Schedule 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities and Exchange Act of
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X ] Preliminary Proxy Statement [ ] Confidential, for Use of
the Commission Only (as
permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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THE HYPERION TOTAL RETURN FUND, INC.
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Payment of Filing Fee (Check the appropriate box:)
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rules 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
THE HYPERION TOTAL RETURN FUND, INC.
One Liberty Plaza o New York, New York 10006-1404
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
March 1, 2002
To the Stockholders:
The Annual Meeting of Stockholders of The Hyperion Total Return Fund,
Inc. (the "Fund") will be held at The Downtown Association, 60 Pine Street
(between William and Pearl Streets), 36th floor, New York, New York 10005, on
April 16, 2002, at 9:45 a.m., for the following purposes:
1. To elect directors (Proposal 1).
2. To approve a new Investment Advisory Agreement between the
Fund and Hyperion Capital Management, Inc. (the "Advisor")
(Proposal 2).
3. To approve a new Investment Sub-Advisory Agreement between the
Advisor and Pacholder Associates, Inc. (Proposal 3).
4. To ratify or reject the selection of PricewaterhouseCoopers
LLP as the independent accountants of the Fund for the fiscal
year ending November 30, 2002 (Proposal 4).
5. To transact any other business that may properly come before
the meeting.
The close of business on February 22, 2002 has been fixed as the record
date for the determination of stockholders entitled to receive notice of and to
vote at the meeting.
By Order of the Board of Directors,
/s/ Patricia A. Sloan
---------------------
Patricia A. Sloan
Secretary
WE NEED YOUR PROXY VOTE IMMEDIATELY.
YOU MAY THINK YOUR VOTE IS NOT IMPORTANT, BUT IT IS VITAL. THE MEETING OF
STOCKHOLDERS OF THE FUND WILL BE UNABLE TO CONDUCT ANY BUSINESS IF LESS THAN A
MAJORITY OF THE SHARES ELIGIBLE TO VOTE IS REPRESENTED. IN THAT EVENT, THE FUND,
AT STOCKHOLDERS' EXPENSE, WOULD CONTINUE TO SOLICIT VOTES IN AN ATTEMPT TO
ACHIEVE A QUORUM. CLEARLY, YOUR VOTE COULD BE CRITICAL TO ENABLE THE FUND TO
HOLD THE MEETING AS SCHEDULED, SO PLEASE RETURN YOUR PROXY CARD IMMEDIATELY. YOU
AND ALL OTHER STOCKHOLDERS WILL BENEFIT FROM YOUR COOPERATION.
1
Instructions for Signing Proxy Cards
The following general rules for signing proxy cards may be of
assistance to you and avoid the time and expense to the Fund involved in
validating your vote if you fail to sign your proxy card properly.
1. Individual Accounts. Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts. Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration.
3. All Other Accounts. The capacity of the individual signing
the proxy card should be indicated unless it is reflected in the form of
registration. For example:
Registration Valid Signature
- ------------ ---------------
Corporate Accounts
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
Trust Accounts
(1) ABC Trust John B. Doe, Trustee
(2) Jane B. Doe, Trustee u/t/d 12/28/78 Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr.
UGMA
(2) John B. Smith John B. Smith, Jr., Executor
2
THE HYPERION TOTAL RETURN FUND, INC.
One Liberty Plaza o New York, New York 10006-1404
PROXY STATEMENT
This proxy statement is furnished in connection with a solicitation by
the Board of Directors of The Hyperion Total Return Fund, Inc. (the "Fund") of
proxies to be used at the Annual Meeting of Stockholders of the Fund to be held
at The Downtown Association, 60 Pine Street (between William and Pearl Streets),
36th floor, New York, New York 10005, at 9:45 a.m. on April 16, 2002 (and at any
adjournment or adjournments thereof) for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders. This proxy statement and
the accompanying form of proxy are first being mailed to stockholders on or
about March 1, 2002. The annual report and semi-annual report is available free
of charge by calling the Fund at 1-800-497-3746 or writing to the Fund at Attn:
Ms. Kelly Burke, The Hyperion Total Return Fund, Inc., One Liberty Plaza, New
York, New York 10006-1404. Stockholders who execute proxies retain the right to
revoke them by written notice received by the Secretary of the Fund at any time
before they are voted. Unrevoked proxies will be voted in accordance with the
specifications thereon and, unless specified to the contrary, will be voted FOR
the re-election of the three nominees for Class III directors, FOR the approval
of the new Investment Advisory Agreement, FOR the approval of the new Investment
Sub-Advisory Agreement and FOR the ratification of the selection of
PricewaterhouseCoopers LLP as the independent accountants of the Fund for the
fiscal year ending November 30, 2002. The close of business on February 22, 2002
has been fixed as the record date for the determination of stockholders entitled
to receive notice of and to vote at the meeting. Each stockholder is entitled to
one vote for each share held. Abstentions will be treated as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum but as unvoted for purposes of determining the approval of any matters
submitted to stockholders for a vote. Broker non-votes will not be counted for
purposes of determining the presence of a quorum or determining whether a
proposal has been approved. On the record date there were ___________ shares
outstanding.
PROPOSAL 1: ELECTION OF DIRECTORS
The Fund's Articles of Incorporation provide that the Fund's Board of
Directors shall be divided into three classes: Class I, Class II and Class III.
The terms of office of the present directors in each class expire at the Annual
Meeting in the year indicated or thereafter in each case when their respective
successors are elected and qualified: Class I, 2003; Class II, 2004; and Class
III, 2002. At each subsequent annual election, Directors chosen to succeed those
whose terms are expiring will be identified as being of that same class and will
be elected for a three-year term. The effect of these staggered terms is to
limit the ability of other entities or persons to acquire control of the Fund by
delaying the replacement of a majority of the Board of Directors.
The terms of Lewis S. Ranieri, Leo M. Walsh, Jr. and Patricia A. Sloan,
the members of Class III, currently serving on the Board of Directors, expire at
this year's Annual Meeting. The persons named in the accompanying form of proxy
intend to vote at the Annual Meeting (unless directed not to so vote) for the
re-election of Messrs. Ranieri and Walsh and Ms. Sloan. Each nominee has
indicated that he/she will serve if elected, but if any nominee should be unable
to serve, the proxy or proxies will be voted for any other person or persons, as
the case may be, determined by the persons named in the proxy in accordance with
their judgment.
3
As described above, there are three nominees for election to the Board
of Directors at this time. Proxies cannot be voted for a greater number of
persons than the nominees currently proposed to serve on the Board of Directors.
Information Concerning Nominees/Directors
The following tables provides information concerning each of the seven
members and nominees of the Board of Directors of the Fund. The three nominees
are listed first in the tables under the Class III directors.
Position(s) Held with Number of
Fund and Term of Office Principal Occupation(s) Portfolios in Fund
Name, Address and Length of During Past 5 Years and Complex Overseen
and Age Time Served Other Directorships Held by Director by Director
- -------------------------------------------------------------------------------------------------------------------------
Class III Nominee/Director to serve until 2005 Annual Meeting of Stockholders:
Lewis S. Ranieri* Director, Member of the Chairman and Chief Executive Officer of 3
c/o One Liberty Executive Committee Ranieri & Co., Inc. (since 1988); President of
Plaza, New York, New LSR Hyperion Corp., a general partner of the
York 10006-1404 Elected for Three Year limited partnership that is the general
Term/Director since June partner of Hyperion Partners L.P. ("Hyperion
Age 53 1989 Partners") (since 1988); Director and Vice
Chairman of the Board of Hyperion Capital
Management, Inc. (since December 1998);
Director and Chairman of the Board of Hyperion
Capital Management, Inc. (1989-November 1998);
Director and President of Hyperion Funding
1993 Corp., the general partner of the limited
partnership that is the general partner of
Hyperion 1993 Fund L.P.; Chairman and
President of various other direct and indirect
subsidiaries of Hyperion Partners (since
1989); Chairman of the Board (1989-December
1998) and/or Director (since 1989) of several
investment companies (3) advised by Hyperion
Capital Management, Inc. or by its affiliates;
Director and Chairman of Bank United Corp.,
and Director of Bank United (since 1988).
Formerly, Director of Lend Lease Hyperion
Mortgage Opportunity Fund, Inc. (formerly,
Equitable Real Estate Hyperion Mortgage
Opportunity Fund, Inc.) and Lend Lease
Hyperion High Yield Commercial Mortgage Fund,
Inc. (formerly, Equitable Real Estate Hyperion
High Yield Commercial Mortgage Fund, Inc.)
(1995-1999).
4
Position(s) Held with Number of
Fund and Term of Office Principal Occupation(s) Portfolios in Fund
Name, Address and Length of During Past 5 Years and Complex Overseen
and Age Time Served Other Directorships Held by Director by Director
- -------------------------------------------------------------------------------------------------------------------------
Class III Nominee/Director to serve until 2005 Annual Meeting of Stockholders:
Patricia A. Sloan* Director Consultant (2000-Present) and Managing 3
c/o One Liberty Director (1988-2000) of Ranieri & Co., Inc.;
Plaza, New York, New Elected for Three Year Secretary, Director and/or Trustee of several
York 10006-1404 Term/Director since April investment companies (3) advised by Hyperion
1994 Capital Management, Inc. or by its affiliates
Age 58 (1989-Present); Director of Bank United Corp.,
Secretary the parent of Bank United (1988-Present).
Elected Annually/
Secretary since July 1989
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* Interested persons as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), because of affiliations with Hyperion Capital
Management, Inc., the Fund's Advisor.
Position(s) Held with Number of
Fund and Term of Office Principal Occupation(s) Portfolios in Fund
Name, Address and Length of During Past 5 Years and Complex Overseen
and Age Time Served Other Directorships Held by Director by Director
- -------------------------------------------------------------------------------------------------------------------------
Class III Nominee/Director to serve until 2005 Annual Meeting of Stockholders:
Leo M. Walsh, Jr. Director, Chairman of the Director and/or Trustee of several investment 3
c/o One Liberty Audit Committee, Member companies (3) advised by Hyperion Capital
Plaza, New York, New of Nominating and Management, Inc. or by its affiliates
York 10006-1404 Compensation Committees (1989-Present); Financial Consultant for
Merck-Medco Managed Care LLC (formerly Medco
Age 69 Elected for Three Year Containment Services Inc.) (1994-Present);
Term/Director since June Director of Lend Lease Hyperion Mortgage
1989 Opportunity Fund, Inc. (formerly, Equitable
Real Estate Hyperion Mortgage Opportunity
Fund, Inc.) and Lend Lease Hyperion High Yield
CMBS Fund, Inc. (formerly, Equitable Real
Estate Hyperion High Yield Commercial Mortgage
Fund, Inc.) (1999-Present).
5
The terms of the Class I and II Directors do not expire this year. The
following table sets forth certain information regarding the Directors in such
classes.
Position(s) Held with Number of
Fund and Term of Office Principal Occupation(s) Portfolios in Fund
Name, Address and Length of During Past 5 Years and Complex Overseen
and Age Time Served Other Directorships Held by Director by Director
- -------------------------------------------------------------------------------------------------------------------------
Class II Directors to serve until 2004 Annual Meeting of Stockholders:
Rodman L. Drake Director, Member of the President, Continuation Investments Group 3
c/o One Liberty Audit Committee, Chairman Inc. (1997-Present); Director and/or Trustee
Plaza, New York, New of Nominating and of several investment companies (3) advised
York 10006-1404 Compensation Committees by Hyperion Capital Management, Inc.
(1989-Present); Director, Alliance Group
Age 59 Elected for Three Year Services, Inc. (1998-Present); Director,
Term/Director since July Hotelevision, Inc. (1999-Present); Chairman,
1989 Metro Cash Card International (1999-Present);
Director, Parsons Brinckerhoff, Inc.
(1995-Present); Director, Absolute Quality
Inc. (2000-Present); Trustee of Excelsior
Funds (3) (1994-Present).
Formerly, Co-Chairman of KMR Power
Corporation (1993-1997); President, Mandrake
Group (1993-1997).
Harry E. Petersen, Director, Member of the Senior Consultant to Cornerstone Equity 3
Jr. Audit Committee, Member Advisors, Inc. (1998-Present); Director
c/o One Liberty of the Compensation and and/or Trustee of several investment
Plaza, New York, New Nominating Committees, companies (3) advised by Hyperion Capital
York 10006-1404 Member of Executive Management, Inc. or by its affiliates
Committee (1992-Present).
Age 77
Elected for Three Year Formerly, Senior Consultant to Potomac Babson
Term/Director since Inc. (1995-1998); Director of Equitable Real
October 1993 Estate Hyperion Mortgage Opportunity Fund,
Inc. and Equitable Real Estate Hyperion High
Yield Commercial Mortgage Fund, Inc.
(1995-1997); Director of Lexington Corporate
Properties, Inc. (1993-1997).
6
Position(s) Held with Number of
Fund and Term of Office Principal Occupation(s) Portfolios in Fund
Name, Address and Length of During Past 5 Years and Complex Overseen
and Age Time Served Other Directorships Held by Director by Director
- -------------------------------------------------------------------------------------------------------------------------
Class I Director to serve until 2003 Annual Meeting of Stockholders:
Robert F. Birch Director, Member of the Chairman and President, New America High 3
c/o One Liberty Audit Committee, Member Income Fund (1992-Present); Chairman of the
Plaza, New York, New of Nominating and Board and Co-Founder,The China Business
York 10006-1404 Compensation Committees, Group, Inc. (1996-Present); Director of
Member of Executive Brandywine Funds (2) (2001-Present).
Age 65 Committee
Formerly, Director and Strategic Planning
Elected for Three Year Consultant, Dewe Rogerson, Ltd. (1994-1998)
Term/Director since
December 1998
Position(s) Held with Number of
Fund and Term of Office Principal Occupation(s) Portfolios in Fund
Name, Address and Length of During Past 5 Years and Complex Overseen
and Age Time Served Other Directorships Held by Director by Director
- -------------------------------------------------------------------------------------------------------------------------
Class I Director to serve until 2003 Annual Meeting of Stockholders:
Andrew M. Carter* Director Chairman and Chief Executive Officer, 3
c/o One Liberty Hyperion Capital Management, Inc. (November
Plaza, New York, New Elected for Three Year 1998-Present); Director of several investment
York 10006-1404 Term/Director since July companies (3) advised by Hyperion Capital
1998 Management, Inc. (1998-Present); Vice
Age 59 Chairman of The China Business Group
Chairman (1996-Present); presently officer of four
Elected Annually/Since charitable boards: The New England
December 1998 Conservatory, The Loomis Chaffee School, The
William E. Simon Graduate School of Business
Administration at the University of
Rochester, and The Big Brother Association of
Boston.
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* Interested persons as defined in the 1940 Act, because of affiliations with
Hyperion Capital Management, Inc., the Fund's Advisor.
The following table sets forth the dollar range of equity securities
beneficially owned by the director for the calendar year ended December 31,
2001. The information as to beneficial ownership is based on statements
furnished to the Fund by the Directors and nominees. Unless otherwise noted,
beneficial ownership is based on sole voting and investment power.
Aggregate Dollar Range of
Equity Securities in All
Funds Overseen by Director
Dollar Range of Equity or Nominee in Family of
Name of Director Securities in the Fund Investment Companies
- --------------------------------------------------------------------------------
Lewis Ranieri None $50,001-$100,000
Leo M. Walsh, Jr. $10,001-$50,000 Over $100,000
Patricia A. Sloan $1-$10,000 $10,001-$50,000
Rodman L. Drake $10,001-$50,000 $10,001-$50,000
7
Aggregate Dollar Range of
Equity Securities in All
Funds Overseen by Director
Dollar Range of Equity or Nominee in Family of
Name of Director Securities in the Fund Investment Companies
- --------------------------------------------------------------------------------
Harry E. Petersen, Jr. $1-$10,000 $1-$10,000
Robert F. Birch $50,001-$100,000 $50,001-$100,000
Andrew M. Carter None None
Officers of the Fund
The officers of the Fund are chosen each year at the first meeting of
the Board of Directors of the Fund following the Annual Meeting of Stockholders,
to hold office at the discretion of the Board of Directors until the meeting of
the Board following the next Annual Meeting of Stockholders and until their
successors are chosen and qualified. The Board of Directors has elected six
officers of the Fund. Except where dates of service are noted, all officers
listed below served as such throughout the 2002 fiscal year. An asterisk (*)
indicates a person is an "interested person" as defined in the 1940 Act, because
of affiliations with Hyperion Capital Management, Inc., the Fund's Advisor. The
following table sets forth information concerning each officer of the Fund who
served during all or part of the last fiscal year of the Fund:
Term of Office and
Name, Address Position(s) Held Length of Time Principal Occupation(s)
and Age with Fund Served During Past 5 Years
- -----------------------------------------------------------------------------------------------------------------------
Andrew M. Carter* Chairman Elected Annually Please see "Information Concerning
Since December 1998 Nominees/Directors."
Clifford E. Lai* President Elected Annually President (since November 1998) of
c/o One Liberty Plaza, Since April 1993 Hyperion Capital Management, Inc.
New York, New York 10006-1404 (March 1993-Present).
Age 48
Patricia A. Botta* Vice President Elected Annually Director of Hyperion Capital Management,
c/o One Liberty Plaza, Since March 1997 Inc. (1989-Present).
New York, New York 10006-1404
Age 44
John Dolan* Vice President Elected Annually Chief Investment Strategist
c/o One Liberty Plaza, Since March 1998 (1998-Present)and Chief Investment
New York, New York 10006-1404 Officer (since 2002) of Hyperion Capital
Management. Formerly Managing Director
Age 48 at Bankers Trust (1995-1997).
8
Term of Office and
Name, Address Position(s) Held Length of Time Principal Occupation(s)
and Age with Fund Served During Past 5 Years
- -----------------------------------------------------------------------------------------------------------------------
Thomas F. Doodian* Treasurer Elected Annually Director of Finance and Operations,
c/o One Liberty Plaza, Since February 1998 Hyperion Capital Management, Inc. (July
New York, New York 10006-1404 1995-Present). Treasurer of several
investment companies advised by Hyperion
Age 41 Capital Management, Inc. (February 1998-
Present).
Patricia A. Sloan* Secretary Elected Annually Please see "Information Concerning
c/o One Liberty Plaza, Since July 1989 Nominees/Directors."
New York, New York 10006-1404
Age 58
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As of February 22, 2002, the directors and officers of the Fund as a
group owned beneficially less than 1% of the outstanding shares of the Fund.
Principal Holders
As of February 22, 2002, the following persons owned beneficially more
than 5% of the Fund's outstanding shares.
Name and Address Amount and Nature of
Title of Class of Beneficial Owner Beneficial Ownership Percent of Class
- --------------------------------------------------------------------------------
Common %
Interested Persons
Mr. Ranieri serves as a Director and Vice Chairman of the Board of the
Advisor and Mr. Carter serves as Chairman and Chief Executive Officer of the
Advisor. Ms. Sloan is a special limited partner of Hyperion Ventures, the sole
general partner of Hyperion Partners L.P., of which the Advisor is a
wholly-owned subsidiary. As a result of their service with the Advisor and
certain affiliations with the Advisor as described below, the Fund considers
Messrs. Ranieri and Carter and Ms. Sloan to be "interested persons" of the Fund
within the meaning of Section 2(a)(19) of the 1940 Act.
Committees and Board of Directors' Meetings
The Fund has a standing Audit Committee presently consisting of Messrs.
Walsh, Drake, Petersen and Birch, all of whom are members of the Board of
Directors and are currently non-interested persons of the Fund. The principal
functions of the Fund's Audit Committee are to recommend to the Board the
appointment of the Fund's accountants, to review with the accountants the scope
and anticipated costs of their audit and to receive and consider a report from
the accountants concerning their conduct of the audit, including any comments or
recommendations they might want to make in that connection. The Board of
Directors has adopted a written charter for the Audit Committee, that was
previously filed with the Securities and Exchange Commission in 2001. The Report
of the Audit Committee is attached as Appendix I. During the last fiscal year of
the Fund, the full Board of Directors met seven times, and the Audit Committee
met two times. All of the members of the Audit Committee attended the Audit
Committee meeting, and all of the Directors attended at least 75% of the
aggregate Board meetings and Audit Committee meeting. The Fund has a Nominating
and a Compensation Committee. The Nominating and Compensation Committees
presently consist of Messrs. Drake, Birch, Petersen and Walsh. There were no
nominees to be considered so the Nominating Committee did not meet during 2001.
The function of the Nominating Committee is to recommend candidates for election
to the Board as independent directors. The Committee will consider nominees
recommended by stockholders. Such recommendations should be submitted in writing
to the Secretary of the Fund. The function of the Compensation Committee is to
determine the compensation paid to the independent directors.
9
Compensation of Directors and Executive Officers
No remuneration was paid by the Fund to persons who were directors,
officers or employees of Hyperion Capital Management, Inc. or any affiliate
thereof for their services as directors or officers of the Fund. Each director
of the Fund, other than those who are officers or employees of Hyperion Capital
Management, Inc. or any affiliate thereof, is entitled to receive a fee of
$8,500 per year plus $1,000 for each Board of Directors' meeting attended.
Members of the Audit Committee receive $750 for each Audit Committee meeting
attended, other than meetings held on days when there is also a directors'
meeting. The following table sets forth information concerning the compensation
received by directors for the twelve month period ended November 30, 2001.
Directors' Total Directors'
Compensation Compensation from the
from the Fund Fund and the Fund Complex
- -------------------------------------------------------------------------------
Robert F. Birch $20,660 $46,215
Rodman L. Drake $19,875 $42,750
Harry E. Petersen, Jr. $19,875 $44,250
Leo M. Walsh, Jr. $23,265 $44,250
Compliance With Section 16 Reporting Requirements
Section 16(a) of the Securities Exchange Act of 1934 requires the
Fund's officers and directors and persons who own more than ten percent of a
registered class of the Fund's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission and the New
York Stock Exchange. Officers, directors and greater than ten-percent
shareholders are required by SEC regulations to furnish the Fund with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by the
Fund and written representations from certain reporting persons that all
applicable filing requirements for such persons had been complied with, the Fund
believes that, during the fiscal year ended November 30, 2001, all filing
requirements applicable to the Fund's officers, directors, and greater than
ten-percent beneficial owners were complied with.
10
Required Vote
Election of the listed nominees for director requires the affirmative
vote of the holders of a majority of the shares of Common Stock of the Fund
present or represented by proxy at the Annual Meeting.
PROPOSALS 2 AND 3: APPROVAL OF THE NEW INVESTMENT ADVISORY AGREEMENT
AND NEW INVESTMENT SUB-ADVISORY AGREEMENT
Summary of the Transaction
Hyperion Capital Management, Inc. (the "Advisor"), currently serves as
investment advisor to the Fund pursuant to an Investment Advisory Agreement
between the Fund and Advisor, dated August 4, 1989 (the "Current Investment
Advisory Agreement"). Pursuant to a investment sub-advisory agreement of the
same date, the Advisor has engaged Pacholder Associates, Inc. (the
"Sub-Advisor") to provide sub-investment advisory services for investments in
higher yielding, lower rated, or unrated fixed income securities of U.S.
corporations (the "Investment Sub-Advisory Agreement," and together, with the
"Current Investment Advisory Agreement, the "Current Agreements"). As explained
in more detail below, shareholders are being asked to separately approve a new
investment advisory agreement between the Fund and the Advisor (the "New
Investment Advisory Agreement"), and a new investment sub-advisory agreement
between the Advisor and Sub-Advisor (the "New Investment Sub-Advisory
Agreement") (together, the "New Agreements"). THE NEW AGREEMENTS WILL CONTAIN
TERMS SUBSTANTIALLY THE SAME AS THOSE IN THE CURRENT AGREEMENTS.
The Advisor is a subsidiary of Hyperion Partners L.P., a Delaware
limited partnership ("Hyperion Partners"). The sole general partner of Hyperion
Partners is Hyperion Ventures L.P., a Delaware limited partnership ("Hyperion
Ventures"). Corporations owned by Lewis S. Ranieri, Salvatore A. Ranieri and
Scott A. Shay are general partners of Hyperion Ventures. Through these
corporations, these individuals own a majority of the partnership interests of
Hyperion Ventures. Mr. Salvatore Ranieri and Mr. Shay, as well as the owners of
the limited partners of Hyperion Ventures, all of whom hold a pro rata interest
in Hyperion Partners, have offered to sell their stock in the Advisor to an
investment group composed entirely of officers and directors of the Advisor,
including Mr. Lewis Ranieri (the foregoing referred to as the "Transaction").
The Transaction is expected to close by May 2002. The Transaction is expected to
close by May 2002. The Transaction will not go forward without the approval of
the New Investment Advisory Agreement by the stockholders of the Fund. If for
any reason the proposed Transaction is not completed the Current Investment
Advisory Agreement will remain in effect.
Following the transaction, the officers and directors of the Advisor
listed below will own an interest of over 5% in the Advisor.
Name Title
-------------------------------------------------------------
Lewis Ranieri Chairman
Clifford Lai President
John Feeney Managing Director, Marketing
John Dolan Managing Director, Chief Investment Officer
11
There is not anticipated to be any change to the management structure
of the Advisor as all current officers will retain their titles and positions.
There will be, however, changes to the Advisor's Board of Directors, as set
forth below.
Current Board and Title Proposed Board and Title
----------------------------------------------------------------------------
Andrew Carter, Chairman Lewis Ranieri, Chairman
Lewis Ranieri, Vice Chairman Clifford Lai, Director
Clifford Lai, Director John Feeney, Director
Scott Shay, Director John Dolan, Director
Salvatore Ranieri, Director
Andrew Carter will remain with the Advisor as Vice Chairman of Hyperion
Capital Management, Inc..
Under the 1940 Act, a change in control of an investment advisor
results in an assignment and termination of the advisor's investment advisory
contracts. The 1940 Act provides a rebuttable presumption that an owner of less
than 25% of the outstanding shares of an entity does not control that entity.
Based largely on this presumption, the Advisor has advised the Fund's Board that
it does not believe that consummation of the Transaction will cause an
assignment of the Current Investment Advisory Agreement. The Fund's directors
have, however, carefully considered the Advisor's development since its
inception and the involvement in management decisions by the partners who are
selling their interests in the Advisor. To avoid any uncertainty about the
status of the Current Investment Advisory Agreement, the Fund's directors
believe that it is prudent and in the best interest of the Fund to obtain
stockholder approval of the New Investment Advisory Agreement. In that
connection, the termination of the Current Investment Advisory Agreement also
would effectively terminate the Current Investment Sub-Advisory Agreement. Thus,
stockholders are being asked to approve the New Investment Sub-Advisory
Agreement as well as the New Investment Advisory Agreement. Approval of the New
Investment Sub-Advisory Agreement requires that the Fund have an investment
advisory agreement in place with the Advisor. Therefore, in the event that the
New Investment Advisory Agreement is not approved by stockholders, but the New
Investment Sub-Advisory Agreement is approved by stockholders, approval of the
New Investment Sub-Advisory Agreement will not be effective.
PROPOSAL 2: APPROVAL OF THE NEW INVESTMENT ADVISORY AGREEMENT
The Current Investment Advisory Agreement
Pursuant to the Current Investment Advisory Agreement, the Fund has
retained the Advisor to manage the investment of the Fund's assets and to
provide, with the assistance of the Sub-Advisor, such investment research,
advice and supervision, in conformity with the Fund's investment objective and
policies, as may be necessary for the operations of the Fund. For more
information relating to the Advisor, see "Additional Information."
12
On March 13, 2001, the Board of Directors of the Fund, including those
persons identified as interested persons and a majority of the directors who are
not parties to the Investment Advisory Agreement or "interested persons" (as
such term is defined in the 1940 Act) of any such party (the "Disinterested
Directors"), approved extension of the Current Investment Advisory Agreement
through March 31, 2002. At the time of the Board's approval of the latest
extension of the Current Investment Advisory Agreement, Messrs. Lewis Ranieri,
Carter, and Ms. Sloan were interested persons of the Fund. The Current
Investment Advisory Agreement was last submitted to a vote of the Stockholders
of the Fund at the first Annual Meeting of the Stockholders of the Fund held on
June 5, 1990. At that meeting, the Stockholders approved the continuance of the
Current Investment Advisory Agreement. The Board of Directors will consider
continuance of the Current Investment Advisory Agreement until March 31, 2003 at
a meeting scheduled for March 12, 2002.
The Current Investment Advisory Agreement provides that it will
continue from year to year, but only so long as such continuation is
specifically approved at least annually by both (1) the vote of a majority of
the Board of Directors or the vote of a majority of the outstanding voting
securities of the Fund (as provided in the 1940 Act) and (2) by the vote of a
majority of the Disinterested Directors cast in person at a meeting called for
the purpose of voting on such approval. The Current Investment Advisory
Agreement may be terminated at any time without the payment of any penalty, upon
the vote of a majority of the Board of Directors or a majority of the
outstanding voting securities of the Fund or by the Advisor, on 60 days' written
notice by either party to the other. The Agreement will terminate automatically
in the event of its "assignment" (as such term is defined in the 1940 Act and
the rules thereunder). The Current Investment Advisory Agreement also provides
that the Advisor shall not be liable for any error of judgment or mistake of
law, any loss arising out of any investment, or any act or omission taken with
respect to the Fund, except for willful misfeasance, bad faith, or gross
negligence in performance of its duties, or by reason of reckless disregard of
its obligations and duties hereunder.
The Current Investment Advisory Agreement provides, among other things,
that the Advisor will bear all expenses of its employees and overhead incurred
in connection with its duties under the Agreement, and will pay all salaries of
the Fund's directors and officers who are "affiliated persons" (as such term is
defined in the 1940 Act) of the Advisor. The Current Investment Advisory
Agreement provides that the Fund shall pay to the Advisor a monthly fee for its
services which is equal to 0.65% per annum of the Fund's average weekly net
assets, which, for purposes of determining the Advisor's fee, shall be the
average weekly value of the total assets of the Fund, minus the sum of accrued
liabilities (including accrued expenses) of the Fund and any declared but unpaid
dividends on the Common Shares. Investment advisory fees paid by the Fund to the
Advisor during the last fiscal year of the Fund amounted to $1,517,083.50, of
which $43,306.07 was paid by the Advisor to the Sub-Advisor.
John H. Dolan, a Vice President of the Fund, has been primarily
responsible for the day-to-day management of the Fund's portfolio since 1998 and
Chief Investment Officer since 2002. He has been the Chief Investment Strategist
of the Advisor since 1998 and was formerly Managing Director at Bankers Trust
from 1995-1997.
13
The Fund has entered into an Administration Agreement with Hyperion
Capital Management, Inc. (the "Administrator"). The Administrator performs
administrative services necessary for the operation of the Fund, including
maintaining certain books and records of the Fund, and preparing reports and
other documents required by federal, state, and other applicable laws and
regulations, and provides the Fund with administrative office facilities. For
these services, the Fund pays a fee monthly at an annual rate of 0.20% of its
average weekly assets. For the twelve month period ended November 30, 2001, the
Administrator earned $458,352.80 in Administration fees. In addition, the
Administrator has entered into Administration Agreements with two other
investment companies, Hyperion 2002 Term Trust, Inc. and Hyperion 2005
Investment Grade Opportunity Term Trust, Inc., with the following fee structure:
a monthly fee at an annual rate of 0.17% of the first $100 million of the
Trust's average weekly net assets, 0.145% of the next $150 million and 0.12% of
any amounts above $250 million.
The New Investment Advisory Agreement
The New Investment Advisory Agreement is the same in all material
respects as the Current Investment Advisory Agreement. Thus, the key terms,
including fees, of the New Investment Advisory Agreement are set out in detail
above, under the heading "The Current Investment Advisory Agreement." The
initial term of the New Investment Advisory Agreement will reflect the date on
which the Transaction is consummated (currently anticipated to be on or about
May ___, 2002) as its new effective date.
A Form of the New Investment Advisory Agreement is attached to this
proxy statement as Exhibit A. Under the New Investment Advisory Agreement, the
Advisor will continue to provide investment advisory services to the Fund,
including making decisions regarding the acquisition, holding or disposition of
securities or other assets that the Fund may own or contemplate acquiring from
time to time. All services under the New Investment Advisory Agreement must be
provided in accordance with the provisions of the 1940 Act and any rules or
regulations thereunder, the Securities Act of 1933 and any rules or regulations
thereunder, the Internal Revenue Code, any other applicable provision of law,
the Fund's charter and by-laws, any policies adopted by the Fund's Board, and
the investment policies of the Fund as disclosed in its registration statement
on file with the Securities and Exchange Commission ("SEC"), as amended from
time to time.
Contingent upon receipt of stockholder approval, the New Investment
Advisory Agreement will be effective upon the consummation of the Transaction,
currently expected to be May __, 2002, and will continue in effect until May __,
2004. Thereafter, the New Investment Advisory Agreement will continue in effect
for successive annual periods, provided its continuance is approved at least
annually by (1) a majority vote, cast in person at a meeting called for that
purpose, of the Fund's directors or (2) a vote of the holders of a majority of
the outstanding voting securities (as defined by the 1940 Act) of the Fund and
(3) in either event by a majority of the Disinterested Directors.
Board Considerations Relating to the New Investment Advisory Agreement
On January 16, 2002, the Board of Directors held a meeting called for
the purpose of considering the New Agreement. At the meeting, senior officers of
the Advisor to discuss the Transaction. The Board considered, among other
things:
14
o the expectation that the operation of the Advisor and the
Fund's day-to-day management, including the Fund's portfolio
manager, will remain largely unchanged for the foreseeable
future;
o the key employees of the Advisor who handle the Fund's
day-to-day management will now be equity owners of the
Advisor; and
o the Transaction is expected to result in better alignment of
interest between employees, management, owners and clients of
the Advisor.
In addition, the directors considered a wide range of information of
the type they regularly consider when determining to continue the Fund's Current
Investment Advisory Agreement as in effect from year to year. The directors
considered, among other things:
o the Advisor and its personnel (including particularly those
personnel with responsibilities for providing services to the
Fund), resources and investment process;
o the terms of the New Investment Advisory Agreement;
o the scope and quality of the services that the Advisor has
been providing to the Fund;
o the investment performance of the Fund and of similar funds
managed by other advisors over various periods;
o the Advisory fee rate payable to the Advisor by the Fund and
by other client accounts managed by the Advisor, and payable
by similar funds managed by other advisors;
o the total expense ratio of the Fund and of similar funds
managed by other advisors;
o compensation payable by the Fund to affiliates of the Advisor
for other services;
o the profitability of the Current Investment Advisory Agreement
to the Advisor and its affiliates; and
The directors also considered the provisions of Section 15(f) of the
1940 Act, which provides, in relevant part, that affiliated persons may receive
compensation if (1) for a period of three years after the Transaction at least
75 percent of the directors of the Fund are independent of the Advisor and (2)
an "unfair burden" is not imposed on the Fund as a result of the Transaction.
The Advisor has agreed not to seek any increase in advisory fees for a period of
at least two years and has agreed to pay incremental costs associated with the
2002 Annual Meeting of Stockholders due to the Transaction. In addition, if the
Transaction is consummated, it is expected that at least 75 percent of the
Fund's directors will be disinterested directors.
After carefully considering the information described above, the
Disinterested Directors unanimously voted to approve the New Investment Advisory
Agreement and to recommend that the Fund's stockholders vote to approve the New
Investment Advisory Agreement.
15
Required Vote
Approval of the New Investment Advisory Agreement requires the vote of
a majority of the Fund's outstanding voting securities, as defined in the 1940
Act. A "majority of the outstanding voting securities" of the Fund, as defined
in the 1940 Act, means the lesser of (a) 67% or more of the shares of the Fund
present at the Meeting if the owners of more than 50% of the shares of the Fund
entitled to vote at the Meeting are present in person or by proxy, or (b) more
than 50% of the outstanding shares of the Fund entitled to vote at the Meeting.
If the stockholders of the Fund do not approve the New Investment
Advisory Agreement, it is expected that the Transaction will not occur, and the
Advisor will continue to provide services under the Current Investment Advisory
Agreement.
THE DIRECTORS, INCLUDING ALL OF THE DISINTERESTED DIRECTORS, UNANIMOUSLY
RECOMMEND THAT YOU VOTE FOR APPROVAL OF THE NEW INVESTMENT ADVISORY AGREEMENT.
PROPOSAL 3: APPROVAL OF THE NEW INVESTMENT SUB-ADVISORY AGREEMENT
The Current Investment Sub-Advisory Agreement
Pursuant to the Current Investment Sub-Advisory Agreement, the Advisor,
has engaged the Sub-Advisor to provide sub-investment advisory services for
investments in higher yielding, lower rated, or unrated fixed income securities
of U.S. corporations ("High Yield Securities"). Although the Sub-Advisor will
make all decisions with respect to the Fund's investments in High Yield
Securities on behalf of the Advisor, the amount of the Fund's assets allocated
to these investments will be determined by the Advisor. For more information
about the Sub-Advisor, see "Additional Information."
On March 13, 2001, the Board of Directors of the Fund, including a
majority of the Disinterested Directors, approved extension of the Current
Sub-Advisory Agreement through March 31, 2002. No director of the Fund owned any
securities of, or had any other material direct or indirect interest in, the
Sub-Advisor or any person controlling, controlled by or under common control
with the Sub-Advisor on the date of the Disinterested Directors' approval of the
extension of the Current Investment Sub-Advisory Agreement. The Board of
Directors will consider continuance of the Current Investment Sub-Advisory
Agreement until March 31, 2003 at a meeting scheduled for March 12, 2002.
16
The Current Investment Sub-Advisory Agreement was last submitted to a
vote of the Stockholders of the Fund at the first Annual Meeting of the
Stockholders of the Fund held on June 5, 1990. At that meeting the Stockholders
approved the Current Investment Sub-Advisory Agreement, which contains the same
provisions with respect to continuation and termination as does the Current
Investment Advisory Agreement, except that the Current Investment Sub-Advisory
Agreement may not be assigned without the consent of the other party thereto,
and any termination by the Advisor must be directed or approved by the vote of a
majority of the Directors of the Fund in office at the time or by the vote of
the holders of a "majority" (as defined in the 1940 Act) of the voting
securities of the Fund at the time outstanding and entitled to vote. The Current
Investment Sub-Advisory Agreement also provides that the Sub-Advisor shall not
be liable for any error of judgment or mistake of law, any loss arising out of
any investment, or any act or omission taken with respect to the Fund, except
for willful misfeasance, bad faith, or gross negligence in performance of its
duties, or by reason of reckless disregard of its obligations and duties
hereunder.
The Current Investment Sub-Advisory Agreement provides, among other
things, that the Sub-Advisor will bear all expenses of its employees and
overhead incurred in connection with its duties under the Agreement. It also
provides that the Advisor shall pay to the Sub-Advisor a monthly fee for the
Sub-Advisor's services which is equal to 0.35% per annum of the portion of the
Fund's average weekly net assets that is invested in High Yield Securities
(which shall be equal to the average weekly value of the total assets invested
in High Yield Securities, minus the sum of accrued liabilities (including
accrued expenses) directly related thereto and a pro rata percentage of any
declared but unpaid dividends on the Common Shares and a pro rata percentage of
accrued liabilities related to the Fund in general). The Advisor has paid and
intends to continue to pay the Sub-Advisor's fee out of the fee that the Advisor
will receive from the Fund. Investment advisory fees paid by the Advisor to the
Sub-Advisor during the last fiscal year of the Fund amounted to $43,306.07.
The overall portfolio management strategy undertaken by the
Sub-Advisor on behalf of the Fund is mutually determined by the Advisor and the
Sub-Advisor. The execution of the management strategy is conducted under the
general supervision and direction of William J. Morgan. Mr. Morgan, a founder of
the Sub-Advisor, is President of the Sub-Advisor and has been a member of the
Sub-Advisor's management review committee, which oversees all investment
functions, including the execution of high yield investment strategy for the
Fund and reviewing the Sub-Advisor's credit watch list and purchase and sale
recommendations, since the inception of the firm in 1983. He was high yield
portfolio manager from 1984 to 1991 and the special assets portfolio manager
from 1991 until 2000. In June 2000, Mr. Morgan resumed the position of high
yield portfolio manager. Dr. Asher O. Pacholder, Chairman of the Sub-Advisor,
owns more than 50% of the shares of the Sub-Advisor and Mr. Morgan owns more
than 20% of the shares. Both Dr. Pacholder and Mr. Morgan are directors of the
Sub-Advisor. No officer, director or employee of the Sub-Advisor is an officer,
director or nominee for election as a director of the Fund.
17
The New Investment Sub-Advisory Agreement
The New Investment Sub-Advisory Agreement is the same in all material
respects as the Current Investment Sub-Advisory Agreement. Thus, the key terms,
including fees, of the New Sub-Advisory Agreement are set out in detail above,
under the heading "The Current Investment Sub-Advisory Agreement." The initial
term of the New Investment Sub-Advisory Agreement will reflect the date on which
the Transaction is consummated (currently anticipated to be on or about
_______________, 2002) as its new effective date.
A Form of the New Investment Sub-Advisory Agreement is attached to this
proxy statement as Exhibit B. Under the New Investment Sub-Advisory Agreement,
the Sub-Advisor will continue to act as investment advisor to the Advisor with
respect to the investment of that portion of the Fund's assets constituting High
Yield Securities and to provide investment research and advice with respect to
High Yield Securities. The Sub-Advisor also will continue to supervise and
arrange the purchase of High Yield Securities for, and the sale of High Yield
Securities in, the investment portfolio of the Fund. All services under the New
Sub-Advisory Agreement must be provided in accordance with the provisions of the
1940 Act and any rules or regulations thereunder, the Securities Act of 1933 and
any rules or regulations thereunder, the Internal Revenue Code, any other
applicable provision of law, the Fund's charter and by-laws, any policies
adopted by the Fund's Board, and the investment policies of the Fund as
disclosed in its registration statement on file with the SEC, as amended from
time to time.
Contingent upon receipt of stockholder approval, the New Investment
Sub-Advisory Agreement will be effective upon the consummation of the
Transaction, currently expected to be _________, 2002, and will continue in
effect until _____________, 2003. Thereafter, the New Investment Sub-Advisory
Agreement will continue in effect for successive annual periods, provided its
continuance is approved at least annually by (1) a majority vote, cast in person
at a meeting called for that purpose, of the Fund's directors or (2) a vote of
the holders of a majority of the outstanding voting securities (as defined by
the 1940 Act) of the Fund and (3) in either event by a majority of the
Disinterested Directors.
Board Considerations Relating to the New Investment Sub-Advisory Agreement
On January 16, 2002, the Board of Directors held a meeting called for
the purpose of considering the New Agreement. At the meeting, senior officers of
the Advisor to discuss the Transaction. The directors considered a wide range of
information, including information of the type they regularly consider when
determining to continue the Fund's Current Investment Sub-Advisory Agreement as
in effect from year to year. The directors considered, among other things:
o the expectation that the operation of the Sub-Advisor and the
day-to-day management of the Fund's portfolio that is invested
in High Yield Securities will remain largely unchanged for the
foreseeable future;
o the Sub-Advisor and its personnel (including particularly
those personnel with responsibilities for providing services
to the Fund), resources and investment process;
18
o the terms of the New Investment Sub-Advisory Agreement;
o the scope and quality of the services that the Sub-Advisor has
been providing to the Fund;
o the investment performance of the Fund and of similar funds
managed by other advisors over various periods; [High Yield
portion of Fund's portfolio] and
o the Sub-Advisor's use of the Fund's portfolio brokerage
transactions to obtain research benefiting the Fund or other
Sub-Advisor clients at a cost that may be in excess of the
amount other brokers would charge or to reduce certain
out-of-pocket expenses otherwise payable by the Fund.
After carefully considering the information described above, the
Disinterested Directors unanimously voted to approve the New Investment
Sub-Advisory Agreement and to recommend that the Fund's stockholders vote to
approve the New Investment Sub-Advisory Agreement.
Required Vote
Approval of the New Investment Sub-Advisory Agreement requires the vote
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act. A "majority of the outstanding voting securities" of the Fund, as
defined in the 1940 Act, means the lesser of (a) 67% or more of the shares of
the Fund present at the Meeting if the owners of more than 50% of the shares of
the Fund entitled to vote at the Meeting are present in person or by proxy, or
(b) more than 50% of the outstanding shares of the Fund entitled to vote at the
Meeting. If the New Investment Sub-Advisory Agreement is not approved, the
Directors will consider other alternatives in the interests of stockholders.
THE DIRECTORS, INCLUDING ALL OF THE DISINTERESTED DIRECTORS, UNANIMOUSLY
RECOMMEND THAT YOU VOTE FOR APPROVAL OF THE NEW INVESTMENT SUB-ADVISORY
AGREEMENT.
PROPOSAL 4: RATIFICATION OR REJECTION OF
SELECTION OF INDEPENDENT ACCOUNTANTS
The Board of Directors of the Fund will consider, and it is expected
that they will recommend, the selection of PricewaterhouseCoopers LLP ("PwC") as
independent accountants of the Fund for the fiscal year ending November 30, 2002
at a meeting scheduled to be held on March 12, 2002. The appointment of
accountants is approved annually by the Audit Committee of the Board of
Directors and is subsequently submitted to the stockholders for ratification or
rejection. The Fund has been advised by PwC that at November 30, 2001 neither
that firm nor any of its partners had any direct or material indirect financial
interest in the Fund. A representative of PwC will be at the meeting to answer
questions concerning the Fund's financial statements and will have an
opportunity to make a statement if he or she chooses to do so.
Audit Fees
The Fund paid PwC $50,000 for its audit of the Fund's November 30, 2001
financial statements.
19
Financial Information Systems Design and Implementation
The Fund paid PwC $8,446 for professional services relating to the
Fund's financial information for the fiscal year ended November 31, 2001.
Hyperion Capital Management, Inc. (the "Advisor") is a subsidiary of Hyperion
Partners L.P., a Delaware limited partnership ("Hyperion Partners"). The sole
general partner of Hyperion Partners is Hyperion Ventures L.P., a Delaware
limited partnership ("Hyperion Ventures"). The Advisor did not pay PwC for any
other professional services relating to the Advisor's financial information
systems for the fiscal year ended November 31, 2001.
All Other Fees
The Fund paid PwC $52,650, including $46,000 for rights offering, for
other non-audit professional services for the fiscal year ended November 31,
2001. The Advisor, Hyperion Partners or Hyperion Ventures did not pay PwC for
any other professional services for the fiscal year ended November 31, 2001. The
Fund's Audit Committee has determined that the provision of the services by PwC
to the Advisor, Hyperion Partners or Hyperion Ventures is compatible with
maintaining PwC's independence.
Required Vote
Ratification of the selection of PwC as independent accountants of the
Fund requires the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock of the Fund present or represented by proxy
at the Annual Meeting.
ADDITIONAL INFORMATION
The Advisor
The Advisor is a Delaware corporation organized in February 1989 and a
registered investment advisor under the Investment Advisers Act of 1940, as
amended. The business address of the Advisor and its officers and directors is
One Liberty Plaza, New York, New York 10006-1404.
As noted above, the Advisor is a subsidiary of Hyperion Partners. The
sole general partner of Hyperion Partners is 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 ("Salomon Brothers"), is the Vice Chairman of
the Board of the Advisor and a Director of the Fund. Mr. Carter is the Chairman
and Chief Executive Officer of the Advisor and Chairman of the Fund. Messrs.
Salvatore Ranieri and Shay are directors of the Advisor, but have no other
positions with either the Advisor or the Fund. Messrs. Salvatore Ranieri and
Shay are principally engaged in the management of the affairs of Hyperion
Ventures and its affiliated entities. Since January 1, 1990, Patricia A. Sloan,
Secretary of the Fund, has been a special limited partner of Hyperion Ventures
and since July 1993 she has been a limited partner of Hyperion Partners. Mr.
Lai, the President of the Fund, is an employee of the Advisor, and may be
entitled, in addition to receiving a salary from the Advisor, to receive a bonus
based upon a portion of the Advisor's profits, including any profit from a sale
of the Advisor. Ms. Botta and Mr. Dolan, Vice Presidents of the Fund, and Mr.
Doodian, Treasurer of the Fund, are also employees of the Advisor. The business
address of Hyperion Partners and Hyperion Ventures is 50 Charles Lindbergh
Boulevard, Suite 500, Uniondale, New York 11553.
20
Investment Companies Managed by the Advisor
The Advisor provides advisory services to several other registered
investment companies and one offshore fund, all of which invest in
mortgage-backed securities. Its management includes several individuals with
extensive experience in creating, evaluating and investing in Mortgage-Backed
Securities, Derivative Mortgage-Backed Securities and Asset-Backed Securities,
and in using hedging techniques. Lewis S. Ranieri, Vice Chairman of the Advisor
and Director of the Fund, was instrumental in the development of the secondary
mortgage-backed securities market and the creation and development of secondary
markets for conventional mortgage loans, CMOs and other mortgage-related
securities. While at Salomon Brothers, Mr. Ranieri directed that firm's
activities in the mortgage, real estate and government guaranteed areas.
Clifford E. Lai, President of the Advisor and President of the Fund, was
Managing Director and Chief Investment Strategist for Fixed Income for First
Boston Asset Management Corporation.
In addition to acting as advisor to the Fund, the Advisor acts as
investment advisor to the following other investment companies at the indicated
annual compensation.
- --------------------------------------------------------------------------------------------------------------
Approximate Net Assets
Name of Fund Investment Advisory Fees at November 30, 2001
- --------------------------------------------------------------------------------------------------------------
Hyperion 2002 Term Trust, Inc. 0.50% of the Trust's average weekly net assets $299,630,338.22
- --------------------------------------------------------------------------------------------------------------
Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc. 0.65% of the Trust's average weekly net assets $169,640,855.33
- --------------------------------------------------------------------------------------------------------------
The Sub-Advisor
As noted above, the Advisor, has engaged the Sub-Advisor to provide
sub-investment advisory services for investments in High Yield Securities. The
Sub-Advisor, a registered investment advisor, is an Ohio corporation, organized
in December 1983, and currently manages approximately $1.1 billion in corporate
high yield bonds and related securities and approximately $145 million of other
securities. The business address of the Sub-Advisor and its officers and
directors is 8044 Montgomery Road, Suite 840, Cincinnati, Ohio 45236.
Brokerage Commissions
Because it buys its portfolio securities in dealer markets, the Fund
did not pay any brokerage commissions on its securities purchases during its
last fiscal year. The Fund paid an aggregate of $8,296.50 in futures commissions
during the last fiscal year, all of which were paid to entities that are not
affiliated with the Fund or the Advisor.
The Advisor and the Sub-Advisor have discretion to select brokers and
dealers to execute portfolio transactions initiated by the Advisor and the
Sub-Advisor and to select the markets in which such transactions are to be
executed. The Current Agreements provide, in substance, that in executing
portfolio transactions and selecting brokers or dealers, the primary
responsibility of the Advisor and the Sub-Advisor is to seek the best
combination of net price and execution for the Fund. It is expected that
securities will ordinarily be purchased in primary markets, and that in
assessing the best net price and execution available to the Fund, the Advisor
and the Sub-Advisor will consider all factors they deem relevant, including the
price, dealer spread, the size, type and difficulty of the transaction involved,
the firm's general execution and operation facilities and the firm's risk in
positioning the securities involved. Transactions in foreign securities markets
may involve the payment of fixed brokerage commissions, which are generally
higher than those in the United States.
21
In selecting brokers or dealers to execute particular transactions and
in evaluating the best net price and execution available, the Advisor and the
Sub-Advisor are authorized to consider "brokerage and research services" (as
those terms are defined in Section 28(e) of the Securities Exchange Act of
1934). The Advisor and the Sub-Advisor are also authorized to cause the Fund to
pay to a broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction. The Advisor and the Sub-Advisor must determine in good faith,
however, that such commission was reasonable in relation to the value of the
brokerage and research services provided, viewed in terms of that particular
transaction or in terms of all the accounts over which the Advisor or the
Sub-Advisor exercise investment discretion. Research services furnished by
brokers through whom the Fund effects securities transactions may be used by the
Advisor and the Sub-Advisor in servicing all of the accounts for which
investment discretion is exercised by the Advisor or the Sub-Advisor, and not
all such services may be used by the Advisor or the Sub-Advisor in connection
with the Fund.
OTHER BUSINESS
The Board of Directors of the Fund does not know of any other matter
which may come before the meeting. If any other matter properly comes before the
meeting, it is the intention of the persons named in the proxy to vote the
proxies in accordance with their judgment on that matter.
PROPOSALS TO BE SUBMITTED BY STOCKHOLDERS
All proposals by stockholders of the Fund that are intended to be
presented at the Fund's next Annual Meeting of Stockholders to be held in 2003
must be received by the Fund for inclusion in the Fund's proxy statement and
proxy relating to that meeting no later than September 23, 2002.
EXPENSES OF PROXY SOLICITATION
The cost of preparing, assembling and mailing material in connection
with this solicitation of proxies will be borne by the Fund. In addition to the
use of the mails, proxies may be solicited personally by regular employees of
the Fund, Hyperion Capital Management, Inc., or Georgeson Shareholder, paid
solicitors for the Fund, or by telephone or telegraph. The anticipated cost of
solicitation by the paid solicitors will be nominal. The Fund's agreement with
Georgeson Shareholder provides that such paid solicitors will perform a broker
search and deliver proxies in return for the payment of their fee plus the
expenses associated with this proxy solicitation. Brokerage houses, banks and
other fiduciaries will be requested to forward proxy solicitation material to
their principals to obtain authorization for the execution of proxies, and they
will be reimbursed by the Fund for out-of-pocket expenses incurred in this
connection.
March 1, 2002
22
Exhibit A
FORM OF INVESTMENT ADVISORY AGREEMENT
-------------------------------------
AGREEMENT dated __________________ between The Hyperion Total Return
Fund, Inc. (the "Fund"), a Maryland corporation, and Hyperion Capital
Management, Inc. (the "Adviser"), a Delaware corporation.
In consideration of the mutual promises. and agreements herein
contained and other good and valuable consideration, the receipt of which is
hereby acknowledged, it is agreed by and between the parties hereto as follows:
1. In General
The Adviser agrees, all as more fully set forth herein, to act as
investment adviser to the Fund with respect to the investment of the Fund's
assets and to supervise and arrange the purchase of securities for and the sale
of securities held in the investment portfolio of the Fund.
2. Duties and obligations of the Adviser with respect to
investments of assets of the Fund
(a) Subject to the succeeding provisions of this paragraph and
subject to the direction and control of the Fund's Board of Directors, the
Adviser shall (i) act as investment adviser for and supervise and manage the
investment and reinvestment of the Fund's assets and in connection therewith
have complete discretion in purchasing and selling securities and other assets
for the Fund and in voting, exercising consents and exercising all other rights
appertaining to such securities and other assets on behalf of the Fund; (ii)
supervise continuously the investment program of the Fund and the composition of
its investment portfolio; and (iii) arrange, subject to the provisions of
paragraph 3 hereof, for the purchase and sale of securities and other assets
held in the investment portfolio of the Fund.
(b) In the performance of its duties under this Agreement, the
Adviser shall at all times conform to, and act in accordance with, any
requirements imposed by (i) the provisions of the Investment Company Act of 1940
(the "Act"), and of any rules or regulations in force thereunder; (ii) any other
applicable provision of law; (iii) the. Provisions of the Articles of
Incorporation and By-Laws of the Fund, as such documents are amended from time
to time; and (iv) any policies and determinations of the Board of Directors of
the Fund.
(c) The Adviser will bear all costs and expenses of its
partners and employees and any overhead incurred in connection with its duties
hereunder and shall bear the costs of any salaries or directors fees of any
officers or directors of the Fund who are affiliated persons (as defined in the
Act) of the Adviser.
(d) The Adviser shall give the Fund the benefit of its best
judgment and effort in rendering services hereunder, but the Adviser shall not
be liable for any act or omission or for any loss sustained by the Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement.
A-1
(e) Nothing in this Agreement shall prevent the Adviser or any
director, officer, employee or other affiliate thereof from acting as investment
adviser for any other other person, firm or corporation, or from engaging in any
lawful activity, and shall not in any way limit or restrict the Adviser or any
of its partners, officers, employees or agents from buying, selling or trading
any securities for its or their own accounts or for the accounts of others for
whom it or they may be acting, provided, however, that the Adviser will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations under this Agreement.
3. Portfolio Transactions and Brokerage
The Adviser is authorized, for the purchase and sale of the Fund's
portfolio securities, to employ such securities dealers as may, in the judgment
of the Adviser, implement the policy of the Fund to obtain the best net results
taking into account such factors as price, including dealer spread, the size,
type and difficulty of the transaction involved, the firm's general execution
and operational facilities and the firm's risk in positioning the securities
involved. Consistent with this policy, the Adviser is authorized to direct the
execution of the Fund's portfolio transactions to dealers and brokers furnishing
statistical information or research deemed by the Adviser to be useful or
valuable to the performance of its investment advisery functions for the Fund.
4. Compensation of the Adviser
(a) The Fund agrees to pay to the Adviser and the Adviser
agrees to accept as full compensation for all services rendered by the Adviser
as such, a fee computed and payable monthly in an amount equal to .65% of the
Fund's average weekly net assets on an annualized basis, for the then-current
fiscal year. For any period less than a month during which this Agreement is in
effect, the fee shall be prorated according to the proportion which such period
bears to a full month of 28, 29, 30 or 31 days, as the case may be.
(b) For purposes of this Agreement, the average weekly net
assets of the Fund shall mean the average weekly value of the total assets of
the Fund, minus the sum of accrued liabilities (including accrued expenses) of
the Fund and any declared but unpaid dividends on the Common Shares issued by
the Fund and any Preferred Shares issued by the Fund (the "Preferred Shares")
and any accumulated dividends on any Preferred Shares, but without deducting the
aggregate liquidation value of the Preferred Shares. The average weekly net
assets of the Fund shall be calculated pursuant to the procedures adopted by
resolutions of the Directors of the Fund for calculating the net asset value of
the Fund's shares or delegating such calculations to third parties.
5. Indemnity
(a) The Fund hereby agrees to indemnify the Adviser and each
of the Adviser's directors, officers, employees and agents (including any
individual who serves at the Adviser's request as director, officer, partner,
trustee or the like of another corporation or other entity) (each such person
being an "indemnitee") against any liabilities and expenses, including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees (all as provided in accordance with applicable corporate law)
reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or investigative body in which he may be or
may have been involved as a party or otherwise or with which he may be or may
have been threatened, while acting in any capacity set forth above in this
Section 5 or thereafter by reason of his having acted in any such capacity,
except with respect to any matter as to which he shall have been adjudicated not
to have acted in good faith in the reasonable belief that his action was in the
best interest of the Fund and furthermore, in the case of any criminal
proceeding, so long as he had no reasonable cause to believe that the conduct
was unlawful, provided, however, that (1) no indemnitee shall be indemnified
hereunder against any liability to the Fund or its shareholders or any expense
of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith,
(iii) gross negligence or (iv) reckless disregard of the duties involved in the
conduct of his position (the conduct referred to in such clauses (i) through
(iv) being sometimes referred to herein as "disabling conduct"), (2) as to any
matter disposed of by settlement or a compromise payment by such indemnitee,
pursuant to a consent decree or otherwise, no indemnification either for said
payment or for any other expenses shall be provided unless there has been a
determination that such settlement or compromise is in the best interests of the
Fund and that such indemnitee appears to have acted in good faith in the
reasonable belief that his action was in the best interest of the Fund and did
not involve disabling conduct by such indemnitee and (3) with respect to any
action, suit or other proceeding voluntarily prosecuted by any indemnitee as
plaintiff, indemnification shall be mandatory only if the prosecution of such
action, suit or other proceeding by such indemnitee was authorized by a majority
of the full Board of the Fund.
A-2
(b) The Fund shall make advance payments in connection with
the expenses of defending any action with respect to which indemnification might
be sought hereunder if the Fund receives a written affirmation of the
indemnitee's good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to reimburse the Fund
unless it is subsequently determined that he is entitled to such indemnification
and if the directors of the Fund determine that the facts then known to them
would not preclude indemnification. In addition, at least one of the following
conditions must be met: (A) the indemnitee shall provide a security for this
undertaking, (B) the Fund shall be insured against losses arising by reason of
any lawful advances, or (C) a majority of a quorum consisting of directors of
the Fund who are neither "interested persons" of the Fund (as defined in Section
2(a)(19) of the Act) nor parties to the proceeding ("Disinterested Non-Party
Directors") or an independent legal counsel in a written opinion, shall
determine, based on a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the indemnitee
ultimately will be found entitled to indemnification.
(c) All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits by a court or
other body before whom the proceeding was brought that such indemnitee is not
liable by reason of disabling conduct or, (2) in the absence of such a decision,
by (i) a majority vote of a quorum of the Disinterested Non-Party Directors of
the Fund, or (ii) if such a quorum is not obtainable or even, if obtainable, if
a majority vote of such quorum so directs, independent legal counsel in a
written opinion. All determinations regarding advance payments in connection
with the expense of defending any proceeding shall be authorized in accordance
with the immediately preceding clause (2) above.
The rights accruing to any indemnitee under these provisions shall not
exclude any other right to which he may be lawfully entitled.
A-3
6. Duration and Termination
This Agreement shall become effective on the date first set forth above
and shall continue in effect until the next meeting of stockholders of the Fund
(but in any event not more than two years after such effective date) and
thereafter from year to year, but only so long as such continuation is
specifically approved at least annually in accordance with the requirements of
the Investment Company Act of 1940.
This Agreement may be terminated by the Adviser at any time without
penalty upon giving the Fund sixty days' written notice (which notice may be
waived by the Fund) and may be terminated by the Fund at any time without
penalty upon giving the Adviser sixty days' notice (which notice may be waived
by the Adviser), provided that such termination by the Fund shall be directed or
approved by the vote of a majority of the Directors of the Fund in office at the
time or by the vote of the holders of a "majority" (as defined in the Investment
Company Act of 1940) of the voting securities of the Fund at the time
outstanding and entitled to vote. This Agreement shall terminate automatically
in the event of its assignment (as "assignment" is defined in the Investment
Company Act of 1940). The Adviser is a corporation and will notify the Fund
promptly after any change in the ownership of such corporation.
7. Notices
Any notice under this Agreement shall be in writing to the other party
at such address as the other party may designate from time to time for the
receipt of such notice and shall be deemed to be received on the earlier of the
date actually received or on the fourth day after the postmark if such notice is
mailed first class postage prepaid.
8. Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York for contracts to be performed entirely therein without
reference to choice of law principles thereof and in accordance with the
applicable provisions of the Act.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers and their respective
seals to be hereunto affixed, all as of the day and the year first above
written.
THE HYPERION TOTAL RETURN FUND, INC.
By:
-------------------------------------
HYPERION CAPITAL MANAGEMENT, INC.
By:
-------------------------------------
A-4
Exhibit B
FORM OF INVESTMENT SUB-ADVISORY AGREEMENT
-----------------------------------------
AGREEMENT, dated ____________, between Hyperion Capital Management,
Inc. (the "Adviser"), a Delaware corporation, and Pacholder Associates Inc. (the
"Sub-Adviser"), an Ohio corporation.
WHEREAS, the Adviser has entered into an Investment Advisery Agreement
(the "Advisery Agreement") of even date herewith with The Hyperion Total Return
Fund, Inc. (the "Fund"), a Maryland corporation; and
WHEREAS, the Adviser seeks to retain the Sub-Adviser in connection with
the Adviser's duties and obligations under said Investment Advisery Agreement
and the Sub-Adviser desires to provide such assistance.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, it is agreed by and between the parties hereto as
follows:
1. In General
The Sub-Adviser agrees, all as more fully set forth herein, to act as
investment adviser to the Adviser with respect to the investment of that portion
of the Fund's assets constituting high yield, fixed income securities of U.S.
corporations ("High Yield Securities") and to provide investment research and
advice with respect to, supervise and arrange the purchase of High Yield
Securities for and the sale of High Yield Securities held in the investment
portfolio of the Fund (the High Yield Securities portion of the Fund's portfolio
is referred to herein as the "Portfolio").
2. Duties and Obligations of the Sub-Adviser with Respect to
Investments of Assets of the Fund
(a) Subject to the succeeding provisions of this paragraph and
subject to the direction and control of the Adviser, the Sub-Adviser shall (i)
act as investment adviser for and supervise and manage the investment and
reinvestment of the Portfolio only and in connection therewith have complete
discretion in purchasing and selling High Yield Securities for the Fund and in
voting, exercising consents and exercising all other rights appertaining to such
securities on behalf of the Fund; (ii) supervise continuously the investment
program of the Fund and the composition of its investment portfolio only as such
program and portfolio pertain to High Yield Securities; and (iii) arrange,
subject to the provisions of paragraph 3 hereof, for the purchase and sale of
High Yield Securities held in the Portfolio.
(b) In the performance of its duties under this Agreement, the
Sub-Adviser shall at all times conform to, and act in accordance with, any
requirements imposed by (i) the provisions of the Investment Company Act of 1940
(the "Act"), and of any rules or regulations in force thereunder; (ii) the
provisions of Subchapter M of the Internal Revenue Code of 1986, as amended, and
of any rules or regulations in force thereunder; (iii) any other applicable
provision of law; (iv) any policies and determinations of the Board of Directors
of the Fund and of the Adviser; and (v) the provisions of the Articles of
Incorporation and By-Laws of the Fund, as such documents are amended from time
to time.
B-1
(c) The Sub-Adviser will bear all costs and expenses of its
partners and employees and any overhead incurred in connection with its duties
hereunder and shall bear the costs of any salaries or directors fees of any
officers or directors of the Fund who are affiliated persons (as defined in the
Act) of the Sub-Adviser.
(d) The Sub-Adviser shall give the Adviser the benefit of its
best judgment and effort in rendering services hereunder, but the Sub-Adviser
shall not be liable for any act or omission or for any loss sustained by the
Fund in connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement.
(e) Nothing in this Agreement shall prevent the Sub-Adviser or
any director, officer, employee or other affiliate thereof from acting as
investment adviser for any other person, firm or corporation, or from engaging
in any other lawful activity, and shall not in any way limit or restrict the
Sub-Adviser or any of its partners, officers, employees or agents from buying,
selling or trading any securities for its or their own accounts or for the
accounts of others for whom it or they may be acting, provided, however, that
the Sub-Adviser will undertake no activities which, in its judgment, will
adversely affect the performance of its obligations under this Agreement.
(f) (1) The Adviser will have sole and absolute discretion to
determine the amount or percentage of Fund assets to be invested in High Yield
Securities. The Sub-Adviser shall invest that portion of the Fund's assets
designated by the Adviser for High Yield Securities as soon as practicable or at
such later time as the Adviser may direct after such funds are made available
for investment. From time to time the Adviser may determine to increase or
decrease the amount or percentage of Fund assets to be invested in High Yield
Securities. If the Adviser determines to increase such amount or percentage, the
Sub-Adviser shall invest such additional funds in High Yield Securities as soon
as practicable, or at such later time as the Adviser may direct, after (i)
notice of such increase is given to the Sub-Adviser and (ii) such additional
funds are made available for investment. If, on the other hand, the Adviser
determines to decrease such amount or percentage, the Sub-Adviser shall, as soon
as practicable, or at such later time as the Adviser may direct, after notice of
such decrease is given to the Sub-Adviser, liquidate that portion of the
Portfolio required for the Portfolio to represent the desired amount or
percentage of the Fund assets and cause such liquidated assets to be available
to the Adviser.
(2) Hedging of positions in the Portfolio, if any, will be
undertaken by the Adviser in consultation with the Sub-Adviser.
(g) The Sub-Adviser shall provide the Adviser with monthly
reports within 5 business days of the end of each month and quarterly reports
within 7 business days of the end of each calendar quarter. Such reports shall
include (i) an itemized print-out of the Portfolio as of the last day of the
period, including the current market value thereof (ii) a statement of the
Sub-Adviser's advice concerning the Fund's investments in High Yield Securities
in light of the objectives of the Fund and the then current market conditions,
(iii) a print-out of the performance of the Portfolio relative to a mutually
agreed upon High Yield securities index, and (iv) such other information as the
Adviser may from time to time reasonably request.
B-2
3. Portfolio Transactions and Brokerage
The Sub-Adviser is authorized, for the purchase and sale of the
securities in the Portfolio, to employ such securities dealers as may, in the
judgment of the Sub-Adviser, implement the policy of the Fund to obtain the best
net results taking into account such factors as price, including dealer spread,
the size, type and difficulty of the transaction involved, the firm's general
execution and operational facilities and the firm's risk in positioning the
securities involved. Consistent with this policy, the Sub-Adviser is authorized
to direct the execution of Portfolio transactions to dealers and brokers
furnishing statistical information or research deemed by the Sub-Adviser to be
useful or valuable to the performance of its investment advisery functions for
the Portfolio. In addition, the Sub-Adviser may give proper instructions to the
Fund's custodian in connection with the purchase or sale of High Yield
Securities. The Adviser, upon the Sub-Adviser's request, shall confirm such
authority to the Custodian.
4. Compensation of the Sub-Adviser
(a) The Adviser agrees to pay to the Sub-Adviser and the
Sub-Adviser agrees to accept as full compensation for all services rendered by
the Sub-Adviser as such, a fee computed and payable monthly in an amount equal
to .35% per annum of the Portfolio's average weekly net assets on an annualized
basis, for the then-current fiscal year. For any period less than a month during
which this Agreement is in effect, the fee shall be prorated according to the
proportion which such period bears to a full month of 28, 29, 30 or 31 days, as
the case may be.
(b) For purposes of this Agreement, the average weekly net
assets of the Portfolio shall mean the average weekly value of the total assets
of the Portfolio, minus the sum of (i) accrued liabilities (including accrued
expenses) directly related to the Portfolio, (ii) that percent of both declared
and unpaid dividends on the Common Shares issued by the Fund and any Preferred
Shares issued by the Fund (the "Preferred Shares") and any accumulated dividends
on any Preferred Shares, but without deducting the aggregate liquidation value
of the Preferred Shares, that is equal to the percent of the Fund's assets that
the Portfolio represents, and (iii) that percent of accrued liabilities related
to the Fund in general that is equal to the percent of the Fund's assets that
the Portfolio represents. The average weekly net assets of the Portfolio shall
be calculated pursuant to the procedures adopted by resolutions of the Directors
of the Fund for calculating the net asset value of the Fund's shares or
delegating such calculations to third parties and such determination shall be
binding on the Sub-Adviser.
B-3
5. Indemnity
(a) Subject to and only to the extent of the indemnification
provided to the Adviser by the Fund in the Advisory Agreement, the Adviser
hereby agrees to indemnify the Sub-Adviser and each of the Sub-Adviser's
directors, officers, employees and agents (including any individual who serves
at the Sub-Adviser's request as director, officer, partner, trustee or the like
of another corporation or other entity in connection with the Sub-Adviser's
duties under this Agreement) (each such person being an "indemnitee") against
any liabilities and expenses, including amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and counsel fees (all as
provided in accordance with applicable corporate law) reasonably incurred by
such indemnitee in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before any court or
administrative or investigative body in which he may be or may have been
involved as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in this Section 5 or
thereafter by reason of his having acted in any such capacity, except with
respect to any matter as to which he shall have been adjudicated not to have
acted in good faith in the reasonable belief that his action was in the best
interest of the Fund and the Adviser and furthermore, in the case of any
criminal proceeding, so long as he had no reasonable cause to believe that the
conduct was unlawful; provided, however, that (1) no indemnitee shall be
indemnified hereunder against any liability to the Adviser or the Fund or its
stockholders or any expense of such indemnitee arising by reason of (i) willful
misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard
of the duties involved in the conduct of his position (the conduct referred to
in such clauses (i) through (iv) being sometimes referred to herein as
"disabling conduct"), (2) as to any matter disposed of by settlement or a
compromise payment by such indemnitee, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other expenses
shall be provided unless there has been a determination, in accordance with
paragraph 5(c) below, that such settlement or compromise is in the best
interests of the Fund and the Adviser and that such indemnitee appears to have
acted in good faith in the reasonable belief that his action was in the best
interest of the Fund and the Adviser and did not involve disabling conduct by
such indemnitee, (3) with respect to any action, suit or other proceeding
voluntarily prosecuted by any indemnitee as plaintiff, indemnification shall be
mandatory only if the prosecution of such action, suit or other proceeding by
such indemnitee was authorized by the Adviser and (4) the indemnity provided
herein shall only be effective if, and to the extent, the Adviser is indemnified
by the Fund pursuant to the Advisory Agreement for the loss related to such
indemnity.
(b) To the extent made available to the Adviser pursuant to
the Advisory Agreement, the Adviser shall make advance payments in connection
with the expenses of defending any action with respect to which indemnification
might be sought hereunder if the Adviser receives a written affirmation of the
indemnitee's good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to reimburse the Adviser,
unless it is subsequently determined that it is entitled to such indemnification
and if the Adviser and the directors of the Fund determine that the facts then
known to them would not preclude indemnification. In addition, at least one of
the following conditions must be met: (A) the indemnitee shall provide a
security for this undertaking, (B) the Adviser and the Fund shall be insured
against losses arising by reason of any lawful advances, (C) a majority of a
quorum consisting of directors of the Fund who are neither "interested persons"
of the Fund (as defined in Section 2(a)(19) of the Act) nor parties to the
proceeding ("Disinterested Non-Party Directors") or (D) an independent legal
counsel in a written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the indemnitee ultimately will be found entitled to
indemnification.
(c) All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits by a court or
other body before whom the proceeding was brought that such indemnitee is not
liable by reason of disabling conduct or, (2) in the absence of such a decision,
by (i) the Adviser together with a majority vote of a quorum of the
Disinterested Non-Party Directors of the Fund, or (ii) if such a quorum is not
obtainable or even, if obtainable, if a majority vote of such quorum so directs,
independent legal counsel in a written opinion. All determinations regarding
advance payments in connection with the expense of defending any proceeding
shall be authorized in accordance with the immediately preceding clause (2)
above.
B-4
The rights accruing to any indemnitee under these provisions shall not
exclude any other right to which he may be lawfully entitled.
6. Duration and Termination
(a) This Agreement shall become effective on the date first
set forth above and shall continue in effect until the next meeting of
stockholders of the Fund (but in any event not more than two years after such
effective date) and thereafter from year to year, but only so long as such
continuation is specifically approved at least annually in accordance with the
requirements of the Investment Company Act of 1940.
(b) This Agreement may be terminated by the Sub-Adviser at any
time without penalty upon giving the Adviser sixty days' written notice (which
notice may be waived by the Adviser) and may be terminated by the Adviser at any
time without penalty upon giving the Sub-Adviser sixty days' notice (which
notice may be waived by the Sub-Adviser); provided that such termination by the
Adviser shall be directed or approved by the vote of a majority of the Directors
of the Fund in office at the time or by the vote of the holders of a "majority"
(as defined in the Investment Company Act of 1940) of the voting securities of
the Fund at the time outstanding and entitled to vote. This Agreement shall
terminate automatically in the event of its assignment (as "assignment" is
defined in the Investment Company Act of 1940). The Sub-Adviser represents that
it is a corporation and will notify the Adviser promptly after any change in
control of such corporation, as defined in Section 2(a)(9) of the Act.
7. Assignment
This Agreement may not be assigned by either party hereto without the
prior written consent of the other party.
8. Notices
Any notice under this Agreement shall be in writing to the other party
at such address as the other party may designate from time to time for the
receipt of such notice and shall be deemed to be received on the date actually
received.
9. Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York for contracts to be performed entirely therein without
reference to choice of law principles thereof and in accordance with the
applicable provisions of the Act.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers and their respective
seals to be hereunto affixed, all as of the day and the year first above
written.
HYPERION CAPITAL MANAGEMENT, INC.
By:
-------------------------------------
PACHOLDER ASSOCIATES INC.
By:
-------------------------------------
B-5
APPENDIX I
REPORT OF THE AUDIT COMMITTEE
January 16, 2002
To the Board of Directors
We have reviewed and discussed with management the Fund's audited financial
statements as of and for the year ended November 30, 2001.
We have discussed with PricewaterhouseCoopers LLP the matters required to be
discussed by Statement of Auditing Standards No. 61, Communications with Audit
Committees, as amended, by the Auditing Standards Board of the American
Institute of Certified Public Accountants.
We have received and reviewed the written disclosures and the letter from
PricewaterhouseCoopers LLP required by Independence Standard No. 1, Independence
Discussion with Audit Committees, as amended, by the Independence Standards
Board, and have discussed with the auditors the auditors' independence.
Based on the reviews and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Fund's Annual Report to shareholders required by Section 30(e) of the
Investment Company Act of 1940, as amended and Rule 30d-1 thereunder for the
year ended November 30, 2001.
Leo M. Walsh, Jr. - Audit Committee Chairman
Rodman L. Drake - Audit Committee Member
Harry E. Petersen, Jr. - Audit Committee Member
Robert F. Birch- Audit Committee Member
The foregoing Report of the Audit Committee shall not be deemed to be
incorporated by reference in any previous or future documents filed by the
Company with the Securities and Exchange Commission under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent that the Fund
specifically incorporates the Report by reference in any such document.
THE HYPERION TOTAL RETURN FUND, INC.
PROXY SOLICITED ON BEHALF OF THE DIRECTORS
The undersigned hereby appoints Andrew M. Carter and Clifford E. Lai and each of
them, attorneys and proxies for the undersigned, with full power of substitution
and revocation, to represent the undersigned and to vote on behalf of the
undersigned all shares of The Hyperion Total Return Fund, Inc. (the "Fund")
which the undersigned is entitled to vote at the Annual Meeting of Stockholders
of the Fund to be held at the Downtown Association, 60 Pine Street (between
William and Pearl Streets), 36th floor, New York, New York 10005, on April 16,
2002 at 9:45 a.m., and at any adjournments thereof. The undersigned hereby
acknowledges receipt of the Notice of Annual Meeting and accompanying Proxy
Statement and hereby instructs said attorneys and proxies to vote said shares as
indicated hereon. In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the Meeting. A majority of the
proxies present and acting at the Meeting, in person or by substitute (or, if
only one shall be so present, then that one), shall have any may exercise all of
the power or authority of said proxies hereunder. The undersigned hereby revokes
any proxy previously given.
This proxy, if properly executed, will be voted in the manner directed by the
stockholder. If no direction is made, this proxy will be voted FOR election of
the nominees as Directors in Proposal 1, FOR the approval of the new Investment
Advisory Agreement in Proposal 2, FOR the approval of the new Investment
Sub-Advisory Agreement in Proposal 3 and FOR the ratification of the selection
of PricewaterhouseCoopers LLP as the independent accountants of the Fund in
Proposal 4. Please refer to the Proxy Statement for a discussion of the
Proposals.
- --------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON THE REVERSE SIDE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE: Please sign exactly as your name(s) appear(s) on this proxy. If joint
owners, EITHER may sign this proxy. When signing as attorney, executor,
administrator, trustee, guardian or corporate officer, please give full title.
- --------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ------------------------------------- ------------------------------------
- ------------------------------------- ------------------------------------
- ------------------------------------- ------------------------------------
- ------------------------------------- ------------------------------------
X PLEASE MARK VOTES AS IN THIS EXAMPLE
----
- --------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
CONTROL NUMBER:
RECORD DATE OF SHARES:
Please be sure to sign and date this Proxy. Date
- --------------------------------------------------------------------------------
Stockholder sign here Co-owner sign here
DETACH CARD
1. Election of Directors
For All Nominees With-Held For All Except
Class III:
Lewis S. Ranieri ------------- ----------- ---------------
Leo M. Walsh, Jr.
Patricia A. Sloan
If you do not wish your shares voted "For" a particular nominee, mark the "For
All Except" box and strike a line through the name(s) of the nominee(s). Your
shares will be voted for the remaining nominee(s).
For Against Abstain
2. Approval for the new Investment
Advisory Agreement. ----------- ----------- -----------
For Against Abstain
3. Approval for the new Investment
Sub-Advisory Agreement. ----------- ----------- -----------
For Against Abstain
4. Ratification or rejection of the
selection of independent accountants (a ----------- ----------- -----------
vote "For" is a vote for ratification).
Mark box at right if an address change -----------
or comment has been noted on
the reverse side of this card.
Mark box at right if you plan to attend -----------
the Annual Meeting of
Stockholders on April 16, 2002.
DETACH CARD