. Blue sky reporting.
* Such services are more fully described in Section 1.2 (a),
(b) and (c) of the Agreement.
EQUITABLE REAL ESTATE HYPERION
MORTGAGE OPPORTUNITY FUND, INC.
BY:____________________________
ATTEST:
_______________________________
STATE STREET BANK AND TRUST COMPANY
BY:_____________________________
Executive Vice President
ATTEST:
_______________________________
- 13 -
292677.1
<PAGE>
STATE STREET BANK AND TRUST COMPANY
EQUITABLE REAL ESTATE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
TRANSFER AGENT FEE SCHEDULE
- -----------------------------------------------------------------------------
I. ACCOUNT SERVICE FEE
- -----------------------------------------------------------------------------
Monthly Maintenance Fee per Fund $2,500
- -----------------------------------------------------------------------------
II. ACTIVITY BASED FEE
- -----------------------------------------------------------------------------
A.
Trade Processing (per trade)
All Transactions including purchases,
redemptions, exchanges, transfers and dividends.
Manual $4.80
Automated $2.00
B.
Wires (per wire)
Incoming $5.25
Outgoing $5.00
- -------------------------------------------------------------------------------
III. OUT OF POCKET EXPENSES
- -------------------------------------------------------------------------------
Out of Pocket expenses include, but are not limited to: custom system
enhancements, telephone, mailing costs and expenses incurred at the
specific direction of the Fund.
- -------------------------------------------------------------------------------
EQUITABLE REAL ESTATE HYPERION MORTGAGE STATE STREET BANK & TRUST
OPPORTUNITY FUND, INC. COMPANY
By By
Title Title
Date Date
- -------------------------------------------------------------------------------
292677.1
BATTLE FOWLER LLP
75 East 55th Street
New York, NY 10022
(212) 339-9150
August 31, 1995
Equitable Real Estate Hyperion Mortgage
Opportunity Fund, Inc.
c/o Equitable Real Estate Hyperion
Capital Management Advisors, L.L.C.
520 Madison Avenue
New York, New York 10022
Gentlemen:
We have acted as counsel to Equitable Real Estate Hyperion
Mortgage Opportunity Fund, Inc., a Maryland corporation (the "Fund"), in
connection with the preparation and filing of Registration Statement No.
33-60019 on Form N-1A and all amendments thereto (the "Registration Statement")
covering shares of Common Stock, par value $.001 per share, of the Fund.
We have examined copies of the Articles of Incorporation, as
amended, and By-Laws of the Fund, the Registration Statement, and such other
corporate records, proceedings and documents, including the consent of the Board
of Directors and the minutes of the meeting of the Board of Directors of the
Fund, as we have deemed necessary for the purpose of this opinion. We have also
examined such other documents, papers, statutes and authorities as we deemed
necessary to form a basis for the opinion hereinafter expressed. In our
examination of such material, we have assumed the genuineness of all signatures
and the conformity to original documents of all copies submitted to us. As to
various questions of fact material to such opinion, we have relied upon
statements and certificates of officers and representatives of the Fund and
others.
Based upon the foregoing, we are of the opinion that the
shares of Common Stock, par value $.001 per share, of the Fund, to be issued in
accordance with the terms of the offering, as set forth in the Prospectus and
Statement of Additional Information included as part of the Registration
Statement, and when issued and paid for, will constitute validly authorized and
legally issued shares of Common Stock, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to us in the Registration
Statement under the heading "Counsel and Independent Accountants" in the in the
Prospectus and in the Statement of Additional Information.
Very truly yours,
Battle Fowler LLP
290670.1
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (the "Registration Statement") of our report dated
August 31, 1995, relating to the statement of assets and liabilities of
Equitable Real Estate Hyperion Mortgage Opportunity Fund, Inc., which appears
in such Statement of Additional Information, and to the incorporation by
reference of our report into the Prospectus which constitutes part of this
Registration Statement. We also consent to the references to us under the
headings "Counsel and Independent Accountants" and "Financial Statements" in
such Statement of Additional Information and to the reference to us under the
heading "Counsel and Independent Accounts" in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
August 31, 1995
299367.1
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
520 Madison Avenue
New York, New York 10020
August , 1995
Board of Directors of
Equitable Real Estate Hyperion
Mortgage Opportunity Fund, Inc.
520 Madison Avenue
New York, New York 10022
Ladies and Gentlemen:
I hereby subscribe for 10,000 shares of Common Stock, $0.001 par
value per share, of Equitable Real Estate Hyperion Mortgage Opportunity Fund,
Inc., a Maryland corporation (the "Fund"), at $10.00 per share for an
aggregate purchase price of $100,000. My payment in full is confirmed.
I hereby represent and agree that I am purchasing these shares of
stock for investment purposes, for my own account and risk and not with a view
to any sale, division or other distribution thereof within the meaning of the
Securities Act of 1933 as amended, nor with any present intention of
distributing or selling such shares. I further agree that if any of such
shares are redeemed during the period that the deferred organizational
expenses of the Fund are being amortized, I will reimburse the Fund the then
unamortized organizational expenses in the same ratio as the number of shares
redeemed bears to the number of such shares held at the time of redemption.
Very truly yours,
EQUITABLE REAL ESTATE
HYPERION CAPITAL ADVISORS, L.L.C.
By: /s/Kenneth C. Weiss
Confirmed and Accepted:
EQUITABLE REAL ESTATE HYPERION
MORTGAGE OPPORTUNITY FUND, INC.
By: /s/Louis C. Lucido
271119.1
[ARTICLE] 6
[LEGEND] The Schedule contains summary financial
information extracted from the financial
statements and supporting schedules as of the
end of the most current period and is qualified
in its entirety by reference to such financial
statements.
[/LEGEND]
[CIK] 0000945865
[NAME] Equitable Real Estate Hyperion Mortgage
Opportunity Fund, Inc.
[SERIES]
[NUMBER] 1
[NAME] SERIES A-1995
<TABLE>
<S> <C>
[FISCAL-YEAR-END] Jul-31-1996
[PERIOD-START] Aug-29-1995
[PERIOD-END] Aug-31-1995
[PERIOD-TYPE] YEAR
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 200,000
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 200,000
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 100,000
[TOTAL-LIABILITIES] 100,000
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 100,000
[SHARES-COMMON-STOCK] 100,000
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 100,000
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 0
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 10,000
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 100,000
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 100,000
[PER-SHARE-NAV-BEGIN] 0
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
