As filed with the Securities and Exchange Commission on June 6, 1995
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]
(Check appropriate box or boxes)
EQUITABLE 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
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.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may declare.
272821.1
<PAGE>
EQUITABLE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
Registration Statement on Form N-1A
-----------------------
CROSS REFERENCE SHEET -
Pursuant to Rule 404(c)
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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 the Fund...................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..............*
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* Not applicable.
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272821.1
<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.
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272821.1
<PAGE>
Subject to Completion dated June 6, 1995
PROSPECTUS June , 1995
EQUITABLE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
SERIES A-1995
Series A-1995 (the "Fund") is a series of
Equitable 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 fixed income 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. 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 June , 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 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 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.
C/M: 11212.0000 259369.6
<PAGE>
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PROSPECTUS SUMMARY
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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
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 current of income. The Fund seeks to achieve its
investment objective by investing, under normal circumstances, in a fixed
income 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." 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
and its related expenses at an annual rate of .35% and .20% of the Fund's
average daily net assets, respectively. The Fund is currently the only
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. See "Purchases and Redemptions of Shares."
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."
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
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C/M: 11212.0000 259369.6
<PAGE>
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, when-
issued purchases and forward commitments, calls and puts, options, futures
contracts and may engage in short sales and other hedging transactions. The
Fund will not invest more than 15% of its net assets in illiquid securities.
Further, investors should consider that currently the Fund is the Adviser's
only advisory client. For the risks associated with these investments see
"Investment Objective and Policies" and "Risk Considerations."
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
---------------------------------------
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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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C/M: 11212.0000 259369.6
<PAGE>
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THE FUND
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The Fund, a non-diversified, open-end management investment
company, is a series of Equitable 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.
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INVESTMENT OBJECTIVE AND POLICIES
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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 fixed income portfolio consisting
primarily of Commercial Mortgage-Backed Securities. Under normal market
conditions, the Fund will have at least 65% of its assets invested in
mortgage-backed securities. Subject to the preceding sentence, the other fixed
income 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.") 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 by Standard &
Poor's Corporation ("S&P"), Baa by Moody's Investor Services Inc. ("Moody's"),
BBB by Fitch Investors Services, Inc. ("Fitch") or BBB 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, however,
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."
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C/M: 11212.0000 259369.6
<PAGE>
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 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 exposures and
potential total
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C/M: 11212.0000 259369.6
<PAGE>
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
Excess
Principal Loss
Typical Cash Flow Absorption
Class Rating Priority Priority
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
The Fund will only invest in those classes listed above with
credit qualities at the time of investment rated triple B 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 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 rations. 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 Mortgaged-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
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C/M: 11212.0000 259369.6
<PAGE>
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.
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
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C/M: 11212.0000 259369.6
<PAGE>
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 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 PAC ("Planned Amortization Class") 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
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
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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-Backed Securities ("ARMBS") --
The Fund intends to invest in ARMBS 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 ARMBS 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 ARMBS to exceed the maximum allowable annual or lifetime reset
limits. In addition, in periods of declining interest rates ARMBS 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 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
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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) Stripped Agency Mortgage-Backed Securities -- The Fund
intends to invest in Stripped Agency Mortgage-Backed Securities which represent
interests in a pool of mortgages the cash flow of which has been separated into
interest and principal components. "IOs" (interest only securities) receive the
interest portion of the cash flow while "POs" (principal only securities)
receive the principal portion. See "Risk Considerations."
(10) 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."
[(11) Whole Loans -- Under normal market conditions, the
Fund does not anticipate investing in Whole Loans, however, under certain
market conditions, the Board of Directors of the Fund may determine that it is
advisable to invest in Whole Loans. Additional disclosure to follow.]
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 each series of the Fund's shares that would
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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 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.
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 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
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specific industry segments, the ability of tenants to make lease payments and
the ability of a property to attract and retain tenants, which in turn may be
affected by local conditions such as oversupply of space or a reduction of
available space, the ability of the owner to provide adequate maintenance and
insurance, changes in management of the underlying commercial property, energy
costs, government regulations with respect to environmental, zoning, rent
control, bankruptcy and other matters, real estate and other taxes, and
prepayments of the underlying commercial mortgage loans (although such
prepayments generally occur less frequently than prepayments on residential
mortgage loans).
While the credit quality of the securities in which the Fund
invests will reflect the perceived appropriateness of future cash flows to meet
operating expenses, the underlying commercial properties may not be able to
continue to generate income to meet their operating expenses (mainly debt
services, lease payments, capital expenditures and tenant improvements) as a
result of any of the factors mentioned above. Consequently, the obligors under
commercial mortgages may be unable to make payments of principal and interest in
a timely fashion, increasing the risk of default on a related Commercial
Mortgage-Backed Security. In addition, the repayment of the commercial mortgage
loans underlying Commercial Mortgage-Backed Securities will typically depend
upon the future availability of financing and the stability of real estate
property values.
Most commercial mortgage loans are non-recourse obligations of
the borrower, meaning that the sole remedy of the lender in the event of a
default is to foreclose upon the collateral. As a result, in the event of
default by a borrower, recourse may be had only against the specific property
pledged to secure the loan and not against the borrower's other assets. If
borrowers are not able or willing to refinance or dispose of the property to pay
the principal balance due at maturity, payments on the subordinated classes of
the related Commercial Mortgage-Backed Securities are likely to be adversely
affected. The ultimate extent of the loss, if any, to the subordinated classes
may only be determined after a foreclosure of the mortgage encumbering the
property and, if the mortgagee takes title to the property upon liquidation of
the property. Factors such as the title to the property, its physical
conditions, and financial performance, as well as governmental disclosure
requirements with respect to the condition of the property, may make a third
party unwilling to purchase the property at a foreclosure sale or for a price
sufficient to satisfy the obligations with respect to the related Commercial
Mortgage-Backed Securities. The condition of a property may deteriorate during
foreclosure proceedings. Certain obligors on underlying mortgages may become
subject to bankruptcy proceedings, in which case the amount and timing of
amounts due under the related Commercial Mortgage-Backed Securities may be
materially adversely affected.
In general, any losses on a given property the lien on
which is included in a Commercial Mortgage-Backed Security will be absorbed
first by the equity holder of the property, then by a cash reserve fund or
letter of credit, if any, and then by the "first loss" subordinated security
holder to the extent of its principal balance. Because the Fund intends to
invest in both senior classes and subordinated classes of Commercial
Mortgage-Backed Securities, in the event of default the equity support, the
reserve fund and any debt classes junior to those in which the Fund invests,
will bear losses prior to the Fund. However, there can be no assurance that
the Fund will be able to recover all of its investments in the securities it
purchases. In addition, if the underlying mortgage portfolio has been
overvalued by the originator, or if the values subsequently decline, the Fund
may bear significant losses.
General Characteristics of Agency Mortgage-Backed Securities
- -- The investment characteristics of Agency Mortgage-Backed Securities differ
from traditional debt securities because the volatility of Agency
Mortgage-Backed Securities is affected by changes in both prepayment rates and
interest rates. Interest payments and principal repayments on Agency
Mortgage-Backed Securities are made more frequently (usually monthly), and
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if the Fund
purchases Agency Mortgage- Backed Securities at a premium, a prepayment rate
that is faster than expected will reduce both the market value and income from
that which was anticipated, while a prepayment rate that is slower than expected
will have the opposite effect of increasing income and market value. Conversely,
if the Fund purchases Agency Mortgage-
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<PAGE>
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 Mortgaged-Backed
Securities backed by fixed rate mortgages having interest rates above current
market rates ("High Coupon Agency Mortgage-Backed Securities") and Stripped
Agency Mortgage Backed Securities, may trade with a wider spread between the bid
and asked quotations than do other fixed-income securities, such as U.S.
Government Securities or U.S. Government Agency Mortgage- Backed Securities
backed by fixed-rate mortgages having current market interest rates.
The spread between the bid and asked quotations is taken into
account, among other things, in the determination of the value of each security
held by the Fund and, theretofore, 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.
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Adjustable Rate Mortgage-Backed Securities ("ARMBS") -- Unlike
investments in pools of fixed-income mortgages which decline in value during
periods of rising interest rates, investments in ARMBS 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 ARMBS 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. Thereinafter,
the interest rates are subject to periodic adjustment, based, subject to the
applicable limitations discussed below, on changes in an applicable index.
Adjustable rate mortgages provide that the mortgage interest
rate may not be adjusted above some applicable lifetime maximum rate or below
some applicable lifetime minimum rate. In addition, certain adjustable rate
mortgages provide for limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Other adjustable rate
mortgages provide instead for limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an adjustable rate mortgage, any such excess interest is
added to the principal balance of the mortgage loan, which is repaid through
future monthly payments. In the event that a monthly payment exceeds the sum of
the interest accrued at the applicable mortgage interest rate and the principal
payment necessary to amortize the outstanding principal balance over the
remaining term of the loan, the excess further reduces the principal balance of
the adjustable rate mortgage in the same manner as a partial prepayment.
The index applicable to adjustable rate mortgages will
normally be either the One Year Treasury Index, the Cost of Funds Index or the
London Interbank Offered Rate ("LIBOR"), which are discussed further in the
Fund's 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 yield 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.
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Accordingly, such subordinated CMOs may have limited marketability and there can
be no assurance that a more efficient secondary market will develop.
CMOs Backed by Mortgages on Multi-Family Dwellings. The Fund
may invest to a significant degree in CMOs backed by mortgages on multi-family
dwellings. Such mortgages are subject to risks generally not associated with
mortgages on single family homes, including vacancy rates, increases in
operating expenses, regulatory requirements and environmental liability
concerns. In addition, such securities may have limited marketability and there
can be no assurance that a more efficient secondary market will develop.
Multi-family dwellings can be affected significantly by supply and demand in the
market for the type of property securing the loan and therefore may be subject
to adverse economic conditions. Market values may vary as a result of economic
events or governmental regulations outside the control of the borrower or
lender, such as rent control laws, which impact the future cash flow of the
property. Mortgages on multi-family and commercial real estate properties often
are structured so that a substantial portion of the loan principal is to be
repaid at maturity. Repayment of such principal may depend on the ability of the
borrower to obtain new financing. CMOs backed by mortgages on multi-family
dwelling may be backed by fewer mortgages involving fewer borrowers than is the
case for Mortgage-Backed Securities backed by mortgages on single-family homes.
Accordingly, the event of a single default or insolvency of a single borrower
may have a greater adverse impact than would be the case for Mortgage-Backed
Securities backed by mortgages on single-family homes. Mortgages on multi-family
dwelling 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 obligators 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.
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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
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 of 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 Stripped Mortgage-Backed Securities other than
those issued by Fannie Mae or Freddie Mac, 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. 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 by 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 which
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.
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
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<PAGE>
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 impacted 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
REITs investment in fixed rate obligations usually rises. Conversely, when
interest rates rise, the value of a REITs 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 REITs 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.
Repurchase Agreements -- The Fund may invest temporarily,
without limitation, in repurchase agreements, which are agreements pursuant to
which securities are acquired by the Fund from a third party with the commitment
that they will be repurchased by the seller at a fixed price on an agreed date.
These agreements may be made with respect to any of the portfolio securities in
which the Fund is authorized to invest. Repurchase agreements may be
characterized as loans by the Fund to the other party to the agreement that are
secured by the underlying securities. Repurchase agreements facilitate portfolio
management and allow the Fund to earn additional revenue. The Fund may enter
into repurchase agreements with (i) member banks of the Federal Reserve System
having total assets in excess of $500 million and (ii) securities dealers,
provided that such banks or dealers meet the creditworthiness standards
established by the Fund's Board of Directors ("Qualified Institutions"). The
Adviser will monitor the continued creditworthiness of Qualified Institutions,
subject to the oversight of the Fund's Board of Directors. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or date of maturity of the purchased security. The
collateral will be marked to market daily. Such agreements permit the Fund to
keep all its assets earning interest while retaining overnight flexibility in
pursuit of investments of a longer-term nature.
The use of repurchase agreements involves certain risks. For
example, if the seller of securities under a repurchase agreement defaults on
its obligation to repurchase the underlying securities, as a result of its
bankruptcy or otherwise, the Fund will seek to dispose of such securities, which
action could involve costs or delays. If the seller becomes insolvent and
subject to liquidation or reorganization under applicable bankruptcy or other
laws, the Fund's ability to dispose of the underlying securities may be
restricted. Also, it is possible that the Fund may not be able to substantiate
its interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by a custodian at all times in
an amount at least equal to the repurchase price, including accrued interest. If
the seller fails to repurchase the securities, the Fund may suffer a loss to the
extent proceeds from the sale of the underlying securities are less than the
repurchase price.
Lending of Securities -- The Fund may lend its portfolio
securities to Qualified Institutions. By lending its portfolio securities, the
Fund attempts to increase its income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that may
occur during the term of the loan will be for the account of the Fund.
-17-
C/M: 11212.0000 259369.6
<PAGE>
The Fund will not lend portfolio securities if, as a result,
the aggregate of such loans exceeds 331/3% of the value of the Fund's total
assets (including such loans). All relevant facts and circumstances, including
the creditworthiness of the Qualified Institution, will be monitored by the
Adviser, and will be considered in making decisions with respect to lending of
securities, subject to review by the Fund's Board of Directors. The Fund may pay
reasonable negotiated fees in connection with loaned securities, so long as such
fees are set forth in a written contract and their reasonableness is determined
by the Fund's Board of Directors.
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 or portfolio of its 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 Company 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 liquid secondary market for closing out or
offsetting a hedging position; (c) losses on hedging positions resulting from
general movements in securities prices or interest rate movements not
anticipated by the Adviser, and (d) the possibility that the Fund could be
obligated to pay variation margin on a hedging position at a time when it would
be disadvantageous to do so. While the use of hedging transactions should tend
to minimize the risk of loss resulting from a decline in the value of hedged
portfolio securities, these transactions will tend to limit any potential that
could result from an increase in the value of these securities. Such
transactions also are subject to the risk that, if the Adviser is incorrect in
its forecast of interest rates, market values or other economic factors
affecting such a transaction, the Fund would have been better off if it had not
entered into the transaction.
Reverse Repurchase Agreements and Dollar Roll Agreements. The
Fund may enter into reverse repurchase agreements and dollar roll agreements
with the same parties with whom it may enter into repurchase agreements. Under a
reverse repurchase agreement or a dollar roll agreement, the Fund sells
securities and agrees to repurchase them, or substantially similar securities in
the case of a dollar roll agreement, at a mutually agreed upon date and price.
Under generally accepted accounting principles, reverse repurchase agreements
and dollar roll agreements are generally regarded as a form of borrowing. At the
time the Fund enters into a reverse repurchase agreement or a dollar roll
agreement, it will establish and maintain a segregated account with its
custodian containing securities from its portfolio having a value not less than
the repurchase price (including accrued interest). The Fund's ability to enter
into reverse repurchase agreements and dollar roll agreements is not limited
except by the requirement to maintain assets in segregated accounts. Reverse
repurchase agreements and dollar roll agreements involve the risk that the
market value of the securities retained in lieu of their sale by the Fund may
decline below the price of the securities the portfolio has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement or a dollar roll agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Fund's obligation to repurchase the
securities, and the Fund's use of the
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C/M: 11212.0000 259369.6
<PAGE>
proceeds of the reverse repurchase agreement or the dollar roll agreement may
effectively be restricted pending such decision. Investors should be aware that
the Fund will enter into reverse repurchase agreements, which may be considered
to be a form of borrowing and, therefore, involve the use of leverage. The use
of leverage involves special risks in that, while providing increased
opportunities for income, the use of leverage also means that any losses will be
magnified. The use of reverse repurchase agreements also involves certain fees
and costs to the Fund.
When-Issued Purchases and Forward Commitments. The Fund may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When such transactions are negotiated, the
price is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date, which can be a month or more after
the date of the transaction. At the time the Fund makes the commitment to
purchase securities on a when-issued or forward commitment basis, it will record
the transaction and thereafter reflect the value of such securities in
determining its net asset value. At the time the Fund enters into a transaction
on a when-issued or forward commitment basis, a segregated account consisting of
cash or liquid securities equal to the value of the when-issued or forward
commitment securities will be established and maintained with a custodian and
will be marked-to-market daily. On the delivery date, the Fund will meet its
obligations from securities that are then maturing or sales of the securities
held in the segregated asset account and/or from then available cash flow.
When-issued securities and forward commitments may be sold prior to the
settlement date which can result in a gain or loss due to market fluctuation
subsequent to the time when the commitment was originally made. There is always
a risk that the securities may not be delivered and that the Fund may incur a
loss or will have lost the opportunity to invest the amount set aside for such
transaction in the segregated asset account. Settlements in the ordinary course,
which may take substantially more than five business days for mortgage-related
securities, are not treated by the Fund as when-issued or forward commitment
transactions and, accordingly, are not subject to the foregoing limitations even
though some of the risks described above may be present in such transactions.
Short Sales. The Fund may also make short sales of securities
as a form of hedging to offset potential declines in long positions in similar
securities. A short sale is a transaction in which the Fund sells a security it
does not own in anticipation that the market price of that security will
decline.
When the Fund makes a short sale, it must borrow the security
sold short and deliver it to the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over 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. Depending on arrangements made with the broker-dealer from which it
borrowed the security regarding payment over any payments received by the Fund
on such security, the Fund may not receive any payments (including interest) on
its collateral deposited with such broker-dealer.
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
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C/M: 11212.0000 259369.6
<PAGE>
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 Indices of Securities. 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.
Options. A put option gives the purchaser of the option the
right to sell and the writer, if the purchaser exercises his right, the
obligation to buy the underlying security at the exercise price during the
option period. A call option gives the purchaser of the option the right to buy
and the writer, if the purchaser exercises his right, the obligation to sell the
underlying security at the exercise price during the option period. The Fund is
authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC Options"). Listed options are issued by the Options Clearing
Corporation ("OCC") which guarantees the performance of the obligations of the
parties to such options.
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 interest 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 interest directly without purchasing a call
option or if the potential purchaser of a put option decides not to purchase the
put option, such potential 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 stock price beyond the expiration date of the option. The more
that an option is out-of-the-money and the shorter its remaining term to
expiration, the greater the risk that a purchaser of the option will lose all or
part of his investment. Further, except where the value of the remaining life of
an option may be realized in the secondary market, for an option purchase to be
profitable the market price of the underlying interest must exceed or be below
the exercise price by more that 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.
-20-
C/M: 11212.0000 259369.6
<PAGE>
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 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 option 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
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C/M: 11212.0000 259369.6
<PAGE>
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 and options thereon for hedging purposes
only and, in each case, in accordance with the rules and regulations of the
CFTC. Eurodollar futures 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.
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
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<PAGE>
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 either of the Rating Agencies and one or
more classes of subordinated certificates which bear ratings lower than the
senior certificates or are non-rated. Holders of either the senior or the
subordinated certificates will ordinarily be entitled to a pro-rata share of
distributions of principal and interest. However, in the event that
delinquencies and defaults on the underlying mortgage loans cause a shortfall in
the distributions to the senior certificates, distributions otherwise payable to
the subordinated certificates will be distributed to the senior certificates to
the extent required. The characteristics of the mortgage loans and other credit
enhancement features will determine the size of the subordinated interest
required to obtain the desired rating on the senior securities.
The Fund may invest in subordinated certificates. To
compensate for the greater risk of loss on and illiquidity of the subordinated
certificates, the yields on subordinated certificates are generally
substantially higher than those available on senior certificates. To the extent
that actual delinquency and loss experience is greater than that 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 of
one issuer other than U.S. Government securities. 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).
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<PAGE>
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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.
The minimum initial investment in the Fund is $100,000.
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.
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.
<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
made payable to "Equitable Hyperion Hyperion Mortgage Opportunity Fund, Inc."
Mortgage Opportunity Fund, Inc." to:
[the Fund, c/o State Street Bank] Include account number on check
- -----------------------------------------------------------------------------------------------------------------------------
By Wire:
---------------------------------------------------------------------------------------------------------------
State Street Bank $100,000 $5,000
Contact __________ at _____________ to Contact your bank and request it to
Contact your bank and request it to wire wire federal funds as specified
federal obtain a Shareholder Account below. You must provide all
Number. funds as specified below. You information requested below.
must provide all Then contact your bank
and request it to information requested
below.
Investors making
initial investments by wire must
promptly complete a Purchase Application
and mail it to __________ at the address
on the back cover. The application may
also be sent via facsimile.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Wire federal funds to: State Street Bank & Trust Co., ABA #_______________,
Account Number ______________, for Equitable Hyperion Mortgage Opportunity Fund,
Inc. Include your name, Shareholder Account Number and social security number.
- -------------------------------------------------------------------------------
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
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C/M: 11212.0000 259369.6
<PAGE>
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.
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
-25-
C/M: 11212.0000 259369.6
<PAGE>
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.
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 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. [Describe Fund
officers and directors who are affiliated with HCM, if any]. Hyperion Capital
Management, Inc. as of
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C/M: 11212.0000 259369.6
<PAGE>
April 30, 1995 acts as investment manager for clients with assets in excess of
$4 billion. The business address of HCM is 520 Madison Avenue, New York, New
York 10022.
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.
[Describe Fund officers and directors who are affiliated with
EREIM, if any].
The Adviser provides the Fund with the unique expertise of its
two owners. With respect to the Adviser, EREIM's personnel provide investment
research, acquisition and asset management services to assist the Adviser in
underwriting, due diligence and portfolio management activities with respect to
the commercial real estate collateral underlying the Fund's investments and
provides the Adviser with personnel to perform real estate evaluation services
used in developing credit evaluation and pricing models. HCM provides personnel
to the Adviser to provide quantitative research, trading, portfolio management,
administration, compliance and finance services to the Adviser in connection
with its underwriting, due diligence and portfolio management activities with
respect to the securities in which the Fund may invest. Further, HCM personnel
provide quantitative modeling services to the Adviser to assist in developing
credit evaluation and pricing models.
Certain affiliates of the Adviser engage in real
estate-related activities, including but not limited to acting as the servicer
of a pool of Commercial Mortgage-Backed Securities; underwriting and issuing
Commercial Mortgage-Backed Securities; serving as market-maker of Commercial
Mortgage-Backed Securities; originating loans that underlie Commercial
Mortgage-Backed Securities; acting as the borrower of a mortgage that underlies
Commercial Mortgage-Backed Securities; and purchasing Commercial Mortgage-Backed
Securities for their own accounts or accounts over which they have control.
Because the 1940 Act prohibits certain affiliated transactions involving the
Fund and certain affiliates of the Fund, in the absence of exemptive relief, the
Fund may be prohibited from purchasing Commercial Mortgage-Backed Securities
with respect to which an affiliate of the Adviser acted in one or more of the
above capacities. The Adviser does not anticipate that this restriction will
have any significant adverse effect on its ability to manage the Fund. However,
the Adviser may seek exemptive relief to permit the Fund to engage in certain
transactions involving affiliates under conditions designed to eliminate or
minimize any potential conflict of interest.
Administrator
Pursuant to an Administrative Services Agreement, the Adviser
supervises the overall administration of the Fund, including, among other
responsibilities, the negotiation of contracts and fees with, and the monitoring
of performance and billings of, the independent contractors and agents of the
Fund; the preparation and filing of all documents required for compliance by the
Fund with applicable laws and regulations; and arranging for the maintenance of
books and records of the Fund. The Adviser provides
-27-
C/M: 11212.0000 259369.6
<PAGE>
persons satisfactory to the Boards of Directors of the Fund to serve as certain
officers of the Fund. Such officers may be directors, officers or employees of
the Adviser or its affiliates. For its administrative services to the Fund, the
Advisers receives a fee from the Fund at a rate equal, on an annual basis, to
0.20% of the average daily net assets of the Fund.
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAX MATTERS
- --------------------------------------------------------------------------------
The Fund intends to qualify as a regulated investment company
for federal income tax purposes. Accordingly, the Fund should not be subject to
federal income tax on the portion of its investment company taxable income
(including any net capital gain) it distributes to shareholders in a timely
manner. In addition, to the extent the Fund distributes to shareholders in a
timely manner at least 98% of its taxable income (including any net capital
gain) it should not be subject to the 4% excise tax on certain undistributed
income of "regulated investment companies."
Distributions to Shareholders
The Fund intends to declare daily and distribute monthly
distributions to its shareholders of net investment income. The Fund reserves
the right to include net short-term gains, if any, in such monthly
distributions. Long-term capital gains and undistributed net short-term gains,
if any, will be distributed once annually. "Net investment income," as used
above, includes all dividends, interest and other income earned by the Fund, net
of the Fund's expenses. Notices will be provided in accordance with Section 19
of the 1940 Act.
A shareholder may elect to receive dividends and capital gain
distributions in either cash or additional shares of the Fund. Unless otherwise
specified in writing by a shareholder, all dividends and capital gain
distributions will be distributed as set above.
Automatic dividend reinvestment at net asset value is
available by contacting the Fund's administrator or transfer agent.
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 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.
-28-
C/M: 11212.0000 259369.6
<PAGE>
Shareholders who are not United States citizens or residents
should be aware that distributions from the Fund will generally be subject to a
withholding tax of 30%, or a lower treaty rate, and should consult their own tax
advisers to determine whether investment in the Fund is appropriate.
Distributions may also be subject to state and local taxation and shareholders
should consult their own tax advisers in this regard.
Entities that generally qualify for an exemption from Federal
income tax, such as many pension trusts, are nevertheless taxed on "unrelated
business taxable income." A tax-exempt entity's dividend income from the Fund
and gain from the sale of shares in the Fund or the Fund's sale of securities is
not expected to constitute unrelated business income to such tax-exempt entity
unless the acquisition of the share itself is debt-financed or constitutes
dealer property in the hands of the tax-exempt entity.
Before investing in the Fund, the trustee or investment
manager of an employee benefit plan (e.g., a pension or profit sharing
retirement plan) should consider among other things (a) whether the investment
is prudent under the Employee Retirement Income Security Act of 1974 ("ERISA"),
taking into account the needs of the plan and all of the facts and circumstances
of the investment in the Fund; (b) whether the investment satisfies the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
the assets of the Trust 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.
- --------------------------------------------------------------------------------
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. (or as of
4:15 p.m. for trading in 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.
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C/M: 11212.0000 259369.6
<PAGE>
Expenses
The Fund pays all of its respective 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 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.
Description of Shares,
Voting Rights and Liabilities
Equitable 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 June , 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 may be determinative of the outcome of any matters submitted to the
vote of the shareholders of the Fund.
-30-
C/M: 11212.0000 259369.6
<PAGE>
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 and Accounting Agency
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 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 June ,
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 have been selected as
independent certified public accountants for the Fund.
-31-
C/M: 11212.0000 259369.6
<PAGE>
A mutual fund seeking high
total return H mutual fund
seeking high total return
including short- and
long-term capital gains
EQUITABLE HYPERION and high
current income MORTGAGE
OPPORTUNITY FUND, INC.
<TABLE>
<CAPTION>
HYPERION
Equitable Hyperion Mortgage Opportunity Fund, Inc.
SERIES A-1995
<S> <C> <C>
Table of Contents Page Investment Adviser and Administrator
Prospectus Summary........................................ Equitable Real Estate Hyperion Capital Advisors, L.L.C.
Expense Summary........................................... 520 Madison Avenue
The Fund.................................................. New York, New York 10022
Investment Objectives and Policies........................
Risk Considerations ......................................
Purchases and Redemptions of Shares....................... Distributor
Performance Information...................................
Management of the Fund.................................... Hyperion Distributors, Inc.
Distributions and Tax Matters............................. 520 Madison Avenue
Other Information Concerning Shares of the New York, New York 10022
Fund................................................... (212) 980-8400
Transfer Agent, Custodian and Accounting
Agent.................................................. Transfer Agent, Custodian and Accounting Agent
Counsel and Independent Accountants.......................
State Street Bank and Trust Company
1776 Heritage Drive
Boston, Massachusetts 02171
PROSPECTUS JUNE , 1995
</TABLE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
June , 1995
EQUITABLE 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 June , 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.................................... 7
4. DETERMINATION OF NET ASSET VALUE;
VALUATION OF PORTFOLIO SECURITIES........................ 7
5. TAX STATUS................................................. 8
6. MANAGEMENT OF THE FUND .................................... 9
7. COUNSEL AND INDEPENDENT ACCOUNTANTS........................ 10
8. PORTFOLIO TRANSACTIONS..................................... 11
9. HOW TO PURCHASE AND REDEEM SHARES.......................... 11
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES.............................................. 11
11. DESCRIPTION OF RATINGS.................................... 12
12. FINANCIAL STATEMENTS...................................... 12
C/M: 11212.0010 268397.4
<PAGE>
1. THE FUND
Series A-1995 (the "Fund") is a series of Equitable Hyperion
Mortgage Opportunity Fund, Inc. (the "Company"), a non-diversified, open-end
management investment company. Equitable Hyperion Mortgage Opportunity Funds,
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 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 Company 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 fixed income 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.
-2-
C/M: 11212.0010 268397.4
<PAGE>
The Ginnie Mae Certificates in which the Fund will invest will
represent a pro rata interest in one or more pools of the following types of
mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes,
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily 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 multifamily 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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<PAGE>
Eleventh District") that are member institutions of the Federal Home Loan Bank
of San Francisco (the "FHLB of San Francisco"), as computed from statistics
tabulated and published by the FHLB of San Francisco. The FHLB of San Francisco
normally announces the Cost of Funds Index on the last working day of the month
following the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of
Funds Index and may cause the Cost of Funds Index to move in a manner different
from indices based upon specific interest rates, such as the One Year Treasury
Index. Because of the various origination dates and maturities of the
liabilities of member institutions of the FHLB Eleventh District upon which the
Cost of Funds Index is based, among other things, at any time the Cost of Funds
Index may not reflect the average prevailing market interest rates on new
liabilities of similar maturities. There can be no assurance that the Cost of
Funds Index will necessarily move in the same direction or at the same rate as
prevailing interest rates since as longer term deposits or borrowings mature and
are renewed at market interest rates, the Cost of Funds Index will rise or fall
depending upon the differential between the prior and the new rates on such
deposits and borrowings. In addition, dislocations in the thrift industry in
recent years have caused and may continue to cause the cost of funds of thrift
institutions to change for reasons unrelated to changes in general interest rate
levels. Furthermore, any movement in the Cost of Funds Index as compared to
other indices based upon specific interest rates may be affected by changes
instituted by the FHLB of San Francisco in the method used to calculate the Cost
of Funds Index. To the extent that the Cost of Funds Index may reflect interest
changes on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later than would be
produced by such other indices, and in a period of declining interest rates, the
Cost of Funds Index may remain higher than other market interest rates. This may
result in a higher level of principal prepayments on mortgage loans which adjust
in accordance with the Cost of Funds Index than mortgage loans which adjust in
accordance with other indices.
LIBOR, the London interbank offered rate, is the interest rate
that the most creditworthy international banks dealing in U.S.
dollar-denominated deposits and loans charge each other for large
dollar-denominated loans. LIBOR is also usually the base rate for large
dollar-denominated loans in the international market. LIBOR is generally quoted
for loans having rate adjustments at one, three, six or twelve month intervals.
Investment Restrictions
The Fund has adopted the following investment restrictions and
which may not be changed without approval by holders of a "majority of the
outstanding voting securities" of each series of the Fund's shares 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
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.
-4-
C/M: 11212.0010 268397.4
<PAGE>
(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.
-5-
C/M: 11212.0010 268397.4
<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 Series 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. (or as of
4:15 p.m. for trading in 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 as a regulated investment company
for federal income tax purposes for its fiscal year ended December 31, 1995, 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
-6-
C/M: 11212.0010 268397.4
<PAGE>
securities of other regulated investment companies). 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 December 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 December 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. Unless otherwise
indicated, the address of each director and officer is 520 Madison Avenue, New
York, New York 10022.
Officers and Directors of the Fund
KENNETH C. WEISS --
CLIFFORD E. LAI --
LOUIS C. LUCIDO --
PAUL ZAVATTONI --
FRANCIS R. SPARK --
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<PAGE>
[Other Names and Bios to Follow]
COMPENSATION TABLE
(Estimated for the year ended December 31, 1995)
<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
Position Fund Fund Expenses Retirement Paid to Directors
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
[ ] None None [ ]
- ----------------------------------------------------------------------------------------------------------
[ ] 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 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,
-8-
C/M: 11212.0010 268397.4
<PAGE>
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 and Accounting Agency
Agreement with State Street Bank & Trust Company ("State Street") which acts as
transfer and accounting agent for the Trust. 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 certified public 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.
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
-9-
C/M: 11212.0010 268397.4
<PAGE>
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 June , 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 its 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 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 Fund
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.
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<PAGE>
11. DESCRIPTION OF RATINGS
See Appendix A.
12. FINANCIAL STATEMENTS
The financial statements included herein have been audited
by Price Waterhouse LLP, independent certified public accountants, as stated
in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority, as experts in accounting and
auditing.
[INSERT FINANCIAL STATEMENTS TO COME]
C/M: 11212.0010 268397.4
<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 268397.4
<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.
-2-
C/M: 11212.0010 268397.4
<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.
-3-
C/M: 11212.0010 268397.4
<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 June __, 1995; and
(2) Statement of Net Assets (unaudited).
(B) EXHIBITS
(1) Articles of Incorporation of the Registrant.
(2) By-Laws of the Registrant.
(3) Not applicable.
(4) Not applicable.
* (5) Investment Management Contract between the Registrant and
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
* (6) See Distribution Agreement filed as Exhibit 15.
(7) Not applicable.
* (8) Custody Agreement between the Registrant and State Street
Bank & Trust Company.
* (9.2)Transfer and Accounting Agency Agreement between the
Registrant and State Street Bank & Trust Company.
* (9.1)Administrative Services Agreement between the Registrant
and Equitable Real Estate Hyperion Capital Advisors, L.L.C.
* (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
headings "Federal Income Taxes" in the Prospectus and "Counsel
and Auditors" 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
- --------
* To be filed by Amendment
-4-
272821.1
<PAGE>
* (15) Distribution Agreement between the Registrant and Hyperion
Distributors, Inc.
(16) Not applicable.
* (17) Financial Data Schedule
* (18) [Multi-Class Plan pursuant to Rule 18F-3 under the
Investment Company Act of 1940 and a copy of the portion of the
minutes of a meeting of the Registrant's directors describing
any action taken to revoke a plan.]
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
Shares of Beneficial
Interest
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 agentssuch 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
-5-
272821.1
<PAGE>
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 [ ] of the Distribution Agreement relating to the
securities being offered hereby, the Registrant agrees to indemnify
and hold harmlessany person who controls Hyperion Distributors, Inc.,
within the meaning of the Securities Act of 1933, against 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:
Positions and Offices Positions and Offices
Name With the Distributor With Registrant
Louis C. Lucido President and Director [Director]
Kenneth C. Weiss Vice President and Secretary [President and Director]
Francis R. Spark Treasurer ---
Clifford E. Lai Director ---
Paul Jacob Director ---
(c) Not applicable
-6-
272821.1
<PAGE>
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.
-7-
272821.1
<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 May, 1995.
EQUITABLE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
By:/s/ Kenneth C. Weiss
Kenneth C. Weiss, President
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 May 31, 1995.
Signature Title Date
(1) Principal Executive Officer:
May 31, 1995
By: /s/ Kenneth C. Weiss
Kenneth C. Weiss
(2) Majority of Directors
Kenneth C. Weiss Director May 31, 1995
By: /s/Kenneth C. Weiss
Louis C. Lucido Director May 31, 1995
By: /s/Louis C. Lucido
<PAGE>
Exhibit Index
(1) Articles of Incorporation of the Registrant.
(2) By-Laws of the Registrant.
(3) Not applicable.
(4) Not applicable.
* (5) Investment Management Contract between the Registrant and
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
* (6) Distribution Agreement filed as Exhibit 15.
(7) Not applicable.
* (8) Form of Custody Agreement between the Registrant and State
Street Bank & Trust Company.
* (9.1)Administrative Services Agreement between the Registrant and
Equitable Real Estate Hyperion Capital Advisors, L.L.C.
* (9.2)Transfer and Accounting Agency 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
headings "Federal Income Taxes" and "Counsel and Auditors" 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) Distribution Agreement between the Registrant and Hyperion
Distributors, Inc.
(16) Not applicable.
* (17) Financial Data Schedule
* (18) [Multi-Class Plan pursuant to Rule 18F-3 under the Investment
Company Act of 1940 and a copy of the portion of the minutes
of a meeting of the Registrant's directors describing any
action taken to revoke a plan.]
- --------
* To be filed by Amendment
-11-
272821.1
ARTICLES OF INCORPORATION
OF
EQUITABLE HYPERION MORTGAGE OPPORTUNITY FUND, INC.
FIRST: (1) The name of the incorporator is Ann M.
Smith.
(2) The incorporator's post office address
is 75 East 55th Street, New York, New York 10022.
(3) The incorporator is over eighteen years
of age.
(4) The incorporator is forming the
corporation named in these Articles of Incorporation under the General
Corporation Law of the State of Maryland.
SECOND: The name of the corporation (hereinafter
called the "Corporation") is Equitable Hyperion Mortgage
Opportunity Fund, Inc.
THIRD: The purposes for which the Corporation is
formed are:
(1) to conduct, operate and carry on the
business of an investment company;
(2) to subscribe for, invest in, reinvest in,
purchase or otherwise acquire, hold, pledge, sell, assign,
transfer, exchange, distribute or otherwise dispose of notes,
bills, bonds, debentures and other negotiable or non-negotiable
instruments, obligations and evidences of indebtedness issued or
guaranteed as to principal and interest by the United States
Government, or any agency or instrumentality thereof, any State
or local government, or any agency or instrumentality thereof,
or any other securities of any kind issued by any corporation or
other issuer organized under the laws of the United States or
any State, territory or possession thereof or any foreign
country or any subdivision thereof or otherwise, to pay for the
same in cash or by the issue of stock, including treasury stock,
bonds and notes of the Corporation or otherwise; and to exercise
any and all rights, powers and privileges of ownership or
interest in respect of any and all such investments of every
kind and description, including and without limitation, the
right to consent and otherwise act with respect thereto, with
power to designate one or more persons,
270949.3
<PAGE>
firms, associations or corporations to exercise any of
said rights, powers and privileges in respect of any
said investments;
(3) to conduct research and investigations in
respect of securities, organizations, business and general
business and financial conditions in the United States of
America and elsewhere for the purpose of obtaining information
pertinent to the investment and employment of the assets of the
Corporation and to procure any and all of the foregoing to be
done by others as independent contractors and to pay
compensation therefor;
(4) to borrow money or otherwise obtain credit and
to secure the same by mortgaging, pledging or otherwise
subjecting as security the assets of the Corporation, and to
endorse, guarantee or undertake the performance of any
obligation, contract or engagement of any other person, firm,
association or corporation;
(5) to issue, sell, distribute, repurchase,
redeem, retire, cancel, acquire, hold, resell, reissue, dispose
of, transfer, and otherwise deal in, shares of stock of the
Corporation, including shares of stock of the Corporation in
fractional denominations, and to apply to any such repurchase,
redemption, retirement, cancellation or acquisition of shares of
stock of the Corporation, any funds or property of the
Corporation, whether capital or surplus or otherwise, to the
full extent now or hereafter permitted by the laws of the State
of Maryland and by these Articles of Incorporation;
(6) to conduct its business, promote its purposes,
and carry on its operations in any and all of its branches and
maintain offices both within and without the State of Maryland,
in any and all States of the United States of America, in the
District of Columbia, and in any or all commonwealths,
territories, dependencies, colonies, possessions, agencies, or
instrumentalities of the United States of America and of foreign
governments;
(7) to carry out all or any part of the foregoing
purposes or objects as principal or agent, or in conjunction
with any other person, firm, association, corporation or other
entity, or as a partner or member of a partnership, syndicate or
joint venture or otherwise, and in any part of the world to the
same extent and as fully as natural persons might or could do;
-2-
270949.3
<PAGE>
(8) to have and exercise all of the powers and
privileges conferred by the laws of the State of Maryland upon
corporations formed under the laws of such State; and
(9) to do any and all such further acts and things
and to exercise any and all such further powers and privileges
as may be necessary, incidental, relative, conducive,
appropriate or desirable for the foregoing purposes.
The enumeration herein of the objects and purposes of the
Corporation shall be construed as powers as well as objects and purposes and
shall not be deemed to exclude by inference any powers, objects or purposes
which the Corporation is empowered to exercise, whether expressly by force of
the laws of the State of Maryland now or hereafter in effect, or impliedly by
the reasonable construction of the said law.
FOURTH: The post office address of the principal
office of the Corporation within the State of Maryland is 11 East
Chase Street, Baltimore City, Maryland 21202.
FIFTH: The resident agent of the Corporation in the
State of Maryland is The Prentice-Hall Corporation System,
Maryland, at 11 East Chase Street, Baltimore, Maryland 21202.
SIXTH: (1) The total number of shares of stock of all classes
and series which the Corporation initially has authority to issue is 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 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.
-3-
270949.3
<PAGE>
(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 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
-4-
270949.3
<PAGE>
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 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.
-5-
270949.3
<PAGE>
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 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,
-6-
270949.3
<PAGE>
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 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
-7-
270949.3
<PAGE>
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 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
-8-
270949.3
<PAGE>
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 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
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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 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
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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.
SEVENTH: The number of directors of the Corporation, until such
number shall be increased pursuant to the By-Laws of the Corporation, shall be
two. The number of directors shall never be less than the number prescribed by
the General Corporation Law of the State of Maryland and shall never be more
than twenty. The names of the persons who shall act as directors of the
Corporation until their successors are duly chosen and qualified are Kenneth C.
Weiss and Louis C. Lucido.
EIGHTH: The following provisions are inserted for the
purpose of defining, limiting and regulating the powers of the
Corporation and of the Board of Directors and stockholders.
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(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 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
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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 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
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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.
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
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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.
TENTH: The Corporation reserves the right to amend, alter,
change or repeal any provision contained in these Articles of Incorporation or
in any amendment hereto in the manner now or hereafter prescribed by the laws
of the State of Maryland and all rights conferred upon stockholders herein are
granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned, being the incorporator of
the Corporation, has adopted and signed these Articles of Incorporation for the
purpose of forming the corporation described herein pursuant to the General
Corporation
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<PAGE>
law of the State of Maryland and does hereby acknowledge that said adoption and
signing are her act.
Ann M. Smith
Dated: May 24, 1995
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BY-LAWS
OF
EQUITABLE 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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<PAGE>
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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(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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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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