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0000950115-96-000013 | 0000950115-96-000013_0000.txt | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the fiscal year ended: SEPTEMBER 30, 1995 Commission File Number: 1-8147
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (609) 665-9300
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES _X_ NO ___
The approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of December 22, 1995 (reference is made to the final paragraph of Part I herein for a statement of the assumptions upon which this calculation is based):
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
The number of shares outstanding of each of the registrant's classes of stock as of December 22, 1995:
Certain portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 5, 1996 (which is expected to be filed with the Commission not later than 120 days after the end of the registrant's last fiscal year) are incorporated by reference into Part III of this report.
MEDIQ Incorporated ('MEDIQ' or the 'Company'), through its wholly-owned subsidiary, MEDIQ/PRN Life Support Services, Inc. ('MEDIQ/PRN'), operates the largest movable critical care and life support medical equipment rental business in the United States. MEDIQ/PRN rents a wide variety of movable equipment for use by acute care hospitals, alternative care facilities, nursing homes, and home health care companies.
On January 20, 1995, the Company announced the formation of a Special Committee of the Board of Directors for the purpose of exploring alternative ways of maximizing shareholder value, including a possible sale of the stock or assets of the Company or certain of its subsidiaries. After exploring a number of alternatives, the Board of Directors on October 23, 1995 accepted the recommendation of the Special Committee to reject two outstanding offers to acquire the Company and terminate any further efforts to sell the Company at the present time. The Board determined to continue the previously announced strategy of divesting substantially all operating assets other than MEDIQ/PRN and using the proceeds thereof to reduce indebtedness. Accordingly, MEDIQ/PRN constitutes the Company's principal business, accounting for 97% of consolidated revenues from continuing operations in 1995.
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
MEDIQ/PRN provides essential cost-effective services to its customers. In order to maximize operating efficiency, health care providers often choose to rent movable medical equipment rather than incur the capital costs required to finance equipment purchases and the on-going expenses required for maintenance and repair. In addition, renting patient-ready equipment provides a vital adjunct that permits a health care provider to meet periods of increased patient census without the need for investing capital in stand-by equipment. MEDIQ/PRN meets these needs by renting a wide variety of equipment to health care providers across the continuum of care. As of September 30, 1995, MEDIQ/PRN had available for rent over 650 different types of medical equipment, including adult and infant ventilators, adult, infant, neonatal and fetal monitors, infusion and suction pumps, incubators, infant warmers, pulse oximeters, sequential compression devices and other movable critical care equipment for use in respiratory care, intensive care, labor and delivery, pediatric, neonatal intensive care and other departments of acute care general hospitals and for use in alternate care facilities, nursing homes, and by home health care providers. The 1994 acquisition of the movable medical equipment of KCI Therapeutic Services, Inc., a subsidiary of Kinetic Concepts, Inc. ('KCI'), substantially increased MEDIQ/PRN's rental equipment inventory and solidified its position as the leader in the critical care life support equipment rental business. MEDIQ/PRN also sells various disposable products which are used in conjunction with MEDIQ/PRN's rental products.
MEDIQ/PRN's customers rent equipment, which is delivered in most cases within two hours of a request, 24 hours a day, 365 days a year through 74 branch offices in major cities nationwide and 11 independent distributors. MEDIQ/PRN offers its customers a wide selection of rental programs, including (i) daily, weekly or monthly rentals with fixed rate terms, (ii) longer-term rentals with discounts which increase with the length of the rental term, and (iii) 'usage' rentals on a per use, per hour or per day basis. MEDIQ/PRN also offers its 'One Source' service which analyzes a customer's total rental activity from many sources for the previous year, and offers the same equipment to the customer on a long-term basis at a single fixed monthly cost that may result in substantial savings to the customer.
MEDIQ/PRN also provides a Comprehensive Asset Management Program (CAMP(Trademark)), which enables a customer to contract with MEDIQ/PRN to supply any element of its medical equipment management needs, including equipment and tracking. MEDIQ/PRN also has programs where it acquires all or part of the customer's equipment and rents the equipment back to the customer, eliminating the customer's burdens of ownership, underutilization and seasonal usage. MEDIQ/PRN's customers can also benefit from the use of CAMP(Trademark) through the reduction of biomedical and other hospital staff, lower equipment maintenance expenses and the elimination or reduction of capital expenditures for equipment. MEDIQ/PRN recently introduced its CAMP(Trademark) Plus logistics program that provides similar management services for multi-site health care networks to manage, service and transport movable patient care equipment.
MEDIQ/PRN also participates in two joint ventures through a subsidiary and a limited liability company. MEDIQ PRN/SLT rents surgical laser equipment to health care providers. MEDIQ PRN/HNE, L.L.C. rents to health care providers mattress systems designed to treat, prevent or manage pressure ulcers.
No single customer accounted for more than 10% of MEDIQ/PRN's rental revenues during fiscal 1995.
The Company's other operating subsidiaries include MEDIQ Management Services, Inc., a provider of health care management and consulting services and MEDIQ Diagnostic Centers, Inc., a provider of management and other administrative support services to diagnostic imaging centers.
The Company was incorporated in 1977. Its principal offices are located at One MEDIQ Plaza, Pennsauken, New Jersey.
MEDIQ/PRN's business is seasonal, with demand historically peaking in the winter months or the Company's second fiscal quarter.
Quality control/quality assurance and risk management procedures are conducted for all of MEDIQ/PRN's medical equipment by trained biomedical technicians to ensure compliance with safety, testing and performance standards at all branch offices. All equipment is serviced and tested prior to delivery to a customer in accordance with MEDIQ/PRN's Pre-Delivery Inspection Program, which is primarily derived from the Emergency Care Research Institute's ('ECRI's') programs. Most types of medical equipment rented by MEDIQ/PRN require routine servicing at scheduled intervals based upon hours of usage, including complete testing and inspection of all components that may need to be replaced or refurbished. Routine servicing is conducted by MEDIQ/PRN's trained personnel at all of its branch locations. Major repairs are performed at MEDIQ/PRN's Pennsauken, New Jersey or Santa Fe Springs, California maintenance facilities by its biomedical equipment technicians.
MEDIQ/PRN acquires substantially all of its new medical equipment for rental from approximately 100 suppliers. MEDIQ/PRN is not dependent upon any single supplier for its rental equipment or disposable products and believes that alternative purchasing sources of medical equipment are available to MEDIQ/PRN should they be needed.
The medical equipment rental industry is competitive, and MEDIQ/PRN encounters competition in all regions in which it operates. MEDIQ/PRN's competitors include (i) medical equipment rental and leasing businesses and medical equipment distributors which rent medical equipment to health care providers; (ii) medical equipment manufacturers which sell medical equipment directly to health care providers; and (iii) general leasing and financing companies and financial institutions, such as banks, which finance the acquisition of medical equipment by health care providers. MEDIQ/PRN believes that key factors influencing the decision regarding the selection of a medical equipment rental vendor include availability and quality of medical equipment, service and price.
PCI Services, Inc. ('PCI') (NASDAQ:PCIS) is a leading provider of integrated pharmaceutical packaging services, including blister packaging, bottle filling, pouch filling, strip packaging, capsule filling, the design and production of folding cartons and thermoformed components, and the printing of inserts. At December 22, 1995, the Company owned 2,875,000 shares of PCI common stock, or approximately 47% of the outstanding shares. PCI's stock traded during fiscal 1995 in the range of $5.50 to $10.125 per share and on December 22, 1995 the closing per share price was $9.875.
NutraMax Products, Inc. ('NutraMax') (NASDAQ:NMPC) is a leading private label health and personal care products company, marketing products in the feminine needs, cough/cold, baby care, ophthalmics, personal care and oral care categories. At December 22, 1995, the Company owned 4,037,258 shares of NutraMax common stock, or approximately 47% of the outstanding shares. NutraMax's stock traded during fiscal 1995 in the range of $5.75 to $10.375 per share and on December 22, 1995 the closing per share price was $9.25. The Company's ownership interest in NutraMax may decrease in the future if certain of the Company's outstanding subordinated debentures ($34.5 million aggregate principal outstanding as of December 22, 1995), which, by their terms, are exchangeable into shares of NutraMax common stock owned by the Company, are exchanged by the holders thereof for such shares. Assuming the Company does not exercise its rights upon such an exchange to redeem the debentures in cash, the effect of the exchange of all of such debentures would be to decrease the Company's ownership of NutraMax to approximately 21%.
The Company has announced its support of the efforts of the Board of Directors of NutraMax to explore opportunities to maximize value for the NutraMax shareholders. The Company has also announced its intention to realize the value of its investment in PCI.
In the second quarter of fiscal 1995, the Company adopted a plan to sell the following four non-core businesses within twelve months: Medifac, Inc. ('Medifac'), a provider of health care facility planning, architectural and development services; Health Examinetics, Inc. ('Health Examinetics'), a provider of mobile health testing services; MEDIQ Mobile X-Ray Services, Inc. ('Mobile X-Ray'), a provider of portable X-ray and EKG services; and MEDIQ Imaging Services, Inc. ('MEDIQ Imaging'), a provider of diagnostic imaging services in mobile and fixed sites. In the fourth quarter of fiscal 1995, the Company revised the plan to include the operations of HealthQuest, Inc. ('HealthQuest'), a provider of case management and utilization review services, which is presently anticipated to be sold in fiscal 1996. As a result of these determinations, operating results and net assets of these five businesses have been reported as discontinued operations for fiscal 1995. Discontinued operations also include the Company's equity investment in InnoServ Technologies, Inc. (formerly MMI Medical, Inc.), which is anticipated to be distributed to the Company's shareholders during fiscal 1996. See footnote C to the Company's consolidated financial statements for certain financial information about discontinued operations.
In June 1995, the Company sold Medifac and related assets to the management of Medifac for approximately $11 million in cash and notes, and the assumption of $26.9 million of non-recourse debt.
In August 1995, the Company sold the assets of MEDIQ Imaging to NMC Diagnostic Services, Inc., a division of W.R. Grace and Co. for approximately $17 million in cash and the assumption of $9.7 million of debt.
InnoServ Technologies, Inc. ('InnoServ') (NASDAQ:ISER) (formerly MMI Medical, Inc.), through its various subsidiaries, provides hospitals, clinics and private physicians' offices with maintenance services for diagnostic imaging equipment, shared mobile computed tomography and cardiac catheterization services and other radiological parts and supplies. The Company owns 2,030,000 shares of InnoServ common stock, or approximately 40% of the outstanding shares. InnoServ's stock traded during fiscal 1995 in the range of $3.00 to $4.125 per share and on December 22, 1995 the closing per share price was $4.125. The present business operations of InnoServ include the business of the Company's former subsidiary, MEDIQ Equipment and Maintenance Services, Inc., which was merged with InnoServ in 1994. Pursuant to an agreement of merger and plan of reorganization, as amended, among MMI Medical, Inc., MMI Acquisition Subsidiary, Inc., MEDIQ, and MEDIQ Equipment and Maintenance Services, Inc. dated as of May 18, 1994, MEDIQ has agreed to distribute the shares of stock of InnoServ owned by MEDIQ to its stockholders as soon as practicable following registration of the shares by InnoServ, which the Company has been advised is expected to be accomplished in fiscal 1996.
The Company presently anticipates that the disposal of Mobile X-Ray, Health Examinetics and HealthQuest will be completed in the second quarter of fiscal 1996.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates primarily in one business segment, exclusive of discontinued operations. The Company, through MEDIQ/PRN, rents medical equipment on a short-term basis nationwide. This segment represents more than 90% of the consolidated revenues, operating profits and assets exclusive of corporate assets, which include net assets of discontinued operations of $27.1 million and equity investments of $43.1 million.
The Company's businesses are subject to Federal, state and local regulations relating to the operation of such businesses. The Company is unable to predict whether, or to what extent, new legislation or regulations affecting its businesses will be enacted and, if enacted, what impact they will have on the Company. The following is a summary of some of the significant regulations currently affecting the operations of MEDIQ/PRN and the Company's other operations.
Compliance with FDA Regulations -- The FDA regulates companies which manufacture, prepare, propagate, compound or process medical devices. Device manufacturers must comply with registration and labeling regulations, submit premarket notifications or obtain premarketing approvals, comply with medical device reporting, tracking and post-market surveillance regulations and with device good manufacturing practices ('GMPs'), and are subject to FDA inspection. The GMP regulations specify the minimum standards for the manufacture, packing, storage, and installation of medical devices, and impose certain record keeping requirements. The FDA currently does not regulate MEDIQ/PRN or organizations which provide similar services as MEDIQ/PRN as device manufacturers. However, any company which services, repairs or reconditions medical devices could be subject to regulatory action by the FDA if its activities cause the devices to become adulterated or mislabeled. In addition, no assurance can be given that in the future the FDA will not regulate as device manufacturers companies such as MEDIQ/PRN, which acquire ownership of devices, recondition or rebuild such devices and rent them to customers or which service, repair or recondition devices owned by others. The Company is unable to predict the cost of compliance if any such regulations were to be adopted. MEDIQ/PRN is required to comply with certain other device tracking and reporting regulations administered by the FDA.
Reimbursement of Health Care Costs -- Substantially all of the revenues generated by Mobile X-Ray are received from third party payors, including governmental programs such as Medicare and Medicaid, which subjects these businesses to rules and regulations governing participation in such programs. The Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act (the 'Anti-Kickback Law') make it a criminal offense to offer, pay, solicit or receive renumeration in order to induce business for which reimbursement is provided under Medicare or Medicaid. In addition to criminal penalties, including fines of up to $250,000 and ten years imprisonment, violations of the Anti-Kickback Law can lead to civil monetary penalties and from the Medicare and Medicaid programs. The scope of prohibited payments in the Anti-Kickback Law is broad and includes a large number of economic arrangements involving hospitals, physicians and other health care providers, including joint ventures, space and equipment rentals, purchases of physician practices and management and personal services contracts. The Department of Health and Human Services published regulations which describe certain arrangements that will not be deemed to constitute violations of the Anti-Kickback Law. The safe harbors described in the regulations are narrow and do not cover a wide range of economic relationships which many hospitals, physicians and other health care providers consider to be legitimate business arrangements not prohibited by the statute. Because the regulations describe safe harbors and do not purport to describe comprehensively all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources, health care businesses having these arrangements or relationships may or may not be required to alter them in order to ensure compliance with the Anti-Kickback Law. The Company believes that it is presently in substantial compliance with the Anti-Kickback Law.
Effective January 1, 1995, a portion of the Medicare Law known as the 'Stark Bill' became effective. The Stark Bill prohibits, with certain limited exceptions, the payment for business referred to an entity by physicians who have a 'financial relationship' with an entity providing 'designated health services.' 'Financial relationship' includes, among other relationships, an ownership or investment interest in the entity, or a compensation arrangement. Sanctions for prohibited referrals include the denial of Medicare payment for the services, civil money penalties, and possible exclusion from the Medicare program. The Company believes that none of its arrangements violate the Stark Bill.
See also 'Legal Proceedings' herein for certain additional information.
The Company and its wholly-owned subsidiaries have approximately 1,250 employees, of which approximately 500 are employees of discontinued operations. The Company believes relations with employees are satisfactory.
The Company's principal facility is located in Pennsauken, New Jersey, where the Company's corporate headquarters and a portion of its operating activities are located, including MEDIQ/PRN's corporate headquarters. The Company and its wholly-owned subsidiaries also lease office and warehouse space in approximately 100 locations throughout the United States for local and regional operations. The properties owned and leased by the Company and its wholly-owned subsidiaries are believed to be adequate for the Company's operations.
On November 28, 1995, in the United States District Court for the Middle District of Pennsylvania, ATS Medical Services, Inc. ('ATS'), a subsidiary of the Company, and the president of ATS each pled guilty to one count of misprision of a felony in violation of Title 18, United States Code, Section 4. In addition, ATS agreed to repay the government $2.1 million for excess reimbursement received by ATS from the Medicare Program from 1988 through 1992. The payment is part of a settlement agreement entered into between ATS, the United States Government and a former ATS employee, who had filed a civil lawsuit on behalf of the government against ATS pursuant to the False Claims Act, Title 31, United States Code, Sections 3729, et seq., relating to ATS's alleged excess reimbursement. The government has agreed to recommend that no fine be imposed against ATS and has agreed that ATS will not be barred from submitting claims to the Medicare Program in the future.
MEDIQ Imaging, the assets of which were sold by the Company in August 1995, is presently the subject of a criminal and civil investigation by the United States Attorney's Office for the District of New Jersey and the Department of Health and Human Services. The investigation has focused on advice given by MEDIQ Imaging employees to physician customers of MEDIQ Imaging relating to the reassignment of certain Medicare claims. The Company and MEDIQ Imaging voluntarily reported the issue to the government in January 1995 after learning that the advice given by MEDIQ Imaging employees was inconsistent with the reassignment regulations. The Company and MEDIQ Imaging have been cooperating in the investigation. The Company has agreed, subject to certain limitations, to be responsible for any fine or penalty assessed following the conclusion of the investigation. Management believes that there has been no violation of any statute or regulation by MEDIQ Imaging or any of its officers, directors or employees and intends to vigorously defend any claims that may be brought.
In addition, the Company has pending several legal claims incurred in the normal course of business, which in the opinion of management, will not have material effect on the consolidated financial statements. See Note H to the Company's Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended September 30, 1995.
For the purposes of calculating the aggregate market value of the shares of common stock of the Company held by nonaffiliates, as shown on the cover page of this report, it has been assumed that all the outstanding shares were held by nonaffiliates except for the shares held by directors and executive officers of the Company. However, this should not be deemed to constitute an admission that all directors and executive officers of the Company are, in fact, affiliates of the Company, or that there are not other persons who may be deemed to be affiliates of the Company. Further information concerning shareholdings of officers, directors and principal shareholders is included in the Company's definitive proxy statement filed or to be filed with the Securities and Exchange Commission.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
The Company's Common Stock and its Series A Preferred Stock, which is convertible into Common Stock, are listed on the American Stock Exchange. The following table sets forth the high and low closing prices for the Company's Common and Preferred Stocks on the American Stock Exchange for the past two fiscal years.
As of December 1995, there were approximately 2,000 holders of record of the Company's Common Stock and approximately 350 holders of record of the Company's Preferred Stock. Since a portion of the Company's Common Stock and Preferred Stock is held in 'street' or nominee name, the Company is unable to determine the exact number of beneficial holders.
Historically, the Company has paid cash dividends on a quarterly basis, dependent upon the earnings, capital requirements, operating and financial condition of the Company, compliance with debt agreements, and other factors deemed relevant by the Board of Directors. The Company did not pay any dividends in 1995. The Company paid cash dividends of $.03 per share on its Common Stock and $.018 per share on its Preferred Stock for the first, second and third quarters of 1994. The terms of one of the Company's indentures currently limits the payment of future dividends or the purchase of the Company's stock to approximately $5 million in the aggregate as of September 30, 1995.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived from the audited financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
See Notes to Selected Consolidated Financial Data on next page
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Revenues, EBITDA and operating income attributable to MEDIQ/PRN, the Company's core business, were as follows (in thousands):
EBITDA -- Represents operating income before interest, income taxes, depreciation and amortization expenses.
(2) Equity participation related to stock transactions by unconsolidated affiliates was ($.7) million, $3.5 million, $14.5 million and $3.6 million in 1994, 1993, 1992 and 1991, respectively. Net gains (losses) from the sale of assets were ($.4) million, $4.7 million, ($.3) million, $3.0 million and $3.1 million in 1995, 1994, 1993, 1992 and 1991, respectively. In 1992, the Company recorded a loss reserve of $10.6 million for an investment in a real estate limited partnership.
(3) On September 30, 1994, MEDIQ/PRN acquired the critical care and life support rental equipment inventory of KCI. The purchase price, which was primarily financed with long-term debt, approximated $88 million, including transaction costs and the assumption of certain capital lease obligations.
(4) In May 1992, MEDIQ/PRN acquired ATI Medical Services, Inc. for $23.9 million in cash and the assumption of debt. In July 1992, MEDIQ/PRN refinanced its outstanding debt by issuing $100 million of 11.125% Senior Secured Notes due 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's strategic plan adopted in fiscal 1991, in summary, called for narrowing the focus of MEDIQ, concentrating the Company's resources in the development of its core business, selling non-core assets and reducing corporate debt. On January 20, 1995, the Company announced the formation of a Special Committee of the Board of Directors for the purpose of exploring alternative ways of maximizing shareholder value, including a possible sale of the stock or assets of the Company or certain of its subsidiaries. After exploring a number of alternatives, the Board of Directors on October 23, 1995 accepted the recommendation of the Special Committee to reject two outstanding offers to acquire the Company and terminate any further efforts to sell the Company at the present time. The Board determined to continue the process of divesting the Company of substantially all operating assets other than MEDIQ/PRN and using the proceeds to reduce indebtedness.
With the $88 million acquisition in 1994 of the movable medical equipment of KCI Therapeutic Services, Inc., a subsidiary of Kinetic Concepts, Inc. ('KCI'), MEDIQ/PRN, the Company's core business, strengthened its position as the leading company in the United States renting movable critical care and life support medical equipment to hospitals, home health care, sub-acute and nursing home providers on an 'as-needed basis.' With the successful integration of these assets into its 85 office distribution network, MEDIQ/PRN expanded its market presence, increased market share and improved its service standards.
The Company's other operating subsidiaries reported as continuing operations include MEDIQ Management Services, Inc., a provider of healthcare management and consulting services and MEDIQ Diagnostic Centers, Inc., a provider of management and other administrative support services to diagnostic imaging centers. In 1993, the Company's other operating subsidiaries also included PCI of Virginia, Inc. and Harrisburg Healthcare, Inc.
In addition to MEDIQ's core business, the Company has significant investments in unconsolidated affiliates, PCI Services, Inc. ('PCI') and NutraMax Products, Inc. ('NutraMax'). The Company owns 2,875,000 shares of the common stock of PCI, or approximately 47% of the outstanding shares. PCI is a leading provider of integrated packaging services to pharmaceutical manufacturers. The Company also owns 4,037,258 shares of the common stock of NutraMax, or approximately 47% of the outstanding shares. NutraMax is a leading private label health and personal care products company. The Company's ownership interest in NutraMax may decrease in the future in the event that certain of the Company's outstanding debentures are exchanged into shares of NutraMax common stock owned by the Company. Assuming the Company does not elect to pay cash, the effect of the exchange of all of such debentures would decrease the Company's ownership of NutraMax to approximately 21%. The Company's investments in PCI and NutraMax are accounted for under the equity method of accounting.
The Company has announced its support of the efforts of the Board of Directors of NutraMax to explore opportunities to maximize value for the NutraMax shareholders. The Company has also announced its intention to realize the value of its investment in PCI.
In the second quarter of fiscal 1995, the Company adopted a plan to sell its non-core businesses: MEDIQ Mobile X-Ray Services, Inc. ('Mobile X-Ray'), a provider of portable X-ray and EKG services; MEDIQ Imaging Services, Inc. ('MEDIQ Imaging'), a provider of diagnostic imaging services in mobile and fixed sites; Medifac, Inc. ('Medifac'), a provider of healthcare facility planning, architectural and development services; and Health Examinetics, Inc. ('Health Examinetics'), a provider of mobile health testing services. In the fourth quarter of fiscal 1995, the Company expanded its plan to sell non-core businesses to include the operations of HealthQuest, Inc. ('HealthQuest'), a provider of case management and utilization review services. These operations, in addition to the Company's equity investment in InnoServ Technologies, Inc.
Inc.), which is anticipated to be distributed to the Company's shareholders in fiscal 1996, are reported as discontinued operations.
In addition, the Company reported the operations of Mental Health Management, Inc., ('MHM'), a provider of behavioral health services, as discontinued operations in fiscal 1993. In August 1993, the Company completed the tax-free distribution to its stockholders of 100% of the stock of MHM.
In June 1995, the Company sold Medifac and related assets to the management of Medifac for approximately $11 million, consisting of $6 million in cash and $5 million in notes, and the assumption of $26.9 million of non-recourse debt.
In August 1995, the Company sold the assets of MEDIQ Imaging to NMC Diagnostic Services, Inc., a division of W.R. Grace & Co., for approximately $17 million in cash and the assumption of $9.7 million of debt.
The Company anticipates that the disposal of Mobile X-Ray, Health Examinetics and HealthQuest will be completed in the second quarter of fiscal 1996.
Fiscal Year 1995 Compared with Fiscal Year 1994
Revenues from continuing operations were $132.2 million, as compared to $81.5 million in the prior year, an increase of $50.7 million, or 62%. MEDIQ/PRN's revenues increased 72%, to $128.8 million, as compared to revenues of $74.9 million in the prior year, primarily attributable to the KCI acquisition. MEDIQ/PRN incorporated the movable medical equipment obtained from the acquisition on September 30, 1994 into its national distribution network with the addition of six branch offices, which resulted in substantially higher revenues. Revenues from the Company's other operating activities (before intercompany eliminations) were $3.8 million, as compared to $6.3 million in the prior year.
Operating income from continuing operations was $23.9 million, as compared to $1.1 million in 1994. The improvement in operating income was attributable to MEDIQ/PRN, which had operating income of $31.5 million, an increase of $26.2 million over 1994, principally related to additional revenues and improved operating margins resulting from the KCI acquisition. The Company's other operating activities had operating income of $.2 million in 1995, as compared to $1.9 million in the prior year. Non-operating activities, including corporate overhead, accounted for operating losses of $7.8 million in 1995, as compared to $6.1 million in 1994.
Operating income from continuing operations in 1995 was adversely affected by corporate general and administrative expenses of approximately $1.7 million incurred in connection with the Company's corporate strategic activities during the year. These activities, which included the formation and activities of a Special Committee of the Board of Directors to explore alternative ways of maximizing shareholder value, were concluded in October 1995 when the Board accepted the recommendation of the Special Committee to reject two outstanding offers to acquire the Company and terminate any further efforts to sell the Company at the present time.
The Company anticipates incurring additional expenses in the first quarter of fiscal 1996 for restructuring charges of approximately $2.0 million for employee severance costs incurred in connection with a plan approved by the Board of Directors to downsize corporate functions and consolidate certain activities with the operations of MEDIQ/PRN. The plan results in the termination of 29 employees in fiscal 1996. The Company anticipates reductions in corporate expenses of approximately $1.3 million in 1996 and $2 million annually thereafter as a result of the downsizing and consolidation of corporate activities.
Interest expense increased 37%, to $29 million, from $21.1 million in 1994. Increased debt associated with financing MEDIQ/PRN's acquisition of KCI on September 30, 1994 resulted in higher interest expense, partially offset by lower interest at the corporate level. Net cash proceeds from the sale of discontinued operations in June and August 1995 aggregating approximately $24 million were used to reduce notes payable to banks and other long-term debt.
The Company's equity in the earnings of its unconsolidated affiliates, PCI and NutraMax, was $4.7 million, as compared to $4.3 million in the prior year. Operating results may be affected in the event of a sale of the Company's equity interest in PCI and/or NutraMax as the proceeds from any such sale would be utilized to reduce indebtedness and, accordingly, would result in reduced interest expense.
Interest income was $1.5 million in 1995 and $1.4 million in 1994 and was primarily derived from the Company's note receivable from MHM.
Other charges and credits for 1995 included a loss of $1.1 million from the sale of the Company's equity interest in New West Eyeworks, Inc. in April 1995 for $3.0 million, and income of $.6 million representing a portion of the contingent proceeds earned in 1995 from the prior year sale of the Company's interest in a kidney stone treatment center. Fiscal 1994 included a gain of $4.0 million related to the sale of the kidney stone treatment center and gains totalling $1.4 million from dividends and the sale of other assets, including a portion of the Company's equity interest in New West Eyeworks.
Pretax income from continuing operations was $1.1 million for 1995, as compared to a pretax loss of $9.0 million in the prior year. The improvement in pretax income was attributable to MEDIQ/PRN and the success of its integration of the assets acquired in the KCI acquisition into its nationwide distribution network. The current year included non-recurring expenses of $1.7 million related to the strategic activities of the Board of Directors and a loss of $1.1 million on the sale of the Company's equity interest in New West Eyeworks. The pretax loss in 1994 included gains from the sale of the Company's interest in a kidney stone treatment center and other assets totalling $5.4 million, and a loss of $.7 million related to the Company's equity participation in common stock transactions of PCI and NutraMax.
The income tax expense related to continuing operations was $1.3 million, as compared to a benefit of $3.1 million in the prior year. The Company's effective tax rates were disproportionate compared to the statutory rates as a result of goodwill amortization and the non-recognition for state income tax purposes of certain operating losses.
Revenues from discontinued operations were $78.4 million in 1995, as compared to $86.6 million in 1994. The net loss from discontinued operations was $4.7 million in 1995, consisting principally of the net loss on disposal, as compared to a net loss of $1.5 million in the prior year.
In November 1995, ATS Medical Services, Inc. ('ATS') a subsidiary of the Company, agreed to repay the government $2.1 million for excess reimbursements received by ATS from the Medicare Program from 1988 through 1992. Under the agreement, $75,000 is payable monthly without interest through October 1996 and, thereafter, $100,000 plus interest is payable monthly through October 1997. Upon the sale of ATS, the balance is payable in full. The Company recorded a reserve for such excess reimbursement in fiscal 1994 and has reflected such reserve in discontinued operations.
Fiscal Year 1994 Compared with Fiscal Year 1993
Revenues from continuing operations were $81.5 million, as compared to $90 million in the prior year, a decrease of $8.5 million, or 9%. Revenues from MEDIQ/PRN, which decreased 2%, to $74.9 million, were adversely affected by lower average rental prices in response to competitive pressures. This situation was mitigated by MEDIQ/PRN's growth in the sub-acute, nursing home and home health care markets. Revenues from the Company's other operating subsidiaries were $6.3 million, as compared to $12 million in the prior year, which included revenues of $5.1 million related to operations that were divested in 1993.
Operating income from continuing operations was $1.1 million, as compared to $8.4 million in 1993. MEDIQ/PRN's operating income decreased 60%, to $5.3 million, as compared to $13.4 million in 1993. This decrease resulted from reductions in average rental prices due to competition and higher administrative and operating expenses. MEDIQ/PRN's operating income was also adversely affected by higher depreciation and amortization expense related to increases in rental equipment inventory. The Company's other operating activities had operating income of $1.9 million, as compared to $1.1 million in 1993. Non-operating activities, including corporate overhead, accounted for operating losses of $6.1 million in 1994 and 1993.
Interest expense was $21.1 million, which was comparable to the prior year.
The Company's equity in the earnings of its unconsolidated affiliates was $4.3 million in 1994, which was comparable to the prior year.
Equity participation related to common stock transactions by PCI and NutraMax resulted in a loss of $.7 million in 1994 and income of $3.5 million in 1993.
Interest income was $1.4 million in 1994 and $1.1 million in 1993 and was primarily related to the MHM note receivable.
Other income, including gains and losses on the sale of assets, was $6 million in 1994, as compared to $.9 million in 1993. In September 1994, the Company sold its rights under a management contract for a kidney stone treatment center to a regional hospital for $4 million in cash and $3 million contingent upon future earnings, resulting in a gain of $4 million. The Company also recognized $1.4 million of income from dividends and the sale of other assets in 1994.
The income tax benefit from continuing operations was $3.1 million, as compared to $3.9 million in the prior year. The Company's effective tax rates were disproportionate compared to the statutory rates as a result of goodwill amortization, non-recognition for state income tax purposes of certain operating losses and permanent differences related to the disposition of assets.
In 1993, the Company repaid approximately $15.9 million of corporate debt with proceeds from the disposition of operations and the Company's debenture offering in July 1993. As a result of such repayments, the Company incurred prepayment premiums of $1.5 million, or $1.0 million net of taxes.
Revenues from discontinued operations were $86.6 million in 1994, as compared to $84.8 million in 1993. The net loss from discontinued operations was $1.5 million as compared to net income of $3.0 million in 1993, which included a net loss on disposal of $.5 million. Fiscal 1994 included a reserve of $1.5 million (net of taxes) related to excess reimbursement received by ATS under the Medicare program.
In 1995, cash provided by operating activities increased to $23.3 million, as compared to $12.6 million in the prior year. This increase was principally the result of significantly higher operating income from MEDIQ/PRN. In addition to cash flow from operations, the Company raised $33 million in cash from the dispositions of Medifac, MEDIQ Imaging and other assets in 1995. The Company anticipates that additional dispositions will occur in 1996 and presently intends to use the net proceeds of any such disposition to further reduce long-term debt.
Net cash provided by investing activities was $19.6 million for 1995, principally as a result of the sale of discontinued operations and other assets, partially offset by expenditures principally for rental medical equipment totalling $11.5 million. The Company anticipates capital expenditures of approximately $10 million during fiscal 1996, primarily for rental medical equipment. The Company intends to fund the rental medical equipment expenditures with cash from operations.
Net cash used in financing activities was $41.5 million for 1995. Cash flow from operations and proceeds from the sale of discontinued operations and other assets were used to repay debt of $42.9 million, partially offset by borrowings of $1.2 million.
In connection with the KCI acquisition, the Company obtained a $43 million term loan and issued $10 million of senior subordinated notes (including warrants) to finance a portion of the purchase price. In addition, KCI provided financing for the acquisition aggregating $17.1 million (net of related discounts). Borrowings under the Company's lines of credit and cash proceeds from the sale of assets in 1994 were utilized to fund the balance of the purchase price.
The $43 million term loan is payable in equal monthly payments of approximately $600,000 through December 2000 plus interest at prime plus 2% or, at the Company's option, a rate equal to the adjusted Eurodollar rate plus 4.25%. The $10 million of senior subordinated notes include warrants which allow the holders to purchase an aggregate of 10% of the common stock of MEDIQ/PRN for a nominal amount. Interest on the notes of 10% is payable semi-annually on April 1 and October 1 and annual principal payments of $1.0 million commence April 1, 2000, with the balance payable on October 1, 2004. Financing provided by KCI in the amount of $17.1 million was comprised of $8.6 million (net of related discounts) of subordinated notes and two term loans aggregating $8.5 million. The subordinated notes are due in September 1999 and bear interest at 10% commencing April 1, 1996. The term loans were paid in monthly installments through October 1, 1995.
In September 1994, in connection with the KCI acquisition, MEDIQ/PRN amended the indenture relating to its outstanding $100 million of 11.125% senior secured notes, which resulted in an increase in the interest rate on the notes to 12.125% commencing September 30, 1995. The notes, which are not guaranteed by the Company, are redeemable after July 1997. MEDIQ/PRN is required to offer to repay a portion of the principal amount of the notes under certain circumstances (as defined in the indenture). At September 30, 1995, MEDIQ/PRN was not required to offer to repay any portion of the notes. Interest is payable on the notes semi-annually on January 1 and July 1. Although MEDIQ/PRN is highly leveraged, it anticipates that excess cash flow will be sufficient to repay the notes when due. If MEDIQ/PRN does not generate funds from operations sufficient to repay the notes upon maturity in 1999, MEDIQ/PRN would attempt to refinance such indebtedness.
The Company's 7.25% convertible subordinated debentures due 2006 require the Company to offer to repurchase a portion of the debentures if stockholders' equity is $40 million or less at the end of two consecutive fiscal quarters. Since June 30, 1994, the Company's stockholders' equity has been less than $40 million. The requirements to repurchase debentures at December 31, 1994 and June 30, 1995 were satisfied through the Company's previous acquisition of $23.3 million principal amount of debentures. As of September 30, 1995, $22.5 million of the debentures was classified as current obligations pursuant to the terms of the indenture. In October and November 1995, the Company repurchased an aggregate of $11.25 million of its debentures at a discount in the open market and through a private transaction resulting in a pretax gain of approximately $1.5 million. This gain will be recorded in the first quarter of fiscal 1996 as an extraordinary item. The Company is required to either repurchase or redeem $11.25 million of debentures prior to June 30, 1996 and semi-annually thereafter until all of the debentures are repurchased or stockholders' equity is more than $40 million.
As of September 30, 1995, the Company had lines of credit aggregating $16 million, bearing interest at rates ranging from prime (8.75% at September 30, 1995) to prime plus 1.5%. No amounts were outstanding under these facilities at September 30, 1995. The Company also has a $13.4 million long-term revolving credit facility. In December 1995, this credit facility which bears interest at prime plus 1% and, originally set to expire October 1995, was extended to December 1996. In connection with the extension to December 1996, the facility was increased to $15.0 million and the interest rate was reduced to prime plus .5%. In addition, as amended, the facility will be reduced by an amount equal to 50% of the net cash proceeds from the sale of discontinued operations and certain other assets. At September 30, 1995, the Company had $.6 million outstanding under this facility. During the first quarter of fiscal 1996, $6.9 million was borrowed under this facility to fund, in part, the repurchase of the Company's 7.25% convertible subordinated debentures.
Certain of the Company's loan agreements require the maintenance of specified financial ratios and impose financial and dividend limitations. The terms of one of the Company's indentures currently limits the payment of future dividends or the purchase of the Company's stock to approximately $5 million in the aggregate as of September 30, 1995.
The Company expects that its primary sources of liquidity for operating activities will be generated through cash flows from MEDIQ/PRN. Proceeds from the sale of discontinued operations and miscellaneous assets will be used to repay long-term debt. The Company believes that sufficient funds will be available from operating cash flows and the sale of assets to meet the Company's anticipated operating and capital requirements, including obligations to redeem or repurchase in the open market a portion of the 7.25% debentures. In addition, the Company is currently evaluating the possibility of refinancing all or a portion of its consolidated senior and subordinated debt, but there can be no assurances that such refinancing will occur.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of MEDIQ Incorporated and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1995. Our audits also include the financial statement schedules listed in the index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MEDIQ Incorporated and subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -- The consolidated financial statements include the accounts of MEDIQ Incorporated and its subsidiaries (the 'Company'). Investments in companies owned 20% to 50% are accounted for under the equity method of accounting. All other investments are stated at the lower of cost or net realizable value. In consolidation, all significant intercompany transactions and balances have been eliminated.
Inventories -- Inventories, which consist primarily of repair parts for rental equipment and finished goods held for sale, are stated at the lower of cost (first-in, first-out method) or market.
Property, plant and equipment -- Rental equipment, machinery and equipment, buildings and improvements, and land are recorded at cost. Capital leases are recorded at the lower of fair market value or the present value of future lease payments. The Company provides straight-line depreciation and amortization over the estimated useful lives (rental equipment and machinery and equipment -- 3 to 10 years and buildings and improvements -- 10 to 40 years).
Goodwill -- The cost of acquired businesses in excess of net assets is amortized on a straight-line basis primarily over 20 years. Accumulated amortization was $12 million and $8.6 million as of September 30, 1995 and 1994, respectively.
Carrying value of long-term assets -- The Company evaluates the carrying value of long-term assets, including rental equipment, goodwill and other intangible assets, based upon current and anticipated undiscounted cash flows, and recognizes an impairment when such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and fair value.
Revenue recognition policy -- MEDIQ/PRN Life Support Services, Inc. ('MEDIQ/PRN') recognizes revenue in accordance with the terms of the related rental agreement and the usage of the related rental equipment. Revenues from other operating activities are recognized as services are rendered or as income is earned.
Income taxes -- Effective October 1, 1993, the Company adopted on a prospective basis the provisions of Statement of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for Income Taxes', which supersedes SFAS No. 96. The effect of the adoption of SFAS No. 109 was not significant. The Company files a consolidated federal tax return with its 80% or more owned subsidiaries and, accordingly, any dividends from included companies are not taxable to the Company.
Subsidiary and unconsolidated affiliate stock transactions -- Gains (losses) resulting from the issuance or repurchase of stock by subsidiaries and unconsolidated affiliates are recognized by the Company as equity participation in the Consolidated Statements of Operations.
Earnings (loss) per share -- Primary net earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents include shares issuable upon conversion of the Company's convertible preferred stock and exercise of outstanding stock options.
Reclassification of accounts -- Certain reclassifications have been made to conform prior years' balances to the current year presentation.
On September 30, 1994, the Company acquired the critical care and life support rental equipment inventory of KCI Therapeutic Services, Inc., a subsidiary of Kinetic Concepts, Inc. ('KCI'). The purchase price was approximately $88 million, including transaction costs and the assumption of certain capitalized lease obligations. The purchase price was allocated to assets acquired and liabilities assumed based on fair values at the date of the acquisition. The excess of the purchase price over fair
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
values of the net assets acquired of $44.5 million was recorded as goodwill and is being amortized over twenty years.
The Company's strategic plan adopted in fiscal 1991, in summary, called for narrowing the focus of MEDIQ, concentrating the Company's resources in the development of its core business, selling non-core assets and reducing corporate debt. On January 20, 1995, the Company announced the formation of a Special Committee of the Board of Directors for the purpose of exploring alternative ways of maximizing shareholder value, including a possible sale of the stock or assets of the Company or certain of its subsidiaries. After exploring a number of alternatives, the Board of Directors on October 23, 1995 accepted the recommendation of the Special Committee to reject two outstanding offers to acquire the Company and terminate any further efforts to sell the Company at the present time. The Board determined to continue the process of divesting the Company of substantially all operating assets other than MEDIQ/PRN and using the proceeds to reduce indebtedness.
In December 1993, the Company exercised warrants to purchase 229,518 shares of common stock of New West Eyeworks, Inc. ('New West') in connection with New West's initial public offering. The warrants were issued to the Company in 1988 together with $5.1 million of New West preferred stock as partial consideration for the sale of a business. In connection with the offering, the Company received $1.9 million, representing a partial redemption of the preferred shares, net proceeds from the sale of 82,500 shares of common stock and partial payment of accumulated preferred stock dividends and accrued interest. The Company received an additional 57,143 shares of New West common stock in payment of the balance of accumulated dividends and interest. The Company recorded income of $1.2 million in 1994 related to the sale of New West common stock and the payment of dividends and interest. In April 1995, the Company sold its remaining investments in New West common stock and preferred stock for aggregate consideration of $3 million resulting in a $1.1 million pretax loss.
In September 1994, the Company sold its rights under a management contract related to a kidney stone treatment center for $4 million in cash and $3 million contingent upon future results of operations. The sale resulted in a pretax gain of $4 million in 1994 and $.6 million in 1995 representing a portion of the contingent proceeds.
In the second quarter of fiscal 1995, the Company adopted a plan to sell four non-core businesses, Medifac, Inc., Health Examinetics, Inc., MEDIQ Mobile X-Ray Services, Inc. and MEDIQ Imaging Services, Inc., within twelve months. In the fourth quarter, the Company revised the plan to include the operations of HealthQuest, Inc., which is anticipated to be sold in fiscal 1996. As a result, operating results and net assets of these businesses have been reported as discontinued operations. Discontinued operations also include the Company's equity investment in InnoServ Technologies, Inc. ('InnoServ,' formerly MMI Medical, Inc.), which is anticipated to be distributed to the Company's shareholders during fiscal 1996. The Company's prior year consolidated financial statements have been restated to report the net assets and operating results of these businesses as discontinued operations. In addition, the Company reported the operations of Mental Health Management, Inc., ('MHM') as discontinued operations in fiscal 1993.
In August 1995, the Company sold the assets of MEDIQ Imaging Services, Inc., the Company's mobile and fixed site ultrasound and nuclear imaging business, to NMC Diagnostic Services, Inc., a
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
division of W.R. Grace & Co., for approximately $17 million in cash, and the assumption of $9.7 million of debt.
In June 1995, the Company sold Medifac, Inc., a healthcare facility planning, design and project management firm, and related assets to the management of Medifac for approximately $11 million, consisting of $6 million in cash and $5 million in notes, and the assumption of $26.9 million of non- recourse debt.
In August 1994, the Company merged its MEDIQ Equipment and Maintenance Services, Inc. ('MEMS') subsidiary with InnoServ, and the Company received 2,030,000 shares of InnoServ common stock, or approximately 40% of the outstanding shares, and warrants to purchase at $6.25 per share an additional 325,000 shares of common stock. No gain or loss resulted from the merger.
In August 1993, the Company completed the tax-free distribution to the Company's shareholders of the stock of MHM, a provider of behavioral healthcare services. The distribution was accounted for as a dividend with a resultant reduction in consolidated stockholders' equity of $15.6 million, representing the Company's equity investment in MHM. In connection with the distribution, the Company obtained a five-year note receivable from MHM for the balance of unpaid management fees and intercompany interest in the amount of $11.5 million. The note bears interest at a rate of prime (8.75% at September 30, 1995) plus 1.5%, with monthly interest payments for two years which commenced October 1, 1993 and monthly principal and interest payments for the following three years, based on a fifteen year amortization period, with the balance due on August 31, 1998.
The Company anticipates that the disposal of Mobile X-Ray, Health Examinetics and HealthQuest will be completed in the second quarter of fiscal 1996. The estimated loss on the sale of discontinued operations, including operations to be sold in fiscal 1996, amounted to $4.7 million (net of income tax expense of $1 million).
The investment in discontinued operations as of September 30, 1995 consisted of (in thousands):
The investment in InnoServ, which will be distributed to the Company's shareholders in the form of a dividend, is reflected as a long-term asset.
Revenues from discontinued operations were $78.4 million, $86.6 million and $84.8 million in 1995, 1994 and 1993, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE D -- PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization expense related to property, plant and equipment was $26.1 million, $19.7 million and $17.7 million in 1995, 1994 and 1993, respectively.
NOTE E -- ACCRUED EXPENSES
NOTE F -- NOTES PAYABLE TO FINANCIAL INSTITUTIONS
The Company has $16 million of lines of credit which bear interest at rates ranging from prime (8.75% at September 30, 1995) to prime plus 1.5% and are secured primarily by certain accounts receivable, a pledge of the common stock of MEDIQ/PRN and a second mortgage on real estate. At September 30, 1995, no amounts were outstanding under these facilities. The amount of available credit fluctuates based upon the amount of eligible accounts receivable. The average amount outstanding under lines of credit in 1995 was $8.4 million and the weighted average interest rate computed on the monthly outstanding balance was 10.1%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE G -- LONG-TERM DEBT
Senior debt consisted of the following:
Subordinated debt consisted of the following:
In September 1994, in connection with the acquisition of the rental equipment inventory of KCI, the Company obtained financing consisting of a $43.0 million term loan, $8.5 million of senior subordinated notes, $8.6 million of subordinated notes payable to KCI and two term loans aggregating $8.5 million payable to KCI. The $43.0 million term loan is payable in equal monthly payments through December 2000 of approximately $600,000 plus interest at the prime rate plus 2% or, at the Company's option, a rate equal to the adjusted Eurodollar rate plus 4.25% and is collateralized by all of the acquired equipment. The $8.5 million of senior subordinated notes, which have a face value of $10 million, include warrants which allow the holders to purchase, in the aggregate, up to 10% of the common stock of MEDIQ/PRN for a nominal amount. Interest on the notes of 10% is payable semi-annually on April 1 and October 1. Annual principal payments on the notes of $1.0 million commence April 1, 2000, with the remaining principal balance payable on October 1, 2004. The $8.6 million of subordinated notes payable to KCI, which have a face value of $10 million, mature on September 30, 1999 and bear interest at 10%, commencing April 1, 1996. The term
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE G -- LONG-TERM DEBT--(CONTINUED)
were payable to KCI in monthly installments through October 1995. The subordinated notes payable to KCI and certain of the term notes are carried net of related discounts. The MHM note receivable is pledged as collateral for the Company's obligations to KCI.
In October 1993, the Company entered into an agreement with a commercial bank for a $7.5 million revolving credit facility, which was increased to $13.4 million in August 1994. In December 1995, this credit facility which bears interest at prime plus 1% and, originally scheduled to expire in October 1995, was extended to December 1996. In connection with the extension to December 1996, the facility was increased to $15 million and the interest rate was reduced to prime plus .5%. In addition, as amended, the facility will be reduced by an amount equal to 50% of the net cash proceeds from the sale of discontinued operations and certain other assets. At September 30, 1995, the Company had $.6 million outstanding and $2.2 million of letters of credit under this facility. This facility is secured by a portion of the shares of common stock of NutraMax and PCI owned by the Company.
In September 1994, in connection with the acquisition of equipment from KCI, MEDIQ/PRN amended the indenture related to its outstanding $100 million of 11.125% senior secured notes to obtain approval for the transaction. The amendment also provided for an increase in the interest rate on the notes to 12.125% effective September 30, 1995. Interest on the notes is payable semi-annually on January 1 and July 1. The notes, which are collateralized by certain of MEDIQ/PRN's assets, are redeemable at the option of MEDIQ/PRN in whole or in part on or after July 1, 1997 at specified redemption prices, plus accrued interest. MEDIQ/PRN is obligated to offer to repay a portion of the principal amount of the senior secured notes under certain circumstances. At September 30, 1995, MEDIQ/PRN was not required to offer to repay any portion of the senior secured notes. The Company's ability to obtain cash from MEDIQ/PRN is limited by provisions in certain of MEDIQ/PRN's debt agreements. For 1995 and 1994, such provisions did not permit MEDIQ/PRN to pay any dividends to the Company.
The 7.5% subordinated debentures are exchangeable for an aggregate of 2,255,000 shares of NutraMax common stock owned by the Company, or an equivalent of $15.30 per share, and are redeemable in whole or in part at the option of the Company after July 1996. Interest is payable semi-annually on January 15 and July 15.
The 7.25% subordinated debentures are convertible at any time prior to maturity into shares of the common stock of the Company at $7.50 per share. Interest is payable semi-annually on June 1 and December 1. Annual sinking fund payments equal to 10% of the principal commence in June 1997. The Company is also required to offer to repurchase a portion of the debentures if stockholders' equity is $40 million or less at the end of two consecutive fiscal quarters. Since June 30, 1994, the Company's stockholders' equity has been less than $40 million. The requirements to repurchase debentures at December 31, 1994 and June 30, 1995 were satisfied through the Company's previous acquisition of $23.3 million principal amount of debentures. As of September 30, 1995, $22.5 million of the debentures was classified as current obligations pursuant to the terms of the indenture. In October and November 1995, the Company repurchased an aggregate of $11.25 million of its debentures at a discount in the open market and through a private transaction resulting in a pretax gain of approximately $1.5 million. This gain will be recorded in the first quarter of fiscal 1996 as an extraordinary item. The Company is required to either repurchase or redeem $11.25 million of debentures prior to June 30, 1996 and semi-annually thereafter until all of the debentures are repurchased or stockholders' equity is more than $40 million.
The Company incurred prepayment premiums in connection with repayments of debt resulting in an extraordinary charge of $1.5 million, or $1.0 million net of taxes, in 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE G -- LONG-TERM DEBT--(CONTINUED)
Certain of the Company's loan agreements require the maintenance of specified financial ratios and impose financial and dividend limitations. The terms of one of the Company's indentures currently limits the payment of future dividends or the purchase of the Company's stock to approximately $5 million in the aggregate as of September 30, 1995. As of September 30, 1995, the Company and one of its subsidiaries did not comply with certain financial ratios, principally working capital and tangible net worth. Subsequent to September 30, 1995, the Company and its subsidiary obtained the necessary waivers/amendments from its lenders regarding these ratios. Restricted net assets of consolidated subsidiaries and unconsolidated affiliates aggregated approximately $38.4 million at September 30, 1995.
Maturities of long-term debt are as follows:
NOTE H -- COMMITMENTS AND CONTINGENCIES
Leases -- The Company leases certain equipment, automobiles and office space. The future minimum lease payments under noncancelable operating leases and capital leases are as follows:
Total rent expense under operating leases was $5.4 million, $5.2 million and $5.4 million in 1995, 1994 and 1993, respectively. The leases, which are for terms of up to 10 years, contain options to renew for additional periods.
At September 30, 1995, rental equipment and machinery and equipment included assets under capitalized lease obligations of $15.2 million, less accumulated amortization of $3.2 million.
Purchase Commitments -- MEDIQ/PRN has agreed to purchase from one of its vendors certain rental equipment parts and supplies, and to obtain certain remanufacturing services from the vendor in the aggregate amount of approximately $3.0 million through 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H -- COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Legal Proceedings -- On November 28, 1995, in the United States District Court for the Middle District of Pennsylvania, ATS Medical Services, Inc. ('ATS'), a subsidiary of the Company, and the president of ATS each pled guilty to one count of misprision of a felony in violation of Title 18, United States Code, Section 4. In addition, ATS agreed to repay the government $2.1 million for excess reimbursement received by ATS from the Medicare Program from 1988 through 1992. The payment is part of a settlement agreement entered into between ATS, the United States Government and a former ATS employee, who had filed a civil lawsuit on behalf of the government against ATS pursuant to the False Claims Act, Title 31, United States Code, Sections 3729, et seq., relating to ATS's alleged excess reimbursement. The government has agreed to recommend that no fine be imposed against ATS and has agreed that ATS will not be barred from submitting claims to the Medicare Program in the future. Under the agreement, $75,000 is payable monthly without interest through October 1996 and, thereafter, $100,000 plus interest is payable monthly through October 1997. Upon the sale of ATS, the balance is payable in full. The Company recorded a reserve for such excess reimbursement in fiscal 1994 and has reflected such reserve in discontinued operations.
MEDIQ Imaging, the assets of which were sold by the Company in August 1995, is presently the subject of a criminal and civil investigation by the United States Attorney's Office for the District of New Jersey and the Department of Health and Human Services. The investigation has focused on advice given by MEDIQ Imaging employees to physician customers of MEDIQ Imaging relating to the reassignment of certain Medicare claims. The Company and MEDIQ Imaging voluntarily reported the issue to the government in January 1995 after learning that the advice given by MEDIQ Imaging employees was inconsistent with the reassignment regulations. The Company and MEDIQ Imaging have been cooperating in the investigation. The Company has agreed, subject to certain limitations, to be responsible for any fine or penalty assessed following the conclusion of the investigation. Management believes that there has been no violation of any statute or regulation by MEDIQ Imaging or any of its officers, directors or employees and intends to vigorously defend any claims that may be brought.
In addition, the Company has pending several legal claims incurred in the normal course of business. The Company has established reserves relating to its legal claims and believes that potential liabilities in excess of those recorded will not have a material adverse effect on the Company's Consolidated Financial Statements, however, there can be no assurances to this effect.
NOTE I -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value of financial instruments is provided in accordance with the requirements of SFAS No. 107, 'Disclosures About Fair Value of Financial Instruments'. The estimated fair value amounts have been determined by the Company using available market information and appropriate methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Accounts receivable and accounts payable -- The carrying amounts of these items are an estimate of their fair values at September 30, 1995.
Note receivable from MHM -- The carrying amount of the Company's note receivable from MHM of $11.5 million is a reasonable estimate of its fair value since the receivable earns interest at the prime rate plus 1.5%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I -- FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Long-term debt (excluding capital lease obligations) -- The fair value of the Company's publicly traded debt is based on quoted market prices. Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues for which quoted market prices are not available. The carrying amount and estimated fair value of long-term debt are $247.1 million and $234.1 million, respectively.
The fair value estimates presented herein are based on information available to management as of September 30, 1995, and have not been comprehensively revalued for purposes of these financial statements since that date. Current estimates of fair value may differ significantly from the amounts presented herein.
NOTE J -- COMMON AND PREFERRED STOCK
Series A preferred stock is convertible on a one-for-one basis into shares of common stock, votes generally with the common stock as a single class, and in all such votes, has ten votes per share. The preferred stock participates in cash dividends at a rate equal to 60% of the amount paid on the common stock and has a $.50 per share preference in the event of dissolution or liquidation.
Cash dividends of $.03 per share on the common stock and $.018 per share on the preferred stock were paid for the first, second and third quarters of 1994.
NOTE K -- INCOME TAXES
Income tax expense (benefit) consisted of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE K -- INCOME TAXES--(CONTINUED)
The differences between the Company's income tax expense (benefit) and the income tax expense (benefit) computed using the U.S. federal income tax rate were as follows:
Significant components of the Company's deferred tax assets and liabilities were as follows:
Under the provisions of SFAS No. 96, the deferred tax benefit for 1993 of $1.2 million resulted principally from depreciation and amortization of $2.7 million, allowance for doubtful accounts of $1.7 million, accrued expenses of $1.9 million, differences between book and tax gains and losses of $1.6 million and equity participation of $1.2 million, partially offset by net operating loss carryforwards of $8 million and the reduction of the alternative minimum tax accrual of $2.9 million.
Deferred taxes of $1.6 million, $1.2 million and $.3 million were recorded in 1995, 1994 and 1993, respectively, for the undistributed earnings of unconsolidated affiliates.
At September 30, 1995 for income tax purposes, the Company had alternative minimum tax credit carryforwards of approximately $5.1 million, net operating loss carryforwards of $41 million expiring
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE K -- INCOME TAXES--(CONTINUED)
through 2009, and capital loss carryforwards of $31.5 million expiring in 1998. State net operating loss carryforwards were $46 million, expiring through 2009. The Company also had a carryforward of Investment Tax Credit and Rehabilitation Tax Credit of $.6 million expiring through 2003.
NOTE L -- RELATED PARTY TRANSACTIONS
The Company recorded interest income related to the MHM note of $1.2 million, $.9 million and $.8 million in 1995, 1994 and 1993, respectively.
In fiscal 1995 and 1994, the Company incurred legal fees of approximately $700,000 and $250,000, respectively, to a law firm of which the Company's Chairman of the Board of Directors is a partner.
The Company derived revenues of $340,000, $327,000 and $225,000 in 1995, 1994 and 1993, respectively, pursuant to agreements to provide financial management, legal and risk management services to PCI, NutraMax and MHM.
In January 1993, the Company sold PCI of Virginia, Inc. to PCI for aggregate consideration of $2.3 million which approximated the Company's investment. In addition, the Company assigned to PCI a purchase option to acquire the real estate leased by PCI of Virginia, in consideration for which PCI reimbursed the Company for a $1.0 million deposit.
NOTE M -- STOCK OPTION PLANS
Under the Company's stock option plans, options may be granted to officers and key employees of the Company and its subsidiaries. No option may be granted for a term in excess of ten years from the date of grant. As of September 30, 1995, all incentive and non-qualified stock options were exercisable under the plan. The exercise prices of outstanding options represented the fair market value at dates of grant. The Company's Board of Directors has reserved a sufficient number of shares for the exercise of outstanding stock options.
In August 1993, the Company's Board of Directors reduced the exercise prices of certain outstanding stock options in connection with the distribution of MHM. A summary of the Company's stock option plan activity for common and preferred shares for the three years ended September 30, 1995 follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE N -- PENSION PLAN
The Company maintains a noncontributory pension plan which provides retirement benefits to substantially all employees. Employees generally are eligible to participate in the plan after one year of service and become fully vested after five years of service. The plan provides defined benefits based on years of credited service and compensation. The Company makes contributions that are sufficient to fully fund its actuarially determined cost, generally equal to the minimum amounts required by ERISA. Assets of the plan consist primarily of stocks, bonds and annuities.
Net periodic pension expense is comprised of the following:
The following table presents the funded status of the Company's pension plan and the amounts reflected in the Consolidated Balance Sheets:
The actuarial assumptions used in determining net periodic pension costs were:
NOTE O -- BUSINESS SEGMENT DATA
The Company operates primarily in one business segment, exclusive of discontinued operations which include the Diagnostic Imaging Services Group, MEMS, MHM and other operating segments including Health Examinetics, Medifac and HealthQuest. Discontinued operations also includes the Company's equity investment in InnoServ. The Company, through its subsidiary MEDIQ/PRN, rents medical equipment on a short-term basis nationwide. This segment represents more than 90% of the consolidated revenues, operating profit and assets exclusive of corporate assets, which include net assets of discontinued operations of $27.1 million and equity investments of $43.1 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands except per share data) for 1995 and 1994 is as follows:
(A) Reflects seasonal nature of MEDIQ/PRN's business (B) Includes non-recurring expenses related to the activities of the Special Committee of the Board of Directors. (C) Reflects the expansion of the Company's plan to sell non-core businesses to include the operations of HealthQuest and the Company's investment in Innoserv. In addition, the Company revised its estimate of the loss on sale of discontinued operations.
NOTE Q -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company's investments in unconsolidated affiliates consist of NutraMax Products, Inc. and PCI Services, Inc. The following summary presents the Company's approximate ownership interest, carrying value and market value as of September 30.
The Company's ownership interest in NutraMax may decrease in the future in the event that certain of the Company's outstanding debentures are exchanged into shares of NutraMax common
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES--(CONTINUED)
stock owned by the Company. Assuming the Company does not elect to pay cash, the effect of the exchange of all of such debentures would decrease the Company's ownership interest of NutraMax to approximately 21%.
Gains (losses) on issuances of common stock by unconsolidated affiliates were $22,000 ($.7) million and $3.5 million in 1995, 1994 and 1993, respectively. Undistributed earnings were $17.1 million as of September 30, 1995. Summarized consolidated financial information for unconsolidated affiliates is as follows:
NUTRAMAX PRODUCTS, INC. -- CONDENSED CONSOLIDATED BALANCE SHEETS
NUTRAMAX PRODUCTS, INC. -- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES--(CONTINUED)
PCI SERVICES, INC. -- CONDENSED CONSOLIDATED BALANCE SHEETS
PCI SERVICES, INC. -- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NOTE R -- RESTRUCTURING CHARGE
In the first quarter of fiscal 1996, the Company recorded a restructuring charge of $2.0 million for employee severance costs incurred in connection with a plan approved by the Board of Directors to downsize corporate functions and consolidate certain activities with the operations of MEDIQ/PRN. The plan results in the termination of 29 employees in fiscal 1996. The Company anticipates reductions in corporate expenses of approximately $1.3 million in 1996 and $2.0 million annually thereafter as a result of the downsizing and consolidation of corporate activities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
The information called for by Item 10 'Directors and Executive Officers of the Registrant', Item 11 'Executive Compensation', Item 12 'Security Ownership of Certain Beneficial Owners and Management' and Item 13 'Certain Relationships and Related Transactions' is incorporated herein by reference to the Company's definitive proxy statement for its Annual Meeting of Shareholders scheduled to be held March 5, 1996, which definitive proxy statement is expected to be filed with the Commission not later than 120 days after the end of the fiscal year to which this report relates.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(1) Loss from discontinued operations does not agree to the consolidated statements of operations because the respective management fees and intercompany interest of discontinued operations have not been eliminated.
See Notes to Schedule I
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
See Notes to Schedule I
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
See Notes to Schedule I
NOTES TO CONDENSED FINANCIAL STATEMENTS
Maturities of long term debt at September 30, 1995 are as follows:
Certain of the Registrant's loan agreements require the maintenance of specified financial ratios and impose financial and dividend limitations. The terms of one of the Registrant's indentures currently limits the payment of future dividends or the purchase of the Registrant's stock to approximately $5 million in the aggregate as of September 30, 1995. At September 30, 1995, the Registrant complied with these ratios and limitations, as amended.
NOTE B -- DIVIDENDS FROM UNCONSOLIDATED SUBSIDIARIES AND AFFILIATES
There were no cash dividends received by the Registrant from unconsolidated subsidiaries and affiliates for the fiscal years ended September 30, 1995 and 1994.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(1) Primarily represents allowances for doubtful accounts related to acquisitions.
(2) Represents accounts directly written-off net of recoveries.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: January 11, 1996 MEDIQ Incorporated
By: /s/ THOMAS E. CARROLL
By: /s/ MICHAEL F. SANDLER Senior Vice President -- Finance,
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: | 10-K405 | 10-K | 1996-01-12T00:00:00 | 1996-01-12T11:57:13 |
0000319016-96-000003 | 0000319016-96-000003_0001.txt | <DESCRIPTION>FOR QUARTER ENDED NOVEMBER 30, 1995
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of small business issuer as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
376 Main Street, P.O. Box 74, Bedminster, New Jersey 07921 (Address of principal executive offices) (Zip Code)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: As of December 31, 1995, the issuer had 1,959,201 shares of its common stock, par value $.01 per share, outstanding.
Transitional Small Business Disclosure Format (check one):
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
See accompanying note to financial statements.
See accompanying note to financial statements.
See accompanying note to financial statements.
The accompanying unaudited financial statements of American Metals Service, Inc. (the "Company") as of November 30, 1995 and for the three months ended November 30, 1995 and 1994 reflect all material adjustments which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the year-end financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended August 31, 1995, as filed with the Securities and Exchange Commission.
The results of operations for the three months ended November 30, 1995 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
Until the fourth quarter of fiscal 1992, the Company was engaged in the wholesale distribution of aluminum alloys, steel and other specialty metals. The Company has liquidated the assets of its former business and is actively seeking an acquisition with the goal of becoming an operating company. In the interim, available cash is being invested in U.S. Treasury securities. Interest income for the quarter ended November 30, 1995, was approximately $27,000 compared to $24,000 in the comparable quarter of the prior year. Higher interest rates and investable balances were the reasons for the increase in revenue.
General and administrative expenses were $16,000 for the three-month periods ended November 30, 1995 and 1994. A management fee of $12,500 per quarter is paid to an affiliated company for accounting, financial and administrative management. This fee is based on the affiliate's estimated costs, and management believes that the allocation method is reasonable. The remaining general and administrative expenses for the quarters ended November 30, 1995 and 1994 consist of stockholder, insurance and other miscellaneous expenses.
At November 30, 1995, cash and cash equivalents and net working capital were approximately $2,044,000 and $2,022,000, respectively. The U.S. Treasury bills of approximately $1,968,000 mature at various dates through February 15, 1996 and bear interest rates ranging between 5.45% and 5.51%. Investing activities in the quarter ended November 30, 1994, consisted of the maturity of U.S. Treasury bills with an original maturity greater than three months. Management believes the Company's cash and cash equivalents and net working capital are adequate for its remaining business activities and for the costs of seeking an acquisition of an operating business. The net book value of the Company at November 30, 1995 is $1.03 per share.
PART II - OTHER INFORMATION
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
27. Financial Data Schedule for the three months ended November 30, 1995.
(b) REPORTS OF FORM 8-K
No reports on Form 8-K were filed during the quarter for which this Form 10-QSB is filed.
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: January 12, 1996 By: /s/ MARK KOSCINSKI | 10QSB | 10QSB | 1996-01-12T00:00:00 | 1996-01-12T14:02:10 |
0000902042-96-000003 | 0000902042-96-000003_0000.txt | REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
(Exact Name of Registrant as Specified in Charter)
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code (210) 308-1234
(Name and Address of Agent for Service)
Exhibit Index for exhibits filed herewith is at page of .
Approximate date of proposed public offering:
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/X/ on JANUARY 15, 1996 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a) of Rule 485
/ / on (DATE), pursuant to paragraph (a) of Rule 485.
Registrant hereby declares, pursuant to Rule 24f-2 under the Investment Company Act of 1940, an indefinite number of shares of beneficial interest, no par value, have previously been registered. The Rule 24f-2 Notice for the most recent fiscal year of Accolade Funds was filed on or about November 30, 1995.
ITEM NO. LOCATION IN PROSPECTUS
of the Funds; The Trust;
5 Management of the Funds
6 Cover Page; The Trust;
7 How to Purchase and Sell
8 How to Purchase and Sell
PART B LOCATION IN STATEMENT ITEM NO. OF ADDITIONAL INFORMATION
Included herein is Part A for Pre-Effective Amendment No.
(INFORMATION, SHAREHOLDER SERVICES AND REQUESTS)
This prospectus presents information that a prospective investor should know about the Bonnel Growth Fund (the "Fund"), a diversified series of Accolade Funds (the "Trust"). The Trust is an open-end management investment company. Read and retain this prospectus for future reference.
A Statement of Additional Information dated January 15, 1996, has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The Statement is available free from Accolade Funds upon request at the address set forth above or by calling 1-800-426-6635.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SUMMARY OF FEES AND EXPENSES .............................................. 2 OTHER INVESTMENT PRACTICES ................................................ 6 HOW TO PURCHASE SHARES .................................................... 10 HOW TO EXCHANGE SHARES .................................................... 12 HOW TO REDEEM SHARES ...................................................... 13 HOW SHARES ARE VALUED ..................................................... 18 DIVIDENDS AND TAXES ....................................................... 18 MANAGEMENT OF THE FUND .................................................... 20 DISTRIBUTION EXPENSE PLAN ................................................. 23
SUMMARY OF FEES AND EXPENSES
The following summary is provided to assist you in understanding the various costs and expenses a shareholder in the Fund could bear directly or indirectly.
Administrative Exchange Fee..... $ 5 Account Closing Fee (does not apply to exchanges).......... $ 10 Short Term Trading Fee (shares held less than 14 days)...... 0.10% (AS A PERCENTAGE OF AVERAGE NET
Except for active ABC Investment PlanT, UGMA/UTMA and retirement accounts, if an account balance falls, for any reason other than market fluctuations, below $5,000 at any time during a month that account will be subject to a monthly small account charge of $1 which will be payable quarterly. See "Small Accounts".
A shareholder who requests delivery of redemption proceeds by wire transfer will be subject to a $10 charge. International wires will be higher.
HYPOTHETICAL EXAMPLE OF EFFECT OF FUND EXPENSES:(1)
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return and redemption at the end of each period.
The Hypothetical Example is based upon the Fund's historical expenses which are expected to decline as the Fund's net assets increases. In conformance with SEC regulations, the example is based upon a $1,000 investment; however, the Fund's minimum investment is $5,000. In practice a $1,000 account would be assessed a monthly $1.00 small account charge which is not reflected in the example. See "Small Accounts". Included in these estimates is the account closing fee of $10 for each period. This fee is a flat charge which does not vary with the size of your investment. Accordingly, for investments larger than $1,000, your total expenses will be substantially lower in percentage terms than the illustration implies. The example should not be considered a representation of future expenses. Actual expenses may be more or less than those shown.
(1) Annual Fund Operating Expenses are based on the Fund's historic expenses. The Fund's Total Operating Expenses ratio of 2.50% is higher than that of most other mutual funds. Management fees are paid to United Services Advisors, Inc. (the "Advisor") for managing its investments and business affairs. The Advisor then pays a portion of the management fee to Bonnel, Inc. (the "Sub-Advisor") for serving as Sub-Advisor. See "Management of the Fund". The Fund incurs other expenses for maintaining shareholder records, furnishing shareholder statements and reports, and for other services. Transfer agency and accounting service fees are paid to United Shareholder Services, Inc. ("USSI" or "Transfer Agent"), a subsidiary of the Advisor, and are not charged directly to individual shareholder accounts. The Transfer Agent charges the Fund $23.00 per shareholder account per year. The account closing fee, account maintenance fee and small account charge will be paid by the shareholder directly to the Transfer Agent which will, in turn, reduce its charges to the Fund by like amount. Please refer to the section entitled "Management of the Fund" for further information.
During the period from October 17, 1994 (initial public offering) through September 30, 1995, the Advisor, Sub-Advisor, and their affiliates voluntarily agreed to waive fees as described in the Financial Highlights and accompanying footnotes.
The following per share data and ratios for a share of beneficial interest outstanding throughout the period from October 17, 1994 (initial public offering) through September 30, 1995, have been audited by Price Waterhouse LLP. The related audited financial statements are available upon request and have been incorporated by reference into the Statement of Additional Information ("SAI"). In addition to the data set forth below, further information about the performance of the Fund is contained in the SAI which may be obtained without charge.
Selected data for a capital share outstanding throughout the period October 17, 1994 (initial public offering) through September 30, 1995, is as follows:
Net asset value, beginning of Net realized and unrealized gain Total from investment operations..... 4.84 Less dividends and distributions: Dividends in excess of net Total dividends and distributions.... .05 Net asset value, end of period....... $ 14.81 Ratios/Supplemental Data: Net assets, end of period Ratio of expenses to average net Ratio of net income to average net (a) For the period from October 17, 1994 (initial public offering) to September 30, 1995.
(b) Net of expense reimbursements and fee waivers.
(c) Includes the effect of capital share transactions throughout the year.
(d) Total return does not reflect the effect of account fees.
(e) Total investment return is not annualized.
(f) Expense ratio is net of fee waivers. Had such reimbursements not been made, the annualized expense ratio subject to the most restrictive state limitations would have been 2.50% and the annualized net investment income ratio would have been (1.52)%.
(g) Annualized; the ratios are not necessarily indicative of twelve months of operations.
Please read the Prospectus carefully before you invest. You are responsible for determining the suitability of the Fund to meet your long term investment goals.
The investment objective of the Bonnel Growth Fund (the "Fund") is long-term growth of capital. Current income is not an objective and any income received is incidental. The Fund seeks this growth by investing primarily in the common stocks of domestic and foreign issuers. The Fund does not intend to invest in fixed income securities other than money market instruments and convertible bonds. There is no assurance that the Fund will achieve its investment objective. Neither the investment objective nor the investment policy are fundamental policies and may be changed by the Board of Trustees without shareholder approval. However, shareholders will be notified in writing at least 30 days prior to any material change to either the Fund's investment objective or its investment policy.
Common stocks will be selected that meet certain fundamental and technical selection standards which, in the Sub-Advisor's opinion, have appreciation potential. The Fund expects to focus its investments on mid- capitalization companies with market capitalizations of around $1 billion. However, the Fund is not limited to mid-capitalization stocks and will also invest in large and small capitalization companies. Fundamental investment criteria include, but are not limited to, earnings figures, equity ownership by management, market leadership, strong management, price to earnings ratios, debt to equity ratios, and the general growth prospects of the issuer. Common stocks will not be eliminated simply because they do not pay a current dividend. Technical selection considerations include, but are not limited to, stock price movement and magnitude of trading volume. These criteria may lead the Fund to invest more or less of its assets in specific industries as market conditions change, but the Fund does not focus its investments in any particular industry. The Fund may invest in securities traded on domestic or foreign exchanges, quoted on NASDAQ, or traded on the domestic or foreign over-the-counter markets. The Sub-Advisor is not obligated to conform to any particular fundamental or technical standard
selection or to the ranking of such standards. Standards of selection and their ranking will vary according to the Sub-Advisor's judgment.
The Sub-Advisor intends to stay fully invested in such stocks, regardless of the movement of stock prices generally. Under normal market conditions, the Fund is required to have at least 80% of the value of its total assets in equity securities and of that 80%, no more than 5% may consist of preferred stock or bonds convertible into common stock. The remainder of the portfolio may be invested in money market instruments to provide liquidity, purchase portfolio securities, pay redemptions and meet other demands for cash. When the Sub-Advisor determines that market conditions warrant, the Fund may invest up to 100% of its assets in money market instruments for temporary defensive purposes.
The Fund may invest up to 25% of its total assets in common stocks and other equity securities of foreign issuers, but only if they are listed on a domestic or foreign exchange, quoted on NASDAQ or traded on the domestic or foreign over-the-counter market. See "Risk Factors" in this prospectus. As a portion of the 25% limitation, no more than 5% of the Fund's net assets will be invested in securities of issuers domiciled in countries considered by the Advisor to be emerging markets.
The Fund may invest in sponsored or unsponsored American Depository Receipts ("ADRs") representing shares of foreign issuers. ADRs are typically issued by a U.S. bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. Generally, ADRs in registered form are designed for use in the U.S. securities market, and ADRs in bearer form are designed for use in securities markets outside the United States. ADRs may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. In addition, the issuers of the securities underlying unsponsored ADRs are not obligated to disclose material information in the United States; and, therefore, there may be less information available regarding such issuers. There may not be a correlation between such information and the market value of the ADRs. For purposes of the Fund's investment policies, the Fund's investment in ADRs will be deemed to be investments in the underlying securities.
As a fundamental policy, which cannot be changed without a vote of shareholders:
(a) the Fund may not invest more than 25% of its total assets in securities of companies principally engaged in any one industry (other than obligations issued or guaranteed by the United States Government or any of
(b) with respect to 75% of its total assets, the Fund will not: (1) invest more than 5% of the value of its total assets in the securities
of any one issuer (except such limitation shall not apply to obligations issued or guaranteed by the United States Government, its agencies or instrumentalities); nor (2) acquire more than 10% of the outstanding voting securities of any one issuer;
(c) the Fund may lend portfolio securities with an aggregate market value of not more than one-third of the Fund's total net assets;
(d) the Fund may borrow up to 33 1/3% of the amount of its total assets (reduced by the amount of all liabilities and indebtedness other than such borrowings) when deemed desirable or appropriate to effect redemptions, provided, however, that the Fund will not purchase additional securities while borrowings exceed 5% of the Fund's total assets.
It is the policy of the Fund to seek long-term growth of capital. The Fund will effect portfolio transactions without regard to its holding period if, in the judgment of the Advisor and Sub-Advisor, such transactions are in the best interests of the Fund. For the period October 17, 1994 (initial public offering) through September 30, 1995, the Fund's portfolio turnover rate was 145%. Increased portfolio turnover may result in higher costs for brokerage commissions, dealer mark-ups and other transaction costs and may also result in taxable capital gains. Certain tax rules may restrict the Fund's ability to engage in short-term trading if the security has been held for less than three months. See "Portfolio Turnover" in the Statement of Additional Information.
In executing portfolio transactions and selecting brokers or dealers, the Fund seeks the best overall terms available. In assessing the terms of a transaction, consideration may be given to various factors, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer (for a specified transaction and on a continuing basis), the reasonableness of the commission, if any, and the brokerage and research services provided. Under the Advisory and Sub-Advisory agreements the Advisor and Sub-Advisor are permitted, in certain circumstances, to pay a higher commission than might otherwise be obtained in order to acquire brokerage and research services. The Advisor and Sub-Advisor must determine in good faith, however, that such commission is 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 investment discretion is exercised. In such case, the Board of Trustees will review the commissions paid by the Fund to determine if the commissions paid over representative periods of time were reasonable in relation to the benefits obtained. The advisory fee of the Advisor would not be reduced by reason of its receipt of
such brokerage and research services. To the extent that any research services of value are provided by broker dealers through or with whom the Fund places portfolio transactions, the Advisor or Sub-Advisor may be relieved of expenses which they might otherwise bear.
The Fund executes most of its transactions through a small group of broker-dealers which have been selected based upon their ability to provide brokerage and research services. The Fund may, in some instances, purchase securities that are not listed on a national securities exchange or quoted on NASDAQ, but rather are traded in the over-the-counter market. With respect to transactions executed in the over-the-counter market, the Fund will usually deal through its selected broker-dealer's commission on such transactions. The Fund believes that the execution and brokerage services which it receives justifies use of broker-dealers in these over-the-counter transactions. See "Portfolio Transactions" in the Statement of Additional Information.
The Fund may lend securities to broker/dealers or institutional investors for their use in connection with short sales, arbitrages and other securities transactions. The Fund may receive a fee from broker/dealers for lending its portfolio securities. The Fund will not lend portfolio securities unless the loan is secured by collateral (consisting of any combination of cash, United States Government securities or irrevocable letters of credit) in an amount at least equal (on a daily marked-to-market basis) to the current market value of the securities loaned. In the event of a bankruptcy or breach of agreement by the borrower of the securities, the Fund could experience delays and costs in recovering the securities loaned. The Fund will not enter into securities lending agreements unless its custodian bank/lending agent will fully indemnify the Fund against loss due to borrower default. The Fund may not lend securities with an aggregate market value of more than one-third of the Fund's total net assets.
The Fund may invest a portion of its assets in repurchase agreements with domestic broker/dealers, banks and other financial institutions, provided the Fund's custodian always has possession of securities serving as collateral or has evidence of book entry receipt of such securities. In a repurchase agreement, the Fund purchases securities subject to the sellers agreement to repurchase such securities at a specified time (normally one day) and price. The repurchase price reflects an agreed-upon interest rate during the time of investment. All repurchase agreements must be collateralized by United States Government or government agency securities, the market values of which equal or exceed 102% of the principal amount of the repurchase obligation. If an institution enters an insolvency proceeding, the resulting delay in liquidation of securities serving as collateral could
cause the Fund some loss if the value of the securities declined prior to liquidation. To minimize the risk of loss, the Fund will enter into repurchase agreements only with institutions and dealers which the Board of Trustees considers creditworthy.
The Fund may purchase or sell call options and may purchase put options on individual securities and on equity indexes. The Fund will not purchase any option if, immediately thereafter, the aggregate market value of all outstanding options purchased and written by the Fund would exceed 5% of the Fund's total assets. For a more complete discussion see, "Put and Call Options" in the Statement of Additional Information.
Equity securities are subject to price fluctuations depending on a variety of factors, including market, business and economic conditions. Investment in growth stocks can involve special risks. In seeking long term growth of capital, the Fund may often purchase common stock of small and medium size companies which may be unseasoned and which often fluctuate in price more than common stocks of larger, more mature companies, such as many of those included in the Dow Jones Industrial Average. Therefore, an investor should expect that the share price of the Fund will often be more volatile, in both "up" and "down" markets than most of the popular stock averages.
Investment in foreign securities may involve risks not present in domestic investment. These include fluctuating exchange rates; the fact that foreign issuers may be subject to different, and in some cases, less comprehensive accounting, financial reporting and disclosure standards than are domestic issuers; the risk of adverse changes in foreign investment or exchange control regulations; volatile currency markets; expropriation or confiscatory taxation; political or financial instability; or other developments which can affect investments. For more detailed information see, "Foreign Securities" in the Statement of Additional Information.
The Fund may purchase or sell call options and may purchase put options on individual securities and on equity indexes. If the Fund sells a covered call option and the securities owned by the Fund appreciates above the option's strike price, the Fund will generally be called upon to deliver the security, which will prevent the Fund from receiving the benefit of any price appreciation above the strike price. When purchasing call options the Fund will realize a loss equal to all or a portion of the premium paid for the
option if the price of the underlying security decreases or does not increase by more than the premium before the call option's expiration. When purchasing put options the Fund will realize a loss equal to all or a portion of the premium paid for the option if the price of the underlying security increases or does not decrease by more than the premium before the put option's expiration.
The minimum initial investment for the Fund is $5,000 for regular accounts or $1,000 for UGMA/UTMA accounts. The minimum subsequent investment is $50. The minimum initial investment for persons enrolled in the ABC Investment PlanT is $1,000 and the minimum subsequent investment pursuant to such a plan is $100 or more per month per account. There is no minimum purchase for retirement plan accounts, including IRAs, administered by the Advisor or its agents and affiliates.
YOU MAY INVEST IN THE FOLLOWING WAYS:
Send your application and check or money order, made payable to the Bonnel Growth Fund, to P.O. Box 781234, San Antonio, Texas 78278-1234.
When making subsequent investments, enclose your check with the return remittance portion of the confirmation of your previous investment or indicate on your check or a separate piece of paper your name, address and account number and mail to the address mentioned above. Do not use the remittance portion of your confirmation statement for a different fund as it is pre-coded. This may cause your investment to be invested into the wrong fund. If you wish to purchase shares in more than one fund, send a separate check or money order for each fund. Third party checks will not be accepted; and the Fund reserves the right to refuse to accept second party checks.
Once your account is open, you may make investments by telephone by calling 1-800-426-6635. Investments by telephone are not available in money market funds or any retirement account administered by the Advisor or its agents. The maximum telephone purchase is ten times the value of the shares owned, calculated at the last available net asset value. Payment for shares purchased by telephone is due within seven business days after the date of the transaction. You cannot exchange shares purchased by telephone until after the payment has been received and accepted by the Trust.
You may make your initial or subsequent investments in the Bonnel Growth Fund by wiring money. To do so, call the Fund at
1-800-4-BONNEL or 1-800-426-6635 for a confirmation number and wiring instructions.
The ABC Investment Plan is offered as a special service for small investors. Once your account is opened with a $1,000 minimum initial investment, you may make investments automatically by completing the ABC Investment PlanT (Automatically Building Capital Investment Plan) form. This form authorizes the Fund to draw on your money market or bank account regularly for as little as $100 a month beginning within thirty (30) days after the account is opened. These small minimums are a special service bringing to small investors the benefits of the Fund without requiring a $5,000 minimum initial investment. You may call United Services (1-800-US-Funds) to open a treasury money market fund or you could inquire at your bank whether it will honor debits through the Automated Clearing House ("ACH") or, if necessary, preauthorized checks. You may change the date or amount of your investment or discontinue the Plan any time by letter received by the Fund at least five business days before the change is to become effective.
All purchases of shares are subject to acceptance by the Fund and are not binding until accepted. The Fund reserves the right to reject any application or investment. Orders become effective as of 4:00 p.m., Eastern time, Monday through Friday exclusive of business holidays. In the event that the NYSE and other financial markets close earlier, as on the eve of a holiday, orders will become effective earlier in the day at the close of trading on the NYSE.
If your telephone order to purchase shares is cancelled due to nonpayment or late payment (whether or not your check has been processed by the Fund), you will be responsible for any loss incurred by the Fund by reason of such cancellation.
If checks are returned unpaid due to insufficient funds, stop payment or other reasons, the Fund will charge your account $20 and you will be responsible for any loss incurred by the Fund with respect to cancelling the purchase.
To recover any such loss or charge, the Fund reserves the right, without further notice, to redeem shares of any affiliated funds already owned by any purchaser whose order is cancelled, for whichever reason, and such a purchaser may be prohibited from placing further orders unless investments are accompanied by full payment by wire or cashier's check.
Accolade Funds charges no sales commissions or "loads." However, investors may purchase and sell shares through registered broker/dealers who may charge fees for their services.
Investments paid for by checks drawn on foreign banks may be deferred until such checks have cleared the normal collection process. In such instances, any amounts charged to the Fund for collection procedures will be deducted from the amount invested.
If the Fund incurs a charge for locating a shareholder without a current address, such charge will be passed through to the shareholder.
The Fund is required by Federal law to withhold and remit to the United States Treasury a portion of the dividends, capital gain distributions and proceeds of redemptions paid to any shareholder who fails to furnish the Fund with a correct taxpayer identification number, who underreports dividend or interest income or who fails to provide certification of a tax identification number. In order to avoid this withholding requirement, you must certify on your application, or on a separate Form W-9 supplied by the Transfer Agent, that your taxpayer identification number is correct and that you are not currently subject to backup withholding or you are exempt from backup withholding. For individuals, your taxpayer identification number is your social security number.
Instructions to exchange or transfer shares held in established accounts will be refused until the certification has been provided. In addition, the Fund assesses a $50 administrative fee if the taxpayer identification number is not provided by year-end.
When you open your account, the Fund will send you a confirmation statement, which will be your evidence that you have opened an account with the Fund. The confirmation statement is nonnegotiable, so if it is lost or destroyed, you will not be required to buy a lost instrument bond or be subject to other expense or trouble, as you would with a negotiable stock certificate. At your written request, the Fund will issue negotiable stock certificates. Unless your shares are purchased with wired money, a certificate will not be issued until 15 days have elapsed from the time of purchase, or the Fund has satisfactory proof of payment, such as a copy of your cancelled check. Negotiable certificates will not be issued for fewer than 100 shares.
You have the privilege of exchanging into any of the other funds offered, affiliated or administered by United Services Advisors, Inc., for a $5 exchange fee. An exchange involves the simultaneous redemption (sale) of shares of one fund and purchase of shares of another fund at the respective closing net asset value and is a taxable transaction.
You will automatically have the privilege to direct the Fund to exchange your shares between identically registered accounts by calling toll free 1-800-4-BONNEL or 1-800-426-6635. In connection with such exchanges neither the Fund nor the Transfer Agent will be responsible for acting upon any instructions reasonably believed by them to be genuine. The shareholder, as a result of this policy, will bear the risk of loss. The Fund and/or its Transfer Agent will, however, employ reasonable procedures to confirm that instructions communicated by telephone are genuine (including, requiring some form of personal identification, providing written confirmation and tape recording conversations); and if it does not employ reasonable procedures, it may be liable for losses due to unauthorized or fraudulent transactions.
You may direct the Fund in writing to exchange your shares. The request must be signed exactly as the name appears in the registration. (Before writing, read "Additional Information About Exchanges.")
(1) There is a $5 charge, which is paid to United Shareholder Services, Inc. ("USSI" or the "Transfer Agent") for each exchange out of any Fund account except that retirement accounts administered by the Advisor or its agents and affiliates are charged $5 for each exchange exceeding three per quarter. The exchange fee is charged to cover administrative costs associated with handling these exchanges.
(2) Like any other redemption, the Fund reserves the right to hold exchange proceeds for up to seven days. In such event, the purchase side of the exchange transaction will also be delayed. You will be notified immediately if the Fund is exercising said right.
(3) If the shares you wish to exchange are represented by a negotiable stock certificate, the certificate must be returned before the exchange can be effected.
(4) Shares may not be exchanged unless you have furnished the Fund with your tax identification number, certified as prescribed by the Internal Revenue Code and Regulations, and the exchange is to an account with like registration and tax identification number. (See "Tax Identification Number".)
(5) The exchange privilege may be terminated at any time. The exchange fee and other terms of the privilege are subject to change.
You may redeem any or all of your shares at will. The Fund redeems shares at the net asset value next determined after it has received and
accepted a redemption request in proper order. Redemption requests must be received prior to 4:00 p.m. Eastern time, Monday through Friday, to be effective that day.
A written request for redemption must be in proper order, which requires delivery of the following to the Transfer Agent:
(1) a written request for redemption signed by each registered owner exactly as the shares are registered, the account number and the number of shares or the dollar amount to be redeemed;
(2) negotiable stock certificates for any shares to be redeemed for which certificates have been issued;
(3) signature guarantees when required; and
(4) such additional documents as are customarily required to evidence the authority of persons effecting redemptions on behalf of corporations, executors, trustees, and other fiduciaries. Redemptions will not become effective until all documents, in the form required, have been received by the Transfer Agent. (Before writing, read "Additional Information About
To redeem your Fund shares by telephone you may call the Fund and direct an exchange out of the Fund into an identically registered account in a United Services treasury money market fund ($1,000 minimum initial investment). You may then write a check against your treasury money market fund account. See "How to Exchange Shares" for a description of exchanges including the $5 exchange fee. Call 1-800-4-BONNEL or 1-800-426-6635 for more information concerning telephone redemption and a treasury money market fund prospectus.
Telephone redemptions without opening a treasury money market account are available for VIPs. For more information about the Fund's VIP program call 1-800-4-BONNEL or 1-800-426-6635.
REDEMPTION ARRANGEMENTS BY WIRE TRANSFER
Special arrangements may be made by institutional investors, or on behalf of accounts established by brokers, advisers, banks or similar institutions, to have redemption proceeds transferred by wire to pre-established accounts upon telephone instructions. For further information call the Fund at 1-800-4-BONNEL or 1-800-426-6635.
Redemptions in excess of $15,000 currently require a signature guarantee. A signature guarantee is required for all redemptions, regardless of the amount involved, when the proceeds are to be paid to someone other
than the registered owner of the shares to be redeemed, or if proceeds are to be mailed to an address other than the registered address of record. When a signature guarantee is required, each signature must be guaranteed by: (a) a federally insured bank or thrift institution; (b) a broker or dealer (general securities, municipal, or government) or clearing agency registered with the U.S. Securities and Exchange Commission that maintains net capital of at least $100,000; or (c) a national securities exchange or national securities association. The guarantee must: (i) include the statement "Signature(s) Guaranteed;" (ii) be signed in the name of the guarantor by an authorized person, the person's printed name and position with guarantor; and (iii) include a recital that the guarantor is federally insured, maintains the requisite net capital or is a national securities exchange or association. Shareholders living abroad may acknowledge their signatures before a U.S. consular officer. Military personnel may acknowledge their signatures before officers authorized to take acknowledgments (e.g., legal officers and adjutants).
REDEMPTION PROCEEDS MAY BE SENT TO YOU:
If your redemption check is mailed, it is usually mailed within 48 hours; however, the Fund reserves the right to hold redemption proceeds for up to seven days. If the shares to be redeemed were purchased by check, the redemption proceeds will not be mailed until the purchase check has cleared, which may take up to seven days. You may avoid this requirement by investing by bank wire (Federal funds). Redemption checks may be delayed if you have changed your address in the last 30 days. Please notify the Fund promptly in writing, or by telephone, of any change of address.
You may authorize the Fund to transmit redemption proceeds by wire, provided you send written wiring instructions with a signature guarantee at the time of redemption. Proceeds from your redemption will usually be transmitted on the first business day following the redemption. However, the Fund reserves the right to hold redemption proceeds for up to seven days. If the shares to be redeemed were purchased by check, the redemption proceeds will not be mailed or wired until the purchase check has cleared, which may take up to seven days. There is a $10 charge to cover the wire, which is deducted from redemption proceeds. International wires will be higher.
The redemption price may be more or less than your cost, depending on the net asset value of the Funds portfolio next determined after your request is received.
A request to redeem shares in an IRA or similar retirement account must be accompanied by an IRS Form W4-P and a reason for withdrawal as specified by the IRS. Proceeds from the redemption of shares from a retirement account may be subject to withholding tax.
The Fund has the authority to redeem existing accounts and to refuse a potential account the privilege of having an account in the Fund if the Fund reasonably determines that the failure to so redeem, or to so prohibit, would have a material adverse consequence to the Fund and its shareholders. The power to redeem existing accounts will be exercised in light of the Trustees' fiduciary duties and in conformance with Massachusetts law. The Fund will not redeem an existing account solely to prevent the legitimate exercise of a shareholder's rights. No account closing fee will be charged to investors whose accounts are closed under this provision.
SHORT-TERM TRADING FEE FOR THE FUND
A short-term trading fee of ten basis points or 0.10% of the value of shares redeemed or exchanged will be assessed to shareholders who redeem or exchange shares of the Fund held less than fourteen (14) calendar days. The short-term trading fee will be paid to the Fund to protect remaining shareholder against expenses due to excessive trading. Excessive short-term trading has an adverse impact on effective portfolio management as well as upon Fund expenses. The Fund has reserved the right to refuse investments from shareholders who engage in short-term trading that may be disruptive to the Fund.
In order to reduce Fund expenses, an account closing fee of $10 will be assessed to shareholders who redeem all shares in their Fund account and direct that redemption proceeds be delivered to them by mail or wire. The charge is payable directly to the Fund's Transfer Agent which, in turn, will reduce its charges to the Fund by an equal amount. The purpose of the charge is to allocate to redeeming shareholders a more equitable portion of the Transfer Agent's fee, including the cost of tax reporting, which is based upon the number of shareholder accounts. The account closing fee does not apply to exchanges between the Fund and affiliated funds nor will it be imposed on any account which is involuntarily redeemed.
Fund accounts which fall, for any reason other than market fluctuations, below $5,000 at any time during the month, will be subject to a monthly small account charge of $1 which will be payable quarterly. The charge is payable directly to the Fund's Transfer Agent which, in turn, will reduce its charges to the Fund by an equal amount. The purpose of the charge is to allocate the costs of maintaining shareholder accounts more equally among shareholders.
As a special service for small investors active ABC Investment PlanT, UGMA/UTMA accounts with at least $1,000, and retirement plan accounts administered by the Advisor or its agents and affiliates will not be subject to the small account charge.
In order to reduce expenses of the Fund, it may redeem all shares in any shareholder account, other than active ABC Investment PlanT, UGMA/UTMA and retirement plan accounts, if, for a period of more than
three months, the account has a net asset value of $2,500 or less and the reduction in value is not due to market fluctuations. If the Fund elects to close such accounts, it will notify shareholders whose accounts are below the minimum of its intention to do so, and will provide those shareholders with an opportunity to increase their accounts by investing a sufficient amount to bring their accounts up to the minimum amount within ninety (90) days of the notice. No account closing fee will be charged to investors whose accounts are closed under this redemption provision.
The Fund has available a number of plans and services to meet the special needs of certain investors. Plans available include:
(1) payroll deduction plans, including military allotments;
(2) custodial accounts for minors;
(3) a flexible, systematic withdrawal plan; and
(4) various retirement plans such as IRA, SEP/IRA, 403(b)(7), 401(k) and employer-adopted defined contribution plans.
There is an annual charge for each retirement plan fund account with respect to which Security Trust & Financial Company ("ST&FC"), a wholly-owned subsidiary of the Advisor, acts as custodian (for example, $10 for IRAs and $15 for SEP/IRAs, 403(b)(7)s, profit sharing and other such accounts). If this administrative charge is not paid separately prior to the last business day of a calendar year or prior to a total redemption, it will be deducted from the shareholder's account.
Application forms and brochures describing these plans and services can be obtained from the Transfer Agent by calling 1-800-4-BONNEL or 1-800-426-6635.
United Shareholder Services, Inc. ("USSI"), a wholly-owned subsidiary of the Advisor, acts as transfer and dividend paying agent for all Fund accounts. Simply write or call 1-800-4-BONNEL or 1-800-426-6635 for prompt service on any questions about your account.
Shareholders can also access 24 hours a day current information on yields, prices, latest dividends, account balances and deposits and redemptions for the previous and current months. Just call 1-800-4-BONNEL or 1-800-426-6635 and press the appropriate codes into your touch-tone phone.
Shares of the Fund are purchased or redeemed, on a continuous basis without a sales charge, at their next determined net asset value per share. The net asset value per share of the Fund is calculated separately by United Shareholder Services, Inc. Net asset value per share is determined and orders become effective as of 4:00 p.m., Eastern time, Monday through Friday, exclusive of business holidays on which the NYSE is closed, by dividing the aggregate net assets of the Fund at market value by the total number of shares of the Fund outstanding. In the event that the NYSE and other financial markets close earlier, as on the eve of a holiday, the net asset value per share will be determined earlier in the day at the close of trading on the NYSE.
A portfolio security listed or traded on a stock exchange or quoted on NASDAQ is valued at the last reported sale price prior to the time when assets are valued. Lacking any sales on that day, the security is valued at the mean between the last reported bid and ask prices. Over-the-counter portfolio securities for which market quotations are readily available are to be valued at the mean between the most recent bid and ask prices as obtained from one or more dealers that make markets in the securities. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are to be valued according to the broadest and most representative market as determined by the Advisor. When market quotations are not readily available, or when restricted securities or other assets are being valued, such assets are valued at fair value as determined in good faith by or under procedures established by the Fund's Board of Trustees.
Short-term investments with maturities of 60 days or less at the time of purchase are valued on the basis of the amortized cost. This involves valuing an instrument at its cost initially and, thereafter, assuming a constant amortization to maturity of any discount or premium.
The Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). By complying with the applicable provisions of the Code, a Fund will not be subject to Federal income tax on its net investment income and capital gain net income that are distributed to shareholders.
All income dividends and capital gain distributions are normally reinvested, without charge, in additional full and fractional shares of the Fund. Alternatively, investors may choose: (1) automatic reinvestment of capital gain distributions in Fund shares and payment of income dividends in cash; (2) payment of capital gain distributions in cash and automatic reinvestment of dividends in Fund shares; or (3) all income dividend and capital gain distributions paid in cash. The share price of the reinvestment
will be the net asset value of the Fund shares computed at the close of business on the date the dividend or distribution is paid. Dividend checks returned to the Fund as being undeliverable and dividend checks not cashed after 180 days will automatically be reinvested at the price of the Fund on the day returned or on or about the 181st day, and the distribution option will be changed to "reinvest."
At the time of purchase, the share price of the Fund may reflect undistributed income, capital gain or unrealized appreciation of securities. Any dividend or capital gain distribution paid to a shareholder shortly after a purchase of shares will reduce the per share net asset value by the amount of the distribution. Although in effect a return of capital to the shareholder, these distributions are fully taxable.
The Fund generally pays dividends, if any, semi-annually and pays capital gains, if any, annually.
The Fund is subject to a nondeductible four percent (4%) excise tax calculated as a percentage of certain undistributed amounts of taxable ordinary income and capital gains net of capital losses. The Fund intends to make such distributions as may be necessary to avoid this excise tax.
Dividends from taxable net investment income and distributions of net short-term capital gains paid by the Fund are taxable to shareholders as ordinary income, whether received in cash or reinvested in additional shares of the Fund. A portion of these dividends may qualify for the 70 percent dividends received deduction available to corporations. Distributions of net capital gains will be taxable to shareholders as long-term capital gains, whether paid in cash or reinvested in additional shares, regardless of the length of time the investor has held his shares.
Each January, the Fund will report to its shareholders the Federal tax status of dividends and distributions paid or declared by the Fund during the preceding calendar year. This statement will also indicate whether and to what extent distributions qualify for the 70 percent dividends received deduction available to corporations.
The foregoing discussion relates only to generally applicable Federal income tax provisions in effect as of the date of this Prospectus. Shareholders should consult their tax advisers about the status of distributions from the Fund in their own states and localities.
Accolade Funds (the "Trust") is an open-end management investment company consisting of three separate, diversified portfolios. Only the Bonnel Growth Fund is currently offered to the public.
The Trust was formed April 16, 1993 as a "business trust" under the laws of the Commonwealth of Massachusetts. It is a "series" company which is authorized to issue shares without par value in separate series.
Shares of the series have been authorized, each of which represents an interest in a separate portfolio. The Board of Trustees of the Trust has the power to create additional portfolios at any time without a vote of shareholders of the Trust.
Under the Trust's Master Trust Agreement, no annual or regular meeting of shareholders is required, although the Trustees may authorize special meetings from time to time. Under the terms of the Master Trust Agreement, the Trust has a staggered Board with terms of at least 25% of the Trustees expiring every three years. The Trustees serve in that capacity for six-year terms. Thus there will ordinarily be no shareholder meeting unless otherwise required by the Investment Company Act of 1940 (the "1940 Act"). The Trust will call a meeting of shareholders for purposes of voting on the question of removal of one or more Trustees when requested in writing to do so by record holders of not less than 10 percent of the Trust's outstanding shares, and in connection with such meeting to comply with the provisions of Section 16(c) of the Investment Company Act of 1940 relating to shareholder communications.
On any matter submitted to shareholders, shares of each portfolio entitle their holder to one vote per share, irrespective of the relative net asset values of each portfolio's shares. On matters affecting an individual portfolio, a separate vote of shareholders of the portfolio is required. Each portfolio's shares are fully paid and non-assessable by the Trust, have no preemptive or subscription rights, and are fully transferable, with no conversion rights.
The business affairs of the Fund are managed by the Trust's Board of Trustees. The Trustees establish policies, as well as review and approve contracts and their continuance. The Trustees also elect the officers and select the Trustees to serve as executive and audit committee members.
Effective September 21, 1994, the Advisor and the Trust contracted with Bonnel, Inc. ("Sub-Advisor") to serve as Sub-Advisor for the Fund. The Sub-Advisor was formed and registered by Mr. Arthur Bonnel as a registered investment advisor. Mr. Bonnel, who serves as the Fund's portfolio manager, has been managing money since 1970, and previously was the portfolio manager of a successful mutual fund for a period of over 5 years. Past performance does not guarantee future results.
The Sub-Advisor is located at P.O. Box 649, Reno, Nevada. The Sub-Advisor manages the composition of the portfolio and furnishes the Fund advice and recommendations with respect to its investments and its investment program and strategy, subject to the general supervision and control of
the Advisor and the Trust's Board of Trustees. In connection with such services, the Advisor pays the Sub-Advisor a minimum sub-advisory fee of $150,000 per year. When the Fund's assets exceed $30 million, the Advisor and the Sub-Advisor will share the management fee equally; except that the Sub-Advisor's fee will be subject to downward adjustments for: 1) the Advisor's incurred costs and expenses of marketing the Fund that exceed the .25% 12b-1 fee charged to the Fund for such marketing purposes; 2) for any monies previously received as a result of the minimum sub-advisory fee set forth above that were paid by the Advisor or the Trust prior to the date that the Securities and Exchange Commission declared the Fund's registration statement effective; 3) the unrecovered costs of organizing the Fund up to $40,000 (the Advisor will be responsible for bearing costs of organization of the Fund in excess of $40,000); and (4) if a decision is made with respect to placing a cap on expenses, to the extent that actual expenses of the Fund exceed the cap, and the Advisor is required to pay or absorb any of the excess expenses, by the amount of the excess expenses paid or absorbed by the Advisor through such downward adjustments. The Fund is not responsible for the Sub-Advisor's fee.
United Services Advisors, Inc., 7900 Callaghan Road, San Antonio, Texas 78229, under an investment advisory agreement with the Trust dated September 21, 1994 furnishes investment advice and is responsible for overall management of the Trust's business affairs. Frank E. Holmes is Chairman of the Board of Directors and Chief Executive Officer of the Advisor, as well as President and Trustee of the Trust. Since October 1989, Mr. Holmes has owned more than 25% of the voting stock of the Advisor and is its controlling person. The Advisor was organized in 1968. The Advisor serves as investment advisor to the United Services Funds, a family of mutual funds with over $1.3 billion in assets.
The Advisor provides to the Trust, and to the Fund in the Trust, management and investment advisory services. The Advisor furnishes an investment program for the Fund, determines, subject to the overall supervision and review of the Board of Trustees of the Trust, what investments should be purchased, sold and held, and makes changes on behalf of the Trust in the investments of the Fund.
The Advisor provides the Trust with office space, facilities and business equipment and provides the services of executive and clerical personnel for administering the affairs of the Trust. The Advisor pays the expense of printing and mailing prospectuses and sales materials used for promotional purposes.
Investment decisions for the Fund are made independently from those of other investment companies advised by United Services Advisors, Inc.
The Advisory Agreement with the Trust provides for the Fund to pay the Advisor a flat management fee of 1% of the Fund's average net assets. For the period from October 17, 1994 (initial public offering) through September 30, 1995, the Fund did not pay the Advisor a management fee due to fee waivers.
The Advisor may, out of profits derived from its management fee, pay certain financial institutions (which may include banks, securities dealers and other industry professionals) a "servicing fee" for performing certain administrative servicing functions for Fund shareholders to the extent these institutions are allowed to do so by applicable statute, rule or regulation. These fees will be paid periodically and will generally be based on a percentage of the value of the institutions' client Fund shares.
The Transfer Agency Agreement with the Trust provides for the Fund to pay USSI an annual fee of $23.00 per account ( 1/12 of $23.00 monthly). In connection with obtaining/providing administrative services to the beneficial owners of Fund shares through broker/dealers which provide such services and maintain an omnibus account with the Transfer Agent, the Fund shall pay to the Transfer Agent a monthly fee equal to one-twelfth ( 1/12) of 12.5 basis points (.00125) of the value of the shares of the fund held in accounts at the broker/dealer, which payment shall not exceed $1.92 multiplied by the average daily number of accounts holding Fund shares at the broker/dealer. These fees cover the usual transfer agency functions. In addition, the Fund bears certain other Transfer Agent expenses such as the costs of record retention and postage, plus the telephone and line charges (including the toll-free 800 service) used by shareholders to contact the Transfer Agent. Transfer Agent fees and expenses, including reimbursed expenses, are reduced by the amount of small account charges and account closing fees the Transfer Agent is paid. For the period from October 17, 1994 (initial public offering) through September 30, 1995, the Fund paid USSI a total of $20,906 for transfer agency, lockbox and printing fees.
USSI performs bookkeeping and accounting services, and determines the daily net asset value for the Fund. Bookkeeping and accounting services are provided to the Fund at an asset based fee of .03% of the first 250 million average net assets, .02% of the next 250 million average net assets and .01% of average net assets in excess of 500 million -- subject to an annual minimum fee of $24,000. For the period from October 17, 1994 (initial public offering) through September 30, 1995, the Fund paid USSI a total of $23,000 for portfolio accounting services.
Additionally, the Advisor is reimbursed certain costs for in-house legal services pertaining to the Fund.
The Fund pays all other expenses for its operations and activities. The expenses borne by the Fund include the charges and expenses of any shareholder servicing agents; custodian fees; legal and auditors' expenses;
brokerage commissions for portfolio transactions; the advisory fee; extraordinary expenses; expenses of shareholders and trustee meetings; expenses for preparing, printing, and mailing proxy statements, reports and other communications to shareholders; and expenses of registering and qualifying shares for sale, among others.
Pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund has adopted a distribution expense plan (the "Plan") under which Fund assets may be utilized to pay for or reimburse expenditures in connection with sales and promotional services related to the distribution of Fund shares, including personal services provided to prospective and existing Fund shareholders, which include the costs of: printing and distribution of prospectuses and promotional materials; making slides and charts for presentations; assisting shareholders and prospective investors in understanding and dealing with the Fund; and travel and out-of-pocket expenses (e.g. copy and long distance telephone charges) related thereto. Fund assets may be utilized to pay for or reimburse such expenditures provided the total amount expended pursuant to this Plan does not exceed 0.25% of net assets on an annual basis.
Under the terms of the Plan the Fund may pay a "servicing fee" of up to 0.25% of the Fund's average net assets ( 1/12 of 0.25% monthly) to persons or institutions for performing certain servicing functions for Fund shareholders. These fees will be paid periodically and will generally be based on a percentage of the value of Fund shares held by the institution's clients. The Plan allows the Fund to pay for or reimburse expenditures in connection with sales and promotional services related to the distribution of Fund shares, including personal services provided to prospective and existing Fund shareholders. See "Distribution Plan" in the Statement of Additional Information.
From time to time, in advertisements or in reports to shareholders or prospective shareholders, the Fund may compare its performance, either in terms of its yield, total return or its yield and total return, to that of other mutual funds with similar investment objectives and to stock or other indices. For example, the Fund may compare its performance to rankings prepared by Lipper Analytical Services, Inc. ("Lipper"), a widely recognized independent service which monitors the performance of mutual funds; to Morningstar's Mutual Fund Values; to the S&P 500 Index; or to the Consumer Price Index. Performance information and rankings as reported in Changing Times, Business Week, Institutional Investor, The Wall Street Journal, Mutual Fund Forecaster, No-Load Investor, Money Magazine, Forbes, Fortune and Barron's magazine may also be used in comparing performance of the Fund. Performance comparisons shall not be considered as representative of the future performance of the Fund.
The Fund's average annual total return is computed by determining the average annual compounded rate of return for a specified period that, if applied to a hypothetical $1,000 initial investment, would produce the redeemable value of that investment at the end of the period, assuming reinvestment of all dividends and distributions and with recognition of all recurring charges. The Fund may also utilize a total return for differing periods computed in the same manner but without annualizing the total return.
The Fund's "yield" refers to the income generated by an investment in the Fund over a 30-day (or one month) period (which period will be stated in the advertisement). Yield is computed by dividing the net investment income per share earned during the most recent calendar month by the maximum offering price per share on the last day of such month. This income is then "annualized." That is, the amount of income generated by the investment during that 30-day period is assumed to be generated each month over a 12-month period and is shown as a percentage of the investment.
For purposes of the yield calculation, interest income is computed based on the yield to maturity of each debt obligation and dividend income is computed based upon the stated dividend rate of each security in the Fund's portfolio, and all recurring charges are recognized.
The standard total return and yield results do not take into account recurring and nonrecurring charges for optional services which only certain shareholders elect and which involve nominal fees such as the $5 fee for exchanges. These fees have the effect of reducing the actual return realized by shareholders.
SHARES OF THE FUND ARE SOLD AT NET ASSET VALUE WITHOUT SALES COMMISSIONS OR
Mailing Address: P.O. Box 29467
New York, New York 10005
One Riverwalk Place, Ste. 900
Be Sure to Retain This Prospectus;
PART B -- STATEMENT OF ADDITIONAL INFORMATION
Included herein is Part B for Pre-Effective Amendment No.
This Statement of Additional Information is not a prospectus but should be read in conjunction with the Fund's prospectus dated January 15, 1996 (the "Prospectus"), which may be obtained from United Services Advisors, Inc. (the "Advisor"), P.O. Box 29467, San Antonio, Texas 78229-0467.
The date of this Statement of Additional Information is January 15, 1996.
TRANSFER AGENCY AND OTHER SERVICES..........................................12
CERTAIN PURCHASES OF SHARES OF THE FUND.....................................13
Accolade Funds (the "Trust") is an open-end management investment company and is a business trust organized under the laws of the Commonwealth of Massachusetts. The Bonnel Growth Fund (the "Fund") is a series of the Trust and represents a separate, diversified of securities (a "Portfolio").
The assets received by the Trust from the issue or sale of shares of the Fund, and all income, earnings, profits and proceeds thereof, subject only to the rights of creditors, are separately allocated to such Fund. They constitute the underlying assets of each fund, are required to be segregated on the books of accounts, and are to be charged with the expenses with respect to such Fund. Any general expenses of the Trust, not readily identifiable as belonging to a particular Fund, shall be allocated by or under the direction of the Board of Trustees in such manner as the Board determines to be fair and equitable.
Each share of the Fund represents an equal proportionate interest in the Fund with each other share and is entitled to such dividends and distributions, out of the income belonging to that Fund, as are declared by the Board. Upon liquidation of the Trust, shareholders of each fund are entitled to share pro rata in the net assets belonging to the Fund available for distribution.
As described under "The Trust" in the prospectus, the Trust's Master Trust Agreement provides that no annual or regular meeting of shareholders is required. However, the Trust has a staggered Board with terms such that at least 25% of the Trustees expire every three years. The Trustees serve in that capacity for six year terms. Thus, there will ordinarily be no shareholder meetings unless otherwise required by the Investment Company Act of 1940.
On any matter submitted to shareholders, the holder of each share is entitled to one vote per share (with proportionate voting for fractional shares). On matters affecting any individual fund, a separate vote of that fund would be required. Shareholders of any fund are not entitled to vote on any matter which does not affect their fund but which requires a separate vote of another fund.
Shares do not have cumulative voting rights, which means that in situations in which shareholders elect Trustees, holders of more than 50% of the shares voting for the election of Trustees can elect 100% of the Trust's Trustees, and the holders of less than 50% of the shares voting for the election of Trustees will not be able to elect any person as a Trustee.
Shares have no preemptive or subscription rights and are fully transferable. There are no conversion rights.
Under Massachusetts law, the shareholders of the Trust could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the Master Trust Agreement disclaims shareholder liability for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Trust or the Trustees. The Master Trust Agreement provides for indemnification out of the Trust's property for all losses and expenses of any shareholder held personally liable for the obligations of the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Trust itself would be unable to meet its obligations.
The following information supplements the discussion of the Fund's investment objectives and policies discussed in the Fund's prospectus.
Neither the investment objective nor the investment policy of Bonnel Growth Fund are fundamental policies and may be changed by the Board of Trustees without shareholder approval. The shareholders will be notified in writing at least 30 days prior to any material change to either the Fund's investment objective or its investment policy.
Under normal market conditions, the Fund shall have at least 80% of the value of its total assets in common stocks and securities convertible into common stocks. The remainder of the portfolio may be invested in money market instruments; and, for temporary defensive purposes the Fund may invest up to 100% of its assets in money market instruments. The Fund may invest in common stocks and other equity securities of foreign issuers but only if they are listed on a domestic or foreign exchange, quoted on NASDAQ or traded on the domestic or foreign over-the-counter market. No more than 25% of the value of the Fund's total net assets will be invested in such foreign securities.
Bonnel Growth Fund will not change any of the following investment restrictions, without the affirmative vote of a majority of the outstanding voting securities of the Fund, which, as used herein, means the lesser of (1) 67% of that Fund's outstanding shares present at a meeting at which more than 50% of the outstanding shares of that Fund are represented either in person or by proxy, or (2) more than 50% of that Fund's outstanding shares.
(2) Borrow money, except that the Fund may borrow not in excess of 5% of its total assets from banks as a temporary measure for extraordinary purposes, may borrow up to 33 1/3% of the amount of its total assets (reduced by the amount of all liabilities and indebtedness other than such borrowing) when deemed desirable or appropriate to effect redemptions, provided, however, that the Fund will not purchase additional securities while borrowings exceed 5% of the total assets of the Fund.
(3) Underwrite the securities of other issuers.
(4) Invest in real estate.
(5) Engage in the purchase or sale of commodities or commodity futures contracts, except that the Fund may invest in futures contracts and options thereon on equity securities indexes in conformance with rules and regulations issued by the Securities and Exchange Commission.
(6) Lend its assets, except that the Fund may purchase money market debt obligations and repurchase agreements secured by money market obligations, and except for the purchase or acquisition of bonds, debentures or other debt securities of a type customarily purchased by institutional investors and except that any Fund may lend portfolio securities with an aggregate market value of not more than one-third of such Fund's total net assets. (Accounts receivable for shares purchased by telephone shall not be deemed loans.)
(7) Purchase any security on margin, except that it may obtain such short-term credits as are necessary for clearance of securities transactions.
(9) Invest more than 15% of its total assets in illiquid securities, including securities which are subject to legal or contractual restrictions on resale.
(10) Invest more than 25% of its total assets in securities of companies principally engaged in any one industry. For the purposes of determining industry concentration, the Fund relies on the Standard Industrial Classification as complied by Standard & Poor's Compustat Services, Inc. as in effect from time to time.
(11) With respect to 75% of its total assets the Fund will not: (a) Invest more than 5% of the value of its total assets in securities of any one issuer, except such limitation shall not apply to obligations issued or guaranteed by the United States Government, its agencies or instrumentalities, or (b) acquire more than 10% of the voting securities of any one issuer.
(12) Invest more than 10% of its total net assets in open-end investment companies. To the extent that the Fund shall invest in open-end investment companies, the Fund's advisor and sub-advisor shall waive a proportional amount of their management fee.
The following investment restrictions may be changed by the Board of Trustees without a shareholder vote.
(13) Invest in companies for the purpose of exercising control or management.
(14) Invest more than 5% of its total assets in securities of companies (including predecessors) that have been in continuous operation for less than 3 years.
(15) Hypothecate, pledge, or mortgage any of its assets, except to secure loans as a temporary measure for extraordinary purposes and except as may be required to collateralize letters of credit to secure state surety bonds.
(16) Participate on a joint or joint and several basis in any trading account (except for a joint securities trading account with other Funds managed by the Advisor for repurchase agreements permitted by the Securities and Exchange Commission pursuant to an exemptive order).
(17) Invest more than 10% of its total net assets in securities that do not have readily available market quotations or are otherwise not readily marketable.
(18) Invest in oil, gas, or other mineral exploration or development programs, but this shall not prevent the Fund from purchasing securities of companies in the oil, gas or mineral business if such purchase is otherwise consistent with the Fund's investment objectives and policies. The Fund is prohibited from any investment in oil, gas, and other mineral leases.
(19) Invest more than 5% of total net assets in securities convertible into common stock, including warrants, convertible bonds, and convertible preferred stocks.
(20) Purchase or sell real property (including limited partnership interests, but excluding readily marketable interests in real estate investment trusts or readily marketable securities of companies which invest in real estate). Nor may the Fund invest in securities of real estate investment trust if by reason thereof the value of its aggregate investment in such securities would exceed 10% of its total assets.
(21) Invest more than 10% of its net assets in securities of unseasoned issuers (defined as an issuer, which at the time the Fund purchases the securities, has been in operation for less than 3 years, including the period of operation of any predecessor or unconditional guarantor of such issuer) and illiquid securities (defined as a security that cannot be sold in the ordinary course of business within seven days at approximately the value at which the Fund has valued the security), provided that, within the 10% limitation, it will not invest more than 10% of its total assets in securities of issuers that are restricted from being sold to the public without registration under the Securities Act of 1933, excluding restricted securities eligible for resale pursuant to rule 144A under the Securities Act of 1933 that have been determined to be liquid by the Fund's Board of Trustees based upon the trading markets for the securities.
(22) Invest in the securities of any issuer if the officers, directors, or trustees of the Fund, the Advisor or Sub- Advisor owning beneficially more than one-half of one percent of the securities of the issuer together own beneficially more than five percent of the securities of that issuer.
(23) Invest in the securities of other investment companies, except by purchase on the open market where no commission or profit to a sponsor or dealer results from the purchase other than the customary broker's commission, or except when the purchase is part of a plan of merger, consolidation, reorganization, or acquisition.
(24) Invest more than 5% of total net assets in warrants (which are valued at the lower of cost or market). Included within that amount investments in warrants not listed on the New York or American Stock Exchange may not exceed 2% of the Fund's total net assets. For purposes of this limitation, warrants acquired by the Fund in units or attached to securities may be deemed to be without value.
If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage, resulting from a change in values of portfolio securities or amount of net assets, will not be considered a violation of any of the foregoing restrictions.
The following are among the most significant risks associated with an investment in the Fund.
EQUITY PRICE FLUCTUATION. Equity securities are subject to price fluctuations depending on a variety of factors, including market, business, and economic conditions.
FOREIGN INVESTMENTS. Investing in securities issued by companies whose principal business activities are outside the United States may involve significant risks not present in domestic investments. For example, there is generally less publicly available information about foreign companies, particularly those not subject to the disclosure and reporting requirements of the United States securities laws. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of possible adverse changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitation of the removal of funds or other assets of the Fund, political or financial instability or diplomatic and other developments which could affect such investment. Further, economies of particular countries or areas of the world may differ favorably or unfavorably from the economy of the United States. It is anticipated that in most cases the best available market for foreign securities will be on exchanges or in over-the-counter markets located outside of the United States. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers (particularly those located in developing countries) may be less liquid and more volatile than securities of comparable United States companies. In addition, foreign brokerage commissions are generally higher than commissions on securities traded in the United States and may be non-negotiable. In general, there is less overall governmental supervision and regulation of foreign securities markets, broker/dealer, and issuers than in the United States.
The Fund may invest up to 5% of its total assets in countries considered by the Advisor to represent emerging markets. The Advisor makes its determination by considering various factors, including development of securities laws and market regulation, total number of issuers, total market capitalization, and perceptions of the investment community. Currently, the Advisor considers the following countries to be among the emerging markets: Malaysia, Mexico, Hong Kong, Greece, Portugal, Turkey, Argentina, Brazil, Indonesia, Malaysia, Philippines, Singapore, Thailand, and China.
SELLING (OR WRITING) COVERED CALL OPTIONS. The Fund may sell (or write) covered call options on portfolio securities to hedge against adverse movements in the prices of these securities. A call option gives the buyer of the option, upon payment of a premium, the right to call upon the writer to deliver a security on or before a fixed date at a predetermined price, referred to as the strike price. If the price of the hedged security should fall or remain below the strike price, the Fund will not be called upon to deliver the security and the Fund will retain the premium received for the option as additional income, offsetting all or part of any decline in the value of the security. The hedge provided by writing covered call options is limited to a price decline in the security of no more than the option premium received by the Fund for writing the option. If the security owned by the Fund appreciates above the options strike price, the Fund will generally be called upon to deliver the security, which will prevent the Fund from receiving the benefit of any price appreciation above the strike price.
BUYING CALL OPTIONS. The Fund may establish an anticipatory hedge by purchasing call options on securities which the Fund intends to purchase to take advantage of anticipated positive movements in the prices of these securities. When establishing an anticipatory hedge, the Fund will deposit cash or cash equivalents into a segregated account equal to the call option's exercise price. The Fund will realize a gain from the exercise of a call option if, during the option period, the price of the underlying security to be purchased increases by more than the amount of the premium paid. A Fund will realize a loss equal to all or a portion of the premium paid for the option if the price of the underlying security decreases or does not increase by more than the premium.
BUYING PUT OPTIONS. The Fund may purchase put options on portfolio securities to hedge against adverse movements in the prices of these securities. A put option gives the buyer of the option, upon payment of a premium, the right to sell a security to the writer of the option on or before a fixed date at a predetermined price. A fund will realize a gain from the exercise of a put option if, during the option period, the price of the security declines by an amount in excess of the premium paid. The Fund will realize a loss equal to all or a portion of the premium paid for the option if the price of the security increases or does not decrease by more than the premium.
CLOSING TRANSACTIONS. The Fund may dispose of an option written by the Fund by entering into a "closing purchase transaction" for an identical option and may dispose of an option purchased by the Fund by entering into a "closing sale transaction" for an identical option. In each case, the closing transaction will have the effect of terminating the rights of the option holder and the obligations of the option purchaser and will result in a gain or loss to the Fund based upon the relative amount of the premiums paid or received for the original option and the closing transaction. The Fund may sell (or write) put options solely for the purpose of entering into closing sale transactions.
INDEX OPTIONS. The Fund may purchase and sell call options and purchase put options on stock indices in order to manage cash flow, reduce equity exposure, or to remain fully invested in equity securities. Options on securities indices are similar to options on a security except that, upon the exercise of an option on a securities index, settlement is made in cash rather than in specific securities.
LIMITATIONS. The Fund will purchase and sell only options that are listed on a securities exchange. The Fund will not purchase any option if, immediately thereafter, the aggregate market value of all outstanding options purchased and written by the Fund would exceed 5% of the Fund's total assets. The Fund will not write any call options if, immediately thereafter, the aggregate value of the Fund's securities subject to outstanding call options would exceed 25% of the value of the Fund's total assets.
The Fund's Management buys and sell securities for the Fund to accomplish investment objectives. The Fund's investment policy may lead to frequent changes in investments, particularly in periods of rapidly fluctuating interest rates. The Fund's investments may also be traded to take advantage of perceived short-term disparities in market values.
A change in the securities held by the Fund is known as "portfolio turnover." For the period October 17, 1994 (initial public offering) through September 30, 1995, the Fund's portfolio turnover rate was 145%. A high portfolio turnover rate may cause the Fund to pay higher transaction expenses, including more commissions and markups, and also result in quicker recognition of capital gains, resulting in more capital gain distributions which may be taxable to shareholders. Any short term gain realized on securities will be taxed to shareholders as ordinary income. See "Tax Status."
For the period October 17, 1994 (initial public offering) through September 30,1995, the Fund paid brokerage fees of $99,587. For a fuller discussion of the Fund's portfolio trading practices see "Portfolio Transactions" in the prospectus.
The Trustees and Officers of the Trust and their principal occupations during the past five years are set forth below. Except as otherwise indicated, the business address of each is 7900 Callaghan Road, San Antonio, Texas 78229.
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
FRANK E. HOLMES** Trustee Chairman of the Board of Directors and President, Chief Executive Officer of the Advisor Chief Executive since October 1989. President of the Officer Advisor from October 1989 to September 1995. Trustee, President, and Chief Executive Officer of United Services Funds ("USF") since October 1989. Director of Security Trust & Financial subsidiary of Advisor, since November 1991. Director of U.S. Advisors subsidiary of Advisor, and of the Guernsey Funds managed by that Company since August 1993. Trustee of since November 1993. Director of Franc-Or Resource Corp. since November 1994. Director of Marleau, Lemire Inc. from January 1995 to December 1995. Director of United Services Advisors Canada, Inc. since February 1995, and Chief Executive Officer from February 1995 to August 1995. Independent adviser from July 1978 to October 1989. From July 1978 to October 1989, held various positions with Merit Investment dealer, including the latest position as Finance. Formerly a member of the with the Toronto Stock Exchange, and former President and Chairman of the Toronto Society of Investment Dealers Association. Formerly a Director of Merit Investment Corporation.
** This Trustee may be deemed an "interested person" of the Trust as defined in the Investment Company Act of 1940.
THOMAS D. TAYS Vice President Vice President and Secretary of the and Trust since September 1995. Vice Secretary of the President and Special Counsel of United Trust Services Advisors, Inc. since September 1995. Associate Counsel of United Services Advisors, Inc. since September 1993. Attorney in private practice from April 1990 through September 1993. General Counsel of James Baker & Company, a broker-dealer and investment adviser from June 1984 through April 1990.
SUSAN B. MCGEE Vice President, Vice President and Assistant Secretary Assistant of the Trust since September 1995. Vice Secretary President and Secretary of the Advisor since September 1995. Vice President and Secretary of USSI since September 1995. Vice President and Secretary of USF President-Operations of ST&FC from May 1993 to December 1994. Secretary of ST&FC since September 1992. Associate Counsel since August 1994.
RICHARD E. HUGHS Trustee Professor at the School of Business of 11 Dennin Drive the State University of New York at Menands, NY 12204 Albany from 1990 to present; Dean, School of Business 1990-1994; Director of the Institute for the Advancement of Health Care Management, 1994 - present. Corporate Vice President, Sierra Pacific Resources, Reno, NV, 1985-1990. Dean and Reno, 1977-1985. Associate Dean, Stern School of Business, New York University, New York City, 1970-1977.
CLARK R. MANDIGO Trustee Business consultant since 1991. From 1250 N.E. Loop 410 1985 to 1991, President, Chief Executive Suite 900 Officer, and Director of Intelogic San Antonio, Texas Trace, Inc., a nationwide company which 78209 sells, leases and maintains computers equipment. Prior to 1985, President BHP Petroleum (Americas), Ltd., an oil and gas exploration and development company. Star Steakhouse & Saloon, Inc. and Physician Corporation of America. Services Funds since November 1993.
BOBBY D. DUNCAN Executive Vice President of the Advisor since September President, Chief 1995. Executive Vice President and Chief Financial Financial Officer of the Advisor from Officer, October 1989 to September 1995. Chief Chief Operating Operating Officer since November 1993. Officer Executive Vice President of USF since October 1989 and Chief Operating Officer since September 1993. Chief Financial Officer of USF from October 1989 to Officer, Chief Financial Officer and Treasurer of the Advisor from January 1989 to October 1989. Prior to January 1990, held various positions with USF, Treasurer, Chief Operating Officer, and Chief Financial Officer. Served as sole Director and Chief Executive Officer of United Shareholder Services Inc. ("USSI"), a transfer agent wholly-owned by the Advisor, from September 1988 to November 1989. Director of USSI from November 1989 to November 1993. Sole Director, President, and CEO of USSI since 1993. Director of A&B Mailers, Inc., a wholly-owned subsidiary of the Advisor, since February 1988 and Chairman since July 1991. Chief Officer, and Director of USSI. Director of the Advisor since July 1986. Director and Executive Vice President, Chief Financial Officer of ST&FC from November 1991 to March 1994. Vice President, Chief Financial Officer and Trustee of since November 1993. President, CEO, and Trustee of United Services Insurance Funds since July 1994. Director and Chief Financial Officer of United Services Advisors Canada Inc. since February 1995.
TERESA G. ROWAN Vice President, Vice President, Fund Accounting of the Treasurer, and Advisor since February 1995. Vice Chief Accounting President and Chief Accounting Officer Officer of USF since March 1995. Chief Financial Officer of USF since September 1995. Controller and Treasurer of USF from March 1995 to September 1995. Vice President, Mutual Fund Accounting of USSI since March 13, 1995. Vice President, Chief Accounting Officer, and Services Funds since March 8, 1995. Employee of the Advisor from September 1985 to February 1995. Auditor with Price Waterhouse from September 1985 to October 1986.
As of December 29, 1995 the officers and Trustees of the Trust, as a group, owned less than 1% of the outstanding shares of the Fund. The Fund is aware of the following person(s) owning of record, or beneficially, more than 5% of the outstanding shares of the Fund as of December 29, 1995.
NAME AND ADDRESS TYPE OF FUND OF OWNER % OWNED OWNERSHIP
BONNEL GROWTH FUND Charles Schwab & Co. Inc. 8.39% Record
The investment adviser to the Funds is United Services Advisors, Inc. (the "Advisor"), a Texas corporation, pursuant to an advisory agreement dated September 21, 1994. Frank E. Holmes, President and a Director of the Advisor, as well as a Trustee, President and Chief Executive Officer of the Trust, beneficially owns more than 25% of the outstanding voting stock of the Advisor and may be deemed to be a controlling person of the Advisor.
In addition to the services described in the Fund's prospectus, the Advisor will provide the Trust with office space, facilities and simple business equipment, and will provide the services of executive and clerical personnel for administering the affairs of the Trust. It will compensate all personnel, Officers, and Trustees of the Trust, if such persons are employees of the Advisor or its affiliates, except that the Trust will reimburse the Advisor for a portion of the compensation of the Advisor's employees who perform certain legal services for the Trust, including state securities law regulatory compliance work, based upon the time spent on such matters for the Trust.
The Trust pays all other expenses for its operations and activities. Each of the funds of the Trust pays its allocable portion of these expenses. The expenses borne by the Trust include the charges and expenses of any transfer agents and dividend disbursing agents, custodian fees, legal and auditing expenses, bookkeeping and accounting expenses, brokerage commissions for portfolio transactions, taxes, if any, the advisory fee, extraordinary expenses, expenses of issuing and redeeming shares, expenses of shareholder and trustee meetings, and of preparing, printing and mailing proxy statements, reports and other communications to shareholders, expenses of registering and qualifying shares for sale, fees of Trustees who are not "interested persons" of the Advisor, expenses of attendance by Officers and Trustees at professional meetings of the Investment Company Institute, the No-Load Mutual Fund Association or similar organizations, and membership or organization dues of such organizations, expenses of preparing and setting in type prospectuses and periodic reports and expenses of mailing them to current shareholders, fidelity bond premiums, cost of maintaining the books, and records of the Trust, and any other charges and fees not specifically enumerated.
The Trust and the Advisor, in connection with the Fund, have entered into a sub-advisory agreement with another firm as discussed in the prospectus. The Sub-Advisor's compensation is set forth in the prospectus and is paid by the Advisor. The Fund will not be responsible for the Sub-Advisor's fee.
The Advisor may, out of profits derived from its management fee, pay certain financial institutions (which may include banks, securities dealers, and other industry professionals) a "servicing fee" for performing certain administrative servicing functions for Fund shareholders to the extent these institutions are allowed to do so by applicable statute, rule or regulation. These fees will be paid periodically and will generally be based on a percentage of the value of the institutions' client Fund shares. The Glass-Steagall Act prohibits banks from engaging in the business of underwriting, selling or distributing securities. However, in the Advisor's opinion, such laws should not preclude a bank from performing shareholder administrative and servicing functions as contemplated herein.
The securities laws of certain states in which shares of the Trust may, from time to time, be qualified for sale require that the Advisor reimburse the Trust for any excess of the Fund's expenses over prescribed percentages of the Fund's average net assets. Thus, the Advisor's compensation (and the Advisor's payments to the Sub-Advisor) under the Advisory Agreement is subject to reduction in any fiscal year to the extent that total expenses of the Fund for such year (including the Advisor's compensation but exclusive of taxes, brokerage commission, extraordinary expenses, and other permissible expenses) exceed the most restrictive applicable expense limitation prescribed by any state in which the Fund's shares are qualified for sale. The Advisor may obtain waivers of these state expense limitations from time to time. Such limitation is currently 2.5% of the first $30 million of average net assets, 2% of the next $70 million of average net assets and 1.5% of the remaining average net assets.
The Advisory Agreement was approved by the Board of Trustees of the Trust (including a majority of the "disinterested Trustees") with respect to the Fund and will be submitted for approval by shareholders of the Fund at the initial meeting of shareholders. The Advisory Agreement provides that it will continue initially for two years, and from year to year thereafter, with respect to each fund, as long as it is approved at least annually both (i) by a vote of a majority of the outstanding voting securities of such fund (as defined in the Investment Company Act of 1940 [the "Act"]) or by the Board of Trustees of the Trust, and (ii) by a vote of a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any party thereto cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement may be terminated on 60 days' written notice by either party and will terminate automatically if it is assigned.
The Advisor provides investment advice to a variety of clients, including other mutual funds. Investment decisions for each client are made with a view to achieving their respective investment objectives. Investment decisions are the product of many factors in addition to basic suitability for the particular client involved. Thus, a particular security may be bought or sold for certain clients even though it could have been bought or sold for other clients at the same time. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling the security. In some instances, one client may sell a particular security to another client. It also sometimes happens that two or more clients simultaneously purchase or sell the same security, in which event each day's transactions in such security are, insofar as possible, averaged as to price and allocated between such clients in a manner which in the Advisor's opinion is equitable to each and in accordance with the amount being purchased or sold by each. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients. The Advisor employs professional staffs of portfolio managers who draw upon a variety of resources, for research information for the clients.
In addition to advising client accounts, the Advisor invests in securities for its own account. The Advisor has adopted policies and procedures intended to minimize or avoid potential conflicts with its clients when trading for its own account. The Advisor's investment objective and strategies are not the same as its clients, emphasizing venture capital investing, private placement arbitrage, and speculative short term trading. The Advisor utilizes a diversified approach to venture capital investing. Investments typically involve early-stage businesses seeking initial financing as well as more mature businesses in need of capital for expansion, acquisitions, management buyouts, or recapitalizations. In general, the Advisor invests in start-up companies in the natural resources or technology fields.
TRANSFER AGENCY AND OTHER SERVICES
In addition to the services performed for the Funds and the Trust under the Advisory Agreement, the Advisor, through its subsidiary USSI, provides transfer agent and dividend disbursement agent services pursuant to the Transfer Agency Agreement as described in the Fund's prospectus under "Management of the Fund -- The Investment Advisor." In addition, lockbox and statement printing services are provided by USSI. The Board of Trustees recently approved the Transfer Agency and related agreements through September 21, 1996.
USSI also maintains the books and records of the Trust and of each fund of the Trust and calculates their daily net asset value as described in the Fund's prospectus under "Management of the Funds -- The Investment Advisor."
A & B Mailers, Inc., a corporation wholly owned by the Advisor, provides the Trust with certain mail handling services. The charges for such services have been negotiated by the Audit Committee and A & B Mailers, Inc. Each service is priced separately.
As described under "Service Fee" in the prospectus, in September 1994, the Fund adopted a Distribution Plan pursuant to Rule 12b-1 of the 1940 Act (the "Distribution Plan"). The Distribution Plan allows the Fund to pay for or reimburse expenditures in connection with sales and promotional services related to the distribution of Fund shares, including personal services provided to prospective and existing Fund shareholders, which includes the costs of: printing and distribution of prospectuses and promotional materials, making slides and charts for presentations, assisting shareholders and prospective investors in understanding and dealing with the Fund, and travel and out-of-pocket expenses (e.g., copy and long distance telephone charges) related thereto.
The total amount expended pursuant to the Distribution Plan may not exceed 0.25% of the Fund's net assets on an annual basis. For the period form October 17, 1994 (initial public offering) through September 30, 1995, the Fund paid a total of $21,821 in distribution fees. No excess distribution expenses shall be carried over from one year to be reimbursed in future years.
Expenses which the Fund incurs pursuant to the Distribution Plan are reviewed quarterly by the Board of Trustees. On an annual basis the Distribution Plan is reviewed by the Board of Trustees as a whole, and the Trustees who are not "interested persons" as that term is defined in the 1940 Act and who have no direct or indirect financial interest in the operation of the Distribution Plan ("Qualified Trustees"). In their review of the Distribution Plan the Board of Trustees, as a whole, and the Qualified Trustees determine whether, in their reasonable business judgment and in light of their fiduciary duties under state law and under Section 36(a) and (b) of the 1940 Act that there is a reasonable likelihood that the Distribution Plan will benefit the Fund and its shareholders. The Distribution Plan may be terminated at any time by vote of a majority of the Qualified Trustees, or by vote of a majority of the outstanding voting securities of the Fund.
The Fund is unaware of any Trustee or any interested person of the Fund who had a direct or indirect financial interest in the operations of the Distribution Plan.
The Fund expects that the Distribution Plan will be used primarily to pay a "service fee" to persons who provide personal services to prospective and existing Fund shareholders. Shareholders of the Fund will benefit from these personal services and the Fund expects to benefit from economies of scale as more shareholders are attracted to the Fund.
CERTAIN PURCHASES OF SHARES OF THE FUND
Shares of the Fund are continuously offered by the Trust at their net asset value next determined after an order is accepted. The methods available for purchasing shares of the Fund are described in the Prospectus. In addition, shares of the Fund may be purchased using stock, so long as the securities delivered to the Trust meet the investment objectives and concentration policies of the Fund, and are otherwise acceptable to the Advisor, which reserves the right to reject all or any part of the securities offered in exchange for shares of the Fund. On any such "in kind" purchase, the following conditions will apply:
(1) the securities offered by the investor in exchange for shares of the Fund must not be in any way restricted as to resale or otherwise be
(2) securities of the same issuer must already exist in the Fund's
(3) the securities must have a value which is readily ascertainable (and not established only by evaluation procedures) as evidenced by a listing on the AMEX, the NYSE, or NASDAQ;
(4) any securities so acquired by any fund shall not comprise over 5% of that fund's net assets at the time of such exchange;
(5) no over-the-counter securities will be accepted unless the principal over-the-counter market is in the United States; and,
(6) the securities are acquired for investment and not for resale.
The Trust believes that this ability to purchase shares of the Fund using securities provides a means by which holders of certain securities may obtain diversification and continuous professional management of their investments without the expense of selling those securities in the public market.
An investor who wishes to make an "in kind" purchase should furnish (either in writing or by telephone) to the Trust a list with a full and exact description of all of the securities which he or she proposes to deliver. The Trust will advise him or her as to those securities which it is prepared to accept and will provide the investor with the necessary forms to be completed and signed by the investor. The investor should then send the securities, in proper form for transfer, with the necessary forms to the Trust and certify that there are no legal or contractual restrictions on the free transfer and sale of the securities. The securities will be valued as of the close of business on the day of receipt by the Trust in the same manner as portfolio securities of the Fund are valued. See the section entitled "How Shares Are Valued" in the prospectus. The number of shares of the Fund, having a net asset value as of the close of business on the day of receipt equal to the value of the securities delivered by the investor, will be issued to the investor, less applicable stock transfer taxes, if any.
The exchange of securities by the investor pursuant to this offer will constitute a taxable transaction and may result in a gain or loss for Federal income tax purposes. Each investor should consult his or her tax adviser to determine the tax consequences under Federal and state law of making such an "in kind" purchase.
SUSPENSION OF REDEMPTION PRIVILEGES. The Trust may suspend redemption privileges or postpone the date of payment for up to seven days, but cannot do so for more than seven days after the redemption order is received except during any period (1) when the NYSE is closed, other than customary weekend and holiday closings, or trading on the Exchange is restricted as determined by the Securities and Exchange Commission ("SEC"); (2) when an emergency exists, as defined by the SEC, which makes it not reasonably practicable for the Trust to dispose of securities owned by it or fairly to determine the value of its assets; or, (3) as the SEC may otherwise permit.
The Fund may advertise performance in terms of average annual total return for 1-, 5- and 10-year periods, or for such lesser periods as the Fund has been in existence. Average annual total return is computed by finding the average annual compounded rates of return over the periods that would equate the initial amount invested to the ending redeemable value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypotheti- cal $1,000 payment made at the beginning of the 1-, 5- or 10-year periods at the end of the year or period.
The calculation assumes all charges are deducted from the initial $1,000 payment and assumes all dividends and distributions by the Fund are reinvested at the price stated in the prospectus on the reinvestment dates during the period, and includes all recurring fees that are charged to all shareholder accounts.
The average annual Total Return for the Fund for the period from October 17, 1994 (initial public offering) through September 30, 1995 was 48.74%. (This
The Fund may provide the above described standard total return results for a period which ends as of not earlier than the most recent calendar quarter end and which begins either twelve months before or at the time of commencement of the Fund's operations. In addition, the Fund may provide nonstandardized total return results for differing periods, such as for the most recent six months. Such nonstandardized total return is computed as otherwise described under "Total Return" except that no annualization is made.
EFFECT OF FEE WAIVER AND EXPENSE REIMBURSEMENT
During the period from October 17, 1995 (initial public offering) through September 30, 1995, the Fund's expense ratio was 2.48%. If the Advisor had not subsidized the Fund's expenses, the expense ratio subject to the most restrictive state limitation would have been 2.50%. Because its expenses were subsidized, the Fund's investment performance, including annual compound rate of return, was improved. The Advisor is not obligated to continue subsidizing the Fund's expenses in the future.
TAXATION OF THE FUND -- IN GENERAL
As stated in its Prospectus, the Fund intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Fund will not be liable for Federal income taxes on its taxable net investment income and capital gain net income that are distributed to shareholders, provided that the Fund distributes at least 90% of its net investment income and net short-term capital gain for the taxable year.
To qualify as a regulated investment company, the Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to its business of investing in such stock, securities or currencies (the "90% test"); (b) derive in each taxable year less than 30% of its gross income from the sale or other disposition of stock or securities held less than three months (the "30% test"); and, (c) satisfy certain diversification requirements at the close of each quarter of the Fund's taxable year.
The Code imposes a non-deductible 4% excise tax on a regulated investment company that fails to distribute during each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income for the calendar year, (2) at least 98% of its capital gain net income for the twelve-month period ending on October 31 of the calendar year and (3) any portion (not taxable to the Fund) of the respective balance from the preceding calendar year. The Fund intends to make such distributions as are necessary to avoid imposition of this excise tax.
TAXATION OF THE FUND'S INVESTMENTS
The Fund's ability to make certain investments may be limited by provisions of the Code that require inclusion of certain unrealized gains or losses in the Fund's income for purposes of the 90% test, the 30% test, and the distribution requirements of the Code, and by provisions of the Code that characterize certain income or loss as ordinary income or loss rather than capital gain or loss. Such recognition, characterization and timing rules generally apply to investments in certain forward currency contracts, foreign currencies and debt securities denominated in foreign currencies.
Taxable distributions generally are included in a shareholder's gross income for the taxable year in which they are received. However, dividends declared in October, November, or December and made payable to shareholders of record in such a month, will be deemed to have been received on December 31, if a Fund pays the dividends during the following January.
Distributions by the Fund will result in a reduction in the fair market value of the Fund's shares. Should a distribution reduce the fair market value below a shareholder's cost basis, such distribution nevertheless would be taxable to the shareholder as ordinary income or long-term capital gain, even though, from an investment standpoint, it may constitute a partial return of capital. In particular, investors should be careful to consider the tax implications of buying shares of the Fund just prior to a distribution. The price of such shares purchased at that time includes the amount of any forthcoming distribution. Those investors purchasing the Fund's shares immediately prior to a distribution may receive a return of investment upon distribution which will nevertheless be taxable to them.
A shareholder of the Fund should be aware that a redemption of shares (including any exchange into other funds offered, affiliated or administered by United Services Advisors, Inc.) is a taxable event and, accordingly, a capital gain or loss may be recognized. If a shareholder of the Fund receives a distribution taxable as long-term capital gain with respect to shares of the Fund and redeems or exchanges shares before he has held them for more than six months, any loss on the redemption or exchange (not otherwise disallowed as attributable to an exempt-interest dividend) will be treated as long-term capital loss to the extent of the long-term capital gain recognized.
Bankers Trust Company acts as Custodian for the Fund. Services with respect to the retirement accounts will be provided by Security Trust and Financial Company of San Antonio, Texas, a wholly-owned subsidiary of the Advisor.
Price Waterhouse LLP, One Riverwalk Place, San Antonio, Texas 78205 is the independent accountant for the Trust.
The financial statements for the period from October 17, 1994 (initial public offering) through September 30, 1995, are hereby incorporated by reference from the Annual Report to Shareholders of that date which has been delivered with the Statement of Additional Information [unless previously provided, in which event the Trust will promptly provide another copy free of charge, upon request to: United Services Advisors, Inc., P.O. Box 29467, San Antonio, Texas 78229- 0467, 1-800-426-6635 or (210) 308-1234].
PART C -- OTHER INFORMATION
Included herein is Part C for Pre-Effective Amendment No.
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) The audited financial highlights for the period from October 17, 1994 (initial public offering) through September 30, 1995, are found in part A.
(2) The audited financial statements for the period from October 17, 1994 (initial public offering) through September 30, 1995 are found in part B.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
(1) (a) Declaration of Trust, Master Trust Agreement (incorporated by reference to initial registration dated April 15, 1993).
(1) (b) Amendment No. 1, dated April 26, 1994 to Master Trust Agreement, dated April 15, 1993 (incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement, dated May 11, 1994).
(1) (c) Amendment No. 2, dated October 3, 1994 to Master Trust Agreement, dated April 15, 1993 (incorporated by reference to Pre-Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(2) By-laws of Accolade Funds (incorporated by reference to initial registration dated April 15, 1993).
(4) Specimen certificate (incorporated by reference to Post-Effective Amendment No. 1 tot eh Registrations Statement, dated March 20, 1995).
(5) (a) Advisory Agreement between Accolade Funds and United Services Advisors, Inc., dated September 21, 1994 (incorporated by reference to Pre-Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(b) Sub-Advisory Agreement between Accolade Funds, United Services Advisors, Inc. and Bonnel, Inc., dated September 21, 1994 (incorporated by reference to Pre-Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(8) Custodian Agreement between Accolade Funds and Bankers Trust Company of New York (incorporated by reference to Pre-Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(9) (a) Transfer Agency Agreement between United Shareholder Services, Inc. and Accolade Funds, dated September 21, 1994 (incorporated by reference to Pre- Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(9) (b) Bookkeeping and Accounting Agreement between United Shareholder Services, Inc. and Accolade Funds, dated September 21, 1994 (incorporated by reference to Pre-Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(9) (c) Lockbox Service Agreement between United Shareholder Services, Inc. and Accolade Funds, dated September 21, 1994 (incorporated by reference to Pre- Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(9) (d) Printing Agreement Agreement between United Shareholder Services, Inc. and Accolade Funds, dated September 21, 1994 (incorporated by reference to Pre- Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(10) Opinion and consent of Thomas D. Tays, Esq. counsel to the Registrant (incorporated by reference to Pre-Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(11) (a)* Consent of Independent Accountants, Price Waterhouse LLP.
(b) Power of Attorney (incorporated by reference to Pre-Effective Amendment No. 3 to the Registration Statement, dated October 17, 1994).
(15) Accolade Funds/Bonnel Growth Fund, Plan Pursuant to Rule 12b-1, approved September 21, 1994 (incorporated by reference to Pre-Effective Amendment No. 2 to the Registration Statement, dated May 11, 1994).
(16) Schedule for computation of each performance quotation provided in response to Item 22 (incorporated by reference to initial registration statement dated April 15, 1993).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Information pertaining to persons controlled by or under common control with Registrant is incorporated by reference to the Prospectus contained in Part A of this Registration Statement at the Section entitled "Management of the Funds" and to the Statement of Additional Information contained in Part B of this Registration Statement at the section entitled "Principal Holders of Securities."
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The number of record holders, as of DECEMBER 29, 1995 of each class of securities of the Registrant:
Under Article VI of the Registrant's Master Trust Agreement, each of its Trustees and officers or person serving in such capacity with another entity at the request of the Registrant (a "Covered Person") shall be indemnified (from the assets of the Sub-Trust or Sub-Trusts in question) against all liabilities, including, but not limited to, amounts paid in satisfaction of judgments, in compromises or as fines or penalties, and expenses, including reasonable legal and accounting fees, incurred by the Covered Person in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal before any court or administrative or legislative body, in which such Covered Person may be or may have been involved as a party or otherwise or with which such person may be or may have been threatened, while in office or thereafter, by reason of being or having been such a Trustee or officer, director or trustee, except with respect to any matter as to which it has been determined that such Covered Person (i) did not act in good faith in the reasonable belief that such Covered Person's action was in or not opposed to the best interests of the Trust or (ii) had acted with wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office (either and both of the conduct described in (i) and (ii) being referred to hereafter as "Disabling Conduct"). A determination that the Covered Person is not entitled to indemnification may be made by (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the person to be indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of a court action or an administrative proceeding against a Covered Person for insufficiency of evidence of Disabling Conduct, or (iii) a reasonable determination, based upon a review of the facts, that the indemnitee was not liable by reason of Disabling Conduct by (a) a vote of the majority of a quorum of Trustees who are neither "interested persons" of the Trust as defined in Section 1(a)(19) of the 1940 Act nor parties to the proceeding, or (b) as independent legal counsel in a written opinion.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
Information pertaining to business and other connections of Registrant's investment advisor is incorporated by reference to the Prospectus and Statement of Additional Information contained in Parts A and B of this Registration Statement at the sections entitled "Management of the Fund" in the Prospectus and "Management of the Fund" and "Investment Advisory Services" in the Statement of Additional Information.
None. The Registrant is currently comprised of a single no-load fund which acts as distributor of its own shares.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts and records maintained by the Registrant are kept at the Registrant's office located at 7900 Callaghan Road, San Antonio, Texas 78229. All accounts and records maintained by Bankers Trust Company as custodian for Accolade Funds are maintained at 16 Wall Street, New York, New York 10005.
Registrant undertakes to call a meeting of shareholders for purposes of voting upon the question of removal of one or more trustees when requested in writing to do so by the holders of at least 10% of the Trust's outstanding record shares, and in connection with such meeting to comply with the provisions of Section 16(c) of the Investment Company Act of 1940 relating to shareholder communications.
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Post-Effective Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and that it has duly caused this Amendment to the Registration Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto duly authorized in the city of San Antonio, State of Texas, on this 10th day of January, 1996.
By: /S/ FRANK E. HOLMES
Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
/S/ FRANK E. HOLMES President January 10, 1996
/S/ RICHARD E. HUGHS Trustee January 10, 1996
/S/ CLARK R MANDIGO Trustee January 10, 1996
/S/ BOBBY D. DUNCAN Executive Vice President January 10, 1996 Bobby D. Duncan Chief Financial Officer
/S/ TERESA G. ROWAN Vice President January 10, 1996
/S/ THOMAS D. TAYS Attorney-In-Fact January 10, 1996
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGES
(15) Consent of Independent Accountants, | 485BPOS | 485BPOS | 1996-01-12T00:00:00 | 1996-01-12T15:52:51 |
0000899243-96-000019 | 0000899243-96-000019_0010.txt | PROMISSORY NOTE, SECURITY AGREEMENT AND PLEDGE
Houston, Texas December 29, 1995
FOR VALUE RECEIVED, TIETEK, INC., a Texas corporation ("Maker"), promises to pay to the order of NORTH AMERICAN TECHNOLOGIES GROUP, INC., a Delaware corporation ("Payee"), in Houston, Texas, or at such other place in the United States of America as Payee may designate in writing, the principal sum of all advances of principal not to exceed in the aggregate ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000.00), such amount being the aggregate amount of the Crosstie Loan (as defined in and made pursuant to the Crosstie Agreement referred to below), in lawful money of the United States of America, together with interest on the unpaid principal balance thereof, until the unpaid principal balance shall be paid in full at the per annum rate of interest equal to ten percent (10.00%); provided, however, that after maturity, whether maturity is brought about by acceleration as described in this Note or otherwise, the rate of interest shall be the highest lawful, non-usurious rate of interest then permitted under Texas law. Interest shall be calculated on the basis of a 365- or 366-day year as appropriate.
This Note evidences the "Crosstie Loan," as defined in that certain Crosstie Purchase Option and Loan Agreement (the "Crosstie Agreement"), dated as of the date of this Note, by and among the Maker, North American Technologies Group, Inc., a Delaware corporation ("NATK"), and each of William T. Aldrich, J. Denny Bartell and Henry W. Sullivan. All capitalized terms used but not otherwise defined herein have the meanings given them in the Crosstie Agreement.
As of the date of this Note, $219,591.86 has been advanced under the Crosstie Loan, as reflected on Schedule 1 hereto, all of which was advanced on the date or dates reflected on such Schedule 1.
All additional advances made by Payee to Maker under the Crosstie Loan pursuant to the provisions of the Crosstie Agreement shall be recorded by Payee and endorsed by Maker on Schedule 1, attached hereto and incorporated herein by this reference for all purposes. Payee agrees to make additional advances under the Crosstie Loan pursuant to the terms of the Crosstie Agreement. Each such advance shall constitute a portion of the principal amount due under this Note and shall be due and payable as provided in, and shall be subject to the terms and provisions of, this Note.
1. The entire outstanding and unpaid principal amount of all advances evidenced by this Note, together with all unpaid interest and other amounts due with respect to this Note, shall be due and payable in full on the earlier to occur of:
(a) the date that is two (2) years after the earlier to occur of (i) the date that NATK provides written notice to the TIETEK Owners that NATK will not exercise the Crosstie Purchase Option (as defined in the Crosstie Agreement), or (ii) the expiration of the Crosstie Purchase Option Period (as defined in the Crosstie Agreement), as such Crosstie Purchase Option Period may be extended in accordance with the terms and provisions of the Crosstie Agreement.
(b) the date that an of the following occurs, after the expiration of the Crosstie Purchase Option Period, as such Crosstie Purchase Option Period may be extended in accordance with the terms and provisions of the Crosstie Agreement: (i) the TIETEK Owners no longer own a majority of the capital stock of the Maker; unless the party or parties who then own a majority of the capital stock of the Maker include NATK or any of its affiliates or any other party or parties reasonably acceptable to NATK, (ii) the engagement, to any substantial extent, by the Maker and any of its subsidiaries (if any) in any business other than the Crosstie Business (as defined in the Crosstie Agreement); (iii) the sale or other disposition of 50% or more of the consolidated assets of the Maker and any of its subsidiaries (if any), unless such sale or other disposition is made to NATK or any of its affiliates; or (iv) the Maker's merger or consolidation with any other entity, unless NATK or any of its affiliates is a party to such merger or consolidation.
Interest shall be calculated from the date of each principal advance hereunder as provided in the Crosstie Agreement. Accrued and unpaid interest on this Note shall be due and payable on the first (1st) calendar day of each January, April, July and October during the term of this Note after the earlier to occur of (x) the date NATK provides written notice to the TIETEK Owners that NATK will not exercise the Crosstie Purchase Option or (y) the expiration of the Crosstie Purchase Option Period, as the same may be extended in accordance with the terms and provisions of the Crosstie Agreement (such earlier date referred to in (x) and (y) herein called the "Capitalization Date"). The amount of all interest accruing on or before the Capitalization Date shall be added to the principal amount of this Note on such date and shall be deemed to be principal under this Note, subject to the provisions of Paragraph 8 hereof.
2. In the event that any payment hereunder is due on a day other than a business day, such payment shall instead be due and payable on the next succeeding business day. As used herein, the term "business day" means any day other than either a Federal holiday or a day during which state or federally- chartered banks located in Harris County, Texas, are required by law to be closed.
3. To the extent of any partial payment or any partial prepayment hereunder, amounts received shall first be applied to accrued and unpaid interest, and the remainder, if any, shall then be applied to the payment of outstanding principal. This Note, and all amounts due hereunder, may be prepaid, in whole or in part, at Maker's option at any time, without premium or penalty upon thirty (30) days prior written notice.
4. In the event that there is a failure to pay when due any interest or principal hereunder and such failure shall continue unremedied for a period of seven (7) days after receipt of written notice of such failure to pay, then Payee, without the necessity of further demand or presentment, may accelerate and declare in a writing delivered to Maker the entire principal balance of this Note then due and payable, together with any accrued interest thereon, and may exercise any other remedy or remedies then available to it hereunder or under law.
5. Maker hereby waives presentment for payment, demand, notice of protect, and protest of this Note, as well as all other notices relating to this Note, except as described in the immediately preceding paragraph. Payee shall not by any act of omission or commission be deemed to waive any right or remedy hereunder or under law, except such waiver as shall be in writing and signed by Payee, and then only to the extent specifically set forth therein; a waiver as to one event shall not be a bar to or waiver of any other right or remedy as to a subsequent event.
6. (a) (i) Maker hereby grants to Payee (sometimes referred to herein as "Secured Party") a first priority security interest in, and a first lien on, and agrees that Secured Party shall have and continue to have a first priority security interest in, and a first lien on, all of its assets including without limitation, all equipment, technologies, know-how, patents and working capital (and the proceeds of such working capital), in each case, whether currently owned or hereafter acquired (the "Maker's Collateral").
(ii) Each of the TIETEK Owners hereby grants to Secured Party a first priority security interest in, a first priority lien on, and a pledge of all of such parties TIETEK Shares (and the proceeds thereof), in each case, whether currently owned or hereafter acquired (the "TIETEK Owners' Collateral;" together with the Maker's Collateral, the "Collateral").
(b) The security interest and lien granted pursuant to Section 6(a) hereof shall serve to secure all indebtedness, liabilities or other sums owed or to become owing hereunder. Notwithstanding the foregoing, at the time of the Closing, as defined in and contemplated by that certain Asset Purchase Agreement (dated as of December 29, 1995, by and among NATK, GAIA Technologies, Inc., a Texas corporation, GAIA Holdings, Inc., a Delaware corporation, Thor Ventures, L.C., a Texas limited liability company, and Thor Industries, Inc., a Texas corporation, which Asset Purchase Agreement is referred to hereinafter as the "Asset Purchase Agreement"), in addition to the security interest and lien on the Collateral granted pursuant to this Note, the Borrower and the TIETEK Owners shall cause to be added as addition security under this Note a first priority security interest in, a first lien on, and pledge of, the 666,667 NATK Shares, referred to as the "Pledged Shares," in the Asset Purchase Agreement. Thereafter, as used herein the term, "Collateral" shall also include such Pledged Shares.
(c) Maker authorizes the Secured Party to file, in jurisdictions where this authorization will be given effect, any financing statement or other
Page 3 of 9 pages instrument of any kind evidencing the security interest and/or lien granted hereunder, and at the request of Secured Party, from time to time, Maker will join the Secured Party in executing one or more of such financing statements and other documents or instruments in form and substance satisfactory to Secured Party.
(d) Until all obligations of Maker hereunder are satisfied in full:
(i) Maker: (x) shall keep the Maker's Collateral free from any and all superior or equal adverse claims, pledges, mortgages, liens, charges, security interests and encumbrances, (y) shall not sell or grant to any other party any ownership or other interest in any of the Maker's Collateral, except as expressly permitted by this Note or the Crosstie Agreement, and (z) shall not move any equipment constituting any portion of the Maker's Collateral to another location without the prior written consent thereto of Secured Party, which may be granted in the sole and absolute discretion of Secured Party.
(ii) Each TIETEK Owner shall keep his TIETEK Owners' Collateral free from any and all superior or equal adverse claims, pledges, mortgages, liens, charges, security interests and encumbrances, and shall not sell or grant to any other party any ownership or other interest in his TIETEK Owners' Collateral, except as expressly permitted by this Note or the Crosstie Agreement.
(iii) Each of Maker and each TIETEK Owner shall immediately notify Secured Party of any transfer, pledge, claim, lien, charge or encumbrance arising in connection with any Collateral about which such party has actual knowledge.
(iv) Maker will pay in a timely manner all taxes and other amounts due or to become due with respect to the Maker's Collateral on or after the date hereof and will pay to Secured Party all expenses and expenditures including reasonable attorney's fees and expenses incurred or paid by the Secured Party in exercising or protecting the interests, rights and remedies of Secured Party hereunder with respect to the Maker's Collateral. Maker shall, at Maker's own expense, defend the Secured Party's right, title and interest in and to the Maker's Collateral against the claims of any person, firm, corporation or other entity.
(v) Each TIETEK Owner shall, at his own expense, pay to Secured Party all expenses and expenditures including reasonable attorney's fees and expenses incurred or paid by the Secured Party in exercising or protecting the interests, rights and remedies of Secured Party hereunder with respect to the TIETEK Owners' Collateral, and each TIETEK Owner shall severally but not jointly defend the Secured Party's right, title and interest in and to his TIETEK Owners' Collateral against the claims of any person, firm, corporation or other entity.
(vi) Maker shall, at its own expense, pay to Secured Party all expenses and expenditures including reasonable attorney's fees and expenses
Page 4 of 9 pages the Secured Party in exercising or protecting the interests, rights and remedies of Secured Party hereunder with respect to any of the Maker's Collateral and shall defend the Secured Party's right, title and interest in and to all of the against the claims of any person, firm, corporation or other entity.
Notwithstanding anything herein to the contrary, no TIETEK Owner shall be individually responsible or liable for the payment or performance of Maker's obligations under this Note to pay any amount of principal, interest or other payment to Payee, except to the extent of the security interest, lien and pledge of his TIETEK Owners' Collateral granted or to be granted by him pursuant to this Note, and NATK's sole recourse therefor against any TIETEK Owner shall be limited to such security interest, lien and pledge of such TIETEK Owner's Collateral granted or to be granted by him pursuant to this Note. In addition, the obligations of each TIETEK Owner under this Note, as among the other TIETEK Owners, shall be several and not joint obligations of each such TIETEK Owner.
(f) The term "default," as used in this instrument, shall mean and include any of the following: (i) a failure to pay when due any interest (if any) or principal hereunder and such failure shall continue unremedied for a period of seven (7) days after receipt of written notice of such failure to pay, or the failure to pay when due any payment of principal or interest in accordance with the terms hereof, or (ii) the failure of Maker or any TIETEK Owner to perform in a timely manner any other obligation or agreement of such party under this instrument or the Crosstie Agreement, which failure under this clause (ii) shall continue unremedied for a period of fifteen (15) days after receipt of written notice of such failure.
(g) In addition to any other right or remedy granted hereunder or under law upon the occurrence of a default hereunder, the Secured Party may, upon 15 days' written notice to Maker and the TIETEK Owners, but without the necessity of further demand or presentment, exercise with reference to the Collateral any and all of the rights and remedies of a secured party under the laws of the State of Texas applicable to the Collateral and, without limitation, any other right or remedy granted hereunder (all of which rights and remedies shall be cumulative), including without limitation the right and power to forthwith realize upon the Collateral or any part thereof, and may forthwith sell or otherwise dispose of and deliver the Collateral, or any part thereof or interest therein, at a public or private sale or sales, at any location in Harris County, Texas selected by Secured Party, upon such terms and conditions and for such consideration as Secured Party shall deem appropriate (in Secured Party's sole discretion), so long as the same are determined and conducted in a commercially reasonable manner, as such term is defined in and interpreted under the Uniform Commercial Code as in effect in the State of Texas on the date hereof.
(h) Notwithstanding anything contained herein or at law to the contrary, Secured Party shall exercise its remedies as a secured party against the Collateral in the following order:
(i) First, as to so many of the Pledged Shares (i.e., the 666,667 NATK Shares referred to above), if any, as may be necessary to pay any amount due
(ii) Thereafter, as to all other Collateral.
7. All notices, requests, demands, waivers and other communications required or permitted to be given under this document shall be in writing and shall be deemed to have been duly given if delivered personally, if mailed (certified or registered mail with postage prepaid) or if sent by telecopier/facsimile as follows (or at such other address or telecopy/facsimile number for a party as shall be specified by like notice):
If to Payee: If to Maker or to any TIETEK Owner:
North American Technologies TIETEK, Inc. Group, Inc. 4710 Bellaire Blvd., Suite 301 4710 Bellaire Blvd, Suite 301 Bellaire, Texas 77401 Bellaire, Texas 77401 Attn: William T. Aldrich and Attn: Tim B. Tarrillion Henry W. Sullivan Telecopy/Facsimile No: Telecopy/Facsimile No:
and with a copy to:
8. The Payee, Maker and the other parties to this Note intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such persons stipulate and agree that none of the terms and provisions contained herein or in the Crosstie Agreement or in any other document executed and delivered pursuant thereto shall ever be construed to provide for such interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. The holder of his Note expressly disavow any intent to charge or collect excessive unearned interest in the event the maturity of this Note is accelerated for any reason
(whether by action of an holder, any prepayments hereafter agreed to, the provisions of Paragraph 1 hereof or otherwise), and if any such acceleration or other event occurs, and, as a result thereof, any amounts held to constitute interest are determined to exceed any applicable legal limit, then such excess amounts shall, without penalty, be applied to reduce the amounts otherwise owing under this Note or otherwise returned to the Maker. Neither the Maker, any TIETEK Owner nor any present or future endorsers, sureties, guarantors or other persons hereafter becoming liable for payment of any obligations hereunder, under the Crosstie Agreement or any other document executed and delivered pursuant to the Crosstie Agreement shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable law from time to time in effect, and the provisions of this Paragraph 8 shall control over all other provisions herein or in the Crosstie Agreement which may be in conflict or apparent conflict herewith.
9. This instrument and the rights and obligations hereunder shall terminate upon the satisfaction in full of all obligations of Maker hereunder, and upon such termination, Secured Party agrees to execute, at the expense of Maker, such reasonable instruments to release its rights in and to the Collateral as Maker or any of the TIETEK Owners may reasonably request.
10. THIS NOTE SHALL BE CONSTRUED, INTERPRETED, AND THE RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS EXCEPT WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. This Note may be executed in counterparts each of which shall be deemed an original and all of which together shall constitute one and the same instrument.
11. Each of the TIETEK Owners joins in the execution of this document only to evidence (a) his agreement with respect to the TIETEK Owners' Collateral set out in Paragraph 6 hereof, and the provisions applying thereto contained in Paragraphs 7, 8, 9 and 10 hereof and (b) his consent to the Maker's request for additional Crosstie Advances (as defined in the Crosstie Agreement) and the execution and delivery by Borrower of a copy of Schedule 1 hereto in connection with each such request.
IN WITNESS WHEREOF, the parties hereto have duly executed this Note effective as of the date first above written.
By: /s/ William T. Aldrich
By: /s/ Tim B. Tarrillion President and Chief Executive Officer
(for the limited purposes set out in Paragraph 11 of this Note)
PROMISSORY NOTE, SECURITY AGREEMENT AND PLEDGE IN THE PRINCIPAL AMOUNT OF $1,500,000, DATED DECEMBER 29, 1995, ISSUED BY TIETEK, INC. IN FAVOR OF NORTH AMERICAN TECHNOLOGIES, INC. (THE "NOTE")
Date of Advance Amount of Advance
November 13, 1995 $ 9,750.00 December 1, 1995 $ 5,000.00 December 13, 1995 $ 3,514.34 December 20, 1995 $ 1,711.10
All capitalized terms used on this Schedule 1, unless otherwise defined herein, have the meanings given them in the Note. | 8-K | EX-10.9 | 1996-01-12T00:00:00 | 1996-01-12T16:52:02 |
0000942794-96-000002 | 0000942794-96-000002_0001.txt | IN RE: CAMBRIDGE BIOTECH CORPORATION CASE NO.: 94-43054-JFQ 365 PLANTATION STREET JUDGE: J.F. QUEENAN
DEBTOR(S): CAMBRIDGE BIOTECH CORPORATION, CHAPTER: 11
MONTHLY OPERATING REPORT FOR MONTH ENDING: OCTOBER 31, 1995
COMES NOW, CAMBRIDGE BIOTECH CORPORATION
Debtor-in-Possession, and hereby submits its Monthly Operating Report for the period commencing October 1, 1995 and ending October 31, 1995 as shown by the report and exhibits consisting of twenty-two pages and containing the following, as indicated:
____X____ Monthly Reporting Questionnaire (Attachment 1) ____X____ Comparative Balance Sheets (Forms OPR-1 & OPR-2) ____X____ Summary of Accounts Receivable (Form OPR-3) ____X____ Schedule of Post-petition Liabilities (Form OPR-4) ____X____ Income Statement (Form OPR-5) ____X____ Statement of Sources and Uses of Cash (Form OPR-6)
I declare under penalty of perjury that this report and all attachments are true and correct to the best of my knowledge and belief.
Date: January 3, 1996 DEBTOR(S)-IN-POSSESSION
Name & Title: Alison Taunton-Rigby
As Debtor-in-Possession commenced filing on July 7, 1994
Case Name: CAMBRIDGE BIOTECH CORPORATION Month of: OCTOBER 1, 1995 THROUGH OCTOBER 31, 1995
1. Payroll: State the amount of all executive wages paid and taxes withheld and paid.
2. Insurance: Is worker's compensation and other insurance in effect? YES. Are payments current? YES. If any policy has lapsed, been replaced or renewed, state so in the schedule below. Attach a copy of the new policy's binder or cover page.
Carrier Coverage Expiration Premium Pd. TYPE Name Amount Policy # Date Amounts Through
Workers Comp(GA) CIGNA $500,000 C41793788 10/31/96 $551.00 10/31/96
Case Name: Cambridge Biotech Corporation Case Number: 94-43054 SCHEDULE #1
Monthly Operating Report - Wages - Executives October 1 through October 31, 1995 Name Title Gross Net Withheld Paid Due
A.Taunton-Rigby Pres./CEO 17,307.69 10,708.57 6,599.12 6,599.12 0.00 Jeffrey Beaver Chairman 7,692.32 4,888.93 2,803.39 2,803.39 0.00 Gary Long VP.Corp.Operations 9,615.40 6,794.41 2,820.99 2,820.99 0.00 Deborah Grabbe VP. Reg.Affairs 10,000.00 6,983.77 3,016.23 3,016.23 0.00 Gerald Beltz VP.R & D 10,769.23 7,971.52 2,797.71 2,797.71 0.00 Robert Kammer VP.Medical Aff. 11,538.46 8,234.83 3,303.63 3,303.63 0.00 --------- --------- --------- --------- ---- Total Executive Payroll: 66,923.10 45,582.03 21,341.07 21,341.07 0.00 WOC C4 17 93 78 8 ATLANTIC EMPLOYERS INSURANCE COMPANY NEW RENEWAL x REWRITE OF NCCI CARRIER CODE: 18678
WORKERS COMPENSATION AND EMPLOYERS INFORMATION PAGE
Item 1. CAMBRIDGE BIOTECH CORPORATION Inter/Intrastate ID No. 203019
Employer's Identification No.: FEIN # 000000000 Other workplaces not shown above: STATE OF NEW JERSEY Item 2.Policy period from 10-31-95 to 10-31-96 12:01 A.M. standard time at insured's mailing address. Item 3. A. Worker's Compensation Insurance: Part One of the policy applies to the Workers Compensation Law of the states listed here: NEW JERSEY
B. Employers Liability Insurance: Part Two of the policy applies to work in each state listed in Item 3.A. The limits of our liability under Part Two are: Bodily Injury by Accident $500,000 each accident Bodily Injury by Disease $500,000 policy limit Bodily Injury by Disease $500,000 each employee C. Other States Insurance: Part Three of the policy applies to the states, if any, listed here: Item 4. The premium for this policy will be determined by our Manual of Rules, Classifications, Rates and Rating Plans. All information required below is subject to verification and change by audit. Code Estimated Total Per $100 of Estimated # Annual Remuneration Remuneration Annual Prem. SALESPERSONS OUTSIDE *8742 47000. .67 315.
0935 Second Injury Fund Surcharge (9.57%) 35. 0936 Uninsured Employers Fund Surch (0.23%) 1. Minimum Premium $ 197. Total Estimated Annual Premium $ 551. If Indicated here, interim adjust- (PAGE 1 LAST PAGE) ments of premium will be made: Semi-Annually Qtrly Mthly Dep. Premium $ This policy includes these endorsements and schedules: WC 290301
AGENCY NO. 984029 04-2787509 NJS Countersigned By____________________ WILLIAM GALLAGHER ASSOC. (Authorized Agent) 200 STATE STREET MARKETING OFFICE: W.Gallagher Agency BOSTON, MA 02109 NATIONAL WC. RE POOL 95282 DOC 6176A WCY CKE-4266a Ptd.in U.S.A. Copyright 1987 Nt'l Council on Compensation Insurance INSURED'S COPY WC 00 00 01A NEW JERSEY PART TWO LIMIT OF LIABILITY ENDORSEMENT Policy Symbol Policy Number Policy Period Effective Date of Endorsement WOC C4 17 93 78 8 10/31/95-10/31/96 Issued By (Name of Insurance Company) Insert the policy number. The remainder of the information is to be completed only when this endorsement is issued subsequent to the preparation of the policy. Worker's Compensation and Employers' Liability Policy This endorsement applies only to the insurance provided by Part Two (Employers Liability Insurance) because New Jersey is shown in item 3.A of the Information Page.
We may not limit our liability to pay damages for which we become legally liable to pay because of bodily injury to your employees if the bodily injury arises out of an in the course of employment that is subject to, and is compensable under, the workers compensation law of New Jersey.
CKE-7615 (4/84) Ptd. in U.S.A. WC 29 03 01
Case Name: Cambridge Biotech Corporation Month of: October 1 Through October 31, 1995
3. Bank Accounts Monthly Operating Report Bank Fleet Dependent First N'tl Flagship
G/L number 1.1113 1.1116 2.1129 1.1119.1
Account number 9372562275 551-50574 175-8828-5 1023381112
Balance ($11,509.29) $4,164.28 $201.24 $17,134.27
LESS:Disbursements (1,493,320.72) ($3,551.58) (512.81) (556,109.19)
Transfers In(Out) (601,635.59) $ 862.32 2,500.00 556,109.19
Balance (1) ($35,654.29) $ 1,475.02 $2,188.43 $17,134.27 Case Name: Cambridge Biotech Corporation As of: October 31, 1995 ------------- Payroll Escrow Cash Total Bank Name Nations Bk CBL Escrow N/A
G/L Number 2.1127 1.1131 xx.1150
Account Number 3933333731 N/A N/A
Beginning Bk Bal. $4,666.74 $100,000.00 $1,228.55 $115,885.79
LESS: Disburs. (40,348.33) (1,445.21) (2,095,287.84) Other:
Transfers In (Out) 40,892.63 1,271.45 (0.00)
Ending Book Balance (1) $5,211.04 $100,000.00 $1,054.79 $162,717.84
(1) Cash balances exclude short term investments of excess cash which totals $5,232,590 for the month. The total cash and short term investments decreased for the month of October by $756,415 and increased since the 7/7/94 filing date by $2,785,568.
Case Name: Cambridge Biotech Corporation Month of: October 1, through October 31, 1995
4. Post Petition Payments: Amount Date Check # Professionals: Bowditch & Dewey $ 26,618.50 10/30/95 72885 Bromberg & Sunstein 137.37 10/26/95 72839 Brown, Rudnick, Freed & Gesmer 50,512.77 10/30/95 72886 Brown, Rudnick, Freed & Gesmer 13,944.75 10/30/95 72886 Hale & Dorr 4,071.43 10/26/95 72848 Hale & Dorr 143.85 10/26/95 72848 Musket Research Associates 5,000.00 10/02/95 72339 Sterne, Kessler, Goldstein 22,177.75 10/06/95 72487 U.S. Trustee 5,000.00 10/20/95 72738 Venable, Baetjer & Howard 325.50 10/31/95 72935 Pre-Petition Debts:
Norwest Capital Lease Payment (2.3505) 387.27 10/12/95 72579 For Unsecured Debt: For Accrued Restructuring: Payments (TMS) 18,889.23 10/15/95 wire transfer Total Management Solutions 49.50 10/13/95 72613
Case Name: Cambridge Biotech Corporation
As of: October 31, 1995
Cash $1,287,187 $771,969 $863,230 $744,627 Instruments (i.e. CD's, Repo's, etc.) 1,322,553 2,925,553 3,235,553 2,001,807 (See OPR-3) 2,813,217 2,798,473 2,426,792 3,072,351 doubtful accounts (159,413) (153,957) (156,702) (156,702) of cost or market 4,771,316 4,727,916 4,588,153 3,989,809 Deposits 540,318 758,112 724,877 917,900 Other Receivables 38,793 68,301 19,737 81,504 TOTAL CURRENT ASSETS 10,613,971 11,896,367 11,701,640 10,651,296
EQUIPMENT, AT COST 27,437,762 27,440,087 27,443,284 27,400,776 NET PROPERTY, PLANT ---------- ---------- ---------- ---------- & EQUIP. 14,431,291 14,189,171 13,924,445 13,606,207
Receivables 7,303,275 7,226,960 7,334,353 7,321,297 Minority Interests 949,801 949,801 949,801 699,801 Receivable 120,000 120,000 120,000 120,000 Technology, net 2,645,753 2,588,888 2,519,249 2,449,611 Misc. other assets 83,666 83,543 85,921 103,250 NET OTHER ASSETS 11,102,495 10,969,192 11,009,324 10,693,959 TOTAL ASSETS $36,147,757 $37,054,730 $36,635,409 $34,951,462
See Accompanying Notes to Financial Statements Case Name: Cambridge Biotech Corporation
As of: October 31, 1995
Cash $121,108 $1,978,464 $141,017 $170,469 Instruments (i.e. CD's, Repo's, etc.) 2,744,989 6,518,489 8,396,774 8,171,774 (See OPR-3) 2,456,055 2,020,214 3,025,812 2,712,218 doubtful accounts (154,965) (154,988) (150,200) (150,754) of cost or market 4,144,276 4,313,167 3,965,668 4,066,730 Deposits 843,827 1,049,251 836,285 857,048 Other Receivables 112,983 65,389 92,624 81,742 TOTAL CURRENT ASSETS 10,268,273 15,789,986 16,307,980 15,909,227
EQUIPMENT, AT COST 27,395,379 27,392,289 24,776,430 24,782,465 NET PROPERTY, PLANT ---------- ---------- ---------- ---------- & EQUIP. 13,338,766 13,073,861 9,883,819 9,640,971
Receivables 7,320,594 2,180 510 0 Minority Interests 699,801 644,200 110,075 110,075 Receivable 120,000 120,000 0 0 Technology, net 2,400,000 2,328,114 2,094,494 2,034,338 Misc. other assets 110,888 72,832 105,791 106,768 NET OTHER ASSETS 10,651,283 3,167,326 2,310,870 2,251,181 TOTAL ASSETS $34,258,322 $32,031,173 $28,502,669 $27,801,379
See Accompanying Notes to Financial Statements Case Name: Cambridge Biotech Corporation
As of: October 31, 1995
(i.e., Commercial Paper, CD's 8,159,683 6,479,683 6,162,566 Accounts Receivable (See OPR-3) 2,721,157 3,221,150 3,111,506 Less: Allowance for doubtful accounts (151,583) (148,773) (155,829) Inventory, at lower of cost or market 3,909,665 3,966,171 4,053,493 Prepaid Expenses and Deposits 931,831 1,198,892 1,229,568 Other Receivables 64,335 77,139 80,229 TOTAL CURRENT ASSETS 15,579,431 15,008,476 14,655,222
PROPERTY, PLANT AND EQUIPMENT, AT COST 24,794,255 24,895,135 24,894,506 Less: Accumulated Depreciation (15,376,953) (15,809,227)(16,039,124) NET PROPERTY, PLANT & EQUIP. 9,417,302 9,085,908 8,855,382
Subsidiary & Interco. Receivables 0 0 1,100 Minority Interests 110,075 110,075 110,075 Long term Notes Receivable 0 0 0 Patents & Purchased Technology, net 1,980,640 1,812,398 1,766,695 Miscellaneous other assets 106,646 106,524 106,401 NET OTHER ASSETS 2,197,361 2,028,997 1,983,171 TOTAL ASSETS $27,194,094 $26,123,381 $25,493,775
See Accompanying Notes to Financial Statements Case Name: Cambridge Biotech Corporation
As of: OCTOBER 31, 1995
Repo's, etc.) 6,051,807 5,976,957 5,973,454 Accounts Receivable (See OPR-3) 3,123,410 3,557,453 3,407,884 Less: Allowance for doubtful accounts (159,019) (166,019) (173,017) Inventory, at lower of cost or market 3,920,770 3,903,542 3,744,522 Prepaid Expenses and Deposits 1,261,826 1,234,929 1,163,646 Other Receivables 78,432 75,165 76,573 TOTAL CURRENT ASSETS 14,435,126 14,720,104 14,537,499
PROPERTY, PLANT AND EQUIPMENT, AT COST 24,913,243 24,903,260 24,926,375 Less: Accumulated Depreciation (16,267,078) (16,669,411) (16,887,830) NET PROPERTY, PLANT & EQUIP. 8,646,165 8,233,849 8,038,545
Subsidiary & Interco. Receivables 0 0 0 Minority Interests 110,075 110,075 110,075 Long term Notes Receivable 0 0 0 Patents & Purchased Technology, net 1,724,305 1,634,189 1,571,552 Miscellaneous other assets 106,279 106,156 106,034 NET OTHER ASSETS 1,940,659 1,850,420 1,787,661 TOTAL ASSETS $25,021,950 $24,804,373 $24,363,705 See Accompanying Notes to Financial Statements Case Name: Cambridge Biotech Corporation
As of: OCTOBER 31, 1995
(i.e. Commercial Paper, 6,215,932 6,040,001 5,232,590 Accounts Receivable (See OPR-3) 3,179,522 3,246,157 4,344,761 Inventory, at lower of cost or Prepaid Expenses and Deposits 1,360,141 1,388,231 779,179 Other Receivables 79,128 85,007 87,124 TOTAL CURRENT ASSETS 14,768,873 14,787,238 14,335,303
PROPERTY, PLANT AND EQUIPMENT, AT COST 24,844,783 24,967,102 25,034,893 Less: Accumulated Depreciation (17,105,893) (17,525,164)(17,809,440) NET PROPERTY, PLANT & EQUIP. 7,838,890 7,441,938 7,225,453
& Interco. Receivables 0 0 0 Long Term Notes Receivable 0 0 0 Patents & Purchased Technology, net 1,527,563 1,339,284 1,246,871 Miscellaneous other assets 105,912 105,790 105,667 NET OTHER ASSETS 1,743,550 1,555,149 1,462,613 TOTAL ASSETS $24,351,313 $23,784,325 $23,023,369 See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation
As of: OCTOBER 31, 1995
POSTPETITION LIABILITIES (OPR-4) $0 $650,373 $1,141,051 $1,497,470
Priority Debt 223,302 182,012 182,012 68,035 Secured Debt 5,034,218 5,033,952 5,033,605 4,026,027 Unsecured Debt 5,523,250 5,524,993 5,524,993 5,555,313 TOTAL PRE PETITION ---------- ---------- ---------- --------- LIABILITIES 10,780,770 10,740,957 10,740,610 9,649,375
Accrued Restructuring 1,844,180 1,842,293 1,838,952 1,838,649 Deferred Revenue & Taxes 5,254,300 5,247,862 5,224,541 4,432,191 TOTAL LIABILITIES 17,879,250 18,481,485 18,945,154 17,417,685
PREFERRED STOCK 0 0 0 0 COMMON STOCK 260,570 260,570 260,570 260,570 PAID - IN CAPITAL 119,978,714 119,985,005 119,993,131 120,001,257
Post Filing Date - 1994 298,447 (592,669) (757,273) Post Filing Date - 1995 TOTAL SHAREHOLDERS' EQUITY 18,268,507 18,573,245 17,690,255 17,533,777
TOTAL LIABILITIES AND ---------- ---------- ---------- ---------- SHAREHOLDERS' EQUITY $36,147,757 $37,054,730 $36,635,409 $34,951,462 See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation
As of: OCTOBER 31, 1995
POSTPETITION LIABILITIES (OPR-4) $2,082,362 $2,755,184 $2,953,193
Priority Debt 68,035 67,035 41,405 Secured Debt 4,025,674 4,025,320 4,024,962 Unsecured Debt 5,557,217 5,554,724 5,648,205 TOTAL PRE PETITION --------- --------- ---------
Accrued Restructuring 1,818,204 1,818,204 378,170 Deferred Revenue & Taxes 4,478,161 7,969,504 6,788,574 TOTAL LIABILITIES 18,029,653 22,189,971 19,834,988
PREFERRED STOCK 0 0 0 COMMON STOCK 260,570 260,570 260,570 PAID - IN CAPITAL 120,009,383 120,017,509 120,024,635
Post Filing Date - 1994 (2,070,507) (8,897,193) (10,077,840) Post Filing Date - 1995 TOTAL ACCUMULATED DEFICIT (104,041,284) (110,436,877)(111,617,524) TOTAL SHAREHOLDERS' EQUITY 16,228,669 9,841,202 8,667,681
TOTAL LIABILITIES AND ---------- ---------- ---------- SHAREHOLDERS' EQUITY $34,258,322 $32,031,173 $28,502,669 See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation
As of: OCTOBER 31, 1995
POST PETITION LIABILITIES (OPR-4) $3,406,350 $3,711,705 $3,844,426
Priority Debt 41,405 41,405 37,685 Secured Debt 4,024,601 4,024,238 4,023,872 Unsecured Debt 5,607,221 5,609,144 5,609,724 TOTAL PRE PETITION LIABILITIES 9,623,227 9,674,787 9,671,281
Accrued Restructuring 378,170 374,564 371,904 Deferred Revenue & Taxes 6,481,588 6,092,576 5,720,237 Income Taxes Payable 479 479 1,299 TOTAL LIABILITIES 19,939,814 19,854,111 19,609,147
MINORITY INTEREST 1,193 1,193 2,800
PREFERRED STOCK 0 0 0 COMMON STOCK 260,570 260,570 260,570 PAID - IN CAPITAL 120,032,761 120,040,887 120,049,013
Post Filing Date - 1994 (10,077,840) (10,077,840) (10,077,840) Post Filing Date - 1995 (815,435) (1,345,143) (2,180,625) TOTAL SHAREHOLDERS' EQUITY 7,860,372 7,338,790 6,511,434
TOTAL LIABILITIES AND ---------- ---------- ---------- SHAREHOLDERS' EQUITY $27,801,379 $27,194,094 $26,123,381 See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation
As of: OCTOBER 31, 1995
POST PETITION LIABILITIES (OPR-4) $4,049,265 $4,344,761 $4,873,571
Priority Debt 36,319 36,319 34,954 Secured Debt 4,023,502 4,023,130 4,022,755 Unsecured Debt 5,594,925 5,594,925 5,600,781 TOTAL PRE PETITION LIABILITIES 9,654,746 9,654,374 9,658,490
Accrued Restructuring 370,929 370,929 366,089 Deferred Revenue 5,401,416 5,083,970 4,753,389 Income Taxes Payable 1,299 1,299 2,335 TOTAL LIABILITIES 19,477,655 19,455,333 19,653,874
MINORITY INTEREST 2,800 2,800 4,832
PREFERRED STOCK 0 0 0 COMMON STOCK 260,570 260,570 260,570 PAID - IN CAPITAL 120,057,139 120,065,265 120,073,391
Post Filing Date - 1994 (10,077,840) (10,077,840) (10,077,840) Post Filing Date - 1995 (2,686,865) (3,144,494) (3,570,770) TOTAL SHAREHOLDERS' EQUITY 6,013,320 5,563,817 5,145,667
TOTAL LIABILITIES AND ---------- ---------- ---------- SHAREHOLDERS' EQUITY $25,493,775 $25,021,950 $24,804,373 See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation
As of: OCTOBER 31, 1995
POST PETITION LIABILITIES (OPR-4) $5,422,110 $5,594,484 $5,774,517
Priority Debt 36,319 36,319 36,319 Secured Debt 4,022,376 4,021,995 4,021,611 Unsecured Debt 5,603,755 5,603,755 5,603,755 TOTAL PRE PETITION LIABILITES 9,662,450 9,662,069 9,661,685
Accrued Restructuring 364,055 321,395 274,694 Deferred Revenue 4,444,846 4,132,160 3,798,366 Income Taxes Payable 2,335 2,335 3,128 TOTAL LIABILITES 19,895,796 19,712,443 19,512,390
MINORITY INTEREST 4,832 4,832 6,386
PREFERRED STOCK 0 0 0 COMMON STOCK 260,570 260,570 260,570 PAID - IN CAPITAL 120,073,391 120,073,391 120,073,391
Through Filing Date (101,539,684)(101,539,684) (101,539,684) Post Filing Date - 1994 (10,077,840) (10,077,840) (10,077,840) Post Filing Date - 1995 (4,253,360) (4,082,399) (4,450,888) TOTAL ACCUMULATED DEFICIT (115,870,884)(115,699,923) (116,068,412) TOTAL SHAREHOLDERS' EQUITY 4,463,077 4,634,038 4,265,549
TOTAL LIABILITIES AND ---------- ----------- ----------- SHAREHOLDERS' EQUITY $24,363,705 $24,351,313 $23,784,325 See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation
As Of: OCTOBER 31, 1995
POST PETITION LIABILITIES (OPR-4) $4,950,424 PRE-PETITION LIIABILITIES: SHAREHOLDERS' EQUITY (DEFICIT): ACCUMULATED DEFICIT: Case Name: Cambridge Biotech Corporation Form: OPR-3
As of: OCTOBER 31, 1995
0 - 30 31 - 60 Date of Filing:July 7, 1994 2,813,216.84 2,110,219.71 452,069.57 Allowance for doubtful accts (159,413.23)
Month: July 31, 1994 2,798,472.98 1,289,104.11 1,238,841.68 Allowance for doubtful accts (153,956.56)
Month: August 31, 1994 2,426,792.24 1,669,036.84 267,054.03 Allowance for doubtful accts (156,701.89)
Month: Sept. 30, 1994 3,072,351.16 2,402,728.52 365,353.30 Allowance for doubtful accts (156,701.89)
Month: October 31, 1994 2,456,054.54 1,406,348.28 750,784.77 Allowance for doubtful accts (154,964.89)
Month: Nov. 30, 1994 2,020,214.59 1,322,881.77 350,696.71 Allowance for doubtful accts (154,988.00)
Month: Dec. 31, 1994 3,025,812.46 2,407,489.50 389,515.89 Allowance for doubtful accts (150,200.00)
Month: January 31, 1995 2,712,217.41 1,602,468.56 854,807.89 Allowance for doubtful accts (150,753.71)
Month: Feb. 28, 1995 2,721,156.82 1,972,020.47 187,953.54 Allowance for doubtful accts (151,582.78)
Month: March 31, 1995 3,221,150.56 2,380,366.33 671,660.83 Allowance for doubtful accts (148,773.14)
Month: April 30, 1995 3,111,505.76 1,660,592.76 1,250,431.86 Allowance for doubtful accts (155,829.15)
Month: May 31, 1995 3,123,410.36 2,153,951.07 257,035.14 Allowance for doubtful accts (159,019.25)
Month: June 30, 1995 3,557,453.25 2,902,109.40 332,562.82 Allowance for doubtful accts (166,019.26)
Month: July 31, 1995 3,407,884.36 2,212,905.66 982,984.93 Allowance for doubtful accts (173,017.12)
Month: August 31, 1995 3,179,522.37 2,183,815.66 281,811.74 Allowance for doubtful accts. (180,037.08)
Month: September 30, ,1995 3,246,157.13 2,482,719.49 515,865.14 Allowance for doubtful accts. (187,341.75)
Month: October 31, 1995 4,344,760.98 2,458,054.64 1,491,457.97 Allowance for doubtful accts. (194,793.10)
Case Name: Cambridge Biotech Corporation Form: OPR-3
As of: OCTOBER 31, 1995
Date of Filing:July 7, 1994 2,813,216.84 56,398.93 194,528.63 Allowance for doubtful accts (159,413.23) (159,413.23)
Month: July 31, 1994 2,798,472.98 128,524.10 142,003.09 Allowance for doubtful accts (153,956.56) (11,953.47) (142,003.09)
Month: August 31, 1994 2,426,792.24 297,637.99 193,063.38 Allowance for doubtful accts (156,701.89) (156,701.89)
Month: Sept. 30, 1994 3,072,351.16 77,168.82 227,100.52 Allowance for doubtful accts (156,701.89) (156,701.89)
Month: October 31, 1994 2,456,054.54 87,405.93 211,515.56 Allowance for doubtful accts (154,964.89) (154,964.89)
Month: Nov. 30, 1994 2,020,214.59 188,381.49 158,254.62 Allowance for doubtful accts (154,988.00) (154,988.00)
Month: Dec. 31, 1994 3,025,812.46 65,733.45 163,073.62 Allowance for doubtful accts (150,200.00) (150,200.00)
Month: January 31, 1995 2,712,217.41 92,582.75 162,358.21 Allowance for doubtful accts (150,753.71) (150,753.71)
Month: Feb. 28, 1995 2,721,156.82 407,769.97 153,412.84 Allowance for doubtful accts (151,582.78) (151,582.78)
Month: March 31, 1995 3,221,150.56 45,696.46 123,426.94 Allowance for doubtful accts (148,773.14) (25,346.20) (123,426.94)
Month: April 30, 1995 3,111,505.76 103,220.04 97,261.10 Allowance for doubtful accts (155,829.15) (58,568.05) (97,261.10)
Month: May 31, 1995 3,123,410.36 631,903.39 80,520.76 Allowance for doubtful accts (159,019.25) (78,498.49) (80,520.76)
Month: June 30, 1995 3,557,453.25 52,189.56 270,591.47 Allowance for doubtful accts (166,019.26) (166,019.26)
Month: July 31, 1995 3,407,884.36 125,622.71 86,371.06 Allowance for doubtful accts (173,017.12) (86,646.06) (86,371.06)
Month: August 31, 1995 3,179,522.37 559,210.76 154,684.21 Allowance for doubtful accts. (180,037.08) (25,352.87) (154,684.21)
Month: September 30, 1995 3,246,157.13 84,128.64 163,443.86 Allowance for doubtful accts (187,341.75) (23,897.89) (163,443.86)
Month: October 31, 1995 4,344,760.98 230,772.04 164,476.33 Allowance for doubtful accts (194,793.10) (30,316.77) (164,476.33)
Case Name: Cambridge Biotech Corporation Form OPR-4
Schedule of Post Petition Liabilities As of: OCTOBER 31, 1995
DATE DATE TOTAL 0-30 31-60 INCURRED DUE DUE DAYS DAYS TAXES PAYABLE: Federal Income Taxes W/H 0 State Income Tax Withheld 0 State Sales & Use Tax Various Various 5,155 1,155 2,000 State Franchise Tax Various Various 3,998 1,573 1,000 Personal Property Tax Various Various 53,344 9,344 9,000 TOTAL TAXES PAYABLE 62,497 12,072 12,000
PAYABLE Various Various 24,286 3,286 3,000
Accounts Payable Various Various 514,400 341,777 20,977 Accrued Expenses Various Various 2,920,416 875,416 430,000 Incentive Plan 7/8/94 Emerge 1,428,825 TOTAL ACCOUNTS --------- --------- ------- PAYABLE & OTHER 4,863,641 2,646,018 450,977 TOTAL POST PETITION LIABILITIES $4,950,424 $2,661,376 $465,977
Case Name: Cambridge Biotech Corporation Form OPR-4
Schedule of Post Petition Liabilities As of: OCTOBER 31, 1995
DATE DATE TOTAL 61-90 OVER 90 INCURRED DUE DUE DAYS DAYS TAXES PAYABLE: Federal Income Taxes W/H 0 State Income Tax Withheld 0 State Sales & Use Tax Various Various 5,155 2,000 State Franchise Tax Various Various 3,998 1,000 425 Personal Property Tax Various Various 53,344 9,000 26,000 TOTAL TAXES PAYABLE 62,497 12,000 26,425
PAYABLE Various Various 24,286 3,000 15,000
Accounts Payable Various Various 514,400 111,712 39,934 Accrued Expenses Various Various 2,920,416 390,000 1,225,000 Incentive Plan 7/8/94 Emerge 1,428,825 1,428,425 TOTAL ACCOUNTS --------- ------- --------- PAYABLE & OTHER 4,863,641 501,712 1,264,934 TOTAL POST PETITION LIABILITIES $4,950,424 $516,712 $1,306,359
Case Name: Cambridge Biotech Corporation Period: July 8, 1994 - October 31, 1995
NET REVENUE (INCOME) $1,990,463 $1,297,330 $2,870,689
TOTAL COST OF GOODS SOLD 677,628 872,451 1,424,705 GROSS PROFIT 1,312,835 424,879 1,445,984
Selling and Marketing 86,253 117,890 129,345 General and Administrative 330,964 404,626 548,839 Research and Development 223,590 359,735 288,595 Other: Regulatory 18,336 22,767 18,815 Other: Misc. (Income)/Expense (13,655) (8,693) (45,076) TOTAL OPERATING EXPENSES 645,488 896,325 940,518
DEPRECIATION, TAXES OR ------- ------- ------- EXTRAORDINARY EXPENSES 667,347 (471,446) 505,466
CHAPTER 11 EXPENSES (97,310) (113,110) (112,501)
INTEREST EXPENSE (27,145) (38,638) (31,839)
INCOME TAX EXPENSE 0 0 0
NET INCOME (LOSS) $298,447 ($891,116) ($164,604) See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation Period: July 8, 1994 - October 31, 1995
NET REVENUE (INCOME) $1,089,394 $1,073,137 $3,369,904
TOTAL COST OF GOODS SOLD 781,526 637,644 1,201,755 GROSS PROFIT 307,868 435,493 2,168,149
Selling and Marketing 130,164 137,154 157,174 General and Administrative 503,279 497,797 931,930 Research and Development 526,086 376,756 871,580 Other: Regulatory 41,259 26,668 32,231 Other: Misc. (Income)/Expense 1,583 (28,619) 929,547 TOTAL OPERATING EXPENSES 1,202,371 1,009,756 2,922,462
DEPRECIATION, TAXES OR ------- ------- ------- EXTRAORDINARY EXPENSES (894,503) (574,263) (754,313)
CHAPTER 11 EXPENSES (130,808) (105,473) (42,975)
INTEREST EXPENSE (25,880) (34,149) 131,775
INCOME TAX EXPENSE 0 0 8,493
NET INCOME (LOSS) $(1,313,234) $(6,826,686) $(1,180,647) See Accompanying Notes to Financial Statements.
Case Name: Cambridge Biotech Corporation Period: July 8, 1994 - October 31, 1995
NET REVENUE (INCOME) $1,396,377 $1,766,809 $2,778,865
TOTAL COST OF GOODS SOLD 757,549 920,742 1,509,887 GROSS PROFIT 638,828 846,067 1,268,978
Selling and Marketing 120,148 116,908 179,619 General and Administrative 502,352 451,508 942,244 Research and Development 404,257 395,094 664,295 Other: Regulatory 33,717 31,186 35,613 Other: Misc. TOTAL OPERATING EXPENSES 1,007,560 950,665 1,778,226
DEPRECIATION, TAXES OR ------- ------- ------- EXTRAORDINARY EXPENSES (368,732) (104,598) (509,248)
CHAPTER 11 EXPENSES (98,405) (96,420) (78,629)
INTEREST EXPENSE (32,384) (31,021) 58,559
INCOME TAX EXPENSE 0 4,116 (4,936)
MINORITY INTEREST (703) 0 (1,607) NET INCOME (LOSS) ($815,435) ($529,708) ($835,482) See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation Period: July 8, 1994 - October 31, 1995
NET REVENUE (INCOME) $1,642,292 $2,188,446 $2,959,667
TOTAL COST OF GOODS SOLD 726,804 1,086,787 1,642,248 GROSS PROFIT 915,488 1,101,659 1,317,419
Selling and Marketing 139,342 152,110 172,675 General and Administrative 490,893 572,129 824,781 Research and Development 392,539 408,496 430,260 Other: Regulatory 17,577 29,652 41,658 Other: Misc. TOTAL OPERATING EXPENSES 992,001 1,116,255 1,386,025
DEPRECIATION, TAXES OR ------ ------ ------- EXTRAORDINARY EXPENSES (76,513) (14,596) (68,606)
CHAPTER 11 EXPENSES (99,270) (113,541) (123,086)
INTEREST EXPENSE (32,995) (33,974) 63,298
INCOME TAX EXPENSE 0 0 (1,036)
NET INCOME (LOSS) ($506,240) ($457,629) ($426,276) See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation Period: July 8, 1994 - October 31, 1995
NET REVENUE (INCOME) $1,938,622 $2,373,327 $2,730,414
TOTAL COST OF GOODS SOLD 1,101,074 946,529 1,357,642 GROSS PROFIT 837,548 1,426,798 1,372,772
Selling and Marketing 134,861 135,741 103,055 General and Administrative 446,284 330,294 918,735 Research and Development 498,460 397,805 414,180 TOTAL OPERATING EXPENSES 1,093,669 878,508 1,347,330
DEPRECIATION, TAXES OR ------- ------- --------- EXTRAORDINARY EXPENSES (256,121) 548,290 25,442
CHAPTER 11 EXPENSES (138,916) (97,785) (105,820)
INTEREST EXPENSE (1,589) 6,064 (1,583)
INCOME TAX EXPENSE 0 0 (793)
MINORITY INTEREST 0 0 (1,554)
INCOME (EXPENSE) 0 0 0 NET INCOME (LOSS) $(682,590) $170,961 ($368,489) See Accompanying Notes to Financial Statements. CASE NAME: Cambridge Biotech Corporation Period: July 8, 1994 - October 31, 1995 NET REVENUE (INCOME) $2,795,039 $34,260,775 COST OF GOODS SOLD: TOTAL COST OF GOODS SOLD 1,242,412 16,887,383 OPERATING EXPENSES: Selling and Marketing 81,641 2,094,080 General & Administrative 442,043 9,138,698 Research & Development 364,558 7,016,286 Other: Misc. (Income)/Expense (48,377) 327,378 TOTAL OPERATING EXPENSES 874,497 19,041,656 INCOME BEFORE INTEREST, DEPRECIATION,-------- --------- CHAPTER 11 EXPENSES (25,411) (1,579,460) INCOME TAX EXPENSE 0 5,844 EXTRAORDINARY INCOME (EXPENSE) 0 (6,013,091) NET INCOME (LOSS) 366,836 (14,161,892) Case Name: Cambridge Biotech Corporation Statement of Sources and Uses of Cash Period of: July 8, 1994 - October 31, 1995
Income (Loss) From Operations $298,447 ($891,116) ($164,604) & Other Non-Cash Items 301,164 322,366 542,532 CASH GENERATED FROM OPERATIONS 599,611 (568,750) 377,928
Prepaid Expenses & Deposits 33,235 Patents & Purchased Technology 18,612 Proceeds on sale of foreign Proceeds on sale of minority interest
Post-Petition Liabilities 650,372 490,679 356,419 TOTAL SOURCES OF CASH (A) 1,380,851 517,917 2,650,160
Prepaid Expenses & Deposits 217,794 193,023 Property, Plant & Equipment 2,325 3,197 37,492 Other non-current assets 2,378 17,329 Short Term Investments 1,603,000 310,000
Accrued Restructuring 1,886 3,341 304 Secured Debt and Capital Leases 266 347 1,007,578 TOTAL USES OF CASH (B) 1,896,069 426,656 2,768,763 NET SOURCE (USE) OF CASH (A-B=NET) (515,218) 91,261 (118,603)
CASH - BEGINNING BALANCE (See OPR-1) 1,287,187 771,969 863,230 CASH - ENDING BALANCE (See OPR-1) $771,969 $863,230 $744,627 See Accompanying Notes to Financial Statements Case Name: Cambridge Biotech Corporation Statement of Sources and Uses of Cash Period of: July 8, 1994 - October 31, 1995
Income (Loss) From Operations ($1,313,234)($6,826,686) ($1,180,647) & Other Non-Cash Items 695,379 5,591,211 813,729 CASH GENERATED FROM OPERATIONS (617,855) (1,235,475) (366,918)
Prepaid Expenses & Deposits 74,073 212,966 Property, Plant & Equipment 80,647 3,090 2,585,034 Patents & Purchased Technology 449,705 Proceeds on sale of foreign Proceeds on sale of minority interest 534,125 Proceeds on note receivable 120,000
Pre-Petition Liabilities 1,904 230,000 120,000 Post-Petition Liabilities 168,807 557,512 101,997 Deferred Revenue 88,212 3,528,549 152,057 TOTAL SOURCES OF CASH (A) 335,800 6,037,579 3,908,430
Prepaid Expenses & Deposits 205,424 Patents & Purchased Technology 1,756 93,988 Property, Plant & Equipment 6,513 Other non-current assets 7,638 34,059 Short Term Investments 743,182 3,773,500 1,878,285
Accrued Restructuring 20,445 0 1,440,034 Secured Debt and Capital Leases 352 355 358 TOTAL USES OF CASH (B) 959,319 4,180,223 5,745,877 NET SOURCE (USE) OF CASH (A-B=NET) (623,519) 1,857,356 (1,837,447)
CASH - BEGINNING BALANCE (See OPR-1) 744,627 121,108 1,978,464 CASH - ENDING BALANCE (See OPR-1) $121,108 $1,978,464 $141,017 See Accompanying Notes to Financial Statements Case Name: Cambridge Biotech Corporation Statement of Sources and Uses of Cash Period of: July 8, 1994 - October 30, 1995
Non-Cash Items 110,375 140,458 424,199 CASH GENERATED FROM ------- ------- -------
Short Term Investments 225,000 12,091 1,680,000
TOTAL SOURCES OF CASH (A) 198,657 (6,245) 1,342,292
Accrued Restructuring 0 3,607 2,660 Capital Leases 361 363 367 TOTAL USES OF CASH (B) 169,205 219,881 1,072,421
NET SOURCE (USE) OF CASH
(See OPR-1) 141,017 170,469 (55,657)
CASH-ENDING BALANCE ------ ------- ------- (See OPR-1) $170,469 ($55,657) $214,214 See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation Statement of Sources and Uses of Cash Period of: July 8, 1994 - October 31, 1995
Non-Cash Items 171,744 166,848 407,066 CASH GENERATED FROM ------- ------- -------
Short Term Investments 317,117 110,759 74,850
Post-Petition Liabilities 95,350 112,840 418,355 TOTAL SOURCES OF CASH (A) 195,301 67,338 527,910
Capital Leases 369 373 375 TOTAL USES OF CASH (B) 235,826 83,127 547,733
NET SOURCE (USE) OF CASH ------ ------ ------
(See OPR-1) 214,214 173,689 157,900
CASH-ENDING BALANCE ------ ------ ------ (See OPR-1) $173,689 $157,900 $138,077 See Accompanying Notes to Financial Statements. Case Name: Cambridge Biotech Corporation Statement of Sources and Uses of Cash Period of: July 8, 1994 - October 31, 1995
SOURCES OF CASH: ------ ------- --------- Non-Cash Items 1,241 (31,548) 273,879 CASH GENERATED FROM ------- -------- ---------
Accounts Receivables 156,567 235,382 44,430 Short Term Investments 3,503 175,931 Increase in Liabilities: Post-Petition Liabilities 519,932 172,374 180,826 TOTAL SOURCES OF CASH (A) 233,295 609,226 311,495
Other Receivables 1,408 2,555 9,243
Accrued Restructuring 2,035 42,660 46,702 Capital Leases 378 381 384 TOTAL USES OF CASH (B) 26,935 521,941 631,495
NET SOURCE (USE) OF CASH ------- ------- -------
(See OPR-1) 138,077 344,437 431,722
CASH - ENDING BALANCE ------- ------- ------- (See OPR-1) $344,437 $431,722 $111,722 See Accompanying Notes to Financial Statements. CASE NAME: Cambridge Biotech Corporation Statement of Sources and Uses of Cash Period of: July 8, 1994 - October 31, 1995
Income (Loss) From Operations $366,836 ($14,161,892) & Other Non-Cash Items 101,327 10,031,970 CASH GENERATED FROM OPER. 468,163 (4,129,922) Add: Decrease in Assets: Prepaid Expenses & Deposits 609,052 1,027,506 Property, Plant & Equipment 2,669,401 Patents & Purchased Tech. 468,317 Proceeds on note receivable 120,000 Increase in Liabilities: TOTAL SOURCES OF CASH (A) 2,064,669 20,374,675 USES OF CASH: Increase in Assets: Prepaid Expenses & Deposits 1,266,366 Patents & Purchased Technology 12,524 282,629 Property, Plant & Equipment 67,791 336,230 Decrease in Liabilities: TOTAL USES OF CASH (B) 2,013,673 21,499,144 NET SOURCE (USE) OF CASH (A-B=NET) 50,996 (1,124,469) CASH-BEGINNING BALANCE (See OPR-1) 111,722 1,287,187 CASH-ENDING BALANCE (See OPR-1) 162,718 $162,718
1. The Company's auditors have completed the December 31, 1994 year end audit. The Company has restated its Monthly Operating Reports to reflect the 1994 audit adjustments. Changes have been made to prior periods to reflect these adjustments in 1994 and the effect of those adjustments on the 1995 monthly financial statements.
2. The Company's monthly inventory valuations for 1995 and the amount of reserves reflect management's best judgement. However the Company is currently reviewing its inventory valuations. The Company has plans to conduct physical inventories at its Rockville, MD; Shrewsbury, MA; and Worcester, MA facilities. The physical counts and management's review may result in adjustments to the monthly inventory valuations. Manage- ment believes that these adjustments will not have a material effect on the results of operations, cash flow, or financial position of the Company.
3. As part of the 1994 year end audit, the Company has written down its investment in GRF Corporation to a carrying value of $110,075, which was GRF's cash on hand at December 31, 1994.
4. On November 30, 1994, the Company sold its Irish subsidiary, Cambridge Biotech, Ltd., to SelfCare, Inc. The loss of the discontinued opera- tions and the disposition of the subsidiary were included in the 1994 audited financial statements.
5. The Company entered into an agreement with BASF Bioresearch Corporation for them to manufacture three batches of QS-21 product including Good Manufacturing Practice (GMP) documentation. The agreement calls for an initial payment of $175,000 plus milestone payments totaling an additional $525,000. Included in the March 1995 results is the initial payment of $175,000. The balance of $525,000 was being held in escrow and is included in Prepaid expenses and Deposits in the accompanying balance sheet (Form OPR-1). The July 1995 results include an accrual for $175,000 for the first mildestone payment. In September 1995, the Company accounted for the second and third milestone payments totaling $350,000 by recording inventory of $276,750 and research expense of $73,250. Upon receiving the QS-21 product in October 1995, the Company authorized the release of the $525,000 held in the escrow account for payment to BASF.
6. In September 1992, the Company purchased a 15% interest in ImmuCell Corporation for $600,000, and had advanced $120,000 to ImmuCell between June 1993 and April 1994. As a result of negotiations with ImmuCell in September 1994, the carrying value of the Company's investment was reduced by $250,000 to reflect an estimate of the net realizable value. In November 1994, the carrying value of the investment was further reduced to $308,571, which the Company received in December 1994 from ImmuCell to purchase all of the shares owned by the Company. The $120,000 advance was paid in full in December 1994.
7. On October 27, 1994, the Company's plan to institute a retention bonus plan for some of its employees was approved by the United States Bankruptcy Court for the District of Massachusetts. The plan called for bonuses to be paid in stock of the reorganized Company upon emergence from Chapter 11 reorganization. As of October 31, 1995, the Company has recorded compensation expense of $1,428,825, which is a non-cash expense.
8. On July 7, 1994, the date of the Company's Chapter 11 filing, it had a $1,007,228 note payable to Fleet Credit Corporation (Fleet) secured by $1,025,553 of certificates of deposit pledged to Fleet. The certificates of deposit matured and were used to liquidate the debt in accordance with relief from stay granted by the Court. Included in the Company's short-term investment balances for July 7, July 31, and August 31, 1994 were $1,025,553 of CD's pledged to Fleet Credit Corporation.
9. On March 8, 1995, an Adversary Proceeding No. 95-4074 was commenced in the United States Bankruptcy Court, District of Massachusetts, Western Division, by Institut Pasteur and Genetic Systems Corporation alleging patent infringement and asking for damages and injunctive relief. The Company filed an answer and counterclaim denying the plaintiffs' allegations and seeking a declaration of the Company's license rights to two of the three patents at issue. On September 1, 1995, the United States Bankruptcy Court issued summary judgment upholding the Company's license to two patents issued to Institut Pasteur to commercialize diagnostic tests for the HIV-2 strain of the AIDS virus. The Court also ruled that the Company's HIV-1 Western blot confirmatory test for HIV-1 infringes a third patent issued to Institut Pasteur, and enjoined the Company from the manufacture and sale of the HIV-1 Western blot test. The Company has appealed the portion of the opinion relating to the patent covering the HIV-1 Western blot test and the injunction has been stayed pending further proceedings. Institut Pasteur and Genetic Systems Corporation have appealed the Bankruptcy Court's decision on Institut Pasteur's patents concerning HIV-2. On November 22 and 30, 1995, the Bankruptcy Court held a hearing to assess damages with respect to the third patent. The Company is also seeking to obtain a license to the third patent from Institut Pasteur. The HIV-1 Western blot test accounted for less than 15% of the Company's diagnostic revenues in 1994.
10. In September 1995, the Company received correspondence from one of its customers claiming that the Company owes it payments totaling $837,220 representing claimed adjustments to the invoiced prices of product sold to the customer during the first seven and one-half months of 1995. As the Company sold product at prices which the Company believes were agreed to among the parties and which were reflected on purchase orders prepared by the customer, the Company vigorously disputes this claim and has communicated this position to the customer. Although the Company is unable to predict with certainty the outcome of this claim, the Company believes that it is probable that it will arrive at a resolution to this matter which will not materially adversely affect the Company's financial position. | 8-K | EX-99 | 1996-01-12T00:00:00 | 1996-01-11T17:32:34 |
0000898430-96-000090 | 0000898430-96-000090_0000.txt | QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 1995
(Exact Name of Registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
1061 Cudahy Place, San Diego, California 92110 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 619/275-1400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Common Stock as of January 10, 1996 7,706,655
(See accompanying notes to consolidated condensed financial statements)
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(See accompanying notes to consolidated condensed financial statements)
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(See accompanying notes to consolidated condensed financial statements)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, WD-40 Company Ltd. (U.K.), WD-40 Products (Canada) Ltd. and WD-40 Company (Australia) Pty. Ltd. All significant intercompany transactions and balances have been eliminated.
The financial statements included herein have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited financial information for the interim periods shown reflects all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation thereof. These financial statements and notes thereto should be used in conjunction with the financial statements and notes thereto included in the Company's 1995 Annual Report to Shareholders, which statements and notes are incorporated by reference in the Company's Annual Report on Form 10-K for the year ended August 31, 1995.
Effective September 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" prospectively. Short-term investments consist of debt securities of high credit quality financial institutions, government agencies and corporate entities which are recorded at amortized cost and classified as "held-to-maturity". Unrealized gains and losses are not significant at November 30, 1995.
Earnings per share are based upon the weighted average number of shares outstanding during the period increased by the effect of dilutive stock options, when applicable, using the treasury stock method.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company is party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or will not have a material adverse effect on the Company's financial position or results of operations.
The Company signed a definitive agreement in November of 1995 for the acquisition of the 3-IN-ONE oil brand from affiliates of Reckitt & Colman plc. Upon signing the agreement, the Company made a $1,600,000 deposit which is included in the purchase price of approximately $15,000,000. The acquisition is expected to be completed in early December of 1995.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
First Quarter of Fiscal Year 1996 compared to First Quarter of Fiscal Year 1995
Consolidated net sales for the quarter were $27,612,000, a decrease of 7.2% or $2,157,000 from a year ago. The soft retail economy and the timing of some promotional activity in North America accounted for the decline in sales. The currency exchange was neutral for the quarter. Management anticipates sales improving in the subsequent quarters.
Cost of product sold remained relatively flat at 42.3% of net sales this quarter versus 42.4% a year ago. Management believes that costs have stabilized and that there will be minimal inflationary impact for the remainder of fiscal year 1996.
Selling, general and administrative expenses decreased $196,000 or 3.3% in the first quarter of fiscal year 1996 as compared to the same period in 1995. Such expenses as a percentage of net sales increased this quarter to 20.9% versus 20.0% last year.
Advertising and sales promotion expenses decreased $685,000 or 25.2% due entirely to the timing of the overall promotional activities. Management believes that these expenses will return to the historical level of 9-10% of net sales by fiscal year end.
Net income decreased $254,000 or 4.6% due primarily to lower net sales. Net income as a percentage of net sales this quarter was 19.1% versus 18.5% in fiscal year 1995.
Net sales decreased $1,900,000 or 9.3%. Export sales to Latin America and the Pacific Rim increased approximately 40%; however, this was offset by very soft domestic sales. The lagging retail economy and timing of promotional activities were the cause of the lower net sales.
Cost of product sold was flat at 43.1% of net sales this quarter as compared to 43.0% in fiscal year 1995.
Selling, general and administrative expenses decreased $103,000 or 2.5% but increased as a percentage of net sales to 21.9% versus 20.4% last year.
Advertising and sales promotion expenses decreased $326,000 or 1.7% and decreased as a percentage of net sales to 8.3% versus 9.1% in 1995.
As a result, net income was down by $574,000 or 16.6%.
Net sales for the quarter decreased $59,000 or 0.9% due to reduced net sales in the U.K.; however, this was partially offset by increased sales to Europe and the Middle East.
Cost of product sold increased slightly to 38.9% of net sales versus 38.4% in fiscal year 1995.
As a percentage of net sales, selling, general and administrative expenses were 20.0% versus 21.3% last year and advertising and sales promotion expenses were also down to 4.6% versus 8.4% in 1995. This decrease is due solely to the timing of promotional activities.
As a result of the factors described above, net income increased $452,000 or 28.8%.
Net sales decreased $186,000 or 7.8% due to the retail economy in Canada.
Cost of product sold as a percentage of net sales was 46.6% versus 49.6% last year reflecting a slight improvement in Canada.
Net income was down 24.6% or $132,000 due primarily to the decrease in net sales.
The Company did not initiate any price increases during this quarter.
Cash and cash equivalents increased $9,169,000 during the three months ended November 30, 1995 versus a decrease of $3,353,000 for the same period of last year.
Interest and Other Income, Net
Net interest income decreased by $178,000 due to lower interest rates and reduced short-term investments. Other income, net increased by $81,000 primarily due to the increase of exchange gains in the U.K.
The current ratio of 5.1 to one on November 30, 1995 was greater than the current ratio of 4.5 to one on August 31, 1995 due mainly to decreases of accrued payroll and related liabilities.
The Company's primary source of liquidity are funds provided by operations. The Company's cash flows from operations are expected to provide sufficient funds to meet both short and long-term operating needs, as well as future dividends. Capital expenditures for fiscal year 1996 are expected to total approximately $1,525,000 principally for replacement of aged vehicles and updating of computer equipment.
On December 8, 1995, the Company acquired all of the worldwide 3-IN-ONE brand trademarks and other intangible assets relating to the sale of 3-IN-ONE brand lubricating products from affiliates of Reckitt & Colman plc. The Company paid cash in the amount of $15,000,000 for the trademarks and other intangible assets. None of the funds required for the acquisition were borrowed.
On December 8, 1995 the acquisition of the 3-IN-ONE oil brand from affiliates of Reckitt & Colman plc was completed. 3-IN-ONE is sold in more than 15 countries throughout the world with sales of approximately $13 million. Management feels this acquisition will provide synergetic growth opportunities for both the 3-IN-ONE and WD-40 brands.
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended November 30, 1995; however, a Form 8-K was filed on December 22, 1995 regarding the 3-IN-ONE acquisition.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: January 11, 1996 /s/ ROBERT D. GAL | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T14:35:04 |
0000950005-96-000010 | 0000950005-96-000010_0001.txt | Harding Associates, Inc. a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Harding Associates, Inc. Harding Associates, Inc. was originally incorporated under the name Harding Merger Subsidiary, Inc., and the original Certificate of Incorporation of said corporation was filed with the Secretary of State of the State of Delaware on July 9, 1987.
2. This Restated Certificate of Incorporation only restates and integrates but does not further amend the provisions of the Certificate of Incorporation of this corporation, as heretofore amended or supplemented.
3. Pursuant to Section 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation was adopted by the Board of Directors of the corporation at a meeting on July 30, 1987, without of vote of the stockholders.
4. The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby restated to read in its entirety as follows:
FIRST: The name of this Corporation is HARDING ASSOCIATES, INC.
SECOND: The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.
FOURTH: The corporation is authorized to issue two classes of shares, designated respectively `Common' and `Preferred.' The total number of Common shares authorized is ten million (10,000,000), and the total number of Preferred shares authorized is one million (1,000,000). Both Common and Preferred shares shall have a par value of one cent ($0.01) per share. The Preferred shares shall be issued in series, and the Board of Directors shall fix the designation and number of shares of each such series and shall determine or alter the rights, privileges, preferences and restrictions granted to or imposed on any wholly unissued series of such shares. As to any such series, the Board may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series.
FIFTH: The name and mailing address of the incorporator is as follows:
Philip S. Boone, Jr. 555 Montgomery Street
SIXTH: This Corporation is to have perpetual existence.
SEVENTH: Elections of the Directors need not be by written ballot unless the Bylaws of this Corporation shall so provide.
EIGHTH: The Board of Directors of this Corporation shall have the power to amend its Bylaws by vote of a majority of the Directors of all classes in office.
NINTH: Meetings of the stockholders of this Corporation may be held within or without the State of Delaware, as the Bylaws may provide. The books of this Corporation may be kept (subject to any provisions contained in any applicable statutes) outside the State of Delaware, at such place or places as may be designated from time to time by the Board of Directors.
TENTH: No action shall be taken by the stockholders of this Corporation except at an annual or special meeting of the stockholders. No action shall be taken by stockholders by written consent.
ELEVENTH: Special meetings of the stockholders of this Corporation for any purpose or purposes may be called at any time by (a) the Board of Directors, (b) a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in the Bylaws of this Corporation, include the power to call such meetings, or (c) the holder or holders of not less than ten percent (10%) of the outstanding shares entitled to vote at such a meeting.
TWELFTH: Advance notice of stockholder nominations for the election of Directors shall be given in the manner provided in the Bylaws of this Corporation.
THIRTEENTH: Section 1. Number of Directors. The number of Directors of this Corporation shall not be less than five (5) nor more than eleven (11), with the exact number within that range to be determined by the Board of Directors from time to time in accordance with the Bylaws.
Section 2. Classification of Directors. The Board of Directors shall be divided into three (3) classes, which shall be designated as Class I, Class II and Class III, and which shall be as nearly equal in number as possible. Each class of Directors shall serve for a term of three (3) years, ending on the date of the third annual meeting of stockholders following the annual meeting at which the members of such class were elected; provided, however, that each initial Director in Class I shall hold office until the annual meeting of stockholders in 1988; each initial Director in Class II shall hold office until meeting of stockholders in 1989; and each initial Director in Class III shall hold office until the annual meeting of stockholders in 1990, so that after the expiration of each such initial term, the term of office of one class of Directors shall expire each year when their respective successors have been duly elected by the stockholders and qualified. At each annual meeting of stockholders held after 1987, the Directors elected to succeed those whose terms then expired shall be identified as being of the same class as the Directors they succeed. For the purpose of the annual meeting of stockholders held in 1988, Class I shall have three (3) Directors, Class II shall have three (3) Directors and Class III shall have three (3) Directors.
Section 3. Change in Number of Directors. Notwithstanding any provision of the Bylaws to the contrary, any amendment thereof relating to an increase or decrease in the authorized number of Directors or to the manner in which the number of Directors is determined shall require the approval of a majority of the entire Board of Directors, or, if the amendment is made by the stockholders, by the affirmative vote of the stockholders of the Corporation representing at leas two-thirds (66-2/3%) of the shares then entitled to vote thereon.
Section 4. Effect of Increase or Decrease in Size of Board. In the event of any increase or decrease in the authorized number of Directors, (a) each Director then serving as such shall nevertheless continue as a Director of the class of which he is a member until the expiration of his current term, or his prior death, retirement, resignation, or removal, and (b) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three (3) classes of
Directors so that such classes shall remain as nearly equal in size as possible.
Section 5. Term of Office and Removal of Directors; Vacancies.
(a) Notwithstanding any of the foregoing provisions of this Article THIRTEENTH, each Director shall serve until his successor is elected and qualified or until his prior death, retirement, resignation, or removal.
(b) No Director shall be removed from his office as a Director, by vote or other action by stockholders or otherwise, with or without cause, except by the affirmative vote of at least two-thirds (66-2/3%) of the outstanding stock entitled to vote generally in the election of Directors.
(c) Should a vacancy occur or be created, whether arising through death, resignation, or removal of a Director or through an increase in the number of Directors of any class, such vacancy shall be filled by a majority vote of the remaining Directors of all classes. Stockholders shall have no right to take action to fill such vacancies. A Director so elected to fill a vacancy shall serve for the remainder of the then present term of office of the class to which he is elected.
FOURTEENTH: Section 1. Vote Required for Certain Business Combinations. The affirmative vote of the holders of not less than two-thirds (66-2/3%) of the outstanding shares of "Voting Stock" (as hereinafter defined) shall be required for the approval or authorization of any "Business Combination" (as hereinafter defined) of this Corporation or any subsidiary of this Corporation with any "Interested Stockholder" (as hereinafter defined), notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law, in any agreement with any national securities exchange or otherwise; provided, however, that this two-thirds voting requirement shall not be applicable and such Business Combination shall require only such required by law, any agreement with any national securities exchange or otherwise if:
(a) The "Continuing Directors" (as hereinafter defined) of this Corporation by at least a majority vote have expressly approved such Business Combination either in advance of or subsequent to such Interested Stockholder becoming an Interested Stockholder; or
(b) All of the following conditions are met:
(i) The cash or "Fair Market Value" (as hereinafter defined) as of the date of the consummation of the Business Combination (the "Combination Date") of the property, securities or other consideration to be received (including, without limitation, capital stock retained by the stockholders) per share by holders of a particular class or series of capital stock, as the case may be, of this Corporation in the Business Combination is not less than the highest of:
(A) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder in acquiring beneficial ownership of any of its holdings of such class or series of capital stock of this Corporation (i) within the two-year period immediately prior to the Combination Date or (ii) in the transaction or series of transactions in which in the Interested Stockholder became an Interested Stockholder, whichever is higher; or
(B) the Fair Market Value per share of the shares of capital stock being acquired in the Business Combination as of (i) the Combination Date or (ii) the date on which the Interested Stockholder became an Interested Stockholder, whichever is higher; or
(C) in the case of Common Stock, the per share book value of the Common Stock as reported at the end of the fiscal quarter immediately prior to the Combination Date, and in the case of Preferred Stock, the highest preferential amount per share to which the holders of shares of such class or series of Preferred Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, regardless of whether the Business Combination to be consummated constitutes such an event.
The provisions of this sub-paragraph 1(b)(i) shall be required to be met with respect to every class or series of outstanding capital stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class or series of capital stock. In all of the above instances, appropriate adjustments shall be made for recapitalizations and for stock dividends, stock splits and like
(ii) The consideration to be received by holders of a particular class or series of capital stock shall be in cash or in the same form as previously has been paid by or on behalf of the Interested Stockholder in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series of stock. If the consideration so paid for any such shares varies as to form, the form of consideration for such shares shall be either cash or the form used to acquire beneficial ownership of the largest number of shares of such class or series of capital stock previously acquired by the Interested
(iii) After such Interested Stockholder as become an Interested Stockholder and prior to the consummation of such Business Combination:
(A) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the
(B) there shall have been (i) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (ii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure to so increase such annual rate is approved by a majority of the Continuing Directors; and
(C) such Interested Stockholder shall not have become the beneficial owner of any additional shares of Voting Stock since the date of the transaction which results in such Interested Stockholder becoming an Interested
(iv) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and
(v) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations
(or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act, rules, regulations, or subsequent provisions).
Section 2. Certain Definitions. For purposes of this Article FOURTEENTH:
(a) The term "Business Combination" shall mean any:
(i) merger or consolidation of this Corporation or a "Subsidiary" (as hereinafter defined) of this Corporation with or into an Interested Stockholder or any other corporation which is or after such merger or consolidation would be an "Affiliate" or "Associate" (as hereinafter defined) of an Interested Stockholder, or
(ii) sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) with any Interested Stockholder, of all or any "Substantial Part" (as hereinafter defined) of the assets of this Corporation or of a Subsidiary of this Corporation to an Interested Stockholder or any Affiliate or Associate of any Interested Stockholder, or
(iii) adoption of any plan or proposal for the liquidation or dissolution of this Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate or Associate of any Interested
(iv) sale, lease, exchange or other disposition (in one transaction or a series of transactions), including without limitation a mortgage or other security device, of all or any Substantial Part of the assets of an Interested Stockholder or any Affiliate or Associate
Interested Stockholder to this Corporation or a Subsidiary of this
(v) issuance, pledge, or transfer of securities of this Corporation or a Subsidiary of this Corporation to or with an Interested Stockholder or any affiliate or Associate of any Interested
(vi) reclassification of securities (including any reverse stock split) or recapitalization of this Corporation, or any merger or consolidation of this Corporation with any of its Subsidiaries, or any other transaction that would have the effect, either directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of this Corporation or any Subsidiary of this Corporation which is directly or indirectly beneficially owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder, or
(vii) agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination.
(b) The term "person" shall mean any individual, firm, corporation or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Voting Stock of this Corporation.
(c) The term "Interested Stockholder" shall mean any person (other than this Corporation or any Subsidiary, and other than any profit-sharing, employee stock ownership or other employee benefit plan of this Corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who or which is:
(i) the "Beneficial Owner" (as hereinafter defined) of ten percent (10%) or more of the Voting Stock; or
(ii) an Affiliate or Associate of this Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of ten percent (10%) or more of the
(iii) an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering with the meaning of the Securities Act of 1933.
(d) For the purposes of this Article FOURTEENTH, a person shall be deemed to be a Beneficial Owner of any Voting Stock which:
(i) such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or
(ii) such person or any of its Affiliates or Associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or
(iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposition of any shares of Voting Stock.
(e) For the purposes of determining whether a person is an Interested Stockholder pursuant to paragraph (c) of this Section 2, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed to be Beneficially Owned through application of paragraph (d) of this Section 2 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement, or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.
(f) The terms "Affiliate" and "Associate" shall have the respective meaning ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as such Rule is in effect on June 1, 1987.
(g) The term "Subsidiary" means any corporation of which a majority of any class of equity securities is owned, directly or indirectly, by this Corporation; provided, however, that for the purposes of the definition of "Interested Stockholder" set forth in paragraph (c) of this Section 2, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity securities is owned, directly or indirectly, by this Corporation.
(h) The term "Continuing Director" means any member of the Board of Directors, while such person is a member of the Board of Directors, who is not an Affiliate, an Associate or a representative of the Interested Stockholder involved in a proposed Business Combination and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director, while such successor is a member of the Board of Directors, who is not an Affiliate, an
Associate or representative of the Interested Stockholder and is recommended or elected to succeed a Continuing Director by a majority of Continuing Directors. Each director elected by the Incorporator of this Corporation shall be a Continuing Director for purposes of this Article FOURTEENTH.
(i) The term "Substantial Part" shall mean more than twenty percent (20%) of the Fair Market Value, as determined by a majority of the Continuing Directors, of the total consolidated assets of this Corporation and its Subsidiaries taken as a whole, or of the assets of an Interested Stockholder, as of the end of its most recent fiscal year ended prior to the time the determination is being made.
(j) The term "Voting Stock" shall mean all of the outstanding shares of Common Stock and the outstanding shares of Preferred Stock entitled to vote on each matter on which the holders of record of Common Stock shall be entitled to vote, and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the votes entitled to be cast by such shares voting as one class.
(k) The term "Fair Market Value" means:
(i) in case of capital stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for the New York Stock Exchange Listed Stock, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or
any successor system in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined in good faith by a majority of the Continuing Directors;
(ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors.
(l) An Interested Stockholder shall be deemed to have acquired a share of the Voting Stock of this Corporation at the time when such Interested Stockholder became the Beneficial Owner thereof. If a majority of the Continuing Directors is not able to determine the price at which an Interested Stockholder has acquired a share of Voting Stock of this Corporation, such price shall be deemed to be the Fair Market Value of the shares in question at the time when the Interested Stockholder became the Beneficial Owner thereof. With respect to shares owned by Affiliates, Associates or other persons whose ownership is attributed to an Interested Stockholder, the price deemed to be paid therefor by such Interested Stockholder shall be the price paid upon the acquisition thereof by such Affiliate, Associate or other person, or, if such price is not determinable by a majority of the Continuing Directors, the Fair Market Value of the shares in question at the time when the Affiliate, Associate or other such person became the Beneficial Owner thereof.
Section 3. No Fiduciary Duty Imposed. The fact that any Business Combination complies with the provisions of paragraph 1(b) of this Article FOURTEENTH shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of this Corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board of Directors, or any member thereof, with respect to evaluations of, or actions and responses taken with respect to, such Business Combination.
Section 4. Determinations by the Continuing Directors. A majority of the Continuing Directors of this Corporation shall have the power and duty to determine for the purposes of this Article FOURTEENTH, on the basis of information known to them after reasonable inquiry, whether a person is an Interested Stockholder, the number of shares of Voting Stock beneficially owned by any person, and whether a person is an Affiliate or Associate of another. A majority of the Continuing Directors of the Corporation shall have the further power to interpret all of the terms and provisions of this Article FOURTEENTH.
FIFTEENTH: Section 1. Limitations on Liability of Directors. No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, as the same exists or hereafter may be amended, or any successor provision thereto, or (iv) for any transaction from which the director derived an improper personal benefit.
Section 2. Indemnification and Insurance.
(a) Right to Indemnification. Every person who is or has been a director of this Corporation may be indemnified by the Corporation to the fullest extent permitted by applicable law against expenses reasonably incurred by him or her in connection with any action, suit, or proceeding to which he or she may be a party defendant, or with which he or she may be threatened, by reason of being or having been a director or officer of the
Corporation. The term "expense," as used herein, shall include attorneys' fees, judgments, fines, and amounts paid in settlement.
(b) Insurance. The Corporation may maintain insurance at its expense, to protect itself and any director or officer of the Corporation against any such expense, liability, or loss, whether or not the Corporation would have the power to indemnify such person against any such expense, liability, or loss under the Delaware General Corporation Law.
Section 3. Non-Exclusivity of Rights. The rights conferred in this Article FIFTEENTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
Section 4. Amendment or Repeal. Any repeal or modification of this Article FIFTEENTH by the stockholders of the Corporation hereafter shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification.
SIXTEENTH: This Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles TENTH, TWELFTH, THIRTEENTH, FOURTEENTH, FIFTEENTH, and this Article SIXTEENTH may not be repealed or amended in any respect unless such repeal or amendment is approved by the affirmative vote of not less than two-thirds (66-2/3%) of the total voting power of all outstanding shares of stock in this Corporation entitled to vote thereon.
IN WITNESS WHEREOF, Harding Associates, Inc. has caused this Restated Certificate of Incorporation to be signed by Richard S. Harding, its President, and Julia H. Slater, its Assistant Secretary, this 11th day of August 1987.
By /s/ Richard S. Harding | 10-Q | EX-3.1 | 1996-01-12T00:00:00 | 1996-01-12T14:47:51 |
0000058091-96-000002 | 0000058091-96-000002_0002.txt | As of December 6, 1995
Each Prudential Affiliate (as hereinafter defined) which becomes bound by certain provisions of this Agreement as hereinafter
Two Prudential Plaza, Suite 5600
The undersigned, Lawter International, Inc. (herein called the "Company"), hereby agrees with you as follows:
1. AUTHORIZATION OF ISSUE OF NOTES. The Company will authorize the issue of its senior promissory notes (the "Notes") in the aggregate principal amount of $125,000,000, to be dated the date of issue thereof, to mature, in the case of each Note so issued, no more than fifteen years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of each Note so issued, in the Confirmation of Acceptance with respect to such Note delivered pursuant to paragraph 2B(5), and to be substantially in the form of Exhibit A attached hereto. The terms "Note" and "Notes" as used herein shall include each Note delivered pursuant to any provision of this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to any such provision. Notes which have (i) the same final maturity, (ii) the same principal prepayment dates, (iii) the same principal prepayment amounts (as a percentage of the original principal amount of each Note), (iv) the same interest rate, (v) the same interest payment periods and (vi) the same date of issuance (which, in the case of a Note issued in exchange for another Note, shall be deemed for these purposes the date on which such Note's ultimate predecessor Note was issued), are herein called a "Series" of Notes.
2B. PURCHASE AND SALE OF NOTES.
2B(1). Facility. Prudential is willing to consider, in its sole discretion and within limits which may be authorized for purchase by Prudential and Prudential Affiliates from time to time, the purchase of Notes pursuant to this Agreement. The willingness of Prudential to consider such purchase of Notes is herein called the "Facility". At any time, the aggregate principal amount of Notes stated in paragraph 1, minus the aggregate principal amount of Notes purchased and sold pursuant t o this Agreement prior to such time, minus the aggregate principal amount of Accepted Notes (as hereinafter defined) which have not yet been purchased and sold hereunder prior to such time, is herein called the "Available Facility Amount" at such time. NOTWITHSTANDING THE WILLINGNESS OF PRUDENTIAL TO CONSIDER PURCHASES OF NOTES, THIS AGREEMENT IS ENTERED INTO ON THE EXPRESS UNDERSTANDING THAT NEITHER PRUDENTIAL NOR ANY PRUDENTIAL AFFILIATE SHALL BE OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE NOTES, OR TO QUOTE RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF NOTES, AND THE FACILITY SHALL IN NO WAY BE CONSTRUED AS A COMMITMENT BY PRUDENTIAL OR ANY PRUDENTIAL AFFILIATE.
2B(2). Issuance Period. Notes may be issued and sold pursuant to this Agreement until the earlier of (i) the third anniversary of the date of this Agreement (or if such anniversary is not a Business Day, the Business Day next preceding such anniversary) and (ii) the thirtieth day after Prudential shall have given to the Company, or the Company shall have given to Prudential, written notice stating that it elects to terminate the issuance and sale of Notes pursuant to this Agreement (or if such thirtieth day is not a Business Day, the Business Day next preceding such thirtieth day). The period during which Notes may be issued and sold pursuant to this Agreement is herein called the "Issuance Period".
2B(3). Request for Purchase. The Company may from time to time during the Issuance Period make requests for purchases of Notes (each such request being herein called a "Request for Purchase"). Each Request for Purchase shall be made to Prudential by telecopier or overnight delivery service, and shall (i) specify the aggregate principal amount of Notes covered thereby, which shall not be less than $10,000,000 and shall not be greater than the Available Facility Amount at the time such Request for Purchase is made, (ii) specify the principal amounts, final maturities, principal prepayment dates and amounts and interest payment periods (quarterly or semi-annually in arrears) of the Notes covered thereby, (iii) specify the use of proceeds of such Notes, (iv) specify the proposed day for the closing of the purchase and sale of such Notes, which shall be a Business Day during the Issuance Period not less than 10 days and not more than 30 days after the making of such Request for Purchase, (v) specify the number of the account and the name and address of the depository institution to which the aggregate purchase price of such Notes are to be transferred on the Closing Day for such purchase and sale, (vi) certify that the representations and warranties contained in paragraph 8 are true on and as of the date of such Request for Purchase and that there exists on the date of such Request for Purchase no Event of Default or Default, (vii) specify the Designated Spread for such Notes and (viii) be substantially in the form of Exhibit B attached hereto. Each Request for Purchase shall be in writing and shall be deemed made when received by Prudential.
2B(4). Rate Quotes. Not later than five Business Days after the Company shall have given Prudential a Request for Purchase pursuant to paragraph 2B(3), Prudential may, but shall be under no obligation to, provide to the Company by telephone or telecopier, in each case between 9:30 A.M. and 1:30 P.M. New York City local time (or such later time as Prudential may elect) interest rate quotes for the several principal amounts, maturities, principal prepayment schedules, and interest payment periods of Notes specified in such Request for Purchase. Each quote shall represent the interest rate per annum payable on the outstanding principal balance of such Notes at which Prudential or a Prudential Affiliate would be willing to purchase such Notes at 100% of the principal amount thereof.
2B(5). Acceptance. Within 30 minutes after Prudential shall have provided any interest rate quotes pursuant to paragraph 2B(4) or such shorter period as Prudential may specify to the Company (such period herein called the "Acceptance Window "), the Company may, subject to paragraph 2B(6), elect to accept such interest rate quotes as to not less than $10,000,000 aggregate principal amount of the Notes specified in the related Request for Purchase. Such election shall be made by an Authorized Officer of the Company notifying Prudential by telephone or telecopier within the Acceptance Window that the Company elects to accept such interest rate quotes, specifying the Notes (each such Note being herein called an "Accepted Note") as to which such acceptance (herein called an "Acceptance") relates. The day the Company notifies Prudential of an Acceptance with respect to any Accepted Notes is herein called the "Acceptance Day" for such Accepted Notes. Any interest rate quotes as to which Prudential does not receive an Acceptance within the Acceptance Window shall expire, and no purchase or sale of Notes hereunder shall be made based on such expired interest rate quotes. Subject to paragraph 2B(6) and the other terms and conditions hereof, the Company agrees to sell to Prudential or a Prudential Affiliate, and Prudential agrees to purchase, or to cause the purchase by a Prudential Affiliate of, the Accepted Notes at 100% of the principal amount of such Notes. As soon as practicable following the Acceptance Day, the Company, Prudential and each Prudential Affiliate which is to purchase any such Accepted Notes will execute a confirmation of such Acceptance substantially in the form of Exhibit C attached hereto (herein called a "Confirmation of Acceptance"). If the Company should fail to execute and return to Prudential within five Business Days following receipt thereof a Confirmation of Acceptance with respect to any Accepted Notes, Prudential may at its election at any time prior to its receipt thereof cancel the closing with respect to such Accepted Notes by so notifying the Company in writing.
2B(6). Market Disruption. Notwithstanding the provisions of paragraph 2B(5), if Prudential shall have provided interest rate quotes pursuant to paragraph 2B(4) and thereafter prior to the time an Acceptance with respect to such quotes shall have been notified to Prudential in
accordance with paragraph 2B(5) the domestic market for U.S. Treasury securities or derivatives shall have closed or there shall have occurred a general suspension, material limitation, or significant disruption o f trading in securities generally on the New York Stock Exchange or in the domestic market for U.S. Treasury securities or derivatives, then such interest rate quotes shall be deemed to have then expired, and no purchase or sale of Notes hereunder shall be made based on such expired interest rate quotes. If the Company thereafter notifies Prudential of the Acceptance of any such interest rate quotes, such Acceptance shall be ineffective for all purposes of this Agreement, and Prudential shall promptly notify the Company in writing that the provisions of this paragraph 2B(6) are applicable with respect to such Acceptance, certifying the reason for such ineffectiveness.
2B(7). Facility Closings. Not later than 11:30 A.M. (New York City local time) on the Closing Day for any Accepted Notes, the Company will deliver to each Purchaser listed in the Confirmation of Acceptance relating thereto at the offices of the Prudential Capital Group, Two Prudential Plaza, Suite 5600, Chicago, IL 60601-6716, the Accepted Notes to be purchased by such Purchaser in the form of one or more Notes in authorized denominations as such Purchaser may request for each Series of Accepted Notes to be purchased on the Closing Day, dated the Closing Day and registered in such Purchaser's name (or in the name of its nominee), against payment of the purchase price thereof by transfer of immediately available funds for credit t o the Company's account specified in the Request for Purchase of such Notes. If the Company fails to tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on the scheduled Closing Day for such Accepted Notes as provided above in this paragraph 2B(7), or any of the conditions specified in paragraph 3 shall not have been fulfilled by the time required on such scheduled Closing Day, the Company shall, prior to 1:00 P.M., New York City local time, on such scheduled Closing Day notify Prudential (which notification shall be deemed received by each Purchaser) in writing whether (i) such closing is to be rescheduled (such rescheduled date to be a Business Day during the Issuance Period not less than one Business Day and not more than 10 Business Days after such scheduled Closing Day (the "Rescheduled Closing Day")) and certify to Prudential (which certification shall be for the benefit of each Purchaser) that the Company reasonably believes that it will be able to comply with the conditions set forth in paragraph 3 on such Rescheduled Closing Day and that the Company will pay the Delayed Delivery Fee in accordance with paragraph 2B(8)(iii) or (ii) such closing is to be canceled. In the event that the Company shall fail to give such notice referred to in the preceding sentence, Prudential (on behalf of each Purchaser) may at its election, at any time after 1:00 P.M., New York City local time, on such scheduled Closing Day, notify the Company in writing that such closing is to be canceled. Notwithstanding anything to the contrary appearing in this Agreement, the Company may not elect to reschedule a closing with respect to any given Accepted Notes on more than one occasion, unless Prudential shall have otherwise consented in writing.
2B(8)(i). Facility Fee. In consideration for the time, effort and expense involved in the preparation, negotiation and execution of this Agreement, on each of the first and second anniversaries of the date of this Agreement, the Company will pay to Prudential in immediately available funds a fee in the amount of $25,000 (such amounts referred to individually as a "Facility Fee Installment" and collectively as the "Facility Fee"). The amount of the Facility Fee Installments shall be reduced (by application in the order in which they become due), on a dollar for dollar basis, if and to the extent that one or more Issuance Fees have been paid by the Company pursuant to paragraph 2B(8)(ii). Except as provided in the balance of this paragraph 2B(8)(i), the Company shall not be obligated to pay the Facility Fee if the Issuance Period is terminated pursuant to clause (ii) of paragraph 2B(2). If during the twelve month period immediately preceding the date on which a Facility Fee Installment is due the Issuance Period terminates as a result of a Designated Termination, a Reduced Facility Fee Installment shall be due on such due date. If the Issuance Period is terminated as a result of a Designated Termination and the last d ay of the Issuance Period occurs prior to the first anniversary of the date of this Agreement, in no event shall the Reduced Facility Fee Installment scheduled for the second anniversary of the date of this Agreement be due or owing.
2B(8)(ii). Issuance Fee. The Company will pay to Prudential in immediately available funds a fee (herein called the "Issuance Fee") on each Closing Day in an amount equal to 0.10% of the aggregate principal amount of Notes sold on such Closing Day. No Issuance Fee shall be due at any time after the aggregate amount of the Issuance Fees and Facility Fee paid by the Company under this Agreement equals $50,000.
2B(8)(iii). Delayed Delivery Fee. If the closing of the purchase and sale of any Accepted Note is delayed for any reason beyond the original Closing Day for such Accepted Note, the Company will (unless the Company has satisfied all applicable conditions of closing set forth in clauses (i) through (iv) of paragraph 3A, paragraph 3C and paragraph 3E) pay to Prudential (a) on the Cancellation Date or actual closing date of such purchase and sale and (b) if earlier, the next Business Day following 90 days after the Acceptance Day for such Accepted Note and on each Business Day following 90 days after the prior payment hereunder, a fee (herein called the "Delayed Delivery Fee") calculated as follows:
(BEY - MMY) X DTS/365 X PA
where "BEY" means Bond Equivalent Yield, i.e., the bond equivalent yield per annum of such Accepted Note, "MMY" means Money Market Yield, i.e., the yield per annum on a commercial paper investment of the highest quality selected by Prudential on the date Prudential receives notice of the delay in the closing for such Accepted Note having a maturity date or dates the same as, or closest to, the Rescheduled Closing Day or Rescheduled Closing Days (a new alternative investment being selected by Prudential each time such closing is delayed); "DTS" means Days to Settlement, i.e., the number of actual days elapsed from and including the original Closing Day with respect to such Accepted Note (in the case of the first such payment with respect to such Accepted Note) or from and including the date of the next preceding payment (in the case of any subsequent delayed delivery fee payment with respect to such Accepted Note) to but excluding the date of such payment; and "PA" means Principal Amount, i.e., the principal amount of the Accepted Note for which such calculation is being made. In no case shall the Delayed Delivery
Fee be less than zero. Nothing contained herein shall obligate any Purchaser to purchase any Accepted Note on any day other than the Closing Day for such Accepted Note, as the same may be rescheduled from time to time in compliance with paragraph 2B(7).
2B(8)(iv). Cancellation Fee. If the Company at any time notifies Prudential in writing that the Company is canceling the closing of the purchase and sale of any Accepted Note, or if Prudential notifies the Company in writing under the circumstances set forth in the last sentence of paragraph 2B(5) or the penultimate sentence of paragraph 2B(7) that the closing of the purchase and sale of such Accepted Note is to be canceled, or if the closing of the purchase and sale of such Accepted Note is not consummated on or prior to the last day of the Issuance Period (the date of any such notification, or the last day of the Issuance Period, as the case may be, being herein called the "Cancellation Date"), the Company will pay to Prudential in immediately available funds an amount (the "Cancellation Fee") calculated as follows:
where "PI" means Price Increase, i.e., the quotient (expressed in decimals) obtained by dividing (a) the excess of the ask price (as reasonably determined by Prudential) of the Hedge Treasury Note(s) on the Cancellation Date over the bid price (as reasonably determined by Prudential) of the Hedge Treasury Notes(s) on the Acceptance Day for such Accepted Note by (b) such bid price; and "PA" has the meaning ascribed to it in paragraph 2B(8)(iii). The foregoing bid and ask prices shall be as reported by Telerate Systems, Inc. (or, if such data for any reason ceases to be available through Telerate Systems, Inc., any publicly available source of similar market data selected by Prudential and reasonably acceptable to the Company). Each price s hall be based on a U.S. Treasury security having a par value of $100.00 and shall be rounded to the second decimal place. In no case shall the Cancellation Fee be less than zero.
3. CONDITIONS OF CLOSING. The obligation of any Purchaser to purchase and pay for any Notes is subject to the satisfaction, on or before the Closing Day for such Notes, of the following conditions:
3A. Certain Documents. Such Purchaser shall have received the following, each dated the date of the applicable Closing Day (if so indicated below, such condition need be satisfied only on the Initial Closing Day):
(i) The Note(s) to be purchased by such Purchaser.
(ii) On the Initial Closing Day, certified copies of the resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Agreement and the issuance of the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes. On each Closing Day after the Initial Closing Day, such Purchaser shall receive certification that the foregoing resolutions remain in full force and effect.
(iii) A certificate of the Secretary or an Assistant Secretary and one other officer of the Company certifying the names and true signatures of the officers of the Company authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder.
(iv) On the Initial Closing Day, certified copies of the Certificate of Incorporation and By-laws of the Company. On each Closing Day after the Initial Closing Day, such Purchaser shall receive either (a) certification that the foregoing Certificate of Incorporation and By-laws have not been amended or otherwise modified and that such instruments remain in full force and effect or (b) if such instruments have been amended or otherwise modified subsequent to the Initial Closing Date, certified copies of the Certificate of Incorporation and By-laws as then in effect.
(v) A favorable opinion of Bell Boyd & Lloyd, special counsel to the Company (or such other counsel designated by the Company and acceptable to the Purchaser(s)) satisfactory to such Purchaser and substantially in the form of Exhibit D attached hereto and as to such other matters as such Purchaser may reasonably request. The Company hereby directs each such counsel to deliver such opinion, agrees that the issuance and sale of any Notes will constitute a reconfirmation of such direction, and understands and agrees that each Purchaser receiving such an opinion will and is hereby authorized to rely on such opinion.
(vi) A long-form good standing certificate (a short-form good standing certificate shall be deemed sufficient for purposes of this paragraph 3A(vi) on each Closing Day after the Initial Closing Day) for the Company from the Secretary of State of Delaware dated of a recent date and such other evidence of the status of the Company as such Purchaser may reasonably request.
(vii) Additional documents or certificates with respect to legal matters or corporate or other proceedings related to the transactions contemplated hereby as may be reasonably requested by such Purchaser.
3B. Opinion of Purchaser's Special Counsel. Such Purchaser shall have received from James F. Evert, Assistant General Counsel of Prudential, or such other counsel who is acting as special counsel for it in connection with this transaction, a favorable opinion satisfactory to such Purchaser as to such matters incident to the matters herein contemplated as it may reasonably request.
3C. Representations and Warranties; No Default. The representations and warranties contained in paragraph 8 shall be true on and as of such Closing Day, except to the extent of changes caused by the transactions herein contemplated; there shall exist on such Closing Day no Event of Default or Default (assuming for purposes hereof, if no Notes are then outstanding, that Notes have been issued and are outstanding); and the Company shall have delivered to such Purchaser an Officer's Certificate, dated such Closing Day, to both such effects.
3D. Purchase Permitted by Applicable Laws. The purchase of and payment for the Notes to be purchased by such Purchaser on the terms and conditions herein provided (including the use of the proceeds from the sale of such Notes by the Comp any) shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation G, T or X of the Board of Governors of the Federal Reserve System) and shall not subject such Purchaser to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation.
3E. Payment of Fees. The Company shall have paid to Prudential any fees due it pursuant to this Agreement, including any Facility Fee due pursuant to paragraph 2B(8)(i), any Issuance Fee due pursuant to paragraph 2B(8)(ii) and any Delayed Delivery Fee due pursuant to paragraph 2B(8)(iii).
4. PREPAYMENTS. The Notes shall be subject to required prepayment as and to the extent provided in paragraph 4A. The Notes shall also be subject to prepayment under the circumstances set forth in paragraph 4B. Any prepayment made by t he Company pursuant to any other provision of this paragraph 4 shall not reduce or otherwise affect its obligation to make any required prepayment referenced in paragraph 4A.
4A. Required Prepayments of Notes. Each Series of Notes shall be subject to required prepayments, if any, set forth in the Notes of such Series, provided that upon any partial prepayment of a Series of Notes pursuant to paragraph 4B the principal amount of each required prepayment (if any) of such Series of Notes becoming due under this paragraph 4A on and after the date of such prepayment, and the payment due at maturity of such Series of Notes, shall be reduced in the same proportion as the aggregate unpaid principal amount of such Series of Notes is reduced as a result of such prepayment. No Yield- Maintenance Amount or premium shall be payable in connection with any required prepayment made pursuant to this paragraph 4A.
4B. Optional Prepayment With Yield-Maintenance Amount. The Notes of each Series shall be subject to prepayment, in whole at any time or in part from time to time (in integral multiples of $500,000 and in a minimum amount of $1,000,000), at the option of the Company, at 100% of the principal amount so prepaid plus interest thereon to the prepayment date and the Yield-Maintenance Amount, if any, with respect to each such Note.
4C. Notice of Optional Prepayment. The Company shall give the holder of each Note of a Series to be prepaid pursuant to paragraph 4B irrevocable written notice of such prepayment not less than 10 Business Days prior to the prepayment date, specifying such prepayment date, the aggregate principal amount of the Notes of such Series to be prepaid on such date, the principal amount of the Notes of such Series held by such holder to be prepaid on that date and that such prepayment is to be made pursuant to paragraph 4B. Notice of prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the Yield- Maintenance Amount, if any, herein provided, shall become due and payable on such prepayment date.
4D. Application of Prepayments. In the case of each prepayment of less than the entire unpaid principal amount of all outstanding Notes of any Series pursuant to paragraph 4A or 4B, the amount to be prepaid shall be applied pro rata to all outstanding Notes of such Series (including, for the purpose of this paragraph 4D only, all Notes prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates other than by prepayment pursuant to paragraph 4A or 4B) according to the respective unpaid principal amounts thereof.
4E. Retirement of Notes. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than by prepayment pursuant to paragraphs 4A or 4B or upon acceleration of such final maturity pursuant to paragraph 7A), or purchase or otherwise acquire, directly or indirectly, Notes of any Series held by any holder unless the Company or such Subsidiary or Affiliate shall have offered to prepay or otherwise retire or purchase or otherwise acquire, as the case may be, the same proportion of the aggregate principal amount of Notes of such Series held by each other holder of Notes of such Series at the time outstanding upon the same terms and conditions. Any Notes so prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall not be deemed to be outstanding for any purpose under this Agreement, except as provided in paragraph 4D.
5. AFFIRMATIVE COVENANTS. During the Issuance Period and so long thereafter as any Note is outstanding and unpaid, the Company covenants as follows:
5A. Financial Statements; Notice of Defaults. The Company covenants that it will deliver to each Significant Holder in triplicate:
as soon as practicable and in any event within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated statements of income, cash flows and shareholders' equity of the Company an d its Subsidiaries for the period from the beginning of the then current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified to by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; provided, however, that delivery pursuant to clause (iii) below of copies of the Quarterly Report on Form 10-Q of the Company for such quarterly period filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (i);
(ii) as soon as practicable and in any event within 90 days after the end of each fiscal year, consolidated statements of income, cash flows and shareholders' equity of the
Company and its Subsidiaries for such fiscal year, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual audit, all in reasonable detail and form and accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with generally accepted accounting principles, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances; provided, however, that delivery pursuant to clause (iii) below of copies of the Annual Report on Form 10-K of the Company for such fiscal year filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (ii);
(iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its public stockholders and copies of all registration statements (without exhibits) and all reports (if any) which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission);
(iv) promptly upon receipt thereof, a copy of each other report (exclusive of the "management letter" delivered in connection with any audit) submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company;
(v) with reasonable promptness, such other financial data as such holder may reasonably request.
Together with each delivery of financial statements required by clauses (i) and (ii) above, the Company will deliver to each Significant Holder a certificate from an Authorized Officer of the Company having knowledge of the Company's financial matter s (a) demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with the provisions of paragraphs 6A, 6B(1), 6B(2), 6B(4) and 6B(5), (b) identifying the sixty consecutive day period referenced in clause (v) of the definition of Funded Debt and, if applicable, the maximum amount of Current Debt referenced therein and (c) stating that, to the best knowledge of such officer, there exists no Event of Default or Default, or, if any Event of Default or Default exists, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. Together with each delivery of financial statements required by clause (ii) above, the Company will deliver to each Significant Holder a certificate of such accountants stating that, in making the audit necessary for their report on such financial statements, they have obtained no knowledge of any Event of Default or Default, or, if they have obtained knowledge of any Event of Default or Default, specifying the nature and period of existence thereof. Such accountants, however, shall not be liable to anyone by reason of their failure to obtain knowledge of any Event of Default or Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards.
The Company also covenants that immediately after any Responsible Officer obtains knowledge of an Event of Default or Default, it will deliver to each Significant Holder an Officer's Certificate specifying the nature and period of existence t hereof and what action the Company proposes to take with respect thereto.
5B. Inspection of Property. The Company covenants that it will permit any Person designated by any Significant Holder in writing, at such Significant Holder's expense, to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with any Responsible Officer of the Company and its independent public accountants, all upon reasonable prior notice and during regular business hours and as often as such Significant Holder may reasonably request. By this provision the Company authorizes its accountants to have discussions with any Significant Holder contemplated by this paragraph 5B so long as a Responsible Officer is permitted to attend.
5C. Covenant to Secure Notes Equally. The Company covenants that, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of paragraph 6B(1)(unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to paragraph 11C), it will make or cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other Debt thereby secured so long as any such other Debt shall be so secured.
5D. Maintenance of Insurance. The Company covenants that it and each Subsidiary will maintain, with financially sound and reputable insurers, insurance in such amounts and against such liabilities and hazards as customarily is maintained by other companies operating similar businesses. Together with each delivery of financial statements under paragraph 5A, the Company will, upon the request of any Significant Holder, deliver an Officer's Certificate specifying the details of such insurance in effect. Notwithstanding the foregoing, nothing contained in this paragraph 5D shall prevent the Company or any Subsidiary from maintaining a self-insurance program if and to the extent it is consistent with sound business practice for companies of similar size engaged in similar business activities.
5E. Compliance with Environmental Laws. The Company covenants that it will, and will cause each of the Subsidiaries to, comply in a timely fashion with, or operate pursuant to valid waivers of the provisions of, all Environmental Laws, except where noncompliance would not materially and adversely affect the business, condition (financial or otherwise) or operations of the Company and the Subsidiaries taken as a whole.
6. NEGATIVE COVENANTS. At all times during which any Note or other amount due hereunder is outstanding and unpaid, the Company covenants as follows:
6A. Fixed Charge Coverage. The Company will not permit the ratio of (i) Operating Cash Flow to (ii) Fixed Charges, in each case for the four consecutive fiscal quarter period ended at the end of any fiscal quarter, to be less than 2.50 t o 1.00.
6B. Lien, Debt and Other Restrictions. The Company will not and will not permit any Subsidiary to:
6B(1). Liens. Create, assume or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Notes in accordance with the provisions of paragraph 5C), except:
(i) Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings,
(ii) Liens incidental to the conduct of its business or the ownership of its property and assets which do not secure Debt and which do not in the aggregate materially impair the use of its property or assets in the
(iii) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or a Non-
(iv) Liens existing on the date hereof securing Debt existing on the date hereof, in each case as described on
(v) other Liens securing Debt (including Liens securing
provided that Priority Debt shall at no time exceed 25% of Consolidated
6B(2). Debt. Create, incur, assume or suffer to exist any Debt, except:
(i) Debt of any Subsidiary to the Company or a Non-Dilutive
(ii) Debt evidenced by the Notes, and
(iii) additional Debt of the Company and of Subsidiaries (including Debt outstanding on the date hereof),
provided that (i) the Funded Debt Ratio shall not exceed .50 to 1.00 at any time and (ii) Priority Debt shall at no time exceed 25% of Consolidated
6B(3). Merger and Consolidation. Merge or consolidate with or into any other Person, except that:
(i) any Subsidiary may merge or consolidate with or into the Company, provided that the Company is the continuing or
(ii) any Subsidiary may merge or consolidate with or into a Non-Dilutive Subsidiary, provided that the Non-Dilutive Subsidiary is the continuing or surviving corporation,
(iii) the Company may merge or consolidate with any other solvent corporation, provided that (a) the Company shall be the continuing or surviving corporation or (b) if the continuing or surviving corporation is not the Company, such continuing or surviving corporation is organized under the laws of the District of Columbia, any state of the United States of America, Japan or any country which is a member of the European Community (or any successor organization or association) a nd has expressly assumed in writing the obligations of the Company under this Agreement and the Notes (which assumption shall be pursuant to an agreement in the form attached hereto as Exhibit E) and the Company shall have caused to be delivered to each holder of Notes an opinion of independent counsel reasonably satisfactory to the Required Holders of the Notes, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof (which opinion may be subject to bankruptcy and other customary exceptions), and (c) no Default or Event of Default exists or would exist immediately after giving effect to such merger or consolidation,
(iv) the Company may sell or otherwise dispose of all or substantially all of its assets (other than stock and Debt of Subsidiaries, which may only be sold or otherwise disposed of pursuant to paragraph 6B(4)) to any Person for consideration which represents the fair market value (as determined in good faith by the Board of Directors of the Company) at the time of such sale or other disposition if (a) the acquiring Person is organized under the laws of the District of Columbia , any state of the United States of America, Japan or any country which is a member off the European Community (or any successor organization or association) and has expressly assumed in writing the obligations of the Company under this Agreement and the Notes (which assumption shall be pursuant to an agreement in the form attached hereto as Exhibit E) and the Company shall have caused to be delivered to each holder of Notes an opinion of independent counsel reasonably satisfactory to the Required Holders of the Notes, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof (which opinion may be subject to bankruptcy and other customary except ions), and (b) no Default or Event of Default exists or would exist immediately after giving effect to such sale or disposition;
6B(4). Sale of Stock and Debt of Subsidiaries. Transfer any shares of stock or Debt of any Subsidiary, except that (i) such shares of stock or Debt may be Transferred to the Company or a Non-Dilutive Subsidiary, (ii) such shares of stock ma y be Transferred to the extent such Subsidiary will continue to be a Subsidiary thereafter and such Transfer is treated as a pro rata Transfer of assets of such Subsidiary and is permitted by clause (v) of paragraph 6B(5) or (iii) all shares of stock and Debt of any Subsidiary at the time owned by or owed to the Company and all Subsidiaries may be sold as an entirety for a cash consideration which represents the fair value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock and Debt so sold; provided that in the case of the foregoing clause (iii), (a) such sale or other disposition is treated as a Transfer of assets of such Subsidiary and is permitted by clause (v) of paragraph 6 B(5) and (b) at the time of such sale, such Subsidiary shall not own, directly or indirectly, any shares of stock or Debt of any other Subsidiary (unless all of the shares of stock and Debt of such other Subsidiary owned, directly or indirectly, by t he Company and all Subsidiaries are simultaneously being sold as permitted by this
6B(5). Transfer of Assets. Transfer any of its assets, except as provided in clause (iv) of paragraph 6B(3) and except that:
(i) any Subsidiary may Transfer assets to the Company or a
(ii) the Company or any Subsidiary may sell inventory in the
(iii) the Company may Transfer shares of capital stock of Hach Company owned by it as of June 30, 1995, as well as any shares received after such date as stock dividends with respect to the shares of capital stock owned
(iv) the Company and Subsidiaries may Transfer Designated Investments so long as at the time of Transfer Designated Investments, together with any capital stock described in clause (iii) above, do not constitute 50% or more of Consolidated Capitalization, and
(v) the Company or any Subsidiary may otherwise Transfer assets (other than Designated Investments), so long as after giving effect thereto (a) the Annual Percentage of Earnings Capacity Transferred pursuant to this clause (v) and paragraph 6B(4) shall not exceed 10%, (b) the Annual Percentage of Total Assets Transferred pursuant to this clause (v) and paragraph 6B(4) shall not exceed 10% and (c) no Default or Event of Default would exist, provided that, for purposes of the foregoing calculations, there shall be excepted any Transfer to the extent the proceeds of which were or are applied to the prepayment of unsecured senior debt of the Company within 30 days after the date of Transfer, provided further that no Transfer of assets may be made pursuant to the exception set forth in the immediately preceding proviso unless no Default or Event of
Default exists on the date of such Transfer, or would exist after giving effect to such Transfer and prepayment; or
6B(6). Affiliate Transactions. Directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise deal with, in the ordinary course of business or otherwise, any Affiliate of the Company, unless such transaction is demonstrably no less favorable to the Company or such Subsidiary than could be obtained on an arm's- length basis.
6C. Line of Business. The Company covenants that it will not permit more than 50% of the book value of the consolidated assets of the Company and Subsidiaries to at any time be devoted to any business or activity other than the specialty chemical businesses engaged in by the Company and Subsidiaries on the date of this Agreement and related specialty chemical businesses. For purposes of this paragraph 6C, the following assets shall be deemed to be devoted to specialty chemical businesses engaged in by the Company on the date of this Agreement: (i) cash and cash equivalents and (ii) capital stock of Hach Company and any other corporation which is engaged in the specialty chemical businesses engaged in by the Company and Subsidiaries on the date of this Agreement or related specialty chemical businesses.
7A. Events of Default; Acceleration. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law o r otherwise):
(i) the Company defaults in the payment of any principal of, or Yield- Maintenance Amount payable with respect to, any Note when the same shall become due, either by the terms thereof or otherwise as herein provided; or
(ii) the Company defaults in the payment of any interest on any Note for more than 10 days after the date due; or
(iii) the Company or any Subsidiary defaults (whether as primary obligoror as guarantor or other surety) in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, an y obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf o f such holder or holders) to cause, such obligation to become due (or to be repurchased by the Company or any Subsidiary) prior to any stated maturity, provided that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration (or resale to the Company or any Subsidiary) shall occur and be continuing exceeds $5,000,000; or
(iv) any representation or warranty made by the Company herein or by the Company or any of its officers in any writing furnished in connection with or pursuant to this Agreement shall be false in any material respect on the date as of which made; or
(v) the Company fails to perform or observe any agreement contained in paragraph 6 (other than paragraph 6B(6); or
(vi) the Company fails to perform or observe any other agreement, term or condition contained herein (including paragraph 6B(6)) and such failure shall not be remedied within 30 days after any Responsible Officer obtains actual knowledge thereof; or
(vii) the Company or any Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or
(viii) any decree or order for relief in respect of the Company or any Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "Bankruptcy Law"), of any jurisdiction; or
(ix) the Company or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Subsidiary, or of any substantial part of the assets of the Company or any Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or any Subsidiary under the Bankruptcy Law of any other jurisdiction; or
(x) any such petition or application is filed, or any such proceedings are commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 60 days after the entry thereof; or
(xi) any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60
(xii) any order, judgment or decree is entered in any proceedings against the Company or any Subsidiary decreeing a split-up of the Company or such Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Subsidiary whose assets represent a substantial part, of the consolidated assets of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a substantial part of the consolidated net income of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or
(xiii) one or more final judgments in an aggregate amount in excess of $5,000,000 is rendered against the Company or any Subsidiary and, within 60 days after entry thereof, any such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; or
(xiv) the Company or any ERISA Affiliate, in its capacity as an employer under a Multiemployer Plan, makes a complete or partial withdrawal from such Multiemployer Plan resulting in the incurrence by such withdrawing employer of a withdrawal liability in an amount exceeding $5,000,000;
then (a) if such event is an Event of Default specified in clause (i) or (ii) of this paragraph 7A, any holder of any Note may at its option during the continuance of such Event of Default, by notice in writing to the Company, declare all of the Note s held by such holder to be, and all of the Notes held by such holder shall thereupon be and become, immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which a re hereby waived by the Company, (b) if such event is an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due an d payable together with interest accrued thereon and, to the extent not prohibited by applicable law, together with the Yield-Maintenance Amount, if any, with respect to each Note, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (c) with respect to any event constituting an Event of Default, the Required Holder(s) of the Notes may at its or their option during the continuance of such Event of Default, by notice in writing to the Comp any, declare all of the Notes to be, and all of the Notes shall thereupon be and become, immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company.
7B. Rescission of Acceleration. At any time after any or all of the Notes of any Series shall have been declared immediately due and payable pursuant to paragraph 7A, the Required Holder(s) of the Notes of such Series may, by notice in writing to the Company, rescind and annul such declaration and its consequences if (i) the Company shall have paid all overdue interest on the
Notes of such Series, the principal of and Yield-Maintenance Amount, if any, payable with respect to any Notes of such Series which have become due otherwise than by reason of such declaration, and interest on such overdue interest and overdue principal and Yield-Maintenance Amount at the rate specified in the Notes of such Series, (ii) the Company shall not have paid any amounts which have become due solely by reason of such declaration, (iii) all Events of Default and Defaults, other than non-payment of amounts which have become due solely by reason of such declaration, shall have been cured or waived pursuant to paragraph 11C, and (iv) no judgment or decree shall have been entered for the payment of any amounts due pursuant to the Notes of such Series or this Agreement. No such rescission or annulment shall extend to or affect any subsequent Event of Default or Default or impair any right arising therefrom.
7C. Notice of Acceleration or Rescission. Whenever any Note shall be declared immediately due and payable pursuant to paragraph 7A or any such declaration shall be rescinded and annulled pursuant to paragraph 7B, the Company shall forthwith give written notice thereof to the holder of each Note of each Series at the time outstanding.
7D. Other Remedies. If any Event of Default or Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise.
8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents, covenants and warrants as follows (all references to "Subsidiary" and "Subsidiaries" in this paragraph 8 shall be deemed omitted if the Company has no Subsidiaries at the time the representations herein are made or repeated):
8A. Organization. The Company is a corporation duly organized and existing in good standing under the laws of the State of Delaware, each Material Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated, and the Company has and each Material Subsidiary has the corporate power to own its respective property and to carry on its respective business as now being conducted.
8B. Financial Statements. The Company has furnished each Purchaser of any Accepted Notes with the following financial statements, identified as such by a principal financial officer of the Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as at December 31 in each of the three fiscal years of the Company most recently completed prior to the date as of which this representation is made or repeated to such Purchaser (other than fiscal years completed within 90 days prior to such date for which audited financial statements have not been released) and consolidated statements of income, cash flows and shareholders' equity of the Company and its Subsidiaries for each such year, all reported on by Arthur Andersen LLP and (ii) a consolidated balance sheet of the Company and its Subsidiaries as at the end of the quarterly period (if any) most recently completed prior to such date and after the end of such fiscal year (other than quarterly periods completed within 45 days prior to such date for which financial statements have not been released) and the comparable quarterly period in the preceding fiscal year and consolidated statements of income, cash flows and shareholders' equity for the periods from the beginning of the fiscal years in which such quarterly periods are included to the end of such quarterly periods, prepared by the Company. Such financial statements (including any related schedules and/or notes) are correct and complete in all material respects (subject, as to interim statements, to changes resulting from audits and year-end adjustments), have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved, except as may be otherwise noted therein. The balance sheets fairly present the financial condition of the Company and its Subsidiaries as at the dates thereof, and the statements of income, stockholders' equity and cash flows fairly present the results of the operations of the Company and its Subsidiaries and their cash flows for the periods indicated. There has been no material adverse change in the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole since the end of the most recent fiscal year for which such audited financial statements have been furnished.
8C. Actions Pending. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body which could reasonably be expected to result in any material adverse change in the business, property or assets, condition (financial or otherwise) or operations o f the Company and its Subsidiaries taken as a whole.
8D. Outstanding Debt; No Defaults. Neither the Company nor any of its Subsidiaries has outstanding any Debt except as permitted by paragraph 6B(2). No Default or Event of Default exists under the Agreement (assuming for purposes hereof, if no Notes are outstanding, that Notes have been issued and are outstanding).
8E. Title to Properties. The Company has and each of its Material Subsidiaries has good and indefeasible title to its respective real properties (other than properties which it leases) and good title to all of its other respective proper ties and assets, including the properties and assets reflected in the most recent audited balance sheet referred to in paragraph 8B (other than properties and assets disposed of in the ordinary course of business), subject to no Lien of any kind except Liens permitted by paragraph 6B(1). Each of the Subsidiaries of the Company which is not a Material Subsidiary has good and indefeasible title to its respective material real properties (other than properties which it leases) and good title to all of its other respective material properties and assets, including the material properties and assets reflected in the most recent audited balance sheet referred to in paragraph 8B (other than properties and assets disposed of in the ordinary course of business), subject to no Lien of any kind except Liens permitted by paragraph 6B(1).
All leases necessary in any material respect for the conduct of the respective businesses of the Company and its Material Subsidiaries are valid and subsisting and are in full force and effect.
8F. Taxes. The Company has and each of its Subsidiaries has filed all federal, state and other income tax returns which, to the best knowledge of the officers of the Company and its Subsidiaries, are required to be filed, and each has pa id all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles.
8G. Conflicting Agreements and Other Matters. Neither the execution nor delivery of this Agreement or the Notes, nor the offering, issuance and sale of the Notes, nor fulfillment of nor compliance with the terms and provisions hereof and of the Notes will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Debt of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type to be evidenced by the Notes except as set forth in the agreements listed in Schedule 8G attached hereto (as such Schedule 8G may have been modified from time to time by written supplements thereto delivered by the Company to Prudential).
8H. Offering of Notes. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes or any similar security of the Company for sale to, or solicited any offers to buy the Notes or any similar security of the Company from, or otherwise approached or negotiated with respect thereto with, any Person other than institutional investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes to the provisions of Section 5 of the Securities Act or to the provisions of any securities or Blue Sky law of any applicable jurisdiction.
8I. Use of Proceeds; Regulation G, etc. Neither the Company nor any of its Subsidiaries, directly or indirectly, will take or permit to be taken any action, or use the proceeds of the issue and sale of any Notes in a manner which would result in the issue and sale of any Notes or the carrying out of any of the transactions contemplated hereby, being violative of Regulations G or T (12 C.F.R., Chapter II), any other regulation of the Board of Governors of the Federal Reserve System o r the Exchange Act.
8J. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the Pension Benefit Guaranty Corporation has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. Neither the Company, any Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries take n as a whole. The execution and delivery of this Agreement and the issuance and sale of the Notes will be exempt from or will not involve any transaction which is subject to the prohibitions of section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of the representation of each Purchaser in paragraph 9B as to the source of funds to be used by it to purchase any Notes.
8K. Governmental Consent. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Notes is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental body (other than routine filings after the Closing Day for any Notes with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the offering, issuance, sale or delivery of the Notes or fulfillment of or compliance with the terms and provisions hereof or of the Notes.
8L. Environmental Compliance. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all Environmental laws except, in any such case, where failure to comply would not result in a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole.
8M. Regulatory Status. Neither the Company nor any Subsidiary is (i) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, (ii) a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Act of 1935, as amended or (iii) a "public utility" within the meaning of the Federal Power Act, as amended.
8N. Disclosure. Neither this Agreement nor any other document, certificate or statement furnished to any Purchaser by or on behalf of the
contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future may (so far as the Company can now reasonably foresee) materially adversely affect the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole and which has not been disclosed to such Purchaser in writing.
8O. Hostile Tender Offers. None of the proceeds of the sale of any Notes will be used to finance a Hostile Tender Offer.
9. REPRESENTATIONS OF THE PURCHASERS.
Each Purchaser represents as follows:
9A. Nature of Purchase. Such Purchaser (i) is an institutional investor and is acquiring the Notes to be purchased by it hereunder for the purpose of investment and not with a view to or for distribution of any thereof, provided that the disposition of such Purchaser's property shall at all times be and remain within its control, (ii) understands that the Notes have not been registered under the Securities Act or any foreign law or any other securities law and, therefore, cannot be sold or otherwise transferred unless they are registered under the Securities Act or unless an exemption from such registration is available and (iii) has been advised that the Company does not contemplate registering, and is not legally required to register, the Notes under the Securities Act.
9B. Source of Funds. One or both of the following two representations is true with respect to such Purchaser:
(i) Such Purchaser is an "insurance company" and the funds being used by such Purchaser to pay the purchase price of the Notes being purchased by such Purchaser hereunder constitute assets of the Purchaser's "insurance company general account" (as both such terms are defined in Section V of United States Department of Labor Prohibited Transaction Class Exemption ("PTCE" 95-60), the Purchaser has disclosed to the Company the names of all employee benefit plans having an interest as contractholder in such insurance company general account as to which the amount of the reserves for the contract(s) held by or on behalf of such plan (determined under Section 807(d) of the Code) exceed 10% of the total of all liabilities of the genera l account or are expected to exceed 10% of the total of all liabilities of the general account as of the date of such purchase, and, as of the date of the purchaser, such Purchaser satisfies all of the applicable requirements for relief under Section IV of PTCE 95-60.
(ii) The funds being used by such Purchaser to pay the purchase price of the Notes being purchased by such Purchaser hereunder constitute assets of one or more separate accounts maintained by it, and it has disclosed to the Company the names of all employee benefit plans whose assets in such separate exceed 10% of the total assets or are expected to exceed 10% of the total assets of such separate account or accounts as of the date of such purchase, and the Purchase r will comply with the record keeping requirements of Section III of PTCE 90-1 or any successor thereto.
For the purpose of this paragraph 9B, all employee benefit plans maintained by the same employer (or, for purposes of clause (i), by an employer and any affiliates of such employer as defined in Section V(A) of PTCE 95-60), or by the same employee organization, are deemed to be a single plan. As used in this paragraph 9B, the terms "separate account", employee benefit plan", "employer", and "employee organization" shall have the respective meanings set forth in Section 3 of ERISA.
10. DEFINITIONS; ACCOUNTING MATTERS. For the purpose of this Agreement, the terms defined in paragraphs 10A and 10B (or within the text of any other paragraph) shall have the respective meanings specified therein and all accounting matters shall be subject to determination as provided in paragraph 10C.
"Called Principal" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4B or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires.
"Designated Spread" shall mean 0% in the case of each Note of any Series unless the Confirmation of Acceptance with respect to the Notes of such Series specifies a different Designated Spread in which case it shall mean, with respect to each Note of such Series, the Designated Spread so specified.
"Discounted Value" shall mean, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (as converted to reflect the periodic basis on which interest on such Note is payable, if payable other than on a semi-annual bas is) equal to the Reinvestment Yield with respect to such Called Principal.
"Reinvestment Yield" shall mean, with respect to the Called Principal of any Note, the Designated Spread over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City local time) on the Business Day next preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Service (or such other display as may replace page 678 on the Telerate Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between yields reported for various maturities.
"Remaining Average Life" shall mean, with respect to the Called Principal of any Note, the number of years (calculated to the nearest one- twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with respect to such Call ed Principal and the scheduled due date of such Remaining Scheduled Payment.
"Remaining Scheduled Payments" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date.
"Settlement Date" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4B or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires.
"Yield-Maintenance Amount" shall mean, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of (including interest due on) the Settlement Date with respect to such Called Principal. The Yield-Maintenance Amount shall in no event be less than zero.
"Acceptance" shall have the meaning specified in paragraph 2B(5).
"Acceptance Day" shall have the meaning specified in paragraph 2B(5).
"Acceptance Window" shall have the meaning specified in paragraph 2B(5).
"Accepted Note" shall have the meaning specified in paragraph 2B(5).
"Affiliate" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company, except a Subsidiary. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise.
"Agreement" shall have the meaning specified in paragraph 11C.
"Annual Percentage of Assets Transferred" shall mean, with respect to any four consecutive fiscal quarter period of the Company, the sum of the Percentages of Assets Transferred for each asset of the Company and Subsidiaries which is Transfer red pursuant to clause (v) of paragraph 6B(5) during such period.
"Annual Percentage of Earnings Capacity Transferred" shall mean, with respect to any four consecutive fiscal quarter period of the Company, the sum of the Percentages of Earnings Capacity Transferred for each asset of the Company and its Subsidiaries that is Transferred pursuant to clause (v) of paragraph 6B(5) during such period.
"Authorized Officer" shall mean (i) in the case of the Company, its chief executive officer, its chief financial officer, any vice president of the Company designated as an "Authorized Officer" of the Company in the Information Schedule attached hereto or any vice president of the Company designated as an "Authorized Officer" of the Company for the purpose of this Agreement in an Officer's Certificate executed by the Company's chief executive officer or chief financial officer and delivered to Prudential, and (ii) in the case of Prudential, any officer of Prudential designated as its "Authorized Officer" in the Information Schedule or any officer of Prudential designated as its "Authorized Officer" for the purpose of this Agreement in a certificate executed by one of its Authorized Officers. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company and whom Prudential in good faith believes to be an Authorized Officer of the Company at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company, and any action taken under this Agreement on behalf of Prudential by any individual who on or after the date of this Agreement shall have been an Authorized Officer of Prudential and whom the Company in good faith believes to be an Authorized Officer of Prudential at the time of such action shall be binding on Prudential even though such individual shall have ceased to be an Authorized Officer of Prudential.
"Available Facility Amount" shall have the meaning specified in paragraph 2B(1).
"Bankruptcy Law" shall have the meaning specified in clause (viii) of paragraph 7A.
"Business Day" shall mean any day other than (i) a Saturday or a Sunday, (ii) a day on which commercial banks in New York City or Chicago, Illinois, are required or authorized to be closed and (iii) for purposes of paragraph 2B(3) hereof only , a day on which The Prudential Insurance Company of America is not open for business.
"Cancellation Date" shall have the meaning specified in paragraph 2B(8)(iv).
"Cancellation Fee" shall have the meaning specified in paragraph 2B(8)(iv).
"Capitalized Lease Obligation" shall mean any rental obligation which, under generally accepted accounting principles, is or will be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof account ed for as indebtedness (net of interest expenses) in accordance with such principles.
"Closing Day" shall mean, with respect to any Accepted Note, the Business Day specified for the closing of the purchase and sale of such Accepted Note in the Request for Purchase of such Accepted Note, provided that (i) if the Company and the Purchaser which is obligated to purchase such Accepted Note agree on an earlier Business Day for such closing, the "Closing Day" for such Accepted Note shall be such earlier Business Day, and (ii) if the closing of the purchase and sale of such Accepted Note is rescheduled pursuant to paragraph 2B(7), the Closing Day for such Accepted Note, for all purposes of this Agreement except references to "original Closing Day" in paragraph 2B(8)(iii), shall mean the Rescheduled Closing Day with respect to such Accepted Note.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Confirmation of Acceptance" shall have the meaning specified in paragraph 2B(5).
"Consolidated Capitalization" shall mean, as of any time of determination thereof, the sum of (i) Consolidated Net Worth and (ii) Consolidated Funded Debt.
"Consolidated Cash" shall mean, as of any time of determination thereof, the aggregate amount of cash and marketable securities classified as current assets in accordance with generally accepted accounting principles of the Company and Subsidiaries on a consolidated basis, exclusive of any cash and marketable securities located outside of the United States which could not be repatriated (or, in the case of marketable securities, the proceeds of which could not be repatriated) for any legal or other reason within thirty days from the date of such determination.
"Consolidated Funded Debt" shall mean, as of any time of determination thereof, the total amount of Funded Debt of the Company and Subsidiaries as determined on a consolidated basis.
"Consolidated Net Income" shall mean, as to any period, the net income of the Company and Subsidiaries determined on a consolidated basis, exclusive of extraordinary gains and losses.
"Consolidated Net Worth" shall mean, as of any time of determination thereof, the net worth of the Company and Subsidiaries determined on a consolidated basis.
"Current Debt" shall mean, with respect to any Person, all Indebtedness of such Person for borrowed money which by its terms or by the terms of any instrument or agreement relating thereto matures on demand or within one year from the date of the creation thereof and is not directly or indirectly renewable or extendible at the option of the debtor to a date more than one year from the date of the creation thereof, provided that Indebtedness for borrowed money outstanding under a revolving credit or similar agreement which obligates the lender or lenders to extend credit over a period of more than one year shall constitute Funded Debt and not Current Debt, even though such Indebtedness by its terms matures on demand or within one yea r from the date of the creation thereof.
"Debt" shall mean Current Debt and Funded Debt.
"Delayed Delivery Fee" shall have the meaning specified in paragraph 2B(8)(iii).
"Designated Investments" shall mean all investments in (i) capital stock (other than capital stock of Hach Company described in clause (iii) of paragraph 6B(5)) and rights to acquire the same and (ii) debt which does not have an investment grade rating from either Moody's Investors Service, Inc. or Standard and Poor's Corporation (or, if neither such rating agency is then in the business of rating debt, by another nationally recognized rating agency), excluding in each case capital stock and investments in Subsidiaries.
"Designated Termination" shall mean a termination of the Issuance Period resulting from the Company's provision of a notice of termination as contemplated by clause (ii) of paragraph 2B(2). Notwithstanding the foregoing, such a termination s hall not constitute a "Designated Termination" if the applicable notice is provided by the Company within five Business Days following Prudential's failure to provide an interest rate quote (as contemplated by paragraph 2B(4)), unless (i) the applicable Request for Purchase failed to conform in all material respects with the requirements of paragraph 2B(3), (ii) a Default or Event of Default existed at the time the applicable Request for Purchase was received, (iii) a Default or Event of Default would have existed upon the issuance of the Notes described in the applicable Request for Purchase, or (iv) a market disrupting event described in paragraph 2B(6) existed at any time during the five Business Day period following receipt of the applicable Request for Purchase.
"Environmental Laws" shall mean all federal, state, local and foreign laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, codes, plans, orders, decrees, judgments, injunctions, notices or demand letter s issued, entered, promulgated or approved thereunder.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended.
"ERISA Affiliate" shall mean any corporation which is a member of the same controlled group of corporations as the Company within the meaning of section 414(b) of the Code, or any trade or business which is under common control with the Company within the meaning of section 414(c) of the Code.
"Event of Default" shall mean any of the events specified in paragraph 7A, provided that there has been satisfied any requirement(s) in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement(s) have been satisfied.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Facility" shall have the meaning specified in paragraph 2B(1).
"Facility Fee" shall have the meaning specified in paragraph 2B(8)(i).
"Fixed Charges" shall mean, for any period, for the Company and its Subsidiaries on a consolidated basis, the sum of (i) operating lease rental expense and (ii) interest expense.
"Funded Debt" shall mean with respect to any Person without duplication,
(i) any obligation payable more than one year from the date of creation thereof which under generally accepted accounting principle should be shown on the balance sheet as a liability (including Capitalized Lease Obligations and excluding reserves for deferred income taxes and other reserves to the extent not constituting an obligation),
(ii) any obligation payable more than one year from the date of creation thereof which is secured by any Lien on property owned by such Person, whether or not the obligation secured thereby shall have been assumed by
(iii) all Swaps of such Person,
(iv) all obligations of the type described in the foregoing clauses (i), (ii) and (iii) with respect to which such Person has become liable by way of a Guarantee,
(v) to the extent Current Debt of such Person and each of its Subsidiaries was not concurrently reduced to zero for a period of sixty consecutive days during the most recently completed fiscal year of such Person, an amount equal to the maximum amount of such Current Debt outstanding during a sixty consecutive day period occurring in such most recently completed fiscal year as selected by such Person.
"Funded Debt Ratio" shall mean, as of any time of determination thereof, the ratio of (i) Consolidated Funded Debt less Consolidated Cash to (ii) Consolidated Capitalization less Consolidated Cash.
"Guarantee" shall mean, with respect to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or for any transportation or service, regardless of the non-delivery or non- furnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. The amount of any Guarantee shall be equal to the outstanding principal amount of the obligation guaranteed or such lesser amount to which the maximum exposure of the guarantor shall have been specifically limited.
"Hedge Treasury Note" shall mean, with respect to any Accepted Note, the actively traded United States Treasury Note whose duration (as reasonably determined by Prudential) most closely matches the duration of such Accepted Note.
"Hostile Tender Offer" shall mean, with respect to the use of proceeds of any Note, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases of such shares, equity interests, securities or rights representing less than 5% of the equity interests or beneficial ownership of such corporation or other entity for portfolio investment purposes, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date on which the Company makes the Request for Purchase of such Note.
"including" shall mean, unless the context clearly requires otherwise, "including, without limitation".
"Indebtedness" shall mean, with respect to any Person, without duplication, (i) all items (excluding items of contingency reserves or of reserves for deferred income taxes) which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as of the date on which Indebtedness is to be determined, (ii) all indebtedness secured by any Lien on any property or asset owned or held by such Person subject thereto, whether or not the indebtedness secured thereby shall have been assumed, and (iii) all indebtedness of others with respect to which such Person has become liable by way of Guarantee.
"Initial Closing Day" shall mean the first Closing Day to occur under and pursuant to this Agreement.
"Issuance Period" shall have the meaning specified in paragraph 2B(2).
"Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of securing the payment or performance of an obligation.
"Material Subsidiary" shall mean, at any date as of which its status as such shall be determined, any Subsidiary which meets one or both of the following descriptions:
(i) the investments of the Company and Subsidiaries in such Subsidiary exceed in the aggregate 10% of the consolidated net asset value of the Company and Subsidiaries as of such date; or
(ii) the equity of the Company and its Subsidiaries in the income before income taxes and extraordinary items of such Subsidiary exceeds 10% of such income of the Company and its Subsidiaries on a consolidated basis for the twelve-month period ending on the last day of the Company's then most recently ended fiscal quarter.
"Multiemployer Plan" shall mean any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA.
"Non-Dilutive Subsidiary" shall mean a Subsidiary in which, as compared to the other Subsidiary in question, the Company directly or indirectly through Non-Dilutive Subsidiaries owns an equal or greater percentage of both (i) Voting Stock an d (ii) economic interest.
"Notes" shall have the meaning specified in paragraph 1.
"Officer's Certificate" shall mean a certificate signed in the name of the Company by an Authorized Officer of the Company.
"Operating Cash Flow" shall mean, for any period, Consolidated Net Income plus, to the extent deducted in determining same, tax expense, operating lease rental expense and interest expense.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor or replacement entity thereto under ERISA.
"Percentage of Assets Transferred" shall mean, with respect to each asset Transferred pursuant to clause (v) of paragraph 6B(5), the percentage of the total assets of the Company and Subsidiaries determined on a consolidated basis which is represented by the book value of such asset, in each case as of the last day of the fiscal quarter most recently ended prior to the effective date of such Transfer.
"Percentage of Earnings Capacity Transferred" shall mean, with respect to each asset Transferred pursuant to clause (v) of paragraph 6B(5), the percentage of Three Year Average Consolidated Net Income produced by, or attributable to, such asset during the fiscal year most recently ended prior to the effective date of such Transfer.
"Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.
"Plan" shall mean any employee pension benefit plan (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate.
"Preferred Stock" shall mean, with respect to any corporation or limited liability company, any capital stock or equity interest that is preferred in right of payment of dividends, earnings, or liquidation proceeds over any other class of capital stock or equity interest.
"Priority Debt" shall mean (i) Debt of the Company secured by a Lien, excluding Debt secured by Liens described on Schedule 6B(1) and (ii) Debt and Preferred Stock of Subsidiaries, excluding that which is held by the Company or a Non-Dilutive Subsidiary.
"Prudential" shall mean The Prudential Insurance Company of America.
"Prudential Affiliate" shall mean any corporation or other entity all of the Voting Stock (or equivalent voting securities or interests) of which is owned by Prudential either directly or through Prudential Affiliates.
"Purchasers" shall mean with respect to any Accepted Notes, Prudential and/or the Prudential Affiliate(s), which are purchasing such Accepted Notes.
"Reduced Facility Fee Installment" shall mean that portion of the applicable Facility Fee Installment due pursuant to paragraph 2B(8)(i) determined by multiplying the amount thereof by a fraction, the denominator of which shall be 365 and the numerator of which shall be the number of days elapsed between the date of the Agreement or the first anniversary of the date of the Agreement (as the case may be) and the date of the Designated Termination.
"Request for Purchase" shall have the meaning specified in paragraph 2B(3).
"Required Holder(s)" shall mean the holder or holders of at least 51% of the aggregate principal amount of the Notes or of a Series of Notes, as the context may require, from time to time outstanding.
"Rescheduled Closing Day" shall have the meaning specified in paragraph 2B(7).
"Responsible Officer" shall mean the chief executive officer, chief operating officer, chief financial officer or chief accounting officer of the Company, general counsel of the Company or any other officer of the Company involved principally in its financial administration or its controllership function.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Series" shall have the meaning specified in paragraph 1.
"Significant Holder" shall mean (i) Prudential, so long as Prudential or any Prudential Affiliate shall hold any Note or the Issuance Period shall not have terminated, or (ii) any other holder of Notes from time to time outstanding, if the Note or Notes held by such holder, at the time of its acquisition by such holder, equalled or exceeded $5,000,000 in aggregate principal amount.
"Subsidiary" shall mean any corporation more than 50% of the total combined voting power of all classes of Voting Stock of which shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries.
"Swaps" shall mean, with respect to any Person, payment obligations with respect to interest swaps or hedges, currency swaps or hedges and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting
of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined.
"Three Year Average Consolidated Net Income" shall mean, as of any time of determination thereof, the average of annual Consolidated Net Income for the three fiscal years of the Company most recently completed as of such time of determination .
"Transfer" shall mean, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
"Transferee" shall mean any direct or indirect transferee of all or any part of any Note purchased by any Purchaser under this Agreement.
"Voting Stock" shall mean, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).
10C. Accounting Principles, Terms and Determinations. All references in this Agreement to "generally accepted accounting principles" shall be deemed to refer to generally accepted accounting principles in effect in the United States at the time of application thereof. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all unaudited financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with generally accepted accounting principles (subject, in the case of unaudited statements, to year end adjustments) applied on a basis consistent with the most recent audited financial statements delivered pursuant to clause (ii) of paragraph 5A or, if no such statements have been so delivered, the most recent audited financial statements referred to in clause (i) of paragraph 8B.
11A. Note Payments. The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal of, interest on, and any Yield-Maintenance Amount payable with respect to, such Note, which comply with the term s of this Agreement, by wire transfer of immediately available funds for credit on the date due (which wire transfer shall be initiated by the Company not later than 12:00 noon, New York City local time, on the date due) to (i) the account or account s in the United States of such Purchaser specified in the Confirmation of Acceptance with respect to such Note or (ii) such other account or accounts in the United States as such Purchaser may from time to time designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each Purchaser agrees that, before disposing of any Note, it will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this paragraph 11A to any Transferee which shall have made the same agreement as the Purchasers have made in this paragraph 11A.
11B. Expenses. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save Prudential, each Purchaser and any Transferee harmless against liability for the payment of, all out-of-pocket expenses arising in connection with such transactions, including (i) all document production and duplication charges and the fees and expenses of any special counsel engaged by the Purchasers or any Transferee in connection with any subsequent propose d modification of, or proposed consent under, this Agreement, whether or not such proposed modification shall be effected or proposed consent granted, and (ii) the costs and expenses, including reasonable attorneys' fees, incurred by any Purchaser or any Transferee in enforcing (or determining whether or how to enforce) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the transactions contemplated hereby or by reason of any Purchaser's or any Transferee's having acquired any Note, including without limitation, costs and expenses incurred in any bankruptcy case. Notwithstanding the foregoing, the Company shall not be obligated to reimburse Prudential or any other Purchaser for costs and expenses (including, without limitation, any fees and expenses of any counsel) incurred in connection with the purchase of any Notes, to the extent incurred on or before the C losing Day for such Notes. The obligations of the Company under this paragraph 11B shall survive the transfer of any Note or portion thereof or interest therein by any Purchaser or any Transferee and the payment of any Note.
11C. Consent to Amendments. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) of the Notes except that, (i) with the written consent of the holders of all Notes of a particular Series, and if an Event of Default shall have occurred and be continuing, of the holders of all Notes of all Series, at the time outstanding (and not without such written consents), the Notes of such Series may be amended or the provisions thereof waived to change the maturity thereof, to change or affect the principal thereof, or to change or affect the rate or time of payment of interest on or any Yield-Maintenance Amount payable with respect to the Notes of such Series, (ii) without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of the provisions of this Agreement shall change or affect the provisions of paragraph 7A or this paragraph 11C insofar as such provisions relate to proportions of the principal amount of the Notes of any Series, or the rights of any individual holder of Notes, required with respect to any declaration of Notes to be due and payable or with respect to any consent, amendment, waiver or declaration, (iii) with the written consent of Prudential (and not without the written consent of Prudential) the provisions of paragraph 2B may be amended or waived (except insofar as any such amendment or waiver would affect any rights or obligations with respect to the purchase and sale of Notes which shall have become Accepted Notes prior to such amendment or waiver), and (iv) with the written consent of all of the Purchasers which shall have become obligated to purchase Accepted Notes of any Series (and not without the written consent of all such Purchasers), any of the provisions of paragraphs 2B and 3 may be amended or waived insofar as such amendment or waiver would affect only rights or obligations with respect to the purchase and sale of the Accepted Notes of such Series or the terms and provisions of such Accepted Notes. Each holder of any Note at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11C, whether or not such Note shall have been marked to indicate such consent, but any Notes issued thereafter may bear a notation refer ring to any such consent. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein and in the Notes, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
11D. Form, Registration, Transfer and Exchange of Notes; Lost Notes. The Notes are issuable as registered notes without coupons in denominations of at least $1,000,000, except as may be necessary to reflect any principal amount not evenly divisible by $1,000,000. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender for registration of transfer of any Note at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer or exchange of Notes. Each prepayment of principal payable on each prepayment date upon each new Note issued upon any such transfer or exchange shall be in the same proportion to the unpaid principal amount of such new Note as the prepayment of principal payable on such date on the Note surrendered for registration of transfer or exchange bore to the unpaid principal amount of such Note. No reference need be made in any such new Note to any prepayment or prepayments of principal previously due and paid upon the Note surrendered for registration of transfer or exchange. Every Note surrendered for registration
of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument o f transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement in such form as shall be reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note.
11E. Persons Deemed Owners; Participations. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and interest on, and any Yield-Maintenance Amount payable with respect to, such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence, the holder of any Note may from time to time grant participations in all or any part of such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion.
11F. Survival of Representations and Warranties; Entire Agreement. All representations and warranties contained herein or made in writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of an y Purchaser or any Transferee. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter.
11G. Successors and Assigns. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not.
11H. Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is prohibited by any one of such covenants, the fact that it would be permitted by an exception to, or otherwise be in compliance within the limitations of, another covenant shall not (i) avoid the occurrence of a Default or Event of Default if such action is taken or such condition exists or (ii) in any way prejudice an attempt by the holder of any Note to prohibit through equitable action or otherwise the taking of any action by the Company or any Subsidiary which would result in a Default or Event of Default.
11I. Notices. All communications provided for hereunder (other than communications provided for under paragraph 2) shall be in writing and sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to any Purchaser, addressed as specified for such communications in the Purchaser Schedule attached to the applicable Confirmation of Acceptance or at such other address as any such Purchaser shall have specified to the Company in writing, (ii) if t o any other holder of any Note, addressed to it at such address as it shall have specified in writing to the Company or, if any such holder shall not have so specified an address, then addressed to such holder in care of the last holder of such Note which shall have so specified an address to the Company and (iii) if to the Company, addressed to it at Lawter International, Inc., 990 Skokie Boulevard, Northbrook, IL 60062, Attention: Chief Financial Officer. Notices given as provided above shall be deemed effective upon receipt thereof. Any communication pursuant to paragraph 2 shall be made by the method specified for such communication in paragraph 2, and shall be effective to create any rights or obligations under this Agreement only i f, in the case of a telephone communication, an Authorized Officer of the party conveying the information and of the party receiving the information are parties to the telephone call, and in the case of a telecopier communication, the communication i s signed by an Authorized Officer of the party conveying the information, addressed to the attention of an Authorized Officer of the party receiving the information, and in fact received at the telecopier terminal the number of which is listed for the party receiving the communication in the Information Schedule or at such other telecopier terminal as the party receiving the information shall have specified in writing to the party sending such information.
11J. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on, or any Yield-Maintenance Amount payable with respect to, any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day. If the date for any payment is extended to the next succeeding Business Day by reason of the preceding sentence, the period of such extension shall be included in the computation of the interest payable on such Business Day.
11K. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
11L. Descriptive Headings. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.
11M. Satisfaction Requirement. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any Purchaser, to any holder of Notes or to the Required H older(s), the determination of such satisfaction shall be made by such Purchaser, such holder or the Required Holder(s), as the case may be, in the sole and exclusive judgment (exercised in good faith and reasonably) of the Person or Persons making such determination.
11N. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAW OF THE STATE OF ILLINOIS.
11O. Severalty of Obligations. The sales of Notes to the Purchasers are to be several sales, and the obligations of Prudential and the Purchasers under this Agreement are several obligations. No failure by Prudential or any Purchaser to perform its obligations under this Agreement shall relieve any other Purchaser or the Company of any of its obligations hereunder, and neither Prudential nor any Purchaser shall be responsible for the obligations of, or any action taken or omitted by , any other such Person hereunder.
11P. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one agreement.
[Balance of page left blank intentionally.]
11Q. Binding Agreement. When this Agreement is executed and delivered by the Company and Prudential, it shall become a binding agreement between the Company and Prudential. This Agreement shall also inure to the benefit of each Purchaser which shall have executed and delivered a Confirmation of Acceptance, and each such Purchaser shall be bound by this Agreement.
By: /s/ William S. Russell
hereby accepted as of the date first above written.
By: /s/ P. Scott Von Fischer | 8-K | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T11:20:51 |
0000942794-96-000002 | 0000942794-96-000002_0000.txt | Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
(Exact name of registrant as specified in its charter)
(State or other (Commission File (IRS Employer jurisdiction of Number) Identification Number)
365 Plantation Street, Biotechnology Research Park (Address of principal executive offices)
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
Attached hereto as Exhibit A is a copy of the Registrant's amended monthly operating report dated January 3, 1996 (the "Monthly Operating Report"), to the United States Bankruptcy Court Trustee for the District of Massachusetts, Western Division, relating to the Registrant's petition under Chapter 11 of the United States Bankruptcy Code, Case No. 94-43054-JFQ.
The Monthly Operating Report has not been audited by the Registrant's independent, certified public accountants, nor does the Monthly Operating Report contain complete consolidated information relating to the Company's subsidiaries and affiliates or adjustments which may be required as a result of an independent audit of the Registrant's financial statements, including adjustments relating to the special investigation described in the Company's reports on Form 8-K filed with the Securities and Exchange Commission on April 6, 1994 and May 13, 1994, respectively.
The Registrant's Monthly Operating Report dated January 3, 1996 filed with the United States Bankruptcy Court Trustee for the District of Massachusetts, Western Division, Case No. 94-43054-JFQ.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.
Dated: January 11, 1996 By: \s\ Alison Taunton-Rigby | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-11T17:32:34 |
0000950168-96-000039 | 0000950168-96-000039_0006.txt | FIRST INVESTORS SERIES FUND II, INC.
WHEREAS, FIRST INVESTORS SERIES FUND II, INC. (the "Fund") is a diversified open-end management investment company duly registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund employs one or more broker-dealers as distributors of its shares ("Underwriter") pursuant to a written agreement ("Underwriting
WHEREAS, Rule 12b-1 under the 1940 Act permits registered investment companies to bear certain expenses associated with the distribution of their
WHEREAS, the Fund offers multiple classes of shares for
WHEREAS, the Board of Directors believes that payment of certain expenses associated with the distribution of Class B shares of the Fund and the servicing or maintenance of such Class B shareholder accounts would be beneficial to the Fund and its shareholders; and
WHEREAS, the Fund, on behalf of its separate designated series presently existing or hereafter established (individually and collectively, "Series"), wishes to adopt a plan under Rule 12b-1 to permit each Series to pay some of the expenses involved in distributing its Class B shares and the servicing or maintenance of its Class B shareholder accounts.
NOW, THEREFORE, in consideration of the foregoing, the Fund hereby adopts the following distribution plan in accordance with Rule 12b-1 (the "Class B Plan"):
1. PAYMENT OF THE FEE. Pursuant to one or more Underwriting Agreements which the Fund can enter into from time to time and this Class B Plan, each Series shall pay as compensation for the Underwriter's services an annualized Rule 12b-1 fee of an aggregate of 1% of each Series' average daily net assets attributable to Class B shares (referred to herein as the "Class B 12b-1 fee"). The Class B 12b-1 fee is payable by each Series monthly or at such intervals as shall be determined by the Board of Directors in the manner provided for approval of this Class B Plan in paragraph 5(a). The Class B 12b-1 fee shall consist of a distribution fee and a service fee, in the following proportions: (a) the distribution fee shall be at the rate of 0.75% of the average daily net assets attributable to Class B shares, and (b) the service fee shall be at the rate of 0.25% of the average daily net assets attributable to Class B shares. The Class B 12b-1 fee shall be payable regardless of whether that amount exceeds or is less than the actual expenses incurred by the Underwriter in distributing Class B shares of such Series in a particular year.
2. EXPENSES DIFFERENT FROM ANNUAL RATE. To the extent that the Class B 12b-1 fee paid by each Series in a particular year exceeds actual expenses attributable to Class B Shares incurred by an Underwriter in that year, the Underwriter may realize a profit in that year. If the expenses attributable to Class B Shares incurred by an Underwriter in a particular year are greater than the Class B 12b-1 fee, the Underwriter may incur a loss in that year and may not recover from such Series such excess of expenses attributable to Class B Shares over the Class B 12b-1 fee unless actual expenses attributable to Class B shares incurred in a subsequent year in which the Class B Plan remained in effect were less than the Class B 12b-1 fee paid under the Class B Plan in that year.
3. DISTRIBUTION AND SERVICE FEES. "Distribution" fees are fees paid for the distribution of the Series' Class B shares, including continuing payments to registered representatives and dealers for sales of such shares, the costs of printing and dissemination of sales material or literature, prospectuses used as sales material and reports or proxy material prepared for the Series' Class B shareholders to the extent that such material is used in connection with the sales of the Series' Class B shares, and general overhead of an Underwriter. "Service" fees are fees paid for services related to the maintenance and servicing of existing Class B shareholder accounts, including shareholder liaison services, whether provided by individual representatives, dealers, an Underwriter or others entitled to receive such fees.
4. REPORTS TO DIRECTORS. Quarterly and annually in each year that the Class B Plan remains in effect, the Treasurer of the Fund shall prepare and furnish to the Board of Directors of the Fund a written report of the amounts so expended and the purposes for which such expenditures were made under the Class B Plan. The Board of Directors will promptly review the Treasurer's report.
5. APPROVAL OF PLAN. The Class B Plan shall become effective with respect to any Series of the Fund immediately upon the approval by the majority vote of (a) the Fund's Board of Directors and of the Directors who are not "interested persons" of the Fund, within the meaning of the 1940 Act, and have no direct or indirect financial interest in the operation of the Class B Plan or in any agreements related to the Class B Plan (the "Independent Directors") cast in person at a meeting called for the purpose of voting on such Class B Plan and (b) the outstanding Class B voting securities of such Series, voting separately from any other class or Series of the Fund, which for this purpose is defined in Section 2(a)(42) of the 1940 Act and means the lesser of (1) more than 50% of the outstanding shares, or (2) 67% or more of the shares present or represented at a shareholders meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy, whichever is less.
6. TERMINATION OF PLAN. The Class B Plan can be terminated by any Series at any time without the payment of any penalty by vote of a majority of the Independent Directors or by vote of a majority of the outstanding Class B voting securities of such Series, voting separately from any other class or Series of the Fund (as defined in Section 2(a)(42) of the 1940 Act), on not more than 60 days' written notice to any other party to the Class B Plan.
7. AMENDMENTS. Any amendment to increase materially the cost to any Series of the Fund under the Class B Plan may not be instituted without the approval of the outstanding Class B voting securities of such Series, voting separately from any other class or Series of the Fund (as defined in Section 2(a)(42) of the 1940 Act).
8. NOMINATION OF DIRECTORS. While the Class B Plan shall be in effect, the selection and nomination of the Independent Directors shall be committed to the discretion of the Independent Directors then in office.
9. TERM. The Class B Plan shall remain in effect with respect to any Series for one year from the date of its approval by the Class B shareholders of such Series and may continue thereafter only if the Class B Plan is approved at least annually by either the Board of Directors or by a vote of a majority of the outstanding Class B voting securities of such Series, voting separately from any other class or Series of the Fund, and in either case by a majority vote of the Independent Directors, cast in person at a meeting called for the purpose of voting on the Class B Plan.
10. PAYMENTS OUTSIDE OF THE PLAN. To the extent any payments made by any Series to its investment advisor, its transfer agent or any company affiliated with an Underwriter, may be deemed to be indirect financing of any monies paid by the Underwriter or investment advisor out of their own assets for distribution expenses, such payments are permissible under the Class B Plan. Permissible payments may include, but are not limited to, the payment by the Series of investment advisory and service fees.
11. TREATMENT OF EXPENSES. The Directors, including all of the Independent Directors, have determined that the Class B 12b-1 fee will not be an operating expense of the Series. However, while it is expected that the payments under the Class B Plan will be excluded from each Series' total expenses for purposes of determining compliance with any state expense limitation, whether any expenditure under the Class B Plan is subject to any such state expense limitation will depend upon the nature of the expenditure and the terms of the state regulation imposing the limitation. In any event, the amounts paid under the Class B Plan will be an expense for accounting purposes. | 485BPOS | EX-99.B15.2 | 1996-01-12T00:00:00 | 1996-01-12T09:22:27 |
0000898430-96-000100 | 0000898430-96-000100_0000.txt | PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY [X] Definitive Proxy Statement RULE 14a-6(E)(2))
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3).
[_] 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 transaction 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 Rule 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:
[X] 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.
(2) Form, Schedule or Registration Statement No.:
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 12, 1996
The Annual Meeting of Stockholders of Fountain Oil Incorporated (the "Company") will be held at the Fairbanks Room of the Holiday Inn Select, 14703 Park Row, Houston, Texas 77079, on February 12, 1996, at 10:00 a.m. for the following purposes:
1. To elect six directors to serve until the next Annual Meeting of Stockholders or until their successors are duly elected and qualified;
2. To approve an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock from 25,000,000
3. To approve the 1995 Long-Term Incentive Plan which provides for the issuance of up to 1,500,000 shares of Common Stock in connection with the grant of stock options or stock appreciation rights to employees, directors, consultants and advisors of the Company;
4. To ratify the selection of Coopers & Lybrand L.L.P. as independent public accountants of the Company for the fiscal year ending August 31,
5. To transact such other business as may properly come before the Meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on December 14, 1995, as the record date for determination of the stockholders entitled to notice of and to vote at the Annual Meeting.
EVEN THOUGH YOU MAY EXPECT TO BE PERSONALLY PRESENT AT THE MEETING, PLEASE BE SURE THAT THE ENCLOSED PROXY CARD IS PROPERLY COMPLETED, DATED, SIGNED AND RETURNED WITHOUT DELAY IN THE ACCOMPANYING ENVELOPE TO WHICH NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
1400 Broadfield Boulevard, Suite 200
SOLICITATION, REVOCATION AND VOTING OF PROXIES
The accompanying proxy is solicited by and on behalf of the Board of Directors of Fountain Oil Incorporated (the "Company"), in connection with the Annual Meeting of Stockholders to be held at 10:00 a.m. on February 12, 1996, at the Fairbanks Room of the Holiday Inn Select, 14703 Park Row, Houston, Texas 77079, and at any and all adjournments thereof. It is anticipated that this Proxy Statement and accompanying proxy will first be mailed to stockholders on or about January 11, 1996.
The accompanying proxy, if properly executed and returned, will be voted as specified by the stockholder or, if no vote is indicated, the proxy will be voted FOR each matter specified. As to any other matter of business which may be brought before the Meeting, a vote may be cast pursuant to the accompanying proxy in accordance with the judgment of the persons voting the same, but management does not know of any such other matter of business. A stockholder may revoke his proxy at any time prior to the voting of shares by voting in person at the Meeting or by filing with the Secretary of the Company a duly executed proxy bearing a later date or an instrument revoking the proxy.
The costs of solicitation of proxies will be paid by the Company. In addition to soliciting proxies by mail, the Company's officers, directors and other regular employees, without additional compensation, may solicit proxies personally, by telephone or by other appropriate means. Banks, brokers, fiduciaries and other custodians and nominees who forward proxy soliciting material to their principals will be reimbursed their customary and reasonable out-of-pocket expenses.
RECORD DATE AND VOTING RIGHTS
Only stockholders of record of the Company's $0.10 par value Common Stock as of the close of business on December 14, 1995 will be entitled to vote at the Meeting. On December 14, 1995 there were outstanding 10,834,063 shares of Common Stock, which constituted all of the outstanding voting securities of the Company, each of which is entitled to one vote per share. A majority of the shares entitled to vote, represented in person or by proxy, constitutes a quorum at the Meeting. Abstentions and broker non-votes are counted as present for purposes of determining the existence of a quorum.
The Board of Directors has nominated six persons to be elected directors at the Annual Meeting to hold office until the next Annual Meeting of Stockholders and until the election of their respective successors. Directors are elected by a plurality of the shares voted; broker non-votes and votes withheld have no effect on the vote. All proxies received by the Board of Directors will be voted for the nominees listed below if no direction to the contrary is given. In the event that any nominee is unable or declines to serve, an event that is not anticipated, the proxies will be voted for the election of any nominee who may be designated by the Board of Directors.
The nominees for director are:
EINAR BANDLIEN was elected a Director of the Company on August 17, 1994, Senior Vice President for Business Development on December 15, 1994 and Executive Vice President for Business Development on November 14, 1995. Mr. Bandlien is a petroleum expert with extensive experience in exploration and petroleum resource management. Prior to joining the Company, he held various positions with Nopec. a.s., a Norwegian petroleum consultant group of companies of which he was a founder, including Director of International Activities from 1987 to 1991 and Chairman from 1990 to 1993. He was a Special Advisor to Nopec from 1993 to 1994. Mr. Bandlien also served as Executive Secretary of the Norwegian Petroleum Resource Management Alliance from 1991 to 1993.
ROBERT A. HALPIN was elected a Director on March 4, 1995 and Chairman of the Board on November 14, 1995. Mr. Halpin has long experience in the oil and gas industry. From 1989 until his retirement in September 1993, he served as Vice President for International Exploration and Production with Petro-Canada. In October 1993, Mr. Halpin became President of Halpin Energy Resources Ltd., a firm he formed to provide advisory services to energy companies with emphasis on international petroleum projects.
STANLEY D. HECKMAN was elected a Director on March 4, 1995. For more than the past five years, Mr. Heckman has been the owner of JSB Services Corp., a company whose primary business is in real estate development and investments.
EUGENE J. MEYERS was elected a Director on January 3, 1994 and served as Chairman of the Board from January 3, 1994 to November 14, 1995. He served as Chief Executive Officer from August 16, 1994 to November 21, 1994 and as President from September 8, 1994 to November 21, 1994. Mr. Meyers is President and owner of GSM Financial Corporation. Through such company and other companies, Mr. Meyers has been involved in real estate development for the past 30 years.
OISTEIN NYBERG was elected a Director on March 4, 1995 and President and Chief Executive Officer effective March 9, 1995. From January 1984 to March 1995, Mr. Nyberg was Managing Director of Smedvig Technology A/S, a Norwegian technology company of which he was one of the founders. Among other services, Smedvig provides consulting services in the areas of reservoir evaluation, production drilling and well control.
NILS N. TRULSVIK was elected a Director on August 17, 1994. He served as Executive Vice President from September 8, 1994 to November 21, 1994 and as President and Chief Executive Officer from November 21, 1994 to March 9, 1995 when he reassumed the position of Executive Vice President. Mr. Trulsvik is a petroleum explorationist with extensive experience in petroleum exploration and development throughout the world. Prior to joining the Company, he held various positions with Nopec a.s., a Norwegian petroleum consultant group of companies of which he was a founder, including Managing Director from 1987 to 1993 and Special Advisor from 1993 to August 1994.
INFORMATION CONCERNING BOARD AND COMMITTEE MEETINGS
The Company's Board of Directors held nine meetings during the fiscal year ended August 31, 1995. Einar Bandlien did not attend three of such meetings. The members of the Audit Committee and the Compensation Committee are Robert A. Halpin and Stanley D. Heckman. The Audit Committee is responsible for reviewing the Company's financial statements, audit results, internal controls, and accounting principles, policies and practices. The Committee also recommends to the Board the selection of the Company's outside accounting firm and approves the fees of such firm. The Audit Committee held two meetings in fiscal year 1995. The Compensation Committee approves the compensation of the Company's executive officers, oversees the compensation scheme for other Company employees, administers and grants awards under stock option and other compensation plans, and recommends to the Board the adoption of retirement and other employee benefit plans. The Compensation Committee held one meeting in fiscal year 1995. The Board of Directors has not designated a nominating committee.
For the fiscal year ended August 31, 1995, the Company paid non-employee Directors fees at the rate of $14,000 per annum. In addition, the Company paid such Directors a fee of $3,000 per year for service on committees of the Board of Directors. Mr. Halpin serves on the Audit, Compensation and Petroleum Committees. Mr. Heckman serves on the Audit and Compensation Committees. The Company also pays a fee of $1,000 per day, other than a day on which the Board meets, for those days spent by a non-employee Director on the business of any committee in excess of one day per year with respect to the Compensation Committee and three days per year with respect to the Audit and Petroleum Committees. The Company also reimburses ordinary out-of-pocket expenses for attending Board and Committee meetings.
The 1995 Long-Term Incentive Plan which is being submitted for approval by the stockholders at the Annual Meeting provides for automatic option grants to non-employee Directors. See "Approval of the 1995 Long-Term Compensation Plan--Automatic Grants to Non-Employee Directors."
Halpin Energy Resources, Ltd., which is controlled by Mr.Halpin, was paid $20,500 for consulting services in the area of petroleum projects provided to the Company in fiscal 1995, including $7,500 for services provided after Mr. Halpin was elected a director.
The following table shows all compensation paid or accrued by the Company and its subsidiaries during the ten month period ended August 31, 1994 and the fiscal year ended August 31, 1995 to certain executive officers of the Company (the "Named Officers").
(1) Mr. Nyberg was elected President/Chief Executive Officer effective March 9, 1995. Other annual compensation paid in fiscal 1995 includes $11,899 as a housing allowance and $7,738 for childrens' school fees. (2) Mr. Trulsvik served as Executive Vice President from September 8, 1994 to November 21, 1994; as President/Chief Executive Officer from November 21, 1994 to March 9, 1995; and as Executive Vice President since March 9, 1995. Mr. Trulsvik's salary in fiscal 1995 includes $33,722 as the value of 10,900 shares of Common Stock received in lieu of cash compensation.
(3) Mr. Meyers served as Chairman of the Board from January 3, 1994 until November 14, 1995 and as Chief Executive Officer from August 16, 1994 to November 21, 1994. (4) Mr. Haavik was elected Executive Vice President/Chief Financial Officer on February 1, 1995. Other annual compensation paid in fiscal 1995 includes $20,505 as a housing allowance. (5) Mr. Plisga was elected Executive Vice President, Americas on January 16, 1995. Mr. Plisga's salary in fiscal 1995 includes $25,610 paid for consulting services provided by him before his employment by the Company.
(6) These options expire August 16, 1999 and are exercisable only while the holder renders services to the Company as an officer, director, employee, consultant or advisor or within six months after the holder ceases to render such services. (7) Represents the Company's contributions or accruals to retirement/pension plans.
FISCAL YEAR END OPTION VALUES
Shown below is information regarding the value of unexercised stock purchase warrants and options issued as compensation (referred to as "options" in the following table) held by the Named Officers as of August 31, 1995.
(1) Represents the difference between the market value on August 31, 1995 and the exercise price.
The Company has entered into Employment Contracts with each of Oistein Nyberg, Nils Trulsvik, Arnfin Haavik and Gary Plisga which may be terminated by either party on six months written notice. The contracts provide for an annual salary of $150,000 which is subject to renegotiation at the end of each fiscal year. In addition, beginning April 1, 1995, each person receives an allowance equal to 12.5% of his base salary, a portion of which is used to provide minimum life and disability insurance coverage for each such person. The remainder of such allowance may be used by each person for additional life, medical or accident insurance and to fund pension/retirement plans. The Company reserves the right to review the 12.5% allowance every three years. Each person is also entitled to receive a full year's salary in the event he is unable to provide services due to sickness or injury.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 14, 1995 with respect to beneficial ownership of the Company's Common Stock by each person known by the Company to be the beneficial owner of more than 5% of the Company's stock, by each director and Named Officer of the Company and by all directors and executive officers of the Company as a group.
*Includes addresses of beneficial owners of 5% or more of the Common Stock. **Less than 1%. (1) John M. and Renee A. Liviakis, husband and wife, are the sole stockholders and principal officers of Liviakis Financial Communications, Inc., which is the record owner of the shares listed. (2) Includes 123,200 shares owned of record by Touchdown Corporation, of which Mr. Landry is a control person; 264,481 shares owned of record by the CNW Irrevocable Trust dated September 10, 1991, of which Mr. Landry is Trustee; and 48,000 shares owned of record by the CNW Irrevocable Trust II dated December 11, 1991, of which Mr. Landry is Trustee. (3) Includes 66,667 shares underlying presently exercisable warrants. (4) Includes 8,000 shares owned by two sons (as to which beneficial ownership is disclaimed), 44,000 shares underlying presently exercisable warrants and 60,000 shares underlying presently exercisable options. (5) Includes 44,000 shares underlying presently exercisable warrants and 44,000 shares underlying presently exercisable options. (6) Includes 44,000 shares underlying presently exercisable warrants and 44,000 shares underlying presently exercisable options. (7) Includes 44,000 shares underlying presently exercisable warrants and 36,000 shares underlying presently exercisable options. (8) Includes 14,286 shares underlying presently exercisable warrants. (9) Represents 12,000 shares underlying presently exercisable options. (10) See Notes 3 through 9; also includes 179,161 issued shares and 156,000 shares underlying currently exercisable warrants and options held by executive officers not named in the foregoing table.
On February 27, 1995, the Company paid the principal and accrued interest due on a $245,000 note payable to certain stockholders of the Company, including Touchdown Corporation, which is controlled by Tom Landry, Jr., a more than 5% stockholder and a former President and Director of the Company. In connection with the repayment, Touchdown Corporation received $75,000 of principal and $3,250 of accrued interest.
During 1991, the Board of Directors of the Company purported to approve additional compensation in the amount $75,000 per year to be due Mr. Landry at the beginning of each of his two years of employment commencing August 1, 1991 with payments to be made on a deferred basis when adequate funds were determined by the Board of Directors to be available. Unpaid amounts were to bear interest. This liability had been classified as non-current since 1992 as the Board of Directors had not identified adequate funds to satisfy such liability. In addition, various liabilities had been accrued by the Company to reflect claims by parties affiliated with Mr. Landry. In June 1995, the Company settled all claims with Mr. Landry and his affiliates by paying $146,315 and transferring equipment with a net book value of $9,547. Since the liabilities thus discharged were carried at $195,628, a gain on settlement of $39,766 was recorded.
On December 20, 1994, the Company entered into a Consulting Agreement with Liviakis Financial Communications, Inc. ("Liviakis") pursuant to which Liviakis has undertaken for a two year period to advise and assist the Company with respect to its corporate finance and financial public relations activities including performing on behalf of the Company functions generally associated with corporate investor relations and public relations departments, disseminating information regarding the Company to the investment community and preparing materials relating to the Company. For undertaking the engagement and for its services under the Consulting Agreement, the Company issued to Liviakis 790,000 shares of Common Stock and is paying Liviakis an annual fee of $40,000. Liviakis paid $79,000, or par value, to the Company in connection with the issuance of the shares. The Company's Board of Directors valued these shares, which were issued without registration under the Securities Act of 1933, as amended, at 62.5% of the mean between the bid and asked prices for the Company's Common Stock at the time the Consulting Agreement was executed, or an aggregate of $1,296,000. The Company is charging the cost of the consulting services against income over the term of the Consulting Agreement based upon the expected rate at which effort would be expended by Liviakis over such term in connection with this engagement. During the fiscal year ended August 31, 1995, $1,134,875 was charged against income with respect to the Consulting Agreement.
AMENDMENT TO CERTIFICATE OF INCORPORATION
The Company's Board of Directors has unanimously adopted resolutions to amend the Company's Certificate of Incorporation, subject to stockholder approval, to increase the number of authorized shares of Common Stock from 25,000,000 shares to 50,000,000 shares, declaring the advisability of such an amendment, and directing that the proposed amendment be considered at the Annual Meeting of Stockholders. The resolution setting forth the text of the proposed amendment is as follows:
RESOLVED, that paragraph (a) of Article Fourth of this Corporation's Certificate of Incorporation be amended to read in its entirety as follows:
(a) The total number of shares of all classes of stock which the Corporation shall have authority to issue is fifty-five million (55,000,000), consisting of:
(1) Five million (5,000,000) shares of Preferred Stock, par value ten cents ($.10) per share (the "Preferred Stock"); and
(2) Fifty million (50,000,000) shares of Common Stock, par value ten cents ($.10) per share (the "Common Stock").
If the proposed amendment is adopted by the stockholders, the Company plans to file a Certificate of Amendment to the Company's Certificate of Incorporation with the Secretary of State of the State of Delaware promptly following the Annual Meeting of Stockholders. The amendment will be effective upon filing. The additional shares of Common Stock would become part of the existing class of Common Stock, and additional shares, when issued, would have the same rights and privileges as the shares of Common Stock now issued and outstanding.
On December 14, 1995, none of the 5,000,000 authorized shares of Preferred Stock was outstanding, and of the 25,000,000 authorized shares of Common Stock, 10,834,063 shares were outstanding, 4,927,977 shares were reserved for issuance upon exercise of outstanding stock purchase warrants, 2,166,500 shares were reserved for issuance upon conversion of up to $7,000,000 principal amount of 8% Convertible Subordinated Debentures due December 31, 1997 that the Company as of the date of this Proxy Statement is offering in offshore transactions to prospective purchasers who are not U.S. persons, 1,550,000 shares were reserved for issuance upon satisfaction of various conditions related to the development of oil and gas projects that the Company is pursuing, 750,000 shares were reserved for issuance in connection with a pending acquisition of an oil and gas project, 400,000 shares were reserved for issuance upon exercise of outstanding stock options, and 34,481 shares were reserved for issuance under the Company's Securities Compensation Plan. The remaining 4,336,979 shares of authorized Common Stock were neither issued nor subject to reservation.
The increase in the number of authorized shares of Common Stock is recommended by the Board of Directors in order to provide a sufficient reserve of such shares for the future growth and needs of the Company. While except as otherwise noted herein the Company has no present plans, agreements, or commitments for the reservation or issuance of additional shares of Common Stock, the Board believes that the availability of additional shares will afford the Company greater flexibility in considering possible future issuances of such shares for various corporate purposes. Such purposes might include, without limitation, payment of part or all of the consideration required in connection with the acquisition of interests in oil and gas properties, on going businesses or other assets; obtaining additional equity capital to strengthen the Company and permit the expansion or development of business opportunities; establishment of employee benefit programs to enable the Company to retain and attract qualified personnel; and satisfaction of various obligations of the Company.
In the event the stockholders approve the 1995 Long-Term Incentive Plan, as described later in this Proxy Statement under "Approval of the 1995 Long-Term Incentive Plan" and the proposed amendment to the Company's Certificate of Incorporation, the Board of Directors intends to reserve 1,500,000 shares of Common Stock for issuance under such plan. The Board has not considered whether it would reserve any shares of Common Stock for issuance under that plan in the event the stockholders approve the 1995 Long-Term Incentive Plan but do not approve the proposed amendment to the Certificate of Incorporation.
The Company has estimated that it will require a net cash outlay in the range of $20,000,000 to $25,000,000 during the fiscal year ending August 31, 1996 in connection with the development of oil and gas projects in which the Company has or expects to acquire an interest as of the date of this Proxy Statement and anticipates financing at least a portion of the development costs of such projects through the issuance of shares of Common Stock or securities convertible into such shares. As of the date of this Proxy Statement, the Company is offering in offshore transactions to prospective purchasers who are not U.S. persons up to $7,000,000 principal amount of 8% Convertible Subordinated Debentures due December 31, 1997 (the "Proposed Debentures"). The Proposed Debentures would be convertible into Common Stock at a price which is 82 1/2% of the average closing price on the five trading days preceding the date of conversion, and 30,950 shares of Common Stock are to be reserved for the conversion of each $100,000 principal amount of the Proposed Debentures. None of the Proposed Debentures would be convertible until forty-five days after the completion of the distribution of the Proposed Debentures, and the Proposed Debentures would not be fully convertible until one hundred ten days after such distribution is completed. No assurances can be given that the Proposed Debentures will be issued and sold. Although the Company has some flexibility in postponing or reducing cash outlays by revising project programs or delaying specific actions, a limitation on the availability of authorized but unissued and unreserved shares of Common Stock could seriously impair the Company's ability to pursue its projects effectively. Even if the Proposed Debentures are issued and sold to the full extent of the $7,000,000 principal amount being offered, the Company believes that it will be required to seek additional financing in the foreseeable future. The Company has also utilized shares of Common Stock as the principal form of consideration provided in the transactions through which it has acquired its principal oil and gas projects and anticipates the continued use of shares of Common Stock for that purpose. In that regard, as of the date of this Proxy Statement the Company anticipates the reservation of an additional 250,000 shares of Common Stock for possible issuance in connection with a pending acquisition of an oil and gas project. A limitation on the availability of authorized but unissued and unreserved shares of Common Stock could also seriously impair the Company's ability to acquire additional oil and gas projects and properties.
Any issuance of additional shares of Common Stock would be in the discretion of the Board, as it has the authority to determine, subject to applicable law and Nasdaq Stock Market regulations (which require stockholder approval for the issuance of shares in certain circumstances), whether, when and on what terms to issue shares of Common Stock. The additional shares will thus be available for issuance from time to time without further action by the stockholders, thereby enabling the Company to avoid the delays and expenses attendant to obtaining further stockholder approval and providing the Company with the flexibility needed to act promptly when business opportunities or propitious market conditions for financing present themselves. The additional shares of Common Stock may be issued without first offering such shares to the stockholders, since stockholders do not have preemptive rights with respect to the Common Stock. Except where shares are issued on a pro-rata basis to all stockholders (such as in a stock dividend or stock split), the issuance of additional shares of Common Stock, including issuances upon conversion of securities convertible into Common Stock, would reduce the proportionate ownership interests in the Company held by current stockholders.
The availability for issuance of additional shares of Common Stock could enable the Board of Directors to render more difficult or discourage an attempt to obtain control of the Company. For example, the issuance of shares of Common Stock in a public or private sale, merger or similar transaction would increase the number of outstanding shares, thereby diluting the proportionate ownership interest of a party interested in obtaining control of the Company. This effect would be particularly pronounced if the shares were issued to a party or parties supportive of the then current management. The Company is not aware of anyone seeking to accumulate Common Stock or obtain control of the Company and has no present intention to use additional authorized shares to deter a change in control.
The affirmative vote of the holders of a majority of the outstanding shares of Common Stock entitled to vote thereon is required for the adoption of the proposed amendment to the Company's Certificate of Incorporation. Abstentions and broker non-votes have the effect of a vote against the proposal.
The Board unanimously recommends a vote FOR the proposal to amend the Certificate of Incorporation to increase the number of authorized shares of Common Stock.
APPROVAL OF THE 1995 LONG-TERM INCENTIVE PLAN
The Board of Directors has determined that it is advisable and in the best interest in the Company and its stockholders to provide incentive for the encouragement of the highest level of performance by selected employees, directors, consultants and advisors of the Company and its subsidiaries by enabling such persons to acquire a proprietary interest in the Company by ownership of its stock through the exercise of stock options and stock appreciation rights. Accordingly, the Board of Directors has approved the 1995 Long-Term Incentive Plan (the "Plan"), subject to stockholder approval at the Annual Meeting, pursuant to which up to 1,500,000 shares of Common Stock may be issued upon the exercise of stock options and stock appreciation rights granted to eligible participants. The following summary of the principal provisions of the Plan is subject to the full text thereof. A copy of the Plan may be obtained from the Company by any stockholder upon written request.
The purpose of the Plan is to further the interests of the Company by enabling employees, directors, consultants and advisors of the Company and its subsidiaries, upon whose judgment, initiative and effort the Company is dependent, to acquire a proprietary interest in the Company by ownership of its stock through the exercise of stock options and stock appreciation rights ("Awards") granted under the Plan. The Company believes that the Plan will enable it to attract and retain participants' services and motivate participants to increase the Company's value, and that the Plan will provide the Company with flexibility in compensating such participants.
SECURITIES SUBJECT TO THE PLAN
The Plan authorizes the issuance of up to 1,500,000 shares of the Company's Common Stock in connection with Awards granted under the Plan. In the event of any change in the number of outstanding shares of the Common Stock by reason of recapitalization, reclassification, stock dividend, stock split, or combination of shares or other similar transactions, appropriate and proportionate adjustment will be made in the number of shares to which the Plan and outstanding Awards relate and the exercise price of Awards.
The Plan may be administered either by the Board of Directors or by a Committee consisting of at least two directors appointed by the Board of Directors who are "disinterested persons" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended. As used herein, the term "Committee" includes the Board of Directors if it is then administering the Plan. The Committee has full authority, subject to the provisions of the Plan, to grant Awards, to designate the recipients of Awards and terms of the Awards, to establish rules and regulations which it may deem appropriate for the proper administration of the Plan, and to interpret and make determinations under the Plan. Members of the Committee serve at the discretion of the Board.
Awards may be granted to persons who are employees, directors, consultants and advisors of the Company or any subsidiary of the Company, provided that non-employee directors of the Company are only eligible to receive non- discretionary automatic option grants as described below under "Automatic Option Grants to Non-Employee Directors." The terms "consultant" and "advisor" are not defined in the Plan. While such terms are generally considered to refer to persons who render services or advice in a capacity other than as an employee, it will be the responsibility of the Committee to construe and interpret such terms on a case by case basis. Awards are not transferable or assignable other than by will or by the laws of descent and distribution.
At January 2, 1996, the Company had 21 employees and six directors (including three non-employee directors) who were eligible to receive Awards under the Plan. The Company also, from time to time, retains various consultants and advisors who would be eligible to receive Awards under the Plan.
TERMS AND CONDITIONS OF OPTIONS
Options granted under the Plan may be either incentive stock options ("Incentive Options") under Section 422 of the Internal Revenue Code of 1986 (the "Code") or non-qualified stock options ("Non-qualified Options"). Incentive Options may be granted only to persons who are employees of the Company or any subsidiary of the Company.
Options granted under the Plan expire on such date as is determined by the Committee, unless earlier terminated as provided in the Plan; provided, however, that Incentive Options may expire no later than ten years after the grant date (five years with respect to optionees who are more than ten percent stockholders of the Company) and options granted pursuant to a Sub-Plan for persons who are domiciled in the United Kingdom and subject to taxation therein may expire no later than seven years from the date of grant.
An option is exercisable at such times as are determined by the Committee on the grant date. The purchase price for shares to be issued upon exercise of an option is determined by the Committee at the time of grant, but with respect to an Incentive Option such price may not be less than 100% of the fair market value (as defined in the Plan) of the Common Stock on the grant date (110% of the fair market value with respect to optionees who are more than ten percent stockholders of the Company).
If the aggregate fair market value (determined at the time the Incentive Option is granted) of Common Stock for which Incentive Options (whether granted under the Plan or any other plan of the Company) are exercisable for the first time during any calendar year exceeds $100,000, the amount of such excess will be treated as Non-qualified Options.
The exercise price of an option is payable in full at the time of delivery of the shares, in cash or, at the option of the Committee, in shares of the Company's Common Stock, by full recourse promissory note, or by waiver of compensation due or accrued for services rendered. The use of Common Stock as payment for the exercise of an option also enables an optionee to "pyramid" his options; that is, to apply automatically the shares received upon the exercise of a portion of an option to satisfy the exercise price for additional portions of the option. The effect of pyramiding is to allow an optionee to deliver a relatively small number of shares in satisfaction of the exercise price of a greater number of shares under the option. Any promissory note delivered in payment for the exercise price of an option must provide for interest at a rate sufficient to avoid imputation of income under the Code and will contain such other terms and conditions as the Committee deems appropriate, provided that promissory notes of non-employees must be adequately secured by collateral other than the shares purchased.
If an optionee ceases to be an employee, director, consultant or advisor for any reason other than death, permanent disability (as defined in the Plan) or termination for cause (as defined in the Plan), the option expires on the earlier of no later than three months from the date of termination of employment or expiration of the term of the option. Upon the death or permanent disability of an optionee while an employee, director, consultant or advisor, the option expires on the earlier of no later than one year from the date of death or permanent disability or expiration of the term of the option. If an optionee's relationship with the Company is terminated for cause, the option expires on the date of such termination. During the period between termination of the optionee's relationship and expiration of the option, the option may be exercised only to the extent that it was exercisable on the date of such termination. The foregoing provisions regarding early expiration of options upon termination of an optionee's relationship with the Company may be varied by the Committee with respect to Non-qualified Options.
These and other terms and conditions of the options will be set forth in an agreement to be entered into between the Company and the optionee at the time an option is granted.
AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS
Non-employee directors of the Company are ineligible to receive Awards under the Plan except pursuant to a Sub-Plan which provides for automatic grants of Non-qualified Options to non-employee directors. Pursuant to the Sub-Plan, a Non-qualified Option to purchase 7,500 shares of Common Stock will be granted automatically to each non-employee director on each of (i) the date of each Meeting of Stockholders at which a non-employee is elected or re-elected as a director and (ii) the date a non-employee is first elected as a director, if not at a Meeting of Stockholders. In addition, a non-employee director will be automatically granted a Non-qualified Option to purchase 7,500 shares of Common Stock on each date on which such non-employee director is elected or re-elected by the Board of Directors as Chairman of the Board of Directors.
The exercise price of each option must be equal to 100% of the fair market value of the Common Stock on the date the option is granted. Each option is 100% vested six months after the date of grant. Options expire on the first to occur of three years from the date of grant or the first anniversary of the date the director ceases to be a director for any reason. The Sub-Plan is administered by the Board of Directors. Except as specifically set forth in the Sub-Plan, the options will be subject to the terms and conditions of the Plan applicable to Non-qualified Options.
Currently, Robert A. Halpin, Stanley D. Heckman and Eugene J. Meyers are eligible to participate in the Sub-Plan. If the Sub-Plan had been in effect during the last fiscal year, each of Messrs. Halpin and Heckman would have received options for 7,500 shares at an exercise price of $5.8125 per share when they were first elected directors on March 4, 1995.
A stock appreciation right ("SAR") entitles the holder to receive a payment in cash and/or Common Stock, in the Committee's discretion, equal in value to the excess of the fair market value of the Common Stock on the date of exercise over the exercise price of the SAR. The Committee establishes the exercise price and vesting schedule of the SAR at the date of grant. Unless otherwise specifically provided in a participant's agreement, an SAR expires on the first to occur of (i) the tenth anniversary of the date the SAR was granted; (ii) 30 days (subject to extension) after the holder ceases to be an employee, director, consultant or advisor for any reason other than death, permanent disability or termination for cause; (iii) six months (subject to extension) after the holder ceases to be an employee, director, consultant or advisor by reason of death or permanent disability; and (iv) the date a holder is terminated as an employee, director, consultant or advisor for cause (as defined in the Plan). During the period between termination of the holder's relationship with the Company and expiration of the SAR, the SAR may only be exercised to the extent that it was vested on the date of such termination.
As a means of enabling a participant to commence his holding period under Rule 144 of the Securities Act of 1933, as amended, with respect to shares of Common Stock subject to an Award which have not been registered under such Act, the Committee may, in its sole discretion, permit a participant to exercise a non-vested portion of an Award and receive shares of restricted stock upon such exercise which will vest at the same rate as provided in the Award which was exercised. If any Award so exercised expires without becoming fully vested, any restricted stock issued which has not vested must be returned to the Company in exchange for a payment in cash or stock by the Company equal to the exercise price paid for such restricted shares, subject to any legal requirements relating to a corporation's ability to repurchase its securities.
DURATION AND MODIFICATION OF THE PLAN AND AWARDS
No Awards may be granted under the Plan after November 13, 2005; provided, however, that the Board of Directors is empowered to terminate the granting of Awards under the Plan at an earlier date or to amend, extend or otherwise modify the Plan; and provided further that except for adjustments made necessary by changes in the Company's Common Stock, the Board of Directors may not, without stockholder approval, increase the total number of shares issuable under the Plan or change the designation of the class of persons eligible to receive Incentive Options.
The Committee may modify or amend the terms of outstanding Awards, including a change of the exercise price or acceleration of the vesting of the Award, and it may exchange, cancel or substitute Awards, subject to the consent of the holder of the Award.
In the event of the Company's liquidation or dissolution, or upon any merger or consolidation in which the Company is not the survivor, the sale or lease of all or substantially all of the business assets of the Company, or the sale of more than 80% of the then outstanding Common Stock of the Company to another corporation or entity, each outstanding Award will terminate on the date of such transaction, subject to the Committee's authority, in its sole discretion, to accelerate the vesting of outstanding Awards or to give advance notice of such event to Plan participants, unless the surviving or acquiring corporation or entity agrees to assume outstanding Awards.
The following discussion is a summary of certain significant United States federal income tax consequences of the Plan based on currently applicable provisions of the Code and the regulations promulgated thereunder.
INCENTIVE OPTIONS. No income is recognized by an optionee at the time an Incentive Option is granted, and no income is recognized by an optionee upon his exercise of the option (although the difference between the fair market value of the shares on the date of exercise and the option price is an item of tax preference for purposes of the alternative minimum tax). If the optionee makes no disposition of the shares received upon exercise of the option within two years from the date the option was granted and one year from the date the shares were issued to him upon exercise of the option, he will recognize capital gain or loss when he disposes of his shares. Such gain or loss will be long-term and will be measured by the difference between the option price and the amount received for the shares at the time of disposition.
If the optionee disposes of shares acquired upon exercise of an Incentive Option before the expiration of the applicable holding periods, any gain recognized from such disqualifying disposition will be taxable as ordinary income in the year of disposition generally to the extent of the amount by which the lesser of the fair market value of the shares on the date the option was exercised and the amount realized upon such disposition exceeds the option price. Any additional gain recognized upon such a disposition will be treated as long-term or short-term capital gain, depending upon whether the shares have been held for more than one year.
According to proposed Treasury regulations, in general, no gain or loss will be recognized by an optionee who uses shares of stock to exercise an Incentive Option. A number of new shares of stock acquired equal to the number of shares surrendered will have a basis and holding period equal to those of the shares surrendered. To the extent new shares of stock acquired pursuant to the exercise of the option exceed the number of shares of stock surrendered, such additional shares will have a zero basis and will have a holding period beginning on the date the option is exercised. Any disqualifying disposition of stock acquired through the surrender of other shares of stock will be deemed to be a disposition of the stock with the lowest basis first.
The use of stock acquired through exercise of an Incentive Option to exercise an Incentive Option will constitute a disqualifying disposition with respect to such stock if the applicable holding period requirement has not been satisfied. This provision is intended to prevent the "pyramiding" of Incentive Options.
NON-QUALIFIED OPTIONS. An optionee recognizes no income at the time a Non- qualified Option is granted under the Plan. At the time of exercise of a Non- qualified Option, the optionee will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the exercise price; provided, however, that if an optionee who is subject to the provisions of Section 16(b) ("Section 16(b)") of the Securities Exchange Act of 1934 (an executive officer, director or 10% shareholder) exercises a Non-qualified Option within six months of the date of grant, such optionee will recognize ordinary income based on the fair market value of the shares on the date which is six months after the date of grant unless he makes an election under Section 83(b) of the Code ("83(b) election") to recognize income based on such value on the date of exercise.
An optionee will recognize gain or loss on the subsequent sale of shares acquired upon exercise of a Non-qualified Option in an amount equal to the difference between the amount realized and the tax basis of such shares, which will equal the option price paid plus the amount included in the employee's income by reason of the exercise of the option; provided, however, that if the optionee is subject to Section 16(b) and sells shares received upon exercise of a Non-qualified Option within six months of the date of grant, such optionee will recognize ordinary income based on the fair market value of the shares on the date which is six months after the date of grant unless he makes an 83(b) election to recognize income on the date the shares were sold. Provided such shares are held as a capital asset, such gain or loss will be long-term or short-term capital gain or loss depending upon whether the shares have been held for more than one year.
No gain or loss will be recognized by an optionee who uses shares of stock to exercise a Non-qualified Option. A number of the shares acquired equal to the number of shares surrendered will have a tax basis and holding period equal to those of the shares surrendered. The optionee will recognize ordinary income in an amount equal to the fair market value of the additional shares acquired at the time of exercise (or, if the optionee is subject to Section 16(b) and exercises the option within six months of the date of grant, on the date which is six months after the date of grant unless the optionee makes an 83(b) election to recognize income at the date of exercise). Such additional shares will be deemed to have been acquired on such date and will have a tax basis equal to their fair market value on such date.
STOCK APPRECIATION RIGHTS. A holder recognizes no income at the time an SAR is granted under the Plan. In the case of an SAR settled in cash, when the SAR is exercised the holder will recognize ordinary income in an amount equal to the cash received. Alternatively, in the case of an SAR settled in shares of Common Stock, the holder will recognize ordinary income in an amount equal to the fair market value of the shares acquired at the time of exercise (or, if the recipient is subject to Section 16(b) and exercises the SAR within six months of the date of grant, on the date which is six months after the date of grant unless the holder makes an 83(b) election to recognize income at the date of exercise). Such shares will be deemed to have been acquired on such date and will have a tax basis equal to their fair market value on such date.
RESTRICTED STOCK. In the case of an exercise of an Award payable in restricted shares of Common Stock, generally the recipient will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date the shares are freely tradable and no longer subject to a substantial risk of forfeiture over the amount paid for such shares, if any, unless the recipient makes an 83(b) election to recognize income at the date of exercise. Such shares will be deemed to have been acquired on such date and will have a tax basis equal to their fair market value on such date.
COMPANY TAX DEDUCTIONS. In the case of Incentive Options, the Company will not be allowed a deduction for federal income tax purposes at the time an Incentive Option is granted or exercised. At the time of a disqualifying disposition by an optionee of shares received pursuant to the exercise of an Incentive Option, the Company will be entitled to a deduction to the extent that the optionee recognizes ordinary income as a result of such disposition.
In the case of Non-qualified Options or SARs, the Company will be entitled to a deduction for federal income tax purposes in the same amount as the individual recognizes ordinary income in connection with the exercise of a Non-qualified Option or SAR. In the case of an Award payable in restricted stock, the Company will be entitled to a deduction for federal income tax purposes in the same amount as the individual recognizes ordinary income in connection with the receipt of the restricted stock.
The Company's deduction described above is subject to the individual's corresponding income being "reasonable compensation" for purposes of deductions under the Code.
The Company has the right to withhold sums required by federal, state, and/or local tax laws to be withheld with respect to the exercise of any Non- qualified Option or SAR from sums owing to the individual exercising such Award or, in the alternative, may require the individual exercising the Award to pay such sums to the Company prior to or in connection with such exercise. The Committee, in its sole discretion, may allow a participant to satisfy such tax withholding obligations by withholding from the shares receivable upon the exercise of a Non-qualified Option or SAR settled in shares a number of shares having an aggregate fair market value equal to the amount to be withheld.
Code Section 162(m), enacted in 1993, precludes a public corporation from taking a deduction in 1994 and subsequent years for compensation in excess of $1 million for its chief executive officer or any of its other four highest paid officers. Based on the current market price of the Company's Common Stock, the Company does not believe that any compensation derived from the exercise of Awards granted under the Plan, together with other compensation paid to the Company's executive officers, will exceed $1 million in any year for each such officer. If, however, it appears that such limit could be exceeded at any time in the future, the Company's Board of Directors will determine what action, if any, at that time would be appropriate in light of Section 162(m).
The affirmative vote of a majority of the shares represented and entitled to vote at the Meeting is necessary for the approval of the Plan. Abstentions are counted in tabulations of the votes cast and therefore have the effect of a vote against the proposal, whereas broker non-votes are not counted and have no effect on the vote.
The Board unanimously recommends that the stockholders vote FOR approval of the Plan.
RATIFICATION OF SELECTION OF INDEPENDENT
At the recommendation of the Audit Committee, the Board of Directors has selected Coopers & Lybrand L.L.P., independent public accountants, to audit the financial statements of the Company for the year ending August 31, 1996 and to perform other appropriate services. Coopers & Lybrand L.L.P. audited the Company's financial statements for the fiscal year ended August 31, 1995. Representatives of Coopers & Lybrand L.L.P. are expected to be present at the meeting, with the opportunity to make a statement if they desire to do so, and are expected to be available to respond to appropriate questions.
The Board of Directors recommends a vote FOR ratification of such selection. In the event of a negative vote on such ratification, the Board of Directors will select another firm of independent accountants. This proposal requires for approval the affirmative vote of a majority of the shares present in person or by proxy and entitled to vote. Abstentions have the effect of a vote against the proposal and broker non-votes have no effect on the vote.
Due to the expansion of the Company's business to include the acquisition of oil and gas properties in various countries, the Board of Directors determined on September 8, 1994 that it would be appropriate to engage an accounting firm with worldwide capabilities and, accordingly, dismissed Cross and Robinson as the Company's principal accounting firm. Cross and Robinson had been the Company's principal accounting firm for the fiscal years ended October 31, 1993 and 1992. On September 13, 1994, the Company engaged Coopers & Lybrand L.L.P. as its principal accounting firm.
In connection with the audits of the two fiscal years ended October 31, 1993 and the subsequent interim period through September 8, 1994, there were no disagreements with Cross and Robinson on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to their satisfaction, would have caused Cross and Robinson to make reference in connection with their opinion to the subject matter of the disagreement.
Except for an explanatory paragraph describing an uncertainty about the Company's ability to continue as a going concern, the audit reports of Cross and Robinson on the Company's financial statements as of and for the years ended October 31, 1993 and 1992 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.
Any stockholder intending to submit to the Company a proposal for inclusion in the Company's Proxy Statement and proxy for the 1997 Annual Meeting must submit such proposal so that it is received by the Company no later than September 14, 1996.
ANNUAL REPORT ON FORM 10-KSB
A copy of the Company's Annual Report on Form 10-KSB for the year ended August 31, 1995 as filed with the Securities and Exchange Commission may be obtained without charge by writing to: Corporate Secretary, Fountain Oil Incorporated, 1400 Broadfield Boulevard, Suite 200, Houston, Texas 77084.
While the Notice of Annual Meeting of Stockholders calls for the transaction of such other business as may properly come before the meeting, the Board of Directors has no knowledge of any matters to be presented for action by the stockholders other than as set forth above. The enclosed proxy gives discretionary authority, however, in the event any additional matters should be presented.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby constitutes and appoints ROBERT A. HALPIN, OISTEIN NYBERG and NILS N. TRULSVIK, and each of them, the attorneys and proxies of the undersigned with full power of substitution to appear and to vote all of the shares of Common Stock of Fountain Oil Incorporated held of record by the undersigned on December 14, 1995 at the Annual Meeting of Stockholders to be held on February 12, 1996, or any adjournment thereof, as designated below:
(1) ELECTION OF [_] FOR all nominees [_] WITHHOLD AUTHORITY DIRECTORS: (except as indicated to vote for all nominees to the contrary below) listed below
Einar Bandlien, Robert A. Halpin, Stanley D. Heckman, Eugene J. Meyers, Oistein
(INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name on the space provided below.)
(2) To approve an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock from 25,000,000 to 50,000,000 shares. [_] FOR [_] AGAINST [_] ABSTAIN
(3) To approve the 1995 Long-Term Incentive Plan which provides for the issuance of up to 1,500,000 shares of Common Stock in connection with the grant of stock options or stock appreciation rights to employees, directors, consultants and advisors of the Company.
[_] FOR [_] AGAINST [_] ABSTAIN
(4) To ratify the selection of Coopers & Lybrand L.L.P. as the Company's independent accounting firm.
[_] FOR [_] AGAINST [_] ABSTAIN
(5) IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE ON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF. (Continued and to be signed on other side)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FOUNTAIN OIL INCORPORATED. IF NO VOTE IS INDICATED, THIS PROXY WILL BE VOTED WITH AUTHORITY FOR THE ELECTION OF THE DIRECTORS AND FOR ALL OTHER PROPOSALS.
YOU ARE URGED TO DATE, SIGN AND RETURN PROMPTLY THIS PROXY IN THE ENVELOPE PROVIDED. IT IS IMPORTANT FOR YOU TO BE REPRESENTED AT THE MEETING. THE EXECUTION OF YOUR PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ARE PRESENT AT THE MEETING.
IMPORTANT: Please sign exactly as your name or names appear on this proxy, and when signing as an trustee or guardian, give your full title as such. If the signatory is a corporation, sign the full corporate name by duly authorized officer, or if a partnership, sign in partnership name by authorized person. | DEF 14A | DEF 14A | 1996-01-12T00:00:00 | 1996-01-12T16:27:15 |
0000823535-96-000006 | 0000823535-96-000006_0004.txt | DECLARATION OF TRUST, made September 9, 1989 by Edward C. Johnson 3d, J. Gary Burkhead, and John E. Ferris (the "Trustees"). WHEREAS, the Trustees desire to establish a trust fund for the investment and reinvestment of funds contributed thereto; NOW, THEREFORE, the Trustees declare that all money and property contributed to the trust fund hereunder shall be held and managed in trust under this Declaration of Trust as herein set forth below. NAME. Section 1. This Trust shall be known as "Fidelity U.S. Treasury Money Market Trust". DEFINITIONS. Section 2. Wherever used herein, unless otherwise required by the context or specifically provided: (a) The terms "Affiliated Person", "Assignment", "Commission", "Interested Person", "Majority Shareholder Vote" (the 67% or the 50% requirement of the third sentence of Section 2(a)(42) of the 1940 Act, whichever may be applicable) and "Principal Underwriter" shall have the meanings given them in the 1940 Act, as amended from time to time; (b) The "Trust" refers to Fidelity U.S. Treasury Money Market Trust and reference to the Trust, when applicable to one or more Series of the Trust, shall refer to any such Series; (c) "Net Asset Value" means the net asset value of each Series of the Trust determined in the manner provided in Article X, Section 3; (d) "Shareholder" means a record owner of Shares of the Trust; (e) The "Trustees" refer to the individual trustees in their capacity as trustees hereunder of the Trust and their successor or successors during the time in office as such trustee or trustees; (f) "Shares" means the equal proportionate transferable units of interest into which the beneficial interest of the Trust or each Series shall be divided from time to time, including such class or classes of Shares as the Trustees may from time to time create and establish and including fractions of Shares as well as whole Shares consistent with the requirements of Federal and/or state securities laws; (g) The "1940 Act" refers to the Investment Company Act of 1940, as amended from time to time; and (h) "Series" refers to series of Shares of the Trust established in accordance with the provisions of Article III. The purpose of this Trust is to provide investors a continuous source of managed investment in securities. SHARES OF BENEFICIAL INTEREST. Section 1. The beneficial interest in the Trust shall be divided into such transferable Shares of one or more separate and distinct Series or classes as the Trustees shall from time to time create and establish. The number of Shares is unlimited and each Share shall be without par value and shall be fully paid and nonassessable. The Trustees shall have full power and authority, in their sole discretion and without obtaining any prior authorization or vote of the Shareholders or any Series or class of Shareholders of the Trust, to create and establish (and to change in any manner) Shares or any classes thereof with such preferences, voting powers, rights and privileges as the Trustees may from time to time determine, to divide or combine the Shares into a greater or lesser number, to classify or reclassify any issued Shares or any Series or classes thereof into one or more Series or classes of Shares, to abolish any one or more Series or classes of Shares, and to take such other action with respect to the Shares as the Trustees may deem desirable. ESTABLISHMENT OF SERIES. Section 2. The establishment of any Series shall be effective upon the adoption of a resolution by a majority of the then Trustees setting forth such establishment and designation and the relative rights and preferences of the Shares of such Series. At any time that there are no Shares outstanding of any particular Series previously established and designated, the Trustees may by a majority vote abolish that Series and the establishment and designation thereof. OWNERSHIP OF SHARES. Section 3. The ownership of Shares shall be recorded in the books of the Trust. The Trustees may make such rules as they consider appropriate for the transfer of Shares and similar matters. The record books of the Trust shall be conclusive as to who are the holders of Shares and as to the number of Shares held from time to time by each Shareholder. INVESTMENT IN THE TRUST. Section 4. The Trustees shall accept investments in the Trust from such persons and on such terms as they may from time to time authorize. Such investments may be in the form of cash or securities in which the appropriate Series is authorized to invest, valued as provided in Article X, Section 3. After the date of the initial contribution of capital, the number of Shares representing the initial contribution may in the Trustees' discretion be considered as outstanding and the amount received by the Trustees on account of the contribution shall be treated as an asset of the Trust. Subsequent investments in the Trust shall be credited to each Shareholder's account in the form of full Shares at the Net Asset Value per Share next determined after the investment is received; provided, however, that the Trustees may, in their sole discretion, (a) impose a sales charge upon investments in the Trust and (b) issue fractional Shares. ASSETS AND LIABILITIES OF SERIES. Section 5. All consideration received by the Trust for the issuance or sale of Shares of a particular Series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall be referred to as "assets belonging to" that Series. In addition any assets, income, earnings, profits and proceeds thereof, funds, or payments that are not readily identifiable as belonging to any particular Series shall be allocated by the Trustees between and among one or more of the Series in such manner as they, in their sole discretion, deem fair and equitable. Each such allocation shall be conclusive and binding upon the Shareholders of all Series for all purposes, and shall be referred to as assets belonging to that Series. The assets belonging to a particular Series shall be so recorded upon the books of the Trust, and shall be held by the Trustees for the benefit of the holders of Shares of that Series. The assets belonging to each particular Series shall be charged with the liabilities of that Series and all expenses, costs, charges and reserves attributable to that Series. Any general liabilities, expenses, costs, charges or reserves of the Trust that are not readily identifiable as belonging to any particular Series shall be allocated and charged by the Trustees between or among any one or more of the Series in such manner as the Trustees in their sole discretion, deem fair and equitable. Each such allocation shall be conclusive and binding upon the Shareholders of all Series for all purposes. Any creditor of any Series may look only to the assets of that Series to satisfy such creditor's debt. NO PREEMPTIVE RIGHTS. Section 6. Shareholders shall have no preemptive or other right to subscribe to any additional Shares or other securities issued by the Trust or the Trustees. LIMITATIONS OF LIABILITY. Section 7. The Trustees shall have no power to bind any Shareholder personally or to call upon any shareholder for the payment of any sum of money or assessment whatsoever other than such sum as the Shareholder may at any time personally agree to pay by way of subscription for any Shares or otherwise. Every note, bond, contract or other undertaking issued by or on behalf of the Trust or the Trustees relating to the Trust shall include a recitation limiting the obligation represented thereby to the Trust and its assets (but the omission of such a recitation shall not operate to bind any Shareholder). MANAGEMENT OF THE TRUST. Section 1. The business and affairs of the Trust shall be managed by the Trustees, and they shall have all powers necessary and desirable to carry out that responsibility. ELECTION: INITIAL TRUSTEES. Section 2. On a date fixed by the Trustees, the Shareholders shall elect not less than three Trustees. A Trustee shall not be required to be a Shareholder of the Trust. The initial Trustees shall be Edward C. Johnson 3d, J. Gary Burkhead, and John E. Ferris and such other individuals as the Board of Trustees shall appoint pursuant to Section 4 of this Article IV. TERM OF OFFICE OF TRUSTEES. Section 3. The Trustees shall hold office during the lifetime of this Trust, and until its termination as hereinafter provided; except (a) that any Trustee may resign by written instrument signed by him and delivered to the other Trustees, which shall take effect upon such delivery or upon such later date as is specified therein; (b) that any Trustee may be removed at any time by written instrument, signed by at least two-thirds of the number of Trustees prior to such removal, specifying the date when such removal shall become effective; (c) that any Trustee who requests in writing to be retired or who has become incapacitated by illness or injury may be retired by written instrument signed by a majority of the other Trustees, specifying the date of his retirement; and (d) that a Trustee may be removed at any Special Meeting of the Trust by a vote of two-thirds of the outstanding Shares. RESIGNATION AND APPOINTMENT OF TRUSTEES. Section 4. In case of the declination, death, resignation, retirement, removal, incapacity or inability of any of the Trustees, or in case a vacancy shall exist, by reason of an increase in number or for any other reason, the remaining Trustees shall fill such vacancy by appointing such other person as they in their discretion shall see fit consistent with the limitations under the 1940 Act. Such appointment shall be evidenced by a written instrument signed by a majority of the Trustees in office or by recording in the records of the Trust, whereupon the appointment shall take effect. Within three months of such appointment the Trustees shall cause notice of such appointment to be mailed to each Shareholder at his address as recorded on the books of the Trust. An appointment of a Trustee may be made by the Trustees then in office and notice thereof mailed to Shareholders as aforesaid in anticipation of a vacancy to occur by reason of retirement, resignation or increase in number of Trustees effective at a later date, provided that said appointment shall become effective only at or after the effective date of said retirement, resignation or increase in number of Trustees. As soon as any Trustee so appointed shall have accepted this trust, the trust estate shall vest in the new Trustee or Trustees, together with the continuing Trustees, without any further act or conveyance, and he shall be deemed a Trustee hereunder. The power of appointment is subject to the provisions of Section 16(a) of the 1940 Act. TEMPORARY ABSENCE OF TRUSTEE. Section 5. Any Trustee may, by power of attorney, delegate his power for a period not exceeding six months at any one time to any other Trustee or Trustees, provided that in no case shall less than two Trustees personally exercise the other powers hereunder except as herein otherwise expressly provided. NUMBER OF TRUSTEES. Section 6. The number of Trustees, not less than three (3) nor more than twelve (12), serving hereunder at any time shall be determined by the Trustees themselves. Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is filled, or while any Trustee is absent from the Commonwealth of Massachusetts or, if not a domiciliary of Massachusetts, is absent from his state of domicile, or is physically or mentally incapacitated by reason of disease or otherwise, the other Trustees shall have the powers hereunder and the certification by the other Trustees of such vacancy, absence or incapacity, shall be conclusive, provided, however, that no vacancy shall remain unfilled for a period longer than six calendar months. EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE. Section 7. The death, declination, resignation, retirement, removal, incapacity or inability of the Trustees, or any one of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust. OWNERSHIP OF ASSETS OF THE TRUST. Section 8. The assets of the Trust shall be held separate and apart from any assets now or hereafter held in any capacity other than as Trustee hereunder by the Trustees or any successor Trustees. All of the assets of the Trust shall at all times be considered as vested in the Trustees. No Shareholder shall be deemed to have a severable ownership in any individual asset of the Trust or any right of partition or possession thereof, but each Shareholder shall have a proportionate undivided beneficial interest in the Trust. POWERS. Section 1. The Trustees in all instances shall act as principals, and are and shall be free from the control of the Shareholders. The Trustees shall have full power and authority to do any and all acts and to make and execute any and all contracts and instruments that they may consider necessary or appropriate in connection with the management of the Trust. The Trustees shall not in any way be bound or limited by present or future laws or customs in regard to trust investments, but shall have full authority and power to make any and all investments which they, in their uncontrolled discretion, shall deem proper to accomplish the purpose of this Trust. Subject to any applicable limitation in the Declaration of Trust or the Bylaws of the Trust, the Trustees shall have power and authority: (a) To invest and reinvest cash and other property, and to hold cash or other property uninvested, without in any event being bound or limited by any present or future law or custom in regard to investments by Trustees, and to sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease any or all of the assets of the Trust. (b) To adopt Bylaws not inconsistent with this Declaration of Trust providing for the conduct of the business of the Trust and to amend and repeal them to the extent that they do not reserve that right to the Shareholders. (c) To elect and remove such officers and appoint and terminate such agents as they consider appropriate. (d) To employ a bank or trust company as custodian of any assets of the Trust subject to any conditions set forth in this Declaration of Trust or in the Bylaws of the Trust, if any. (e) To retain a transfer agent and Shareholder servicing agent, or both. (f) To provide for the distribution of interests of the Trust either through a Principal Underwriter in the manner hereinafter provided for or by the Trust itself, or both. (g) To set record dates in the manner provided for in Article XII, Section 3. (h) To delegate such authority as they consider desirable to any officers of the Trust and to any agent, custodian or underwriter. (i) To sell or exchange any or all of the assets of the Trust, subject to the provisions of Article XII, Section 4(b) hereof. (j) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper. (k) To exercise powers and rights of subscription or otherwise that in any manner arise out of ownership of securities. (l) To hold any security or property in a form not indicating any trust, whether in bearer, unregistered or other negotiable form, or in either its own name or in the name of a custodian or a nominee or nominees, subject in either case to proper safeguards according to the usual practice of Massachusetts trust companies or investment companies. (m) To establish separate and distinct Series with separately defined investment objectives and policies and distinct investment purposes in accordance with the provisions of Article III. (n) To allocate assets, liabilities and expenses of the Trust to a particular Series or to apportion the same between or among two or more Series, provided that any liabilities or expenses incurred by a particular Series shall be payable solely out of the assets belonging to that Series as provided for in Article III. (o) To consent to, or participate in, any plan for the reorganization, consolidation or merger of any corporation or concern, any security of which is held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or concern, and to pay calls or subscriptions with respect to any security held in the Trust. (p) To compromise, arbitrate, or otherwise adjust claims in favor of or against the Trust or any matter in controversy including, but not limited to, claims for taxes. (q) To make distributions of income and of capital gains to Shareholders in the manner hereinafter provided for. (r) To borrow money and to pledge, mortgage or hypothecate the assets of the Trust, subject to applicable requirements of the 1940 Act. (s) To establish from time to time a minimum total investment for Shareholders, and to require the redemption of the Shares of any Shareholders whose investment is less than such minimum upon giving notice to such Shareholder. No one dealing with the Trustees shall be under any obligation to make any inquiry concerning the authority of the Trustees, or to see to the application of any payments made or property transferred to the Trustees or upon their order. TRUSTEES AND OFFICERS AS SHAREHOLDERS. Section 2. Any Trustee, officer or other agent of the Trust may acquire, own and dispose of Shares to the same extent as if he were not a Trustee, officer or agent; and the Trustees may issue and sell or cause to be issued and sold Shares to and buy such Shares from any such person or any firm or company in which he is interested, subject only to the general limitations herein contained as to the sale and purchase of such Shares; and all subject to any restrictions that may be contained in the Bylaws of the Trust. ACTION BY THE TRUSTEES. Section 3. The Trustees shall act by majority vote at a meeting duly called or by unanimous written consent without a meeting or by telephone consent, provided that a quorum of Trustees participate in any such telephonic meeting, unless the 1940 Act requires that a particular action be taken only at a meeting of the Trustees. At any meeting of the Trustees, a majority of the Trustees shall constitute a quorum. Meetings of the Trustees may be called orally or in writing by the Chairman of the Trustees or by any two other Trustees. Notice of the time, date and place of all meetings of the Trustees shall be given by the party calling the meeting to each Trustee by telephone or telegram sent to his home or business address at least twenty-four hours in advance of the meeting or by written notice mailed to his home or business address at least seventy-two hours in advance of the meeting. Notice need not be given to any Trustee who attends the meeting without objecting to the lack of notice or who executes a written waiver of notice with respect to the meeting. Subject to the requirements of the 1940 Act, the Trustees by majority vote may delegate to any one of their number their authority to approve particular matters or take particular actions on behalf of the Trust. CHAIRMAN OF THE TRUSTEES. Section 4. The Trustees may appoint one of their number to be Chairman of the Board of Trustees. The Chairman shall preside at all meetings of the Trustees, shall be responsible for the execution of policies established by the Trustees and the administration of the Trust, and may be the chief executive, financial and accounting officer of the Trust. TRUSTEE REIMBURSEMENT. Section 1. Subject to the provisions of Article III, Section 5, the Trustees shall be reimbursed from the Trust estate or the assets belonging to the appropriate Series for their expenses and disbursements, including, without limitation, fees and expenses of Trustees who are not Interested Persons of the Trust, interest expenses, taxes, fees and commissions of every kind, expenses of pricing Trust portfolio securities, expenses of issue, repurchase and redemption of shares including expenses attributable to a program of periodic repurchases or redemptions, expenses of registering and qualifying the Trust and its Shares under Federal and State laws and regulations, charges of custodians, transfer agents and registrars, expenses of preparing and setting up in type Prospectuses and Statements of Additional Information, expenses of printing and distributing Prospectuses sent to existing Shareholders, auditing and legal expenses, reports to Shareholders, expenses of meetings of Shareholders and proxy solicitations therefor, insurance expenses, association membership dues and for such non-recurring items as may arise, including litigation to which the Trust is a party, and for all losses and liabilities by them incurred in administering the Trust, and for the payment of such expenses, disbursements, losses and liabilities, the Trustees shall have a lien on the assets belonging to the appropriate Series prior to any rights or interests of the Shareholders thereto. This section shall not preclude the Trust from directly paying any of the aforementioned fees and expenses. INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER AGENT INVESTMENT ADVISER. Section 1. Subject to a Majority Shareholder Vote, the Trustees may in their discretion from time to time enter into an investment advisory or management contract(s) with respect to the Trust or any Series thereof whereby the other party(ies) to such contract(s) shall undertake to furnish the Trustees such management, investment advisory, statistical and research facilities and services and such other facilities and services, if any, and all upon such terms and conditions, as the Trustees may in their discretion determine. Notwithstanding any provisions of this Declaration of Trust, the Trustees may authorize the investment adviser(s) (subject to such general or specific instructions as the Trustees may from time to time adopt) to effect purchases, sales or exchanges of portfolio securities and other investment instruments of the Trust on behalf of the Trustees or may authorize any officer, agent, or Trustee to effect such purchases, sales or exchanges pursuant to recommendations of the investment adviser (and all without further action by the Trustees). Any such purchases, sales and exchanges shall be deemed to have been authorized by all of the Trustees. The Trustees may, subject to applicable requirements of the 1940 Act, including those relating to Shareholder approval, authorize the investment adviser to employ one or more sub-advisers from time to time to perform such of the acts and services of the investment adviser, and upon such terms and conditions, as may be agreed upon between the investment adviser and sub-adviser. PRINCIPAL UNDERWRITER. Section 2. The Trustees may in their discretion from time to time enter into (a) contract(s) providing for the sale of the Shares, whereby the Trust may either agree to sell the Shares to the other party to the contract or appoint such other party its sales agent for such Shares. In either case, the contract shall be on such terms and conditions as may be prescribed in the Bylaws of the Trust, if any, and such further terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article VII, or of the Bylaws of the Trust, if any, and such contract may also provide for the repurchase or sale of Shares by such other party as principal or as agent of the Trust. TRANSFER AGENT. Section 3. The Trustees may in their discretion from time to time enter into a transfer agency and Shareholder service contract whereby the other party shall undertake to furnish the Trustees with transfer agency and Shareholder services. The contract shall be on such terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Declaration of Trust or of the Bylaws of the Trust, if any. Such services may be provided by one or more entities. PARTIES TO CONTRACT. Section 4. Any contract of the character described in Sections 1, 2 and 3 of this Article VII or in Article IX hereof may be entered into with any corporation, firm, partnership, trust or association, although one or more of the Trustees or officers of the Trust may be an officer, director, trustee, shareholder or member of such other party to the contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any relationship, nor shall any person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom, provided that the contract when entered into was reasonable and fair and not inconsistent with the provisions of this Article VII or the Bylaws of the Trust. The same person (including a firm, corporation, partnership, trust, or association) may be the other party to contracts entered into pursuant to Sections 1, 2 and 3 above or Article IX, and any individual may be financially interested or otherwise affiliated with persons who are parties to any or all of the contracts mentioned in this Section 4. PROVISIONS AND AMENDMENTS. Section 5. Any contract entered into pursuant to Sections 1 and 2 of this Article VII shall be consistent with and subject to the requirements of Section 15 of the 1940 Act (including any amendments thereof or other applicable Act of Congress hereafter enacted) with respect to its continuance in effect, its termination, and the method of authorization and approval of such contract or renewal thereof, and no amendment to any contract, entered into pursuant to Section 1 shall be effective unless assented to by a Majority Shareholder Vote. SHAREHOLDERS' VOTING POWERS AND MEETINGS VOTING POWERS. Section 1. The Shareholders shall have power to vote (a) for the election of Trustees as provided in Article IV, Section 2, (b) for the removal of Trustees as provided in Article IV, Section 3(d), (c) with respect to any investment advisory or management contract as provided in Article VII, Sections 1 and 5, (d) with respect to the amendment of this Declaration of Trust as provided in Article XII, Section 7, (e) to the same extent as the shareholders of a Massachusetts business corporation, as to whether or not a court action, proceeding or claim should be brought or maintained derivatively or as a class action on behalf of the Trust or the Shareholders, provided, however, that a Shareholder of a particular Series shall not be entitled to bring any derivative or class action on behalf of any other Series of the Trust, and (f) with respect to such additional matters relating to the Trust as may be required or authorized by law, by this Declaration of Trust, or the Bylaws of the Trust, if any, or any registration of the Trust with the Securities and Exchange Commission ("Commission") or any State, as the Trustees may consider desirable. On any matter submitted to a vote of the Shareholders, all shares shall be voted by individual Series, except (a) when required by the 1940 Act, Shares shall be voted in the aggregate and not by individual Series; and (b) when the Trustees have determined that the matter affects only the interests of one or more Series, then only the Shareholders of such Series shall be entitled to vote thereon. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote, and each fractional Share shall be entitled to a proportionate fractional vote. There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by proxy. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required or permitted by law, this Declaration of Trust or any Bylaws of the Trust to be taken by Shareholders. MEETINGS. Section 2. The first Shareholders' meeting shall be held as specified in Section 2 of Article IV at the principal office of the Trust or such other place as the Trustees may designate. Special meetings of the Shareholders of any Series may be called by the Trustees and shall be called by the Trustees upon the written request of Shareholders owning at least one-tenth of the outstanding Shares of that Series entitled to vote. Whenever ten or more Shareholders meeting the qualifications set forth in Section 16(c) of the 1940 Act, as the same may be amended from time to time, seek the opportunity of furnishing materials to the other Shareholders with a view to obtaining signatures on such a request for a meeting, the Trustees shall comply with the provisions of said Section 16(c) with respect to providing such Shareholders access to the list of the Shareholders of record of the Trust or the mailing of such materials to such Shareholders of record. Shareholders shall be entitled to at least fifteen days' notice of any meeting. QUORUM AND REQUIRED VOTE. Section 3. A majority of Shares entitled to vote in person or by proxy shall be a quorum for the transaction of business at a Shareholders' meeting, except that where any provision of law or of this Declaration of Trust permits or requires that holders of any Series shall vote as a Series then a majority of the Shares of that Series entitled to vote shall be necessary to constitute a quorum for the transaction of business by that Series. Any lesser number shall be sufficient for adjournments. Any adjourned session or sessions may be held, within a reasonable time after the date set for the original meeting, without the necessity of further notice. Except when a larger vote is required by any provision of this Declaration of Trust or any Bylaws of the Trust, a majority of the Shares voted in person or by proxy shall decide any questions and a plurality shall elect a Trustee, provided that where any provision of law or of this Declaration of Trust permits or requires that the holders of any Series shall vote as a Series, then a majority of the Shares of that Series voted on the matter shall decide that matter insofar as that Series is concerned. APPOINTMENT AND DUTIES. Section 1. The Trustees shall at all times employ a bank or trust company having capital, surplus and undivided profits of at least two million dollars ($2,000,000 or such other amount or such other entity as shall be allowed by the Commission or by the 1940 Act) as custodian with authority as its agent, but subject to such restrictions, limitations and other requirements, if any, as may be contained in the Bylaws of the Trust: (1) to hold the securities owned by the Trust and deliver the same upon written order or oral order, if confirmed in writing, or by such electro-mechanical or electronic devices as are agreed to by the Trust and the custodian, if such procedures have been authorized in writing by the (2) to receive and receipt for any moneys due to the Trust and deposit the same in its own banking department or elsewhere as the Trustees may direct; (3) to disburse such funds upon orders or vouchers; and the Trust may also employ such custodian as its agent: (1) to keep the books and accounts of the Trust and furnish clerical and (2) to compute, if authorized to do so by the Trustees, the Net Asset Value of any Series in accordance with the provisions hereof; all upon such basis of compensation as may be agreed upon between the Trustees and the custodian. If so directed by a Majority Shareholder Vote, the custodian shall deliver and pay over all property of the Trust held by it as specified in such vote. The Trustees may also authorize the custodian to employ one or more sub-custodians from time to time to perform such of the acts and services of the custodian, and upon such terms and conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the Trustees, provided that in every case such sub-custodian shall be a bank or trust company organized under the laws of the United States or one of the states thereof and having capital, surplus and undivided profits of at least two million dollars ($2,000,000) or such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act as amended from time to time. CENTRAL CERTIFICATE SYSTEM. Section 2. Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the custodian to deposit all or any part of the securities owned by the Trust in a system for the central handling of securities established by a national securities exchange or a national securities association registered with the Commission under the Securities Exchange Act of 1934, or such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act as from time to time amended, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Trust. DISTRIBUTIONS. Section 1. (a) The Trustees may from time to time declare and pay dividends. The amount of such dividends and the payment of them shall be wholly in the discretion of the Trustees. (b) The Trustees shall have power, to the fullest extent permitted by the laws of Massachusetts, at any time to declare and cause to be paid dividends on Shares of a particular Series, from the assets belonging to that Series, which dividends, at the election of the Trustees, may be paid daily or otherwise pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Trustees may determine, and may be payable in Shares of that Series at the election of each Shareholder of that Series. (c) Anything in this instrument to the contrary notwithstanding, the Trustees may at any time declare and distribute pro rata among the Shareholders of a particular Series as of the record date of that Series fixed as provided in Section 3 hereof a "stock dividend". REDEMPTIONS. Section 2. In case any holder of record of Shares of a particular Series desires to dispose of his Shares, he may deposit at the office of the transfer agent or other authorized agent of that Series a written request or such other form of request as the Trustees may from time to time authorize, requesting that the Series purchase the Shares in accordance with this Section 2; and the Shareholder so requesting shall be entitled to require the Series to purchase, and the Series or the principal underwriter of the Series shall purchase his said Shares, but only at the Net Asset Value thereof (as described in Section 3 hereof). The Series shall make payment for any such Shares to be redeemed, as aforesaid, in cash from the assets of that Series and payment for such Shares shall be made by the Series or the principal underwriter of the Series to the Shareholder of record within seven (7) days after the date upon which the request is effective. DETERMINATION OF NET ASSET VALUE AND VALUATION OF PORTFOLIO ASSETS. Section 3. The term "Net Asset Value" of any Series shall mean that amount by which the assets of that Series, exceed its liabilities, all as determined by or under the direction of the Trustees. Such value per Share shall be determined separately for each Series of Shares and shall be determined on such days and at such times as the Trustees may determine. Such determination shall be made with respect to securities for which market quotations are readily available, at the market value of such securities; and with respect to other securities and assets, at the fair value as determined in good faith by the Trustees, provided, however, that the Trustees, without Shareholder approval, may alter the method of appraising portfolio securities insofar as permitted under the 1940 Act and the rules, regulations and interpretations thereof promulgated or issued by the Commission or insofar as permitted by any Order of the Commission applicable to the Series. The Trustees may delegate any of its powers and duties under this Section 3 with respect to appraisal of assets and liabilities. At any time the Trustees may cause the value par Share last determined to be determined again in similar manner and may fix the time when such redetermined value shall become effective. SUSPENSION OF THE RIGHT OF REDEMPTION. Section 4. The Trustees may declare a suspension of the right of redemption or postpone the date of payment as permitted under the 1940 Act. Such suspension shall take effect at such time as the Trustees shall specify but not later than the close of business on the business day next following the declaration of suspension, and thereafter there shall be no right of redemption or payment until the Trustees shall declare the suspension at an end. In the case of a suspension of the right of redemption, a Shareholder may either withdraw his request for redemption or receive payment based on the Net Asset Value per Share existing after the termination of the suspension. LIMITATION OF LIABILITY AND INDEMNIFICATION LIMITATION OF LIABILITY. Section 1. Provided they have exercised reasonable care and have acted under the reasonable belief that their actions are in the best interest of the Trust, the Trustees shall not be responsible for or liable in any event for neglect or wrongdoing of them or any officer, agent, employee or investment adviser of the Trust, but nothing contained herein shall protect any Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. INDEMNIFICATION. Section 2. (a) Subject to the exceptions and limitations contained in paragraph (b) below: (i) every person who is, or has been, a Trustee or officer of the Trust (hereinafter referred to as "Covered Person") shall be indemnified by the appropriate Series to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer and against amounts paid or incurred by him in the settlement (ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened while in office or thereafter, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (b) No indemnification shall be provided hereunder to a Covered Person: (i) who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or (B) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust; or (ii) in the event of a settlement, unless there has been a determination that such Trustee or officer did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who are neither interested persons of the Trust nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type inquiry); provided, however, that any Shareholder may, by appropriate legal proceedings, challenge any such determination by the Trustees, or by independent counsel. (c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such Trustee or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel, other than Trustees and officers, and other persons may be entitled by contract or otherwise under law. (d) Expenses in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in paragraph (a) of this Section 2 may be paid by the applicable Series from time to time prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him to the applicable Series if it is ultimately determined that he is not entitled to indemnification under this Section 2; provided, however, that either (a) such Covered Person shall have provided appropriate security for such undertaking, (b) the Trust is insured against losses arising out of any such advance payments or (c) either a majority of the Trustees who are neither interested persons of the Trust nor parties to the matter, or independent legal counsel in a written opinion, shall have determined, based upon a review of readily available facts (as opposed to a trial-type inquiry or full investigation), that there is reason to believe that such Covered Person will be found entitled to indemnification under this Section 2. SHAREHOLDERS. Section 3. In case any Shareholder or former Shareholder of any Series of the Trust shall be held to be personally liable solely by reason of his being or having been a Shareholder and not because of his acts or omissions or for some other reason, the Shareholder or former Shareholder (or his heirs, executors, administrators or other legal representatives or in the case of a corporation or other entity, its corporate or other general successor) shall be entitled out of the assets belonging to the applicable Series to be held harmless from and indemnified against all loss and expense arising from such liability. The Series shall, upon request by the Shareholder, assume the defense of any claim made against the Shareholder for any act or obligation of the Series and satisfy any judgment thereon. TRUST NOT A PARTNERSHIP. Section 1. It is hereby expressly declared that a trust and not a partnership is created hereby. No Trustee hereunder shall have any power to bind personally either the Trust's officers or any Shareholder. All persons extending credit to, contracting with or having any claim against the Trust or the Trustees shall look only to the assets of the appropriate Series for payment under such credit, contract or claim; and neither the Shareholders nor the Trustees, nor any of their agents, whether past, present or future, shall be personally liable therefor. Nothing in this Declaration of Trust shall protect a Trustee against any liability to which the Trustee would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee hereunder. TRUSTEE'S GOOD FAITH ACTION; EXPERT ADVICE; NO BOND OR SURETY. Section 2. The exercise by the Trustees of their powers and discretions hereunder in good faith and with reasonable care under the circumstances then prevailing, shall be binding upon everyone interested. Subject to the provisions of Section 1 of this Article XII and to Article XI, the Trustees shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, and subject to the provisions of Section 1 of this Article XII and to Article XI, shall be under no liability for any act or Omission in accordance with such advice or for failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is obtained. ESTABLISHMENT OF RECORD DATES. Section 3. The Trustees may close the stock transfer books of the Trust for a period not exceeding sixty (60) days preceding the date of any meeting of Shareholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of Shares shall go into effect. In lieu of closing the stock transfer books as aforesaid, the Trustees may fix in advance a date not exceeding sixty (60) days preceding the date of any meeting of Shareholders, or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of Shares shall go into effect, as a record date for the determination of the Shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of Shares, and in such case such Shareholders and only such Shareholders as shall be Shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting, or to receive payment of such dividend, or to receive such allotment or rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any Shares on the books of the Trust after any such record date fixed or aforesaid. TERMINATION OF TRUST. Section 4. (a) This Trust shall continue without limitation of time but subject to the provisions of paragraph (b) of this Section 4. (b) Subject to a Majority Shareholder Vote of each Series affected by the matter or, if applicable, to a Majority Shareholder Vote of the Trust, the (i) sell and convey the assets of the Trust or any affected Series to another trust, partnership, association or corporation organized under the laws of any State which is a diversified open-end management investment company as defined in the 1940 Act, for adequate consideration which may include the assumption of all outstanding obligations, taxes and other liabilities, accrued or contingent, of the Trust or any affected Series, and which may include shares of beneficial interest or stock of such trust, partnership, association or corporation; or (ii) at any time sell and convert into money all of the assets of the Trust or any affected Series. Upon making provision for the payment of all such liabilities in either (i) or (ii), by such assumption or otherwise, the Trustees shall distribute the remaining proceeds or assets (as the case may be) ratably among the holders of the Shares of the Trust or any affected Series then outstanding. (c) Upon completion of the distribution of the remaining proceeds or the remaining assets as provided in sub-section (b), the Trust or any affected Series shall terminate and the Trustees shall be discharged of any and all further liabilities and duties hereunder and the right, title and interest of all parties shall be cancelled and discharged. FILING OF COPIES; REFERENCES; AND HEADINGS. Section 5. The original or a copy of this instrument and of each declaration of trust supplemental hereto shall be kept at the office of the Trust where it may be inspected by any Shareholder. A copy of this instrument and of each supplemental declaration of trust shall be filed by the Trustees with the Secretary of the Commonwealth of Massachusetts and the Boston City Clerk, as well as any other governmental office where such filing may from time to time be required. Anyone dealing with the Trust may rely on a certificate by an officer or Trustee of the Trust as to whether or not any such supplemental declarations of trust have been made and as to any matters in connection with the Trust hereunder, and with the same effect as if it were the original, may rely on a copy certified by an officer or Trustee of the Trust to be a copy of this instrument or of any such supplemental declaration of trust. In this instrument or in any such supplemental declaration of trust, references to this instrument and all expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to this instrument as amended or affected by any such supplemental declaration of trust. Headings are placed herein for convenience of reference only and in case of any conflict, the text of this instrument, rather than the headings, shall control. This instrument may be executed in any number of counterparts each of which shall be deemed an original. APPLICABLE LAW. Section 6. The trust set forth in this instrument is made in the Commonwealth of Massachusetts, and it is created under and is to be governed by and construed and administered according to the laws of said Commonwealth. The Trust shall be of the type commonly called a Massachusetts business trust, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a trust. AMENDMENTS. Section 7. If authorized by votes of the Trustees and a Majority Shareholder Vote, or by any larger vote which may be required by applicable law or this Declaration of Trust in any particular case, the Trustees shall amend or otherwise supplement this instrument, by making a declaration of trust supplemental hereto, which thereafter shall form a part hereof, except that an amendment which shall affect the Shareholders of one or more Series but not the Shareholders of all outstanding Series shall be authorized by vote of the Shareholders holding a majority of the Shares entitled to vote of each Series affected and no vote of Shareholders of a Series not affected shall be required. Amendments having the purpose of changing the name of the Trust or of supplying any omission, curing any ambiguity or curing, correcting or supplementing any defective or inconsistent provision contained herein shall not require authorization by Shareholder vote. Copies of the supplemental declaration of trust shall be filed as specified in Section 5 of this Article XII. FISCAL YEAR. Section 8. The fiscal year of the Trust shall end on a specified date as set forth in the Bylaws, provided, however, that the Trustees may, without Shareholder approval, change the fiscal year of the Trust. USE OF THE WORD "FIDELITY". Section 9. Fidelity Management & Research Company ("FMR") has consented to the use by any Series of the Trust of the identifying word "Fidelity" in the name of any Series of the Trust at some future date. Such consent is conditioned upon the employment of FMR as investment adviser of each Series of the Trust. As between the Trust and itself, FMR controls the use of the name of the Trust insofar as such name contains the identifying word "Fidelity". FMR may from time to time use the identifying word "Fidelity" in other connections and for other purposes, including, without limitation, in the names of other investment companies, corporations or businesses which it may manage, advise, sponsor or own or in which it may have a financial interest. FMR may require the Trust or any Series thereof to cease using the identifying word "Fidelity" in the name of the Trust or any Series thereof if the Trust or any Series thereof ceases to employ FMR or a subsidiary or affiliate thereof as investment adviser. IN WITNESS WHEREOF, the undersigned, being all of the initial Trustees of the Trust, have executed this instrument this ninth day of September, 1989. | 485BPOS | EX-99.B24B1A | 1996-01-12T00:00:00 | 1996-01-12T16:08:42 |
0000950109-96-000198 | 0000950109-96-000198_0000.txt | As filed with the Securities and Exchange Commission on January 11, 1996
Post-Effective Amendment No. 3 to THE SECURITIES ACT OF 1933
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
(Complete address of depositor's principal executive offices)
FRANCIS C. CLEARY, JR., ESQ. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY JOHN HANCOCK PLACE, BOSTON, 02117 (Name and complete address of agent for service)
Freedman, Levy, Kroll & Simonds 1050 Connecticut Avenue, N.W.
It is proposed that this filing become effective(check appropriate box)
/ X / immediately upon filing pursuant to paragraph (b) of Rule 485 / / on (date) pursuant to paragraph (b) of Rule 485 / / 60 days after filing pursuant to paragraph (a)(1) of Rule 485 / / on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate check the following box
/ / this post-effective amendment designates a new effective date for a
Pursuant to the provisions of Rule 24f-2, Registrant has registered an indefinite amount of the securities being offered and filed its Notice for fiscal year 1994 pursuant to Rule 24f-2 on February 23, 1995.
-------------------- John Hancock Variable Life
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
The flexible premium variable life survivorship policy ("Policy") described in this Prospectus can be funded, at the discretion of the Owner, by any of the twelve variable subaccounts of John Hancock Variable Life Account S (the "Account"), by a fixed subaccount (the "Fixed Account"), or by any combination of the Fixed Account and the variable subaccounts (collectively, the "Subaccounts"). The assets of each variable Subaccount will be invested in a corresponding investment portfolio ("Portfolio") of John Hancock Variable Series Trust I, a mutual fund advised by John Hancock Mutual Life Insurance Company ("John Hancock") or of M Fund, Inc., a mutual fund advised by M Financial Investment Advisers, Inc. (collectively, the "Funds"). The assets of the Fixed Account will be invested in the general account of John Hancock Variable Life Insurance Company ("JHVLICO").
The Prospectuses for the Funds, which are attached to this Prospectus, describe the investment objectives, policies and risks of investing in the twelve Portfolios of the Funds: Stock, Select Stock, Bond, Money Market, Managed, Real Estate Equity, International, Short-Term U.S. Government, Special Opportunities, Edinburgh Overseas Equity, Turner Core Growth and Frontier Capital Appreciation. Other variable Subaccounts and Portfolios may be added in the future.
Replacing existing insurance with a Policy described in this Prospectus may not be to your advantage.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. IT IS NOT VALID UNLESS ATTACHED TO CURRENT PROSPECTUSES FOR THE FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
INDEX OF DEFINED WORDS AND PHRASES
Below are listed certain words and phrases used in this Prospectus, together with identification of the page on which each is defined or explained:
WHAT IS THE VARIABLE LIFE POLICY BEING OFFERED?
John Hancock Variable Life Insurance Company ("JHVLICO") issues variable life insurance policies. The Policies described in this Prospectus provide life insurance coverage on two insureds, with a death benefit payable only when the last surviving insured dies. The Policies also provide for premium flexibility. JHVLICO issues other variable life insurance policies. These other policies are not funded by the Account and are offered by means of other Prospectuses.
As explained below, the death benefit and Surrender Value under the Policy may increase or decrease daily. The Policies differ from ordinary fixed- benefit life insurance in the way they work. However, the Policies are like fixed-benefit survivorship life insurance in providing lifetime protection against economic loss resulting from the death of the second of two persons insured. The Policies are primarily insurance and not investments.
The Policies work generally as follows: the Policy owner (the "Owner") periodically gives JHVLICO a premium payment. JHVLICO takes from each premium an amount for processing expenses, taxes, and sales expenses. JHVLICO then places the rest of the premium into as many as thirteen Subaccounts as directed by the Owner. The assets allocated to each variable Subaccount are invested in shares of the corresponding Portfolio of the Funds. The currently available Portfolios are Stock, Select Stock, Bond, Money Market, Managed, Real Estate Equity, International, Short-Term U.S. Government, Special Opportunities, Edinburgh Overseas Equity, Turner Core Growth and Frontier Capital Appreciation. The assets allocated to the Fixed Account are invested in the general account of JHVLICO. During the year, JHVLICO takes charges from each Subaccount and credits or charges each Subaccount with its respective investment performance. The insurance charge, which is deducted from the invested assets attributable to each Policy ("Account Value"), varies monthly with the then attained age of the insureds and with the amount of insurance provided at the start of each month.
The Policy provides for payment of death benefit proceeds when the last surviving insured dies. The death benefit proceeds will equal the death benefit, plus any additional benefit included by rider and then due, minus any Indebtedness. The death benefit under Option A equals the Sum Insured less any withdrawals that the Owner has made. The death benefit under Option B equals the Sum Insured plus the Policy Account Value on the date of death of the last surviving insured. Under Option A, the Owner may also elect an Extra Death Benefit feature that may result in a higher death benefit in some cases. The Policy also increases the death benefit if necessary to ensure that the Policy will continue to qualify as life insurance under the Federal tax laws.
Within limits prescribed by JHVLICO, the Owner may also elect whether to purchase the survivorship coverage as part of the "Basic Sum Insured" or as an "Additional Sum Insured." The Basic Sum Insured will not lapse during the first ten Policy years, so long as (1) specified Guaranteed Minimum Death Benefit Premiums have been paid, and (2) the Additional Sum Insured is not scheduled to exceed the Basic Sum Insured at any time. The Owner may elect for this Guaranteed Minimum Death Benefit feature to extend beyond ten years. The Additional Sum Insured is subject to lapse, but has certain cost and other advantages.
The initial Account Value is the amount of the premium that JHVLICO credits to the Policy, after deduction of the initial charges. The Account Value increases or decreases daily depending on the investment experience of the Subaccounts to which the amounts are allocated at the direction of the Owner. JHVLICO does not guarantee a minimum amount of Account Value. Therefore, the Owner bears the investment risk for that portion of the Account Value allocated to the variable Subaccounts. The Owner may surrender a Policy at any time while either of the insureds is living. The Surrender Value is the Account Value less any Indebtedness. The Owner may also make partial withdrawals from a Policy, subject to certain restrictions and an administrative charge. If the Owner surrenders in the early Policy years, the amount of Surrender Value would be low (as compared with other investments without sales charges) and, consequently, the insurance protection provided prior to surrender would be costly.
The minimum Sum Insured that may be bought at issue is $1,000,000. All persons insured must meet specified age limits and certain health and other criteria called "underwriting standards." The smoking status of the insureds is generally reflected in the insurance charges made. Policies issued in certain jurisdictions will not directly reflect the sexes of the insureds in either the premium rates or the charges and values under the Policy.
WHAT IS THE AMOUNT OF THE PREMIUMS?
Premiums are flexible, and the Owner may choose the amount and frequency of premium payments, so long as each premium payment is at least $100 and meets certain other requirements.
The minimum amount of premium required at the time of Policy issue is determined by JHVLICO based on the characteristics of each insured, the Policy's Sum Insured at issue, and the Policy options selected by the Owner. Unless the Guaranteed Minimum Death Benefit is in effect, if the Policy Account Value at the beginning of any Policy month is insufficient to pay the monthly Policy charges then due, JHVLICO will estimate the amount of additional premiums necessary to keep the Policy in force for three months. The Owner will have a 61 day grace period to pay at least that amount or the Policy will lapse.
At the time of Policy issue, the Owner may designate the amount and frequency of Planned Premium payments. The Owner may pay premiums other than the Planned Premium payments, subject to certain limitations.
The Policy has a Guaranteed Minimum Death Benefit provision, which guarantees that the basic Sum Insured will not lapse during the first ten Policy years if (1) prescribed amounts of premiums have been paid, based on the characteristics of each insured and the amount of the Basic Sum Insured at issue and (2) any Additional Sum Insured is not scheduled to exceed the Basic Sum Insured at any time. The Owner may at the time of application elect for this feature to be extended beyond the first ten Policy years for an additional charge.
WHAT IS JOHN HANCOCK VARIABLE LIFE ACCOUNT S?
The Account is a separate investment account of JHVLICO, operated as a unit investment trust, which supports benefits payable under the Policies. There are currently twelve variable Subaccounts within the Account. Each is invested in a corresponding Portfolio of John Hancock Variable Series Trust I or of M Fund, Inc., each of which is a "series" type of mutual fund. The Portfolios of the Funds which are currently available are Stock, Select Stock, Bond, Money Market, Managed, Real Estate Equity, International, Short-Term U.S. Government, Special Opportunities, Edinburgh Overseas Equity, Turner Core Growth and Frontier Capital Appreciation.
John Hancock receives a fee from John Hancock Variable Series Trust I for providing investment management services with respect to the Stock, Bond and Money Market Portfolios at an annual rate of .25% of the average daily net assets; with respect to the Select Stock and Managed Portfolios, at an annual rate of .40% of the first $500 million of the average daily net assets and at lesser percentages for amounts above $500 million; with respect to the Real Estate Equity Portfolio, at an annual rate of .60% of the first $300 million of the average daily net assets and at lesser percentages for amounts above $300 million; with respect to the International
Portfolio, at an annual rate of .60% of the first $250 million of the average daily net assets and at lesser percentages for amounts above $250 million; with respect to the Short-Term U.S. Government Portfolio, at an annual rate of .50% for the first $250 million of average daily net assets and at lesser percentages for amounts above $250 million; and with respect to the Special Opportunities Portfolio, at an annual rate of .75% for the first $250 million of average daily net assets and at lesser percentages for amounts above $250 million.
M Financial Investment Advisers, Inc., receives a fee from M Fund, Inc. for providing investment management services with respect to the International Equity Portfolio at an annual rate of 1.05% of the first $10 million of the average daily net assets and at an annual rate of .90% of the next $15 million of the average daily net assets and at lesser percentages for amounts above $25 million; with respect to the Core Growth Portfolio at an annual rate of .45% of the average daily net assets; and with respect to the Capital Appreciation Portfolio at an annual rate of .90% of the average daily net assets.
For a full description of the Funds, see the Prospectuses for the Funds attached to this Prospectus.
WHAT ARE THE CHARGES MADE BY JHVLICO?
Premium Processing Charge. A 1.25% charge deducted from each premium payment. This charge will be reduced for Policies with a Sum Insured at issue of more than $5,000,000, subject to a minimum charge of .50%.
State Premium Tax Charge and Federal DAC Tax Charge. Charges deducted from each premium payment, currently 2.35% for state premium taxes and 1.25% as a Federal deferred acquisition cost or "DAC Tax" charge.
Sales Charge. A charge deducted from each premium payment in the amount of 30% of premiums paid in the first year up to the "target premium" and 3.5% of premiums paid during the first year in excess of that target. The current sales charge in subsequent years generally is: 15% of premiums paid up to the target premium in each of years 2 through 5; 10% of premiums paid up to the target premium in each of years 6 through 10; 3% of premiums paid up to the target premium in years 11 through 20; and 0% of premiums paid up to the target premium thereafter. The current sales charge for premiums paid in excess of the target premium is 3.5% of such excess premiums paid in years 2 through 10; 3% of such excess premiums paid in years 11 through 20; and 0% of such excess premiums paid thereafter. Subject to maximums set forth in the Policy, certain of these charges may be increased after the tenth Policy year.
Issue Charge. A charge deducted monthly from Account Value at the rate of $55.55 per month for the first 5 Policy years, plus 2c per $1,000 of the Sum Insured at issue for the first 3 Policy years, except that the charge per $1,000 is guaranteed not to exceed $200 per month.
Administrative Charge. A charge deducted monthly from Account Value in an amount equal to no more than $10 per Policy and 3c per $1,000 of the Sum Insured at issue (currently $7.50 for all Policy years, plus 1c per $1,000 of the Sum Insured at issue for the first 10 Policy years, except that the $7.50 charge currently is zero for any Policy with a Sum Insured at issue of at least $5,000,000).
Insurance Charge. A charge based upon the amount for which JHVLICO is at risk, considering the attained age and risk classification of each of the insureds and JHVLICO's then current monthly insurance rates (never to exceed rates set forth in the Policy) deducted monthly from Account Value.
Guaranteed Minimum Death Benefit Charge. If the Guaranteed Minimum Death Benefit option is elected beyond the first 10 Policy years, a maximum charge starting at the beginning of the eleventh Policy year not to exceed 3c (currently 1c) per $1,000 of the basic Sum Insured at issue, deducted monthly from Account Value.
Charge for Mortality and Expense Risks. A charge made daily at a maximum effective annual rate of .90% of the assets of the Account. The current charges are: for a Policy with Sum Insured at issue of $1 million through $4.999 million, .625% of assets; $5 million through $14.999 million, .575% of assets; and $15 million or more, .525% of assets.
Charge for Extra Mortality Risks. An additional charge, depending upon the ages of the insureds and the degree of additional mortality risk, required if either of the insureds does not qualify for the standard underwriting class. This additional charge is deducted monthly from Account Value.
Charge for Optional Rider Benefits. An additional charge required if the Owner elects to purchase optional insurance benefits by rider. This additional charge is deducted from premiums when paid or is deducted monthly from Account Value.
Charge for Partial Withdrawal. A charge of $20 made against Account Value at the time of withdrawal.
See "Charges and Expenses", for a fuller description of the charges under the Policy.
IS THERE A CHARGE AGAINST THE ACCOUNT FOR FEDERAL INCOME TAX?
Currently no charge is made against any Subaccount for Federal income taxes; but if JHVLICO incurs, or expects to incur, income taxes attributable to any Subaccount or this class of Policies in future years, it reserves the right to make a charge. JHVLICO expects that it will continue to be taxed as a life insurance company. See "Charge for JHVLICO's Taxes."
WHAT IS THE RELATIONSHIP BETWEEN THE PREMIUM AND THE AMOUNT ALLOCATED TO THE SUBACCOUNTS?
The initial net premium is allocated by JHVLICO from its general account to the Money Market Subaccount on the date of issue of the Policy. The initial net premium is the gross Minimum First Premium, plus any additional amount of premium that has been paid prior to the date of issue, less the premium processing charge, the charges deducted for sales expenses and state premium taxes, and the Federal DAC Tax charge. These charges also apply to subsequent premium payments. Twenty days after the date of issue, the amount in the Money Market Subaccount is reallocated among the Subaccounts in accordance with the Owner's election. Net premiums derived from payments received after this reallocation date are allocated, generally on the date of receipt, to one or more of the Subaccounts as elected by the Owner.
HOW ARE AMOUNTS ALLOCATED TO EACH SUBACCOUNT?
At issue and subsequently thereafter, the Owner will provide us with the rule ("Investment Rule") we will follow to invest net premiums or other amounts in any of the Subaccounts. The Owner may change the Investment Rule under which JHVLICO will allocate amounts to Subaccounts. See "Premiums-- Billing, Allocation of Premium Payments (Investment Rule)."
WHAT COMMISSIONS ARE PAID TO AGENTS?
The Policies are sold through agents who are licensed by state authorities to sell JHVLICO's insurance policies. Commissions payable to agents are described under "Distribution of Policies." Sales expenses in any year are not equal to the deduction for sales expenses in that year. Rather, total sales expenses under the Policies are intended to be recovered over the lifetimes of the insureds covered by the Policies.
WHAT IS THE DEATH BENEFIT?
The death benefit proceeds, payable when the last insured dies, will equal the death benefit of the Policy, plus any additional rider benefits included and then due, minus any Indebtedness. The death benefit payable depends on the Policy's Sum Insured and the death benefit option selected by the Owner at the time the Policy is issued, as follows:
OPTION A: The death benefit equals the Policy's current Sum Insured less any withdrawals of Account Value that the Owner has made. (The Sum Insured is the Basic Sum Insured plus the amount of any Additional Sum Insured.) If this option is elected, the Owner may also elect an optional Extra Death Benefit feature, under which the death benefit will increase if and when the Policy Account Value exceeds a certain predetermined amount.
OPTION B: The death benefit is the Policy's current Sum Insured plus the Policy Account Value on the date of death of the last surviving insured, and varies in amount based on investment results.
The death benefit of the Policy under either Option A or Option B will be increased if necessary to ensure that the Policy will continue to qualify as life insurance under the Federal tax law. See "Death Benefits" and "Tax Considerations."
Under the Guaranteed Minimum Death Benefit provision, the Policy is guaranteed not to lapse during the first 10 Policy years, provided the amount of premiums paid, accumulated at 4% interest, minus any withdrawals, also accumulated at 4% interest, is at least equal to the Guaranteed Minimum Death Benefit Premiums, accumulated at 4% interest. For an additional charge, the Owner also may elect for this benefit to continue beyond the tenth Policy year. However, the Guaranteed Minimum Death Benefit will not apply to any Policy if the Additional Sum Insured is scheduled to exceed the Basic Sum Insured at any time.
HOW DOES THE ACCOUNT VALUE OF A POLICY VARY IN RELATION TO THE SUBACCOUNTS' INVESTMENT EXPERIENCE?
In general, the Account Value for any day equals the Account Value for the previous day, increased by any net premium placed in the Subaccounts for the Policy, decreased by any charges made against the Account Value, and increased or decreased by the investment experience of the Subaccounts. No minimum Account Value for the Policy is guaranteed.
WHAT IS THE LOAN PROVISION AND HOW DOES A LOAN AFFECT THE DEATH BENEFIT, ACCOUNT VALUE AND SURRENDER VALUE?
The Owner may obtain a Policy loan in the maximum amount of 90% of the Surrender Value. Interest charged on any loan will accrue daily at an annual rate determined by JHVLICO at the start of each Policy year. This interest rate will not exceed the greater of (1) the "Published Monthly Average" (see "Loan Provision and Indebtedness") for the calendar month ending two months before the calendar month of the Policy anniversary or (2) 5%. In jurisdictions where a fixed loan rate is applicable, JHVLICO will charge interest at an effective annual rate of 5% in the first 20 Policy years and 4.5% thereafter, accrued daily. A loan plus accrued interest ("Indebtedness") may be repaid at the discretion of the Owner in whole or in part in accordance with the terms of the Policy.
While a loan is outstanding, the rate of interest credited to the Account Value because of the loan will usually be different than the net investment experience of the Subaccounts. Therefore, the Account Value, the Surrender Value and any death benefit above the current Sum Insured are permanently affected by any loan.
IS THERE A SHORT-TERM CANCELLATION RIGHT?
The Owner may surrender a Policy by delivering or mailing it within 45 days after the date Part A of the application has been completed for both insureds, or within 10 days after receipt of the Policy by the Owner, or within 10 days after mailing by JHVLICO of a Notice of Withdrawal Right, whichever is latest, to JHVLICO's Home Office, or to the agent or agency office through which it was delivered. Coverage under the Policy will be cancelled immediately as of the date of such mailing or delivery. Any premium paid on it will be refunded. If required by state law, the refund will equal the Account Value at the end of the Valuation Period in which the Policy is received plus all charges or deductions made against premiums plus an amount reflecting charges against the Subaccounts and the investment management fee of the Fund.
WHAT INVESTMENT TRANSFERS ARE ALLOWED AN OWNER?
The Owner may transfer the Account Value among the variable Subaccounts or into the Fixed Account at any time. Transfers out of the Fixed Account, however, are subject to restrictions.
ARE THE BENEFITS UNDER A POLICY SUBJECT TO FEDERAL INCOME TAX?
The benefits under Policies described in this Prospectus are expected to receive the same tax treatment under the Internal Revenue Code of 1986 as benefits under traditional fixed-benefit life insurance policies. Thus, death benefits payable under the Policies will not be included in the beneficiary's gross income. Also, the Owner is not taxed on interest and gains under the Policy unless and until values are actually received through withdrawal, surrender, or other distributions.
Under Federal tax law, distributions from Policies on which premiums greater than a "7-pay" premium limit (as defined in the law) have been paid, will be subject to special taxation. See "Premiums--7-Pay Premium Limit" and "Policy Proceeds" for a discussion of how the "7-pay" premium limit may be exceeded under a Policy. A distribution on such a Policy (called a "modified endowment") will be taxed to the extent there is any income (gain) to the Owner and an additional penalty tax may be imposed on the taxable amount.
JHVLICO, a stock life insurance company chartered in 1979 under Massachusetts law, is authorized to transact a life insurance and annuity business in Massachusetts and all other states, except New York. JHVLICO began selling variable life insurance policies in 1980.
JHVLICO is a wholly-owned subsidiary of John Hancock, a company chartered in Massachusetts in 1862. Its Home Office is at John Hancock Place, Boston, Massachusetts 02117. As of December 31, 1994, John Hancock's assets were over $45 billion and it had invested over $380 million in JHVLICO in connection with JHVLICO's organization and operations. It is anticipated that John Hancock will from time to time make additional capital contributions to JHVLICO to enable it to meet its reserve requirements and expenses in connection with its business, and John Hancock is committed to make additional capital contributions if necessary to ensure that JHVLICO maintains a positive net worth.
THE ACCOUNT AND THE SERIES FUNDS
The Account, a separate account established under Massachusetts law in 1993, meets the definition of "separate account" under the Federal securities laws and is registered as a unit investment trust under the Investment Company Act of 1940 ("1940 Act").
The Account's assets are the property of JHVLICO. Each Policy provides that the portion of the Account's assets equal to the reserves and other liabilities under the Policy shall not be chargeable with liabilities arising out of any other business JHVLICO may conduct. In addition to the assets attributable to variable life policies, the Account's assets include assets derived from charges made by JHVLICO. From time to time these additional assets may be transferred in cash by JHVLICO to its general account. Before making any such transfer, JHVLICO will consider any possible adverse impact the transfer might have on any Subaccount. Additional premiums are charged for Policies where the insured is classified as a substandard risk and a portion of these premiums is allocated to the Account.
The Account is registered with the Securities and Exchange Commission (the "Commission") under the 1940 Act. Such registration does not involve supervision by the Commission of the management or policies of the Account, JHVLICO or John Hancock.
The assets in each variable Subaccount are invested in corresponding Portfolios of the Funds, but the assets of one variable Subaccount are not necessarily legally insulated from liabilities associated with another variable Subaccount. New variable Subaccounts may be added or existing variable Subaccounts may be deleted as new Portfolios are added to or deleted from the Funds and made available to Owners.
Each Fund is a "series" type of mutual fund registered with the Commission under the 1940 Act as an open-end diversified management investment company. Each Fund serves as the investment medium for the Account and other unit investment trust separate accounts established for other variable life insurance policies and variable annuity contracts. (See the attached Fund Prospectuses for a description of a need to monitor for possible conflicts and other consequences.) A very brief summary of the investment objectives of each Portfolio is set forth below.
Stock Portfolio. The investment objective of this Portfolio is to achieve intermediate and long-term growth of capital, with income as a secondary consideration. This objective will be pursued by investments principally in common stocks (and in securities convertible into or with rights to purchase common stocks) of companies believed by management to offer growth potential over both the intermediate and long-term.
Select Stock Portfolio. The investment objective of this Portfolio is to achieve above-average capital appreciation through the ownership of common stocks of companies believed by management to offer above-average capital appreciation opportunities. Current income is not an objective of the Portfolio.
Bond Portfolio. The investment objective of this Portfolio is to provide as high a level of long-term total rate of return as is consistent with prudent investment risk, through investment in a diversified portfolio of freely marketable debt securities. Total rate of return consists of current income, including interest and discount accruals, and capital appreciation.
Money Market Portfolio. The investment objective of this Portfolio is to provide maximum current income consistent with capital preservation and liquidity. It seeks to achieve this objective by investing in a managed portfolio of high quality money market instruments.
Managed Portfolio. The investment objective of this Portfolio is to achieve maximum long-term total return consistent with prudent investment risk. Investments will be made in common stocks, convertibles and other fixed income securities and in money market instruments.
Real Estate Equity Portfolio. The investment objective of this Portfolio is to provide above-average income and long-term growth of capital by investment principally in equity securities of companies in the real estate and related industries.
International Portfolio. The investment objective of this Portfolio is to achieve long-term growth of capital by investing primarily in foreign equity securities.
Short-Term U.S. Government Portfolio. The investment objective of this Portfolio is to provide a high level of current income consistent with the maintenance of principal, through investment in a portfolio of short-term U.S. Treasury securities and U.S. Government agency securities.
Special Opportunities Portfolio. The investment objective of this Portfolio is to achieve long-term capital appreciation by emphasizing investments in equity securities of issuers in various economic sectors.
John Hancock acts as the investment manager for the above portfolios, and John Hancock's indirectly owned subsidiary, Independence Investment Associates, Inc., with its principal place of business at 53 State Street, Boston, Massachusetts, provides sub-investment advice with respect to the Stock, Select Stock, Managed, Real Estate Equity and Short-Term U.S. Government Portfolios. Another indirectly owned subsidiary, John Hancock Advisers, Inc., located at 101 Huntington Avenue, Boston, Massachusetts, provides sub-investment advice with respect to the Special Opportunities Portfolio; and John Hancock Advisers and its subsidiary, John Hancock Advisers International, Limited, located at 34 Dover Street, London, England, provide sub-investment advice with respect to the Bond and International Portfolios.
Edinburgh Overseas Equity Portfolio. Its investment objective is long-term capital appreciation with reasonable investment risk through active management and investment in common stock and common stock equivalents of foreign issuers. Current income, if any, is incidental.
Turner Core Growth Portfolio. The investment objective of this Portfolio is long-term capital appreciation through a diversified portfolio of common stocks that show strong earnings potential with reasonable market prices.
Frontier Capital Appreciation Portfolio. This Portfolio seeks maximum capital appreciation through investment in common stock of companies of all sizes, with emphasis on stocks of small- to medium-capitalization companies. Importance is placed on an evaluation of earnings per share growth and expectations of stock price appreciation, rather than income.
M Financial Investment Advisers, Inc., acts as the investment manager for the three Portfolios of M Fund, Inc. described above. Edinburgh Fund Managers PLC, provides sub-investment advice to the Edinburgh Overseas Equity Portfolio; Turner Investment Partners, Inc. provides sub-investment advice to the Turner Core Growth Portfolio; and Frontier Capital Management Company, Inc., provides sub-investment advice to the Frontier Capital Appreciation Portfolio.
JHVLICO will purchase and redeem Fund shares for the Account at their net asset value without any sales or redemption charges. Shares of the Fund represent an interest in one of the Portfolios which corresponds to a variable Subaccount of the Account. Any dividend or capital gains distributions received by the Account will be reinvested in Fund shares at their net asset value as of the dates paid.
On each Valuation Date, shares of each Portfolio are purchased or redeemed by JHVLICO for each variable Subaccount based on, among other things, the amount of net premiums allocated to the variable Subaccount, distributions reinvested, transfers to, from and among variable Subaccounts, all to be effected as of that date. Such purchases and redemptions are effected at the net asset value per Fund share for each Portfolio determined on that same Valuation Date. A Valuation Date is any date on which JHVLICO is open for business, the New York Stock Exchange is open for trading and on which the Fund values its shares. A Valuation Period is that period of time from the beginning of the day following a Valuation Date to the end of the next following Valuation Date.
A full description of each Fund, its investment objectives, policies and restrictions, its charges, expenses and all other aspects of its operation is contained in the attached Prospectuses and the statement of additional information referred to therein, which should be read together with this Prospectus.
An Owner may allocate premiums to the Fixed Account or transfer all or a part of the Account Value under a Policy to the Fixed Account. The amount so allocated or transferred will become a part of JHVLICO's general account assets. JHVLICO's general account consists of assets owned by JHVLICO other than those in the Account and in other separate accounts that have been or may be established by JHVLICO. Subject to applicable law, JHVLICO has sole discretion over the investment of assets of the general account, and Owners do not share in the investment experience of those assets. Instead, JHVLICO guarantees that the Account Value allocated to the Fixed Account will accrue interest daily at an effective annual rate of at least 4% without regard to the actual investment experience of the general account. Transfers from the Fixed Account are subject to certain limitations. See "Transfers Among Subaccounts."
The Account Value in the Fixed Account is equal to the portion of the net premiums allocated to it, plus any amounts transferred to it and interest credited to it, minus any charges deducted from it or partial withdrawals or amounts transferred from it. JHVLICO guarantees that interest credited to the Account Value in the Fixed Account will not be less than an effective annual rate of 4%. JHVLICO may, in its sole discretion, credit higher rates although it is not obligated to do so. The Owner assumes the risk that interest credited will not exceed 4% per year. Upon request and in the annual statement, JHVLICO will inform Owners of the then-applicable rates. The rate of interest declared with respect to any amount in the Fixed Account may depend on when that amount was first allocated to the Fixed Account.
Because of exemptive and exclusionary provisions, interests in JHVLICO's general account have not been registered under the Securities Act of 1933 and the general account has not been registered as an investment company under the 1940 Act. Accordingly, neither the general account nor any interests therein are subject to the provisions of these Acts, and JHVLICO has been advised that the staff of the Securities and Exchange Commission has not reviewed the disclosure in this Prospectus relating to the Fixed Account. Disclosure regarding the Fixed Account may, however, be subject to certain generally- applicable provisions of the Federal securities laws relating to accuracy and completeness of statements made in prospectuses.
REQUIREMENTS FOR ISSUANCE OF POLICY
The Policy is generally available with a minimum Sum Insured at issue of $1,000,000 and a minimum Basic Sum Insured of $500,000. At the time of issue, each insured must be age 20 through 80. All persons insured must meet certain health and other criteria called "underwriting standards." The smoking status of each insured is reflected in the insurance charges made. Policies issued in certain jurisdictions will not directly reflect the sex of the insured in either the premium rates or the charges or values under the Policy. Accordingly, the illustrations set forth in this Prospectus may differ for such Policies. Amounts of coverage that JHVLICO will accept under the Policies may be limited by JHVLICO's underwriting and reinsurance procedures as in effect from time to time.
Payment Flexibility. Premiums are flexible. The Owner may choose the amount and frequency of premium payments, so long as each premium payment is at least $100 and meets the other requirements described below.
Minimum First Premium. The amount of premium required at the time of issue is determined by JHVLICO, and depends on the age, sex, smoking status, and underwriting class of each of the insureds at issue, the Policy's Sum Insured at issue, and any additional benefits selected. The Minimum First Premium must be received by JHVLICO at its Home Office before the Policy is in full force and effect. See "Death Benefits." There is no grace period for the payment of the Minimum First Premium.
Minimum Premiums. If the Policy's Surrender Value at the beginning of any Policy month is insufficient to pay the monthly Policy charges then due, JHVLICO will notify the Owner and the Policy will enter a grace period, unless the Guaranteed Minimum Death Benefit is in effect. If premiums sufficient to pay at least three months' estimated charges are not paid by the end of the grace period, the Policy will lapse. See "Default."
Planned Premium Schedule. At the time of issue, the Owner may designate a Planned Premium schedule for the amount and frequency of premium payments. JHVLICO will send billing statements for the amount chosen, at the frequency chosen. The Owner may change the Planned Premium after issue. The Owner may also pay a premium in excess of the Planned Premium, subject to the limitations described below. At the time of Policy issuance, JHVLICO will determine whether the Planned Premium schedule will exceed the 7-Pay limit discussed below. If so, JHVLICO will not issue the Policy unless the Owner signs a form acknowledging that fact.
Other Premium Limitations. Federal tax law requires a minimum death benefit in relation to Account Value. See "Death Benefits--Definition of Life Insurance." The death benefit of the Policy will be increased if necessary to ensure that the Policy will continue to satisfy this requirement. Also, as described under "Death Benefits--Optional Extra Death Benefit Feature," the optional Extra Death Benefit feature may result in a death benefit under Option A that is higher than the Sum Insured. If the payment of a given premium will cause the Policy Account Value to increase to such an extent that an increase in death benefit is necessary to satisfy federal tax law requirements, or pursuant to the Extra Death Benefit option, JHVLICO has the right to not accept the excess portion of that premium payment, or to require evidence of insurability before that portion is accepted. In no event, however, will JHVLICO refuse to accept any premium necessary to maintain the Guaranteed Minimum Death Benefit in effect under a Policy.
Whether or not the Guaranteed Minimum Death Benefit is in effect, JHVLICO also reserves the right to limit premium payments above the amount of the cumulative Guaranteed Minimum Death Benefit premiums. JHVLICO will not, however, refuse to accept any premium payment that is required to keep the Policy from lapsing.
Guaranteed Minimum Death Benefit Premiums. A Guaranteed Minimum Death Benefit feature may apply during the first ten Policy years and, if the Owner has elected, thereafter. See "Death Benefits." The Guaranteed Minimum Death Benefit Premiums required to maintain this benefit in force depend on the issue age, sex, smoking status, and underwriting class of each of the insureds at issue and the Basic Sum Insured at issue. This premium will be higher than the Minimum First Premium and is 85% of the target premium (discussed under "Sales Charge"). To keep the Guaranteed Minimum Death Benefit in effect, the amount of actual premiums paid, accumulated at 4% interest, minus any withdrawals, also accumulated at 4% interest, must at each Policy anniversary be at least equal to the Guaranteed Minimum Death Benefit Premiums due to date accumulated at 4% interest. If this test is not satisfied on any Policy anniversary, JHVLICO will notify the Owner of the shortfall and a 61-day grace period will commence as of that anniversary. This notice will be mailed to the Owner's last-known address at least 31 days prior to the end of the grace period. If JHVLICO does not receive payment for the amount of the deficiency by the end of the grace period, the Guaranteed Minimum Death Benefit feature will lapse unless and until restored as described under "Default-- Reinstatement." The Guaranteed Minimum Death Benefit will not apply if the Additional Sum Insured is scheduled to exceed the Basic Sum Insured at any time.
Billing, Allocation of Premium Payments (Investment Rule). The Owner may at any time elect to be billed by JHVLICO for an amount of premium other than the Guaranteed Minimum Death Benefit Premium. The Owner may also elect to be billed for premiums on an annual, semi-annual or quarterly basis. An automatic check-writing program may be available to an Owner interested in making monthly premium payments. All premiums are payable at JHVLICO's Home Office.
Any premium payment will be processed by JHVLICO as of the end of the Valuation Period in which it is received, unless one of the three exceptions noted below is applicable. Each premium payment will be reduced by the premium processing charge, the state premium tax charge, the sales charge, and the Federal DAC Tax charge. See "Charges and Expenses." The remainder is the net premium.
The Owner at the time of application must elect an Investment Rule which will allocate net premiums and any credits to any of the ten Subaccounts. The Owner must select allocation percentages in whole numbers, and the total allocated must equal 100%. The Owner may thereafter change the Investment Rule prospectively at any time. The change will be effective as to any net premiums and credits applied after receipt at JHVLICO's Home Office of notice satisfactory to JHVLICO. Notwithstanding the Investment Rule, all net premiums credited to Account Value as of a date prior to the end of the Valuation Period that includes the 20th day following the date of issue will automatically be allocated to the Money Market Subaccount. At the end of that Valuation Period, the Policy's Account Value will be reallocated automatically among the Subaccounts in accordance with the Investment Rule chosen by the Owner.
There are three exceptions to the normal practice of processing a premium payment as of the end of the Valuation Period in which it is received:
(1) A payment received prior to a Policy's date of issue will be processed as if received on the Valuation Date immediately preceding the date of issue.
(2) If the Minimum First Premium is not received prior to the date of issue, each payment received thereafter will be processed as if received on the Valuation Date immediately preceding the date of issue until all of the Minimum First Premium is received.
(3) That portion of any premium that we delay accepting as described under "Other Premium Limitations" above, or "7-Pay Premium Limit" below, will be processed as of the end of the Valuation Period in which we accept that amount.
7-Pay Premium Limit. Federal tax law modifies the tax treatment of certain Policy distributions such as loans, surrenders, partial surrenders, and withdrawals. The application of this modified treatment to any Owner depends upon whether premiums have been paid at any time during the first 7 Policy years that exceed a "7-pay" premium limit as defined in the law. The "7-pay" premium is greater than the Guaranteed Minimum Death Benefit Premium but is generally less than the amount an Owner may choose to pay and JHVLICO will accept. The 7-pay limit is the total of net level premiums that would have been payable at any time for the Policy to be fully paid-up after the payment of 7 level annual premiums. If the total premiums paid exceed the 7-pay limit, the Policy will be treated as a "modified endowment", which means that the Owner will be subject to tax to the extent of any income (gain) on any distributions made from the Policy. A material change in the Policy will result in a new 7-pay limit and test period. A reduction in the Policy's benefits within the 7-year period following issuance of, or a material change in, the Policy may also result in the application of the modified endowment treatment. See "Policy Proceeds" under "Tax Considerations." If JHVLICO receives any premium payment that will cause a Policy to become a modified endowment, the excess portion of that premium payment will not be accepted unless the Owner signs an acknowledgment of that fact.
ACCOUNT VALUE AND SURRENDER VALUE
Amount of Account Value. The Account Value increases or decreases depending upon a number of factors, such as the applicable Subaccount's investment experience, the proportion of the Account Value invested in each Subaccount and the interest credited to any Loan Account established upon the making of a Policy loan. In general the Account Value for any day equals the Account Value for the previous day, decreased by charges against the Account Value, increased or decreased by the investment experience of the Subaccounts and increased by net premiums received. No minimum amount of Account Value is guaranteed.
A Policy loan will not affect the total amount of Account Value at the time the loan is made but will result in a different rate of return being credited to the Loan Account portion of the Account Value.
Amount of Surrender Value. The Surrender Value will be the Account Value less any Indebtedness.
When Policy May Be Surrendered. A Policy may be surrendered for its Surrender Value at any time while either of the insureds is living and the Policy is not in a grace period. Surrender takes effect and the Surrender Value is determined as of the end of the Valuation Period in which occurs the later of receipt at JHVLICO's Home Office of a signed request or the surrendered Policy.
If a Policy is surrendered during the second Policy year, a portion of the sales charge, equal to 5% of premiums paid in the second Policy year up to one target premium, will be refunded to the Owner.
Partial Withdrawal of Surrender Value. The Owner may request withdrawal of part of the Surrender Value in accordance with JHVLICO's rules then in effect. Any withdrawal must be at least $1,000 and is subject to an administrative charge of $20.
An Owner may request a partial withdrawal of Surrender Value at any time when at least one of the insureds is still living, provided that the Policy is not in a grace period. This privilege, which reduces the Account Value by the amount of the withdrawal and the associated charge, may not be used to reduce the Account Value below the amount JHVLICO estimates will be required to pay three months' charges under the Policy as they fall due. The withdrawal will be effective as of the end of the Valuation Period in which JHVLICO receives written notice satisfactory to it at its Home Office.
A withdrawal will reduce any Option A death benefit by the amount withdrawn. JHVLICO reserves the right to refuse any withdrawal request that would cause the Policy's death benefit to fall below $1,000,000.
An amount equal to the Account Value withdrawn will be removed from each Subaccount in the same proportion as the Account Value is then allocated among the Subaccounts. A withdrawal is not a loan and, once made, cannot be repaid.
A withdrawal may have significant tax consequences. See "Tax Considerations."
The Owner may elect a rider that permits the Policy's current Sum Insured to be split on a "50/50" basis into two other individual life insurance policies on the lives of the insured persons. Such a split will not require evidence of insurability of either insured, but is permitted only upon the insureds' divorce or the occurrence of certain Federal tax law changes. This rider must be elected at the time of application for a Policy, but may be cancelled at any time by the Owner. The monthly charge for the rider is 3c per $1000 of current Sum Insured. Certain conditions, described in the rider, must be met prior to effecting a Policy split. The rider automatically terminates on the date of death of the first insured to die, the Policy anniversary nearest the older insured's 80th birthday, or the date the Policy terminates, whichever is earliest.
Tax Considerations. See "Tax Considerations--Policy Split Option", for possible tax consequences of a Policy split under the option described above.
The death benefit proceeds are payable when the last surviving insured dies while the Policy is in effect. The death benefit proceeds will equal the death benefit of the Policy, plus any additional rider benefits then due, minus any Indebtedness. If the last surviving insured dies during a grace period, JHVLICO will also deduct any overdue monthly deductions.
The death benefit payable depends on the current Sum Insured and the death benefit option selected by the Owner at the time the Policy is issued, as follows:
OPTION A: The death benefit equals the current Sum Insured, subject to any increases described below under "Optional Extra Death Benefit Feature" and "Definition of Life Insurance", and reduced by the amount of any partial withdrawals that have been made over the life of the Policy.
OPTION B: The death benefit is the current Sum Insured, plus the Policy Account Value at the end of the Valuation Period in which the last surviving insured dies. This death benefit is a varying amount and fluctuates with the amount of the Account Value. This death benefit is also subject to any increase described below under "Definition of Life Insurance."
The Sum Insured is the Basic Sum Insured, plus the amount of any Additional Sum Insured (discussed below).
Owners who prefer to have favorable investment experience reflected in increased insurance coverage should choose Option B. Owners who prefer to have insurance coverage that generally does not vary in amount and lower cost of insurance charges should choose Option A.
Optional Extra Death Benefit Feature (Option M). If Option A is elected, the Owner may also elect an optional Extra Death Benefit feature. Pursuant to this feature the death benefit under Option A will be no less than the amount of the Policy Account Value at the beginning of the Policy year in which the last surviving insured dies, multiplied by a factor specified in the Policy. The factor is based on the younger insured's age. The optional Extra Death Benefit feature may result in an Option A death benefit that is higher than the minimum death benefit required under Federal tax law, as described below under "Definition of Life Insurance." Although there is no special charge for the optional Extra Death Benefit, the monthly cost of insurance deductions will be based on the amount of death benefit then in effect, including any additional death benefit pursuant to this option. An election of this option must be made at the time of application for the Policy, although the Owner may revoke the election at any time. There may be tax consequences involved, if revoking the Extra Death Benefit feature under Option A causes a reduction in death benefit. See "Tax Considerations--Policy Proceeds."
Definition of Life Insurance. Federal tax law requires a minimum death benefit in relation to cash value for a Policy to qualify as life insurance. The death benefit of a Policy will be increased if necessary to ensure that the Policy will continue to qualify as life insurance. The higher death benefit amount will be equal to the Policy Account Value on the date of death of the last surviving insured, times a percentage based on the younger insured's age at the beginning of the Policy year of the last surviving insured's death. This percentage, which declines with age, is set out in the Policy. The monthly deductions for the cost of insurance will be based on the amount of death benefit then in effect, including any additional death benefit required to satisfy the definition of life insurance.
Guaranteed Minimum Death Benefit. During the first 10 Policy years (and thereafter if the Owner elects), the Basic Sum Insured is guaranteed not to lapse, provided that (1) the amount of premiums paid through each Policy anniversary, accumulated at 4% interest, minus any withdrawals, also accumulated at 4% interest, is at least equal to the Guaranteed Minimum Death Benefit Premiums accumulated at 4% interest and (2) any Additional Sum Insured under a Policy is not scheduled to exceed the Basic Sum Insured at any time. At any time when this feature is not in force, the death benefit of the Policy is not guaranteed. The election to extend the Guaranteed Minimum Death Benefit beyond ten Policy years must be made at the time of Policy issuance, and the Owner may revoke the election at any time. JHVLICO imposes a charge after the tenth Policy year if the Owner elects to extend this benefit.
Additional Sum Insured. The Owner may apply for an amount of Additional Sum Insured under the Policy, pursuant to which an additional amount of death benefit will be paid upon the death of the last surviving insured under the Policy. Purchasers of a Policy should consider various factors in determining whether to elect coverage in the form of Basic Sum Insured or in the form of Additional Sum Insured.
The Basic Sum Insured generally cannot be increased or decreased after issue, whereas the amount of Additional Sum Insured can be decreased, or, upon application and submission of evidence of insurability, increased subsequent to Policy issuance. JHVLICO may refuse to accept any request to reduce the Additional Sum Insured (a) that would cause the Policy's current Sum Insured to fall below $1,000,000 or (b) if immediately following the reduction, the Policy's current death benefit would reflect an increase necessary for the Policy to continue to qualify as life insurance (see "Death Benefits-- Definition of Life Insurance") or an increase pursuant to the optional Extra Death Benefit feature. Any increase or decrease in Additional Sum Insured will become effective at the beginning of the first Policy month after JHVLICO receives in good order at its Home Office all information necessary to process the change, and, in the case of an increase in coverage, approves the change.
Any decision by the Owner to modify the amount of Additional Sum Insured coverage after issue can have significant tax consequences. See "Tax Considerations--Policy Proceeds."
Also, the Owner may elect among several forms of Additional Sum Insured coverage at the time the Owner applies for it: a level amount of coverage; an amount of coverage that increases on each Policy anniversary up to a prescribed limit; an amount of coverage that increases on each Policy anniversary to the amount of premiums paid during prior years plus the Planned Premium for the current year, subject to certain limits; or a combination of those forms of coverage.
The amount of target premium under a Policy is not affected by the amount of the Additional Sum Insured. Accordingly, the amount of sales charge paid by the Owner and the amount of compensation paid to the selling insurance agent may be less if coverage is included as Additional Sum Insured, rather than as Basic Sum Insured.
The amount of any Additional Sum Insured is not included in any Guaranteed Minimum Death Benefit. Therefore, if the Policy's Account Value is insufficient to pay the monthly charges as they fall due (including the charges for the Additional Sum Insured) the Additional Sum Insured coverage will lapse, even if the Basic Sum Insured stays in effect pursuant to the Guaranteed Minimum Death Benefit feature.
The Additional Sum Insured is limited to 400% of the Basic Sum Insured. Generally, an Owner will incur lower sales charges and have more flexible coverage with respect to the Additional Sum Insured than with respect to the Basic Sum Insured. On the other hand, for Owners that wish to take advantage of the Guaranteed Minimum Death Benefit, the proportion of the Policy's Sum Insured that is guaranteed can be increased by taking out more coverage as Basic Sum Insured at the time of Policy issue. The Guaranteed Minimum Death Benefit does not apply to either the Basic Sum Insured or any Additional Sum Insured if the Additional Sum Insured is scheduled to exceed the Basic Sum Insured at any time. In such a case, it could be to the Owner's advantage either to increase the amount of coverage applied for as Basic Sum Insured in order that the Guaranteed Minimum Death Benefit will be available or, if such guarantee is not of value to the Owner, to maximize the proportion of the Additional Sum Insured.
Temporary Coverage Prior to Policy Delivery. If a specified amount of premium is paid with the application for a Policy, temporary survivorship term coverage may be available prior to the time that coverage under the Policy takes effect. Temporary term coverage under all applications with John Hancock and its affiliates will not exceed $1,000,000, and is subject to the terms and conditions described in the application for a Policy.
The Owner may reallocate the amounts held for the Policy in the Subaccounts with no charge at any time, except as noted below. The Owner may either (1) use percentages (in whole numbers) to be transferred among Subaccounts or (2) designate the dollar amount of funds to be transferred among Subaccounts. The reallocation must be such that the total in the Subaccounts after reallocation equals 100% of Account Value. Transfers out of a variable Subaccount will be effective at the end of the Valuation Period in which JHVLICO receives at its Home Office notice satisfactory to JHVLICO.
Transfers out of the Fixed Account to the variable Subaccounts are permitted only once each Policy year and only during the 31-day period beginning on the Policy anniversary. Transfers out of the Fixed Account may be requested from 60 days before to 30 days after the Policy anniversary. If received on or before the Policy anniversary, requests for transfer out of the Fixed Account will be processed on the Policy anniversary (or the next Valuation Date if the Policy anniversary does not occur on a Valuation Date); if received after the Policy anniversary, they will be processed at the end of the Valuation Period in which JHVLICO receives the request at its Home Office. (JHVLICO reserves the right to defer such Fixed Account transfers for six months.) If an Owner requests a transfer out of the Fixed Account 61 days or more prior to the Policy anniversary, that portion of the reallocation will not be processed and the Owner's confirmation statement will not reflect a transfer out of the Fixed Account as to such request. Transfers among variable Subaccounts and transfers into the Fixed Account may be requested at any time. A maximum of 20% of Fixed Account assets or, if greater, $500 may be transferred out of the Fixed Account in any Policy year. Currently, there is no minimum amount limit on transfers out of the Fixed Account, but JHVLICO reserves the right to impose such a limit in the future. No transfers may be made while the Policy is in a grace period.
Telephone Transfers and Policy Loans. Once a written authorization is completed by the Owner, the Owner may request a transfer or policy loan by telephoning 1-800-732-5543. During periods of heavy telephone usage, implementing a telephone transfer or policy loan may be difficult. If an Owner is unable to reach JHVLICO via the above number, the Owner should send a written request via fax to 1-800-621-0448. (Any requests via fax are considered telephone requests and are bound by the conditions in the Owner's signed telephone authorization form.) Any fax request should include the Owner's name, daytime telephone number, Policy number and, in the case of transfers, the names of the subaccounts from which and to which money will be transferred. The right to discontinue telephone transactions at any time without notice to Owners is specifically reserved.
An Owner who authorizes telephone transactions will be liable for any loss, expense or cost arising out of any unauthorized or fraudulent telephone instructions which JHVLICO reasonably believes to be genuine, unless such loss, expense or cost is the result of JHVLICO's mistake or negligence. JHVLICO employs procedures which provide adequate safeguards against the execution of unauthorized transactions, and which are reasonably designed to confirm that instructions received by telephone are genuine. These procedures include requiring personal identification, tape recording calls, and providing written confirmation to the Owner.
Loan Provisions. Loans may be made at any time a Loan Value is available, either of the insureds is alive and the Policy is not in a grace period. The Owner may borrow money, assigning the Policy as the only security for the loan, by completion of a form satisfactory to JHVLICO or, if the telephone transaction authorization form has been completed, by telephone. The Loan Value will be 90% of the Surrender Value. Interest charged on any loan will accrue and compound daily at an annual rate determined by JHVLICO at the start of each Policy Year. This interest rate will not exceed the greater of (1) the "Published Monthly Average" (defined below) for the calendar month ending 2 months before the calendar month of the Policy anniversary or (2) 5%. In jurisdictions where a fixed loan rate is applicable, JHVLICO will charge interest at an effective annual rate of 5% in the first 20 Policy years, and 4.5% thereafter, accrued daily. The "Published Monthly Average" means Moody's Corporate Bond Yield Average-Monthly Average Corporates, as published by Moody's Investors Service, Inc., or if the average is no longer published, a substantially similar average established by the insurance regulator where the Policy is issued.
The amount of any outstanding loan plus accrued interest is called the "Indebtedness." A loan will not be permitted unless it is at least $1,000. A loan may be repaid in full or in part at any time before the last surviving insured's death and while the Policy is not in a grace period. When a loan is made, an amount equal to the loan proceeds will be transferred out of the Account and the Fixed Account, as applicable. This amount is allocated to the Loan Account, a portion of JHVLICO's general account. Each Subaccount will be reduced in the same proportion as the Account Value is then allocated among the Subaccounts. Upon each loan repayment, the same proportionate amount of the entire loan as was borrowed from the Fixed Account will be repaid to the Fixed Account. The remainder of the loan repayment will be allocated to the appropriate Subaccounts as stipulated in the current Investment Rule. For example, if the entire loan outstanding is $3000 of which $1000 was borrowed from the Fixed Account, then upon a repayment of $1500, $500 would be allocated to the Fixed Account and the remaining $1000 would be allocated to the appropriate Subaccounts as stipulated in the current Investment Rule. If an Owner wishes any payment to constitute a loan repayment (rather than a premium payment), the Owner must so specify.
Effect of Loan and Indebtedness. While the Indebtedness is outstanding, that portion of the Account Value that is in the Loan Account is credited with interest at a rate that is 1% less than the loan interest rate for the first 20 Policy years and, thereafter, .5% less than the loan interest rate. This rate will usually be different than the net return for the Subaccounts. Since the Loan Account and the remaining portion of the Account Value will generally have different rates of investment return, any death benefit above the Sum Insured, the Account Value, and the Surrender Value are permanently affected by any Indebtedness, whether or not repaid in whole or in part. The amount of any Indebtedness is subtracted from the amount otherwise payable when the Policy proceeds become payable.
Whenever the Indebtedness equals or exceeds 90% of the Account Value, the Policy terminates 31 days after notice has been mailed by JHVLICO to the Owner and any assignee of record at their last known addresses, unless a repayment of the excess Indebtedness is made within that period.
Tax Considerations. If the Policy is a modified endowment at the time a loan is made, that loan may have significant tax consequences. See "Tax Considerations."
Premium Grace Period, Default and Lapse. Unless the Guaranteed Minimum Death Benefit is in force, at the beginning of each Policy month, JHVLICO determines whether the Account Value, net of any Indebtedness, is sufficient to pay all monthly charges then due under the Policy. If not, the Policy is in default and JHVLICO will notify the Owner of the amount estimated to be necessary to pay three months' deductions, and a grace period will be in effect until 61 days after the date the notice was mailed. If JHVLICO does not receive payment of at least this amount by the end of the grace period, the Policy will lapse, and any remaining amount owed to the Owner as of the date of lapse will be paid to the Owner.
If the Guaranteed Minimum Death Benefit is in effect and the Policy provides for an Additional Sum Insured, the grace period and lapse procedures set forth in the preceding paragraph will apply only to the Additional Sum Insured. Lapse of the Additional Sum Insured can have significant tax consequences. See "Tax Considerations--Policy Proceeds." If the Guaranteed Minimum Death Benefit has been in effect and lapses at the end of a grace period (as described in "Premiums--Guaranteed Minimum Death Benefit Premiums"), the usual default, grace period and lapse procedures described in the preceding paragraph will be applied commencing with the first day of the first Policy month following the lapse of the Guaranteed Minimum Death Benefit.
The insurance under the Policy continues in full force during any grace period but, if the last surviving insured dies during the grace period, the amount in default is deducted from the death benefit otherwise payable.
Written notice will be furnished to the Owner at his or her last known address, at least 31 days prior to the end of any grace period, specifying the minimum amount which must be paid to continue the Policy in force on a premium paying basis after the end of the grace period.
Reinstatement. A lapsed Policy (or a lapsed Additional Sum Insured, if the Basic Sum Insured remains in force or is reinstated) or the Guaranteed Minimum Death Benefit may be reinstated in accordance with the Policy's terms. Evidence of insurability satisfactory to JHVLICO will be required (except as to a request to restore the Guaranteed Minimum Death Benefit within 1 year after the beginning of its grace period) and payment of the required premium and charges. The request must be received at JHVLICO's Home Office within 1 year after the beginning of the grace period (or 5 years if the request relates only to the Guaranteed Minimum Death Benefit). JHVLICO reserves the right to refuse Guaranteed Minimum Death Benefit restorations after the first. A reinstatement of the Basic Sum Insured or the Additional Sum Insured will be treated as a material change for Federal income tax purposes. See "Premiums-- 7-Pay Premium Limit" and "Tax Considerations."
The Owner may transfer the entire Account Value under the Policy to the Fixed Account at any time, creating a non-variable policy. The exchange will be effective at the end of the Valuation Period in which JHVLICO receives at its Home Office notice of the transfer satisfactory to JHVLICO.
The foregoing description of Policy provisions is qualified by reference to the specimen Policy which has been filed as an exhibit to the Registration Statement.
In addition to the sales charge (see "Sales Charge" below), the following charges are deducted from premiums:
Premium Processing Charge. 1.25% of each premium payment will be deducted from each premium payment for collection and Policy processing costs. This charge will be reduced for a Policy with a Sum Insured at issue of more than $5,000,000, subject to a minimum charge equal to .50%. The premium processing charge for these larger Policies will be computed pursuant to a mathematical formula which defines the percentage rate of the charge to be:
1.25% X [1 -- (Sum Insured at Issue -- $5,000,000) X .25]
State Premium Tax Charge. A charge currently equal to 2.35% of each premium payment will be deducted from each premium payment. Premium taxes vary from state to state. The 2.35% rate is the average rate currently expected to be paid on premiums received in all states over the lifetimes of the insureds covered by the Policies. JHVLICO will not increase this charge under outstanding Policies, but reserves the right to change this charge for Policies not yet issued in order to correspond with changes in the state premium tax levels.
Federal DAC Tax Charge. A charge currently equal to 1.25% of each premium payment will be deducted from each premium payment to cover the estimated cost to JHVLICO of the Federal income tax treatment of the Policies' deferred acquisition costs--commonly referred to as the "DAC Tax." JHVLICO has determined that this charge is reasonable in relation to JHVLICO's increased Federal income tax burden under the Internal Revenue Code resulting from the receipt of premiums. JHVLICO will not increase this charge under outstanding Policies, but reserves the right, subject to any required regulatory approval, to change this charge for Policies not yet issued in order to correspond with changes in the Federal income tax treatment of the Policies' deferred acquisition costs.
A charge is made to compensate JHVLICO for the cost of selling the Policy. This cost includes agents' commissions, commission overrides, advertising, and the printing of Prospectuses and sales literature. The amount of the charge in any Policy year cannot be specifically related to sales expenses for that year. JHVLICO expects to recover its total sales expenses over the period the Policies are in effect. To the extent that sales charges are insufficient to cover total sales expenses, the sales expenses may be recovered from other sources, including gains from the charge for mortality and expense risks and other gains with respect to the Policies, or from JHVLICO's general assets. See "Distribution of Policies."
The sales charge in the first Policy year is equal to 30% of the premiums paid up to one "target premium" and 3.5% of all premiums in excess of the target premium in that year. The target premium is established at issue and is the amount of the level premium that would be necessary to support a whole life insurance policy in the amount of the Basic Sum Insured at the maximum guaranteed cost of insurance rates, assuming deductions or charges for the other policy expenses at the maximum levels guaranteed under the Policies, a state premium tax charge of 2.35%, a Federal DAC tax premium charge of 1.25%, and a net interest rate of 5%. Target premiums will vary based on the issue age, sex, smoking status and underwriting class of each of the insureds.
The current sales charge for premiums paid up to one target premium in subsequent Policy years is 15% in years 2 through 5, 10% in years 6 through 10, 3% for years 11 through 20 and 0% thereafter. The sales charge for premiums paid in excess of the target premium is 3.5% in years 2 through 10, 3% in years 11 through 20 and 0% thereafter.
The guaranteed maximum sales charges under the Policy are no higher than the current sales charges, except that the guaranteed maximum sales charge for premiums paid up to one target premium is 4% in years 11 through 20 and 3% thereafter and, for premiums paid in excess of one target premium, is 3% after year 20. Because the Policies were first offered only in 1993, sales charges at the lower current rates are not yet applicable under any outstanding Policy.
Notwithstanding the foregoing, if the younger insured is age 71 or older at the time of Policy issuance, the current and guaranteed sales charge is 0%, commencing in Policy year 12 and thereafter.
An Owner may structure the timing and amount of premium payments to minimize the sales charges deducted from premium payments, although doing so involves certain risks. Paying less than one target premium in the first Policy year or paying more than one target premium in any Policy year could reduce the Owner's total sales charges over time. For example, an Owner, paying ten target premiums of $10,000 each, would pay total sales charges of $14,000 if he paid $10,000 in each of the first ten Policy years, but only $9,750 if he paid $20,000 (i.e., two times the target premium amount) in every other Policy year up to the ninth Policy year. However, delaying the payment of target premiums to later Policy years could increase the risk that the Account Value will be insufficient to pay monthly Policy charges as they come due and that, as a result, the Policy will lapse and eventually terminate. See "Default." Conversely, accelerating the payment of target premiums to earlier Policy years could cause aggregate premiums paid to exceed the Policy's 7-pay premium limit and, as a result, cause the Policy to become a modified endowment, with adverse tax consequences to the Owner upon receipt of Policy distributions. See "Premiums--7-Pay Premium Limit."
REDUCED CHARGES FOR ELIGIBLE GROUPS
The sales charge and issue charge (described below) otherwise applicable may be reduced with respect to Policies issued to a class of associated individuals or to a trustee, employer or similar entity where JHVLICO anticipates that the sales to the members of the class will result in lower than normal sales or administrative expenses. These reductions will be made in accordance with JHVLICO's rules in effect at the time of the application for a Policy. The factors considered by JHVLICO in determining the eligibility of a particular group for reduced charges, and the level of the reduction, are as follows: the nature of the association and its organizational framework; the method by which sales will be made to the members of the class; the facility with which premiums will be collected from the associated individuals and the association's capabilities with respect to administrative tasks; the anticipated persistency of the policies; the size of the class of associated individuals and the number of years it has been in existence; and any other such circumstances which justify a reduction in sales or administrative expenses. Any reduction will be reasonable and will apply uniformly to all prospective Policy purchasers in the class and will not be unfairly discriminatory to the interests of any Policy Owner.
CHARGES DEDUCTED FROM ACCOUNT VALUE OR ASSETS
The following charges are deducted from Account Value or assets:
Issue Charge. JHVLICO will deduct an issue charge from Account Value, currently at the rate of $55.55 per month for the first 5 Policy years, plus 2c per $1,000 of the Sum Insured at issue for the first 3 Policy years. The charge per $1,000 of Sum Insured at issue is guaranteed not to exceed $200 per month. Thus, for a Policy with a Sum Insured at issue of $1,000,000, the aggregate amount deducted during the first 3 Policy years would be $2,719.80.
The issue charge is to compensate JHVLICO for expenses incurred in connection with the issuance of the Policy, other than sales expenses. Such expenses include medical examinations, insurance underwriting costs and costs incurred in processing applications and establishing permanent Policy records.
Administrative Charge. JHVLICO will deduct from the Account Value a maximum charge of $10 per Policy and 3c per $1,000 of the Sum Insured at issue. The current monthly charge is $7.50 for all Policy years, plus 1c per $1,000 of the Sum Insured at issue for the first 10 Policy years, except that the $7.50 charge currently is zero for any Policy with a Sum Insured at issue of at least $5,000,000. Thus, for a Policy with a Sum Insured at issue of $1,000,000 and using the current administrative charge, the aggregate amount deducted during the first 10 Policy years would be $2,100.
This charge is to compensate JHVLICO for administrative expenses, including recordkeeping, processing death claims and surrenders, making Policy changes, reporting and other communications to Owners and other similar expense and overhead costs.
Insurance Charge. The insurance charge deducted monthly from Account Value is based on the attained age of each of the insureds and the amount at risk. The amount at risk is the difference between the current death benefit and the Account Value. The amount of the insurance charge is determined by multiplying JHVLICO's then current monthly rate for insurance by the amount at risk.
Current monthly rates for insurance are based on the sex, age, smoking status and underwriting class of each of the insureds and the length of time the Policy has been in effect. JHVLICO will review these rates at least every 5 years, and may change these rates from time to time based on JHVLICO's expectations of future experience. However, these rates will never be more than the guaranteed maximum rates based on the 1980 Commissioners' Standard Ordinary Mortality Tables, as set forth in the Policy. The insurance charge is not affected by the death of the first insured to die.
If an insured's underwriting risk classification has worsened, any subsequently-added Additional Sum Insured coverage may have higher insurance charge rates than the Basic Sum Insured. If an insured's underwriting risk classification has improved, cost of insurance rates on the total Sum Insured may be reduced, as may the target premium with respect to subsequent premium payments.
Lower current insurance rates are offered at most ages for insureds who qualify as non-smokers. To qualify, an insured must meet additional requirements that relate to smoking habits.
Guaranteed Minimum Death Benefit Charge. There is no charge for any Guaranteed Minimum Death Benefit during the first 10 Policy years. If the Guaranteed Minimum Death Benefit option is elected for a period beyond the first 10 Policy years, JHVLICO deducts a charge from Account Value beginning in the eleventh Policy year. The maximum monthly charge is 3c per $1000 of the Basic Sum Insured at issue and the current monthly charge is 1c per $1,000 of the Basic Sum Insured at issue. If the Guaranteed Minimum Death Benefit lapses due to failure to pay sufficient premiums, the charge will be discontinued. Because the Policies were first offered only in 1993, no Guaranteed Minimum Death Benefit charge is yet applicable to any Policy at the current rate.
Charge for Mortality and Expense Risks. A daily charge is made for mortality and expense risks assumed by JHVLICO at a maximum effective annual rate of .90% of the value of the Account's assets attributable to the Policies. The effective annual rate of this charge will vary, depending upon the Sum Insured at issue. The table below shows the current levels of this charge. This charge begins when amounts under a Policy are first allocated to the Account. The mortality risk assumed is that insureds may live for a shorter period of time than estimated and, therefore, a greater amount of death benefit than expected will be payable in relation to the amount of premiums received. The expense risk assumed is that expenses incurred in issuing and administering the Policies will be greater than estimated. JHVLICO will realize a gain from this charge to the extent it is not needed to provide for benefits and expenses under the Policies.
Charges for Extra Mortality Risks. An insured who does not qualify for the standard underwriting class must pay an additional charge because of the extra mortality risk. The level of the charge depends upon the ages of the insureds and the degree of extra mortality risk. This additional charge is deducted monthly from Account Value.
Charges for Optional Rider Benefits. An additional charge must be paid if the Owner elects to purchase an optional insurance benefit by Policy rider. This additional charge is deducted from premiums when paid or is deducted monthly from Account Value.
Charges for Taxes. Currently no charge is made against Account Value for JHVLICO's Federal income taxes but if JHVLICO incurs, or expects to incur, income taxes attributable to the Account or this class of Policies in future years, it reserves the right to make a charge, and any charge would affect what the Subaccounts earn. Charges for other taxes, if any, attributable to the Subaccounts may also be made.
Charge for Partial Withdrawal. JHVLICO will deduct a charge in the amount of $20 on a partial withdrawal of Surrender Value, as described under "Account Value and Surrender Value." The charge will be deducted from Account Value. The charge is to compensate JHVLICO for the administrative expenses of effecting the withdrawal.
Fund Investment Management Fee. The Account purchases shares of the Funds at net asset value, a value which reflects the deduction from the assets of each Fund of its investment management fee, which is described briefly in the Summary of this Prospectus, and of certain non-advisory operating expenses. For a full description of these deductions, see the attached Prospectuses for the Funds.
The monthly deductions from Account Value described above are deducted on the date of issue and on the first day of each Policy month thereafter. These deductions are made from the Subaccounts in proportion to the amount of Account Value in each. For each month that JHVLICO is unable to deduct any charge because there is insufficient Account Value, the uncollected charges will accumulate and be deducted when and if sufficient Account Value is available.
GUARANTEE OF PREMIUMS AND CERTAIN CHARGES
The Policy's Guaranteed Minimum Death Benefit Premium is guaranteed not to increase. The premium processing charge, the state premium tax charge, the Federal DAC Tax charge, the issue charge and the charge for partial withdrawals are guaranteed not to increase over the life of the Policy. The administrative charge, the Guaranteed Minimum Death Benefit Charge, the sales charge, the mortality and expense risk charge, and the insurance charge are guaranteed not to exceed the maximums set forth in the Policy.
Applications are solicited by agents who are licensed by state insurance authorities to sell JHVLICO's Policies and who are also registered representatives ("representatives") of John Hancock or other broker-dealer firms, as discussed below. John Hancock performs insurance underwriting, determines whether to accept or reject the application for a Policy and each insured's risk classification and, pursuant to a sales agreement among John Hancock, JHVLICO, and the Account, acts as the principal underwriter of the Policies. The sales agreement will remain in effect until terminated upon sixty days written notice by any party. JHVLICO will make the appropriate refund if a Policy ultimately is not issued or is returned under the short- term cancellation provision. Officers and employees of John Hancock and JHVLICO are covered by a blanket bond by a commercial carrier in the amount of $25 million.
John Hancock's representatives are compensated for sales of the Policies on a commission and service fee basis by John Hancock, and JHVLICO reimburses John Hancock for such compensation and for other direct and indirect expenses (including agency expense allowances, general agent, district manager and supervisor's compensation, agent's training allowances, deferred compensation and insurance benefits of agents, general agents, district managers and supervisors, agency office clerical expenses and advertising) actually incurred in connection with the marketing and sale of the Policies.
The maximum commission payable to a John Hancock representative for selling a Policy is 45% of the target premium paid in the first Policy year, 5% of the target premium paid in the second through fifth Policy years, and 3% of the target premium paid in each year thereafter. The maximum commission on any premium paid in any year in excess of the target premium is 3%.
Representatives with less than four years of service with John Hancock and those compensated on salary plus bonus or level commission programs may be paid on a different basis. Representatives who meet certain productivity and persistency standards with respect to the sale of policies issued by JHVLICO and John Hancock will be eligible for additional compensation.
John Hancock is registered with the Commission under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. John Hancock is not a member of the Securities Investor Protection Corporation because it is exempt from membership in that organization. The Policies are also sold through other registered broker- dealers that have entered into selling agreements with John Hancock and whose representatives are authorized by applicable law to sell variable life insurance policies. The commissions which will be paid by such broker-dealers to their representatives will be in accordance with their established rules. The commission rates may be more or less than those set forth above for John Hancock's representatives. In addition, their qualified registered representatives may be reimbursed by the broker-dealers under expense reimbursement allowance programs in any year for approved voucherable expenses incurred. John Hancock will compensate the broker-dealers as provided in the selling agreements, and JHVLICO will reimburse John Hancock for such amounts and for certain other direct expenses in connection with marketing the Policies through other broker-dealers.
John Hancock serves as principal underwriter for six other separate accounts registered under the 1940 Act: John Hancock Variable Annuity Accounts U, I and V, John Hancock Mutual Variable Life Insurance Account UV and John Hancock Variable Life Accounts U and V. John Hancock is also the principal investment manager and principal underwriter for John Hancock Variable Series Trust I.
The below description of Federal income tax consequences is only a brief summary and is not intended as tax advice. For further information consult a qualified tax advisor. Federal, state and local tax laws can change from time to time and, as a result, the tax consequences to the Owner and beneficiary may be altered.
Although the Policy contains provisions not found in fixed benefit life insurance policies, JHVLICO believes the Policy will receive the same Federal income and estate tax treatment. Section 7702 of the Internal Revenue Code ("Code") defines life insurance for Federal tax purposes. See "Death Benefits--Definition of Life Insurance." If certain standards are met at issue and over the life of the Policy, the Policy will come within that definition. JHVLICO will monitor compliance with these standards. Furthermore, JHVLICO reserves the right to make any changes in the Policy necessary to ensure the Policy is within the definition of life insurance.
If the Policy complies with the definition of life insurance and the investment diversification requirements mentioned below, as JHVLICO believes it will, the death benefit under the Policy will be excludable from the beneficiary's gross income under Section 101 of the Code. In addition, increases in Account Value as a result of interest or investment experience will not be subject to Federal income tax unless and until values are actually received through withdrawal, surrender or other distributions.
A surrender, lapse or partial withdrawal may have tax consequences. For example, the Owner will be taxed on a surrender to the extent that the Account Value exceeds the premiums paid under the Policy, ignoring premiums paid for riders. But under certain circumstances within the first 15 Policy years, the Owner may be taxed on a withdrawal of Policy values even if total withdrawals do not exceed total premiums paid.
JHVLICO also believes that, except as noted below, loans received under the Policy will be treated as indebtedness of an Owner and that no part of any loan will constitute income to the Owner. However, the amount of any loan outstanding will be taxed to the Owner if a Policy lapses.
Distributions under Policies on which premiums greater than the "7-pay" limit (see "Premiums--7-Pay Premium Limit") have been paid will be treated as distributions from a "modified endowment," which are subject to special taxation based on Federal tax law. The Owner of such a Policy will be taxed on distributions such as loans, surrenders and partial withdrawals to the extent of any income (gain) to the Owner (income-first basis). The distributions affected will be those made on or after, and within the two year period prior to, the time the Policy becomes a modified endowment. Additionally, a 10% penalty tax may be imposed on affected income distributed before the Owner attains age 59 1/2.
Furthermore, any time there is a "material change" in a Policy (such as an increase in Additional Sum Insured, the addition of certain other Policy benefits after issue, or reinstatement of a lapsed policy), the Policy will be subject to a new "7-pay" test, with the possibility of a tax on distributions if it were subsequently to become a modified endowment. Moreover, if benefits under a Policy are reduced (such as a reduction in the Sum Insured or death benefit or the reduction or cancellation of certain rider benefits, or Policy termination) during the 7 years in which the 7-pay test is being applied, the 7-pay limit will be recalculated based on the reduced benefits. If the premiums paid to date are greater than the recalculated 7-pay limit, the policy will become a modified endowment.
All modified endowments issued by the same insurer (or affiliates) to the Owner during any calendar year generally will be treated as one contract for the purpose of applying the modified endowment rules. Your tax advisor should be consulted if you have questions regarding the possible impact of the 7-pay limit on your Policy.
The Code and Treasury Regulations set forth requirements for the diversification of the investments underlying variable life insurance policies. JHVLICO and the Portfolios intend to comply with these requirements with respect to the Policy. Failure to meet these requirements would mean that the Policy would not be treated as a life insurance contract, subjecting the Owner to Federal income tax on the income and gains under the Policy.
The Treasury Department has said in the past that it may issue a regulation or a ruling prescribing the circumstances in which an Owner's control over investments underlying a variable life insurance policy may cause the Owner, rather than the insurance company, to be treated as the owner of the assets in the Account, with the effect that income and gains from the Account would be included in the Owner's income for Federal income tax purposes. Under current law, we believe that JHVLICO, and not the Policy Owner, would be considered the owner of the assets of the Account. However, JHVLICO has reserved certain rights to alter the Policy and the investment alternatives of the Account if necessary to comply with any such regulation or ruling.
The United States Congress and the Treasury Department have in the past and may in the future consider new legislation that, if enacted, could change the Federal tax treatment of life insurance policy income or death benefits. Any such change could have a retroactive effect. We suggest you consult with your legal or tax adviser, if you have any questions about this.
Federal estate and state and local estate, inheritance and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Owner or beneficiary.
Except for the DAC Tax charge, JHVLICO currently makes no charge for Federal income taxes that may be attributable to this class of Policies. If JHVLICO incurs, or expects to incur, income taxes attributable to this class of Policies or any Subaccount in the future, it reserves the right to make a charge for those taxes.
Under current laws, JHVLICO may incur state and local taxes (in addition to premium taxes) in several states. At present, these taxes are not significant. If there is a material change in applicable state or local tax laws, charges for such taxes may be made.
An Owner may elect to split a Policy into two other individual life insurance policies, as described under "Policy Split Option." A Policy split could have adverse tax consequences including, but not limited to, the recognition of taxable income in an amount up to any taxable gain in the Policy at the time of the split.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF JHVLICO
The Directors and Executive Officers of JHVLICO and their principal occupations during the past five years are as follows:
The business address of all Directors and officers of JHVLICO is John Hancock Place, Boston, Massachusetts 02117.
At least once each Policy year a statement will be sent to the Owner setting forth the amount of the death benefit, Basic Sum Insured, Additional Sum Insured, Account Value, the portion of the Account Value in each Subaccount, Surrender Value, premiums received and charges deducted from premiums since the last report, and any outstanding Policy loan (and interest charged for the preceding Policy year) as of the last day of such year. Moreover, confirmations will be furnished to Owners of premium payments, transfers among Subaccounts, Policy loans, partial withdrawals and certain other Policy transactions.
Owners will be sent semiannually a report containing the financial statements of the Funds, including a list of securities held in each Portfolio.
All of the assets in the variable Subaccounts of the Account, apart from assets attributable to Policy loans, are invested in shares of the corresponding Portfolios of the Funds. JHVLICO will vote the shares of each of the Portfolios of the Funds which are deemed attributable to the Policies at regular and special meetings of the Funds' shareholders in accordance with instructions received from owners of all policies funded through the Account's corresponding variable Subaccounts. Shares of the Funds held in the Account which are not attributable to the Policies and shares for which instructions from owners are not received will be represented by JHVLICO at the meeting and will be voted for and against each matter in the same proportions as the votes based upon the instructions received from the owners of all policies funded through the Account's corresponding variable Subaccounts.
The number of Fund shares held in each variable Subaccount deemed attributable to each Owner is determined by dividing the amount of a Policy's Account Value held in the variable Subaccount by the net asset value of one share in the corresponding Fund Portfolio in which the assets of that variable Subaccount are invested. Fractional votes will be counted. The number of shares as to which the Owner may give instructions will be determined as of the record date for the Funds' meetings.
Owners of Policies may give instructions regarding the election of the Board of Trustees of each Fund, ratification of the selection of independent auditors, approval of Fund investment advisory agreements and other matters requiring a vote under the 1940 Act. Owners will be furnished information and forms by JHVLICO in order that voting instructions may be given.
JHVLICO may, when required by state insurance regulatory authorities, disregard voting instructions if the instructions require that the shares be voted so as to change the investment objectives of the Portfolios or to approve or disapprove an investment advisory or underwriting contract for the Funds. JHVLICO also may disregard voting instructions in favor of changes initiated by an Owner or Fund's Board of Trustees in the investment policy, investment adviser or principal underwriter of the Fund, if JHVLICO (i) reasonably disapproves of such changes and (ii) in the case of a change of investment policy or investment adviser, makes a good-faith determination that the proposed change is contrary to state law or prohibited by state regulatory authorities or that the change would be inconsistent with a variable Subaccount's investment objectives or would result in the purchase of securities which vary from the general quality and nature of investments and investment techniques utilized by other separate accounts of JHVLICO or of an affiliated life insurance company, which separate accounts have investment objectives similar to those of the variable Subaccount. In the event JHVLICO does disregard voting instructions, a summary of that action and the reasons for such action will be included in the next semi-annual report to Owners.
CHANGES THAT JHVLICO CAN MAKE
The voting privileges described in this Prospectus are afforded based on JHVLICO's understanding of applicable Federal securities law requirements. To the extent that applicable law, regulations or interpretations change to eliminate or restrict the need for such voting privileges, JHVLICO reserves the right to proceed in accordance with any such revised requirements. JHVLICO also reserves the right, subject to compliance with applicable law, including approval of Owners if so required, (1) to transfer assets determined by JHVLICO to be associated with the class of policies to which the Policies belong from the Account to another separate account or variable Subaccount by withdrawing the same percentage of each investment in the Account with appropriate adjustments to avoid odd lots and fractions, (2) to operate the Account as a "management-type investment company" under the 1940 Act, or in any other form permitted by law, the investment adviser of which would be JHVLICO, an affiliate or John Hancock, (3) to deregister the Account under the 1940 Act, (4) to substitute for the Portfolio shares held by a Subaccount any other investment permitted by law, and (5) to take any action necessary to comply with or obtain any exemptions from the 1940 Act. JHVLICO would notify Owners of any of the foregoing changes and, to the extent legally required, obtain approval of Owners and any regulatory body prior thereto. Such notice and approval, however, may not be legally required in all cases.
JHVLICO is subject to regulation and supervision by the Massachusetts Commissioner of Insurance who periodically examines its affairs. It also is subject to the applicable insurance laws and regulations of all jurisdictions in which it is authorized to do business.
JHVLICO is required to submit annual statements of its operations, including financial statements, to the insurance departments of the various jurisdictions in which it does business for purposes of determining solvency and compliance with local insurance laws and regulations.
Legal matters in connection with the Policies described in this Prospectus have been passed on by Francis C. Cleary, Jr., Counsel for JHVLICO. Messrs. Freedman, Levy, Kroll & Simonds, Washington, D.C., have advised JHVLICO on certain Federal securities law matters in connection with the Policies.
This Prospectus omits certain information contained in the Registration Statement which has been filed with the Commission. More details may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee.
The financial statements of the Account and JHVLICO included in this Prospectus have been audited by Ernst & Young LLP, independent auditors, for the periods indicated in their reports thereon which appear elsewhere herein and have been included in reliance on their reports given on their authority as experts in accounting and auditing.
Actuarial matters included in this Prospectus have been examined by Deborah A. Poppel, F.S.A., an Actuary of JHVLICO.
The financial statements of JHVLICO included herein should be distinguished from the financial statements of the Account and should be considered only as bearing upon the ability of JHVLICO to meet its obligations under the Policies. The September 30, 1995 financial statements of JHVLICO are unaudited.
The September 30, 1995 financial statements of the Account are unaudited.
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
STATEMENT OF ASSETS AND LIABILITIES
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
STATEMENTS OF CHANGES IN NET ASSETS
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
John Hancock Variable Life Account S (the Account) is a separate investment account of John Hancock Variable Life Insurance Company (JHVLICO), a wholly- owned subsidiary of John Hancock Mutual Life Insurance Company (John Hancock). The Account was created on November 12, 1993. The Account commenced operations on December 14, 1993 from the receipt of policy premiums. The Account was formed to fund variable life insurance policies (Policies) issued by JHVLICO. The Account is operated as a unit investment trust registered under the Investment Company Act of 1940, as amended, and currently consists of nine subaccounts. The assets of each subaccount are invested exclusively in shares of a corresponding portfolio of John Hancock Variable Series Trust I (the Fund). New subaccounts may be added as new portfolios are added to the Fund, or as other investment options are developed, and made available to policyowners. The nine portfolios of the Fund which are currently available are Select Stock, Bond, International, Money Market, Real Estate Equity, Special Opportunities, Stock, Short-Term U.S. Government and Managed. Each portfolio has a different investment objective.
The net assets of the Account may not be less than the amount required under state insurance law to provide for death benefits (without regard to the minimum death benefit guarantee) and other policy benefits. Additional assets are held in JHVLICO's general account to cover the contingency that the guaranteed minimum death benefit might exceed the death benefit which would have been payable in the absence of such guarantee.
The assets of the Account are the property of JHVLICO. The portion of the Account's assets applicable to the policies may not be charged with liabilities arising out of any other business JHVLICO may conduct.
Investments in shares of the Fund are valued at the reported net asset values of the respective portfolios. Investment transactions are recorded on the trade date. Dividend income is recognized on the ex-dividend date. Realized gains and losses on sales of fund shares are determined on the basis of identified cost.
The operations of the Account are included in the federal income tax return of JHVLICO, which is taxed as a life insurance company under the Internal Revenue Code. JHVLICO has the right to charge the Account any federal income taxes, or provision for federal income taxes, attributable to the operations of the Account or to the policies funded in the Account. Currently, JHVLICO does not make a charge for income or other taxes. Charges for state and local taxes, if any, attributable to the Account may also be made.
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
JHVLICO assumes mortality and expense risks of the variable life insurance policies for which asset charges are deducted at a maximum annual rate of .90% of net assets (excluding policy loans) of the Account. In addition, a monthly charge at varying levels for the cost of insurance is deducted from the net assets of the Account.
JHVLICO makes certain deductions for administrative expenses and state premium taxes from premium payments before amounts are transferred to the Account.
Policy loans represent outstanding loans plus accrued interest. Interest is accrued (net of a charge for policy loan administration determined at an annual rate of .75% of the aggregate amount of policyowner indebtedness) and compounded daily. At September 30, 1995, there were no outstanding policy loans.
John Hancock acts as the distributor, principal underwriter and investment advisor for the Fund.
Certain officers of the Account are officers and directors of JHVLICO, the Fund or John Hancock.
The details of the shares owned and cost and value of investments in the portfolios of the Fund at September 30, 1995 were as follows:
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
Purchases, including reinvestment of dividend distributions and proceeds from sales of shares in the portfolios of the Fund for the period ended September 30, 1995 were as follows:
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
STATEMENT OF ASSETS AND LIABILITIES
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
* The Short-Term U.S. Government and the Special Opportunities Subaccounts commenced operations on May 1 and May 6, 1994, respectively.
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
STATEMENTS OF CHANGES IN NET ASSETS
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
* The Short-Term U.S. Government and the Special Opportunities Subaccounts commenced operations on May 1 and May 6, 1994, respectively.
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
John Hancock Variable Life Account S (the Account) is a separate investment account of John Hancock Variable Life Insurance Company (JHVLICO), a wholly- owned subsidiary of John Hancock Mutual Life Insurance Company (John Hancock). The Account was created on November 12, 1993. The Account commenced operations on December 14, 1993 from the receipt of policy premiums. The Account was formed to fund variable life insurance policies (Policies) issued by JHVLICO. The Account is operated as a unit investment trust registered under the Investment Company Act of 1940, as amended, and currently consists of nine subaccounts. The assets of each subaccount are invested exclusively in shares of a corresponding portfolio of John Hancock Variable Series Trust I (the Fund). New subaccounts may be added as new portfolios are added to the Fund, or as other investment options are developed, and made available to policyowners. The nine portfolios of the Fund which are currently available are Select Stock, Bond, International, Money Market, Real Estate Equity, Special Opportunities, Stock, Short-Term U.S. Government and Managed. Each portfolio has a different investment objective.
The net assets of the Account may not be less than the amount required under state insurance law to provide for death benefits (without regard to the minimum death benefit guarantee) and other policy benefits. Additional assets are held in JHVLICO's general account to cover the contingency that the guaranteed minimum death benefit might exceed the death benefit which would have been payable in the absence of such guarantee.
The assets of the Account are the property of JHVLICO. The portion of the Account's assets applicable to the policies may not be charged with liabilities arising out of any other business JHVLICO may conduct.
Investments in shares of the Fund are valued at the reported net asset values of the respective portfolios. Investment transactions are recorded on the trade date. Dividend income is recognized on the ex-dividend date. Realized gains and losses on sales of fund shares are determined on the basis of identified cost.
The operations of the Account are included in the federal income tax return of JHVLICO, which is taxed as a life insurance company under the Internal Revenue Code. JHVLICO has the right to charge the Account any federal income taxes, or provision for federal income taxes, attributable to the operations of the Account or to the policies funded in the Account. Currently, JHVLICO does not make a charge for income or other taxes. Charges for state and local taxes, if any, attributable to the Account may also be made.
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
JHVLICO assumes mortality and expense risks of the variable life insurance policies for which asset charges are deducted at a maximum annual rate of .90% of net assets (excluding policy loans) of the Account. In addition, a monthly charge at varying levels for the cost of insurance is deducted from the net assets of the Account.
JHVLICO makes certain deductions for administrative expenses and state premium taxes from premium payments before amounts are transferred to the Account.
Policy loans represent outstanding loans plus accrued interest. Interest is accrued (net of a charge for policy loan administration determined at an annual rate of .75% of the aggregate amount of policyowner indebtedness) and compounded daily. At December 31, 1994, there were no outstanding policy loans.
The net assets attributable to JHVLICO represent JHVLICO's funds deposited in the Account. At its discretion, these amounts may be transferred by JHVLICO to its general account. At December 31, 1994, there were no assets attributable to JHVLICO in the Account.
John Hancock acts as the distributor, principal underwriter and investment advisor for the Fund.
Certain officers of the Account are officers and directors of JHVLICO, the Fund or John Hancock.
The details of the shares owned and cost and value of investments in the portfolios of the Fund at December 31, 1994 were as follows:
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
Purchases, including reinvestment of dividend distributions, and proceeds from sales of shares in the portfolios of the Fund during 1994 were as follows:
REPORTS OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
John Hancock Variable Life Account S of John Hancock Variable Life Insurance Company
We have audited the accompanying statement of assets and liabilities of John Hancock Variable Life Account S (comprising, respectively, the Select Stock, Bond, International, Money Market, Real Estate Equity, Special Opportunities, Stock, Short-Term U.S. Government and Managed Subaccounts) as of December 31, 1994, and the related statements of operations and statements of changes in net assets for the year ended December 31, 1994, and the period from October 4, 1993 (commencement of operations) to December 31, 1993 for the Select Stock, Bond, International, Money Market, Real Estate Equity, Stock, and Managed Subaccounts; the related statement of operations and statement of changes in net assets for the period from May 6, 1994 (commencement of operations) to December 31, 1994 for the Special Opportunities Subaccount; and the related statement of operations and statement of changes in net assets for the period from May 1, 1994 (commencement of operations) to December 31, 1994 for the Short-Term U.S. Government Subaccount. These financial statements are the responsibility of the Account's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective subaccounts constituting John Hancock Variable Life Account S at December 31, 1994, and the results of their operations and the changes in their net assets for each of the periods indicated above, in conformity with generally accepted accounting principles.
John Hancock Variable Life Insurance Company
We have audited the accompanying statements of financial position of John Hancock Variable Life Insurance Company as of December 31, 1994 and 1993, and the related statements of operations and unassigned deficit and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of John Hancock Variable Life Insurance Company at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles for a stock life insurance company wholly-owned by a mutual life insurance company and with reporting practices prescribed or permitted by the Commonwealth of Massachusetts Division of Insurance.
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND UNASSIGNED DEFICIT
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
John Hancock Variable Life Insurance Company (the Company) is a wholly-owned subsidiary of John Hancock Mutual Life Insurance Company (John Hancock). The financial statements have been prepared on the basis of accounting practices prescribed or permitted by the Commonwealth of Massachusetts Division of Insurance and in conformity with the practices of the National Association of Insurance Commissioners which are currently considered generally accepted accounting principles for a stock life insurance company wholly-owned by a mutual life insurance company. Accordingly, the assets in the statements of financial position are "admitted assets" as defined by regulatory authorities.
In January, 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts." This Statement extends the requirements of Statements No. 60, 97 and 113 to mutual life insurance enterprises and amends FASB Interpretation No. 40, "Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises." SFAS No. 120 and Interpretation No. 40, as amended, require life insurance companies to adopt certain accounting principles in their financial statements in order to continue to be considered in accordance with generally accepted accounting principles, effective for 1996 financial statements. The manner in which policy reserves, new business acquisition costs, asset valuation and the related tax effects are recorded will change. The modifications to existing accounting practices which may be necessary have been defined by the American Institute of Certified Public Accountants in Statement of Position (SOP) 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises." The Company has not yet determined the effects of such modifications on its general purpose financial statements.
The significant accounting practices of the Company are as follows:
Revenues and Expenses: Premium revenues are recognized over the premium-paying period of the policies whereas expenses, including the acquisition costs of new business, are charged to operations as incurred and policyholder dividends are provided as paid or accrued.
Cash and Temporary Cash Investments: Cash includes currency on hand and demand deposits with financial institutions. Temporary cash investments are short- term, highly-liquid investments both readily convertible to known amounts of cash and so near maturity that there is insignificant risk of changes in value because of changes in interest rates.
Valuation of Assets: General account investments are carried at amounts determined on the following bases:
Bonds and stock values are carried as prescribed by the National Association of Insurance Commissioners (NAIC): bonds generally at amortized amounts or cost, preferred stocks generally at cost and common stocks at market. The discount or premium on bonds is amortized using the interest method.
Investments in affiliates are included on the statutory equity method.
Goodwill is amortized on a straight line basis over a ten year period.
Mortgage loans are carried at outstanding principal balance or amortized cost.
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 IS
Investment real estate is carried at depreciated cost, less encumbrances. Depreciation on investment real estate is recorded on a straight line basis.
Real estate acquired in satisfaction of debt and held for sale is carried at the lower of cost or market as of the date of foreclosure.
Policy loans are carried at outstanding principal balance, not in excess of policy cash surrender value.
Asset Valuation and Interest Maintenance Reserves: Beginning in 1992, the Company adopted the Asset Valuation Reserve (AVR) prescribed by the NAIC to replace the Mandatory Securities Valuation Reserve (MSVR) previously required by the NAIC and the additional Mortgage and Real Estate Valuation Reserve (MRVR) provided by the Company. The AVR is computed in accordance with the prescribed NAIC formula and represents a provision for possible fluctuations in the value of bonds, equity securities, mortgage loans, real estate and other invested assets. Changes to the AVR are charged or credited directly to the unassigned deficit.
The Company also records the NAIC prescribed Interest Maintenance Reserve (IMR) that represents the after tax net accumulated unamortized realized capital gains and losses attributable to changes in the general level of interest rates on sales of fixed income securities, principally bonds and mortgage loans. Such gains and losses are deferred and amortized into income over the remaining expected lives of the investments sold. At September 30, 1995, the IMR, net of 1995 amortization of $0.8 million, amounted to $6.5 million which is included in policy reserves. The corresponding amounts at September 30, 1994 were $0.8 million and $7.4 million, respectively. At December 31, 1994, the IMR, net of 1994 amortization of $1.1 million, amounted to $7.1 million, which is included in policy reserves. The corresponding 1993 amounts were $0.5 million and $7.6 million, respectively.
Separate Accounts: Separate account assets (unit investment trusts valued at market) and separate account obligations (principally policyholder account values) are included as separate captions in the statements of financial position. In 1995 and 1994, the change in separate account surplus is recognized through direct charges or credits to unassigned deficit. In 1993 and 1992 separate account business was combined with the general account under the appropriate captions in the consolidated summary of operations. The 1993 and 1992 presentation was reclassified to permit comparison with the corresponding 1995 and 1994 amounts. The presentation has no effect on unassigned deficit.
Fair Values of Financial Instruments: SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate the value. In situations where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Therefore, the aggregate fair value amounts presented do not represent the underlying value of the Company.
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 IS
The methods and assumptions utilized by the Company in estimating its fair value disclosures for financial instruments are as follows:
The carrying amounts reported in the statement of financial position for cash and temporary cash investments approximate their fair values.
Fair values for public bonds are obtained from an independent pricing service. Fair values for private placement securities and publicly traded bonds not provided by the independent pricing service are estimated by the Company by discounting expected future cash flows using current market rates applicable to the yield, credit quality and maturity of the investments. The fair values for common and preferred stocks, other than its subsidiary investments which are carried at equity values are based on quoted market prices.
The fair value for mortgage loans is estimated using discounted cash flow analyses using interest rates adjusted to reflect the credit characteristics of the loans. Mortgage loans with similar characteristics and credit risks are aggregated into qualitative categories for purposes of the fair value calculations.
The carrying amount in the statement of financial position for policy loans approximates its fair value.
The fair value for outstanding commitments to purchase long-term bonds is estimated using a discounted cash flow method incorporating adjustments for the difference in the level of interest rates between the dates the commitments were made and the end of the period, respectively. The fair value for commitments to purchase real estate approximates the amount of the initial commitment.
Capital Gains and Losses: Realized capital gains and losses, net of taxes and amounts transferred to the IMR, are included in net gain or loss. Unrealized gains and losses, which consist of market value and book value adjustments, are shown as adjustments to the unassigned deficit.
Policy Reserves: Reserves for variable life insurance policies are maintained principally on the modified preliminary term method using the 1958 and 1980 Commissioner's Standard Ordinary (CSO) mortality tables, with an assumed interest rate of 4% for policies issued prior to May 1, 1983 and 4 1/2% for policies issued on or thereafter. Reserves for single premium policies are determined by the net single premium method using the 1958 CSO mortality table, with an assumed interest rate of 4%. Reserves for universal life policies issued prior to 1985 are equal to the gross account value which at all times exceeds minimum statutory requirements. Reserves for universal life policies issued from 1985 through 1988 are maintained at the greater of the Commissioner's Reserve Valuation Method (CRVM) using the 1958 CSO mortality table, with 4 1/2% interest or the cash surrender value. Reserves for universal life policies issued after 1988 and for flexible variable policies are maintained using the greater of the cash surrender value or the CRVM method with the 1980 CSO mortality table and 5 1/2% interest for policies issued from 1988 through 1992; 5% interest for policies issued in 1993 and 1994; and 4 1/2% interest for policies issued in 1995.
Federal Income Taxes: Federal income taxes are provided in the financial statements based on amounts determined to be payable as a result of operations within the current accounting period. The operations of the Company are consolidated with John Hancock, its Parent, in filing a consolidated federal income tax return for the affiliated group. The federal income taxes of the Company are allocated on a separate return basis with certain adjustments. The Company made payments of $26.7 million for the nine months ended September 30,
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 IS
received tax benefits of $1.8 million for the nine months ended September 30, 1994. The Company received federal tax benefits of $7.0 million in 1994 and made payments of $17.0 million and $24.9 million in 1993 and 1992, respectively.
Income before taxes differs from taxable income principally due to tax-exempt investment income, the limitation placed on the tax deductibility of policyholder dividends, accelerated depreciation, differences in policy reserves for tax return and financial statement purposes, capitalization of policy acquisition expenses for tax purposes and other adjustments prescribed by the Internal Revenue Code.
No provision is generally recognized for timing differences that may exist between financial reporting and taxable income or loss.
Adjustments to Policy Reserves: From time to time, the Company finds it appropriate to modify certain required policy reserves because of changes in actuarial assumptions or increased benefits. Reserve modifications resulting from such determinations are recorded directly to the unassigned deficit. During 1994, the Company refined certain actuarial assumptions inherent in the calculation of preconversion yearly renewable term and gross premium deficiency reserves, resulting in a $2.7 million decrease in the unassigned deficit at December 31, 1994. Similar refinements to the actuarial assumptions inherent in the calculation of active life waiver of premium disability reserves were made during 1993 and 1992 resulting in a $2.3 million and $9.0 million decrease in the unassigned deficit at December 31, 1993 and December 31, 1992, respectively. During the nine months ended September 30, 1995, there were no refinements in actuarial assumptions inherent in the calculation of policy reserves. During the nine months ended September 30, 1994, the Company refined actuarial assumptions inherent in the calculation of preconversion yearly renewable term reserves, resulting in a $2.5 million decrease in the unassigned deficit at September 30, 1994.
Reinsurance: Premiums, commissions, expense reimbursements, benefits and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. Amounts applicable to reinsurance ceded for future policy benefits, unearned premium reserves and claim liabilities have been reported as reductions of these items.
Reclassifications: Certain 1993 and 1992 amounts have been reclassified to permit comparison with the corresponding 1995 and 1994 amounts.
At December 31, 1994, the Company had 50,000 shares authorized with 20,000 shares issued and outstanding. On February 16, 1995, the Company issued the remaining 30,000 shares to John Hancock and transferred $22.5 million from common stock to paid-in capital. The par value per share is $50.
In prior years, the Company received capital contributions from John Hancock, with a portion of the contributed capital being credited to common stock, although no additional shares were issued. This practice had the effect of stating the carrying value of issued shares of common stock at amounts other than $50 per share par value with the offset reflected in paid-in capital.
During 1993, the Company returned $1.8 million of paid-in capital to John Hancock.
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 IS
On June 23, 1993, the Company acquired all of the outstanding shares of stock of Colonial Penn Annuity and Life Insurance Company (CPAL) from Colonial Penn Life Insurance Company, for an aggregate purchase price of approximately $42.5 million. At the date of acquisition, assets of CPAL were approximately $648.5 million, consisting principally of cash and temporary cash investments and liabilities were approximately $635.2 million, consisting principally of reserves related to a block of interest sensitive single-premium whole life insurance business assumed by CPAL from Charter National Life Insurance Company (Charter). The purchase price includes contingent payments of up to approximately $7.3 million payable between 1994 and 1998 based on the actual lapse experience of the business in force on June 23, 1993. The acquisition was accounted for using the purchase method and the unamortized goodwill was $17.9 million and $18.9 million at September 30, 1995 and December 31, 1994, respectively. The Company made contingent payments to CPAL of $1.5 million for the nine months ended September 30, 1995 and $1.5 million in 1994.
On June 24, 1993, the Company contributed $24.6 million in additional capital to CPAL. CPAL was renamed John Hancock Life Insurance Company of America (JHLICOA) on July 7, 1993. JHLICOA manages the business assumed from Charter and does not currently issue new business.
Investment income has been reduced by the following amounts:
NOTE 5--NET CAPITAL GAINS (LOSSES) AND OTHER ADJUSTMENTS
Net realized capital gains (losses) consist of the following items:
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 IS
NOTE 5--NET CAPITAL GAINS (LOSSES) AND OTHER ADJUSTMENTS--CONTINUED
Net unrealized capital gains (losses) and other adjustments consist of the following items:
The Company's Parent provides the Company with personnel, property and facilities in carrying out certain of its corporate functions. The Parent annually determines a fee for these services and facilities based on a number of criteria which were revised in 1995, 1994, 1993 and 1992 to reflect continuing changes in the Company's operations. The amount of the service fee charged to the Company was $72.4 million, $88.5 million, $117.0 million, $98.2 million and $75.2 million for the nine months ended September 30, 1995 and September 30, 1994, in 1994 and 1993, and 1992, respectively, which has been included in insurance and investment expenses. The Parent has guaranteed that, if necessary, it will make additional capital contributions to prevent the Company's stockholder's equity from declining below $1.0 million.
In 1992, the National Association of Insurance Commissioners issued its accounting policy for "Employers' Accounting for Postretirement Benefits Other Than Pensions." The service fee charged to the Company by the Parent includes $1.6 million, $2.0 million, $6.0 million and $1.4 million for the nine months ended September 30, 1995 and September 30, 1994 and the years ended December 31, 1994 and 1993, respectively, representing the portion of the provision for retiree benefit plans determined under the accrual method in accordance with this policy, including a provision for the transition liability which is being amortized over twenty years, that was allocated to the Company.
On October 1, 1993, the Company entered into an assumption reinsurance agreement with John Hancock to cede a block of variable life, universal life and flexible variable life insurance policies to John Hancock representing substantially all of such policies written by the Company in the State of New York. In connection with this agreement, general account assets consisting of bonds, mortgage loans, policy loans, cash, investment income due and accrued and deferred and uncollected premiums totalling $72.2 million were transferred by the Company to John Hancock, along with policy reserves, unearned premiums and dividend liabilities totalling $47.7 million and surplus totalling $24.5 million. Separate account assets consisting of common stock and policy loans totalling $200.8 million were transferred to John Hancock's separate accounts along with $200.8 million in separate account policyholder obligations.
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 IS
Effective January 1, 1994, the Company entered into a modified coinsurance agreement with John Hancock to reinsure 50% of 1995 and 1994 issues of flexible premium variable life insurance and scheduled premium variable life insurance policies. In connection with this agreement, John Hancock transferred $30.2 million of cash for tax, commission, and expense allowances to the Company, which increased the Company's net gain from operations by $13.6 million for the nine months ended September 30, 1995. The corresponding amounts for the year ended December 31, 1994 were $29.5 million and $26.9 million, respectively.
The statement value and fair value of bonds are shown below:
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 IS
The statement value and fair value of bonds by contractual maturity, are shown below. Maturities will differ from contractual maturities because eligible borrowers may exercise their right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales, maturities and prepayments of bonds during the nine months ended September 30, 1995 and September 30, 1994 were $44.9 million and $44.5 million, respectively. Gross gains of $0.6 million and $0.9 million and gross losses of $0.1 million and $0.0 million were realized on these transactions during the nine months ended September 30, 1995 and September 30, 1994, respectively.
Proceeds from sales, maturities, and prepayments of bonds during 1994, 1993 and 1992 were $70.1 million, $103.0 million and $49.1 million, respectively. Gross gains of $1.1 million in 1994, $10.1 million in 1993, and $0.9 million in 1992 and gross losses of $0.2 million in 1994, $0.0 million in 1993, and $1.0 million in 1992 were realized on these transactions.
The cost of common stocks was $1.4 million at September 30, 1995, December 31, 1994 and December 31, 1993, respectively. Gross unrealized appreciation on common stocks totaled $1.6 million at September 30, 1995
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 IS
and $1.6 million at December 31, 1994 and gross unrealized depreciation totaled $0.7 million at September 30, 1995 and $1.2 million at December 31, 1994. The fair value of preferred stock totaled $5.4 million at September 30, 1995, $5.0 million at December 31, 1994, and $6.7 million at December 31, 1993.
Mortgage loans with outstanding principal balances of $1.1 million and bonds with amortized cost of $0.0 million were nonincome producing for the nine months ended September 30, 1995. The corresponding amounts for the twelve months ended December 31, 1994 were $3.4 million and $0.2 million, respectively.
The mortgage loan portfolio was diversified by geographic region and specific collateral property type as displayed below. The Company controls credit risk through credit approvals, limits and monitoring procedures.
At September 30, 1995, the fair values of the commercial and agricultural mortgage loans portfolios were $121.9 million and $29.3 million, respectively. The corresponding amounts as of December 31, 1994 were approximately $118.8 million and $27.3 million, respectively. The corresponding amounts as of December 31, 1993 were approximately $141.4 million and $31.4 million, respectively.
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY (INFORMATION AS OF, AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 IS
The Company cedes business to reinsurers to share risks under variable life, universal life and flexible variable life insurance policies for the purpose of reducing exposure to large losses. Premiums, benefits and reserves ceded to reinsurers during the nine months ended September 30, 1995 were $48.1 million, $6.1 million, and $12.9 million, respectively. The corresponding amounts during the nine months ended September 30, 1994 were $9.5 million, $9.3 million, and $15.9 million, respectively. The corresponding amounts in 1994 were $67.5 million, $12.3 million, and $16.3 million, respectively. The corresponding amounts in 1993 were $74.9 million, $9.8 million, and $14.4 million, respectively. The corresponding amounts in 1992 were $15.5 million, $5.8 million, and $18.4 million, respectively.
To the extent that an assuming reinsurance company in unable to meet its obligations under a reinsurance agreement, the Company remains liable as the direct insurer on all risks reinsured.
The Company has extended commitments to purchase long-term bonds and issue real estate mortgages totalling $9.0 million and $9.3 million, respectively, at September 30, 1995. The corresponding amounts at December 31, 1994 were $6.7 million and $5.0 million, respectively. The Company monitors the creditworthiness of borrowers under long-term bond commitments and requires collateral as deemed necessary. If funded, loans related to real estate mortgages would be fully collateralized by the related properties. The fair values of the commitments described above was $19.2 million at September 30, 1995 and $11.7 million at December 31, 1994. The majority of the commitments at September 30, 1995 expire in 1996.
In the normal course of its business operations, the Company is involved in litigation from time to time with claimants, beneficiaries and others, and a number of litigation matters were pending as of September 30, 1995 and December 31, 1994. It is the opinion of management, after consultation with counsel, that the ultimate liability with respect to these claims, if any, will not materially affect the financial position of the Company.
In place of a single payment, an amount of $1,000 or more payable under the Policy as a benefit or as the Surrender Value, if any, may be left with JHVLICO under the terms of a supplementary agreement. The agreement will be issued when the proceeds are applied through the election of any one of the options below.
The following options are subject to the restrictions and limitations stated in the Policy.
Option 1--Interest Income at the declared rate but not less than 3 1/2% a year on proceeds held on deposit.
Option 2A--Income of a Specified Amount, with payments each year totaling at least 1/12th of the proceeds, until the proceeds, with interest credited at the declared rate but not less than 3 1/2% a year on unpaid balances, are fully paid.
Option 2B--Income for a Fixed Period, with each payment as declared.
Option 3--Life Income with Payments for a Guaranteed Period.
Option 4--Life Income without Refund at the death of the Payee of any part of the proceeds applied. Only one payment is made if the Payee dies before the second payment is due.
Option 5--Life Income with Cash Refund at the death of the Payee of the amount, if any, equal to the proceeds applied less the sum of all income payments made.
No election of an option may provide for income payments of less than $50.
Other options may be arranged with JHVLICO's approval including optional methods of settlement available from John Hancock.
The tax treatment of the Policy proceeds may vary, depending on which settlement option is chosen and when. You should consult your tax advisor in this regard.
On payment of an additional premium or charge and subject to certain age and insurance underwriting requirements, certain additional provisions, such as the yearly renewable term benefits discussed below, which are subject to the restrictions and limitations set forth therein, may be included in a Policy by rider.
YEARLY RENEWABLE TERM INSURANCE. This is term insurance on the life of one of the insureds under the base Policy and payable upon the death of the covered insured person. This insurance is level or decreasing in amount and may be applied for, or increased, at any time upon evidence of insurability and any other underwriting requirements. The yearly coverage also may be cancelled by the Owner at any time. The charges for this coverage will be separately billed to and paid by the Owner and not out of Account Value. An increase or a decrease in this insurance may have significant tax consequences. See "Premiums--7-Pay Premium Limit" and "Tax Considerations."
BENEFICIARY. The Beneficiary will be as shown in the application for the Policy, unless thereafter changed by the Owner in accordance with the terms of the Policy. In general, if on the death of the last surviving insured there is no surviving Beneficiary, the Owner will be the Beneficiary, but if the Owner was one of the insureds, his or her estate will be the Beneficiary.
OWNER AND ASSIGNMENT. The Owner's interest in the Policy may be assigned without the consent of any revocable Beneficiary. JHVLICO will not be on notice of any assignment unless it is in writing and until a duplicate of the original assignment has been filed at JHVLICO's Home Office. JHVLICO assumes no responsibility for the validity or sufficiency of any assignment.
If a Policy has joint Owners, both Owners must join in any request or instructions to JHVLICO under the Policy.
MISSTATEMENT OF AGE OR SEX. If the age or sex of an insured has been misstated, JHVLICO will adjust the benefits payable to reflect the correct age or sex.
SUICIDE. If either insured commits suicide within 2 years (except where state law requires a shorter period) from the date of issue shown in the Policy, JHVLICO will pay in place of all other benefits an amount equal to the premium paid less any Indebtedness on the date of death and any withdrawals. If either insured commits suicide within 2 years (except where state law requires a shorter period) from the date of any Policy change that increases the death benefit, the death benefit will be limited as described in the Policy. Subject to terms and conditions set forth in the Policy, we will make coverage available to any surviving insured, if the surviving insured elects such coverage within 60 days after the suicide.
AGE AND POLICY ANNIVERSARIES. For purpose of the Policy, an insured's "age" is his or her age on his or her nearest birthday. Policy months and Policy years are calculated from the date of issue.
INCONTESTABILITY. The Policy shall be incontestable other than for nonpayment of premiums after it has been in force during the lifetime of an insured for 2 years from its issue date. If, however, evidence of insurability is required with respect to any increase in death benefit, such increase shall be incontestable after the increase has been in force for 2 years from the increase date.
DEFERRAL OF DETERMINATIONS AND PAYMENTS. Payment of any death, surrender, partial withdrawal or loan proceeds will ordinarily be made within seven days after receipt at JHVLICO's Home Office of all documents required for any such payment. Approximately two-thirds of the claims for death proceeds which are made within two years after the date of issue of the Policy will be investigated to determine whether the claim should be contested and payment of these claims will therefore be delayed.
JHVLICO may defer any transaction requiring a determination of Account Value in any variable Subaccount for any period during which: (1) the disposal or valuation of the Account's assets is not reasonably practicable because the New York Stock Exchange is closed or conditions are such that, under the Commission's rules and regulations, trading is restricted or an emergency is deemed to exist or (2) the Commission by order permits postponement of such actions for the protection of Owners.
The foregoing description of Policy provisions is qualified by reference to the specimen Policy which has been filed as an exhibit to the Registration Statement.
SURRENDER VALUES AND ACCUMULATED PREMIUMS
The following tables illustrate the changes in death benefit and Surrender Value of the Policy, disregarding any Policy loans. Each table separately illustrates the operation of a Policy for identified issue ages, Planned Premium schedule and Sum Insured and shows how the death benefit and Surrender Value may vary over an extended period of time assuming hypothetical rates of investment return (i.e., investment income and capital gains and losses, realized or unrealized) equivalent to constant gross annual rates of 0%, 6% and 12%. The tables are based on given annual Planned Premiums paid at the beginning of each Policy year and will assist in a comparison of the death benefit and surrender value figures set forth in the tables with those under other variable life insurance policies which may be issued by JHVLICO or other companies. Tables are provided for Option A, without the Extra Death Benefit feature, as well as for Option B death benefits. The death benefit and Surrender Value for a Policy would be different from those shown if premiums are paid in different amounts or at different times or if the actual gross rates of investment return average 0%, 6% or 12% over a period of years, but nevertheless fluctuate above or below the average for individual Policy years, or if the Policy were issued in a state in which no distinctions are made based on the gender of the insureds.
The amounts shown for the death benefit and Surrender Value are as of the end of each Policy year. The first two tables headed "Using Current Charges" assume that the current rates for insurance, sales, risk, and expense charges will apply in each year illustrated. The two tables headed "Using Maximum Charges" assumes that the maximum (guaranteed) insurance, sales, risk, and expense charges will be made in each year illustrated. The amounts shown in all tables reflect an average asset charge for the daily investment advisory expense charges to the Portfolios of the Fund (equivalent to an effective annual rate of .53%) and an assumed average asset charge for the annual nonadvisory operating expenses of each Portfolio of the Funds (equivalent to an effective annual rate of .15%). For a description of expenses charged to the Portfolios, see the attached Prospectuses for the Funds. The charges for the daily investment management fee and the annual non-advisory operating expenses are based on the hypothetical assumption that Policy values are allocated equally among the variable Subaccounts. The actual Portfolio charges and expenses associated with any Policy will vary depending upon the actual allocation of Policy values among Subaccounts.
The tables reflect that no charge is currently made to the Accounts for Federal income taxes. However, JHVLICO reserves the right to make such a charge in the future and any charge would require higher rates of investment return in order to produce the same Policy values. All of the tables do, however, reflect the imposition of a Federal DAC Tax charge in the amount of 1.25% of all premiums paid and a premium tax charge in the amount of 2.35% of all premiums paid.
The tables assume that the Guaranteed Minimum Death Benefit has not been elected beyond the tenth Policy year and that no Additional Sum Insured or optional rider benefits have been elected.
The second column of each table shows the amount to which the total premiums paid to the end of a Policy year during the premium paying period would accumulate if an amount equal to those premiums were invested to earn interest, after taxes, at 5% compounded annually.
JHVLICO will furnish upon request a comparable illustration reflecting the proposed insureds' ages, sexes, underwriting risk classifications and the Sum Insured at issue and Planned Premium amount requested, and assuming annual Planned Premiums.
PLAN:FLEXIBLE PREMIUM VARIABLE LIFE SURVIVORSHIP MALE, ISSUE AGE 55, NONSMOKER UNDERWRITING CLASS FEMALE, ISSUE AGE 50, NONSMOKER UNDERWRITING CLASS NO GUARANTEED MINIMUM DEATH BENEFIT OPTION AFTER TENTH POLICY YEAR
* The illustrations assume that Planned Premiums equal to the Target Premium are paid at the start of each Policy Year. The Death Benefit and Surrender Value will differ if premiums are paid in different amounts or frequencies, if policy loans are taken, or if Additional Sum Insured, Guaranteed Minimum Death Benefit after the tenth Policy Year, or optional rider benefits are elected.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RETURNS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING INVESTMENT ALLOCATIONS MADE BY THE OWNER. THE DEATH BENEFIT AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF INVESTMENT RETURN AVERAGE 0%, 6%, OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATE ABOVE OR BELOW THE AVERAGE FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RESULTS CAN BE ACHIEVED FOR ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
PLAN:FLEXIBLE PREMIUM VARIABLE LIFE SURVIVORSHIP MALE, ISSUE AGE 55, NONSMOKER UNDERWRITING CLASS FEMALE, ISSUE AGE 50, NONSMOKER UNDERWRITING CLASS NO GUARANTEED MINIMUM DEATH BENEFIT OPTION AFTER TENTH POLICY YEAR
* The illustrations assume that Planned Premiums equal to the Target Premium are paid at the start of each Policy Year. The Death Benefit and Surrender Value will differ if premiums are paid in different amounts or frequencies, if policy loans are taken, or if Additional Sum Insured, Guaranteed Minimum Death Benefit after the tenth Policy Year, or optional rider benefits are elected.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RETURNS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING INVESTMENT ALLOCATIONS MADE BY THE OWNER. THE DEATH BENEFIT AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF INVESTMENT RETURN AVERAGE 0%, 6%, OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATE ABOVE OR BELOW THE AVERAGE FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RESULTS CAN BE ACHIEVED FOR ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
PLAN:FLEXIBLE PREMIUM VARIABLE LIFE SURVIVORSHIP MALE, ISSUE AGE 55, NONSMOKER UNDERWRITING CLASS FEMALE, ISSUE AGE 50, NONSMOKER UNDERWRITING CLASS NO GUARANTEED MINIMUM DEATH BENEFIT OPTION AFTER TENTH POLICY YEAR
* The illustrations assume that Planned Premiums equal to the Target Premium are paid at the start of each Policy Year. The Death Benefit and Surrender Value will differ if premiums are paid in different amounts or frequencies, if policy loans are taken, or if Additional Sum Insured, Guaranteed Minimum Death Benefit after the tenth Policy Year, or optional rider benefits are elected. ** Policy lapses unless additional premium payments are made.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RETURNS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING INVESTMENT ALLOCATIONS MADE BY THE OWNER. THE DEATH BENEFIT AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF INVESTMENT RETURN AVERAGE 0%, 6%, OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATE ABOVE OR BELOW THE AVERAGE FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RESULTS CAN BE ACHIEVED FOR ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
PLAN:FLEXIBLE PREMIUM VARIABLE LIFE SURVIVORSHIP MALE, ISSUE AGE 55, NONSMOKER UNDERWRITING CLASS FEMALE, ISSUE AGE 50, NONSMOKER UNDERWRITING CLASS NO GUARANTEED MINIMUM DEATH BENEFIT OPTION AFTER TENTH POLICY YEAR
* The illustrations assume that Planned Premiums equal to the Target Premium are paid at the start of each Policy Year. The Death Benefit and Surrender Value will differ if premiums are paid in different amounts or frequencies, if policy loans are taken, or if Additional Sum Insured, Guaranteed Minimum Death Benefit after the tenth Policy Year, or optional rider benefits are elected. ** Policy lapses unless additional premium payments are made.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RETURNS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING INVESTMENT ALLOCATIONS MADE BY THE OWNER. THE DEATH BENEFIT AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF INVESTMENT RETURN AVERAGE 0%, 6%, OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATE ABOVE OR BELOW THE AVERAGE FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RESULTS CAN BE ACHIEVED FOR ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that Section.
Pursuant to Section X of JHVLICO's Bylaws and Section 67 of the Massachusetts Business Corporation Law, JHVLICO indemnifies each director, former director, officer, and former officer, and his heirs and legal representatives from liability incurred or imposed in connection with any legal action in which he may be involved by reason of any alleged act or omission as an officer or a director of JHVLICO.
Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
This Registration Statement comprises the following Papers and Documents:
The prospectus consisting of 69 pages.
The undertaking to file reports.
Pursuant to the requirements of the Securities Act of 1933, the John Hancock Variable Life Insurance Company has duly caused this amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunder duly authorized, and its seal to be hereunto fixed and attested, all in the City of Boston and Commonwealth of Massachusetts on the 5 th day of January, 1996.
By /s/ HENRY D. SHAW
Attest: /s/ FRANCIS C. CLEARY, JR. Francis C. Cleary, Jr.
Pursuant to the requirements of the Securities Act of 1933, this Post- Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities with John Hancock Variable Life Insurance Company and on the dates indicated.
Pursuant to the requirements of the Securities Act of 1933, the Registrant, John Hancock Variable Life Account S, certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto fixed and attested, all in the City of Boston and Commonwealth of Massachusetts on the 5th day of January, 1996.
JOHN HANCOCK VARIABLE LIFE ACCOUNT S
By John Hancock Mutual Life Insurance Company
By /s/ HENRY D. SHAW
Attest /s/ FRANCIS C. CLEARY, JR. Francis C. Cleary, Jr. | 485BPOS | 485BPOS | 1996-01-12T00:00:00 | 1996-01-11T17:42:34 |
0000950131-96-000066 | 0000950131-96-000066_0013.txt | <DESCRIPTION>DECLARATION OF TRUST OF INTEGRATED EQUITY PORT.
THE DECLARATION OF TRUST of INTEGRATED EQUITY PORTFOLIOS is made the 18th day of June, 1986 by the parties signatory hereto, as trustees (such persons, so long as they shall continue in office in accordance with the terms of this Declaration of Trust, and all other persons who at the time in question have been duly elected or appointed as trustees in accordance with the provisions of this Declaration of Trust and are then in office, being hereinafter called the "Trustees").
W I T N E S S E T H:
WHEREAS, the Trustees desire to form a trust fund under the laws of Massachusetts for the investment and reinvestment of funds contributed thereto;
WHEREAS, it is proposed that the beneficial interest in the trust assets be divided into transferable shares of beneficial interest as hereinafter provided;
NOW, THEREFORE, the Trustees hereby declare that they will hold in trust all money and property contributed to the trust fund to manage and dispose of the same for the benefit of the holders from time to time of the shares of beneficial interest issued hereunder and subject to the provisions hereof, to wit:
1.1. Name. The name of the trust created hereby (the "Trust") shall be "Integrated Equity Portfolios," and so far as may be practicable the Trustees shall conduct the Trust's activities, execute all documents and sue or be sued under that name, which name (and the word "Trust" wherever hereinafter used) shall refer to the Trustees as trustees, and not individually, and shall not refer to the officers, agents, employees or shareholders of the Trust. However, should the Trustees determine that the use of such name is not advisable, they select such other name for the Trust as they deem proper and the Trust may hold its property and conduct its activities under such other name. Any name change shall become effective upon the execution by a majority of the then Trustees of an instrument setting forth the new name. Any such instrument shall have the status of an amendment to this Declaration.
1.2. Definitions. As used in this Declaration, the following terms shall have the following meanings:
The terms "Affiliated Person," "Assignment," "Commission," "Interested Person" and "Principal Underwriter" shall have the meanings given them in the 1940 Act, as amended from time to time.
"Declaration" shall mean this Declaration of Trust as amended from time to time. References in this Declaration to "Declaration," "hereof," "herein" and "hereunder" shall be deemed to refer to the Declaration rather than the article or section in which such words appear.
"Fundamental Policies" shall mean the investment objectives, policies and restrictions set forth in the Prospectus or Statement of Additional Information of the Trust and designated therein as policies or restrictions which may be changed only upon a vote of Shareholders of the Trust.
"Majority Shareholder Vote" means the vote of the holders of: (i) a majority of Shares represented in person or by proxy and entitled to vote at a meeting of Shareholders at which a quorum, as determined in accordance with the By-Laws, is present and (ii) a majority of Shares issued and outstanding and entitled to vote when action is taken by written consent of Shareholders. For these purposes, however, the term "majority" shall mean a "majority of the outstanding voting securities," as the phrase is defined in the 1940 Act, when any action is required by the 1940 Act by such majority as so defined.
"Person" shall mean and include individuals, corporations, partnerships, trusts, associations, joint ventures and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof.
"Prospectus" and "Statement of Additional Information" shall mean the currently effective Prospectus and Statement of Additional Information of the Trust under the Securities Act of 1933, as amended.
"Series" means one of the separately managed components of the Trust as set forth in Section 6.1 hereof or as may be established and designated from time to time by the Trustees pursuant to that section.
"Shares" shall mean the equal proportionate transferable units of interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole shares.
"Shareholders" shall mean as of any particular time all holders of record of outstanding Shares at such time.
"Trustees" shall mean the signatories to this Declaration of Trust, so long as they shall continue in office in accordance with the terms hereof, and all other persons who at the time in question have been duly elected or appointed and have qualified as trustees in accordance with the provisions hereof and are then in office, and reference in this Declaration of Trust to a Trustee or Trustees shall refer to such person or persons in their capacity as trustees hereunder.
"Trust Property" shall mean as of any particular time any and all property, real or personal, tangible or intangible, which at such time is owned or held by or for the account of the Trust or the Trustees.
The "1940 Act" refers to the Investment Company Act of 1940 and the rules and regulations promulgated thereunder, as amended from time to time.
2.1. Number of Trustees. The number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by a majority of the Trustees, provided, however, that the number of Trustees shall in no event be less than three nor more than fifteen.
2.2. Election, Term. Each Trustee named herein, or elected or appointed hereafter, shall (except in the event of resignation, removal or vacancy) hold office until a successor has been elected or appointed and has qualified to serve as Trustee. Trustees shall have terms of unlimited duration, subject to the resignation and removal provisions of Section 2.3 hereof. Except as herein provided and subject to Section 16(a) of the 1940 Act, Trustees need not be elected by Shareholders, and the Trustees may elect and appoint their own successors and may, pursuant to Section 2.4 hereof, appoint Trustees to fill vacancies. The Trustees may adopt By-Laws not inconsistent with this Declaration or any provision of law to provide for election of Trustees by Shareholders at such time or times as the Trustees shall determine to be necessary or advisable. Except for the Trustees named herein, an individual may not commence to serve as Trustee except if appointed pursuant to a written instrument signed by a majority of the Trustees then in office or unless elected by Shareholders, and any such election or appointment shall not become effective until the individual appointed or elected shall have accepted such election or appointment and agreed in writing to be bound by the terms of this Declaration of Trust. A Trustee shall be an individual at least 21 years of age who is not under a legal disability.
2.3. Resignation and Removal. Any Trustee may resign his trust (without need for prior or subsequent accounting) by an instrument in writing signed by him and delivered to the other Trustees and such resignation shall be effective upon such delivery, or at a later date according to the terms of the instrument. Any of the Trustees may be removed (provided the aggregate number of Trustees after such removal shall not be less than the number required by Section 2.1 hereof) with cause, by action of two thirds of the remaining Trustees or by the action of the Shareholders of record of not less than two-thirds of the Shares outstanding. For purposes of determining the circumstances and procedures under which such removal by the Shareholders may take place, the provisions of Section 16(c) of the 1940 Act shall be applicable to the same extent as if the Trust were subject to the provisions of that Section. Upon the resignation or removal of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees any Trust Property held in the name of the resigning or removed Trustee. Upon the incapacity or death of any Trustee, his legal representative shall execute and deliver on his behalf such documents as the remaining Trustees shall require as provided in the preceding sentence.
2.4. Vacancies. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of the death, resignation, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office, or removal, of a Trustee. No such vacancy shall operate to annul this Declaration of Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust. In the case of a vacancy caused by reason of an increase in the number of Trustees, subject to the provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall fill such vacancy by the appointment of such other person as they, in their discretion, shall see fit. An appointment of a Trustee may be made in anticipation of a vacancy to occur at a later date by reason of retirement, resignation or increase in the number of Trustees. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in this Section 2.4, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by the Declaration. A written instrument certifying the existence of such vacancy signed by a majority of the Trustees shall be conclusive evidence of the existence of such vacancy.
2.5. Meetings. Meetings of the Trustees shall be held from time to time upon the call of the Chairman, if any, the President, the Secretary or any two Trustees of the Trust. Regular meetings of the Trustees may be held without call or notice at a time and place fixed by the By-Laws or by resolution of the Trustees. Notice of any other meeting shall be mailed or otherwise given not less than 48 hours before the meeting but may be waived in writing by any Trustee either before or after such meeting. The attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Trustee attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened. The Trustees may act with or without a meeting. A quorum for all meetings of the Trustees shall be a majority of the Trustees. Unless provided otherwise in this Declaration of Trust or by applicable law, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees present (a quorum being present) or without a meeting by written consents of all of the Trustees.
Any committee of the Trustees, including an executive committee, if any, may act with or without a meeting. A quorum for all meetings of any such committee shall be a majority of the members thereof. Unless provided otherwise in this Declaration, any action of any such committee may be taken at a meeting by vote of a majority of the members present (a quorum being present) or without a meeting by written consent of a majority of the members.
With respect to actions of the Trustees and any committee of the Trustees, Trustees who are Interested Persons of the Trust within the meaning of Section 1.2 hereof or otherwise interested in any action to be taken may be counted for quorum purposes under this Section and shall be entitled to vote to the extent permitted by the 1940 Act.
All or any one or more Trustees may participate in a meeting of the Trustees or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting pursuant to such communications systems shall constitute presence in person at such meeting.
2.6. Officers. The Trustees shall annually elect a President, a Secretary and a Treasurer and may elect a Chairman. The Trustees may elect or appoint or authorize the Chairman, if any, or President to appoint such other officers or agents with such powers as the Trustees may deem to be advisable. The Chairman and President shall be and the Secretary and Treasurer may, but need not, be a Trustee.
2.7. By-Laws. The Trustees may adopt and from time to time amend or repeal the By-Laws for the conduct of the business of the Trust.
2.8. Delegation of Power to Other Trustees. Any Trustee may, by power of attorney, delegate his power for a period not exceeding six months at any one time to any other Trustee or Trustees; provided that in no case shall less than two Trustees personally exercise the powers granted to the Trustees under the Declaration except as herein otherwise expressly provided.
3.1. General. The Trustees shall have exclusive and absolute control over the Trust Property and over the business of the Trust to the same extent as if the Trustees were the sole owners of the Trust Property and business in their own right, but with such powers of delegation as may be permitted by this Declaration. The Trustees may perform such acts as in their sole discretion are proper for conducting the business of the Trust. The enumeration of any specific power herein shall not be construed as limiting the aforesaid power. Such powers of the Trustees may be exercised without order of or resort to any court.
3.2. Investments. The Trustees shall have power, subject to the Fundamental Policies, to:
(a) conduct, operate and carry on the business of an investment
(b) subscribe for, invest in, reinvest in, purchase or otherwise acquire, hold, pledge, sell, assign, transfer, exchange, distribute or otherwise deal in or dispose of securities and other investments and assets of whatever kind, or retain Trust assets in cash and from time to time change the investments of the assets of the Trust, and exercise any and all rights, powers and privileges of ownership or interest in respect of any and all such investments and assets of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more persons, firms, associations or corporations to exercise any of said rights, powers and privileges in respect of any of said investments and assets.
The Trustees shall not be limited to investing in obligations maturing before the possible termination of the Trust, nor shall the Trustees be limited by any law limiting the investments which may be made by fiduciaries.
3.3. Legal Title. Legal title to all Trust Property shall be vested in the Trustees as joint tenants, except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine, provided that the interest of the Trust therein is appropriately protected.
The right, title and interest of the Trustees in the Trust Property shall vest automatically in each person who may hereafter become a Trustee. Upon the resignation, removal or death of a Trustee he shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered.
3.4. Issuance and Repurchase of Securities. The Trustees shall have the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in, Shares, including shares in fractional denominations, and, subject to the more detailed provisions set forth in Articles VIII and IX, to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares any funds or property of the Trust whether capital or surplus or otherwise, to the full extent now or hereafter permitted by the laws of the Commonwealth of Massachusetts governing business corporations.
3.5. Borrow Money; Lend Assets. Subject to the Fundamental Policies, the Trustees shall have power to borrow money or otherwise obtain credit and to secure the same by mortgaging, pledging or otherwise subjecting as security the assets of the Trust, including the lending of portfolio securities, and to endorse, guarantee or undertake the performance of any obligation, contract or engagement of any other Person and to lend Trust assets.
3.6. Delegation; Committees. The Trustees shall have power, consistent with their continuing exclusive authority over the management of the Trust and the Trust Property, to delegate from time to time to such of their number or to officers, employees or agents of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or names of the Trustees or otherwise as the Trustees may deem expedient, to the same extent as such delegation is permitted to directors of a Massachusetts business corporation and is permitted by the 1940 Act.
3.7. Collection and Payment. The Trustees shall have power to collect all property due to the Trust; and to pay all claims, including taxes, against the Trust Property; to prosecute, defend, compromise or abandon any claims relating to the Trust Property; to foreclose any security interest securing any obligations, by virtue of which any property is owed to the Trust; and to enter into releases, agreements and other instruments.
3.8. Expenses. The Trustees shall have power to incur and pay any expenses which in the opinion of the Trustees are necessary or incidental to carry out any of the purposes of this Declaration of Trust, and to pay reasonable compensation from the funds of the Trust to themselves as Trustees. The Trustees shall fix the compensation of all officers, em- ployees and Trustees. The Trustees may pay themselves such compensation for special services, including legal, underwriting, syndicating and brokerage services, as they in good faith may deem reasonable and reimbursement for expenses reasonably incurred by themselves on behalf of the Trust.
3.9. Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for the transaction of the business of the Trust and terminate such employees or contractual relationships as they consider appropriate; (b) enter into joint ventures, partnerships and any other combinations or associations; (c) remove Trustees or fill vacancies in or add to their number elect and remove such officers and appoint and terminate such agents or employees as they consider appropriate, and appoint from their own number, and terminate, any one or more committees which may exercise some or all of the power and authority of the Trustees as the Trustees may determine; (d) purchase, and pay for out of Trust Property, insurance policies insuring the Shareholders, Trustees, officers, employees, agents, investment advisers, distributors, selected dealers or independent contractors of the Trust against all claims arising by reason of holding any such position or by reason of any action taken or omitted by any such Person in such capacity, whether or not constituting negligence, or whether or not the Trust would have the power to indemnify such Person against such liability; (e) establish pension, profit-sharing, share purchase and other retirement, incentive and benefit plans for any Trustees, officers, employees and agents of the Trust; (f) make donations, irrespective of benefit to the Trust, for charitable, religious, educational, scientific, civic or similar purposes; (g) to the extent permitted by law, indemnify any Person with whom the Trust has dealings, including the investment adviser, distributor, transfer agent and selected dealers, to such extent as the Trustees shall determine; (h) guarantee indebtedness or contractual obligations of others; (i) determine and change the fiscal year of the Trust and the method in which its accounts shall be kept; (j) adopt a seal for the Trust, but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust; and (k) call for meetings of Shareholders as may be necessary or appropriate.
3.10. Further Powers. The Trustees shall have power to conduct the business of the trust and carry on its operations in any and all of its branches and maintain offices both within and without the Commonwealth of Massachusetts, in any and all states of the United States of America, in the District of Columbia, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments, and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith small be conclusive. In construing the provisions of tion shall be in favor of a grant of power to the Trustees. The Trustees will not be required to obtain any court order to deal with the Trust Property.
3.11. Principal Transactions. Except in transactions permitted by the 1940 Act or any rule or regulation thereunder, or any order of exemption issued by the Commission, or effected to implement the provisions of any agreement to which the Trust is a party, the Trustees shall not knowingly, on behalf of the Trust, buy any securities (other than Shares) from or sell any securities (other than Shares) to, or lend any assets of the Trust to, any Trustee or officer of the Trust or any firm of which any such Trustee or officer is a member acting as principal, or have any such dealings with any investment adviser, distributor or transfer agent or with any Affiliated Person of such Person; but the Trust may employ any such Person, or firm or company in which such Person is an Interested Person, as broker, legal counsel, registrar, transfer agent, dividend disbursing agent or custodian upon customary terms.
3.12. Litigation. The Trustees shall have the power to engage in and to prosecute, defend, compromise, abandon, or adjust, by arbitration or otherwise, any actions, suits, proceedings, disputes, claims and demands relating to the Trust, and out of the assets of the Trust to pay or to satisfy any debts, claims or expenses incurred in connection therewith, including those of litigation, and such power shall include without limitation the power of the Trustees or any appropriate committee thereof, in the exercise of their or its good faith business judgment, to dismiss any action, suit, proceeding, dispute, claim or demand, derivative or otherwise, brought by any person, including a Shareholder in its own name or the name of the Trust, whether or not the Trust or any of the Trustees may be named individually therein or the subject matter arises by reason of business for or on behalf of the Trust.
4.1. Management Arrangements. Subject to approval by a Majority Shareholder Vote, the Trustees may in their discretion from time to time enter into advisory, administration or management contracts whereby the other party to such contract shall undertake to furnish such advisory, administrative, management, accounting, legal, statistical and research facilities and services, promotional or marketing activities, and such other facilities and services, if any, as the Trustees shall from time to time consider desirable and all upon such terms and conditions as the Trustees may in their discretion determine. Notwithstanding any provisions of this Declaration of Trust, the Trustees may authorize any adviser, administrator or manager (subject to such general or specific instructions as the Trustees may from time to time adopt) to effect purchases, sales, loans or exchanges of portfolio securities of the Trust on behalf of the Trustees or may authorize any officer, employee or Trustee to effect such purchases, sales, loans or exchanges pursuant to recommendations of any such adviser, administrator or manager (all without further action by the Trustees). Any such purchases, sales, loans and exchanges shall be deemed to have been authorized by all of the Trustees. The Trustees may, in their sole discretion, call a meeting of Shareholders in order to submit to a vote of Shareholders at such meeting the approval or continuance of any such investment advisory, management or other contract. If the Shareholders of any one or more of the Series of the Trust should fail to approve any such investment advisory or management contract, the Investment Adviser may nonetheless serve as Investment Adviser with respect to any Series whose Shareholders approved such contract.
4.2. Administrative Services. The Trustees may in their discretion from time to time contract for administrative personnel and services whereby the other party shall agree to provide to the Trustees or the Trust administrative personnel and services to operate the Trust on a daily or other basis on such terms and conditions as the Trustees may in their discretion determine. Such services may be provided by one or more persons or entities.
4.3. Distribution Arrangements. The Trustees may in their discretion from time to time enter into a contract, providing for the sale of the Shares of the Trust to net the Trust not less than the par value per share, whereby the Trust may either agree to sell the Shares to the other party to the contract or appoint such other party its sales agent for such Shares. Such contract may also provide for the repurchase or sale of Shares by such other party as principal or as agent of the Trust and may provide that such other party may enter into selected dealer agreements with regis- tered securities dealers to further the purpose of the distribution or repurchase of the Shares. The contract shall be on such terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article IV or the By-Laws.
4.4. Parties to Contract. Any contract of the character described in Sections 4.1, 4.2 or 4.3 of this Article IV, or in Article VI or in Article VII hereof, may be entered into with any corporation, firm, trust or association, although one or more of the Trustees or officers of the Trust may be an officer, director, Trustee, shareholder, employee or member of such other party to the contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any such relationship, nor shall any person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom, provided that the contract when entered into was reasonable and fair and not inconsistent with the provisions of this Article IV or the By-Laws. The same person (including a firm, corporation, trust or association) may be the other party to contracts entered into pursuant to Sections 4.1, 4.2 or 4.3 above or Article VI or VII, and any individual may be financially interested or otherwise affiliated with Persons who are parties to any or all of the contracts mentioned in this Section 4.4.
4.5. Provisions and Amendments. Any contract entered into pursuant to Sections 4.1, 4.2 or 4.3 of this Article IV shall be consistent with and subject to all applicable requirements of the 1940 Act with respect to its adoption, continuance, termination and the method of authorization and approval of such contract or renewal thereof, and no amendment to any contract entered into pursuant to such sections shall be effective unless entered into in accordance with applicable provisions of the 1940 Act.
Limitations of Liability of Shareholders,
5.1. No Personal Liability of Shareholders, Trustees, etc. No Shareholder, as such, shall be subject to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. No Trustee, officer, employee or agent of the Trust shall be subject to any personal liability whatsoever to any Person, other than the Trust or its Shareholders, in connection with Trust Property or the affairs of the Trust, and all such Persons shall look solely to the Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee, officer, employee or agent, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability, he shall not on account thereof be held to any personal liability. The Trust shall indemnify and hold each Shareholder harmless from and against all claims and liabilities to which such Shareholder may become subject by reason of his being or having been a Shareholder, and shall reimburse such Shareholder for all legal and other expenses reasonably incurred by him in connection with any such claim or liability; provided that Shareholders of a particular Series who are subject to claims or liabilities solely by reason of their status as Shareholders of that Series shall be limited to the assets of that Series for recovery of any loss and related expenses. The rights accruing to a Shareholder under this Section 5.1 shall not exclude any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein.
5.2. Non-Liability of Trustees, etc. No Trustee, officer, employee or agent of the Trust shall be liable to the Trust, its Shareholders or to any Shareholder, Trustee, officer, employee or agent thereof for any action or failure to act (including without limitation the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties.
5.3. Indemnification. The Trustees shall provide for indemnification by the Trust of any person who is, or has been a Trustee, officer, employee or agent of the Trust against all liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee, officer, employee or agent and against amounts paid or incurrred by him in the settlement thereof, in such manner as the Trustees may provide from time to time in the By-Laws.
The words "claim," "action," "suit" or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.
5.4. No Bond Required of Trustees. No Trustee, as such, shall be obligated to give any bond or surety or other security for the performance of any of his duties hereunder.
5.5. No Duty of Investigation; Notice in Trust, Instruments, etc. No purchaser, lender, transfer agent or other person dealing with the Trustees or any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract, instrument, certificate, Share, other security of the Trust or undertaking, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively taken to have been executed or done by the executors thereof only in their capacity as Trustees under this Declaration of Trust or in their capacity as officers, employees or agents of the Trust. Every written obligation, contract, instrument, certificate, Share, other security of the Trust or undertaking made or issued by the Trustees or by any officers, employees or agents of the Trust, in their capacity as such, shall contain an appropriate recital to the effect that the writing is executed or made by them not individually, but as Trustees under the Declaration that the Shareholders, Trustees, officers, employees and agents of the Trust shall not personally be bound by or liable thereunder, nor shall resort be had to their private property for the satisfaction of any obligation or claim thereunder but only to the Trust Estate or, in the case of any such obligation which relates only to a specific Series, only to the property of such Series, and appropriate references shall be made therein to the Declaration of Trust, and may contain any further recital which they may deem appropriate, but the omission of such recital shall not operate to impose personal liability on any of the Trustees, Shareholders, officers, employees or agents of the Trust. The Trustees may maintain insurance for the protection of the Trust Property, its Shareholders, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable.
5.6. Reliance on Experts, etc. Each Trustee and officer or employee of the Trust shall, in the performance of his duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of its officers or employees or by any investment adviser, distributor, transfer agent, selected dealers, accountants, appraisers or other experts or consultants selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee.
6.1. Beneficial Interest. The interest of the beneficiaries hereunder shall be divided into transferable shares of beneficial interest, with par value $.0l per share. The number of such shares of beneficial interest authorized hereunder is unlimited. The Trustees may initially issue whole and fractional shares of a single class, each of which shall represent an equal proportionate share in the Trust with each other Share. As provided by the provisions of Section 6.9 hereof, the Trustees may authorize the creation of series of shares (the proceeds of which may be invested in separate, independently managed portfolios) and additional classes of shares within any series. All Shares issued hereunder including, without limitation, Shares issued in connection with a dividend in Shares or a split of Shares, shall be fully paid and nonassessable.
6.2. Rights of Shareholders. The ownership of the Trust Property of every description and the right to conduct any business hereinbefore described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to share or assume any losses of the Trust or suffer an assessment of any kind by virtue of their ownership of Shares. The Shares shall be personal property giving only the rights in this Declaration specifically set forth. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights (except for rights of appraisal specified in Section 11.4 and as the Trustees may determine with respect to any series or class of Shares).
6.3. Trust Only. It is the intention of the Trustees to create only the relationship of Trustee and beneficiary between the Trustees and each Shareholder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form of legal relationship other than a trust. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association.
6.4. Issuance of Shares. The Trustees, in their discretion, may from time to time without a vote of the Shareholders issue Shares, in addition to the then issued and outstanding Shares and Shares held in the treasury, to such party or parties and for such amount not less than par value and type of consideration, including cash or property, at such time or times, and on such terms as the Trustees may deem best, and may in such manner acquire other assets (including the acquisition of assets subject to, and in connection with the assumption of, liabilities) and businesses. In connection with any issuance of Shares, the Trustees may issue fractional Shares. The Trustees may from time to time divide or combine the Shares into a greater or lesser number without thereby changing the proportionate beneficial interests in the Trust.
6.5. Register of Shares. A register shall be kept at the Trust or a transfer agent duly appointed by the Trustees under the direction of the Trustees which shall contain the names and addresses of the Shareholders and the number of Shares held by them respectively and a record of all transfers thereof. Such register shall be conclusive as to who are the holders of the Shares and who shall be entitled to receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have notice given to him as herein provided, until he has given his address to a transfer agent or such other officer or agent of the Trustees as shall keep the said register for entry thereon. It is not required that certificates be issued for the Shares; however, the Trustees, in their discretion, may authorize the issuance of share certificates and promulgate appropriate rules and regulations as to their use.
6.6. Transfer Agent and Registrar. The Trustee shall have power to employ a transfer agent or transfer agents, and a registrar or registrars. The transfer agent or transfer agents may keep the said register and record therein the original issues and transfers, if any, of the said Shares. Any such transfer agent and registrars shall perform the duties usually performed by transfer agents and registrars of certificates of stock in a corporation, except as modified by the Trustees.
6.7. Transfer of Shares. Shares shall be transferable on the records of the Trust only by the record holder thereof or by his agent thereto duly authorized in writing, upon delivery to the Trustees or a transfer agent of the Trust of a duly executed instrument of transfer, together with such evidence of the genuineness of each such execution and authorization and of other matters as may reasonably be required. Upon such delivery the transfer shall be recorded on the register of the Trust. Until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof and neither the Trustees nor any transfer agent or registrar nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the register of Shares as the holder of such Shares upon production of the proper evidence thereof to the Trustees or a transfer agent of the Trust, but until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof and neither the Trustees nor any transfer agent or registrar nor any officer or agent of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of 1aw.
6.8. Treasury Shares. Shares held in the treasury shall, until reissued, not confer any voting rights on the Trustees, nor shall such shares be entitled to any dividends or other distributions declared with respect to the Shares.
6.9. Series Designation. The Trustees, in their discretion, may authorize the division of Shares into two or more series or two or more classes, and the different series or classes shall be established and designated, and the variations in the relative rights and preferences as between the different series or classes shall be fixed and determined, by the Trustees; provided, that all Shares shall be identical except that there may be variations so fixed and determined between different series or classes as to investment objective, purchase price, right of redemption, special and relative rights as to dividends and on liquidation and conversion rights, and the several series or classes shall have separate voting rights, as set forth in Section 10.1 of this Declaration. All references to Shares in this Declaration shall be deemed to be shares of any or all series and classes as the context may require.
If the Trustees shall divide the Shares of the Trust into two or more series or two or more classes, the following provisions shall be applicable:
(a) The number of authorized Shares and the number of Shares of each series or of each class that may be issued shall be unlimited. The Trustees may classify or reclassify any unissued Shares or any Shares previously issued and reacquired of any series or class into one or more series or one or more classes that may be established and designated from time to time. The Trustees may hold as treasury shares (of the same or some other series or class), reissue for such consideration and on such terms as they may determine, or cancel any Shares of any series or any class reacquired by the Trust at their discretion from time to time.
(b) The power of the Trustees to invest and reinvest the Trust Property shall be governed by Section 3.2 of this Declaration with respect to any one or more series which represents the interests in the assets of the Trust immediately prior to the establishment of two or more series and the power of the Trustees to invest and reinvest assets applicable to any other series shall be the same, except as otherwise set forth in the instrument of the Trustees establishing such series which is hereinafter described.
(c) All consideration received by the Trust for the issue or sale of Shares of a particular series or class, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that series or class for all purposes, subject only to the rights of creditors and except as may otherwise be required by applicable tax laws, and shall be so recorded upon the books of account of the Trust. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds, or payments which are not readily identifiable as belonging to any particular series or class, the Trustees shall allocate them among any one or more of the series or classes established and designated from time to time in such manner and on such basis as they, in their sole discretion, deem fair and equitable. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all series or classes for all purposes.
(d) The assets belonging to each particular series shall be charged with the liabilities of the Trust in respect of that series and all expenses, costs, charges and reserves attributable to that series. All expenses and liabilities incurred or arising in connection with a particular Series, or in connection with the management thereof, shall be payable solely out of the assets of that Series and creditors of a particular Series shall be entitled to look solely to the property of such Series for satisfaction of their claims. Any general liabilities, expenses, costs, charges or reserves of the Trust which are not readily identifiable as belonging to any particular series shall be allocated and charged by the Trustees to and among any one or more of the series established and designated and designated from time to time in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon the holders of all series for all purposes. The Trustees shall have full discretion, to the extent not inconsistent with the 1940 Act, to determine which items are capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders.
(e) The power of the Trustees to pay dividends and make distributions shall be governed by Section 9.2 of this Declaration with respect to any one or more series or classes which represents the interests in the assets of the Trust immediately prior to the establishment of two or more series or classes. With respect to any other series or class, dividends and distributions on Shares of a particular series or class may be paid with such frequency as the Trustees may determine, which may be daily or otherwise, pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Trustees may
determine, to the holders of Shares of that series or class, from such of the income and capital gains, accrued or realized, from the assets belonging to that series or class, as the Trustees may determine, after providing for actual and accrued liabilities belonging to that series or class. All dividends and distributions on Shares of a particular series or class shall be distributed pro rata to the holders of that series or class in proportion to the number of Shares of that series or class held by such holders at the date and time of record established for the payment of such dividends or distributions.
(f) Subject to the requirements of the 1940 Act, particularly Section 18(f) and Rule 18f-2, the Trustees shall have the power to determine the designations, preferences, privileges, limitations and rights of each class and series of Shares.
(g) Subject to compliance with the requirements of the 1940 Act, the Trustees shall have the authority to provide that the holders of Shares of any series or class shall have the right to convert or exchange said Shares into Shares of one or more series of Shares in accordance with such requirements and procedures as may be established by the Trustees.
(h) The establishment and designation of any series or class of Shares shall be effective upon the execution by a majority of the then Trustees of an instrument setting forth such establishment and designation and the relative rights and preferences of such series or class, or as otherwise provided in such instrument. At any time that there are no Shares outstanding of any particular series or class previously established and designated, the Trustees may by an instrument executed by a majority of their number abolish that series or class and the establishment and designation thereof. Each instrument referred to in this paragraph shall have the status of an amendment to this Declaration.
(i) In the event of the liquidation of a particular series, the Shareholders of that series which has been established and designated and which is being liquidated shall be entitled to receive, when and as declared by the Trustees, the excess of the assets belonging to that series over the liabilities belonging to that series. The holders of Shares of any series shall not be entitled hereby to any distribution upon liquidation of any other series. The assets so distributable to the Shareholders of any series shall be distributed among such Shareholders in proportion to the number of Shares of that series held by them and recorded on the books of the Trust. The liquidation of any particular series in which there are Shares then outstanding may be authorized by an instrument in writing, without a meeting, signed by a majority of the Trustees then in office, subject to the approval of a
majority of the outstanding voting securities of that series, as that phrase is defined in the 1940 Act.
6.10. Notices. Any and all notices to which any Shareholder hereunder may be entitled and any and all communications shall be deemed duly served or given if mailed, postage prepaid, addressed to any Shareholder of record at his last known address as recorded on the register of the Trust.
7.1. Appointment and Duties. The Trustees shall at all times employ a custodian or custodians, meeting the qualifications for custodians contained in the 1940 Act, as custodian with authority as its agent, but subject to such restrictions, limitations and other requirements, if any, as may be contained in the By-Laws of the Trust and the 1940 Act, for purposes of maintaining custody of the Trust's securities and similar investments.
7.2. Central Certificate System. Subject to applicable rules, regulations and orders, the Trustees may direct the custodian to deposit all or any part of the securities and similar investments owned by the Trust in a system for the central handling of securities pursuant to which all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities.
8.1. Redemptions. All outstanding Shares may be redeemed at the option of the holders thereof, upon and subject to the terms and conditions provided in this Article VIII. The Trust shall, upon application of any Shareholder or pursuant to authorization from any Shareholder, redeem or repurchase from such Shareholder for cash or in kind outstanding Shares for an amount per share determined by the application of a formula adopted for such purpose by resolution of the Trustees (which formula shall be consistent with applicable provisions of the 1940 Act); provided that (a) such amount per Share shall not exceed the cash equivalent of the proportionate interest of each Share in the assets of the Trust at the time of the purchase or redemption and (b) if so authorized by the Trustees, the Trust may, at any time and from time to time, charge fees for effecting such redemption, at such rates as the Trustees may establish, as and to the extent permitted under the 1940 Act, and may, at any time and from time to time, pursuant to such Act or an order thereunder, suspend such right of redemption. The procedures for effecting redemption shall be as set forth in the Prospectus and the Statement of Additional Information, as amended from time to time.
8.2. Redemption of Shares; Disclosure of Holding. If the Trustees shall, at any time and in good faith, be of the opinion that direct or indirect ownership of Shares or other securities of the Trust has or may become concentrated in any person to an extent which would disqualify the Trust as a regulated investment company under the Internal Revenue Code, then the Trustees shall have the power by lot or other means deemed equitable by them (i) to call for redemption a number, or principal amount, of Shares or other securities of the Trust sufficient, in the opinion of the Trustees, to maintain or bring the direct or indirect ownership of Shares or other securities of the Trust into conformity with the requirements of such qualification and (ii) to refuse to transfer or issue Shares or other securities of the Trust to any Person whose acquisition of the Shares or other securities of the Trust in question would in the opinion of the Trustees result in such disqualification. The redemption shall be effected at a redemption price determined in accordance with Section 8.1.
The holders of Shares or other securities of the Trust shall upon demand disclose to the Trustees in writing such information with respect to direct and indirect ownership of Shares or other securities of the Trust as the Trustees deem necessary to comply with the provisions of the Internal Revenue Code, or to comply with the requirements of any other taxing authority.
8.3. Redemptions of Account of Less than $500. The Trustees shall have the power to redeem shares at a redemption price determined in accordance with Section 8.1 if at any time the total investment in a Shareholder account does not have a value of at least $500 (or such lesser amount as the Trustees may determine); provided, however, that the Trustees may not exercise such power with respect to Shares if the Prospectus does not describe such power (and applicable amount). In the event the Trustees determine to exercise their power to redeem Shares provided in this Section 8.3., shareholders shall be notified that the value of their account is less than $500 (or such lesser amount as determined above) and allowed a reasonable period of time to make an additional investment before the redemption is effected.
Determination of Net Asset Value,
9.1. Net Asset Value. The net asset value of each outstanding Share of the Trust shall be determined in such manner and at such time or times on such days as the Trustees may determine, in accordance with applicable provisions of the 1940 Act, as described from time to time in the Trust's currently effective Prospectus and Statement of Additional Information. The power and duty to make the daily calculations may be delegated by the Trustees to the adviser, administrator, manager, custodian, transfer agent or such other person as the Trustees may determine. The Trustees may suspend the daily determination of net asset value to the extent permitted by the 1940 Act.
9.2. Distributions to Shareholders. The Trustees shall from time to time distribute ratably among the Shareholders such proportion of the net profits, including net income, surplus (including paid-in surplus), capital or assets held by the Trustees as they may deem proper. Such distribution shall be made in cash or Shares, and the Trustees may distribute ratably among the Shareholders additional Shares issuable hereunder in such manner, at such times, and on such terms as the Trustees may deem proper. Such distributions may be among the Shareholders of record at the time of declaring a distribution or among the Shareholders of record at such later date as the Trustees shall determine. The Trustees may always retain from the net profits such amount as they may deem necessary to pay the debts or expenses of the Trust or to meet obligations of the Trust, or as they may deem desirable to use in the conduct of its affairs or to retain for future requirements or extensions of the business. The Trustees may adopt and offer to Shareholders such dividend reinvestment plan, cash dividend payout plans or related plans as the Trustees shall deem appropriate.
Inasmuch as the computation of net income and gains for federal income tax purposes may vary from the computation thereof on the books of the Trust, the above provisions shall be interpreted to give the Trustees the power in their discretion to distribute for any fiscal year as ordinary dividends and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust to avoid or reduce liability for taxes.
10.1. Voting. The Shareholders shall have power to vote only (i) for the election of Trustees as provided in Article II hereof, (ii) for the removal of Trustees as provided in Section 2.3 hereof; (iii) with respect to any investment advisory, management or other contract as provided in Section 4.1, (iv) with respect to termination of the Trust as provided in Section 11.2, (v) with respect to any amendment of the Declaration to the extent and as provided in Section 11.3, (vi) with respect to any merger, consolidation or sale of assets as provided in Section 11.4, (vii) with respect to incorporation of the Trust to the extent and as provided in Section 11.5, (viii) to the same extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or Shareholders, provided that Shareholders of a Series are not entitled to vote with respect to a matter which does not affect that series, and (ix) with respect to such additional matters relating to the Trust as may be required by law, the Declaration, the By-Laws or any registration statement of the Trust filed with any federal or state regulatory authority, or as and when the Trustees may consider necessary or desirable. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote, except that Shares held in the treasury of the Trust as of the record date, as determined in accordance with the By-Laws, shall not be voted. A Majority Shareholder Vote shall be sufficient to take or authorize action upon any matter except as otherwise provided herein. There shall be no cumulative voting in the election of Trustees. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, the Declaration or the By-Laws to be taken by Shareholders.
In the event of the establishment of series or classes as contemplated by Section 6.9, Shareholders of each such series or class shall, with respect to those matters upon which Shareholders are entitled to vote, be entitled to vote only on matters affecting such series or class, and voting shall be by series or class and require a Majority Shareholder Vote of each series or class that would be affected by such matter, except that all Shares (regardless of series or class) shall be voted as a single voting class, or a Majority Shareholder Vote of each series or class shall be necessary, where required by applicable law. Except as otherwise required by law, any action required or permitted to be taken at any meeting of Shareholders may be taken without a meeting if Shareholders constituting a Majority Shareholder Vote consent to the action in writing and such consents are filed with the records of the Trust. Such consents all purposes as votes taken at a meeting of Shareholders. The By-Laws may include further provisions for Shareholders' votes and meetings and related matters not inconsistent with the Declaration.
10.2. Reports. The Trustees shall transmit to Shareholders such written financial reports of the operations of the Trust, including financial statements certified by independent public accountants, as may be required under applicable law.
11.1. Duration. Subject to possible termination in accordance with the provisions of Section 11.2 hereof, the Trust created hereby shall continue without limitation of time.
(a) The Trust may be terminated (i) by a Majority Shareholder Vote at any meeting of Shareholders, (ii) by an instrument in writings without a meeting, signed by a majority of the Trustees and consented to by holders constituting a Majority Shareholder Vote or (iii) by the Trustees by written notice to the Shareholders. Upon the termination of the Trust,
(i) The Trust shall carry on no business except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under the this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Property to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business; provided that any sale, conveyance, assignment, exchange, transfer or other disposition of all or substantially all the Trust Property shall require approval as set forth in Section 11.4.
(iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements, as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly each, among Shareholders according to their respective rights.
(b) After termination of the Trust and distribution to Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease.
(a) This Declaration may be amended by vote of the Shareholders. The Trustees may also amend this Declaration without the vote or consent of Shareholders to change the name of the Trust, to supply any omission, to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof, or if they deem it necessary or desirable to conform this Declaration to the requirements of applicable federal or state laws or regulations or the requirements of the regulated investment company provisions of the Internal Revenue Code, but the Trustees shall not be liable for failing so to do.
(b) No amendment may be made, under Section 11.3(a) above, which would change any rights with respect to any Shares of the Trust by reducing the amount payable thereon upon liquidation of the Trust or by diminishing or eliminating any voting rights pertaining thereto, except with the vote or consent of affected Shareholders. Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders.
(c) A certification in recordable form signed by a majority of the Trustees or by the Secretary or any Assistant Secretary of the Trust, setting forth an amendment and reciting that it was duly adopted by the Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as amended, in recordable form, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust.
11.4. Merger, Consolidation and Sale of Assets. The Trust may merge or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of the Trust Property, including its good will, upon such terms and conditions and for such consideration when and as authorized by a Majority Shareholder Vote, and any such merger, consolidation, sale, lease or exchange shall be deemed for all purposes to have been accomplished under and pursuant to the statutes of the Commonwealth of Massachusetts. In respect of any such merger, consolidation, sale or exchange of assets, any Shareholder shall be entitled to rights of appraisal of his Shares to the same extent as a shareholder of a Massachusetts business corporation in respect of a merger, consolidation, sale or exchange of assets of a Massachusetts business corporation, and such rights shall be his exclusive remedy in respect of his dissent from any such action.
11.5. Incorporation. Upon a Majority Shareholder Vote, the Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction or any other trust partnership, association or other organization to take over all of the Trust Property or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust Property to any such corporation, trust, association or organization in exchange for shares or securities thereof or otherwise, and to lend money to, subscribe for shares or securities of, and enter into any contracts with any such corporation, trust, partnership, association or organization, or any corporation, partnership, trust, association or organization in which the Trust holds or is about to acquire shares or any other interest. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, partnership, association or other organization if and to the extent permitted by law. Nothing contained herein shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring a portion of the Trust Property to such organizations or entities.
12.1. Filing. This Declaration and all amendments hereto shall be filed in the office of the Secretary of the Commonwealth of Massachusetts and in such other places as may be required under the laws of Massachusetts and may also be filed or recorded in such other places as the Trustees deem appropriate. Each amendment so filed shall be accompanied by a certificate signed and acknowledged by a Trustee stating that such action was duly taken in a manner provided herein, and unless such amendment or such certificate sets forth some later time for the effectiveness of such amendment, such amendment shall be effective upon its filing. A restated Declaration, containing the original Declaration and all amendments theretofore made, may be executed from time to time by a majority of the Trustees and shall, upon filing with the Secretary of the Commonwealth of Massachusetts, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto.
12.2. Resident Agent. The Trust hereby appoints CT Corporation System as its resident agent in the Commonwealth of Massachusetts, whose post office address is 2 Oliver Street, Boston, Massachusetts 02109.
12.3. Governing Law. This Declaration is executed by the Trustees and delivered in the Commonwealth of Massachusetts and with reference to the laws thereof, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to the laws of said State and reference shall be specifically made to the business corporation law of the Commonwealth of Massachusetts as to the construction of matters not specifically covered herein or as to which an ambiguity exists.
12.4. Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart.
12.5. Reliance by Third Parties. Any certificate executed by an individual who, according to the records of the Trust, or of any recording office in which this Declaration may be recorded, appears to be a Trustee hereunder, certifying to: (a) the number or identity of Trustees or Shareholders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or Shareholders present any meeting or executing any written instrument satisfies the requirements of this Declaration, (e) the form of any By-Laws adopted by or the identity of any officers elected by the Trustees, or (f) the existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any person dealing with the Trustees and their successors.
12.6. Provisions in Conflict With Law or Regulations.
(a) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with 1940 Act, the regulated investment company provisions of the Internal Revenue Code or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Declaration; provided, however, that such determination shall not affect any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written.
On the 13 day of June, 1986, before me personally appeared Harvey Eisen and Geoffrey Bobroff, to me known to be the persons described in and who executed the foregoing instrument, and acknowledged that they executed the same.
Commission Expires March 30, 1987
On this 18th day of June, 1986, before me personally appeared David M. Elwood, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed.
PAULINE FRANCES MARTIN, Notary Public MY Commission Expires October 31, 1986
Amendment to Declaration of Trust
The undersigned, being all of the Trustees of INTEGRATED EQUITY PORTFOLIOS, a Massachusetts business trust, acting pursuant to the Declaration of Trust, hereby amend the Declaration of Trust as follows:
"The name of the Trust shall be SUNAMERICA EQUITY PORTFOLIOS."
WITNESS the due execution hereof this 19th day of January, 1990.
/s/ S. James Coppersmith /s/ Samuel M. Eisenstat S. James Coppersmith Samuel M. Eisenstat
/s/ Harvey P. Eisen /s/ Stephen J. Gutman Harvey P. Eisen Stephen J. Gutman
CERTIFICATE OF AMENDMENT TO DECLARATION OF TRUST
I, Robert M. Zakem, the duly elected Secretary of SunAmerica Equity Portfolios (the "Trust"), a Massachusetts business trust, hereby certify as follows:
1. That the Trust was organized as a Massachusetts business trust under a Declaration of Trust dated June 18, 1986, as amended on January 19, 1990 (hereinafter, as so amended, referred to as the "Declaration of Trust");
2. That the following amendment to the Declaration of Trust has been duly adopted by a majority of the Board of Trustees of the Trust at a special meeting of the Board of Trustees held on March 31, 1993:
RESOLVED: That Section 1.1 of the Declaration of Trust be, and it hereby is amended as follows:
Section 1.1 Name. The name of the Trust shall be SunAmerica Equity Funds.
IN WITNESS WHEREOF, I have hereunto set my hand this 24th day of September, 1993.
By: /s/ Robert M. Zakem
A C K N O W L E D G E M E N T - - - - - - - - - - - - - - -
STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) September 24, 1993
Then personally appeared before me the above named Robert M. Zakem and acknowledged the foregoing instrument to be his free act and deed.
Qualified in New York County My Commission Expires May 7, 1994
Establishment and Designation of Shares
The undersigned, being the Secretary of SunAmerica Equity Funds (hereinafter referred to as the "Trust"), a trust with transferable shares of the type commonly called a Massachusetts business trust, DOES HEREBY CERTIFY that, pursuant to the authority conferred upon the Trustees of the Trust by Sections 1.1, 6.9 and/or 11.3 of the Declaration of Trust, dated June 18, 1986, as amended on January 10, 1990, and September 24, 1993, respectively (hereinafter, as so amended, referred to as the "Declaration of Trust"), and by the affirmative vote of a majority of the Board of Trustees of the Trust at a special meeting duly called and held on March 30, 1994, the Declaration of Trust is amended as follows:
(1) That two series of the Trust's unissued shares of beneficial interest, $.01 par value, are hereby established to have all the rights and preferences described in the Declaration of Trust, to be designated as follows:
SunAmerica Growth and Income Fund
(2) That SunAmerica Emerging Growth Fund shall be renamed "SunAmerica Small Company Growth Fund."
(3) That SunAmerica Growth Fund shall be renamed "SunAmerica Mid-Cap Growth Fund."
(4) That SunAmerica Value Fund shall be renamed "SunAmerica Blue Chip Growth Fund."
The SunAmerica Global Balanced Fund, SunAmerica Growth and Income Fund, SunAmerica Small Company Growth Fund, SunAmerica Mid-Cap Growth Fund and SunAmerica Blue Chip Growth Fund are hereinafter referred to individually as a "Fund" and collectively as the "Funds."
(5) That the shares of beneficial interest of the Trust, $.01 par value, of each Fund are hereby further classified as three classes of shares, which are designated Class A, Class B and Class C shares.
(5) That the Class A, Class B and Class C shares of each particular Fund shall represent identical interests in the Trust and have identical voting (except with respect to those matters affecting a particular class of shares), other rights, as set forth in the Declaration of Trust; provided, however, that notwithstanding anything in the Declaration of Trust to the contrary:
(a) the Class A, Class B and Class C shares may be issued and sold subject to such different front-end sales loads, contingent deferred sales charges, or front-end sales loads and contingent deferred sales charges as the Board of Trustees shall from time to time determine;
(b) expenses related solely to a particular class (including, without limitation, distribution expenses under a Rule 12b-1 plan and administrative expenses under an administration or service agreement, plan or other arrangement, however designated) shall be borne by that class and shall be appropriately reflected (in the manner determined by the Board of Trustees) in the net asset value of, or the dividends and distributions on, the shares of
(c) except as otherwise provided, on the first business day of the month following the seventh anniversary of the issuance of Class B shares to a holder thereof, such Class B shares (as well as a pro rata portion of any Class B shares purchased through the reinvestment of dividends and other distributions paid in respect of all Class B shares held by such holder) shall automatically convert to Class A shares of the same Fund on the basis of the respective current net asset values per share of the Class B shares and the Class A shares of that Fund on the conversion date; provided, however, that any conversion of Class B shares shall be subject to the continuing availability of an opinion of counsel to the effect that (i) the assessment of higher distribution fees or transfer agency costs with respect to Class B shares does not result in the Trust's dividends or distributions constituting "preferred dividends" under the Internal Revenue Code of 1986, as amended, and (ii) such conversion does not constitute a taxable event under federal income tax law, and the Board of Trustees, in its sole discretion, may suspend the conversion of Class B shares if such opinion is no longer available.
The actions contained herein shall be effective as of June 1, 1994.
By: /s/ Robert M. Zakem
A C K N O W L E D G E M E N T
STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) May 18, 1994
Then personally appeared before me the above named Robert M. Zakem and acknowledged the foregoing instrument to be his free act and deed.
Establishment and Designation of Shares
The undersigned, being the Secretary of SunAmerica Equity Funds (hereinafter referred to as the "Trust"), a trust with transferable shares of the type commonly called a Massachusetts business trust, DOES HEREBY CERTIFY that, pursuant to the authority conferred upon the Trustees of the Trust by Sections 1.1, 6.9 and/or 11.3 of the Declaration of Trust, dated June 18, 1986, as amended on January 10, 1990 and September 24, 1993, respectively (hereinafter, as so amended, referred to as the "Declaration of Trust"), and by the affirmative vote of a majority of the Board of Trustees of the Trust at a special meeting duly called and held on March 31, 1993, the Declaration of Trust is amended as follows:
(1) That two series of the Trust's unissued shares of beneficial interest, $.01 par value, are hereby established to have all the rights and preferences described in the Declaration of Trust, to be designated as follows:
(2) That SunAmerica Aggressive Growth Portfolio shall be renamed "SunAmercia Emerging Growth Fund".
(3) That SunAmerica Growth Portfolio shall be renamed "SunAmerica Growth Fund".
The SunAmerica Balanced Assets Fund, SunAmerica Value Fund, SunAmerica Emerging Growth Fund and SunAmerica Growth Fund are hereinafter referred to individually as a "Fund" and collectively as the "Funds".
(4) That the shares of beneficial interest of the Trust, $.01 par value, of each Fund are hereby further classified as three classes of shares, which are designated Class A, Class B and Class C shares.
(5) That the Class A, Class B and Class C shares of each particular Fund shall represent identical interests in the Trust and have identical voting (except with respect to those matters affecting a particular class of shares), dividend, liquidation and other rights, as set forth in the Declaration of Trust; provided, however, that notwithstanding anything in the Declaration of Trust to the contrary:
(a) the Class A, Class B and Class C shares may be issued and sold subject to such different front-end sales loads, contingent deferred sales charges, or front-end sales loads and contingent deferred sales charges as the Board of Trustees shall from time to time determine;
(b) expenses related solely to a particular class (including, without limitation, distribution expenses under a Rule 12b-1 plan and administrative expenses under an administration or service agreement, plan or other arrangement, however designated) shall be borne by that class and shall be appropriately reflected (in the manner determined by the Board of Trustees) in the net asset value of, or the dividends and distributions on, the shares of
(c) except as otherwise provided, on the first business day of the month following the seventh anniversary of the issuance of Class B shares to a holder thereof, such Class B shares (as well as a pro rata portion of any Class B shares purchased through the reinvestment of dividends and other distributions paid in respect of all Class B shares held by such holder) shall automatically convert to Class A shares of the same Fund on the basis of the respective current net asset values per share of the Class B shares and the Class A shares of that Fund on the conversion date; provided, however, that any conversion of Class B shares shall be subject to the continuing availability of an opinion of counsel to the effect that (i) the assessment of higher distribution fees or transfer agency costs with respect to Class B shares does not result in the Trust's dividends or distributions constituting "preferred dividends" under the Internal Revenue Code of 1986, as amended, and (ii) such conversion does not constitute a taxable event under federal income tax law, and the Board of Trustees, in its sole discretion, may suspend the conversion of Class B shares if such opinion is no longer available.
The actions contained herein shall be effective as of September 24, 1993.
By: /s/ Robert M. Zakem
STATE OF NEW YORK } } ss: COUNTY OF NEW YORK } September 24, 1993
Then personally appeared before me the above named Robert M. Zakem and acknowledged the foregoing instrument to be his free act and deed. | 485BPOS | EX-99.B1 | 1996-01-12T00:00:00 | 1996-01-12T16:13:13 |
0000912057-96-000462 | 0000912057-96-000462_0001.txt | TENTATIVE RESOLUTION OF ISSUE AFFECTING BAXTER'S TENDER OFFER FOR PSICOR
DEERFIELD, Ill. and SAN DIEGO, Ca., January 12, 1996 -- Baxter Healthcare Corporation ("Baxter") and PSICOR, Inc. ("PSICOR") jointly announced today that a tentative resolution has been reached regarding certain aspects of the case captioned REISS, ET AL. V. PSICOR, INC. AND PSICOR OFFICE LABORATORIES, INC. in the Superior Court of New Jersey Law Division, Union County (the "Reiss Action"). A subsidiary of Baxter has commenced a tender offer (the "Offer") to purchase all of the outstanding shares of common stock of PSICOR at $17.50 net cash per share.
The plaintiffs in the Reiss Action had sought, among other things, to enjoin any sale of PSICOR Office Laboratories, Inc. ("POL"), which is a subsidiary of PSICOR. The sale of POL (or an agreement providing for the closing of such a sale promptly following the consummation of the Offer) is a condition of the Offer. On January 10, 1996, the parties in the Reiss Action read into the court record their agreement that defendants would post a bond of $1.1 million and plaintiffs would not seek to enjoin the sale of POL, among other things. The court directed the parties to prepare a stipulation and order concerning this matter.
The Offer is scheduled to expire on Thursday, January 25, 1996 at 12:00 midnight New York City time. The Offer remains subject to various conditions, including, among other things, the valid tender and non-withdrawal at the expiration of the Offer of at least 80% of the outstanding common stock of PSICOR on a fully diluted basis.
PSICOR, founded in 1968, is the nation's leading provider of cardiovascular technology and services and the placement and support of diagnostic clinical laboratories to physicians. The company supplies over 400 hospitals and 200 physician offices with advanced life-sustaining equipment, skilled technicians, disposable supplies and expert resource management on a cost-effective basis.
Baxter is the principal operating subsidiary of Baxter International Inc. Through its subsidiaries, Baxter International Inc. is the leading manufacturer and marketer of health-care products and services to health-care providers in nearly 100 countries. The company concentrates research and development programs in cardiovascular medicine, biotechnology, renal therapy and related medical fields. | SC 14D9/A | EX-99.9 | 1996-01-12T00:00:00 | 1996-01-12T17:24:46 |
0000950124-96-000226 | 0000950124-96-000226_0000.txt | 8% TRUST ORIGINATED PREFERRED SECURITIESSM ("TOPRSSM") (LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY) GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
The 8% Trust Originated Preferred Securities (the "Preferred Securities") offered hereby represent preferred undivided beneficial interests in the assets of Illinois Power Financing I, a statutory business trust formed under the laws of the State of Delaware ("Illinois Power Financing I" or the "Trust"). Illinois Power Company, an Illinois corporation ("Illinois Power"), will directly or indirectly own all the common securities (the "Common Securities" and, together with the Preferred Securities, the "Trust Securities") representing undivided beneficial interests in the assets of Illinois Power Financing I. Illinois Power Financing I exists for the sole purpose of issuing the Preferred Securities and Common Securities and investing the proceeds thereof in an equivalent amount of
SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES, INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH PAYMENTS OF DISTRIBUTIONS ON THE PREFERRED SECURITIES MAY BE DEFERRED AND THE RELATED UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL.
Application has been made to list the Preferred Securities on the New York Stock Exchange. If so approved, trading of the Preferred Securities on the New York Stock Exchange is expected to commence within a 30-day period after the date of this Prospectus. See "Underwriting." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(1) Plus accrued distributions, if any, from January 17, 1996. (2) Illinois Power Financing I and Illinois Power have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) In view of the fact that the proceeds of the sale of the Preferred Securities will be invested in the Subordinated Debentures, Illinois Power has agreed to pay to the Underwriters as compensation (the "Underwriters' Compensation") for their arranging the investment therein of such proceeds $.7875 per Preferred Security (or $3,150,000 in the aggregate); provided, that such compensation for sales of 10,000 or more Preferred Securities to a single purchaser will be $.50 per Preferred Security. Therefore, to the extent of such sales, the actual amount of Underwriters' Compensation will be less than the aggregate amount specified in the preceding sentence. See "Underwriting." (4) Expenses of the offering which are payable by Illinois Power are estimated to be $400,000.
The Preferred Securities offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the Preferred Securities will be made only in book-entry form through the facilities of The Depository Trust Company, on or about January 17, 1996. MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
The date of this Prospectus is January 11, 1996.
SM "Trust Originated Preferred Securities" and "TOPrS" are service marks of Merrill Lynch & Co., Inc.
Junior Subordinated Deferrable Interest Debentures due 2045 (the "Subordinated Debentures") of Illinois Power. Upon an event of a default under the Declaration (as defined herein), the holders of Preferred Securities will have a preference over the holders of the Common Securities with respect to payments in respect of distributions and payments upon liquidation, redemption and otherwise.
Holders of the Preferred Securities are entitled to receive cumulative cash distributions at an annual rate of 8% of the liquidation amount of $25 per Preferred Security, accruing from the date of original issuance and payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year, commencing March 31, 1996 ("distributions"). The payment of distributions out of moneys held by Illinois Power Financing I and payments on termination of Illinois Power Financing I or the redemption of Preferred Securities, as set forth below, are guaranteed by Illinois Power (the "Guarantee") to the extent Illinois Power Financing I has funds available therefor as described under "Description of the Preferred Securities Guarantee." The obligations of Illinois Power under the Guarantee are subordinate and junior in right of payment to all other liabilities of Illinois Power and pari passu with the most senior preferred stock issued, from time to time, if any, by Illinois Power. The obligations of Illinois Power under the Subordinated Debentures are subordinate and junior in right of payment to all present and future Senior Indebtedness (as defined herein) of Illinois Power, which aggregated approximately $2.2 billion at September 30, 1995, and rank pari passu with Illinois Power's general unsecured creditors other than holders of Senior Indebtedness.
The distribution rate and the distribution payment date and other payment dates for the Preferred Securities will correspond to the interest rate and interest payment date and other payment dates on the Subordinated Debentures, which will be the sole assets of Illinois Power Financing I. As a result, if principal or interest is not paid on the Subordinated Debentures, no amounts will be paid on the Preferred Securities. If Illinois Power does not make principal or interest payments on the Subordinated Debentures, Illinois Power Financing I will not have sufficient funds to make distributions on the Preferred Securities, in which event, the Guarantee will not apply to such distributions until Illinois Power Financing I has sufficient funds available therefor.
Illinois Power has the right to defer payments of interest on the Subordinated Debentures by extending the interest payment period on the Subordinated Debentures at any time for up to 20 consecutive quarters (each, an "Extension Period"). If interest payments are so deferred, distributions on the Preferred Securities will also be deferred. During such Extension Period, distributions will continue to accrue with interest thereon (to the extent permitted by applicable law) at an annual rate of 8% per annum compounded quarterly, and during any Extension Period, holders of Preferred Securities will be required to include deferred interest income in their gross income for United States federal income tax purposes in advance of receipt of the cash distributions with respect to such deferred interest payments. There could be multiple Extension Periods of varying lengths throughout the term of the Subordinated Debentures. See "Description of the Subordinated Debentures -- Option to Extend Interest Payment Period." See "Risk Factors -- Option to Extend Interest Payment Period" and "United States Federal Income Taxation -- Original Issue Discount." In the event of any such deferral, the holders of the Preferred Securities do not have the right to appoint a special representative or trustee or otherwise act to protect their interests.
The Subordinated Debentures are redeemable by Illinois Power, in whole or in part, from time to time, on or after January 31, 2001, or at any time in certain circumstances upon the occurrence of a Tax Event (as defined herein). If Illinois Power redeems Subordinated Debentures, Illinois Power Financing I must redeem Trust Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Subordinated Debentures so redeemed at $25 per Preferred Security plus accrued and unpaid distributions thereon (the "Redemption Price") to the date fixed for redemption. See "Description of the Preferred Securities -- Mandatory Redemption." The Preferred Securities will be redeemed upon maturity of the Subordinated Debentures. The Subordinated Debentures mature on January 31, 2045. In addition, upon the occurrence of a Special Event (as defined herein), unless the Subordinated Debentures are redeemed in the limited circumstances described herein, Illinois Power Financing I shall be terminated, with the result that the Subordinated Debentures will be distributed to the holders of the Preferred Securities, on a pro rata basis, in lieu of any cash distribution. See "Description of the Preferred Securities -- Special Event Redemption or Distribution." In the case of the occurrence of a Special Event that is a Tax Event, Illinois Power will have the right in certain circumstances to redeem the Subordinated Debentures, which would result in the redemption by Illinois Power Financing I of Trust Securities in the same amount on a pro rata basis. If the Subordinated Debentures are distributed to the holders of the Preferred Securities, Illinois Power will use its best efforts to have the Subordinated Debentures listed on the New York Stock Exchange or on such other exchange as the Preferred Securities are then listed. See "Description of the Preferred Securities -- Special Event Redemption or Distribution" and "Description of the Subordinated Debentures."
In the event of the involuntary or voluntary dissolution, winding up or termination of Illinois Power Financing I, the holders of the Preferred Securities will be entitled to receive for each Preferred Security a liquidation amount of $25 plus accrued and unpaid distributions thereon (including interest thereon) to the date of payment, unless, in connection with such dissolution, winding up or termination, the Subordinated Debentures are distributed to the holders of the Preferred Securities. See "Description of the Preferred Securities -- Liquidation Distribution Upon Termination."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Illinois Power is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, information statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, information statements and other information filed by Illinois Power with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661 and at the 13th Floor, Seven World Trade Center, New York, New York 10048. Copies of such material may be obtained from the public reference section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. Such reports, information statements and other information concerning Illinois Power may also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005 and the Chicago Stock Exchange, 440 South LaSalle Street, Chicago, Illinois 60605, on which exchanges certain of Illinois Power's securities are listed. In addition, such reports, information statements and other information concerning Illinois Power can be inspected at the principal office of Illinois Power, 500 South 27th Street, Decatur, Illinois 62525.
This Prospectus does not contain all the information set forth in the Registration Statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement"), which Illinois Power and Illinois Power Financing I have filed with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). Statements contained or incorporated by reference herein concerning the provisions of documents are necessarily summaries of such documents, and each statement is qualified in its entirety by reference to the Registration Statement.
No separate financial statements of Illinois Power Financing I have been included herein. Illinois Power and Illinois Power Financing I do not consider that such financial statements would be material to holders of Preferred Securities because Illinois Power Financing I is a newly formed special purpose entity, has no operating history and no independent operations and is not engaged in, and does not propose to engage in, any activity other than as set forth below. See "Illinois Power Financing I."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by Illinois Power with the Commission pursuant to the Exchange Act are incorporated herein by reference:
1. Illinois Power's Annual Report on Form 10-K for the year ended
2. Illinois Power's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995; and
3. Illinois Power's Current Report on Form 8-K dated August 11, 1995.
All documents subsequently filed by Illinois Power pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering of the Preferred Securities offered hereby, shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus.
ILLINOIS POWER WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS REFERRED TO ABOVE WHICH HAVE BEEN OR MAY BE INCORPORATED IN THIS PROSPECTUS BY REFERENCE, OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THIS PROSPECTUS INCORPORATES. REQUEST FOR SUCH COPIES SHOULD BE DIRECTED TO MS. CYNTHIA G. STEWARD, CONTROLLER, ILLINOIS POWER COMPANY, 500 SOUTH 27TH STREET, DECATUR, ILLINOIS 62525, TELEPHONE NUMBER (217) 424-6600.
The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus.
Preferred Securities Offered. 4,000,000 8% Trust Originated Preferred Securities evidencing preferred undivided beneficial interests in the assets of Illinois Power Financing I are offered hereby. Holders of the Preferred Securities are entitled to receive cumulative cash distributions at an annual rate of 8% of the liquidation amount of $25 per Preferred Security, accruing from the date of original issuance and payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 1996. The distribution rate and the distribution and other payment dates for the Preferred Securities will correspond to the interest rate and interest and other payment dates on the Subordinated Debentures, which will be the sole assets of Illinois Power Financing I. As a result, if principal or interest is not paid on the Subordinated Debentures, no amounts will be paid on the Preferred Securities. See "Description of the Preferred Securities."
Subordinated Debentures. Illinois Power Financing I will invest the proceeds from the issuance of the Preferred Securities and Common Securities in an equivalent amount of 8% Subordinated Debentures due January 31, 2045 of Illinois Power. The Subordinated Debentures will be subordinate and junior in right of payment to all Senior Indebtedness of Illinois Power. See "Description of the Subordinated Debentures -- Subordination."
Preferred Securities Guarantee. Payment of distributions out of moneys held by Illinois Power Financing I, and payments on termination of Illinois Power Financing I or the redemption of Preferred Securities are guaranteed by Illinois Power to the extent Illinois Power Financing I has funds available therefor. If Illinois Power does not make principal or interest payments on the Subordinated Debentures, Illinois Power Financing I will not have sufficient funds to make distributions on the Preferred Securities, in which event the Guarantee will not apply to such distributions until Illinois Power Financing I has sufficient funds available therefor. See "Description of the Preferred Securities Guarantee" and "Effect of Obligations Under the Subordinated Debentures and the Guarantee" herein. The obligations of Illinois Power under the Guarantee are subordinate and junior in right of payment to all other liabilities of Illinois Power and will rank pari passu with the most senior preferred stock issued by Illinois Power. See "Risk Factors -- Ranking of Subordinate Obligations Under the Guarantee and Subordinated Debentures" and "Description of the Preferred Securities Guarantee."
Interest Deferral. Illinois Power has the right to defer payments of interest on the Subordinated Debentures by extending the interest payment period on the Subordinated Debentures, at any time, for up to 20 consecutive quarters. If interest payments on the Subordinated Debentures are so deferred, distributions on the Preferred Securities will also be deferred. During any such deferral, distributions will continue to accrue with interest thereon (to the extent permitted by law) as described herein. There could be multiple Extension Periods of varying lengths throughout the term of the Subordinated Debentures. During an Extension Period, holders of Preferred Securities will be required to include deferred interest income in their gross income in advance of receipt of the cash interest payments attributable thereto. See "Description of the Preferred Securities -- Voting Rights," "Description of the Subordinated Debentures -- Option to Extend Interest Payment Period" and "United States Federal Income Taxation -- Original Issue Discount," and "-- Market Discount and Bond Premium."
Redemption. The Subordinated Debentures are redeemable by Illinois Power (in whole or in part) from time to time, on or after January 31, 2001 or at any time in certain circumstances upon the occurrence of a Tax Event. If the Subordinated Debentures are redeemed, Illinois Power Financing I must redeem Trust Securities having an aggregate liquidation amount equal to the aggregate principal amount of Subordinated Debentures so redeemed. The Preferred Securities will be redeemed upon maturity of the Subordinated Debentures. See "Description of the Preferred Securities -- Mandatory Redemption."
Prospective purchasers of Preferred Securities should carefully review the information contained elsewhere in this Prospectus and should particularly consider the following matters.
RANKING OF SUBORDINATE OBLIGATIONS UNDER THE GUARANTEE AND SUBORDINATED
Illinois Power's obligations under the Guarantee are subordinate and junior in right of payment to all liabilities of Illinois Power and pari passu with the most senior preferred stock issued, from time to time, if any, by Illinois Power. The obligations of Illinois Power under the Subordinated Debentures are subordinate and junior in right of payment to all present and future Senior Indebtedness of Illinois Power and pari passu with obligations to or rights of Illinois Power's general unsecured creditors other than holders of Senior Indebtedness. As of September 30, 1995, Senior Indebtedness aggregated approximately $2.2 billion. There are no terms in the Preferred Securities, the Subordinated Debentures or the Guarantee that limit Illinois Power's ability to incur additional indebtedness, including indebtedness that ranks senior to the Subordinated Debentures and the Guarantee. See "Description of Preferred Securities Guarantee -- Status of the Guarantee" and "Description of the Subordinated Debentures -- Subordination" herein.
The Guarantee will be qualified as an indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). Wilmington Trust Company will act as indenture trustee under the Guarantee for the purposes of compliance with the provisions of the Trust Indenture Act (the "Guarantee Trustee"). The Guarantee Trustee will hold the Guarantee for the benefit of the holders of the Preferred Securities.
The Guarantee guarantees to the holders of the Preferred Securities the payment of (i) any accrued and unpaid distributions that are required to be paid on the Preferred Securities, to the extent Illinois Power Financing I has funds available therefor, (ii) the Redemption Price, including all accrued and unpaid distributions with respect to Preferred Securities called for redemption by Illinois Power Financing I, to the extent Illinois Power Financing I has funds available therefor, and (iii) upon a voluntary or involuntary dissolution, winding-up or termination of Illinois Power Financing I (other than in connection with the distribution of Subordinated Debentures to the holders of Preferred Securities or a redemption of all the Preferred Securities), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid distributions on the Preferred Securities to the date of the payment to the extent Illinois Power Financing I has funds available therefor or (b) the amount of assets of Illinois Power Financing I remaining available for distribution to holders of the Preferred Securities upon termination of Illinois Power Financing I. The holders of a majority in liquidation amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under the Guarantee. In addition, any holder of Preferred Securities may institute a legal proceeding directly against Illinois Power to enforce such holder's rights under the Guarantee without first instituting a legal proceeding against Illinois Power Financing I, the Guarantee Trustee or any other person or entity. If Illinois Power were to default on its obligation to pay amounts payable on the Subordinated Debentures, Illinois Power Financing I would lack available funds for the payment of distributions or amounts payable on redemption of the Preferred Securities or otherwise, and, in such event, holders of the Preferred Securities would not be able to rely upon the Guarantee for payment of such amounts. Instead, holders of the Preferred Securities would either (i) rely on the enforcement by the Property Trustee of its rights as registered holder of the Subordinated Debentures against Illinois Power pursuant to the terms of the Subordinated Debentures or (ii) enforce the Property Trustee's rights directly against Illinois Power. See "Description of the Preferred Securities Guarantee" and "Description of the Subordinated Debentures." The Declaration provides that each holder of Preferred Securities, by acceptance thereof, agrees to the provisions of the Guarantee, including the subordination provisions thereof, and the Indenture (as defined herein).
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If (i) Illinois Power Financing I fails to pay distributions in full on the Preferred Securities for six consecutive quarterly distribution periods or (ii) a Declaration Event of Default (as defined herein) occurs and is continuing, then the holders of Preferred Securities would rely on the enforcement by the Property Trustee (as defined herein) of its rights as a holder of the Subordinated Debentures against Illinois Power. In addition, the holders of a majority in liquidation amount of the Preferred Securities will have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Property Trustee or to direct the exercise of any trust or power conferred upon the Property Trustee under the Declaration, including the right to direct the Property Trustee to exercise the remedies available to it as a holder of the Subordinated Debentures. If the Property Trustee fails to enforce its rights under the Subordinated Debentures or the Declaration, any holder of Preferred Securities may institute a legal proceeding directly against Illinois Power to enforce the Property Trustee's rights under the Subordinated Debentures or the Declaration without first instituting a legal proceeding against the Property Trustee or any other person or entity. In addition, if Illinois Power fails to make interest or other payments on the Subordinated Debentures when due, any holder of Preferred Securities may enforce the Property Trustee's rights directly against Illinois Power.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
Illinois Power has the right under the Indenture to defer payments of interest on the Subordinated Debentures by extending the interest payment period at any time, and from time to time, on the Subordinated Debentures. As a consequence of such an extension, quarterly distributions on the Preferred Securities would be deferred (but despite such deferral would continue to accrue with interest thereon compounded quarterly to the extent permitted by applicable law) by Illinois Power Financing I during any such Extension Period. Such right to extend the interest payment period for the Subordinated Debentures is limited to a period not exceeding 20 consecutive quarters. In the event that Illinois Power exercises this right to defer interest payments, then (a) Illinois Power shall not declare or pay dividends on, or make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock, provided, however, Illinois Power may declare and pay a stock dividend where the dividend stock is the same stock as that on which the dividend is being paid, (b) Illinois Power shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities (including guarantees) issued by Illinois Power which rank pari passu with or junior to the Subordinated Debentures, and (c) Illinois Power shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Guarantee). Prior to the termination of any such Extension Period, Illinois Power may further extend the interest payment period; provided, that such Extension Period, together with all such previous and further extensions thereof, may not exceed 20 consecutive quarters. Upon the termination of any Extension Period and the payment of all amounts then due, Illinois Power may commence a new Extension Period, subject to the above requirements. See "Description of the Preferred Securities -- Distributions" and "Description of the Subordinated Debentures -- Option to Extend Interest Payment Period."
Because Illinois Power has the right to extend the interest payment period for the Subordinated Debentures, the Preferred Securities will be treated as having been issued with original issue discount ("OID") for United States federal income tax purposes. Should Illinois Power exercise its right to defer payments of interest by extending the interest payment period, each holder of Preferred Securities will continue to accrue income (as OID) in respect of the deferred interest allocable to its Preferred Securities for United States federal income tax purposes, which will be allocated, but not distributed, to holders of record of Preferred Securities. As a result, each such holder of Preferred Securities will recognize income for United States federal income tax purposes in advance of the receipt of cash, regardless of their method of accounting, and will not receive the cash from Illinois Power Financing I related to such income if such holder disposes of its Preferred Securities prior to the record date for the date on which distributions of such amounts are made. Illinois Power has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the Subordinated Debentures. However, should Illinois Power determine to exercise such right in the future, the market price of the Preferred Securities is likely to be affected. A holder that disposes of its Preferred Securities during an Extension Period, therefore, might not receive the same return on its investment as a holder that continues to hold its Preferred Securities. In addition, as a result of the existence of Illinois Power's right to defer interest payments, the market price of the Preferred Securities (which represent an undivided beneficial interest in the Subordinated Debentures) may be more volatile than other securities on which OID accrues that do not have such rights. See "United States Federal Income Taxation -- Original Issue Discount."
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
Upon the occurrence of a Special Event, Illinois Power Financing I shall be terminated, except in the limited circumstance described below, with the result that, after satisfaction of liabilities to creditors, the Subordinated Debentures would be distributed to the holders of the Trust Securities in connection with the termination of Illinois Power Financing I. In the case of a Special Event that is a Tax Event, in certain circumstances Illinois Power shall have the right to redeem the Subordinated Debentures, in whole or in part, in lieu of a distribution of the Subordinated Debentures by Illinois Power Financing I; in which event Illinois Power Financing I will redeem the Trust Securities on a pro rata basis to the same extent as the Subordinated Debentures are redeemed by Illinois Power. See "Description of the Preferred Securities -- Special Event Redemption or Distribution."
There can be no assurance as to the market prices for the Preferred Securities or the Subordinated Debentures that may be distributed in exchange for Preferred Securities if a termination of Illinois Power Financing I were to occur. Accordingly, the Preferred Securities that an investor may purchase, whether pursuant to the offer made hereby or in the secondary market, or the Subordinated Debentures that a holder of Preferred Securities may receive on termination of Illinois Power Financing I, may trade at a discount to the price that the investor paid to purchase the Preferred Securities offered hereby. Because holders of Preferred Securities may receive Subordinated Debentures upon the occurrence of a Special Event, prospective purchasers of Preferred Securities are also making an investment decision with regard to the Subordinated Debentures and should carefully review all the information regarding the Subordinated Debentures contained herein. See "Description of the Preferred Securities -- Special Event Redemption or Distribution" and "Description of the Subordinated Debentures -- General."
On December 7, 1995, the U.S. Treasury Department proposed a series of tax law changes that would, among other things, prevent companies from deducting interest on debt instruments with a maturity of more than 40 years and on instruments with a maximum term of more than 20 years which are not shown as indebtedness on the consolidated balance sheet of the issuer. Either of these proposals, if enacted, would prevent Illinois Power from deducting interest paid on the Subordinated Debentures. However, on December 19, 1995, the Treasury Department stated that based on input it had received to date, it would recommend to Congress that transitional relief from the proposed changes be granted for financial instruments that are issued pursuant to a registration statement that was filed with the Commission on or before December 7, 1995. Illinois Power cannot predict whether the proposed tax law changes will become law. However, if the proposed tax law changes and the proposed transitional relief are enacted, Illinois Power should be able to deduct interest on the Subordinated Debentures. If legislation is enacted limiting, in whole or in part, the deductibility by Illinois Power of interest on the Subordinated Debentures for United States federal income tax purposes, such enactment would be a Tax Event. Under certain circumstances following a Tax Event, Illinois Power may cause the Subordinated Debentures and the Preferred Securities to be redeemed. See "Description of the Preferred Securities -- Special Event Redemption or Distribution." It is expected that the December 7, 1995 proposed tax law changes, if enacted, would not alter the United States federal income tax consequences of the purchase, ownership and disposition of the Preferred Securities. See "United States Federal Income Taxation."
Holders of Preferred Securities will have limited voting rights and will not be entitled to vote to appoint, remove or replace, or to increase or decrease the number of, Illinois Power Trustees (as defined herein), which voting rights are vested exclusively in the holder of the Common Securities. See "Description of the Preferred Securities -- Voting Rights."
The Preferred Securities may trade at a price that does not fully reflect the value of accrued but unpaid interest with respect to the underlying Subordinated Debentures. A holder who disposes of his Preferred Securities between record dates for payments of distributions thereon will be required to include accrued but unpaid interest on the Subordinated Debentures through the date of disposition in income as ordinary income (i.e., OID), and to add such amount to his adjusted tax basis in his pro rata share of the underlying Subordinated Debentures deemed disposed of. To the extent the selling price is less than the holder's adjusted tax basis (which will include, in the form of OID, all accrued but unpaid interest), a holder will recognize a capital loss. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. See "United States Federal Income Taxation -- Original Issue Discount" and "-- Sales of Preferred Securities."
Illinois Power was incorporated under the laws of Illinois on May 25, 1923. Effective May 27, 1994, Illinois Power became a subsidiary of Illinova Corporation ("Illinova"), an exempt holding company under the Public Utility Holding Company Act of 1935, as amended, pursuant to a merger in which each outstanding share of Illinois Power's Common Stock was converted into one share of common stock of Illinova. Illinois Power is engaged in the generation, transmission, distribution and sale of electric energy and the distribution and sale of natural gas in the State of Illinois. Its service area is a widely diversified industrial and agricultural area comprising approximately 15,000 square miles in northern, central and southern Illinois. Electric service is provided at retail to 310 incorporated municipalities, adjacent suburban and rural areas and numerous unincorporated municipalities having an estimated aggregate population of 1,265,000. Gas service is provided to 257 incorporated municipalities, adjacent suburban areas and numerous unincorporated municipalities having an estimated aggregate population of 920,000. The larger cities served include Decatur, East St. Louis (gas only), Champaign, Danville, Belleville, Granite City, Bloomington (electric only), Galesburg, Urbana and Normal (electric only). The executive offices of Illinois Power are located at 500 South 27th Street, Decatur, Illinois 62525, and Illinois Power's telephone number is (217) 424-6600.
Illinois Power Financing I is a statutory business trust formed under Delaware law pursuant to (i) a declaration of trust, dated as of October 17, 1995, executed by Illinois Power, as sponsor (the "Sponsor"), and the trustees of Illinois Power Financing I (the "Illinois Power Trustees") and (ii) the filing of a certificate of trust with the Secretary of State of the State of Delaware on October 17, 1995. Such declaration will be amended and restated in its entirety (as so amended and restated, the "Declaration") substantially in the form filed as an exhibit to the Registration Statement of which this Prospectus forms a part. The Declaration will be qualified as an indenture under the Trust Indenture Act. Upon issuance of the Preferred Securities, the purchasers thereof will own all of the Preferred Securities. See "Description of the Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust Company." Illinois Power will directly or indirectly acquire Common Securities in an aggregate liquidation amount equal to approximately 3% of the total capital of Illinois Power Financing I. Illinois Power Financing I exists for the exclusive purposes of (i) issuing the Trust Securities representing undivided beneficial interests in the assets of Illinois Power Financing I, (ii) investing the gross proceeds of the Trust Securities in the Subordinated Debentures and (iii) engaging in only those other activities necessary, convenient or incidental thereto. Illinois Power Financing I has a term of approximately 54 years, but may terminate earlier as provided in the Declaration.
Pursuant to the Declaration, the number of Illinois Power Trustees will initially be three. Two of the Illinois Power Trustees (the "Regular Trustees") will be persons who are employees or officers of or who are affiliated with Illinois Power. The third trustee will be a financial institution that maintains its principal place of business in the State of Delaware and is unaffiliated with Illinois Power, which trustee will serve as property trustee under the Declaration and as indenture trustee for the purposes of compliance with the provisions of the Trust Indenture Act (the "Property Trustee"). Initially, Wilmington Trust Company, a Delaware banking corporation, will be the Property Trustee until removed or replaced by the holder of the Common Securities. Wilmington Trust Company will also act as indenture trustee under the Guarantee for the purposes of compliance with the provisions of the Trust Indenture Act (the "Guarantee Trustee"). See "Description of the Preferred Securities Guarantee."
The Property Trustee will hold title to the Subordinated Debentures for the benefit of the holders of the Trust Securities, and the Property Trustee will have the power to exercise all rights, powers and privileges under the Indenture (as defined herein) as the holder of the Subordinated Debentures. In addition, the Property Trustee will maintain exclusive control of a segregated non-interest bearing bank account (the "Property Account") to hold all payments made in respect of the Subordinated Debentures for the benefit of the holders of the Trust Securities. The Property Trustee will make payments of distributions and payments on liquidation, redemption and otherwise to the holders of the Trust Securities out of funds from the Property Account. The Guarantee Trustee will hold the Guarantee for the benefit of the holders of the Preferred Securities. Illinois Power, as the direct or indirect holder of all the Common Securities, will have the right to appoint, remove or replace any Illinois Power Trustee and to increase or decrease the number of Illinois Power Trustees; provided, that (i) the number of Illinois Power Trustees shall be at least three, and (ii) at least two shall be Regular Trustees. Illinois Power will pay all fees and expenses related to Illinois Power Financing I and the offering of the Trust Securities. See "Description of the Subordinated Debentures -- Miscellaneous."
The rights of the holders of the Preferred Securities, including rights to information and voting rights, are set forth in the Declaration, the Delaware Business Trust Act (the "Trust Act") and the Trust Indenture Act. See "Description of the Preferred Securities."
SUMMARY FINANCIAL INFORMATION OF ILLINOIS POWER (THOUSANDS EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following information is qualified in its entirety by the information appearing elsewhere in this Prospectus and by the information and financial statements incorporated in this Prospectus by reference.
(a) Subsequent to Illinois Power's merger with Illinova, net assets of Illinova Generating Company (formerly IP Group, Inc.) were transferred in the form of a dividend from the Company to Illinova. The income statement data contained herein has been restated to reflect the financial results of Illinois Power's current operations.
(b) In the opinion of Illinois Power, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the unaudited twelve-month period ended September 30, 1995, have been made.
(c) Earnings used in the calculation of the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividend requirements include the allowance for funds used during construction and the deferred financing costs associated with Illinois Power's Clinton Power Station and are before deduction of income taxes and fixed charges. Fixed charges include interest on long-term debt, related amortization of debt discount, premium, and expense, other interest and that portion of rent expense which is estimated to be representative of the interest component. Preferred stock dividend requirements have been increased to an amount representing the pre-tax earnings required to cover such dividend requirements.
(d) The ratios of earnings to fixed charges for the years ended December 31, 1993 and 1990 of 0.80 and 0.70, respectively, indicate that earnings were inadequate to cover fixed charges. The dollar amounts of the coverage deficiency for the years ended 1993 and 1990 were approximately $37 million and $68 million, respectively. Excluding the loss on disallowed plant costs of $200 million, net of income taxes, recorded in the third quarter of 1993, the ratio of earnings to fixed charges would have been 2.25 for the year ended 1993. Excluding the loss on disallowed plant costs of $137 million, net of income taxes, recorded in the fourth quarter of 1990, the ratio of earnings to fixed charges would have been 1.41 for the year ended 1990.
(e) The ratios of earnings to combined fixed charges and preferred stock dividend requirements for the years ended December 31, 1993 and 1990 of 0.70 and 0.60, respectively, indicate that earnings were inadequate to cover combined fixed charges and preferred stock dividend requirements. The dollar amounts of the coverage deficiency for the years ended 1993 and 1990 were approximately $63 million and $105 million, respectively. Excluding the loss on disallowed plant costs of $200 million, net of income taxes, recorded in the third quarter of 1993, the ratio of earnings to combined fixed charges and preferred stock dividend requirements would have been 1.83 for the year ended 1993. Excluding the loss on disallowed plant costs of $137 million, net of income taxes, recorded in the fourth quarter of 1990, the ratio of earnings to combined fixed charges and preferred stock dividend requirements would have been 1.09 for the year ended 1990.
(f) Includes $6 million excess of carrying amount over consideration paid for redeemed preferred stock.
(g) The sole asset of Illinois Power Capital, L.P. is the $100 million principal amount of 9.45% Subordinated Deferrable Interest Debentures due 2043 of Illinois Power.
(h) As described in this Prospectus, the sole asset of Illinois Power Financing I will be the $103.1 million principal amount of 8% Junior Subordinated Deferrable Interest Debentures due 2045 of Illinois Power.
The financial statements of Illinois Power Financing I will be reflected in Illinois Power's consolidated financial statements with the Preferred Securities shown as Company-obligated mandatorily redeemable preferred securities of Illinois Power Financing I holding subordinated debentures of Illinois Power.
All of the proceeds from the sale of the Preferred Securities will be invested by Illinois Power Financing I in Subordinated Debentures of Illinois Power issued pursuant to the Indenture therefor described herein and ultimately will be used by Illinois Power to repay short-term indebtedness which matures at varying dates on or before March 1, 1996 and bears interest as of December 27, 1995 at a weighted average interest rate of approximately 6% per annum. The indebtedness was incurred to redeem all outstanding shares of the Company's 8.24% Serial Preferred Stock, $50 par value, at a redemption price of $51.90 per share, all outstanding shares of its 8.00% Serial Preferred Stock, $50 par value, at a redemption price of $52.29 per share, and all outstanding shares of its 7.56% Serial Preferred Stock, $50 par value, at a redemption price of $51.685 per share, together in each case, with any accrued and unpaid dividends to the date of redemption.
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the Declaration. The Declaration will be qualified as an indenture under the Trust Indenture Act. The Property Trustee, Wilmington Trust Company, will act as indenture trustee under the Declaration for purposes of compliance with the provisions of the Trust Indenture Act. The terms of the Preferred Securities will include those stated in the Declaration and those made part of the Declaration by the Trust Indenture Act. The following summary of the principal terms and provisions of the Preferred Securities does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Declaration (a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part) and the Trust Indenture Act.
The Declaration authorizes the Regular Trustees to issue on behalf of Illinois Power Financing I the Trust Securities, which represent undivided beneficial interests in the assets of Illinois Power Financing I. All of the Common Securities will be owned, directly or indirectly, by Illinois Power. The Common Securities rank pari passu, and payments will be made thereon on a pro rata basis, with the Preferred Securities, except that upon the occurrence of a Declaration Event of Default, the rights of the holders of the Common Securities to receive payment of periodic distributions and payments upon liquidation, redemption and otherwise will be subordinated to the rights of the holders of the Preferred Securities. The Declaration does not permit the issuance by Illinois Power Financing I of any securities other than the Trust Securities or the incurrence of any indebtedness by Illinois Power Financing I. Pursuant to the Declaration, the Property Trustee will own the Subordinated Debentures purchased by Illinois Power Financing I for the benefit of the holders of the Trust Securities. The payment of distributions out of money held by Illinois Power Financing I, and payments upon redemption of the Trust Securities or termination of Illinois Power Financing I, are guaranteed by Illinois Power to the extent described under "Description of the Preferred Securities Guarantee." The Guarantee will be held by Wilmington Trust Company, the Guarantee Trustee, for the benefit of the holders of the Preferred Securities. The Guarantee does not cover payment of distributions when Illinois Power Financing I does not have sufficient available funds to pay such distributions. In such event, a remedy of a holder of Preferred Securities is to vote to direct the Property Trustee to enforce the Property Trustee's rights under the Subordinated Debentures. See "Description of the Preferred Securities -- Voting Rights."
Distributions on the Preferred Securities will be fixed at a rate per annum of 8% of the stated liquidation amount of $25 per Preferred Security. Distributions in arrears for more than one quarter will bear interest thereon at the rate per annum of 8% thereof compounded quarterly. The term "distribution" as used herein includes any such interest payable unless otherwise stated. The amount of distributions payable for any period will be computed on the basis of a 360-day year of twelve 30-day months.
Distributions on the Preferred Securities will be cumulative, will accrue from January 17, 1996, and will be payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year, commencing March 31, 1996, when, as and if funds are available and determined to be so payable by the Property Trustee, except as otherwise described below.
Illinois Power has the right under the Indenture to defer payments of interest on the Subordinated Debentures by extending the interest payment period from time to time on the Subordinated Debentures, which, if exercised, would defer quarterly distributions on the Preferred Securities (though such distributions would continue to accrue with interest since interest would continue to accrue on the Subordinated Debentures) during any such Extension Period. Such right to extend the interest payment period for the Subordinated Debentures is limited to a period not exceeding 20 consecutive quarters provided that no Extension Period shall last beyond the date of maturity of the Subordinated Debentures. In the event that Illinois Power exercises this right, then (a) Illinois Power shall not declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock, and (b) Illinois Power shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by Illinois Power that rank pari passu with or junior to such Subordinated Debentures. Prior to the termination of any such Extension Period, Illinois Power may further extend the interest payment period; provided, that such Extension Period, together with all such previous and further extensions thereof, may not exceed 20 consecutive quarters or extend beyond the maturity date of the Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, Illinois Power may select a new Extension Period, subject to the above requirements. See "Description of the Subordinated Debentures -- Interest" and "-- Option to Extend Interest Payment Period." If distributions are deferred, the deferred distributions and accrued interest thereon shall be paid to holders of record of the Preferred Securities as they appear on the books and records of Illinois Power Financing I on the record date next following the termination of such deferral period.
Distributions on the Preferred Securities must be paid on the dates payable to the extent that Illinois Power Financing I has funds available for the payment of such distributions in the Property Account. Illinois Power Financing I's funds available for distribution to the holders of the Preferred Securities will be limited to payments received from Illinois Power on the Subordinated Debentures. See "Description of the Subordinated Debentures." The payment of distributions out of moneys held by Illinois Power Financing I is guaranteed by Illinois Power to the extent set forth under "Description of the Preferred Securities Guarantee."
Distributions on the Preferred Securities will be payable to the holders thereof as they appear on the books and records of Illinois Power Financing I on the relevant record dates, which, as long as the Preferred Securities remain in book-entry only form, will be one Business Day (as defined herein) prior to the relevant payment dates. Such distributions will be paid through the Property Trustee who will hold amounts received in respect of the Subordinated Debentures in the Property Account for the benefit of the holders of the Trust Securities. Subject to any applicable laws and regulations and the provisions of the Declaration, each such payment will be made as described under "Book-Entry Only Issuance -- The Depository Trust Company" below. In the event that the Preferred Securities do not continue to remain in book-entry only form, the relevant record dates for the Preferred Securities shall conform to the rules of any securities exchange on which the securities are listed and, if none, shall be selected by the Regular Trustees, which dates shall be at least one Business Day but less than 60 Business Days prior to the relevant payment dates. In the event that any date on which distributions are to be made on the Preferred Securities is not a Business Day, then payment of the distributions payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made
Business Day, in each case with the same force and effect as if made on such date. A "Business Day" shall mean any day other than Saturday, Sunday or any other day on which banking institutions in New York City (in the State of New York) are permitted or required by any applicable law to close.
The Subordinated Debentures will mature on January 31, 2045, and may be redeemed, in whole or in part, at any time on or after January 31, 2001, or at any time in certain circumstances upon the occurrence of a Tax Event (as defined herein). Upon the repayment of the Subordinated Debentures, whether at maturity or upon redemption, the proceeds from such repayment or payment shall simultaneously be applied to redeem Trust Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Subordinated Debentures so repaid or redeemed at the Redemption Price; provided, that holders of Trust Securities shall be given not less than 30 nor more than 60 days notice of such redemption, except in the case of payments upon maturity. See "Description of the Subordinated Debentures -- Optional Redemption." In the event that fewer than all of the outstanding Preferred Securities are to be redeemed, the Preferred Securities will be redeemed pro rata as described under "Book -- Entry Only Issuance -- The Depository Trust Company" below.
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
"Tax Event" means that the Regular Trustees shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters (a "Dissolution Tax Opinion") to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein or (b) any amendment to or change in an interpretation or application of such laws or regulations by any legislative body, court, governmental agency or regulatory authority, in each case on or after the date of this Prospectus, there is more than an insubstantial risk that (i) Illinois Power Financing I is or within 90 days will be subject to United States federal income tax with respect to income accrued or received on the Subordinated Debentures, (ii) interest payable to Illinois Power Financing I on the Subordinated Debentures is or within 90 days will not be deductible by Illinois Power for United States federal income tax purposes or (iii) Illinois Power Financing I is or within 90 days will be subject to more than a de minimis amount of other taxes, duties or other governmental charges, which change or amendment becomes effective on or after the date of this Prospectus.
"Investment Company Event" means that the Regular Trustees shall have received an opinion from independent counsel experienced in practice under the 1940 Act (as defined herein) to the effect that, as a result of the occurrence of a change in law or regulation or a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), there is more than an insubstantial risk that Illinois Power Financing I is or will be considered an "investment company" which is required to be registered under the Investment Company Act of 1940, as amended (the "1940 Act"), which Change in 1940 Act Law becomes effective on or after the date of this Prospectus.
If, at any time, a Tax Event or an Investment Company Event (each, as defined above, a "Special Event"), shall occur and be continuing, Illinois Power Financing I shall, except in the limited circumstances described below, be terminated with the result that, after satisfaction of liabilities to creditors, the Subordinated Debentures with an aggregate principal amount equal to the aggregate stated liquidation amount of, with an interest rate identical to the distribution rate of, and accrued and unpaid interest equal to accrued and unpaid distributions on, the Trust Securities, would be distributed to the holders of the Trust Securities in liquidation of such holders' interests in Illinois Power Financing I on a pro rata basis within 90 days following the occurrence of such Special Event; provided, however, that in the case of the occurrence of a Tax Event, that such termination and distribution shall be conditioned on (i) the Regular Trustees' receipt of an opinion of nationally recognized independent tax counsel experienced in such matters (a "No Recognition Opinion"), which opinion may rely on published revenue rulings of the Internal Revenue Service, to the effect that the holders of the Trust Securities will not recognize any gain or loss for United States federal income tax purposes as a result of such termination of Illinois Power Financing I and such distribution of Subordinated Debentures and (ii) Illinois Power being unable to avoid such Tax Event within such 90-day period by taking some ministerial action or pursuing some other reasonable measure that will have no adverse effect on Illinois Power Financing I, Illinois Power or the holders of the Trust Securities. Furthermore, if after receipt of a Dissolution Tax Opinion by the Regular Trustees (i) Illinois Power has received an opinion (a "Redemption Tax Opinion") of nationally recognized independent tax counsel experienced in such matters that, as a result of a Tax Event, there is more than an insubstantial risk that Illinois Power would be precluded from deducting the interest on the Subordinated Debentures for United States federal income tax purposes, even after the Subordinated Debentures were distributed to the holders of Trust Securities in liquidation of such holders' interests in Illinois Power Financing I as described above, or (ii) the Regular Trustees shall have been informed by such tax counsel that it cannot deliver a No Recognition Opinion to Illinois Power Financing I, Illinois Power shall have the right, upon not less than 30 nor more than 60 days notice, to redeem the Subordinated Debentures, in whole or in part, for cash within 90 days following the occurrence of such Tax Event, and, following such redemption, Trust Securities with an aggregate liquidation amount equal to the aggregate principal amount of the Subordinated Debentures so redeemed shall be redeemed by Illinois Power Financing I at the Redemption Price on a pro rata basis; provided, however, that if at the time there is available to Illinois Power or Illinois Power Financing I the opportunity to eliminate, within such 90-day period, the Tax Event by taking some ministerial action, such as filing a form or making an election or pursuing some other similar reasonable measure that has no adverse effect on Illinois Power Financing I, Illinois Power or the holders of the Trust Securities, Illinois Power or Illinois Power Financing I will pursue such measure in lieu of redemption.
If the Subordinated Debentures are distributed to the holders of the Preferred Securities, Illinois Power will use its best efforts to cause the Subordinated Debentures to be listed on the New York Stock Exchange or on such other exchange as the Preferred Securities are then listed.
After the date for any distribution of Subordinated Debentures upon termination of Illinois Power Financing I, (i) the Preferred Securities will no longer be deemed to be outstanding, (ii) the Depositary (as defined herein) or its nominee, as the record holder of the Preferred Securities, will receive a registered global certificate or certificates representing the Subordinated Debentures to be delivered upon such distribution, and (iii) any certificates representing Preferred Securities not held by the Depositary or its nominee will be deemed to represent beneficial interests in the Subordinated Debentures having an aggregate principal amount equal to the aggregate stated liquidation amount of, with an interest rate identical to the distribution rate of, and accrued and unpaid interest equal to accrued and unpaid distributions on such Preferred Securities until such certificates are presented to Illinois Power or its agent for transfer or reissuance.
There can be no assurance as to the market prices for either the Preferred Securities or the Subordinated Debentures that may be distributed in exchange for the Preferred Securities if a termination of Illinois Power Financing I were to occur. Accordingly, the Preferred Securities that an investor may purchase, whether pursuant to the offer made hereby or in the secondary market, or the Subordinated Debentures that an investor may receive if a termination of Illinois Power Financing I were to occur, may trade at a discount to the price that the investor paid to purchase the Preferred Securities offered hereby.
Illinois Power Financing I may not redeem fewer than all of the outstanding Preferred Securities unless all accrued and unpaid distributions have been paid on all Preferred Securities for all quarterly distribution periods terminating on or prior to the date of redemption.
If Illinois Power Financing I gives a notice of redemption in respect of Preferred Securities (which notice will be irrevocable), then, by 12:00 noon, New York City time, on the redemption date, provided that Illinois Power has paid to the Property Trustee a sufficient amount of cash in connection with the related redemption or maturity of the Subordinated Debentures, Illinois Power Financing I will irrevocably deposit with the Depositary funds sufficient to pay the applicable Redemption Price and will give the Depositary irrevocable instructions and authority to pay the Redemption Price to the holders of the Preferred Securities. See "Book-Entry Only Issuance -- The Depository Trust Company." If notice of redemption shall have been given and funds deposited as required, then, immediately prior to the close of business on the date of such distributions will cease to accrue and all rights of holders of such Preferred Securities so called for redemption will cease, except the right of the holders of such Preferred Securities to receive the Redemption Price but without interest on such Redemption Price. In the event that any date fixed for redemption of Preferred Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (without any interest or other payment in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day. In the event that payment of the Redemption Price in respect of Preferred Securities is improperly withheld or refused and not paid either by Illinois Power Financing I, or by Illinois Power pursuant to the Guarantee, distributions on such Preferred Securities will continue to accrue at the then applicable rate from the original redemption date to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price.
In the event that fewer than all of the outstanding Preferred Securities are to be redeemed, the Preferred Securities will be redeemed pro rata as described below under "Book-Entry Only Issuance -- The Depository Trust Company."
Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws), Illinois Power or its affiliates may at any time, and from time to time, purchase outstanding Preferred Securities by tender, in the open market or by private agreement.
In the event of any voluntary or involuntary dissolution, winding-up or termination of Illinois Power Financing I (each, a "Liquidation"), then holders of the Preferred Securities will be entitled to receive out of the assets of Illinois Power Financing I, after satisfaction of liabilities to creditors, distributions in an amount equal to the aggregate of the stated liquidation amount of $25 per Preferred Security plus accrued and unpaid distributions thereon to the date of payment (the "Liquidation Distribution"), unless, in connection with such Liquidation, Subordinated Debentures in an aggregate principal amount equal to the aggregate stated liquidation amount of, with an interest rate identical to the distribution rate of, and accrued and unpaid interest equal to accrued and unpaid distributions on, the Preferred Securities have been distributed on a pro rata basis to the holders of the Preferred Securities in exchange for such Preferred Securities.
If, upon any such Liquidation, the Liquidation Distribution can be paid only in part because Illinois Power Financing I has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by Illinois Power Financing I on the Preferred Securities shall be paid on a pro rata basis. The holders of the Common Securities will be entitled to receive distributions upon any such Liquidation pro rata with the holders of the Preferred Securities, except that if a Declaration Event of Default has occurred and is continuing, the Preferred Securities shall have a preference over the Common Securities with regard to such distributions.
Pursuant to the Declaration, Illinois Power Financing I shall terminate (i) on December 31, 2050, the expiration of the term of Illinois Power Financing I, (ii) upon the bankruptcy of Illinois Power or the holder of the Common Securities, (iii) upon the filing of a certificate of dissolution or its equivalent with respect to the holder of the Common Securities or Illinois Power, or the revocation of the charter of the holder of the Common Securities or Illinois Power and the expiration of 90 days after the date of revocation without a reinstatement thereof, (iv) upon the distribution of Subordinated Debentures upon the occurrence of a Special Event, (v) upon the entry of a decree of a judicial dissolution of the holder of the Common Securities, Illinois Power or Illinois Power Financing I, or (vi) upon the redemption of all the Trust Securities.
An event of default under the Indenture (an "Indenture Event of Default") constitutes an event of default under the Declaration with respect to the Trust Securities (a "Declaration Event of Default"); provided, that pursuant to the Declaration, the holder of the Common Securities will be deemed to have waived any Declaration Event of Default with respect to the Common Securities until all of Default with respect to the Preferred Securities have been cured, waived or otherwise eliminated. Until such Declaration Events of Default with respect to the Preferred Securities have been so cured, waived, or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the holders of the Preferred Securities and only the holders of the Preferred Securities will have the right to direct the Property Trustee with respect to certain matters under the Declaration, and therefore the Indenture.
Upon the occurrence of a Declaration Event of Default, the Property Trustee, as the sole holder of the Subordinated Debentures, will have the right under the Indenture to declare the principal of and interest on the Subordinated Debentures to be immediately due and payable. Illinois Power and Illinois Power Financing I are each required to file annually with the Property Trustee an officer's certificate as to its compliance with all conditions and covenants under the Declaration.
Except as described herein under "Description of the Preferred Securities Guarantee -- Amendments and Assignment" and as otherwise required by law and the Declaration, the holders of the Preferred Securities will have no voting rights. In the event that Illinois Power elects to defer payments of interest on the Subordinated Debentures as described above under "-- Distributions," the holders of the Preferred Securities do not have the right to appoint a special representative or trustee or otherwise act to protect their interests.
Subject to the requirement of the Property Trustee obtaining a tax opinion in certain circumstances set forth in the last sentence of this paragraph, the holders of a majority in aggregate liquidation amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or direct the exercise of any trust or power conferred upon the Property Trustee under the Declaration including the right to direct the Property Trustee, as holder of the Subordinated Debentures, to (i) exercise the remedies available under the Indenture with respect to the Subordinated Debentures, (ii) waive any past Indenture Event of Default that is waivable under the Base Indenture (as defined herein), (iii) exercise any right to rescind or annul a declaration that the principal of all the Subordinated Debentures shall be due and payable, provided, however, that, where a consent or action under the Indenture would require the consent or act of holders of more than a majority in principal amount of the Subordinated Debentures (a "Super-Majority") affected thereby, only the holders of at least the proportion in liquidation amount of the Preferred Securities which the relevant Super-Majority represents of the aggregate principal amount of the Subordinated Debentures may direct the Property Trustee to give such consent or take such action. If the Property Trustee fails to enforce its rights under the Subordinated Debentures or the Declaration, any holder of Preferred Securities may institute a legal proceeding directly against Illinois Power to enforce the Property Trustee's rights under the Subordinated Debentures or the Declaration without first instituting a legal proceeding against the Property Trustee or any other person or entity. In addition, if Illinois Power fails to make interest or other payments on the Subordinated Debentures when due, any holder of Preferred Securities may enforce the Property Trustee's rights directly against Illinois Power. The Property Trustee shall notify all holders of the Preferred Securities of any notice of default received from the Indenture Trustee with respect to the Subordinated Debentures. Such notice shall state that such Indenture Event of Default also constitutes a Declaration Event of Default. Except with respect to directing the time, method and place of conducting a proceeding for a remedy, the Property Trustee shall not take any of the actions described in clauses (i), (ii) or (iii) above unless the Property Trustee has obtained an opinion of tax counsel to the effect that, as a result of such action, Illinois Power Financing I will not fail to be classified as a grantor trust for United States federal income tax purposes and that each holder of Preferred Securities will not fail to be treated as owning an undivided beneficial interest in the Subordinated Debentures.
In the event the consent of the Property Trustee, as the holder of the Subordinated Debentures, is required under the Indenture with respect to any amendment, modification or termination of the Indenture, the Property Trustee shall request the direction of the holders of the Trust Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification or termination as directed by 66 2/3% in liquidation amount of the Trust Securities voting together as a single class; provided, however, that where a consent under the Indenture would require the the Property Trustee may only give such consent at the direction of the holders of at least the proportion in liquidation amount of the Trust Securities which the relevant Super-Majority represents of the aggregate principal amount of the Subordinated Debentures outstanding. The Property Trustee shall be under no obligation to take any such action in accordance with the directions of the holders of the Trust Securities unless the Property Trustee has obtained an opinion of tax counsel to the affect that for the purposes of United States federal income tax Illinois Power Financing I will not be classified as other than a grantor trust and that each holder of Preferred Securities will not fail to be treated as owning an undivided beneficial interest in the Subordinated Debentures.
A waiver of an Indenture Event of Default will constitute a waiver of the corresponding Declaration Event of Default.
Any required approval or direction of holders of Preferred Securities may be given at a separate meeting of holders of Preferred Securities convened for such purpose, at a meeting of all of the holders of Trust Securities or pursuant to written consent. The Regular Trustees will cause a notice of any meeting at which holders of Preferred Securities are entitled to vote, or of any matter upon which action by written consent of such holders is to be taken, to be mailed to each holder of record of Preferred Securities. Each such notice will include a statement setting forth the following information: (i) the date of such meeting or the date by which such action is to be taken; (ii) a description of any resolution proposed for adoption at such meeting on which such holders are entitled to vote or of such matter upon which written consent is sought; and (iii) instructions for the delivery of proxies or consents. No vote or consent of the holders of Preferred Securities will be required for Illinois Power Financing I to redeem and cancel Preferred Securities or distribute Subordinated Debentures in accordance with the Declaration.
Notwithstanding that holders of Preferred Securities are entitled to vote or consent under any of the circumstances described above, any of the Preferred Securities that are owned at such time by Illinois Power or any entity directly or indirectly controlling or controlled by, or under direct or indirect common control with, Illinois Power, shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if such Preferred Securities were not outstanding.
The procedures by which holders of Preferred Securities may exercise their voting rights are described below. See "-- Book-Entry Only Issuance -- The Depository Trust Company" below.
Holders of the Preferred Securities will have no rights to appoint or remove the Illinois Power Trustees, who may be appointed, removed or replaced solely by Illinois Power as the indirect or direct holder of all of the Common Securities.
The Declaration may be modified and amended if approved by the Regular Trustees (and in certain circumstances the Property Trustee or the Delaware Trustee), provided that, if any proposed amendment provides for, or the Regular Trustees otherwise propose to effect, (i) any action that would materially adversely affect the powers, preferences or special rights of the holders of Trust Securities, whether by way of amendment to the Declaration or otherwise or (ii) the dissolution, winding-up or termination of Illinois Power Financing I other than pursuant to the terms of the Declaration, then the holders of the Trust Securities voting together as a single class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of at least 66 2/3% in liquidation amount of the Trust Securities affected thereby; provided, that, if any amendment or proposal referred to in clause (i) above would materially adversely affect only the Preferred Securities or the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of 66 2/3% in liquidation amount of such class of Securities.
Notwithstanding the foregoing, no amendment or modification may be made to the Declaration if such amendment or modification would (i) cause Illinois Power Financing I to be classified for purposes of United States federal income taxation as other than a grantor trust, (ii) reduce or otherwise materially affect the powers of the Property Trustee or the Delaware Trustee or (iii) cause Illinois Power Financing I to be deemed an "investment company" which is required to be registered under the 1940 Act.
Illinois Power Financing I may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other body, except as described below. Illinois Power Financing I may, with the consent of the Regular Trustees and without the consent of the holders of the Trust Securities, consolidate, amalgamate, merge with or into, or be replaced by a trust organized as such under the laws of any State; provided, that (i) such successor entity either (x) expressly assumes all of the obligations of Illinois Power Financing I under the Trust Securities or (y) substitutes for the Preferred Securities other securities having substantially the same terms as the Trust Securities (the "Successor Securities"), so long as the Successor Securities rank the same as the Trust Securities rank with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) Illinois Power expressly acknowledges a trustee of such successor entity possessing the same powers and duties as the Property Trustee as the holder of the Subordinated Debentures, (iii) the Preferred Securities or any Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or with another organization on which the Preferred Securities are then listed or quoted, (iv) such merger, consolidation, amalgamation or replacement does not cause the Preferred Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, (v) such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the holders of the Trust Securities (including any Successor Securities) in any material respect (other than with respect to any dilution of the holders' interest in the new entity), (vi) such successor entity has a purpose identical to that of Illinois Power Financing I, (vii) prior to such merger, consolidation, amalgamation or replacement, Illinois Power has received an opinion of a nationally recognized independent counsel to Illinois Power Financing I experienced in such matters to the effect that, (A) such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the holders of the Trust Securities (including any Successor Securities) in any material respect (other than with respect to any dilution of the holders' interest in the new entity), (B) following such merger, consolidation, amalgamation or replacement, neither Illinois Power Financing I nor such successor entity will be required to register as an investment company under the 1940 Act and (C) following such merger, consolidation, amalgamation or replacement, Illinois Power Financing I (or the Successor Entity) will continue to be classified as a grantor trust for United States federal income tax purposes, and each holder of the Trust Securities will be treated as owning an undivided beneficial interest in the Subordinated Debentures, and (viii) Illinois Power guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee and the Common Securities Guarantee. Notwithstanding the foregoing, Illinois Power Financing I shall not, except with the consent of holders of 100% in liquidation amount of the Trust Securities, consolidate, amalgamate, merge with or into, or be replaced by any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it, if such consolidation, amalgamation, merger or replacement would cause Illinois Power Financing I or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as securities depositary for the Preferred Securities. The Preferred Securities will be issued only as fully-registered securities registered in the name of Cede & Co. (DTC's nominee). One or more fully-registered global Preferred Securities certificates, representing the total aggregate number of Preferred Securities, will be issued and will be deposited with DTC.
The laws of some jurisdictions require that certain purchasers of securities take physical delivery of securities in definitive form. Such laws may impair the ability to transfer beneficial interests in the global Preferred Securities as represented by a global certificate.
DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others, such as securities brokers and dealers, banks and trust companies that clear transactions through or maintain a direct or indirect custodial relationship with a Direct Participant either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the Commission.
Purchases of Preferred Securities within the DTC system must be made by or through Direct Participants, which will receive a credit for the Preferred Securities on DTC's records. The ownership interest of each actual purchaser of each Preferred Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchases, but Beneficial Owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owners purchased Preferred Securities. Transfers of ownership interests in the Preferred Securities are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Preferred Securities, except in the event that use of the book-entry system for the Preferred Securities is discontinued.
To facilitate subsequent transfers, all the Preferred Securities deposited by Participants with DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of Preferred Securities with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Preferred Securities. DTC's records reflect only the identity of the Direct Participants to whose accounts such Preferred Securities are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements that may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the Preferred Securities are being redeemed, DTC will reduce the amount of the interest of each Direct Participant in such Preferred Securities in accordance with its procedures.
Although voting with respect to the Preferred Securities is limited, in those cases where a vote is required, neither DTC nor Cede & Co. will itself consent or vote with respect to Preferred Securities. Under its usual procedures, DTC would mail an Omnibus Proxy to Illinois Power Financing I as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. consenting or voting rights to those Direct Participants to whose accounts the Preferred Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy). Illinois Power and Illinois Power Financing I believe that the arrangements among DTC, Direct and Indirect Participants, and Beneficial Owners will enable the Beneficial Owners to exercise rights equivalent in substance to the rights that can be directly exercised by a holder of a beneficial interest in Illinois Power Financing I.
Distribution payments on the Preferred Securities will be made to DTC. DTC's practice is to credit Direct Participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payments on such payment date.
Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the account of customers in bearer form or registered in "street name," and such payments will be the responsibility of such Participant and not of DTC, Illinois Power Financing I or Illinois Power, subject to any statutory or regulatory requirements to the contrary that may be in effect from time to time. Payment of distributions to DTC is the responsibility of Illinois Power Financing I, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to the Beneficial Owners is the responsibility of Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner will not be entitled to receive physical delivery of Preferred Securities. Accordingly, each Beneficial Owner must rely on the procedures of DTC to exercise any rights under the Preferred Securities.
DTC may discontinue providing its services as securities depositary with respect to the Preferred Securities at any time by giving reasonable notice to Illinois Power Financing I. Under such circumstances, in the event that a successor securities depositary is not obtained, Preferred Securities certificates are required to be printed and delivered. Additionally, the Regular Trustees (with the consent of Illinois Power) may decide to discontinue use of the system of book-entry transfers through DTC (or any successor depositary) with respect to the Preferred Securities. In that event, certificates for the Preferred Securities will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that Illinois Power and Illinois Power Financing I believe to be reliable, but neither Illinois Power nor Illinois Power Financing I takes responsibility for the accuracy thereof.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, prior to the occurrence of a default with respect to the Trust Securities, undertakes to perform only such duties as are specifically set forth in the Declaration and, after default, shall exercise the same degree of care as a prudent individual would exercise in the conduct of his or her own affairs. Subject to such provisions, the Property Trustee is under no obligation to exercise any of the powers vested in it by the Declaration at the request of any holder of Preferred Securities, unless offered reasonable indemnity by such holder against the costs, expenses and liabilities which might be incurred thereby. The holders of Preferred Securities will not be required to offer such indemnity in the event such holders, by exercising their voting rights, direct the Property Trustee to take any action following a Declaration Event of Default.
In the event that the Preferred Securities do not remain in book-entry only form, the following provisions would apply:
The Property Trustee will act as paying agent and may designate an additional or substitute paying agent at any time.
Registration of transfers of Preferred Securities will be effected without charge by or on behalf of Illinois Power Financing I, but upon payment (with the giving of such indemnity as the Regular Trustees may require) in respect of any tax or other governmental charges that may be imposed in relation to it.
Illinois Power Financing I will not be required to register or cause to be registered the transfer of Preferred Securities after such Preferred Securities have been called for redemption.
The Declaration and the Preferred Securities will be governed by, and construed in accordance with, the internal laws of the State of Delaware.
The Regular Trustees are authorized and directed to operate Illinois Power Financing I in such a way so that Illinois Power Financing I will not be required to register as an "investment company" under the 1940 Act or characterized as other than a grantor trust for United States federal income tax purposes and so that each holder of Preferred Securities will be treated as owning an undivided beneficial interest in the Subordinated Debentures. Illinois Power is authorized and directed to conduct its affairs so that the Subordinated Debentures will be treated as indebtedness of Illinois Power for United States federal income tax purposes. In this connection, Illinois Power and the Regular Trustees are authorized to take any action, not inconsistent with applicable law, the certificate of trust of Illinois Power Financing I or the certificate of incorporation of Illinois Power, that each of Illinois Power and the Regular Trustees determine in their discretion to be necessary or desirable to achieve such end, as long as such action does not materially adversely affect the interests of the holders of the Preferred Securities or vary the terms thereof.
Holders of the Preferred Securities have no preemptive rights.
DESCRIPTION OF THE PREFERRED SECURITIES GUARANTEE
Set forth below is a summary of information concerning the Guarantee that will be executed and delivered by Illinois Power for the benefit of the holders from time to time of the Preferred Securities. The Guarantee will be qualified as an indenture under the Trust Indenture Act. Wilmington Trust Company will act as the Guarantee Trustee. The terms of the Guarantee will be those set forth therein and those made part thereof by the Trust Indenture Act. The following summary does not purport to be complete and is subject in all respects to the provisions of, and is qualified in its entirety by reference to, the Guarantee, which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part and the Trust Indenture Act. The Guarantee will be held by the Guarantee Trustee for the benefit of the holders of the Preferred Securities.
Pursuant to the Guarantee, Illinois Power will irrevocably and unconditionally agree, to the extent set forth therein, to pay in full to the holders of the Preferred Securities the Guarantee Payments (as defined herein) (without duplication of amounts theretofore paid by Illinois Power Financing I), to the extent not paid by Illinois Power Financing I, regardless of any defense, right of set-off or counterclaim that Illinois Power Financing I may have or assert. The following payments or distributions with respect to the Preferred Securities to the extent not paid or made by Illinois Power Financing I (the "Guarantee Payments") will be subject to the Guarantee (without duplication): (i) any accrued and unpaid distributions that are required to be paid on the Preferred Securities, to the extent Illinois Power Financing I has funds available therefor, (ii) the Redemption Price, including all accrued and unpaid distributions to the date of the redemption, to the extent Illinois Power Financing I has funds available therefore, with respect to any Preferred Securities called for redemption by Illinois Power Financing I and (iii) upon a voluntary or involuntary dissolution, winding-up or termination of Illinois Power Financing I (other than in connection with the distribution of Subordinated Debentures to the holders of Preferred Securities in exchange for Preferred Securities), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid distributions on the Preferred Securities to the date of payment, to the extent Illinois Power Financing I has funds available therefor, and (b) the amount of assets of Illinois Power Financing I remaining available for distribution to holders of Preferred Securities in termination of Illinois Power Financing I. Illinois Power's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by Illinois Power to the holders of Preferred Securities or by causing Illinois Power Financing I to pay such amounts to such holders.
The Guarantee will be a guarantee of the Guarantee Payments with respect to the Preferred Securities from the time of issuance of the Preferred Securities, but will not apply to the payment of distributions and other payments on the Preferred Securities when the Property Trustee does not have sufficient funds in the Property Account to make such distributions or other payments. If Illinois Power does not make interest payments on the Subordinated Debentures held by the Property Trustee, Illinois Power Financing I will not make distributions on the Preferred Securities issued by Illinois Power Financing I and will not have funds available therefor. See "Description of the Subordinated Debentures -- Certain Covenants."
Illinois Power will also agree separately to irrevocably and unconditionally guarantee the obligations of Illinois Power Financing I with respect to the Common Securities (the "Common Securities Guarantee") to the same extent as the Guarantee, except that upon the occurrence and during the continuation of an Indenture Event of Default, holders of Preferred Securities shall have priority over holders of Common Securities with respect to distributions and payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF ILLINOIS POWER
In the Guarantee, Illinois Power will covenant that, so long as the Preferred Securities remain outstanding, if there shall have occurred and is continuing any event that would constitute an event of default under the Guarantee or the Declaration, then (a) Illinois Power shall not declare or pay any dividend on, or make any distribution with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock, provided, however, Illinois Power may declare and pay a stock dividend where the dividend stock is the same stock as that on which the dividend is being paid, (b) Illinois Power shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities (including guarantees) issued by Illinois Power which rank pari passu with or junior to the Subordinated Debentures, and (c) Illinois Power shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Guarantee).
Except with respect to any changes which do not materially adversely affect the rights of holders of Preferred Securities (in which case no vote will be required), the Guarantee may be amended only with the prior approval of the holders of not less than 66 2/3% in liquidation amount of the outstanding Preferred Securities. The manner of obtaining any such approval of holders of the Preferred Securities is set forth under "Description of the Preferred Securities -- Voting Rights." All guarantees and agreements contained in the Guarantee shall bind the successors, assigns, receivers, trustees and representatives of Illinois Power and shall inure to the benefit of the Guarantee Trustee and the holders of the Preferred Securities then outstanding.
The Guarantee will terminate and be of no further force and effect as to the Preferred Securities upon full payment of the Redemption Price of all Preferred Securities, or upon distribution of the Subordinated Debentures to the holders of the Preferred Securities, and will terminate completely upon full payment of the amounts payable upon termination of Illinois Power Financing I. See "Description of the Subordinated Debentures -- Indenture Events of Default" for a description of the events of default and enforcement rights of the holders of Subordinated Debentures. The Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any holder of Preferred Securities must repay to Illinois Power Financing I or Illinois Power, or their successors, any sums paid to them under such Preferred Securities or the Guarantee.
An event of default under the Guarantee will occur upon the failure of Illinois Power to perform any of its payment or other obligations thereunder.
The holders of a majority in liquidation amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of the Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under the Guarantee. In addition, any holder of Preferred Securities may institute a legal proceeding directly against Illinois Power to enforce such holder's rights under the Guarantee without first instituting a legal proceeding against Illinois Power Financing I, the Guarantee Trustee or any other person or entity.
Illinois Power's obligations under the Guarantee to make the Guarantee Payments will constitute an unsecured obligation of Illinois Power and will rank (i) subordinate and junior in right of payment to all other liabilities of Illinois Power, including the Subordinated Debentures, except those liabilities of Illinois Power made pari passu or subordinate by their terms, (ii) pari passu with the most senior preferred stock now or hereafter issued by Illinois Power and with any guarantee now or hereafter entered into by Illinois Power in respect of any preferred stock of any affiliate of Illinois Power, and (iii) senior to Illinois Power's common stock. The terms of the Preferred Securities provide that each holder of Preferred Securities by acceptance thereof agrees to the subordination provisions and other terms of the Guarantee.
The Guarantee will constitute a guarantee of payment and not of collection (that is, the guaranteed party may institute a legal proceeding directly against the guarantor to enforce its rights under the guarantee without instituting a legal proceeding against any other person or entity). The Guarantee will be deposited with the Guarantee Trustee to be held for the benefit of the holders of the Preferred Securities. Except as otherwise noted herein, the Guarantee Trustee has the right to enforce the Guarantee on behalf of the holders of the Preferred Securities. The Guarantee will not be discharged except by payment of the Guarantee Payments in full (without duplication of amounts theretofore paid by Illinois Power Financing I).
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to the Guarantee and after the curing of all such defaults that may have occurred, undertakes to perform only such duties as are specifically set forth in the Guarantee and, after default, shall exercise the same degree of care as a prudent individual would exercise in the conduct of his or her own affairs. Subject to such provisions, the Guarantee Trustee is under no obligation to exercise any of the powers vested in it by the Guarantee at the request of any holder of Preferred Securities, unless offered reasonable indemnity against the costs, expenses and liabilities which might be incurred thereby; but the foregoing shall not relieve the Guarantee Trustee, upon the occurrence of an event of default under the Guarantee from exercising the rights and powers vested in it by the Guarantee. The Guarantee Trustee also serves as Property Trustee and Indenture Trustee.
The Guarantee will be governed by, and construed in accordance with, the internal laws of the State of Illinois.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
Set forth below is a description of the terms of the Subordinated Debentures in which Illinois Power Financing I will invest the proceeds from the issuance and sale of the Trust Securities. The following description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Indenture, dated as of January 1, 1996, (the "Base Indenture") between Illinois Power and Wilmington Trust Company, as Trustee (the "Indenture Trustee"), as supplemented by a First Supplemental Indenture, dated as of January 1, 1996 (the Base Indenture, as so supplemented, is hereinafter referred to as the "Indenture"), the forms of which are filed as Exhibits to the Registration Statement of which this Prospectus forms a part. The terms of the Subordinated Debentures will include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act. Certain capitalized terms used herein are defined in the Indenture.
Under certain circumstances involving the termination of Illinois Power Financing I following the occurrence of a Special Event, Subordinated Debentures may be distributed to the holders of the Trust Securities. See "Description of the Preferred Securities -- Special Event Redemption or Distribution."
If the Subordinated Debentures are distributed to the holders of the Preferred Securities, Illinois Power will use its best efforts to have the Subordinated Debentures listed on the New York Stock Exchange or on such other national securities exchange or similar organization on which the Preferred Securities are then listed or quoted.
The Subordinated Debentures will be issued as unsecured subordinated debt under the Indenture. The Subordinated Debentures will be limited in aggregate principal amount to $103,100,000, such amount being the sum of the aggregate stated liquidation amount of the Preferred Securities and the contributions made by Illinois Power in exchange for the Common Securities (the "Illinois Power Payment").
The Amended and Restated Articles of Incorporation of Illinois Power limit the amount of unsecured indebtedness that Illinois Power may issue or assume, without the consent of the holders of a majority of the total number of shares of preferred stock then outstanding, to 20% of the aggregate of the total principal amount of all outstanding bonds or other securities representing secured indebtedness of Illinois Power and the capital and surplus of Illinois Power as then stated on Illinois Power's books. At September 30, 1995, Illinois Power could have issued approximately $308 million of unsecured indebtedness (such as the Subordinated Debentures) without violating this provision.
The Subordinated Debentures are not subject to a sinking fund provision. The entire principal amount of the Subordinated Debentures will mature and become due and payable, together with any accrued and unpaid interest thereon including Compound Interest (as defined herein) and Additional Interest (as defined herein), if any, on January 31, 2045.
If Subordinated Debentures are distributed to holders of Preferred Securities in liquidation of such holders' interests in Illinois Power Financing I, such Subordinated Debentures will initially be issued as a Global Security (as defined herein). As described herein, under certain limited circumstances, Subordinated Debentures may be issued in certificated form in exchange for a Global Security. See "-- Book-Entry and Settlement" below. In the event that Subordinated Debentures are issued in certificated form, such Subordinated Debentures will be in denominations of $25 and integral multiples thereof and may be transferred or exchanged at the offices described below. Payments on Subordinated Debentures issued as a Global Security will be made to DTC, a successor depositary or, in the event that no depositary is used, to a Paying Agent for the Subordinated Debentures. In the event Subordinated Debentures are issued in certificated form, principal and interest will be payable, the transfer of the Subordinated Debentures will be registrable and Subordinated Debentures will be exchangeable for Subordinated Debentures of other denominations of a like aggregate principal amount at the corporate trust office of the Indenture Trustee in Wilmington, Delaware; provided, that payment of interest may be made at the option of Illinois Power by check mailed to the address of the persons entitled thereto.
The Indenture does not contain provisions that afford holders of the Subordinated Debentures protection in the event of a highly leveraged transaction involving Illinois Power.
The Indenture provides that the Subordinated Debentures are subordinated and junior in right of payment to all Senior Indebtedness of Illinois Power, whether now existing or hereafter incurred. No payment of principal (including redemption payments, if any), premium, if any, or interest on, the Subordinated Debentures may be made if (i) any Senior Indebtedness of Illinois Power is not paid when due, and any applicable grace period with respect to such default has ended and such default has not been cured or waived or ceased to exist, or (ii) the maturity of any Senior Indebtedness of Illinois Power has been accelerated because of a default. Upon any distribution of assets of Illinois Power to creditors upon any dissolution, winding-up, liquidation or reorganization, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, all principal, premium, if any, and interest due or to become due on all Senior Indebtedness of Illinois Power must be paid in full before the holders of Subordinated Debentures are entitled to receive or retain any payment. Upon satisfaction of all claims of all Senior Indebtedness then outstanding, the rights of the holders of the Subordinated Debentures will be subrogated to the rights of the holders of Senior Indebtedness of Illinois Power to receive payments or distributions applicable to Senior Indebtedness until all amounts owing on the Subordinated Debentures are paid in full.
The term "Senior Indebtedness" means, with respect to Illinois Power, (i) the principal, premium, if any, interest on and any other payment in respect of (A) indebtedness of Illinois Power for money borrowed and (B) indebtedness evidenced by securities, debentures, bonds or other similar instruments issued by Illinois Power, including, without limitation, indebtedness evidenced by securities issued pursuant to its Mortgage and Deed of Trust dated November 1, 1943, as supplemented, and its General Mortgage Indenture and Deed of Trust dated as of November 1, 1992, (ii) all capital lease obligations of Illinois Power, (iii) all obligations of Illinois Power issued or assumed as the deferred purchase price of property, all conditional sale obligations of Illinois Power and all obligations of Illinois Power under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business), (iv) all obligations of Illinois Power for the reimbursement on any letter of credit, banker's acceptance, security purchase facility or similar credit transaction, (v) all obligations of the type referred to in clauses (i) through (iv) above of other persons for the payment of which Illinois Power is responsible or liable as obligor, guarantor or otherwise and (vi) all obligations of the type referred to in clauses (i) through (v) above of other persons secured by any lien on any property or asset of Illinois Power (whether or not such obligation is assumed by Illinois Power), except for (1) any such indebtedness that is by its terms subordinated to or pari passu with the Subordinated Debentures and (2) any indebtedness between or among Illinois Power or its affiliates, including all other debt securities and guarantees in respect of those debt securities, issued to any other trust, or a trustee of such trust, partnership or other entity affiliated with Illinois Power that is a financing vehicle of Illinois Power (a "financing entity") in connection with the issuance by such financing entity of Preferred Securities or other securities that rank pari passu with, or junior to, the Preferred Securities. Such Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of such Senior Indebtedness. In October 1994, Illinois Power issued $100 million of Series A Subordinated Debentures to Illinois Power Capital, L.P., a financing entity which issued cumulative monthly income preferred securities that rank pari passu with the Preferred Securities.
The Indenture does not limit the aggregate amount of Senior Indebtedness that may be issued by Illinois Power. As of September 30, 1995, Senior Indebtedness of Illinois Power aggregated approximately $2.2 billion.
If (i) there shall have occurred any event that would constitute an Indenture Event of Default or (ii) Illinois Power shall be in default with respect to its payment of any obligations under the Guarantee or the Common Securities Guarantee, then (a) Illinois Power shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase or make a liquidation payment with respect to, any of its capital stock, provided, however, Illinois Power may declare and pay a stock dividend where the dividend stock is the same stock as that on which the dividend is being paid, (b) Illinois Power shall not make any payment of interest, principal or premium, if any on or repay, repurchase or redeem any debt securities issued by Illinois Power which rank pari passu with or junior to the Subordinated Debentures, and (c) Illinois Power shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Guarantee).
If Illinois Power shall have given notice of its election of an Extension Period as provided in the Indenture and such period, or any extension thereof, shall be continuing, then (a) Illinois Power shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase or make a liquidation payment with respect to, any of its capital stock, provided, however, Illinois Power may declare and pay a stock dividend where the dividend stock is the same stock as that on which the dividend is being paid, (b) Illinois Power shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities (including guarantees) issued by Illinois Power which rank pari passu with or junior to the Subordinated Debentures, and (c) Illinois Power shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Guarantee).
For so long as the Trust Securities remain outstanding, Illinois Power will covenant (i) to directly or indirectly maintain 100% direct or indirect ownership of the Common Securities of the Trust; provided, however, that any permitted successor of Illinois Power under the Indenture may succeed to Illinois Power's ownership of such Common Securities, (ii) not to cause, as sponsor of Illinois Power Financing I, or to permit, as holder of the Common Securities, the dissolution, winding-up or termination of Illinois Power Financing I, except in connection with a distribution of the Subordinated Debentures as provided in the Declaration and in connection with certain mergers, consolidations or amalgamation and (iii) to use its reasonable efforts to cause Illinois Power Financing I (a) to remain a statutory business trust, except in connection with the distribution of Subordinated Debentures to the holders of Trust Securities in termination of Illinois Power Financing I, the redemption of all of the Trust Securities of Illinois Power Financing I, or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, and (b) to otherwise continue to be classified as a grantor trust for United States federal income purposes with each holder of Preferred Securities being treated as owning an undivided beneficial interest in the Subordinated Debentures.
Illinois Power shall have the right to redeem the Subordinated Debentures, in whole or in part, from time to time, on or after January 31, 2001, or at any time in certain circumstances upon the occurrence of a Special Event as described under "Description of the Preferred Securities -- Special Event Redemption or Distribution," upon not less than 30 nor more than 60 days notice, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest, including Additional Interest, if any, to the redemption date. If a partial redemption of the Preferred Securities resulting from a partial redemption of the Subordinated Debentures would result in the delisting of the Preferred Securities by such exchange on which the Preferred Securities are then listed, Illinois Power may only redeem the Subordinated Debentures in whole.
Each Subordinated Debenture shall bear interest at the rate of 8% per annum from the original date of issuance, payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year (each an "Interest Payment Date"), commencing March 31, 1996, to the person in whose name such Subordinated Debenture is registered, subject to certain exceptions, at the close of business on the Business Day next preceding such Interest Payment Date. In the event the Subordinated Debentures shall not continue to remain in book-entry only form, Illinois Power shall have the right to select record dates, which shall be more than one Business Day prior to the Interest Payment Date.
The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any period shorter than a full quarterly period for which interest is computed, will be computed on the basis of the actual number of days elapsed per 30-day month. In the event that any date on which interest is payable on the Subordinated Debentures is not a Business Day, then payment of the interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, then such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
Illinois Power shall have the right at any time, and from time to time, during the term of the Subordinated Debentures to defer payments of interest by extending the interest payment period for a period not exceeding 20 consecutive quarters, at the end of which Extension Period, Illinois Power shall pay all interest then accrued and unpaid (including any Additional Interest) together with interest thereon compounded quarterly at the rate specified for the Subordinated Debentures to the extent permitted by applicable law ("Compound Interest"); provided, that during any such Extension Period, (a) Illinois Power shall not declare or pay dividends on, make any distribution with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to any of its capital stock, provided, however, Illinois Power may declare and pay a stock dividend where the dividend stock is the same stock as that on which the dividend is being paid, (b) Illinois Power shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by Illinois Power that rank pari passu with or junior to the Subordinated Debentures, and (c) Illinois Power shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Guarantee). Prior to the termination of any such Extension Period, Illinois Power may further defer payments of interest by extending the interest payment period; provided, however, that, such Extension Period, including all such previous and further extensions, may not exceed 20 consecutive quarters or extend beyond the maturity of the Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, Illinois Power may commence a new Extension Period, subject to the terms set forth in this section. No interest during an Extension Period, except at the end thereof, shall be due and payable. Illinois Power has no present intention of exercising its right to defer payments of interest by extending the interest payment period on the Subordinated Debentures. If the Property Trustee shall be the sole holder of the Subordinated Debentures, Illinois Power shall give the Regular Trustees and the Property Trustee notice of its election of such Extension Period one Business Day prior to the earlier of (i) the date distributions on the Preferred Securities are payable or (ii) the date the Regular Trustees are required to give notice to the New York Stock Exchange (or other applicable self-regulatory organization) or to holders of the Preferred Securities of the record date or the date such distribution is payable. The Regular Trustees shall give notice of Illinois Power's selection of such Extension Period to the holders of the Preferred Securities. If the Property Trustee shall not be the sole holder of the Subordinated Debentures, Illinois Power shall give the holders of the Subordinated Debentures notice of its election of such Extension Period ten Business Days prior to the earlier of (i) the Interest Payment Date or (ii) the date upon which Illinois Power is required to give notice to the New York Stock Exchange (or other applicable self-regulatory organization) or to holders of the Subordinated Debentures of the record or payment date of such related interest payment.
If at any time Illinois Power Financing I or the Property Trustee shall be required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any such case, Illinois Power will pay as additional interest ("Additional Interest") such additional amounts as shall be required so that the net amounts received and retained by Illinois Power Financing I after paying any such taxes, duties, assessments or other governmental charges will be not less than the amounts Illinois Power Financing I and the Property Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed.
In case any Indenture Event of Default shall occur and be continuing, the Property Trustee, as the holder of the Subordinated Debentures, will have the right to declare the principal of and the interest on the Subordinated Debentures (including any Compound Interest and Additional Interest, if any) and any other amounts payable under the Indenture to be forthwith due and payable and to enforce its other rights as a creditor with respect to the Subordinated Debentures.
The Indenture provides that any one or more of the following described events, which has occurred and is continuing, constitutes an "Event of Default" with respect to the Subordinated Debentures:
(a) failure for 30 days to pay interest on the Subordinated Debentures, including any Additional Interest in respect thereof, when due; provided, however, that a valid extension of the interest payment period by Illinois Power shall not constitute a default in the payment of interest
(b) failure to pay principal or premium, if any, on the Subordinated Debentures when due whether at maturity, upon earlier redemption or
(c) failure to observe or perform any other covenant or agreement (other than those specifically relating to another series of subordinated debt securities) contained in the Indenture or established
pursuant thereto for 90 days after written notice to Illinois Power from the Indenture Trustee or the holders of at least 25% in principal amount of the outstanding Subordinated Debentures; or
(d) certain events of bankruptcy, insolvency or reorganization of
(e) the voluntary or involuntary dissolution, winding-up or termination of Illinois Power Financing I, except in connection with the distribution of Subordinated Debentures to the holders of Preferred Securities upon termination of Illinois Power Financing I, the redemption of all outstanding Trust Securities of Illinois Power Financing I and certain mergers, consolidations or amalgamations permitted by the Declaration.
The holders of a majority in aggregate outstanding principal amount of the Subordinated Debentures have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Indenture Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate outstanding principal amount of the Subordinated Debentures may declare the principal due and payable immediately on default, but the holders of a majority in aggregate outstanding principal amount may annul such declaration and waive the default if the default has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration and any applicable premium has been deposited with the Indenture Trustee.
The holders of a majority in aggregate outstanding principal amount of the Subordinated Debentures affected thereby may, on behalf of the holders of all the Subordinated Debentures, waive any past default, except (i) a default in the payment of principal, premium, if any, or interest (unless such default has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration and any applicable premium has been deposited with the Indenture Trustee) or (ii) a default in the covenant of Illinois Power not to declare or pay dividends on, or make distributions with respect to, or redeem, purchase or acquire any of its capital stock during an Extension Period. An Indenture Event of Default also constitutes a Declaration Event of Default. The holders of Preferred Securities in certain circumstances have the right to direct the Property Trustee to exercise its rights as the holder of the Subordinated Debentures. In addition, if Illinois Power fails to make interest or other payments on the Subordinated Debentures when due, any holder of Preferred Securities may enforce the Property Trustee's rights directly against Illinois Power. See "Description of the Preferred Securities -- Declaration Events of Default" and "-- Voting Rights."
If distributed to holders of Preferred Securities in connection with the involuntary or voluntary dissolution, winding-up or termination of Illinois Power Financing I as a result of the occurrence of a Special Event, the Subordinated Debentures will be issued in the form of one or more global certificates (each a "Global Security") registered in the name of the Depositary or its nominee. Except under the limited circumstances described below, Subordinated Debentures represented by the Global Security will not be exchangeable for, and will not otherwise be issuable as, Subordinated Debentures in definitive form. The Global Securities described above may not be transferred except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or to a successor depositary or its nominee.
The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability to transfer beneficial interests in such a Global Security.
Except as provided below, owners of beneficial interests in such a Global Security will not be entitled to receive physical delivery of Subordinated Debentures in definitive form and will not be considered the holders (as defined in the Indenture) thereof for any purpose under the Indenture, and no Global Security representing Subordinated Debentures shall be exchangeable, except for another Global Security of like denomination and tenor to be registered in the name of the Depositary or its nominee or to a successor Depositary or its nominee. Accordingly, each Beneficial Owner must rely on the procedures of the or if such person is not a Participant, on the procedures of the Participant through which such person owns its interest to exercise any rights of a holder under the Indenture.
If Subordinated Debentures are distributed to holders of Preferred Securities in liquidation of such holders' interests in Illinois Power Financing I, DTC will act as securities depositary (the "Depositary") for the Subordinated Debentures. For a description of DTC and the specific terms of the depositary arrangements, see "Description of the Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust Company." As of the date of this Prospectus, the description therein of DTC's book-entry system and DTC's practices as they relate to purchases, transfers, notices and payments with respect to the Preferred Securities apply in all material respects to any debt obligations represented by one or more Global Securities held by DTC. Illinois Power may appoint a successor to DTC or any successor depositary in the event DTC or such successor depositary is unable or unwilling to continue as a depositary for the Global Securities.
None of Illinois Power, Illinois Power Financing I, the Indenture Trustee, any paying agent and any other agent of Illinois Power or the Indenture Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Security for such Subordinated Debentures or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
DISCONTINUANCE OF THE DEPOSITARY'S SERVICES
A Global Security shall be exchangeable for Subordinated Debentures registered in the names of persons other than the Depositary or its nominee only if (i) the Depositary notifies Illinois Power that it is unwilling or unable to continue as a depositary for such Global Security and no successor depositary shall have been appointed, (ii) the Depositary, at any time, ceases to be a clearing agency registered under the Exchange Act at which time the Depositary is required to be so registered to act as such depositary and no successor depositary shall have been appointed or (iii) Illinois Power, in its sole discretion, determines that such Global Security shall be so exchangeable. Any Global Security that is exchangeable pursuant to the preceding sentence shall be exchangeable for Subordinated Debentures registered in such names as the Depositary shall direct. It is expected that such instructions will be based upon directions received by the Depositary from its Participants with respect to ownership of beneficial interests in such Global Security.
In the event the Subordinated Debentures are not represented by one or more Global Securities, certificates evidencing Subordinated Debentures may be presented for registration of transfer (with the form of transfer endorsed thereon duly executed) or exchange, at the office of the Security Registrar or at the office of any transfer agent designated by Illinois Power for such purpose with respect to the Subordinate Debentures without service charge and upon payment of any taxes and other governmental charges as described in the Indenture. Such transfer or exchange will be effected upon the Security Registrar or such transfer agent, as the case may be, being satisfied with the documents of title and identity of the person making the request. Illinois Power has appointed the Indenture Trustee as Security Registrar with respect to the Subordinated Debentures. Illinois Power may at any time rescind the designation of any such transfer agent or approve a change in the location through which any such transfer agent acts, except that Illinois Power will be required to maintain a transfer agent at the place of payment. Illinois Power may at any time designate additional transfer agents with respect to the Subordinated Debentures.
In the event of any redemption in part, Illinois Power shall not be required to (i) issue, exchange or register the transfer of Subordinated Debentures during a period beginning at the opening of business 15 days before the date of the mailing of a notice of redemption of less than all of the Subordinated Debentures and ending at the close of business on the date of such mailing and (ii) register the transfer of or exchange any Subordinated Debentures so selected for redemption, in whole or in part, except the unredeemed portion of any Subordinated Debentures being redeemed in part.
The Indenture contains provisions permitting Illinois Power and the Indenture Trustee, with the consent of the holders of at least 66 2/3% in principal amount of the Subordinated Debentures, to modify the Indenture or any supplemental indenture affecting that series or the rights of the holders of the
Debentures; provided that no such modification may, without the consent of the holder of each outstanding Subordinated Debentures affected thereby, (i) extend the fixed maturity of the Subordinated Debentures, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the holder of the Subordinated Debentures so affected or (ii) reduce the percentage of Subordinated Debentures, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of each Subordinated Debenture then outstanding and affected thereby.
In addition, Illinois Power and the Indenture Trustee may execute, without the consent of holders of the Subordinated Debentures, any supplemental indenture for certain other usual purposes including the creation of any new series of subordinated debt securities.
The Indenture does not contain any covenant which restricts Illinois Power's ability to merge or consolidate with or into any other corporation, sell or convey all or substantially all of its assets to any person, firm or corporation or otherwise engage in restructuring transactions.
Under the terms of the Indenture, Illinois Power will be discharged from any and all obligations in respect of the Subordinated Debentures (except in each case for certain obligations with respect to denominations and provisions for payment of the Subordinated Debentures and obligations to register the transfer or exchange of Subordinated Debentures, replace stolen, lost or mutilated Subordinated Debentures, maintain paying agencies and hold moneys for payment in trust) if Illinois Power (i) deposits with the Indenture Trustee, in trust, moneys or governmental obligations, in an amount sufficient to pay all the principal of, and interest on, the Subordinated Debentures on the dates such payments are due in accordance with the terms of such Subordinated Debentures and (ii) delivered to the Indenture Trustee an opinion of counsel to the effect that, based upon Illinois Power's receipt from, or the publication by, the Internal Revenue Service of a ruling or a change in law, the holders of the Subordinated Debentures will not recognize income, gain or loss for United States federal income tax purposes as a result of the deposit, defeasance and discharge and will be subject to United States federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance or discharge had not occurred.
The Indenture and the Subordinated Debentures will be governed by, and construed in accordance with, the internal laws of the State of New York.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee, prior to default, undertakes to perform only such duties as are specifically set forth in the Indenture and, after default, shall exercise the same degree of care as a prudent individual would exercise in the conduct of his or her own affairs. Subject to such provision, the Indenture Trustee is under no obligation to exercise any of the powers vested in it by the Indenture at the request of any holder of Subordinated Debentures, unless offered reasonable indemnity by such holder against the costs, expenses and liabilities which might be incurred thereby; but the foregoing shall not relieve the Indenture Trustee, upon the occurrence of an Indenture Event of Default, from exercising the rights and powers vested in it by the Indenture. The Indenture Trustee is not required to expand or risk its own funds or otherwise incur personal financial liability in the performance of its duties if the Indenture Trustee reasonably believes that repayment or adequate indemnity is not reasonably assured to it.
Illinois Power will have the right at all times to assign any of its rights or obligations under the Indenture to a direct or indirect wholly-owned subsidiary of Illinois Power; provided that, in the event of any such assignment, Illinois Power will remain liable for all of their obligations. Subject to the foregoing, the Indenture will be binding upon and inure to the benefit of the parties thereto and their respective successors and assigns. The Indenture provides that it may not otherwise be assigned by the parties thereto.
The Indenture will provide that Illinois Power will pay all fees and expenses related to (i) the offering of the Trust Securities and the Subordinated Debentures, (ii) the organization, maintenance and dissolution of Illinois Power Financing I, (iii) the taxes of Illinois Power Financing I (other than United States withholding taxes attributable to Illinois Power Financing I or its assets), (iv) the retention of the Illinois Power Trustees and (v) the enforcement by the Property Trustee of the rights of holders of Preferred Securities.
EFFECT OF OBLIGATIONS UNDER THE SUBORDINATED DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of Illinois Power Financing I is to issue the Trust Securities evidencing undivided beneficial interests in the assets of Illinois Power Financing I and to invest the proceeds from such issuance and sale in the Subordinated Debentures.
As long as payments of interest and other payments are made when due on the Subordinated Debentures, such payments will be sufficient to cover distributions and payments due on the Trust Securities because of the following factors: (i) the aggregate principal amount of Subordinated Debentures will be equal to the sum of the aggregate liquidation amount of the Trust Securities; (ii) the interest rate and the interest and other payment dates on the Subordinated Debentures will match the distribution rate and distribution and other payment dates for the Preferred Securities; (iii) Illinois Power shall pay all, and Illinois Power Financing I shall not be obligated to pay, directly or indirectly, any costs and expenses of Illinois Power Financing I; and (iv) the Declaration further provides that the Illinois Power Trustees shall not cause or permit Illinois Power Financing I to, among other things, engage in any activity that is not consistent with the purposes of Illinois Power Financing I.
Payments of distributions (to the extent funds therefor are available) and other payments due on the Preferred Securities (to the extent funds therefor are available) are guaranteed by Illinois Power as and to the extent set forth under "Description of the Preferred Securities Guarantee." If Illinois Power does not make interest payments on the Subordinated Debentures purchased by Illinois Power Financing I, Illinois Power Financing I will not have sufficient funds to pay distributions on the Preferred Securities. The Guarantee is a guarantee from the time of its issuance but does not apply to any payment of distributions unless and until Illinois Power Financing I has sufficient funds for the payment of such distributions.
If Illinois Power fails to make interest or other payments on the Subordinated Debentures when due (taking into account any Extension Period), the Declaration provides a mechanism whereby the holders of the Preferred Securities, using the procedures described in "Description of the Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust Company" and "-- Voting Rights," may direct the Property Trustee to enforce its rights under the Subordinated Debentures. If the Property Trustee fails to enforce its rights under the Subordinated Debentures, any holder of Preferred Securities may institute a legal proceeding against Illinois Power to enforce the Property Trustee's rights under the Subordinated Debentures without first instituting any legal proceeding against the Property Trustee or any other person or entity. In addition, if Illinois Power fails to make interest or other payments on the Subordinated Debentures when due, any holder of Preferred Securities may enforce the Property Trustee's rights directly against Illinois Power.
If Illinois Power fails to make payments under the Guarantee, the Guarantee provides a mechanism whereby the holders of the Preferred Securities may direct the Guarantee Trustee to enforce its rights thereunder. In addition, any holder of Preferred Securities may institute a legal proceeding directly against Illinois Power to enforce such holder's rights under the Guarantee without first instituting a legal proceeding against Illinois Power Financing I, the Guarantee Trustee, or any other person or entity. Illinois Power, under the Guarantee, acknowledges that the Guarantee Trustee shall enforce the Guarantee on behalf of the holders of the Preferred Securities.
The obligations of Illinois Power with respect to the Preferred Securities under the Subordinated Debentures, the Indenture, the Guarantee and the Declaration (including its obligation to pay the expenses of Illinois Power Financing I), taken together, constitute a full and unconditional guarantee by Illinois Power of payments due on the Preferred Securities. See "Description of the Preferred Securities Guarantee -- General."
UNITED STATES FEDERAL INCOME TAXATION
The following is a summary of certain of the material United States federal income tax consequences of the purchase, ownership and disposition of Preferred Securities to a holder that is a citizen or resident of the United States, a corporation, partnership or other entity created or organized under the laws of the United States or any state thereof or the District of Columbia, or an estate or trust the income of which is subject to United States federal income taxation regardless of its source. Unless otherwise stated, this summary deals only with Preferred Securities held as capital assets by holders who purchase the Preferred Securities upon original issuance ("Initial Holders"). It does not deal with special classes of holders such as banks, thrifts, real estate investment trusts, regulated investment companies, insurance companies, dealers in securities or currencies, tax-exempt investors, or persons that will hold the Preferred Securities as a position in a "straddle," as part of a "synthetic security" or "hedge," as part of a "conversion transaction" or other integrated investment, or as other than a capital asset. This summary also does not address the tax consequences to persons that have a functional currency other than the U.S. Dollar or the tax consequences to shareholders, partners or beneficiaries of a holder of Preferred Securities. Further, it does not include any description of any alternative minimum tax consequences or the tax laws of any state or local government or of any foreign government that may be applicable to the Preferred Securities. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations thereunder (the "Treasury Regulations") and administrative and judicial interpretations thereof, as of the date hereof, all of which are subject to change, possibly on a retroactive basis.
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
In connection with the issuance of the Subordinated Debentures, Schiff Hardin & Waite, counsel to Illinois Power and Illinois Power Financing I, will render its opinion generally to the effect that, although not entirely free from doubt, under then current law and assuming full compliance with the terms of the Indenture (and certain other documents), and based on certain facts and assumptions contained in such opinion, the Subordinated Debentures held by Illinois Power Financing I will be classified for United States federal income tax purposes as indebtedness of Illinois Power. On December 7, 1995, the U.S. Treasury Department proposed a series of tax law changes that would, among other things, prevent companies from deducting interest on debt instruments with a maturity of more than 40 years and on instruments with a maximum term of more than 20 years which are not shown as indebtedness on the consolidated balance sheet of the issuer. Either of these proposals, if enacted, would prevent Illinois Power from deducting interest paid on the Subordinated Debentures. However, on December 19, 1995, the Treasury Department stated that based on input it had received to date, it would recommend to Congress that transitional relief from the proposed changes be granted for financial instruments that are issued pursuant to a registration statement that was filed with the Commission on or before December 7, 1995. Illinois Power cannot predict whether the proposed tax law changes will become law. However, if the proposed tax law changes and the proposed transitional relief are enacted, Illinois Power should be able to deduct interest on the Subordinated Debentures. If legislation is enacted limiting, in whole or in part, the deductibility by Illinois Power of interest on the Subordinated Debentures for United States federal income tax purposes, such enactment would be a Tax Event. Under certain circumstances following a Tax Event, Illinois Power may cause the Subordinated Debentures and the Preferred Securities to be redeemed. See "Description of the Preferred Securities -- Special Event Redemption or Distribution." It is expected that the December 7, 1995 proposed tax law changes, if enacted, would not alter the United States federal income tax consequences of the purchase, ownership and disposition of the Preferred Securities.
CLASSIFICATION OF ILLINOIS POWER FINANCING I
In connection with the issuance of the Preferred Securities, Schiff Hardin & Waite, counsel to Illinois Power and Illinois Power Financing I, will render its opinion generally to the effect that, under then current law and assuming full compliance with the terms of the Declaration and the Indenture (and certain other documents), and based on certain facts and assumptions contained in such opinion, Illinois Power Financing I will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation. Accordingly, for United States federal income tax purposes, each holder of Preferred Securities generally will be considered the owner of an undivided interest in the Subordinated Debentures, and each holder will be required to include in its gross income any OID accrued with respect to its allocable share of those Subordinated Debentures.
Because Illinois Power has the option, under the terms of the Subordinated Debentures, to defer payments of interest by extending interest payment periods for up to 20 quarters, all of the stated interest payments on the Subordinated Debentures will be treated as OID. Holders of debt instruments issued with OID must include that discount in income on an economic accrual basis before the receipt of cash attributable to the interest, regardless of their method of tax accounting. Generally, all of a holder's taxable interest income with respect to the Subordinated Debentures will be accounted for as OID, and actual distributions of stated interest will not be separately reported as taxable income. The amount of OID that accrues in any month will approximately equal the amount of the interest that accrues on the Subordinated Debentures in that month at the stated interest rate. In the event that the interest payment period is extended, holders will continue to accrue OID approximately equal to the amount of the interest payment due at the end of the Extension Period on an economic accrual basis over the length of the Extension Period.
In addition, the amount of OID will be increased or decreased if the issue price of the Subordinated Debentures (offering price of the Preferred Securities at the time of the issuance) is less than or greater than their stated principal amount. It is anticipated that the issue price of the Subordinated Debentures will equal or exceed their stated principal amount. In the event that the issue price of the Subordinated Debentures is less than their stated principal amount, however, the Treasury Regulations may be read to require a recalculation of the amount of OID for each period that Illinois Power does not exercise its right to extend the interest payment period. This recalculation could result in minor adjustments to the amount of OID taxable to the Holders for such period.
Because income on the Preferred Securities will constitute OID, corporate holders of Preferred Securities will not be entitled to a dividends-received deduction with respect to any income recognized with respect to the Preferred Securities.
MARKET DISCOUNT AND BOND PREMIUM
Holders of Preferred Securities other than Initial Holders may be considered to have acquired their undivided interests in the Subordinated Debentures with market discount or acquisition premium as such phrases are defined for United States federal income tax purposes. Such holders are advised to consult their tax advisors as to the income tax consequences of the acquisition, ownership and disposition of the Preferred Securities.
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF ILLINOIS POWER
Under certain circumstances, as described under the caption "Description of the Preferred Securities -- Special Event Redemption or Distribution," Subordinated Debentures may be distributed to holders in exchange for the Preferred Securities and upon termination of Illinois Power Financing I. Under current law, such a distribution, for United States federal income tax purposes, would be treated as a non-taxable event to each holder, and each holder would receive an aggregate tax basis in the Subordinated Debentures equal to such holder's aggregate tax basis in its Preferred Securities. A holder's holding period in the Subordinated Debentures so received upon termination of Illinois Power Financing I would include the period during which the Preferred Securities were held by such holder.
Under certain circumstances described herein (see "Description of the Preferred Securities -- Special Event Redemption or Distribution"), the Subordinated Debentures may be redeemed for cash and the proceeds of such redemption distributed to holders in redemption of their Preferred Securities. Under current law, such a redemption would, for United States federal income tax purposes, constitute a taxable disposition of the redeemed Preferred Securities, and a holder could recognize gain or loss as if it sold such redeemed Preferred Securities for cash. See "United States Federal Income Taxation -- Sales of Preferred Securities."
A holder that sells Preferred Securities will recognize gain or loss equal to the difference between its adjusted tax basis in the Preferred Securities and the amount realized on the sale of such Preferred Securities. A holder's adjusted tax basis in the Preferred Securities generally will be its initial purchase price increased by OID previously includible in such holder's gross income to the date of disposition and decreased by payments received on the Preferred Securities. Such gain or loss generally will be a capital gain or loss and generally will be a long-term capital gain or loss if the Preferred Securities have been held for more than one year.
The Preferred Securities may trade at a price that does not accurately reflect the value of accrued but unpaid interest with respect to the underlying Subordinated Debentures. A holder who disposes of his Preferred Securities between record dates for payments of distributions thereon will be required to include accrued but unpaid interest on the Subordinated Debentures through the date of disposition in income as OID, and to add such amount to his adjusted tax basis in his pro rata share of the underlying Subordinated Debentures deemed disposed of. To the extent the selling price is less than the holder's adjusted tax basis (which will include, in the form of OID, all accrued but unpaid interest) a holder will recognize a capital loss. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes.
Subject to the qualifications discussed below, income on the Preferred Securities will be reported to holders on Forms 1099, which forms should be mailed to holders of Preferred Securities by January 31 following each calendar year.
Illinois Power Financing I will be obligated to report annually to Cede & Co., as holder of record of the Preferred Securities, the OID related to the Subordinated Debentures that accrued during the year. Illinois Power Financing I currently intends to report such information on Form 1099 prior to January 31 following each calendar year even though Illinois Power Financing I is not legally required to report to record holders until April 15 following each calendar year. The Underwriters (as defined herein) have indicated to Illinois Power Financing I that, to the extent that they hold Preferred Securities as nominees for beneficial holders, they currently expect to report to such beneficial holders on Forms 1099 by January 31 following each calendar year. Under current law, holders of Preferred Securities who hold as nominees for beneficial holders will not have any obligation to report information regarding the beneficial holders to Illinois Power Financing I. Illinois Power Financing I, moreover, will not have any obligation to report to beneficial holders who are not also record holders. Thus, beneficial holders of Preferred Securities who hold their Preferred Securities through the Underwriters will receive Forms 1099 reflecting the income on their Preferred Securities from such nominee holders rather than Illinois Power Financing I.
Payments made on, and proceeds from the sale of, the Preferred Securities may be subject to a "backup" withholding tax of 31% unless the holder complies with certain identification requirements. Any withheld amounts will be allowed as a credit against the holder's United States federal income tax, provided the required information is provided to the Service.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
Subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement"), Illinois Power Financing I has agreed to sell to each of the underwriters named below (the "Underwriters"), and each of the Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Smith Barney Inc., Dean Witter Reynolds Inc., A.G. Edwards & Sons, Inc. and PaineWebber Incorporated are acting as representatives (the "Representatives"), has severally agreed to purchase the number of Preferred Securities set forth opposite its name below. In the Underwriting Agreement, the several Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Preferred Securities offered hereby if any of the Preferred Securities are purchased. In the event of default by an Underwriter, the Underwriting Agreement provides that, in certain circumstances, the purchase commitments of the nondefaulting Underwriters may be increased or the Underwriting Agreement may be terminated.
The Underwriters propose to offer the Preferred Securities in part directly to the public at the initial public offering price, as set forth on the cover page of this Prospectus, and in part to certain securities dealers at such price less a concession of $.50 per Preferred Security. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $.30 per Preferred Security to certain brokers and dealers. After the Preferred Securities are released for sale to the public, the offering price and other selling terms may from time to time be varied by the Representatives.
In view of the fact that the proceeds of the sale of the Preferred Securities will be used to purchase the Subordinated Debentures of Illinois Power, the Underwriting Agreement provides that Illinois Power will agree to pay as compensation ("Underwriters' Compensation") to the Underwriters for the Underwriters' arranging the investment therein of such proceeds, an amount in New York Clearing House (next day) funds of $.7875 per Preferred Security (or $3,150,000 in the aggregate) for the accounts of the several Underwriters, provided that such compensation for sales of 10,000 or more Preferred Securities to any single purchaser will be $.50 per Preferred Security. Therefore, to the extent of such sales, the actual amount of Underwriters' Compensation will be less than the aggregate amount specified in the preceding sentence.
During a period of 30 days from the date of the pricing of the Preferred Securities, neither Illinois Power Financing I nor Illinois Power will, without the prior written consent of the Representatives, directly or indirectly, sell, offer to sell, contract to sell, grant any option for the sale of, or otherwise dispose of, any Preferred Securities, any security convertible into or exchangeable into or exercisable for Preferred Securities or the Subordinated Debentures or any debt securities substantially similar to the Subordinated Debentures or any equity securities substantially similar to the Preferred Securities (except for the Subordinated Debentures and the Preferred Securities offered hereby).
Application has been made to list the Preferred Securities on the New York Stock Exchange. If approved, trading of the Preferred Securities on the New York Stock Exchange is expected to commence within a 30-day period after the date of this Prospectus. The Representatives have advised Illinois Power Financing I that the Underwriters intend to make a market in the Preferred Securities prior to the commencement of trading on the New York Stock Exchange. The Underwriters will have no obligation to make a market in the Preferred Securities, however, any may cease market making activities, if commenced, at any time.
Prior to this offering, there has been no public market for the Preferred Securities. In order to meet one of the requirements for listing the Preferred Securities on the New York Stock Exchange, the Underwriters will undertake to sell lots of 100 or more Preferred Securities to a minimum of 400 beneficial holders.
Illinois Power and Illinois Power Financing I have agreed to indemnify the Underwriters against, or to contribute to payments that the Underwriters may be required to make in respect of, certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters engage in transactions with, and, from time to time, have performed services for, Illinois Power in the ordinary course of business.
Certain legal matters will be passed upon for Illinois Power and Illinois Power Financing I by Schiff Hardin & Waite, Chicago, Illinois, and for the Underwriters by Reid & Priest LLP, New York, New York. Certain matters of Delaware law relating to the validity of the Preferred Securities will be passed upon by Richards, Layton & Finger, P.A., Wilmington, Delaware, special Delaware counsel to Illinois Power and Illinois Power Financing I. Schiff Hardin & Waite may rely on the opinion of Reid & Priest LLP as to all matters of New York law, and Reid & Priest LLP may rely on the opinion of Schiff Hardin & Waite as to all matters of Illinois law.
The financial statements incorporated in this Prospectus by reference to Illinois Power's Annual Report on Form 10-K for the year ended December 31, 1994 have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ILLINOIS POWER COMPANY, ILLINOIS POWER FINANCING I OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF ILLINOIS POWER COMPANY OR ILLINOIS POWER FINANCING I, SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
GUARANTEED TO THE EXTENT SET
A.G. EDWARDS & SONS, INC. | 424B4 | 424B4 | 1996-01-12T00:00:00 | 1996-01-12T17:26:13 |
0000891618-96-000013 | 0000891618-96-000013_0006.txt | The undersigned directors and officers of Applied Materials, Inc., a Delaware corporation (the "Company") hereby constitute and appoint James C. Morgan and Gerald F. Taylor, and each of them with full power to act without the other, the undersigned's true and lawful attorney-in-fact, with full power of substitution and resubstitution, for the undersigned and in the undersigned's name, place and stead in the undersigned's capacity as an officer and/or director of the Company, to execute in the name and on behalf of the undersigned an annual report of the Company on Form 10-K for the fiscal year ended October 29, 1995 (the "Report"), under the Securities and Exchange Act of 1934, as amended, and to file such Report, with exhibits thereto and other documents in connection therewith and any and all amendments thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done and to take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required of, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion.
IN WITNESS WHEREOF, I have hereunto set my hand this 7th day of December, 1995. /s/ MICHAEL H. ARMACOST /s/ ALFRED J. STEIN Michael H. Armacost Alfred J. Stein
/s/ HERBERT M. DWIGHT, JR. /s/ JAMES C. MORGAN Herbert M. Dwight, Jr. James C. Morgan Director Chairman, Chief Executive Officer
/s/ GEORGE B. FARNSWORTH /s/ JAMES W. BAGLEY George B. Farnsworth James W. Bagley Director Vice Chairman and Director
/s/ PHILIP V. GERDINE /s/ DAN MAYDAN Philip V. Gerdine Dan Maydan
/s/ TSUYOSHI KAWANISHI /s/ GERALD F. TAYLOR Tsuyoshi Kawanishi Gerald F. Taylor Director Senior Vice President and Chief
/s/ PAUL R. LOW /s/ MICHAEL K. O'FARRELL Paul R. Low Michael K. O'Farrell | 10-K | EX-24 | 1996-01-12T00:00:00 | 1996-01-12T16:21:13 |
0000866273-96-000003 | 0000866273-96-000003_0000.txt | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended November 30, 1995
(Exact name of registrant as specified in its charter)
(State of incorporation) (I.R.S. Employer
l070l E. Ute St., Tulsa, Oklahoma 74ll6-l5l7 (Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 months (or for such shorter period that the reg- istrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of January 12, 1996, there were 9,491,153 shares of the Company's com- mon stock, $.01 par value per share, issued and 9,295,541 shares outstanding.
Condensed Consolidated Statements of Income (in thousands, except share and per share data)
Three Months Ended Six Months Ended
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant inter-company balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-0l of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the in- formation furnished reflects all adjustments, consisting only of normal re- curring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods.
The accompanying financial statements should be read in conjunction with the audited financial statements for the year ended May 3l, 1995, included in the Company's Annual Report on Form 10-K for the year then ended. The Company's business is seasonal; therefore, results for any interim period may not necessarily be indicative of future operating results.
NOTE B - BUSINESS ACQUISITIONS
On June 10, 1993, the Company acquired substantially all of the assets and as- ssumed certain liabilities of Heath Engineering, Ltd. and an affiliated company, Heath Engineering (Tank Maintenance) Ltd. (collectively "Heath"), for $3.3 mil- lion. The purchase price consisted of $2.5 million in cash and $782 thousand (1,000 shares) in redeemable preferred stock, of a wholly owned subsidiary of the company. The dividend rate on the preferred is bank prime (currently 6%), and the preferred stock is redeemable at a rate of approximately $39 thousand per quarter, (or 50 shares per quarter) for a 5-year period. The transaction was accounted for as a purchase and created approximately $2.2 million of goodwill and non-compete covenants.
On July 18, 1993, the Company executed a joint venture agreement with Saud Al Shafai and Sons Constructors, a Saudi Arabian Company. The Company invested $653 thousand for a 49% interest in Al Shafai-Midwest Constructors, Ltd. The Al Shafai-Midwest joint venture was established to conduct maintenance services and capital construction projects for the petroleum industry in the Middle East. Adverse changes in economic conditions in Saudi Arabia, have caused a shortage of work available of the nature performed by the joint venture. It is manage- ment's opinion that these conditions could last for several years. The venture partners, Saudi Al Shafai and Sons Contractors and the Company, are in the process of liquidating the joint venture. The Company has reduced the carrying value of its investment in this joint venture to the estimated recovery amount upon completion of the liquidation. The Company recorded a loss of $1.4 million for the year ended May 31, 1995 and $200 thousand loss for the year ended May 31, 1994, in conjunction with the joint venture.
On April 4, 1994, the Company acquired all of the outstanding common and special stock of Georgia Steel Fabricators, Inc. and its wholly owned subsidiary Brown Steel Contractors, Inc. (collectively "Brown Steel") for up to $8.0 million, subject to certain adjustments. The purchase price consisted of $3.5 million in cash and 45,452 shares of the Company's common stock valued at $ 500 thousand. In addition, the stockholders of Brown Steel are entitled to receive in the future up to an additional $4.0 million in cash if Brown Steel satisfies certain earnings requirements. The transaction was accounted for as a purchase.
On August 26, 1994, the Company acquired certain assets of Mayflower Vapor Seal Corporation for $660,000. The purchase price was paid in cash.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Three Months Ended November 30, 1995 Compared With The Three Months Ended November 30, 1994
Revenues for the quarter ending November 30, 1995 were $48.3 million as compared to revenues of $59.2 million for the quarter ended November 30, 1994, representing a decrease of approximately $10.9 million or 18%. The decrease is due to decreased revenues from the Company's refinery maintenance operations as compared with the same period in 1994. This decrease, resulted primarily from a shortage of work available in the MidWest Division during the current period.
Gross profit decreased to $4.3 million for the quarterly period ended November 30, 1995 from gross profit of $5.4 million for the quarterly period ended November 30, 1994, a decrease of approximately $1.1 million or 20%. Gross profit as a percentage of revenues decreased to 8.9% for the 1995 period from 9.2% for the 1994 period. The decrease of gross profit percentage for the current period as compared with prior period is due to lower revenues. The Company continues to experience pricing pressure as a result of lower demand for the Company's products and services in its established markets.
Selling, general and administrative expenses decreased to $2.7 million for the quarterly period ended November 30, 1995 from expenses of $3.2 million for the quarterly period ended November 30, 1994, a decrease of $501 thousand or approximately 16%. The decrease in selling, general and administrative expenses was related to the decrease in operations for the current period compared to the 1994 period. Selling, general and administrative expenses as a percentage of revenues increased to 5.6% for the current period as compared with 5.4% or the 1994 period. The increase in selling, general and admini- strative expenses as a percentage of revenues for the current period as compared to the prior period is due to the lower revenues.
Operating income decreased to $1.3 million for the quarterly period ended November 30, 1995 from income of $1.8 million for the quarterly period ended November 30, 1994, a decrease of $486 thousand or approximately 27%. The decrease was due to a decrease in revenues and a lower gross profit, partially offset by a decrease in selling, general and administrative expenses.
Interest expense increased to $229 thousand for the quarterly period ended November 30, 1995 from $185 thousand of interest expense for the quarterly period ended November 30, 1994. The increase resulted primarily from a slightly increased level of borrowing under the Company's credit facility.
Net income decreased to $670 thousand for the quarterly period ended November, 30, 1995 from net income of $1.4 million for the quarterly period ended November 30, 1994. The decrease was due to decreased revenues and decreased gross profit margin from the Company's established markets, and partially off- set by a decrease in selling, general and administrative expenses for the 1995 period as compared with the 1994 period.
Six Months Ended November 30, 1995 Compared With The Six Months Ended November 30, 1994
Revenues for the six months ended November 30, 1995 were $91.4 million as compared to revenues of $103.1 million for the six months ended November 30, 1994, representing a decrease of approximately $11.7 million or 11%. The de- crease was due to decreased revenues from the Company's refinery maintenance operations in the six month period ended November 30, 1995, as compared with the same period in 1994. This decrease, resulted primarily from a shortage of work available in the MidWest Division during the current period.
Gross profit decreased to $8.6 million for the six months ended November 30, 1995 from gross profit of $9.7 million for the six months ended November 30, 1994, a decrease of approximately $1.1 million. Gross profit as a percentage of revenues decreased to 9.4% for the 1995 period from 9.5% for the 1994 period. The decrease in gross profit percentage for the current period as compared with prior period is due to lower revenues.
Selling, general and adminstrative expenses decreased to $5.3 million for the six months ended November 30, 1995 from expenses of $5.7 million for the six months ended November 30, 1994, a decrease of $396 thousand or approximately 7%. The decrease in expenses was related to the decrease in operations for the current period compared to the 1994 period. Selling, general and administrative expenses as a percentage of revenues increased to 5.8% for the current period as compared with 5.5% for the 1994 period. The increase in the selling, general and administrative expenses as a percentage of revenues for the current period as compared to the prior period is due to the lower revenues.
Operating income decreased to $2.8 million for the six months ended November 30, 1995 from income of $3.2 million for the six months ended November 30, 1994, a decrease of $417 thousand or approximately 13%. The decrease was due to decreased revenues and a lower gross profit margin, offset in part by a decrease in selling, general and administrative expenses.
Net income decreased to $1.2 million in the 1995 period from net income of $2.1 million in 1994. The decrease was due to decreased revenues, a lower gross profit margin, and offset in part by decreased selling, general and administratiave expenses.
The Company has financed its operations recently with cash generated by opera- tions and advances under the Company's credit facility. The Company has a credit facility with a commercial bank under which the Company may borrow a total of $20.0 million. The Company may borrow up to $15.0 million under a rev- olving credit agreement based on the level of the Company's eligible receiv- ables. The agreement provides for interest at the Prime Rate minus one-half of one percent (1/2 of 1%), or a LIBOR based option, and matures on October 31, 1996. At November 30, 1995, the interest rate was 8.25% and the outstanding ad- vances under the revolver totaled $7.5 million. The credit facility also pro- vides for a term loan up to $5.0 million. On October 5, 1994, a term loan of $4.9 million was made to the Company. The term loan is due on August 31, 1999 and is to be repaid in 54 equal payments beginning in March 1995 at an interest rate based upon the Prime Rate. At November 30, 1995, the interest rate on the term loan was 8.75%, and the outstanding balance was $4.1 million.
Operations of the Company provided $1.6 million of cash for the six months ended November 30, 1995 as compared with using cash in operations of $3.5 million for the six months ended November 30, 1994, representing an increase of approximately $5.1 million. The increase was primarily the result of in- creased collections of accounts receivables of $6.4 million, a decrease in inventory of $764 thousand, a net decrease of $3.2 million in billings on uncompleted contracts in excess of costs and estimated earnings and $3.1 million of taxes receivable and other accruals, offset by net decreases of $1.9 million in costs and estimated earnings in excess of billings on uncompleted contracts and $6.5 million decrease from accounts payable and a decrease in current income of $877 thousand.
Capital expenditures during the six month period ended November 30, 1995 total- ed approximately $1.3 million. Of this amount approximately $951 thousand was used to purchase welding and construction equipment for field operations. In addition, the Company has invested approximately $111 thousand in transpor- tation equipment to be used to support field operations. The Company has currently budgeted approximately $2.2 million for additional capital expend- itures primarily to be used to purchase construction equipment during the re- mainder of fiscal year 1996. The Company expects to be able to finance any such expenditures with available working capital.
The Company believes that its existing funds, amounts available for borrowing under its credit facility, and cash generated by operations will be sufficient to meet the Company's working capital needs at least through fiscal 1996 and possibly thereafter unless significant expansions of operations not now planned are undertaken, in which case the Company would arrange additional financing as a part of any such expansion.
ITEM 4. Submission of Matters to a Vote of Security Holders: At the Company's 1995 Annual Meeting of Stockholders held October 25, 1995, the stockholders approved the Matrix Service Company 1995 Nonemployee Directors' Stock Option Plan in the aggregate amount of 250,000 shares.
ITEM 6. Exhibits and Reports on Form 8-K:
A. Exhibit 10.1 - 1995 Nonemployee Directors' Stock Option Plan. Exhibit 11 - Computation of earnings per share. Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K: None
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: January 12, 1996 By: /s/C. William Lee Signing on behalf of the chief financial officer. | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T17:20:21 |
0000950130-96-000108 | 0000950130-96-000108_0021.txt | <DESCRIPTION>LORAL CORPORATION SUPPLEMENTAL BONUS PROGRAM
LORAL CORPORATION SUPPLEMENTAL BONUS PROGRAM
The purpose of the Loral Corporation Supplemental Bonus Program (the "Program") is to provide supplemental bonus compensation to selected key executives of Loral Corporation (the "Company") in recognition of their dedication, service and contributions to the Company's business. Bonuses will be paid under the Program in connection with the successful consummation of the offer (the "Offer") described in Section 1.1(a) of the Agreement and Plan of Merger dated as of January 7, 1996 By and Among Loral Corporation, Lockheed Martin Corporation and LAC Acquisition Corporation.
Key employees of the Company and its subsidiaries who are selected by the Company's Chief Executive Officer (the "CEO") or his designee ("Eligible Employees") shall be eligible to receive bonuses under the Program. The CEO shall not be paid a bonus under the Program.
The amount of bonus compensation to be paid to an Eligible Employee (the "Bonus Award") shall be determined by the CEO. The aggregate amount of Bonus Awards payable pursuant to the Program shall not exceed the difference between (i) $40 million, and (ii) the cash amount actually paid to the CEO pursuant to Section 5 of his Restated Employment Agreement with the Company dated April 1, 1990, as amended June 14, 1994, as a result of the consummation of the Offer.
Effective as of the successful consummation of the Offer, the Company shall have a binding obligation to pay Bonus Awards to the Eligible Employees who have been selected for participation in the Program, in the amounts determined by the CEO. Such obligation shall be binding upon any successor of the Company. Bonus Awards shall be paid to Eligible Employees immediately prior to, contemporaneously with, or as soon as practicable after, the successful consummation of the Offer; provided, that, the Board of Directors may approve arrangements for the deferral of such payments in its discretion.
The Program is effective as of January 7, 1996.
Prior to the successful consummation of the Offer, the Board of Directors of the Company may amend or terminate the Program in any respect, with or without the consent of any Eligible Employee; provided, however, that as of the successful consummation of the Offer, the Program may not be amended or terminated in any manner which would reduce or otherwise adversely affect the Bonus Award payable to any Eligible Employee without such Eligible Employee's express written consent. | SC 14D1 | EX-99.(C)(9) | 1996-01-12T00:00:00 | 1996-01-12T17:26:30 |
0000950005-96-000012 | 0000950005-96-000012_0000.txt | <DESCRIPTION>NOTICE OF MEETING AND PROXY STATEMENT
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/ Filed by a party other than the Registrant / /
/ / Preliminary proxy statement / / Confidential, for use of the Commission only (as permitted by / / Definitive additional materials / / Soliciting material pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) or Schedule 14A / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / 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 transactions applies:
(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 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:
/ / 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.:
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 30, 1996
TO THE STOCKHOLDERS OF ELEXSYS INTERNATIONAL, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of ELEXSYS INTERNATIONAL, INC., a Delaware corporation (the "Company"), will be held on Tuesday, January 30, 1996 at 2:00 p.m. local time at the Four Points Hotel, 100 North Mathilda Avenue, Sunnyvale, California 94089 for the following purposes:
1. To elect directors to serve for the ensuing year and until their successors are elected.
2. To approve the adoption of the Company's 1996 Employee Stock Purchase Plan.
3. To approve the adoption of the Company's 1995 Stock Option Plan, as amended and restated.
4. To approve the adoption of the Company's 1996 Non-Employee Directors' Stock Option Plan.
5. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.
The Board of Directors has fixed the close of business on December 11, 1995, as the record date for the determination of stockholders entitled to notice of and to vote at this Annual Meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
FOR ANNUAL MEETING OF STOCKHOLDERS
INFORMATION CONCERNING SOLICITATION AND VOTING
The enclosed proxy is solicited on behalf of the Board of Directors (the "Board") of Elexsys International, Inc., a Delaware corporation (the "Company"), for use at the Annual Meeting of Stockholders to be held on January 30, 1996, at 2:00 p.m. local time (the "Annual Meeting"), or at any adjournment or postponement thereof, for the purposes set forth herein and in the accompanying Notice of Annual Meeting. The Annual Meeting will be held at the Four Points Hotel, 100 North Mathilda Avenue, Sunnyvale, California 94089. The Company intends to mail this proxy statement and accompanying proxy card on or about January 12, 1996, to all stockholders entitled to vote at the Annual Meeting.
The Company will bear the entire cost of solicitation of proxies, including preparation, assembly, printing and mailing of this proxy statement, the proxy and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names shares of Common Stock beneficially owned by others to forward to such beneficial owners. The Company may reimburse persons representing beneficial owners of Common Stock for their costs of forwarding solicitation materials to such beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone, telegram or personal solicitation by directors, officers or other regular employees of the Company. No additional compensation will be paid to directors, officers or other regular employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on December 11, 1995 will be entitled to notice of and to vote at the Annual Meeting. At the close of business on December 11, 1995 the Company had outstanding and entitled to vote 9,023,930 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one vote for each share held on all matters to be voted upon. With respect to the election of directors, stockholders may exercise cumulative voting rights. Under cumulative voting, each holder of Common Stock will be entitled to three votes for each share held. Each stockholder may give one candidate, who has been nominated prior to voting, all the votes such stockholder is entitled to cast or may distribute such votes among as many such candidates as such stockholder chooses.
All votes will be tabulated by the inspector of election appointed for the meeting, who will separately tabulate affirmative and negative votes, abstentions and broker non-votes. Abstentions will be counted towards the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether a matter has been approved.
Any person giving a proxy pursuant to this solicitation has the power to revoke it at any time before it is voted. It may be revoked by filing with the Secretary of the Company at the Company's principal executive office, 1188 Bordeaux Drive, Sunnyvale, California 94089, a written notice of revocation or a duly executed proxy bearing a later date, or it may be revoked by attending the meeting and voting in person. Attendance at the meeting will not, by itself, revoke a proxy.
Proposals of stockholders that are intended to be presented at the Company's 1997 Annual Meeting of Stockholders must be received by the Company not later than September 13, 1996 in order to be included in the proxy statement and proxy relating to that Annual Meeting.
At the 1995 Annual Meeting of Stockholders, the stockholders approved a proposal to adopt the Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate"). Among other things, the Restated Certificate eliminated the classification of the Company's Board of Directors in favor of the annual election of directors. However, the Restated Certificate provides that any incumbent director serving a term in excess of one year on March 2, 1995, the effective date of the Restated Certificate, shall not be required to stand for re-election until the expiration of such director's term. Further, a director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same term as the remaining term of his predecessor.
The Company's Bylaws presently authorize a Board of Directors composed of five directors. Three directors will be elected at the Annual Meeting. Pursuant to the Restated Certificate, the terms of two current directors expire at the Annual Meeting. The Board currently has one vacancy. Each director to be elected will hold office until the next annual meeting of stockholders and until his successor is elected and has qualified, or until such director's earlier death, resignation or removal. Each nominee listed below is currently a director of the Company and was previously elected by the stockholders, except for Mr. Jeffries. The terms of two directors, Messrs. Mandaric and Mendelson, do not expire at the Annual Meeting.
Shares represented by executed proxies will be voted, if authority to do so is not withhold, for the election of the three nominees named below, subject to the discretionary power to cumulate votes. In the event that any nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as management may propose. Each person nominated for election has agreed to serve if elected and management has no reason to believe that any nominee will be unable to serve.
Set forth below is biographical information for the individuals nominated and for each person whose term of office as a director will continue after the Annual Meeting.
The names of the nominees and certain information about them are set forth below:
Roland G. Matthews, age 56, has served as a director of the Company since September 1980. He was Chairman of the Board of the Company from January 1990 until June 1994. Mr. Matthews was Chief Executive Officer of the Company from September 1980 through March 1993 and was President of the Company from September 1980 to February 1990 and from January 1992 through March 1993.
Peter S. Jonas, age 57, has served as a director of the Company since September 1980 and Vice Chairman of the Board of Directors of the Company since January 1990. He was a consultant to the Company from October 1994 to September 1995; President and Chief Executive Officer of the Company from February 1993 until October 1994; Secretary of the Company from September 1980 to October 1994; Executive Vice President of the Company from September 1980 to January 1990; and Chief Financial Officer of the Company from September 1980 to February 1993. Mr. Jonas is presently a private investor and business consultant to private and public companies.
C. Bradford Jeffries, age 64, has been a partner of Sigma Management since 1984. Sigma Management is the general partner of Sigma Partners I, II and III, three venture capital funds. Mr. Jeffries is a vice president of Venture Investment Management Company L.L.C., which he co-founded in 1993. Venture Investment Management Company is the general partner of Venture Investment Associates, a venture capital fund formed to acquire the venture investment portfolio of American Express Co. Currently, Mr. Jeffries serves as a director of four private companies. Prior to 1994, Mr. Jeffries was a partner of Cooley Godward Castro Huddleson & Tatum, a private law firm and counsel to the Company, to which he continues to be of counsel.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE.
DIRECTOR CONTINUING IN OFFICE UNTIL THE 1997 ANNUAL MEETING
Milan Mandaric, age 57, has served as Chairman of the Board of Directors of the Company since June 1994 and President and Chief Executive Officer of the Company since October 1994. Mr. Mandaric was a director of Sanmina Corporation, a high technology multilayer circuit board and backpanel manufacturer, from 1980 until February 1994 and President, Chief Executive Officer and Chairman of the Board of Sanmina Corporation from 1980 until September 1989. Mr. Mandaric was Chairman of the Board of Directors of Senses International, Inc., a manufacturer of wireless security systems, from July 1989 to May 1995.
DIRECTOR CONTINUING IN OFFICE UNTIL THE 1998 ANNUAL MEETING
Alan C. Mendelson, age 47, was elected a director of the Company in January 1996. He has been a partner of Cooley Godward Castro Huddleson & Tatum, a private law firm and counsel to the Company, since 1980, and served as the managing partner of its Palo Alto office from May 1990 through March 1995. Mr. Mendelson also served as Secretary and Acting General Counsel of Amgen Inc., a biopharmaceutical company, from April 1990 to March 1991 and is currently serving as Acting General Counsel of Cadence Design Systems, Inc., an electronic design automation software company. Mr. Mendelson is currently a director of Acuson Corporation, CoCensys, Inc. and Isis Pharmaceuticals, Inc.
During the fiscal year ended September 30, 1995 the Board of Directors held 13 meetings. The Board has an Audit Committee and a Stock Option Committee.
The Audit Committee, whose current members are Messrs. Matthews and Jonas, has the following principal powers, duties and functions: (i) to review management's recommendations to the Board of Directors with respect to the selection of a firm of independent public accountants to audit the consolidated financial statements of the Company and its subsidiaries; (ii) to discuss with such independent public accountants the scope, results and effectiveness of their audit; (iii) to discuss with such independent public accountants and with the management of the Company the Company's internal accounting and control functions; and (iv) to report to the Board of Directors with respect to the foregoing, at such times and in such manner as the Board of Directors shall determine. The Audit Committee met two times during the fiscal year ended September 30, 1995.
The Stock Option Committee makes stock option grants to employees and consultants under the Company's stock option plans and performs such other functions as the Board may delegate. The Stock Option Committee, whose current members are Messrs. Matthews and Jonas, met four times during the fiscal year ended September 30, 1995.
The Company does not have a compensation or nominating committee.
APPROVAL OF THE ADOPTION OF THE 1996 EMPLOYEE STOCK PURCHASE PLAN
In January 1996, the Board of Directors adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan") authorizing the issuance of 250,000 shares of the Company's Common Stock. No shares had been issued under the Purchase Plan to date. The Purchase Plan is intended to afford the Company flexibility in providing employees with stock incentives and ensures that the Company can continue to provide such incentives at levels determined appropriate by the Board.
Stockholders are requested in this Proposal 2 to approve the adoption of the Purchase Plan. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the meeting will be required to approve the adoption of the Purchase Plan. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2.
The essential features of the Purchase Plan, as amended, are outlined below:
The purpose of the Purchase Plan is to provide a means by which employees of the Company (and any parent or subsidiary of the Company designated by the Board of Directors to participate in the Purchase Plan) may be given an opportunity to purchase Common Stock of the Company through payroll deductions, to assist the Company in retaining the services of its employees, to secure and retain the services of new employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company. All of the Company's approximately 940 employees, who meet the eligibility requirements, are eligible to participate in the Purchase Plan.
The rights to purchase Common Stock granted under the Purchase Plan are intended to qualify as options issued under an "employee stock purchase plan" as that term is defined in Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code").
The Purchase Plan is administered by the Board of Directors, which has the final power to construe and interpret the Purchase Plan and the rights granted under it. The Board has the power, subject to the provisions of the Purchase Plan, to determine when and how rights to purchase Common Stock of the Company will be granted, the provisions of each offering of such rights (which need not be identical), and whether any parent or subsidiary of the Company shall be eligible to participate in such plan. The Board has the power, which it has not exercised, to delegate administration of such plan to a committee of not less than two Board members. The Board may abolish any such committee at any time and revest in the Board the administration of the Purchase Plan.
The Purchase Plan is implemented by offerings of rights to all eligible employees from time to time by the Board. Generally, each such offering is six months in duration.
Any person who is customarily employed at least 20 hours per week an five months per calendar year by the Company (or by any parent or subsidiary of the Company designated from time to time by the Board on the first day of an offering period is eligible to participate in that offering under the
Purchase Plan, provided such employee has been in the continuous employ of the Company for at least six months preceding the first day of the offering period. Non-Employee Directors are not eligible to participate in the Purchase Plan.
Notwithstanding the foregoing, no employee is eligible for the grant of any rights under the Purchase Plan if, immediately after such grant, the employee would own, directly or indirectly, stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or of any parent or subsidiary of the Company (including any stock which such employee may purchase under all outstanding rights and options), nor will any employee be granted rights that would permit him to buy more than $25,000 worth of stock (determined at the fair market value of the shares at the time such rights are granted) under all employee stock purchase plans of the Company in any calendar year.
Eligible employees become participants in the Purchase Plan by delivering to the Company, prior to the date selected by the Board as the offering date for the offering, an agreement authorizing payroll deductions of up to 15% of such employees' compensation, excluding bonuses, during the purchase period.
The purchase price per share at which shares are sold in an offering under the Purchase Plan is the lower of (a) 85% of the fair market value of a share of Common Stock on the date of commencement of the offering, or (b) 85% of the fair market value of a share of Common Stock on the last day of the purchase period.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS
The purchase price of the shares is accumulated by payroll deductions over the offering period. At any time during the purchase period, a participant may reduce or terminate his or her payroll deductions. A participant may not increase or begin such payroll deductions after the beginning of any purchase period, except, if the Board provides, in the case of an employee who first becomes eligible to participate as of a date specified during the purchase period. All payroll deductions made for a participant are credited to his or her account under the Purchase Plan and deposited with the general funds of the Company. A participant may not make any additional payments into such account.
By executing an agreement to participate in the Purchase Plan, the employee is entitled to purchase shares under such plan. In connection with offerings made under the Purchase Plan, the Board may specify a maximum number of shares any employee may be granted the right to purchase and a maximum aggregate number of shares which may be purchased pursuant to such offering by all participants. If the aggregate number of shares to be purchased upon exercise of rights granted in the offering would exceed the maximum aggregate number, the Board would make a pro rata allocation of shares available in a uniform and equitable manner. Unless the employee's participation is discontinued, his right to purchase shares is exercised automatically at the end of the purchase period at the applicable price. See "Withdrawal" below.
While each participant in the Purchase Plan is required to sign an agreement authorizing payroll deductions, the participant may withdraw from a given offering by terminating his or her payroll deductions and by delivering to the Company a notice of withdrawal from the Purchase Plan. Such withdrawal may be elected at any time prior to the end of the applicable offering period.
Upon any withdrawal from an offering by the employee, the Company will distribute to the employee his or her accumulated payroll deductions without interest, less any accumulated deductions previously applied to the purchase of stock on the employee's behalf during such offering, and such employee's interest in the offering will be automatically terminated. The employee is not entitled to again participate in such offering. An employee's withdrawal from an offering will not have any effect upon such employee's eligibility to participate in subsequent offerings under the Purchase Plan.
Rights granted pursuant to any offering under the Purchase Plan terminate immediately upon cessation of an employee's employment for any reason, and the Company will distribute to such employee all of his or her accumulated payroll deductions, without interest.
Rights granted under the Purchase Plan are not transferable and may be exercised only by the person to whom such rights are granted.
The Board may suspend or terminate the Purchase Plan at any time.
The Board may amend the Purchase Plan at any time. Any amendment of the Purchase Plan must be approved by the stockholders within 12 months of its adoption by the Board if the amendment would (a) increase the number of shares of Common Stock reserved for issuance under the Purchase Plan, (b) modify the requirements relating to eligibility for participation in the Purchase Plan or (c) modify any other provision of the Purchase Plan in a manner that would materially increase the benefits accruing to participants under the Purchase Plan, if such approval is required in order to comply with the requirements of Rule 16b-3 ("Rule 16b-3") of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Rights granted before amendment or termination of the Purchase Plan will not be impaired by any amendment or termination of such plan without consent of the person to whom such rights were granted, except as necessary to comply with applicable laws or regulations.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event of a dissolution, liquidation or specified type of merger of the Company, the surviving corporation either will assume the rights under the Purchase Plan or substitute similar rights, or the exercise date of any ongoing offering will be accelerated such that the outstanding rights may be exercised immediately prior to, or concurrent with, any such event.
STOCK SUBJECT TO PURCHASE PLAN
If rights granted under the Purchase Plan expire, lapse or otherwise terminate without being exercised, the Common Stock not purchased under such rights again becomes available for issuance under such plan.
Rights granted under the Purchase Plan are intended to qualify for favorable federal income tax treatment associated with rights granted under an employee stock purchase plan which qualifies under provisions of Section 423 of the Code.
A participant will be taxed on amounts withheld for the purchase of shares as if such amounts were actually received. Other than this, no income will be taxable to a participant until disposition of the shares acquired, and the method of taxation will depend upon the holding period of the purchased shares.
If the stock is disposed of at least two years after the beginning of the offering period and at least one year after the stock is transferred to the participant, then the lesser of (a) the excess of the fair market value of the stock at the time of such disposition over the exercise price or (b) the excess of the fair market value of the stock as of the beginning of the offering period over the exercise price (determined as of the beginning of the offering period) will be treated as ordinary income. Any further gain or any loss will be taxed as a long-term capital gain or loss. Capital gains currently are generally subject to lower tax rates than ordinary income. The maximum capital gains rate for federal income tax purposes is 28% while the maximum ordinary rate is effectively 39.6% at the present time.
If the stock is sold or disposed of before the expiration of either of the holding periods described above, then the excess of the fair market value of the stock on the exercise date over the exercise price will be treated as ordinary income at the time of such disposition, and the Company may, in the future, be required to withhold income taxes relating to such ordinary income from other payments made to the participant. The balance of any gain will be treated as capital gain. Even if the stock is later disposed of for less than its fair market value on the exercise date, the same amount of ordinary income is attributed to the participant, and a capital loss is recognized equal to the difference between the sales price and the fair market value of the stock on such exercise date. Any capital gain or loss will be long or short-term depending on whether the stock has been held for more than one year.
There are no federal income tax consequences to the Company by reason of the grant or exercise of rights under the Purchase Plan. The Company is entitled to a deduction to the extent amounts are taxed as ordinary income to a participant (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation).
APPROVAL OF ADOPTION OF THE 1995 STOCK OPTION PLAN,
In July 1995, the Board of Directors adopted the Company's 1995 Stock Option Plan (the "1995 Plan").
At December 11, 1995, options (net of canceled or expired options) covering an aggregate of 82,000 shares of the Company's Common Stock had been granted under the 1995 Plan, and 918,000 shares (plus any shares that might in the future be returned to the plans as a result of cancellations or expiration of options) remained available for future grant under the 1995 Plan. During the last fiscal year, under the 1995 Plan, the Company did not grant options to any current executive officers or current directors. In January 1996, the Board approved an amendment and restatement of the 1995 Plan to reflect current applicable tax and securities requirements and for administrative ease.
The Board included in the 1995 Plan, as amended and restated, provisions to maximize the ability of the Company, under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), to deduct as a business expense certain compensation attributable to the exercise of stock options granted under the 1995 Plan. Section 162(m) denies a deduction to any publicly held corporation for certain compensation paid to specified employees in a taxable year to the extent that the compensation exceeds $1,000,000 for any covered employee. See "Federal Income Tax Information" below for a discussion of the application of Section 162(m). In light of the Section 162(m) requirements, the Board has amended the 1995 Plan, subject to stockholder approval, to include a limitation providing that no person may be granted options under the 1995 Plan during a calendar year to purchase in excess of 450,000 shares of Common Stock. Previously, no such formal limitation was placed on the number of shares available for option grants to an employee. In addition, the 1995 Plan was amended to provide that, in the Board's discretion, directors who grant options to covered employees may be "outside directors" as defined in Section 162(m). For a description of this requirement, see "Administration."
Stockholders are requested in this Proposal 3 to approve the 1995 Plan as adopted and as amended and restated. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the meeting will be required to approve the 1995 Plan as adopted and as amended and restated. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3.
The essential features of the 1995 Plan are outlined below:
The 1995 Plan provides for the grant of both incentive and nonstatutory stock options. Incentive stock options granted under the 1995 Plan are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Code. Nonstatutory stock options granted under the 1995 Plan are intended not to qualify as incentive stock options under the Code. See "Federal Income Tax Information" for a discussion of the tax treatment of incentive and nonstatutory stock options.
The 1995 Plan was adopted to provide a means by which selected officers and employees of and consultants to the Company and its affiliates could be given an opportunity to purchase stock in the Company, to assist in retaining the services of employees holding key positions, to secure and retain the services of persons capable of filling such positions and to provide incentives for such persons to exert maximum efforts for the success of the Company. Approximately 160 of the Company's approximately 940 employees and consultants are eligible to participate in the 1995 Plan.
The 1995 Plan is administered by the Board of Directors of the Company. The Board has the power to construe and interpret the 1995 Plan and, subject to the provisions of the 1995 Plan, to determine the persons to whom and the dates on which options will be granted, the number of shares to be subject to each option, the time or times during the term of each option within which all or a portion of such option may be exercised, the exercise price, the type of consideration and other terms of the option. The Board of Directors is authorized to delegate administration of the 1995 Plan to a committee composed of not fewer than two members of the Board. The Board has delegated administration of the 1995 Plan to the Stock Option Committee of the Board. As used herein with respect to the 1995 Plan, the "Board" refers to the Stock Option Committee as well as to the Board of Directors itself.
The regulations under Section 162(m) require that the directors who serve as members of the Stock Option Committee must be "outside directors." The 1995 Plan has been amended, subject to stockholder approval, to provide that, in the Board's discretion, directors serving on the Committee will also be "outside directors" within the meaning of Section 162(m). This limitation would exclude from the Stock Option Committee (i) current employees of the Company, (ii) former employees of the Company receiving compensation for past services (other than benefits under a tax-qualified pension plan), (iii) current and former officers of the Company, (iv) directors currently receiving direct or indirect remuneration from the Company in any capacity (other than as a director), unless any such person is otherwise considered an "outside director" for purposes of Section 162(m).
Incentive stock options may be granted under the 1995 Plan only to selected key employees (including officers) of the Company and its affiliates. Selected key employees (including officers) and consultants are eligible to receive nonstatutory stock options under the 1995 Plan. Directors who are not salaried employees of or consultants to the Company or to any affiliate of the Company are not eligible to participate in the 1995 Plan.
No incentive stock option may be granted under the 1995 Plan to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of the Company or any affiliate of the Company, unless the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and the term of the option does not exceed five years from the date of grant. For incentive stock options granted under the 1995 Plan, the aggregate fair market value, determined at the time of grant, of the shares of Common Stock with respect to which such options are exercisable for the first time by an optionee during any calendar year (under all such plans of the Company and its affiliates) may not exceed $100,000.
Subject to stockholder approval of this Proposal 3, the Company has added to the 1995 Plan, as amended and restated, a per-person, per-calendar year limitation equal to 450,000 shares of Common Stock. The purpose of adding this limitation is to maximize the Company's ability to deduct for tax purposes the compensation attributable to the exercise of options granted under the 1995 Plan. Previously, the Board or the Stock Option Committee determined in its discretion the number of shares subject to an option for any employee and no such formal limitation was placed on the number of shares available for an option to an optionee. To date, the Company has not granted to any employee in any calendar year period options to purchase a number of shares equal to or in excess of the limitation.
STOCK SUBJECT TO THE 1995 PLAN
If options granted under the 1995 Plan expire or otherwise terminate without being exercised, the Common Stock not purchased pursuant to such options again becomes available for issuance under the 1995 Plan.
The following is a description of the permissible terms of options under the 1995 Plan. Individual option grants may be more restrictive as to any or all of the permissible terms described below.
Exercise Price; Payment. The exercise price of incentive stock options under the 1995 Plan may not be less than the fair market value of the Common Stock subject to the option on the date of the option grant, and in some cases (see "Eligibility" above), may not be less than 110% of such fair market value. The exercise price of nonstatutory options under the 1995 Plan may not be less than 85% of the fair market value of the Common Stock subject to the option on the date of the option grant. However, if options were granted with exercise prices below market value, deductions for compensation attributable to the exercise of such options could be limited by Section 162(m). See "Federal Income Tax Information." At December 11, 1995, the closing price of the Company's Common Stock as reported on the Nasdaq System was $16.875 per share.
In the event of a decline in the value of the Company' s Common Stock, the Board has the authority to offer employees the opportunity to replace outstanding higher priced options, whether incentive or nonstatutory, with new lower priced options. The Company has provided that opportunity to employees in the past. To the extent required by Section 162(m), an option repriced under the 1995 Plan is deemed to be canceled and a new option granted. Both the option deemed to be canceled and the new option deemed to be granted will be counted against the 450,000 share limitation.
The exercise price of options granted under the 1995 Plan must be paid either: (a) in cash at the time the option is exercised; or (b) at the discretion of the Board, (i) by delivery of other Common Stock of the Company, (ii) pursuant to a deferred payment arrangement or, pursuant to the terms of the 1995 Plan as amended and restated, (c) in any other form of legal consideration acceptable to the Board.
Option Exercise. Options granted under the 1995 Plan may become exercisable in cumulative increments ("vest") as determined by the Board. Shares covered by currently outstanding options under the 1995 Plan typically vest in four equal annual installments (at the rate of 25% per year) during the optionee's employment or services as a consultant. Shares covered by options granted in the future under the 1995 Plan may be subject to different vesting terms. The Board has the power to accelerate the time during which an option may be exercised. In addition, options granted under the 1995 Plan, as amended and restated, may permit exercise prior to vesting, but in such event the optionee may be required to enter into an early exercise stock purchase agreement that allows the Company to repurchase shares not yet vested at their exercise price should the optionee leave the employ of the Company before vesting. To the extent provided by the terms of an option, an optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such option by a cash payment upon exercise, by authorizing the Company to withhold a portion of the stock otherwise issuable to the optionee, by delivering already-owned stock of the Company or by a combination of these means.
Term. The maximum term of options under the 1995 Plan is ten years, except that in certain cases (see "Eligibility") the maximum term is five years. Options granted under the 1995 Plan, prior to its amendment and restatement, may be exercised (to the extent vested upon termination of service) for 30 days after termination of the optionee's employment or relationship as a consultant or director of the Company or an affiliate, unless (a) such termination is due to the optionee's death or permanent and total disability (as defined in the Code), in which case the option terminates one year after such termination of service; or (b) such termination is due to the optionee's retirement after attainment of age 65 or by reason of resignation of employment or status as a consultant or director with the prior consent of the Board, in which case the option terminates three months after such termination. Options granted under the 1995 Plan, subsequent to its amendment and restatement, may be exercised (to the extent vested upon termination of service) for three months after termination of the optionee's employment or relationship as a consultant or director of the Company or any affiliate of the Company, unless (a) such termination is due to such person's permanent and total disability (as defined in the Code), in which case the option may, but need not, provide that it may be exercised at any time within one year of such termination; (b) the optionee dies while employed by or serving as a consultant or director of the Company or any affiliate of the Company, or within three months after termination of such relationship, in which case the option may, but need not, provide that it may be exercised within eighteen months of the optionee's death by the person or persons to whom the rights to such option pass by will or by the laws of descent and distribution; or (c) the option by its terms specifically provides otherwise. Individual options by their terms may provide for exercise within a longer period of time following termination of employment or the consulting relationship. The option term may also be extended in the event that exercise of the option within these periods is prohibited for specified reasons.
If there is any change in the stock subject to the 1995 Plan or subject to any option granted under the 1995 Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the 1995 Plan and options outstanding thereunder will be appropriately adjusted as to the class and the maximum number of shares subject to such plan, the maximum number of shares which may be granted to an employee during a calendar year period, and the class, number of shares and price per share of stock subject to such outstanding options.
EFFECT OF CERTAIN CORPORATE EVENTS
For options granted under the 1995 Plan, prior to its amendment and restatement, the time during which such options may be exercised will be accelerated so that such options will be fully exercisable in the event of (a) approval by the stockholders of a plan of liquidation or dissolution or specified type of merger or other corporate reorganization; (b) the replacement of a majority of the members of the Board as it was constituted on June 30, 1995, unless such replacements are approved by the vote of at least a majority of such members; or (c) the acquisition by any individual, entity or group of beneficial ownership of 25% or more of the combined voting power of then-outstanding securities of the Company entitled to vote (excluding acquisitions (i) directly from or by the Company or an affiliate or their benefit plans, or (ii) pursuant to any transaction in which more than 50% of the beneficial owners of outstanding voting securities remains substantially the same as prior to such transaction or in which no entity (other than the Company, any affiliate or certain significant stockholders) will beneficially own 25% or more of the then-outstanding securities of the Company entitled to vote. The 1995 Plan, subsequent to its amendment and restatement, provides that in the event of a (a) dissolution or liquidation of the Company; (b) specified type of merger; or (c) other corporate reorganization, then, to the extent permitted by law, the time during which such options may be exercised will be accelerated and the options terminated if not exercised after such acceleration and at or prior to such event. The acceleration of an option in the event of an acquisition or similar corporate event may be viewed as an antitakeover provision, which may have the effect of discouraging a proposal to acquire or otherwise obtain control of the Company.
The Board may suspend or terminate the 1995 Plan without stockholder approval or ratification at any time or from time to time. Unless sooner terminated, the 1995 Plan will terminate on July 17, 2005.
The Board may also amend the 1995 Plan at any time or from time to time. However, no amendment will be effective unless approved by the stockholders of the Company within twelve months before or after its adoption by the Board if the amendment would: (a) modify the requirements as to eligibility for participation (to the extent such modification requires stockholder approval in order for the Plan to satisfy Section 422 of the Code, if applicable, or Rule 16b-3 of the Exchange Act); (b) increase the number of shares reserved for issuance upon exercise of options; or (c) change any other provision of the Plan in any other way if such modification requires stockholder approval in order to comply with Rule 16b-3 or satisfy the requirements of Section 422 of the Code. The Board may submit any other amendment to the 1995 Plan for stockholder approval, including, but not limited to, amendments intended to satisfy the requirements of Section 162(m) of the Code regarding the exclusion of performance-based compensation from the limitation on the deductibility of compensation paid to certain employees.
All stock options granted under the 1995 Plan, prior to its amendment and restatement, and all incentive stock options whenever granted under the 1995 Plan may only be transferred by the optionee by will or by the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by the optionee. A nonstatutory stock option granted under the 1995 Plan, subsequent to its amendment and restatement, may only be transferred by will or by the laws of descent and distribution or pursuant to a "qualified domestic relations order." In any case, however, the optionee may designate in writing a third party who may exercise the option in the event of the optionee's death. In addition, shares subject to repurchase by the Company under an early exercise stock purchase agreement may be subject to restrictions on transfer which the Board deems appropriate.
Incentive Stock Options. Incentive stock options under the 1995 Plan are intended to be eligible for the favorable federal income tax treatment accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee or the Company by reason of the grant or exercise of an incentive stock option. However, the exercise of an incentive stock option may increase the optionee's alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock option for at least two years from the date on which the option is granted and at least one year from the date on which the shares are transferred to the optionee upon exercise of the option, any gain or loss on a disposition of such stock will be long-term capital gain or loss. Generally, if the optionee disposes of the stock before the expiration of either of these holding periods (a "disqualifying disposition"), at the time of disposition, the optionee will realize taxable ordinary income equal to the lesser of (a) the excess of the stock's fair market value on the date of exercise over the exercise price, or (b) the optionee's actual gain, if any, on the purchase and sale. The optionee's additional gain, or any loss, upon the disqualifying disposition will be a capital gain or loss, which will be long-term or short-term depending on whether the stock was held for more than one year. Long-term capital gains currently are generally subject to lower tax rates than ordinary income. The maximum capital gains rate for federal income tax purposes is currently 28% while the maximum ordinary income rate is effectively 39.6% at the present time. Slightly different rules may apply to optionees who acquire stock subject to certain repurchase options or who are subject to Section 16(b) of the Exchange Act.
To the extent the optionee recognizes ordinary income by reason of a disqualifying disposition, the Company will generally be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation) to a corresponding business expense deduction in the tax year in which the disqualifying disposition occurs.
Nonstatutory Stock Options. Nonstatutory stock options granted under the 1995 Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionee or the Company by reason of the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock option, the optionee normally will recognize taxable ordinary income equal to the excess of the stock's fair market value on the date of exercise over the option exercise price. Generally, with respect to employees, the Company is required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation, the Company will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the optionee. Upon disposition of the stock, the optionee will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon exercise of the option. Such gain or loss will be long or short-term depending on whether the stock was held for more than one year. Slightly different rules may apply to optionees who acquire stock subject to certain repurchase options or who are subject to Section 16(b) of the Exchange Act.
Potential Limitation on Company Deductions. As part of the Omnibus Budget Reconciliation Act of 1993, the U.S. Congress amended the Code to add Section 162(m), which denies a deduction to any publicly held corporation for compensation paid to certain employees in a taxable year to the extent that compensation exceeds $1,000,000 for a covered employee. It is possible that compensation attributable to stock options, when combined with all other types of compensation received by a covered employee from the Company, may cause this limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based compensation," are disregarded for purposes of the deduction limitation. In accordance with proposed Treasury regulations issued under Section 162(m), compensation attributable to stock options will qualify as performance-based compensation, provided that the option is granted by a stock option committee comprised solely of "outside directors" and either: (i) the option plan contains a per-employee limitation on the number of shares for which options may be granted during a specified period, the per-employee limitation is approved by the stockholders, and the exercise price of the option is no less than the fair market value of the stock on the date of grant; or (ii) the option is granted (or exercisable) only upon the achievement (as certified in writing by the stock option committee) of an objective performance goal established in writing by the stock option committee while the outcome is substantially uncertain, and the option is approved by stockholders.
APPROVAL OF THE ADOPTION OF THE 1996 NON-EMPLOYEE
In January 1996, the Board of Directors adopted, subject to stockholder approval, the Company's 1996 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan provides for automatic, non-discretionary grants of options to purchase an aggregate of 200,000 shares of the Company's Common Stock.
Stockholders are requested in this Proposal 4 to approve the Directors' Plan, including the reservation of 200,000 shares of Common Stock for issuance thereunder. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the meeting will be required to approve the Directors' Plan. Abstentions will will be counted toward the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 4.
The essential features of the Directors' Plan are outlined below:
The Directors' Plan provides for non-discretionary grants of nonstatutory stock options. Options granted under the Directors' Plan are not intended to qualify as incentive stock options, as defined under Section 422 of the Code.
The purpose of the Directors' Plan is to retain the services of persons now serving as Non-Employee Directors of the Company (as defined below), to attract and retain the services of persons capable of serving on the Board of Directors of the Company and to provide incentives for such persons to exert maximum efforts to promote the success of the Company.
The Directors' Plan is administered by the Board of Directors of the Company. The Board of Directors has the final power to construe and interpret the Directors' Plan and options granted under it, and to establish, amend and revoke rules and regulations for its administration.
The Board of Directors is authorized to delegate administration of the Directors' Plan to a committee of not less than two members of the Board. The Board of Directors does not presently contemplate delegating administration of the Directors' Plan to any committee of the Board of Directors.
The Directors' Plan provides that options may be granted only to Non-Employee Directors of the Company. A "Non-Employee Director" is defined in the Directors' Plan as a director of the Company and its affiliates who is not otherwise an employee of the Company or any affiliate. Three of the Company's four current directors and its nominee for the vacancy on the Board will be eligible to participate in the Directors' Plan.
Each option under the Directors' Plan is subject to the following terms and conditions:
Non-Discretionary Grants. Each person who is, after September 30, 1995, first elected to be a Non-Employee Director shall automatically be granted an option to purchase 15,000 shares of Common Stock upon the date of such election. Each year, commencing with calendar year 1997, on the day following the day of the annual stockholder meeting of the Company, each person who is then a Non- Employee Director and has been a Non-Employee Director for at least four months, shall automatically be granted an option to purchase 5,000 shares of Common Stock.
Option Exercise. An option granted under the Directors' Plan becomes exercisable over a four- year period in 48 equal monthly installments. Such vesting is conditioned upon continued service as a Non-Employee Director or employee of or consultant to the Company or an affiliate.
Exercise Price; Payment. The exercise price of options granted under the Directors' Plan shall be equal to 100% of the fair market value of the Common Stock subject to such options on the date such option is granted. The exercise price of options granted under the Directors' Plan must be paid at the time the option is exercised in cash or by delivery of other Common Stock of the Company.
Transferability; Term. Under the Directors' Plan, an option may not be transferred by the optionee, except by will or the laws of descent and distribution, or pursuant to a "qualified domestic relations order." No option granted under the Directors' Plan is exercisable by any person after the expiration of ten years from the date the option is granted.
Other Provisions. The option agreement may contain such other terms, provisions and conditions not inconsistent with the Directors' Plan as may be determined by the Board of Directors.
If there is any change in the stock subject to the Directors' Plan or subject to any option granted under the Directors' Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Directors' Plan and options outstanding thereunder will be appropriately adjusted as to the class and the maximum number of shares subject to the Directors' Plan and the class, number of shares and price per share of stock subject to outstanding options.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event of a dissolution, liquidation or specified type of merger or other corporate reorganization, to the extent permitted by law, the time during which outstanding options may be exercised shall be accelerated and the options terminated if not exercised after such acceleration and at or prior to such event. The acceleration of an option in the event of an acquisition or similar corporate event may be viewed as an antitakeover provision, which may have the effect of discouraging a proposal to acquire or otherwise obtain control of the Company.
The Board of Directors may amend, suspend or terminate the Directors' Plan at any time or from time to time; provided, however, that the Board may not amend the Directors' Plan with respect to the amount, price or timing of grants more often than once every six months other than to comport with changes to the Code or the Employee Retirement Income Security Act of 1974, as amended. No amendment will be effective unless approved by the stockholders of the Company within twelve months before or after its adoption by the Board if the amendment would: (i) increase the number of shares reserved for options under the plan; (ii) modify the requirements as to eligibility for participation in the plan (to the extent such modification requires stockholder approval in order for the plan to comply with the requirements of Rule 16b-3); or (iii) modify the plan in any other way if such modification requires stockholder approval in order for the plan to meet the requirements of Rule 16b-3. The Directors' Plan shall terminate at the discretion of the Board.
CERTAIN FEDERAL INCOME TAX INFORMATION
Stock options granted under the Directors' Plan are subject to federal income tax treatment pursuant to rules governing options that are not incentive stock options.
The following is only a summary of the effect of federal income taxation upon the optionee and the Company with respect to the grant and exercise of options under the Directors' Plan, does not purport to be complete and does not discuss the income tax laws of any state or foreign country in which an optionee may reside.
Options granted under the Directors' Plan are nonstatutory options. There are no tax consequences to the optionee or the Company by reason of the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock option, the optionee normally will recognize taxable ordinary income equal to the excess of the stock's fair market value on the date of exercise over the option exercise price. Because the optionee is a director of the Company, under existing laws, the date of taxation (and the date of measurement of taxable ordinary income) may in some instances be deferred unless the optionee files an election under Section 83(b) of the Code. The filing of a Section 83(b) election with respect to the exercise of an option may affect the time of taxation and the amount of income recognized at each such time. Upon disposition of the stock, the optionee will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon exercise of such option. Such gain or loss will be long or short-term depending on whether the stock was held for more than one year.
1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN NAME AND POSITION DOLLAR VALUE(2) TO OPTIONS GRANTED Alan C. Mendelson(1) ................ 234,375 15,000
as a Group(3 ........................ 234,375 15,000
(1) The grant to Mr. Mendelson is subject to shareholder approval of Proposal 4.
(2) Exercise price ($15.625) multiplied by the number of shares underlying the option.
(3) In addition to the above grant, pursuant to the terms of the Directors' Plan, Mr. Jeffries, upon his election as a Non-Employee Director of the Company at the Annual Meeting (see Proposal 1) and the approval of Proposal 4, will automatically be granted options to purchase 15,000 shares each of the Company's common stock. Such grant will be effective on the date of the Annual Meeting and will be priced at the fair market value on the date of grant.
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of the Company's Common Stock as of December 11, 1995 by: (i) each director and nominee for director; (ii) each of the executive officers named in the Summary Compensation Table employed by the Company in that capacity on December 11, 1995; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent of its Common Stock.
C. Bradford Jeffries .................................... 0 * Peter S. Jonas(2) ....................................... 510,000 5.7% Roland G. Matthews(2)(3) ................................ 584,730 6.5% Alan C. Mendelson ....................................... 11,000 * W. Barry Hegarty ........................................ 30,000 * Michael S. Shimada(4) ................................... 26,125 * All executive officers and directors as a group
* Less than one percent. (1) This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G, if any, filed with the Securities and Exchange Commission (the "SEC"). Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, the Company believes that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 9,023,930 shares outstanding on December 11, 1995, adjusted as required by rules promulgated by the SEC.
(2) The mailing address of the stockholder is c/o Elexsys International, Inc., 1188 Bordeaux Drive, Sunnyvale, California 94089.
(3) Shares held in the name of a family limited partnership, of which Mr. Matthews and his wife are the general partners.
(4) Includes 17,300 shares which Michael S. Shimada, an executive officer of the Company, has the right to acquire within 60 days after the date of this table pursuant to outstanding options.
COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16(A)
Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended September 30, 1995, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with; except that two reports, covering four transactions, were filed late by Mr. Mandaric and one report, covering one transaction, was filed late by Mr. Hegarty.
Mr. Mandaric does not receive any compensation for serving on the Board in addition to his compensation as an employee of the Company.
For his service on the Board of Directors and as a consultant to the Company, Mr. Jonas received $15,000 per month during the fiscal year ended September 30, 1995. For his service on the Board of Directors, commencing October 1, 1995, Mr. Jonas receives $2,500 per month. Benefits received by Mr. Jonas include certain medical insurance benefits available to founding directors, in addition to the Company's general group health plan, at a total cost to the Company for the year ended September 30, 1995 of $20,698 and for the use of a Company automobile valued at $2,052 for the fiscal year ended September 30, 1995.
For their service on the Board of Directors, Messrs. Jeffries and Mendelson will receive an annual retainer of $7,500 and $1,500 for each meeting of the Board attended.
For his service on the Board of Directors, Mr. Matthews receives $2,500 per month. Benefits received by Mr. Matthews include certain medical insurance benefits available to founding directors, in addition to the Company's general group health plan, at a total cost to the Company for the year ended September 30, 1995 of $2,824.
For his service on the Board of Directors, Charles Handley, a former director of the Company, received $9,500.
In the fiscal year ended September 30, 1995, the total compensation paid to Non-Employee Directors was $245,074. The members of the Board of Directors are also eligible for reimbursement for their expenses incurred in connection with attendance at Board meetings in accordance with Company policy.
In January 1996, the Board adopted the Directors' Plan (see Proposal 4) to provide for the automatic grant of options to purchase shares of the Company's Common Stock to Non-Employee Directors of the Company.
The following table shows for the fiscal years ended September 30, 1993, 1994 and 1995, compensation awarded or paid to, or earned by, the Company's Chief Executive Officer and its two other executive officers at September 30, 1995 (the "Named Executive Officers"):
NAME AND PRINCIPAL SALARY BONUS OPTIONS/ COMPENSATION POSITION YEAR ($) ($) (#) ($) -------- ---- ------ ----- -------------- ------------ Milan Mandaric ............1995 12 50,000 0 0 Chief Executive Officer 1994 0 0 0 0 1993 0 0 0 0 W. Barry Hegarty ....... 1995 105,000 60,000 100,000 5,070 Chief Operating Officer 1994 0 0 0 0 1993 0 0 0 0 Michael S. Shimada .... 1995 130,000 15,000 0 10,956 Chief Financial Officer 1994 106,290 0 47,000 107,106 1993 131,250 0 [15,000](1) 222
(1) Options expired during fiscal year ended September 30, 1993 and are no longer exercisable.
STOCK OPTION GRANTS AND EXERCISES
During the last fiscal year, the Company granted options to one executive officer under its 1994 Incentive Stock Option Plan (the "1994 Option Plan"). As of December 11, 1995, options to purchase a total of 404,680 shares were outstanding under the 1994 Option Plan and options to purchase 64,850 shares remained available for grant thereunder.
The following table shows for the fiscal year ended September 30, 1995, certain information regarding options granted to and held at year end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
During the fiscal year ended September 30, 1995, no options were exercised by the Named Executive Officers.
The Company has severance arrangements (the "Arrangements") with each of Messrs. Shimada and Hegarty (the "Executives"). If an Executive's employment is terminated without cause by the Company, the Executive will receive monthly payments equal to his monthly salary at the time of termination for six months, in the case of Mr. Hegarty, or 12 months, in the case of Mr. Shimada, or until his earlier reemployment. In the case of Mr. Shimada, if there is a change in control of the Company and his employment is terminated within 18 months following the change in control, either without cause by the Company or for good reason by him, he will instead receive a lump sum cash payment equal to two years' salary.
If any portion of the Executive's severance compensation under the Arrangement (i) exceeds the total amount of payments or benefits which could be received by the Executive from the Company pursuant to Section 280G of the Code; or (ii) is subject to the excise tax imposed by Section 4999 of the Code, such payments or benefits shall be reduced to the extent necessary to comply with the limitation.
On October 3, 1994, Mr. Jonas resigned as an officer of the Company but continues to serve as a director. In addition, Mr. Jonas served as a consultant to the Company through September 1995. Pursuant to the terms of an agreement with the Company, Mr. Jonas received as consulting fees monthly payments equal to his monthly salary at the time of his resignation for a period of 12 months, ended in September 1995. In addition, Mr. Jonas received through September 1995 the same employee benefits he received immediately prior to his resignation.
REPORT OF THE BOARD OF DIRECTORS
The following report of the Board of Directors shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933, as amended, or under the Exchange Act, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
The Company does not have a compensation committee. The Board of Directors makes all decisions regarding compensation of executive officers. The primary components of executive compensation consist of annual compensation, which includes base salaries and annual bonuses, and long-term compensation through the grant of options to purchase Common Stock. Though the aim of the Company is to maximize stockholder value, compensation for the executive officers is not primarily related to the overall performance of the Company. The Board of Directors' principal philosophy is one of fairness and executive officers are judged on their individual merits, which is the standard of evaluation for all employees of the Company.
Section 162(m) of the Code limits the Company to a deduction for federal income tax purposes of no more than $1 million of compensation paid to certain Named Executive Officers in a taxable year. Compensation above $1 million may be deducted if it is "performance-based compensation" within the meaning of the Code.
The Stock Option Committee has determined that certain stock options granted under the Company's 1995 Plan with an exercise price of at least equal to the fair market value of the Company's common stock on the date of grant may be treated as "performance-based compensation." As a result, the Company's stockholders have been asked to approve an amendment to the 1995 Plan to maximize the Company's ability to take a business expense deduction in connection with the grant of such a stock option.
The base salary levels of executive officers (other than Mr. Mandaric) are determined periodically by evaluating the performance of the executive officers and their contributions to the Company, and their responsibilities, experience and potential. Mr. Mandaric was paid a nominal salary during fiscal 1995.
The annual bonuses of the executive officers are determined in the discretion of the Board of Directors based on individual performance and the financial performance of the Company. The Company has a discretionary profit sharing bonus plan that provides for payment of bonuses to all eligible employees in accordance with the achievement of certain performance standards. The amount an employee, including an executive officer, receives is determined in the discretion of management. The determination of Mr. Mandaric's bonus for fiscal 1995 was based upon a number of factors, including increases in revenues and net income over the prior year, increases in the Company's stock price and the market capitalization of the Company and balance sheet improvements, such as greater working capital and stockholders' equity.
(1) This section is not "soliciting material," is not deemed "filed" with the SEC and is not to be incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION
Mr. Jonas, a member of the Board since 1980, served as an officer of the Company from September 1980 to October 1994, during which period he served as President and Chief Executive Officer of the Company from February 1993 to October 1994. Mr. Matthews, a member of the Board since 1980, served as an officer of the Company from September 1980 to March 1993. Additionally, Mr. Mandaric, the Company's President and Chief Executive Officer, serves as Chairman of the Board.
The following graph shows the total stockholder return of an investment of $100 in cash on September 30, 1990 for (i) the Company's Common Stock, (ii) the NASDAQ Stock Market - U.S. Index and (iii) a Peer Group consisting of Altron, Incorporated. (ALRN), Circuit Systems, Inc. (CSYI), Data- Design Laboratories, Inc. (DDL), Hadco Corp. (HDCO), Merix Corp. (MERX), Parlex Corp. (PRLX), Sanmina Corp. (SANM), Sheldahl Inc., (SHEL) and Sigma Circuits, Inc. (SIGA) (the "Peer Group"). All values assume reinvestment of the full amount of all dividends and are calculated as of September 30 of each year:
[The following descriptive data is supplied in accordance with Rule 304(d) of
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG ELEXSYS INTERNATIONAL INC., THE NASDAQ STOCK MARKET--U.S. INDEX
1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- Elexsys International Inc. $100 $ 78 $ 70 $ 35 $ 46 $530 Peer Group 100 93 98 211 205 439 NASDAQ Group Market--U.S. 100 157 176 231 233 321
* $100 invested on 09/30/90 in stock or index including reinvestment of dividends. Fisal year ending September 30.
(1) This section is not "soliciting material," is not deemed "filed" with the SEC and is not to be incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
The Company and Milan Mandaric, the Company's Chairman of the Board, President and Chief Executive Officer, entered into a Second Securities Exchange Agreement dated as of March 29, 1995 (the "Agreement").
Pursuant to the Agreement, on March 31, 1995 (the "Closing Date") Mr. Mandaric exchanged an aggregate of $4,000,000 in principal amount of the Company's outstanding 5-1/2% Convertible Subordinated Debentures due 2012 (the "Debentures") for 400,000 newly issued shares of the Company's Common Stock, par value $1.00 per share. In addition, the Company paid to Mr. Mandaric $18,333, an amount equal to the accrued but unpaid interest on the Debentures through the Closing Date.
Deloitte & Touche, which has been the Company's independent certified public accountants since the Company's inception, will continue to serve in that capacity for the current fiscal year. It is anticipated that representatives of Deloitte & Touche will be present at the Annual Meeting and will be provided with an opportunity to make a statement if they so desire and to respond to appropriate questions from stockholders.
The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED ON JANUARY 8, 1996
(a) The purpose of the 1996 Non-Employee Directors' Stock Option Plan (the "Plan") is to provide a means by which each director of Elexsys International, Inc. (the "Company") who is not otherwise at the time of grant an employee of or consultant to the Company or of any Affiliate of the Company (each such person being hereafter referred to as a "Non-Employee Director") will be given an opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended from time to time (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company.
(a) The Plan shall be administered by the Board of Directors of the Company (the "Board") unless and until the Board delegates administration to a committee, as provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under the Plan shall not exceed in the aggregate two hundred thousand (200,000) shares of the Company's common stock. If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.
Options shall be granted only to Non-Employee Directors of the Company.
(a) Each person who is, after September 30, 1995, elected for the first time to be a Non-Employee Director automatically shall, upon the date of initial election to be a Non-Employee Director by the Board or stockholders of the Company, be granted an option to purchase fifteen thousand (15,000) shares of common stock of the Company on the terms and conditions set forth herein.
(b) Each year, commencing with calendar year 1997, on the day following the day of the annual meeting of the stockholders of the Company, each person who is then a Non-Employee Director and has been a Non-Employee Director for at least four (4) months automatically shall be granted an option to purchase five thousand (5,000) shares of common stock of the Company on the terms and conditions set forth herein.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted and, unless sooner terminated as set forth herein, expires on the date ("Expiration Date") ten (10) years from the date of grant. If the optionee's service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate terminates for any reason or for no reason, the option shall terminate on the earlier of the Expiration Date or the date twelve (12) months following the date of termination of all such service; provided, however, that if such termination of service is due to the optionee's death, the option shall terminate on the earlier of the Expiration Date or eighteen (18) months following the date of the optionee's death. In any and all circumstances, an option may be exercised following termination of the optionee's service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate only as to that number of shares as to which it was exercisable as of the date of termination of all such service under the provisions of subparagraph 6(e).
(b) The exercise price of each option shall be one hundred percent (100%) of the fair market value of the stock subject to such option on the date such option is granted.
(c) The optionee may elect to make payment of the exercise price under one of the following alternatives:
(i) Payment of the exercise price per share in cash at the
(ii) Provided that at the time of the exercise the Company's common stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of shares of common stock of the Company already owned by the optionee, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interest, which common stock shall be valued at its fair market value on the date preceding the date of exercise; or
(iii) Payment by a combination of the methods of payment specified in subparagraph 6(c)(i) and 6(c)(ii) above.
Notwithstanding the foregoing, this option may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of cash (or check) by the Company either prior to the issuance of shares of the Company's common stock or pursuant to the terms of irrevocable instructions issued by the optionee prior to the issuance of shares of the Company's common stock.
(d) An option shall not be transferable except by will or by the laws of descent and distribution, or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 ("Rule 16b-3") and shall be exercisable during the lifetime of the person to whom the option is granted only by such person (or by his guardian or legal representative) or transferee pursuant to such an order. Notwithstanding the foregoing, the optionee may, by delivering written notice to the Company in a to the Company, designate a third party who, in the event of the death of the optionee, shall thereafter be entitled to exercise the option.
(e) The option shall become exercisable in installments over a period of four years from the date of grant as follows: one forty-eighth (1/48) of the shares shall vest each month commencing on the date of grant of the option, provided that the optionee has, during the entire period prior to such vesting date, continuously served as a Non-Employee Director, employee or consultant to the Company or any Affiliate of the Company, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment.
(f) The Company may require any optionee, or any person to whom an option is transferred under subparagraph 6(d), as a condition of exercising any such option: (i) to give written assurances satisfactory to the Company as to the optionee's knowledge and experience in financial and business matters; and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then-currently-effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii), as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require any optionee to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities laws as a condition of granting an option to the optionee or permitting the optionee to exercise the option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.
(g) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act.
(h) The Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that any optionee not sell or otherwise transfer or dispose of any shares of common stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act as may be requested by the Company or the representative of the underwriters.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the options granted under the Plan; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any option granted under the Plan, or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the Plan shall constitute general funds of the Company.
(a) Neither an optionee nor any person to whom an option is transferred under subparagraph 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms.
(b) Throughout the term of any option granted pursuant to the Plan, the Company shall make available to the holder of such option, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the option term, upon request, such financial and other information regarding the Company as comprises the annual report to the stockholders of the Company provided for in the Bylaws of the Company and such other information regarding the Company as the holder of such option may reasonably request.
(c) Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Company or any Affiliate in any capacity or shall affect any right of the Company, its Board or stockholders or any Affiliate to remove any Non-Employee Director pursuant to the Company's By-Laws and the provisions of the Delaware General Corporation Law (or the laws of the Company's state of incorporation should that change in the future).
(d) No Non-Employee Director, individually or as a member of a group, and no beneficiary or other person claiming under or through him, shall have any right, title or interest in or to any option reserved for the purposes of the Plan except as to such shares of common stock, if any, as shall have been reserved for him pursuant to an option granted to him.
(e) In connection with each option made pursuant to the Plan, it shall be a condition precedent to the Company's obligation to issue or transfer shares to a Non-Employee Director, or to evidence the removal of any restrictions on transfer, that such Non-Employee Director make arrangements satisfactory to the Company to insure that the amount of any federal or other withholding tax required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax.
(f) As used in this Plan, "fair market value" means, as of any date, the value of the common stock of the Company determined as follows:
(i) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable;
(ii) If the common stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable;
(iii) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding options. Such adjustments shall be made by the Board, the determination of which shall be final, binding, and conclusive.
(The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the
(b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or groups within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any comparable successor provisions (excluding any employee benefit plan, or related trust, approved or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent not prohibited by applicable law: the time during which options outstanding under the Plan may be exercised shall be accelerated prior to such event and the options terminated if not exercised after such acceleration and at or prior to such event.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan, provided, however, that the Board shall not amend the plan more than once every six (6) months, with respect to the provisions of the Plan which relate to the amount, price and timing of grants, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. Except as provided in paragraph 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will:
(i) Increase the number of shares which may be issued
(ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3);
(iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3 or Section 162(m) of the Internal Revenue Code.
(b) Rights and obligations under any option granted before any amendment of the Plan shall not be impaired by such amendment unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. No options may be granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted.
(c) The Plan shall terminate upon the occurrence of any of the events described in Section 10(b) above.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(a) The Plan shall become effective upon adoption by the Board of Directors, subject to the condition subsequent that the Plan is approved by the stockholders of the Company.
(b) No option granted under the Plan shall be exercised or exercisable unless and until the condition of subparagraph 13(a) above has been met.
1996 EMPLOYEE STOCK PURCHASE PLAN
Approved by Shareholders on January ____, 1996
(a) The purpose of the 1996 Employee Stock Purchase Plan (the "Plan") is to provide a means by which employees of Elexsys International, Inc., a Delaware corporation (the "Company"), and its Affiliates, as defined in subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be given an opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of its employees, to secure and retain the services of new employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company.
(d) The Company intends that the rights to purchase stock of the Company granted under the Plan be considered options issued under an "employee stock purchase plan" as that term is defined in Section 423(b) of the Code.
(a) The Plan shall be administered by the Board of Directors (the "Board") of the Company unless and until the Board delegates administration to a Committee, as provided in subparagraph 2(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan.
(b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the Company shall be granted and the provisions of each offering of such rights (which need not be identical).
(ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and its Affiliates and to carry out the intent that the Plan be treated as an "employee stock purchase plan" within the meaning of Section 423 of the Code.
(c) The Board may delegate administration of the Plan to a Committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 12 relating to adjustments upon changes in stock, the stock that may be sold pursuant to rights granted under the Plan shall not exceed in the aggregate two hundred fifty thousand (250,000) shares of the Company's common stock (the "Common Stock"). If any right granted under the Plan shall for any reason terminate without having been exercised, the Common Stock not purchased under such right shall again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
(a) The Board or the Committee may from time to time grant or provide for the grant of rights to purchase Common Stock of the Company under the Plan to eligible employees (an "Offering") on a date or dates (the "Offering Date(s)") selected by the Board or the Committee. Each Offering shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate, which shall comply with the requirements of Section 423(b)(5) of the Code that all employees granted rights to purchase stock under the Plan shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the memorandum documenting the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, the substance of the provisions contained in paragraphs 5 through 8, inclusive.
(b) If an employee has more than one right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (1) each agreement or notice delivered by that employee will be deemed to apply to all of his or her rights under the Plan, and (2) a right with a lower exercise price (or an earlier-granted right, if two rights have identical exercise prices), will be exercised to the fullest possible extent before a right with a higher exercise price (or a later-granted right, if two rights have identical exercise prices) will be exercised.
(a) Rights may be granted only to employees of the Company or, as the Board or the Committee may designate as provided in subparagraph 2(b), to employees of any Affiliate of the Company. Except as provided in subparagraph 5(b), an employee of the Company or any Affiliate shall not be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee has been in the employ of the Company or any Affiliate for such continuous period preceding such grant as the Board or the Committee may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. In addition, unless otherwise determined by the Board or the Committee and set forth in the terms of the applicable Offering, no employee of the Company or any Affiliate shall be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee's customary employment with the Company or such Affiliate is at least twenty (20) hours per week and at least five (5) months per calendar year.
(b) The Board or the Committee may provide that each person who, during the course of an Offering, first becomes an eligible employee of the Company or designated Affiliate will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an eligible employee or occurs thereafter, receive a right under that Offering, which right shall thereafter be deemed to be a part of that Offering. Such right shall have the same characteristics as any rights originally granted under that Offering, as described herein, except that:
(i) the date on which such right is granted shall be the "Offering Date" of such right for all purposes, including determination of the exercise price of such right;
(ii) the period of the Offering with respect to such right shall begin on its Offering Date and end coincident with the end of such
(iii) the Board or the Committee may provide that if such person first becomes an eligible employee within a specified period of time before the end of the Offering, he or she will not receive any right under that Offering.
(c) No employee shall be eligible for the grant of any rights under the Plan if, immediately after any such rights are granted, such employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any employee, and stock which such employee may purchase under all outstanding rights and options shall be treated as stock owned by such employee.
(d) An eligible employee may be granted rights under the Plan only if such rights, together with any other rights granted under "employee stock purchase plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such employee's rights to purchase stock of the Company or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of fair market value of such stock (determined at the time such rights are granted) for each calendar year in which such rights are outstanding at any time.
(e) Officers of the Company and any designated Affiliate shall be eligible to participate in Offerings under the Plan, provided, however, that the Board may provide in an Offering that certain employees who are highly compensated employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate.
(a) On each Offering Date, each eligible employee, pursuant to an Offering made under the Plan, shall be granted the right to purchase up to the number of shares of Common Stock of the Company purchasable with a percentage designated by the Board or the Committee not exceeding fifteen percent (15%) of such employee's Earnings (as defined in subparagraph 7(a)) during the period which begins on the Offering Date (or such later date as the Board or the Committee determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no more than twenty-seven (27) months after the Offering Date. The Board or the Committee shall establish one or more dates during an Offering (the "Purchase Date(s)") on which rights granted under the Plan shall be exercised and purchases of Common Stock carried out in accordance with such Offering. In connection with each Offering made under this Plan, the Board or the Committee may specify a maximum number of shares which may be purchased by any employee as well as a maximum aggregate number of shares which may be purchased by all eligible employees pursuant to such Offering. In addition, in connection with each Offering which contains more than one Purchase Date (as defined in the relevant Offering), the Board or the Committee may specify a maximum aggregate number of shares which may be purchased by all eligible employees on any given Purchase Date under the Offering. If the aggregate purchase of shares upon exercise of rights granted under the Offering would exceed any such maximum aggregate number, the Board or the Committee shall allocation of the shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable.
(b) The purchase price of stock acquired pursuant to rights granted under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Purchase Date.
(a) An eligible employee may become a participant in the Plan pursuant to an Offering by delivering a participation agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board or the Committee of such employee's Earnings during the Offering. "Earnings" is defined as an employee's regular salary or wages (including amounts thereof elected to be deferred by the employee, that would otherwise have been paid, under any arrangement established by the Company intended to comply with Section 401(k), Section 402(e)(3), Section 125, Section 402(h), or Section 403(b) of the Code, and also including any deferrals under a non-qualified deferred compensation plan or arrangement established by the Company), which shall include or exclude bonuses, commissions, overtime pay, incentive pay, profit sharing, other remuneration paid directly to the employee, the cost of employee benefits paid for by the Company or an Affiliate, education or tuition reimbursements, imputed income arising under any group insurance or benefit program, traveling expenses, business and moving expense reimbursements, income received in connection with stock options, contributions made by the Company or an Affiliate under any employee benefit plan, and similar items of compensation, as determined by the Board or Committee. The payroll deductions made for each participant shall be credited to an account for such participant under the Plan and shall be deposited with the general funds of the Company. A participant may reduce (including to zero) or increase or begin such payroll deductions, and an eligible employee may begin such payroll deductions, after the beginning of any Offering only as provided for in the Offering. A participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the participant has not had the maximum amount withheld during the Offering.
(b) At any time during an Offering, a participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board or the Committee in the Offering. Upon such withdrawal from the Offering by a participant, the Company shall distribute to such participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the
Offering, without interest, and such participant's interest in that Offering shall be automatically terminated. A participant's withdrawal from an Offering will have no effect upon such participant's eligibility to participate in any other Offerings under the Plan but such participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating employee's employment with the Company and any designated Affiliate, for any reason, and the Company shall distribute to such terminated employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the terminated employee), under the Offering, without interest.
(d) Rights granted under the Plan shall not be transferable by a participant otherwise than by will or the laws of descent and distribution, or by beneficiary designation as provided in paragraph 14, and shall be exercisable only by the person to whom such rights are granted.
(a) On each Purchase Date, each participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of whole shares of stock of the Company, up to the maximum number of shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares shall be issued upon the exercise of rights granted under the Plan. The amount, if any, of accumulated payroll deductions remaining in each participant's account after the purchase of shares which is less than the amount required to purchase one share of stock on the final Purchase Date of an Offering shall be held in each such participant's account for the purchase of shares under the next Offering under the Plan, unless such participant withdraws from such next Offering, as provided in subparagraph 7(b), or is no longer eligible to be granted rights under the Plan, as provided in paragraph 5, in which case such amount shall be distributed to the participant after the final Purchase Date of the Offering, without interest. The amount, if any, of accumulated payroll deductions remaining in any participant's account after the purchase of shares which is equal to the amount required to purchase whole shares of stock on the final Purchase Date of an Offering shall be distributed in full to the participant after such Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent unless the shares to be issued upon such exercise under the Plan (including rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act of 1933, as amended (the "Securities Act") and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date in any Offering hereunder the Plan is not so registered or in such compliance, no rights granted under the Plan or any Offering shall be exercised on said Purchase Date and the Purchase Date shall be delayed until the Plan is subject to such an effective registration statement and such compliance, except that the Purchase Date shall not be delayed more than two (2) months and the Purchase shall in no event be more than twenty-seven (27) months from the Offering Date. If on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered and in such compliance, no rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire stock) shall be distributed to the participants, without interest.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the rights granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such rights.
(b) The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such rights unless and until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the Plan shall constitute general funds of the Company.
11. RIGHTS AS A SHAREHOLDER.
A participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to rights granted under the Plan unless and until the participant's shareholdings acquired upon exercise of rights hereunder are recorded in the books of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to any rights granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding rights will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding rights. Such adjustments shall be made by the Board or Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not including the receipt of consideration by the
(b) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then, as determined by the Board in its sole discretion (i) any surviving corporation may assume outstanding rights or substitute similar rights for those under the Plan, (ii) such rights may continue in full force and effect, or (iii) participants' accumulated payroll deductions may be used to purchase Common Stock immediately prior to the transaction described above and the participants' rights under the ongoing Offering terminated.
13. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will:
(i) Increase the number of shares reserved for rights under
(ii) Modify the provisions as to eligibility for participation in the Plan (to the extent such modification requires shareholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-
(iii) Modify the Plan in any other way if such modification requires shareholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3.
It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to employee stock purchase plans and/or to bring the Plan and/or rights granted under it into compliance therewith.
(b) Rights and obligations under any rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan, except with the consent of the person to whom such rights were granted or except as necessary to comply with any laws or governmental regulation.
(a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of an Offering but prior to delivery to the participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death during an Offering.
(b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. No rights may be granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except as expressly provided in the Plan or with the consent of the person to whom such rights were granted or except as necessary to comply with any laws or governmental regulation.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no rights granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company.
AMENDED AND RESTATED JANUARY 8, 1996
(a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either Incentive Stock Options or Nonstatutory Stock Options. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option.
(a) "Affiliate" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan.
(e) "Company" means Elexsys International, Inc., a Delaware corporation.
(f) "Consultant" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors.
(g) "Continuous Status as an Employee, Director or Consultant" means that the service of an individual to the Company, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between the Company, Affiliates or their successors.
(h) "Covered Employee" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code.
(i) "Director" means a member of the Board.
(j) "Disinterested Person" means a Director who either (i) was not during the one year prior to service as an administrator of the Plan granted or awarded equity securities pursuant to the Plan or any other plan of the Company or any affiliate entitling the participants therein to acquire equity securities of the Company or any affiliate except as permitted by Rule 16b-3(c)(2)(i); or (ii) is otherwise considered to be a "disinterested person" in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission.
(k) "Employee" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(m) Less Flexibility: "Fair Market Value" means, as of any date, the value of the common stock of the Company determined as follows: (1) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable;
(2) If the common stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable;
(3) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board.
(n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
(r) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.
(s) "Optionee" means a person who holds an outstanding Option.
(t) "Outside Director" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code.
(u) "Plan" means this Elexsys International, Inc. 1995 Stock Option Plan.
(v) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.
(a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how each Option shall be granted; whether an Option will be an Incentive Stock Option or a Nonstatutory Stock Option; the provisions of each Option granted (which need not be identical), including the time or times such Option may be exercised in whole or in part; and the number of shares for which an Option shall be granted to each such person.
(2) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
(3) To amend the Plan or an Option as provided in Section 11.
(4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company.
(c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee shall be Disinterested Persons and may also be, in the discretion of the Board, Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Notwithstanding anything in this Section 3 to the contrary, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Options to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Option, or (ii) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code.
(d) Any requirement that an administrator of the Plan be a Disinterested Person shall not apply if the Board or the Committee expressly declares that such requirement shall not apply. Any Disinterested Person shall otherwise comply with the requirements of Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to Options shall not exceed in the aggregate One Million (1,000,000) shares of the Company's common stock. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not purchased under such Option shall revert to and again become available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.
(a) Incentive Stock Options may be granted only to Employees. Nonstatutory Stock Options may be granted only to Employees, Directors or Consultants.
(b) A Director shall in no event be eligible for the benefits of the Plan unless at the time discretion is exercised in the selection of the Director as a person to whom Options may be granted, or in the determination of the number of shares which may be covered by Options granted to the Director: (i) the Board has delegated its discretionary authority over the Plan to a Committee which consists solely of Disinterested Persons; or (ii) the Plan otherwise complies with the requirements of Rule 16b-3. The Board shall otherwise comply with the requirements of Rule 16b-3. This subsection 5(b) shall not apply if the Board or Committee expressly declares that it shall not apply.
(c) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Incentive Stock Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.
(d) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options covering more than Four Hundred Fifty Thousand (450,000) shares of the Company's common stock in any calendar year.
Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted.
(b) Price. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.
(c) Consideration. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment arrangement, except that payment of the common stock's "par value" (as defined in the Delaware General Corporation Law) shall not be made by deferred payment, or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement.
(d) Transferability. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and the rules thereunder (a "QDRO"), and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person or any transferee pursuant to a QDRO. The person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option.
(e) Vesting. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised.
(f) Securities Law Compliance. The Company may require any Optionee, or any person to whom an Option is transferred under subsection 6(d), as a condition of exercising any such Option, (1) to give written assurances satisfactory to the Company as to the Optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Option for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the Option has been registered under a then currently effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require the Optionee to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities and other laws as a condition of granting an Option to such Optionee or permitting the Optionee to exercise such Option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.
(g) Termination of Employment or Relationship as a Director or Consultant. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant, or such longer or shorter period specified in the Option Agreement, or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.
(h) Disability of Optionee. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.
(i) Death of Optionee. In the event of the death of an Optionee during, or within a period specified in the Option Agreement after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option as of the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan.
(j) Early Exercise. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate.
(k) Withholding. To the extent provided by the terms of an Option Agreement, the Optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such Option by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the Optionee as a result of the exercise of the Option; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep available at all times the number of shares of stock required to satisfy such Options.
(b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company.
(a) The Board shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in the Option stating the time at which it may first be exercised or the time during which it will vest.
(b) Neither an Optionee nor any person to whom an Option is transferred under subsection 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Employee, Director, Consultant or Optionee any right to continue in the employ of the Company or any Affiliate [(or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee, with or without cause, to remove any Director as provided in the Company's By-
Laws and the provisions of the General Corporation Law of the State of Delaware, or to terminate the relationship of any Consultant in accordance with the terms of that Consultant's agreement with the Company or Affiliate to which such Consultant is providing services.
(d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.
(e) (1) The Board or the Committee shall have the authority to effect, at any time and from time to time (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of the affected holders of Options, the cancellation of any outstanding Options and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of common stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case an Incentive Stock Option granted to a ten percent (10%) stockholder (as defined in subsection 5(c)), not less than one hundred and ten percent (110%) of the Fair Market Value) per share of common stock on the new grant date.
(2) Shares subject to an Option canceled under this subsection 9(e) shall continue to be counted against the maximum award of Options permitted to be granted pursuant to subsection 5(d) of the Plan. The repricing of an Option under this subsection 9(e), resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and the grant of a substitute Option; in the event of such repricing, both the original and substituted Options shall be counted against the maximum awards of Options permitted to be granted pursuant to subsection 5(d) of the Plan. The provisions of this subsection 9(e) shall be applicable only to the extent required by Section 162(m) of the Code.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to any Option (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the maximum number of shares subject to award to any person during any calendar year pursuant to subsection 5(d), and the outstanding Options will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Options. Such adjustments shall be made by the Board or Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the
(b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent permitted by applicable law and, with respect to Options held by persons then performing services as Employees, Directors or Consultants, the time during which such Options may be exercised shall be accelerated prior to such event and the Options terminated if not exercised after such acceleration and at or prior to such event.
11. AMENDMENT OF THE PLAN AND OPTIONS.
(a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will:
(1) Increase the number of shares reserved for Options under
(2) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the
(3) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3.
(b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Optionees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights and obligations under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on July 18, 2005, which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Options may be granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Option was granted.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Options granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board.
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF ELEXSYS INTERNATIONAL, INC. For the Annual Meeting of Stockholders--January 30, 1996
MILAN MANDARIC and ALAN C. MENDELSON are hereby appointed proxies (each with power to act alone and with power of substitution) to vote all shares which the undersigned would be entitled to vote at the 1996 Annual Meeting of Stockholders of Elexsys International, Inc. (the "Company") at the Four Points Hotel, 100 North Mathilda Avenue, Sunnyvale, California 94089 at 2:00 p.m. local time on January 30, 1996, and all adjournments thereof, on the matters set forth below, and in their discretion upon any other matters brought before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE NOMINEES NAMED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3 AND 4 AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS NO. 1, 2 , 3, AND 4.
FOR [ ] Roland G. Matthews, Peter S. Jonas and C. Bradford Jeffries WITHHOLD AUTHORITY [ ] to vote for all nominees listed above. (INSTRUCTION: To withhold authority to vote for any individual nominee, strike a line through such nominee's name.)
2. To approve the adoption of the 1996 Employee Stock Purchase Plan. FOR [ ] AGAINST [ ] ABSTAIN [ ]
(Continued and to be signed on reverse side)
3. To approve the adoption of the 1995 Stock Option Plan, as amended and restated. FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To approve the adoption of the 1996 Non-Employee Directors' Stock Option Plan. FOR [ ] AGAINST [ ] ABSTAIN [ ]
[ ] I/We Plan to Attend the Meeting.
Please be sure to date this Proxy and to sign exactly as your name appears herein; joint owners should each sign; if by a corporation, sign in the manner usually employed by it; if by a fiduciary, the fiduciary's title should be shown.
PLEASE SIGN, DATE AND MAIL THIS PROXY TODAY. YOUR VOTE IS IMPORTANT. | DEF 14A | DEF 14A | 1996-01-12T00:00:00 | 1996-01-12T16:00:00 |
0000950134-96-000108 | 0000950134-96-000108_0003.txt | <DESCRIPTION>LETTER OF AGREE. BETWEEN SEARCH AND ALEX BROWN
[SEARCH CAPITAL GROUP, INC. LETTERHEAD]
1290 Avenue of the Americas
Attached please find your letter agreement executed as of this date. My compliments for your changes in a very timely fashion.
We also will mail a hard copy to follow. Attached also please find for your information a prospective news release, subject to the finalization of the written legal settlement today. We should be issuing this tomorrow, if not, at the latest, next Tuesday.
Please confirm with me or Linda your clearance related to Alex. Brown's portion. We will be talking with you next week.
P.S. Please clear the news release as soon as possible today. Thanks.
[ALEX. BROWN & SONS INCORPORATED LETTERHEAD]
Chairman of the Board, President Search Capital Group, Inc. 700 N. Pearl Street - Suite 400
This letter agreement (the "Agreement") confirms the understanding and agreement between Search Capital Group, Inc. ("Search" or the "Company"), and Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Financial Advisor") as follows:
1. The Company hereby retains Alex. Brown to render financial advisory services to the Company, on the terms and subject to the conditions set forth herein, in connection with the restructuring of certain secured notes (the "Notes") of eight Securitization Subsidiaries of the Company. The Notes currently total approximately $70 million in aggregate outstanding principal as detailed in Exhibit I. Such proposed restructuring, whether by a solicitation of waivers and consents with respect to the Notes or an exchange offer involving new securities, or a settlement on the existing securities, or other similar transactions is hereinafter referred to as the "Restructuring".
2. Alex. Brown's services will include, as necessary:
(a) Evaluating from a financial point of view the Company's business operations and projections;
(b) Determining the Company's and each of the Securitization Subsidiaries' debt capacity in light of its projected cash flows;
(c) Rendering financial advice to the Company and participating in any meetings or negotiations with the Noteholders and/or their representatives in connection with any restructuring, modification or refinancing of the Notes, including any solicitation of waivers, consents or exchanges that may be required as a part of the Restructuring;
(d) Rendering financial advice to the Company and participating in any meetings or negotiations with GECC or any other prospective lender in connection with any secured lending facility;
(e) Providing the Company with general capital
(f) Assisting the Company in the development of a specific restructuring proposal to present to the
(g) Advising the Company on specific tactics and strategy for negotiating with the Noteholders;
(h) Assisting the Company with potential exchange offers;
(i) Advising the Company with respect to the timing, the nature and the terms of securities or other inducements to be offered pursuant to the
(j) Assisting the Company in the preparation of any documentation required in connection with the
(k) Providing the Company with general restructuring advice from a financial point of view, as required.
3. As consideration for Alex. Brown's services as set forth herein, the Company agrees to pay Alex. Brown certain restructuring fees as follows:
(a) Upon acceptance of this Agreement and on the 15th of each succeeding month, the Company shall pay Alex. Brown a monthly cash fee of $60,000.
(b) Upon the completion of the Restructuring, the Company shall pay Alex. Brown a success fee, in the form of cash, equal to 8/10ths of one percent (i.e. 0.8% of the aggregate outstanding principal amount of any Notes participating in such Restructuring. The monthly fees described in 3(a) above will be credited against the fee due, in 3(b). In the event no Restructuring is undertaken, Alex. Brown will only be paid the monthly cash fee, as provided for in 3(a) above.
(c) Upon the completion of the Restructuring, the Company shall pay Alex. Brown a success fee, in the form of common stock of Search Capital Group, Inc., equal to 4/10th of one percent (i.e. 0.4%) of the aggregate outstanding principal amount of any Notes participating in such Restructuring. In calculating the number of shares to be provided to Alex. Brown,
fee shall be divided by the average of the per share closing bid price for the 30 consecutive trading days beginning with the first trading day which is 60 calendar days after the completion of the Restructuring. In the event that trading prices are not available for any 10 or more of these 30 consecutive trading days, Alex. Brown shall have the option to receive 50% of this fee in cash.
(d) In the event that the Restructuring is completed under a pre-packaged bankruptcy filing, the Company shall endeavor to retain Alex. Brown as its financial advisor on terms consistent with this Agreement.
(e) Except as noted in paragraph 2 above, the advisory services and compensation arrangements set forth herein do not encompass other investment banking services, such as raising new debt or equity capital, the solicitation of a third party investor, specific asset sales, of any other similar transaction which might be undertaken by Alex. Brown, nor do they include any expansion of the Financial Advisor role beyond that outlined in this letter. To the extent that the Company requires such additional services, the Alex. Brown will be entitled to compensation relating to such services as mutually agreed to by Alex. Brown and the Company.
4. This Agreement may be terminated by the Company or the Financial Advisor by written notice, with or without cause, effective immediately upon receipt. Notwithstanding termination of this Agreement, the Financial Advisor will be entitled to receive: (i) reimbursement of all out-of-pocket expenses through the effective date of termination, (ii) any monthly restructuring fees that have been earned prior to such termination, and (iii) the full benefit of the indemnity and reimbursement provisions detailed in Addendum A which shall remain in full force and effect. Furthermore, if within six months after termination by the Company, the company completes a restructuring substantially similar to such restructuring recommended by the Financial Advisor, then the Financial Advisor shall be entitled to the success fee in 3(b) and 3(c) above.
5. In addition to any fees that may be payable to the Financial Advisor, the Company shall reimburse the Financial Advisor for all: (i) out-of-pocket expenses (including travel and lodging, data processing and communications charges, courier and other appropriate expenditures, and any expenses of counsel incurred by the Financial Advisor with the Company's consent) and (ii) fees and expenses (including expenses of counsel, if any) to the extent described in Addendum A. Alex. Brown agrees to promptly notify the Company if it retains counsel. Alex. Brown will also provide the Company with a periodic summary of its expenses and will notify the Company when its total expenses have reached $25,000 and in increments of $10,000
thereafter. Alex. Brown's expense policy is attached as Addendum B.
6. In connection with the Financial Advisor's activities, the Company will furnish the Financial Advisor with all information concerning the Company which is necessary for the Financial Advisor to perform its duties under this Agreement and provide access to the Company's management, and its outside attorneys and accountants (the "Information"). The Company represents that to the best of its knowledge, unless indicated otherwise, all Information will be complete and correct in all material respects and will not contain any materially untrue statement of a material fact. The Financial Advisor will be using and relying on the Information without independent verification thereof or independent appraisal of any of the Company's assets and the Financial Advisor shall bear no liability with respect to any services rendered by the Financial Advisor pursuant to this Agreement, in which it used or relied upon, directly or indirectly, any Information which was incomplete or incorrect in any material respect or contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein not misleading in light of the circumstances in which they were made. The Company agrees that it will provide all information necessary to the Financial Advisor to perform its duties including but not limited to adequate and sufficient information as to all material aspects of the Restructuring.
7. The Company is signing this Agreement solely for the purpose of inducing the Financial Advisor to act hereunder and undertakes to provide all compensation, reimbursement, as well as indemnification and contribution as provided herein. Accordingly, the Company agrees to the indemnification and contribution provisions (the "Indemnification Provisions") attached to this Agreement as Addendum A and incorporated herein in their entirety, as well as the compensation and reimbursement provisions contained herein.
8. The benefits of this Agreement shall inure to the respective successors and assigns of the parties hereto and of the indemnified parties hereunder and their respective successors and assigns and representatives, and the obligations and liabilities assumed in this Agreement by the parties hereto shall survive the termination of the Financial Advisor's engagement and shall be binding upon their respective successors and assigns. Alex. Brown agrees not to assign this Agreement without the prior consent of the Company, which will not be unreasonably withheld.
9. The Company will not make any written reference to the Financial Advisor or this Agreement or any statements contained herein in connection with any proposal made by the Company or in any press release or other public disclosure announcing any such proposal or the acceptance thereof or in any public filing by the Company
without the prior approval of the Financial Advisor, which shall not be unreasonably withheld except to the extent that such disclosure is required by law or requested by any governmental or regulatory agency or body.
10. This Agreement and the indemnification letter, attached as Addendum A, incorporate the entire understanding of the parties with respect to the subject matter of this Agreement and supersede all previous agreements should they exist.
11. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument.
12. This Agreement may not be amended or modified except in writing executed by the Company and the Financial Advisor, and shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law.
If the foregoing letter is in accordance with your understanding of the terms of our engagement, please sign and return to us the enclosed duplicate hereof.
ALEX. BROWN & SONS INCORPORATED
By: /s/ BARRY W. RIDINGS
By: /s/ GEORGE C. EVANS Chairman of the Board, President
In connection with the engagement of Alex. Brown & Sons Incorporated ("Alex. Brown") as a financial advisor, pursuant to a separate engagement letter (the "Letter") between Alex. Brown and the Company (as defined in the Letter), the Company agrees to indemnify and hold harmless Alex. Brown and each of its directors, officers, agents, employees and controlling persons (within the meaning of the Securities Act of 1933, as amended) against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) related to or rising out of Alex. Brown's engagement and will reimburse Alex. Brown and each other person indemnified hereunder for all legal and other expenses as such expenses are incurred in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding whether or not in connection with pending or threatened litigation in which Alex. Brown or any other indemnified person is a party; provided, however, that the Company will not be liable in any such case (except cases arising out of the use of information provided by the Company) for losses, claims, damages, liabilities or expenses that a court of competent jurisdiction shall have found in a final judgment to have arisen primarily from the gross negligence or willful misconduct of the person seeking indemnification.
In case any proceeding shall be instituted involving any person in respect of whom indemnity may be sought, such person (the "indemnified party") shall promptly notify the Company, but failure to so notify the Company will not relieve it from any liability which it may have hereunder or otherwise, except to the extent such failure materially prejudices the Company's rights. The Company, upon the request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the Company may designate in such proceeding and shall pay as incurred the fees and expenses of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense, except that the Company shall pay as they are incurred the fees and expenses of counsel retained by the indemnified party in the event that (i) the Company and the indemnified party shall have mutually agreed to the retention of such counsel or, (ii) the named parties to any such proceeding (including any impleaded parties) include both the Company and the indemnified party and representation of both parties by the same counsel would be inappropriate, in the reasonable opinion of the indemnified party, due to actual or potential differing interests between them. The Company will not be liable, without its consent, for the fees and expenses of more than one counsel in any proceeding.
The Company shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there is a final judgment for the plaintiff, the Company agrees to indemnify the indemnified party to the extent set forth herein. In addition the Company will not, without the prior written consent of Alex. Brown, which consent will not be unreasonably withheld, settle or compromise or consent to the entry or any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not Alex. Brown or any indemnified party is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of Alex. Brown and each other indemnified party hereunder from all liability arising out of such claim, action, suit or proceeding.
In the event a claim for indemnification hereunder is determined to be unenforceable by a final judgment of a court of competent jurisdiction, then the Company shall contribute to the aggregate losses, claims, damages or liabilities to which Alex. Brown or its officers, directors, agents, employees or controlling persons may be subject in such amount as is appropriate to reflect the relative benefits received by each of the Company and the party seeking contribution on the one hand and the relative faults of the Company and the party seeking contribution on the other, as well as any other relevant equitable considerations.
This indemnification shall apply to the engagement as set forth in the Letter and any modification of the engagement and the indemnification provided herein shall survive termination of Alex. Brown's engagement and shall be binding upon any successors or assigns of the Company.
By: /s/ GEORGE C. EVANS Chairman of the Board, President
(AS OF MARCH 31, 1995)
Alex. Brown's charges for expenses to the client are determined pursuant to Alex. Brown's Travel and Entertainment Policy. Out-of-pocket expenses incurred by Alex. Brown are charged to a client if the expenses are incurred in connection with services rendered for such particular client. In particular, Alex. Brown's internal policies with respect to out-of-pocket expenses billed to clients are set forth below:
(a) TRAVEL AND LODGING: All airfare charges billed to a client are based on coach fare rates. Booking air travel first class is permitted only: (1) when traveling with clients who are traveling first class, (2) and on domestic red eye flights. Business class over and coach on the return flight is permitted on international flights exceeding 7 hours. Business class round trip is permitted for international flights exceeding 10 hours. Alex. Brown has only traveled coach airfare on this assignment.
With respect to local travel, Alex. Brown's general policy enables employees to travel by taxi or private car service to and from meetings while rendering services to a client on a client related matter, for which the client is charged. This policy is based on Alex. Brown's determination that travel by taxi or private car service is the most efficient use of a professional's time. Alex. Brown employees are not permitted to charge commutation expenses to a client unless the employee is travelling after 8:00 p.m. or on a weekend.
(b) MEALS: Alex. Brown's general policy permits its employees to bill lunch or dinner meals to a client if the employee is required to render services during such meal time to the client due to extreme time constraints. Alex. Brown employees are also permitted to bill clients for meals while travelling on behalf of clients and their related matters. Alex. Brown employees are permitted to order meals in the office if the Alex, Brown employee is required to work after 8:00 p.m. or on weekends,
(c) COMPUTER ACCESS: Alex. Brown bills its clients for time spent by its employees on computer databases. Alex. Brown purchases or leases such databases from third party sources typically for a monthly fee. Such databases are used to retrieve market price data (ie. such as stock or bond prices) and financial information. For example, information from Securities Data Company, a capital markets database, is required in analyzing comparable companies. Alex. Brown charges clients a fee of $250.00 a month for these computer charges.
(d) POSTAGE AND MAILING: Messengers and couriers (including Federal Express) are used by Alex. Brown to deliver hard copy documents relating to the client matter which require receipt on an expedited basis; otherwise, Alex. Brown uses the regular postal system. Any charges for either messengers and couriers are billed to a client at cost.
(e) PRINTING EXPENSES: Alex. Brown's ability to produce color charts, large volumes of reports and certain types of presentation slides is limited by space and mechanical constraints. Outside production companies are used for projects that can not be handled by Alex. Brown's in-house production capabilities. Any charges for outside production are billed to a client at cost.
(f) DISCLOSURE INFORMATION SERVICES: Outside financial research consists of charges from outside services, principally Disclosure Information Services, which supply, for a fee, financial documents to Alex. Brown. Such outside charges are billed to a client at cost. Financial research services generally consist of the retail of financial documents filed with the Securities and Exchange Commission or other governmental and regulatory agencies.
(g) REPRODUCTION COSTS: Alex. Brown bills photocopying charges at the rate of $.25 per page.
(h) COMMUNICATIONS: Alex. Brown employees must stay in contact with their office while they are travelling. These charges consist of phone cards and air or rail phone. | 10-K | EX-10.20 | 1996-01-12T00:00:00 | 1996-01-12T17:20:19 |
0000092103-96-000001 | 0000092103-96-000001_0002.txt | <DESCRIPTION>EDISON REACTS TO CPUC'S DECISION RE ITS 1995 GRC
Edison Reacts to CPUC'S Decision Regarding Its 1995 General Rate Case
ROSEMEAD, Calif., Jan. 10, 1995 -- Southern California Edison today expressed disappointment with the California Public Utilities Commission's (CPUC) decision regarding operating revenues in the company's 1995 General Rate Case, but pledged to work diligently to provide customers with high- quality electric service despite the decision.
The Commission's decision reduces Edison's operating revenues by approximately $100 million, in inflation-adjusted dollars, from the amount the Commission found reasonable and necessary in the company's last General Rate Case. The decision falls substantially short of the General Rate Case settlement the company negotiated with the Division of Ratepayer Advocates (DRA) of the CPUC more than a year ago. The changes from the DRA settlement with respect to operating revenues were in every respect adverse to the company.
Edison said the impact of the decision would fall primarily on workforce levels, but that the company would work diligently to avoid measures that would impact service to customers.
Edison said it would consult with its partners in the Memorandum of Understanding (MOU) to assess the portion of the GRC decision dealing with its San Onofre Nuclear Generating Station (SONGS), which appears to be consistent with the restructuring decision reached by the CPUC on Dec. 20.
Under the procedure adopted by the Commission, Edison will evaluate the CPUC's GRC decision before deciding whether to accept the terms of the decision or to seek further review by the Commission. | 8-K | EX-20 | 1996-01-12T00:00:00 | 1996-01-12T14:19:58 |
0000950109-96-000213 | 0000950109-96-000213_0000.txt | Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): January 5, 1996
(Exact name of registrant as specified in its charter)
(State or other jurisdiction) (Commission (IRS Employer of incorporation) File Number) Identification No.)
470 Main Street, Fitchburg, Massachusetts 01420 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 343-6406
A. Agreement and Plan of Merger
On January 5, 1996, The Safety Fund Corporation, a Massachusetts corporation ("Safety Fund"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with CFX Corporation, a New Hampshire corporation ("CFX"). A copy of the joint press release issued by Safety Fund and CFX on January 5, 1996 and the Merger Agreement are filed as exhibits hereto and incorporated by reference herein.
Under the terms of the Merger Agreement, CFX will form a Massachusetts corporation as a wholly owned subsidiary, which subsidiary will be merged with and into Safety Fund, with Safety Fund as the surviving corporation (the "Merger"). Upon the effectiveness of the Merger, each share of the common stock, par value $5.00 per share, of Safety Fund ("Safety Fund Common Stock"), issued and outstanding immediately prior to the effectiveness of the Merger (other than shares held by dissenting stockholders or owned by Safety Fund or any of its subsidiaries or CFX or any of its subsidiaries) shall be converted into and exchangeable for shares of the common stock, par value $0.66 2/3 per share, of CFX ("CFX Common Stock") equal to one share multiplied by the appropriate exchange ratio (the "Exchange Ratio").
The parties expect the Merger to be accounted for under the pooling-of- interests method of accounting. If CFX can make a Pooling Determination (as such term is defined in the Merger Agreement), the Exchange Ratio will be 1.700, subject to adjustment based on the average closing price of CFX Common Stock for the ten consecutive trading days ending on the business day before the date on which the last regulatory approval required to consummate the transaction is obtained (the "Buyer Trading Price"). In the event the Buyer Trading Price is greater than or equal to $12.43 but less than $13.21, then the Exchange Ratio becomes a fraction, the numerator of which is $22.46 and the denominator of which is the Buyer Trading Price. If the Buyer Trading Price is greater than or equal to $17.87 but less than $18.65, then the Exchange Ratio becomes a fraction, the numerator of which is $30.38 and the denominator of which is the Buyer Trading Price. In the event the Buyer Trading Price is below $12.43, the Exchange Ratio becomes 1.806; and if the Buyer Trading Price is above $18.65, the Exchange Ratio becomes 1.629. Safety Fund has the right to terminate the Merger Agreement if the Buyer Trading Price is below $11.65 unless CFX agrees to increase the Exchange Ratio.
The parties have agreed upon an alternative pricing mechanism to be applied if a Pooling Determination with respect to the Merger cannot be made and the Merger is accounted for under the purchase method of accounting. In such event, the Exchange Ratio will be 1.520 subject to adjustments based on the Buyer Trading Price. In the event the Buyer Trading Price is greater than or equal to $12.50 but less than $13.16, then the Exchange Ratio becomes a fraction, the numerator of which is $20.00 and the denominator of which is the Buyer Trading Price. If the Buyer Trading Price is greater than or equal to $16.45 but less than $20.84, then the Exchange Ratio becomes a fraction the numerator of which is $25.00 and the denominator of which is the Buyer Trading Price. If the Buyer Trading Price is equal to or greater than $20.84, then the Exchange Ratio becomes 1.200. If the Buyer Trading Price is less than $12.50, the Exchange Ratio becomes 1.600 but Safety Fund has the right to terminate the Merger Agreement unless CFX agrees to increase the Exchange Ratio.
The Merger Agreement also provides that, at the effective time of the Merger, each then outstanding stock option to purchase Safety Fund Common Stock ("Safety Fund Option") pursuant to the 1984 Incentive Stock Option Plan or the 1994 Incentive and Nonqualified Stock Option Plan (collectively, the "Safety Fund Stock Option Plans") (the aggregate number of such Safety Fund Options not to exceed 65,850) will be assumed by CFX. Each Safety Fund Option so assumed will be exercisable (when vested) for that number of whole shares of CFX Common Stock equal to the product of the number of shares of Safety Fund Common Stock covered by the Safety Fund Option multiplied by the Exchange Ratio.
As part of the Merger, Safety Fund and CFX have also entered into a Stock Option Agreement dated January 5, 1996 (the "Option Agreement") pursuant to which Safety Fund has granted an option (the "Option") to CFX to purchase up to 332,000 shares of Safety Fund Common Stock (19.9% of the outstanding Safety Fund Common Stock) under certain conditions, at a price of $20.00 per share, subject to adjustment. Safety Fund agreed to grant the Option to CFX as a condition to CFX's entry into the Merger Agreement and to induce such entry. A copy of the Option Agreement is filed as an exhibit hereto and is incorporated by reference herein. Because a Safety Fund stockholder has filed an application with federal regulators for approval to acquire securities representing greater than 10% of the voting power of Safety Fund, one of the conditions triggering the Option has been satisfied and the Option is now exercisable, and shall remain exercisable for so long as such condition is continuing.
The transaction, which is subject to customary closing conditions, has been approved by the Boards of Directors of both Safety Fund and CFX. It must be approved by the stockholders of Safety Fund and CFX as well as by regulatory authorities.
The foregoing description of the Merger Agreement and the Option Agreement does not purport to be complete and is qualified in its entirety by reference to the attached exhibits, which are incorporated herein by reference.
On January 5, 1996, the Board of Directors of Safety Fund distributed one Right for each outstanding share of the Safety Fund Common Stock. The Rights will be issued to the holders of record of Safety Fund Common Stock outstanding on January 5, 1996, and with respect to Safety Fund Common Stock issued thereafter until the Distribution Date (as defined below) and, in certain circumstances, with respect to Safety Fund Common Stock issued after the Distribution Date. Each Right, when it becomes exercisable as described below, will entitle the registered holder to purchase from Safety Fund one one-thousandth (1/1000th) of a share of Series A Participating Cumulative Preferred Stock, par value $10.00 per share, of Safety Fund (the "Preferred Shares") at a price of $65 (the "Purchase Price"). The description and terms of the Rights are set forth in a Rights Agreement dated as of January 5, 1996 (the "Rights Agreement"), between Safety Fund and Fleet National Bank of Massachusetts, as Rights Agent (the "Rights Agent").
Until the earlier of (i) such time as Safety Fund learns that a person or group (including any affiliate or associate of such person or group) has acquired, or has obtained the right to acquire, Beneficial Ownership (as defined below) of an amount equal to or greater than such person's or group's Ownership Threshold (as defined below) of the outstanding Capital Shares (as defined below) (such person or group being an "Acquiring Person"), and (ii) such date, if any, as may be designated by the Board of Directors of Safety Fund following the commencement of, or first public disclosure of an intent to commence, a tender or exchange offer for outstanding Capital Shares which could result in such person or group becoming the Beneficial Owner of an amount equal to or greater than such person's or group's Ownership Threshold of the outstanding Capital Shares (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced by the certificates for Capital Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Right Certificates, as defined below) and not by separate Right Certificates. Therefore, until the Distribution Date, the Rights will be transferred with and only with the Capital Shares.
"Beneficial Ownership", when used with reference to the ownership of securities, means (i) securities which a person, or any of such person's associates and affiliates, is deemed to "beneficially own" under Securities and Exchange Commission Rule 13d-3, (ii) securities which a person, or any of such person's associates and affiliates, has the right to acquire or the right to vote pursuant to any agreement, arrangement or understanding (whether written or oral) and (iii) securities Beneficially Owned by any person with which such person, or any of such person's associates and affiliates, has any agreement, arrangement or understanding (whether written or oral), or is acting in concert or with conscious parallel behavior, for the purpose of acquiring, holding, voting or disposing of any securities of the company. In the case of clause (iii), the Safety Fund Board of Directors may attribute Beneficial Ownership of securities to any person if the Safety Fund Board determines in good faith that such an agreement, arrangement or understanding exists or that such actions in concert or with conscious parallel behavior have occurred. A person will not be deemed to Beneficially Own any Capital Shares solely by virtue of the receipt by such person of a revocable proxy or consent given to such person pursuant to a definitive proxy statement filed with the Securities and Exchange Commission and otherwise in accordance with the rules and regulations under the Securities Exchange Act of 1934.
"Capital Shares", when used with reference to Safety Fund prior to a business combination, means the shares of Safety Fund Common Stock or any other stock of Safety Fund into which the Safety Fund Common Stock shall be reclassified or changed.
"Ownership Threshold" means, with respect to any person, the Beneficial Ownership of the greater of (i) 15% of the Capital Shares at any time outstanding or (ii) the percentage of the aggregate of the outstanding Capital Shares Beneficially Owned by such person on the date the Rights Plan is implemented, plus in the case of this clause (ii) 1% of the Capital Shares outstanding on such date.
As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Capital Shares as of the close of business on the Distribution Date (and to each initial record holder of certain Safety Fund Common Stock originally issued after the Distribution Date), and such separate Right Certificates alone will thereafter evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire on January 5, 2006 (the "Expiration Date") unless earlier redeemed by Safety Fund as described below.
The number of Preferred Shares or other securities issuable upon exercise of a Right, the Purchase Price, the Redemption Price (as defined below) and the number of Rights associated with each outstanding Capital Share are all subject to adjustment by the Board of Directors of Safety Fund in the event of any change in the Capital Shares or the Preferred Shares, whether by reason of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations or exchanges of securities, split-ups, split-offs, spin-offs, liquidations, other similar changes in capitalization, any distribution or issuance of cash, assets, evidences of indebtedness or subscription rights, options or warrants to holders of Capital Shares or Preferred Shares, as the case may be (other than distribution of the Rights or regular quarterly cash dividends) or otherwise.
The Preferred Shares are authorized to be issued in fractions which are an integral multiple of one one-thousandth (1/1000th) of a Preferred Share. Safety Fund may, but is not required to, issue fractions of shares upon the exercise of Rights, and, in lieu of fractional shares, Safety Fund may issue certificates or utilize a depository arrangement as provided by the terms of the Preferred Shares and, in the case of fractions other than one one-thousandth (1/1000th) of a Preferred Share or integral multiples thereof, may make a cash payment based on the market price of such shares.
At such time as there is an Acquiring Person, the Rights will entitle each holder (other than such Acquiring Person (or any affiliate or associate of such Acquiring Person)) of a Right to purchase, for the Purchase Price, that number of one one-thousandths (1/1000ths) of a Preferred Share equivalent to the number of Capital Shares which at the time of such event would have a market value of twice the Purchase Price.
In the event Safety Fund is acquired in a merger or other business combination by an Acquiring Person or an associate or affiliate of an Acquiring Person that is a publicly traded corporation or 50% or more of Safety Fund's assets or assets representing 50% or more of Safety Fund's revenues or cash flow are sold, leased, exchanged or otherwise transferred (in one or more transactions) to an Acquiring Person or an associate or affiliate of an Acquiring Person that is a publicly traded corporation, each Right will entitle its holder (subject to the next paragraph) to purchase, for the Purchase Price, that number of common shares of such corporation which at the time of the transaction would have a market value of twice the Purchase Price. In the event Safety Fund is acquired in a merger or other business combination by an Acquiring Person or an associate or affiliate of an Acquiring Person that is not a publicly traded entity or 50% or more of Safety Fund's assets or assets representing 50% or more of Safety Fund's revenues or cash flow are sold, leased, exchanged or otherwise transferred (in one or more transactions) to an Acquiring Person or an associate or affiliate of an Acquiring Person that is not a publicly traded entity, each Right will entitle its holder (subject to the next paragraph) to purchase, for the Purchase Price, at such holder's option, (i) that number of shares of the surviving corporation in the transaction with such entity (which surviving corporation could be Safety Fund) which at the time of the transaction would have a book value of twice the Purchase Price, (ii) that number of shares of such entity which at the time of the transaction would have a book value of twice the Purchase Price or (iii) if such entity has an affiliate which has publicly traded common shares, that number of common shares of such affiliate which at the time of the transaction would have a market value of twice the Purchase Price.
Any Rights that are at any time Beneficially Owned by an Acquiring Person (or any affiliate or associate of an Acquiring Person) will be null and void and nontransferable and any holder of any such Right (including any purported transferee or subsequent holder) will be unable to exercise or transfer any such Right.
At any time after a person or a group becomes an Acquiring Person, the Board of Directors of Safety Fund may exchange all or part of the then outstanding Rights (other than Rights that have become null and void and nontransferable as described above) for consideration per Right consisting of one-half of the securities that otherwise would have been issuable to the holder of each Right upon exercise thereof. The Board of Directors of Safety Fund may also issue, in substitution for Preferred Shares, Safety Fund Common Stock having an equivalent market value to the Preferred Shares if, at such time, Safety Fund has a sufficient number of Safety Fund Common Stock issued but not outstanding or authorized but unissued.
At any time prior to the earlier of (i) such time as a person becomes an Acquiring Person and (ii) the Expiration Date, the Board of Directors of Safety Fund may redeem the Rights in whole, but not in part, at a price (in cash or Safety Fund Common Stock or other securities of Safety Fund deemed by the Board of Directors to be at least equivalent in value) of $.01 per Right, subject to adjustment as provided in the Rights Agreement (the "Redemption Price").
Immediately upon the action of the Board of Directors of Safety Fund electing to redeem the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
After there is an Acquiring Person, the Board of Directors may elect to exchange each Right (other than Rights that shall have become null and void and nontransferable as described above) for consideration per Right consisting of one-half of the securities that would be issuable at such time upon the exercise of one Right pursuant to the terms of the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of Safety Fund, including, without limitation, the right to vote or to receive dividends.
At any time prior to the Distribution Date, Safety Fund may, without the approval of any holder of the Rights, supplement or amend any provision of the Rights Agreement (including the date on which the Distribution Date shall occur, the time during which the Rights may be redeemed or the terms of the Preferred Shares), except that no supplement or amendment shall be made which reduces the Redemption Price (other than pursuant to certain adjustments therein) or provides for an earlier Expiration Date.
The Rights have certain antitakeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire Safety Fund without conditioning the offer on substantially all the Rights being acquired. The Rights will not interfere with any merger or other business combination pursuant to certain all-cash tender offers for all outstanding Capital Shares or with a third party approved by the Board of Directors of Safety Fund since the Board of Directors of Safety Fund may, at its option, at any time prior to any person becoming an Acquiring Person, redeem all but not less than all of the then outstanding Rights at the Redemption Price.
A Registration Statement on Form 8-A with respect to the Rights has been filed with the Securities and Exchange Commission. The Rights Agreement specifying the terms of the Rights, the Certificate of Vote of Directors Establishing a Series of a Class of Stock of the Preferred Shares specifying the terms of the Preferred Shares (Exhibit A to the Rights Agreement) and the form of Right Certificate (Exhibit B to the Rights Agreement) are filed herewith as exhibits. The foregoing description of the Rights does not purport to be complete and is qualified in its entirety by reference to such exhibits, which are incorporated herein by reference.
2(a) Agreement and Plan of Merger dated January 5, 1996 between CFX Corporation and The Safety Fund Corporation.
2(b) Press release dated January 5, 1996.
2(c) Stock Option Agreement dated January 5, 1996 between CFX Corporation and The Safety Fund Corporation.
4(a) Rights Agreement dated as of January 5, 1996, between The Safety Fund Corporation and Fleet National Bank of Massachusetts, as Rights Agent.
4(b) Form of Certificate of Vote of Directors Establishing a Series of a Class of Stock (which is attached as Exhibit A to the Rights Agreement filed as Exhibit 4(a) hereto).
4(c) Form of Right Certificate (which is attached as Exhibit B to the Rights Agreement filed as Exhibit 4(a) hereto).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: January 12, 1996 By:/s/ Christopher W. Bramley President and Chief Executive Officer
Pursuant to Item 601 of Regulation S-K
2(a) Agreement and Plan of Merger between CFX Corporation and The Safety Fund Corporation dated January 5, 1996.
2(b) Press release dated January 5, 1996.
2(c) Stock Option Agreement between CFX Corporation and The Safety Fund Corporation dated January 5, 1996.
4(a) Rights Agreement dated as of January 5, 1996, between The Safety Fund Corporation and Fleet National Bank of Massachusetts, as Rights Agent.
4(b) Form of Certificate of Vote of Directors Establishing a Series of a Class of Stock (which is attached as Exhibit A to the Rights Agreement filed as Exhibit 4(a) hereto).
4(c) Form of Right Certificate (which is attached as Exhibit B to the Rights Agreement filed as Exhibit 4(a) hereto). | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T16:40:45 |
0000950152-96-000087 | 0000950152-96-000087_0000.txt | [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
(Exact name of registrant as specified in its charter)
(State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number)
3500 Payne Avenue, Cleveland, Ohio 44114 (Address of principal executive offices)
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock - $1 Par Value 5,295,556 Shares Outstanding as of May 12, 1995
March 31, 1995 and September 30, 1994
See accompanying notes to consolidated condensed financial statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1995 and 1994
See accompanying notes to consolidated condensed financial statements
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 1995 and 1994
See accompanying notes to consolidated condensed financial statements
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Certain prior year amounts have been reclassified to conform to the 1995 classifications.
(2) The consolidated financial statements included in this report have been prepared by the Company from the consolidated statements of HMI Industries Inc. and its subsidiaries. In the opinion of the Company, these consolidated financial statements contain all of the adjustments necessary to present fairly the financial position as of March 31, 1995 and September 30, 1994, the results of operations and cash flows for the three and six months ended March 31, 1994 and 1994. Independent public accountants have not examined these statements.
These consolidated financial statements should be read in conjunction with the financial statements and the notes included in the Company's latest annual report on Form 10-K.
(3) The Company is contingently liable under a Conditional Purchase Agreement to a Netherlands bank in the amount of $1,397,000. If the contingent liability were called upon by the bank, the Company would take possession of certain finished goods and work in process inventories and sell them into existing markets.
(4) Inventories at March 31, 1995 and September 30, 1994 consist of the following:
(5) Effective October 1, 1993, the Company adopted Financial Accounting Standard (FAS) No. 109, "Accounting for Income Taxes". The adoption of this accounting principle resulted in the recognition of a one time cumulative tax benefit of $719,000 or $0.15 per share during the quarter ended December 31, 1993. The statement has been applied prospectively and prior year financial statements were not restated.
(6) Inventory analysis revealed that costs in the Tubular operations were understated by some items previously sold under contract and due to an erroneous accounting entries. Accordingly, cost of goods sold as reported of $24,680,650 has been restated to reflect these items. These adjustments totaled $339,244 for the second quarter resulting in cost of goods sold for the quarter of $25,019,894.
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES - MATERIAL CHANGES IN FINANCIAL POSITION
The working capital balance at March 31, 1995 was $21,978,000 a decrease of 4% from the September 30, 1994 balance of $22,941,000.
The effect of foreign exchange is primarily limited to the Canadian and Mexican operations. The Consolidated Statements of Cash Flows incorporates the effects of foreign exchange in each of the categories presented. The impact of the devaluation in Mexico during the quarter in the amount of $1,378,000 ($2,575,000 for the six months ended March 31, 1995) has been reflected as a component of equity based on the nature of the Company's investment and intended timing of repayment of the amounts due. The value of the Mexican Peso versus the US dollar continues to fluctuate. In managements' opinion, the amount of additional adjustments, if any, would not have a material effect on consolidated shareholders' equity.
The Company's cash increased by $85,000 for the six months ended March 31, 1995. Trade receivables increased by $2,315,000, inventories increased by $1,443,000, trade payables increased by $2,210,000 and accrued expenses and other liabilities decreased by $1,858,000. The increase in trade receivables reflects the strong sales in all operations during the last half of the quarter and the inventory growth reflects the continuation of this pattern. The Company acquired all of the assets and business of the HRS Division of Reckitt & Colman Canada, Inc. in December 1993 for $4,875,000. The acquisition was financed by the Company's line of credit. The purchase price included $3,375,000 which was assigned to certain license agreements related to use of trade marks in the US and Canada. The amount is being amortized over 18 months to 4 years. Unamortized balances are reflected in the accompanying balance sheets. The acquisition agreement also provides for a contingent Earn Out of $1,875,000 to be paid out over a 10 year period dependent upon business expansion and revenue generation.
At March 31, 1995, $5,000,000 of the unsecured, 9.86%, seven year private placement notes were outstanding. This debt was obtained in 1990 to finance the acquisition of Bliss Manufacturing Company. A portion of the Company's line of credit ($5,000,000) has been classified as long term based on the agreement with the bank dated July 1994.
Capital expenditures during the six months ended March 31, 1995 were $1,492,000 as compared to $952,000 in the previous year. Outlays in the Consumer Goods Division include $148,000 for tooling additions and improvements, $156,000 for computer software and $244,000 for new steam cleaning equipment for the HRS operations. Additions in the Manufactured Products Division include $77,000 for tubular fabrication machinery and equipment and $534,000 for machinery and equipment for the industrial and commercial stamping operations. These latter additions at Bliss Manufacturing Co. including a Turret Punch Press ($397,000) were added to specifically meet the customer demand and increase both capacity and efficiencies. Future capital expenditure commitments include $125,000 for the 1995 completion of a new filter cone manufacturing machine.
The outstanding balance on the Company's line of credit was $9,673,716 at March 31, 1995. The increase in the outstanding balance is principally due to the payment of annual bonus and profit sharing plan contributions, private placement debt reductions and inventory increases.
Management believes the Company's long term liquidity needs will continue to be met by cash flow from operations, its access to the line of credit and its potential to borrow from existing debt sources.
Net Sales - Sales increased from $33,504,000 for the three months ended March 31, 1994 to $36,913,000 for the current quarter. Sales for the six months ended March 31, 1995 were $68,981,000 compared to $62,115,000 for the same period ending March 31, 1994. Sales increases in the Consumer Goods and Manufactured Products Divisions for the current quarter compared to the 1994 quarter were 13% and 3%, respectively. The existing Consumer Goods Division's markets continue to grow. The ability of the Commercial and Industrial Stamping operations to accommodate customer requirements on short-term notice continues to add sales opportunities.
Gross Profit - Gross profit for the quarter ended March 31, 1995 was $11,893,000 or 32.2% as compared to $10,369,000 or 30.9% in the 1994 period. Gross profit for the six months ended March 31, 1995 was $22,274,000 or 32.3% as compared to $19,094,000 or 30.7% in the period ended March 31, 1994. The Company owned distribution channel in Mexico and the HRS operations have contributed to improved gross margins in the Consumer Foods division. The Company remains committed to utilizing available capacity in the Tubular Products Group and thereby increasing sales and return on assets.
Selling, General and Administrative Expenses - Selling, general and administrative expenses as a percent of total revenues were 23.7% as compared to 21.7% for the three months ended March 31, 1995 and 1994, respectively. For the six months ended March 31, 1995, these expenses were 23.6% compared to 21.2% for the prior comparable period. The increase in these costs reflects the Company-owned Mexican operation and the addition of HRS in December 1993, both of which while contributing higher gross margins, also have higher selling costs.
Financing Revenue represents the interest and fees generated by the Company's Health-Mor Acceptance Corporation, Australian and Mexican subsidiaries generated on contracts financed.
Interest expense - The 9.86%, seven year, unsecured Term Notes, comprise$123,000 and $164,000 of the three months interest expense for the quarters ended March 31, 1995 and 1994, respectively. The balance of the interest expense was comprised of short-term borrowing interest of $264,000 (compared to $184,000 in 1994).
Trademark amortization - These expenses represent the allocation of the amounts paid for the rights to use specific trademarks arising from the acquisition of HRS over periods ranging from eighteen months to four years.
Acquisition related costs - These costs represent amortization of non-compete Agreements arising in the course of the Company's acquisitions.
Accounting change for Income Taxes - The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 109 Accounting for Income Taxes which became effective for the Company in the current fiscal year. The cumulative effect of the change in accounting principle was $719,000 and is included in the results for the six months ended March 31, 1994. This item should not be considered a continuing item.
PART II - OTHER INFORMATION AND SIGNATURE
PART II - OTHER INFORMATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there to duly authorized.
Date: January 12, 1996 \s\Kevin Dow | 10-Q/A | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T17:03:25 |
0000805664-96-000005 | 0000805664-96-000005_0000.txt | THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF TEMPLETON GROWTH FUND, INC. DATED JANUARY 1, 1996, AS AMENDED FROM TIME TO TIME, WITHOUT CHARGE UPON REQUEST TO FRANKLIN TEMPLETON DISTRIBUTORS, INC. 700 CENTRAL AVENUE, P.O. BOX 33030
TOLL FREE TELEPHONE: 800/DIAL BEN
-Special Net Asset Value Purchases.....................34 -Redemptions in Kind. . . . . . . .....................35
Templeton Growth Fund, Inc. (the "Fund") was incorporated in Maryland on November 10, 1986 and is registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end diversified management investment company. The Fund is the successor in interest to approximately 58% of Templeton Growth Fund, Ltd., a Canadian corporation organized on September 1, 1954 (the "Canadian Fund"), which was reorganized on December 31, 1986 into two mutual funds. Under the reorganization, the Canadian Shareholders of the Canadian Fund, representing 42% of the Shares outstanding, remained Shareholders of the Canadian Fund and the non-Canadian Shareholders, representing 58% of the Shares outstanding, became Shareholders of the Fund. Accordingly, 58% of the portfolio and other assets of the Canadian Fund were transferred to the Fund for Shares of the Fund, immediately transferred, on a Share for Share basis, to the non-Canadian Shareholders in redemption of their holdings in the Canadian Fund.
INVESTMENT POLICIES. The Fund's investment objective and policies are described in the Prospectus under the heading "General Description--Investment Objective and Policies." The Fund may invest for defensive purposes in commercial paper which, at the date of investment, must be rated A-1 by Standard & Poor's Corporation ("S&P") or Prime-1 by Moody's Investors Service, Inc. ("Moody's") or, if not rated, issued by a company which, at the date of investment, has an outstanding debt issue rated AAA or AA by S&P or Aaa or Aa by Moody's.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the buyer of a security simultaneously commits to resell the security to the seller at an agreed upon price and date. Under a repurchase agreement, the seller is required to maintain the value of the securities subject to the repurchase agreement at not less than their repurchase price. Templeton Global Advisors Limited (the "Investment Manager") will monitor the value of such securities daily to determine that the value equals or exceeds the repurchase price. Repurchase agreements may involve risks in the event of default or insolvency of the seller, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. The Fund will enter into repurchase agreements only with parties who meet creditworthiness standards approved by the Fund's Board of Directors, I.E., banks or broker-dealers which have been determined by the Investment Manager to present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend to banks and broker-dealers portfolio securities with an aggregate market value of up to one-third of its total assets. Such loans must be secured by collateral (consisting of any combination of cash, U.S. Government securities or irrevocable letters of credit) in an amount at least equal (on a daily marked-to-market basis) to the current market value of the securities loaned. The Fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. The Fund may terminate the loans at any time and obtain the return of the securities loaned within five business days. The Fund will continue to receive any interest or dividends paid on the loaned securities and will continue to have voting rights with respect to the securities. However, as with other extensions of credit, there are risks of delay in recovery or even loss of rights in collateral should the borrower fail.
DEBT SECURITIES. The Fund may invest in debt securities which are rated at least Caa by Moody's or CCC by S&P or deemed to be of comparable quality by the Investment Manager. As an operating policy, the Fund will not invest more than 5% of its assets in debt securities rated lower than Baa by Moody's or BBB by S&P. The market value of debt securities generally varies in response to changes in interest rates and the financial condition of each issuer. During periods of declining interest rates, the value of debt securities generally increases. Conversely, during periods of rising interest rates, the value of such securities generally declines. These changes in market value will be reflected in the Fund's net asset value.
Bonds rated Caa by Moody's are of poor standing. Such securities may be in default or there may be present elements of danger with respect to principal or interest. Bonds rated CCC by S&P are regarded, on balance, as speculative. Such securities will have some quality and protective characteristics, but these are outweighed by large uncertainties or major risk exposures to adverse conditions.
Although they may offer higher yields than do higher rated securities, low rated and unrated debt securities generally involve greater volatility of price and risk of principal and income, including the possibility of default by, or bankruptcy of, the issuers of the securities. In addition, the markets in which low rated and unrated debt securities are traded are more limited than those in which higher rated securities are traded. The existence of limited markets for particular securities may diminish the Fund's ability to sell the securities at fair value either to meet redemption requests or to respond to a specific economic event such as a deterioration in the creditworthiness of the issuer. Reduced secondary market liquidity for certain low rated or unrated debt securities may also make it more difficult for the Fund to obtain accurate market quotations for the purposes of valuing the Fund's portfolio. Market quotations are generally available on many low rated or unrated securities only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of low rated debt securities, especially in a thinly traded market. Analysis of the creditworthiness of issuers of low rated debt securities may be more complex than for issuers of higher rated securities, and the ability of the Fund to achieve its investment objective may, to the extent of investment in low rated debt securities, be more dependent upon such credit-worthiness analysis than would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. The prices of low rated debt securities have been found to be less sensitive to interest rate changes than higher rated investments, but more sensitive to adverse economic downturns or individual corporate developments. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in low rated debt securities prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If the issuer of low rated debt securities defaults, the Fund may incur additional expenses to seek recovery.
The Fund may accrue and report interest on high yield bonds structured as zero coupon bonds or pay-in-kind securities as income even though it receives no cash interest until the security's maturity or payment date. In order to qualify for beneficial tax treatment afforded regulated investment companies, the Fund must distribute substantially all of its income to Shareholders (see "Tax Status"). Thus, the Fund may have to dispose of its portfolio securities under disadvantageous circumstances to generate cash in order to satisfy the distribution requirement.
Recent legislation, which requires federally insured savings and loan associations to divest their investments in low rated debt securities, may have a material adverse effect on the Fund's net asset value and investment practices.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities in which the Fund may invest are entities organized and operated solely for the purpose of restructuring the investment characteristics of various securities. These entities are typically organized by investment banking firms which receive fees in connection with establishing each entity and arranging for the placement of its securities. This type of restructuring involves the deposit with or purchases by an entity, such as a corporation or trust, of specified instruments and the issuance by that entity of one or more classes of securities ("Structured Investments") backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued Structured Investments to create securities with different investment characteristics such as varying maturities, payment priorities or interest rate provisions; the extent of the payments made with respect to Structured Investments is dependent on the extent of the cash flow on the underlying instruments. Because Structured Investments of the type in which the Fund anticipates investing typically involve no credit enhancement, their credit risk will generally be equivalent to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that is either subordinated or unsubordinated to the right of payment of another class. Subordinated Structured Investments typically have higher yields and present greater risks than unsubordinated Structured Investments. Although the Fund's purchase of subordinated Structured Investments would have a similar economic effect to that of borrowing against the underlying securities, the purchase will not be deemed to be leverage for purposes of the limitations placed on the extent of the Fund's assets that may be used for borrowing activities.
Certain issuers of Structured Investments may be deemed to be "investment companies" as defined in the 1940 Act. As a result, the Fund's investment in these Structured Investments may be limited by the restrictions contained in the 1940 Act. Structured Investments are typically sold in private placement transactions, and there currently is no active trading market for Structured Investments. To the extent such investments are illiquid, they will be subject to the Fund's restrictions on investments in illiquid securities.
STOCK INDEX FUTURES CONTRACTS. The Fund's investment policies also permit it to buy and sell stock index futures contracts with respect to any stock index traded on a recognized stock exchange or board of trade, to an aggregate amount not exceeding 20% of the Fund's total assets at the time when such contracts are entered into. Successful use of stock index futures is subject to the Investment Manager's ability to predict correctly movements in the direction of the stock markets. No assurance can be given that the Investment Manager's judgment in this respect will be correct.
A stock index futures contract is a contract to buy or sell units of a stock index at a specified future date at a price agreed upon when the contract is made. The value of a unit is the current value of the stock index. For example, the Standard & Poor's 500 Stock Index (the "S&P 500 Index") is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange ("NYSE"). The S&P 500 Index assigns relative weightings to the value of one share of each of these 500 common stocks included in the Index, and the Index fluctuates with changes in the market values of the shares of those common stocks. In the case of the S&P 500 Index, contracts are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150). The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. For example, if the Fund enters into a futures contract to BUY 500 units of the S&P 500 Index at a specified future date at a contract price of $150 and the S&P 500 Index is at $154 on that future date, the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a futures contract to SELL 500 units of the stock index at a specified future date at a contract price of $150 and the S&P 500 Index is at $154 on that future date, the Fund will lose $2,000 (500 units x loss of $4).
During or in anticipation of a period of market appreciation, the Fund may enter into a "long hedge" of common stock which it proposes to add to its portfolio by purchasing stock index futures for the purpose of reducing the effective purchase price of such common stock. To the extent that the securities which the Fund proposes to purchase change in value in correlation with the stock index contracted for, the purchase of futures contracts on that index would result in gains to the Fund which could be offset against rising prices of such common stock.
During or in anticipation of a period of market decline, the Fund may "hedge" common stock in its portfolio by selling stock index futures for the purpose of limiting the exposure of its portfolio to such decline. To the extent that the Fund's portfolio of securities changes in value in correlation with a given stock index, the sale of futures contracts on that index could substantially reduce the risk to the portfolio of a market decline and, by so doing, provide an alternative to the liquidation of securities positions in the portfolio with resultant transaction costs.
Parties to an index futures contract must make initial margin deposits to secure performance of the contract, which currently range from 1-1/2% to 5% of the contract amount. Initial margin requirements are determined by the respective exchanges on which the futures contracts are traded. There also are requirements to make variation margin deposits as the value of the futures contract fluctuates.
At the time the Fund purchases a stock index futures contract, an amount of cash, U.S. Government securities, or other highly liquid debt securities equal to the market value of the contract will be deposited in a segregated account with the Fund's custodian. When selling a stock index futures the Fund will maintain with its custodian liquid assets that, when added to the amounts deposited with a futures commission merchant or broker as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may "cover" its position by owning a portfolio with a volatility substantially similar to that of the index on which the futures contract is based, or holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Fund's custodian).
STOCK INDEX OPTIONS. The Fund may purchase and sell put and call options on securities indices in standardized contracts traded on national securities exchanges, boards of trade, or similar entities, or quoted on NASDAQ. An option on a securities index is a contract that gives the purchaser of the option, in return for the premium paid, the right to receive from the writer of the option, cash equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars, times a specified multiplier for the index option. An index is designed to reflect specified facets of a particular financial or securities market, a specific group of financial instruments or securities, or certain indicators.
The Fund may write call options and put options only if they are "covered." A call option on an index is covered if the Fund maintains with its custodian cash or cash equivalents equal to the contract value. A call option is also covered if the Fund holds a call on the same index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in cash or cash equivalents in a segregated account with its custodian. A put option on an index is covered if the Fund maintains cash or cash equivalents equal to the exercise price in a segregated account with its custodian. A put option is also covered if the Fund holds a put on the same index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by the Fund in cash or cash equivalents in a segregated account with its custodian.
If an option written by the Fund expires, the Fund will realize a capital gain equal to the premium received at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund will realize a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires.
INVESTMENT RESTRICTIONS. The Fund has imposed upon itself certain Investment Restrictions, which together with the Investment Objective and Policies are fundamental policies except as otherwise indicated. No changes in the Fund's Investment Objective and Policies or Investment Restrictions (except those which are not fundamental policies) can be made without approval of the Shareholders. For this purpose, the provisions of the 1940 Act require the affirmative vote of the lesser of either (A) 67% or more of the Shares present at a Shareholders' meeting at which more than 50% of the outstanding Shares are present or represented by proxy or (B) more than 50% of the outstanding Shares of the Fund.
In accordance with these Restrictions, the Fund will not:
1. Invest in real estate or mortgages on real estate (although the Fund may invest in marketable securities secured by real estate or interests therein or issued by companies or investment trusts which invest in real estate or interests therein); invest in interests (other than debentures or equity stock interests) in oil, gas or other mineral exploration or development programs; purchase or sell commodity contracts except stock index futures contracts; invest in other open-end investment companies or, as an operating policy approved by the Board of Directors, invest in closed-end investment companies.
2. Purchase or retain securities of any company in which Directors or Officers of the Fund or of its Investment Manager, individually owning more than 1/2 of 1% of the securities of such company, in the aggregate own more than 5% of the securities of such company.
3. Purchase more than 10% of any class of securities of any one company, including more than 10% of its outstanding voting securities, or invest in any company for the purpose of exercising control or management.
4. Act as an underwriter; issue senior securities; purchase on margin or sell short; write, buy or sell
puts, calls, straddles or spreads (but the Fund may make margin payments in connection with, and purchase and sell, stock index futures contracts and options on securities indices).
5. Loan money, apart from the purchase of a portion of an issue of publicly distributed bonds, debentures, notes and other evidences of indebtedness, although the Fund may buy Canadian and United States Government obligations with a simultaneous agreement by the seller to repurchase them within no more than seven days at the original purchase price plus accrued interest.
6. Borrow money for any purpose other than redeeming its Shares or purchasing its Shares for cancellation, and then only as a temporary measure to an amount not exceeding 5% of the value of its total assets, or pledge, mortgage, or hypothecate its assets other than to secure such temporary borrowings, and then only to such extent not exceeding 10% of the value of its total assets as the Board of Directors may by resolution approve. (For the purposes of this Restriction, collateral arrangements with respect to margin for a stock index futures contract are not deemed to be a
7. Invest more than 5% of the value of the Fund's total assets in securities of issuers which have been in continuous operation less than three years.
8. Invest more than 5% of the Fund's total assets in warrants, whether or not listed on the New York or American Stock Exchange, including no more than 2% of its total assets which may be invested in warrants that are not listed on those exchanges. Warrants acquired by the Fund in units or attached to securities are not included in this Restriction. This Restriction does not apply to options on securities indices.
9. Invest more than 15% of the Fund's total assets in securities of foreign issuers that are not listed on a recognized United States or foreign securities exchange, including no more than 10% of its total assets (including warrants) which may be invested in securities with a limited trading market. The Fund's position in the latter type of securities may be of such size as to affect adversely their liquidity and marketability and the Fund may not be able to dispose of its holdings in these securities at the current market price.
10. Invest more than 25% of the Fund's total assets in a single industry.
11. Invest in "letter stocks" or securities on which there are sales restrictions under a purchase agreement.
12. Participate on a joint or a joint and several basis in any trading account in securities.
Whenever any Investment Policy or Investment Restriction states a maximum percentage of the Fund's assets which may be invested in any security or other property, it is intended that such maximum percentage limitation be determined immediately after and as a result of the Fund's acquisition of such security or property. The value of the Fund's assets is calculated as described in the Prospectus under the heading "How to Buy Shares of the Fund." Nothing in the Investment Policies or Investment Restrictions (except Restrictions 9 and 10) shall be deemed to prohibit the Fund from purchasing securities pursuant to subscription rights distributed to the Fund by any issuer of securities held at the time in its portfolio (as long as such purchase is not contrary to the Fund's status as a diversified investment company under the 1940 Act).
RISK FACTORS. The Fund has an unlimited right to purchase securities in any foreign country, developed or developing, if they are listed on a stock exchange, as well as a limited right to purchase such securities if they are unlisted. Investors should consider carefully the substantial risks involved in securities of companies and governments of foreign nations, which are in addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies comparable to the reports and ratings published about companies in the United States. Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to United States companies. The Fund, therefore, may encounter difficulty in obtaining market quotations for purposes of valuing its portfolio and calculating its net asset value. Foreign markets have substantially less volume than the NYSE and securities of some foreign companies are less liquid and more volatile than securities of comparable United States companies. Although the Fund may invest up to 15% of its total assets in unlisted foreign securities, including not more than 10% of its total assets in securities with a limited trading market, in the opinion of management such securities with a limited trading market do not present a significant liquidity problem. Commission rates in foreign countries, generally fixed rather than subject to negotiation as in the United States, are likely to be higher. In many foreign countries there is less government supervision and regulation of stock exchanges, brokers, and listed companies than in the United States.
Investments in companies domiciled in developing countries may be subject to potentially higher risks than investments in developed countries. These risks include (i) less social, political and economic stability; (ii) the small current size of the markets for such securities and the currently low or nonexistent volume of trading, which result in a lack of liqui-dity and in greater price volatility; (iii) certain national policies which may restrict the Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; (v) the absence of developed legal structures governing private or foreign investment or allowing for judicial redress for injury to private property; (vi) the absence, until recently in certain Eastern European countries, of a capital market structure or market-oriented economy; and (vii) the possibility that recent favorable economic developments in Eastern Europe may be slowed or reversed by unanticipated political or social events in such countries.
In addition, many countries in which the Fund may invest have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain countries. Moreover, the economies of some developing countries may differ favorably or unfavorably from the United States economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments position.
Investments in Eastern European countries may involve risks of nationalization, expropriation and confiscatory taxation. The Communist governments of a number of Eastern European countries expropriated large amounts of private property in the past, in many cases without adequate compensation, and there can be no assurance that such expropriation will not occur in the future. In the event of such expropriation, the Fund could lose a substantial portion of any investments it has made in the affected countries. Further, no accounting standards exist in Eastern European countries. Finally, even though certain Eastern European currencies may be convertible into United States dollars, the conversion rates may be artificial to the actual market values and may be adverse to Fund Shareholders.
Investing in Russian companies involves a high degree of risk and special considerations not typically associated with investing in the United States securities markets, and should be considered highly speculative. Such risks include: (a) delays in settling portfolio transactions and risk of loss arising out of Russia's system of share registration and custody; (b) the risk that it may be impossible or more difficult than in other countries to obtain and/or enforce a judgment; (c) pervasiveness of corruption and crime in the Russian economic system; (d) currency exchange rate volatility and the lack of available currency hedging instruments; (e) higher rates of inflation (including the risk of social unrest associated with periods of hyper-inflation); (f) controls on foreign investment and local practices disfavoring foreign investors and limitations on repatriation of invested capital, profits and dividends, and on the Fund's ability to exchange local currencies for U.S. dollars; (g) the risk that the government of Russia or other executive or legislative bodies may decide not to continue to support the economic reform programs implemented since the dissolution of the Soviet Union and could follow radically different political and/or economic policies to the detriment of investors, including non-market-oriented policies such as the support of certain industries at the expense of other sectors or investors, or a return to the centrally planned economy that existed prior to the dissolution of the Soviet Union; (h) the financial condition of Russian companies, including large amounts of inter-company debt which may create a payments crisis on a national scale; (i) dependency on exports and the corresponding importance of international trade; (j) the risk that the Russian tax system will not be reformed to prevent inconsistent, retroactive and/or exorbitant taxation; and (k) possible difficulty in identifying a purchaser of securities held by the Fund due to the underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they are relatively new and a substantial proportion of securities transactions in Russia are privately negotiated outside of stock exchanges. Because of the recent formation of the securities markets as well as the underdeveloped state of the banking and telecommunications systems, settlement, clearing and registration of securities transactions are subject to significant risks. Ownership of shares (except where shares are held through depositories that meet the requirements of the 1940 Act) is defined according to entries in the company's share register and normally evidenced by extracts from the register or by formal share certificates. However, there is no central registration system for shareholders and these services are carried out by the companies themselves or by registrars located throughout Russia. These registrars are not necessarily subject to effective state supervision and it is possible for the Fund to lose its registration through fraud, negligence or even mere oversight. While the Fund will endeavor to ensure that its interest continues to be appropriately recorded either itself or through a custodian or other agent inspecting the share register and by obtaining extracts of share registers through regular confirmations, these extracts have no legal enforceability and it is possible that subsequent illegal amendment or other fraudulent act may deprive the Fund of its ownership rights or improperly dilute its interests. In addition, while applicable Russian regulations impose liability on registrars for losses resulting from their errors, it may be difficult for the Fund to enforce any rights it may have against the registrar or issuer of the securities in the event of loss of share registration. Furthermore, although a Russian public enterprise with more than 1,000 shareholders is required by law to contract out the maintenance of its shareholder register to an independent entity that meets certain criteria, in practice this regulation has not always been strictly enforced. Because of this lack of independence, management of a company may be able to exert considerable influence over who can purchase and sell the company's shares by illegally instructing the registrar to refuse to record transactions in the share register. This practice may prevent the Fund from investing in the securities of certain Russian companies deemed suitable by the Investment Manager. Further, this also could cause a delay in the sale of Russian company securities by the Fund if a potential purchaser is deemed unsuitable, which may expose the Fund to potential loss on the investment.
The Fund's management endeavors to buy and sell foreign currencies on as favorable a basis as practicable. Some price spread on currency exchange (to cover service charges) may be incurred, particularly when the Fund changes investments from one country to another or when proceeds of the sale of Shares in U.S. dollars are used for the purchase of securities in foreign countries. Also, some countries may adopt policies which would prevent the Fund from transferring cash out of the country or withhold portions of interest and dividends at the source. There is the possibility of cessation of trading on national exchanges, expropriation, nationalization or confiscatory taxation, withholding and other foreign taxes on income or other amounts, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), default in foreign government securities, political or social instability, or diplomatic developments that could affect investments in securities of issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by fluctuations in the relative rates of exchange between the currencies of different nations, by exchange control regulations and by indigenous economic and political developments. Some countries in which the Fund may invest may also have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies may not be internationally traded. Certain of these currencies have experienced a steady devaluation relative to the U.S. dollar. Any devaluations in the currencies in which the Fund's portfolio securities are denominated may have a detrimental impact on the Fund. Through the Fund's flexible policy, management endeavors to avoid unfavorable consequences and to take advantage of favorable developments in particular nations where, from time to time, it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase securities with substantial risk characteristics and other decisions such as changing the emphasis on investments from one nation to another and from one type of security to another. Some of these decisions may later prove profitable and others may not. No assurance can be given that profits, if any, will exceed losses.
The Directors consider at least annually the likelihood of the imposition by any foreign government of exchange control restrictions which would affect the liquidity of the Fund's assets maintained with custodians in foreign countries, as well as the degree of risk from political acts of foreign governments to which such assets may be exposed. The Directors also consider the degree of risk involved through the holding of portfolio securities in domestic and foreign securities depositories (see "Investment Management and Other Services -- Custodian and Transfer Agent"). However, in the absence of willful misfeasance, bad faith or gross negligence on the part of the Investment Manager, any losses resulting from the holding of the Fund's portfolio securities in foreign countries and/or with securities depositories will be at the risk of the Shareholders. No assurance can be given that the Directors' appraisal of the risks will always be correct or that such exchange control restrictions or political acts of foreign governments might not occur.
There are additional risks involved in stock index futures transactions. These risks relate to the Fund's ability to reduce or eliminate its futures positions, which will depend upon the liquidity of the secondary markets for such futures. The Fund intends to purchase or sell futures only on exchanges or boards of trade where there appears to be an active secondary market, but there is no assurance that a liquid secondary market will exist for any particular contract or at any particular time. Use of stock index futures for hedging may involve risks because of imperfect correlations between movements in the prices of the stock index futures on the one hand and movements in the prices of the securities being hedged or of the underlying stock index on the other. Successful use of stock index futures by the Fund for hedging purposes also depends upon the Investment Manager's ability to predict correctly movements in the direction of the market, as to which no assurance can be given.
There are several risks associated with transactions in options on securities indices. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. If the Fund were unable to close out an option that it had purchased on a securities index, it would have to exercise the option in order to realize any profit or the option may expire worthless. If trading were suspended in an option purchased by the Fund, it would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Except to the extent that a call option on an index written by the Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Fund's securities during the period the option was outstanding.
TRADING POLICIES. The Investment Manager and its affiliated companies serve as investment manager to other investment companies and private clients. Accordingly, the respective portfolios of certain of these funds and clients may contain many or some of the same securities. When certain funds or clients are engaged simultaneously in the purchase or sale of the same security, the trades may be aggregated for execution and then allocated in a manner designed to be equitable to each party. The larger size of the transaction may affect the price of the security and/or the quantity which may be bought or sold for each party. If the transaction is large enough, brokerage commissions may be negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage commissions, fees (except customary transfer fees) or other remuneration in connection therewith, may be effected between any of these funds, or between funds and private clients, under procedures adopted pursuant to Rule 17a-7 under the 1940 Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j) under the 1940 Act, who are employees of Franklin Resources, Inc. or their subsidiaries, are permitted to engage in personal securities transactions subject to the following general restrictions and procedures: (1) The trade must receive advance clearance from a Compliance Officer and must be completed within 24 hours after this clearance; (2) Copies of all brokerage confirmations must be sent to the Compliance Officer and within 10 days after the end of each calendar quarter, a report of all securities transactions must be provided to the Compliance Officer; (3) In addition to items (1) and (2), access persons involved in preparing and making investment decisions must file annual reports of their securities holdings each January and also inform the Compliance Officer (or other designated personnel) if they own a security that is being considered for a fund or other client transaction or if they are recommending a security in which they have an ownership interest for purchase or sale by a fund or other client.
The name, address, principal occupation during the past five years and other information with respect to each of the Directors and Principal Executive Officers of the Fund are as follows:
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS
Chairman of the Board, president and chief executive officer of General Host Corporation (nursery and craft centers); and a director of RBC Holdings (U.S.A.)Inc. (a bank holding company) and Bar-S Foods. Age 63.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman of Templeton Latin America Investment Trust PLC; chairman of Darby Overseas Investments, Ltd. (an investment firm) (1994- present); director of the Amerada Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J. Heinz Company; Secretary of the United States Department of the Treasury (1988-January 1993); and chairman of the board of Dillion, Read & Co. Inc. (investment banking) prior thereto. Age 65.
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a director of General Host Corporation. Age 63.
of Gulfwest Banks, Inc. (bank 1991). Age 74.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS
Consultant for the Triangle Consulting Group; chairman of the board and chief executive officer of Florida Progress Corporation (1982-February 1990) and director of various of its subsidiaries; chairman and director of Precise Power Corporation; executive-in-residence of Eckerd College (1991-present); and a director of Checkers Drive-In Restaurants, Inc. Age 72.
Chairman of the Board and
President, chief executive officer, and director of Franklin Resources, Inc.; chairman of the board and director of Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; director of General Host Corporation, and Templeton Global Investors, Inc.; and officer and director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin and of 55 of the investment companies in the Franklin Templeton Group. Age 62.
Director or trustee of various civic associations; formerly, economic analyst, U.S. Government. Age 66.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS
Chairman of White River Corporation (information services); director of Fund America Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI Communications Corporation, Fusion Systems Corporation, Infovest Corporation, and Medimmune, Inc.; formerly, chairman of Hambrecht and Quist Group, director of H&Q Healthcare Investors, and president of the National Association of Securities Dealers, Inc. Age 67.
Manager of personal investments (1978-present); chairman and chief executive officer of Landmark Banking Corporation (1969-1978); financial vice president of Florida Power and Light (1965- 1969); vice president of The Federal Reserve Bank of Atlanta (1958-1965); and director of various other business and nonprofit organizations. Age 66.
President and director of Templeton Global Advisors Limited; chief investment officer of global equity research for Templeton Worldwide, Inc.; president or vice president of the Templeton Funds; formerly, investment administrator with Roy West Trust Corporation (Bahamas) Limited (1984-1985). Age 35.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS
Senior vice president, treasurer and chief financial officer of Franklin Resources, Inc., director and executive vice president of Templeton Investment Counsel, Inc.; director, president and chief executive officer of Templeton Global Investors, Inc.; director or trustee and president or vice president of various Templeton Funds; accountant, Arthur Andersen & Company (1982-1983); and a member of the International Society of Financial Analysts and the American Institute of Certified Public Accountants. Age 35.
Vice president of the Templeton Funds; vice president and treasurer of Templeton Global Investors, Inc. and Templeton Worldwide, Inc.; assistant vice president of Franklin Templeton Distributors, Inc.; formerly, vice president and controller, the Keystone Group, Inc. Age 55.
Senior vice president of Templeton Global Investors, Inc.; vice president of Franklin Templeton Distributors, Inc.; secretary of the Templeton Funds; formerly, attorney, Dechert Price & Rhoads (1985-1988) and Freehill, Hollingdale & Page (1988); and judicial clerk, U.S. District Court (Eastern District of Virginia) (1984-1985). Age 42.
Certified public accountant; treasurer of the Templeton Funds; senior vice president of Templeton Worldwide, Inc., Templeton Global Investors, Inc., and Templeton Funds Trust Company; formerly, senior tax manager, Ernst & Young (certified public accountants) (1977-1989). Age 41.
* These are Directors who are "interested persons" of the Fund as that term is defined in the 1940 Act. Mr. Brady and Franklin Resources, Inc. are limited partners of Darby Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady established Darby Overseas in February, 1994, and is Chairman and a shareholder of the corporate general partner of Darby Overseas. In addition, Darby Overseas and Templeton Global Advisor Limited are limited partners of Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Directors.
All of the Fund's Officers and Directors also hold positions with other investment companies in the Franklin Templeton Group. No compensation is paid by the Fund to any officer or Director who is an officer, trustee or employee of the Investment Manager or its affiliates. Each Templeton Fund pays its independent directors and trustees and Mr. Brady an annual retainer and/or fees for attendance at Board and Committee meetings, the amount of which is based on the level of assets in each fund. Accordingly, the Fund currently pays the independent Directors and Mr. Brady an annual retainer of $10,000 and a fee of $800 per meeting attended of the Board and its Committees. The independent Directors and Mr. Brady are reimbursed for any expenses incurred in attending meetings, paid pro rata by each
Franklin Templeton Fund in which they serve. No pension or retirement benefits are accrued as part of Fund expenses.
The following table shows the total compensation paid to the Directors by the Fund and by all investment companies in the Franklin Templeton Group:
* For the fiscal year ended August 31, 1995. ** For the calendar year ended December 31, 1995.
As of December 1, 1995, there were 414,319,951 Shares of the Fund outstanding, of which 448,931 Shares (0.108%) were owned beneficially, directly or indirectly, by all the Directors and officers of the Fund as a group. As of December 1, 1995, to the knowledge of management, no person owned beneficially or of record 5% or more of the outstanding Shares of Class I, and no persons owned beneficially or of record 5% or more of the outstanding shares of Class II, except Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Funds Operations, 4800 Deer Lake Dr., E., 3rd Floor, Jacksonville, Florida 32246-6484 owned of record 457,753 Shares (9% of the outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of the Fund is Templeton Global Advisors Limited, a Bahamian corporation with offices in Nassau, Bahamas. On October 30, 1992, the Investment Manager assumed the investment management duties of Templeton, Galbraith & Hansberger Ltd. ("Old TGH"), a Cayman Islands corporation, with respect to the Fund in connection with the merger of the business of Old TGH with that of Franklin Resources, Inc. ("Franklin"). The Investment Management Agreement, dated October 30, 1992, amended and restated December 6, 1994 was approved by the Shareholders of the Fund on October 30, 1992, was last approved by the Board of Directors, including a majority of the Directors who were not parties to the Agreement or interested persons of any such party, at a meeting on December 5, 1995, and will continue through December 31, 1996. The Investment Management Agreement continues from year to year, subject to approval annually by the Board of Directors or by vote of a majority of the outstanding Shares of the Fund (as defined in the 1940 Act) and also, in either event, with the approval of a majority of those Directors who are not parties to the Investment Management Agreement or interested persons of any such party in person at a meeting called for the purpose of voting on such approval.
The Investment Management Agreement requires the Investment Manager to manage the investment and reinvestment of the Fund's assets. The Investment Manager is not required to furnish any personnel, overhead items or facilities for the Fund, including daily pricing or trading desk facilities, although such expenses are paid by investment advisers of some other investment companies.
The Investment Management Agreement provides that the Investment Manager will select brokers and dealers for execution of the Fund's portfolio transactions consistent with the Fund's brokerage policies (see "Brokerage Allocation"). Although the services provided by broker-dealers in accordance with the brokerage policies incidentally may help reduce the expenses of or otherwise benefit the Investment Manager and other investment advisory clients of the Investment Manager and of its affiliates, as well as the Fund, the value of such services is indeterminable and the Investment Manager's fee is not reduced by any offset arrangement by reason thereof.
The Investment Manager renders its services to the Fund from outside the United States. When the Investment Manager determines to buy or sell the same securities for the Fund that the Investment Manager or certain of its affiliates have recommended for one or more of the Investment Manager's other clients or for clients of its affiliates, the orders for all such securities trades may be placed for execution by methods determined by the Investment Manager, with approval by the Fund's Board of Directors, to be impartial and fair, in order to seek good results for all parties (see "Investment Objective and Policies -- Trading Policies" above). Records of securities transactions of persons who know when orders are placed by the Fund are available for inspection at least four times annually by the compliance officer of the Fund so that the non-interested Directors (as defined in the 1940 Act) can be satisfied that the procedures are generally fair and equitable for all parties.
The Investment Manager also provides management services to numerous other investment companies or funds and accounts pursuant to management agreements with each fund or account. The Investment Manager may give advice and take action with respect to any of the other funds and accounts it manages, or for its own account, which may differ from action taken by the Investment Manager on behalf of the Fund. Similar, with respect to the Fund, the Investment Manager is not obligated to recommend, purchase or sell, or to refrain from recommending, purchasing or selling any security that the Investment Manager and access persons, as defined by the 1940 Act, may purchase and sell for its own and their own account or for the accounts of any other fund or account. Furthermore, the Investment Manager is not obligated to refrain from investing in securities held by the Fund or other funds or accounts which it manages or administers. Any transactions for the accounts of the Investment Manager and Code of Ethics as described in the section "Investment Objectives and Policies--Personal Securities Transactions."
The Investment Management Agreement provides that the Investment Manager shall have no liability to the Fund or any Shareholder of the Fund for any error of judgment, mistake of law, or any loss arising out of any investment or other act or omission in the performance by the Investment Manager of its duties under the Investment Management Agreement, or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Fund's assets, or from acts or omissions of custodians or security depositories, or from any wars or political acts of any foreign governments to which such assets might be exposed, except for any liability, loss or damage resulting from willful misfeasance, bad faith or gross negligence on the Investment Manager's part or reckless disregard of its duties under the Investment Management Agreement. The Investment Management Agreement will terminate automatically in the event of its assignment, and may be terminated by the Fund at any time without payment of any penalty on 60 days' written notice, with the approval of a majority of the Directors of the Fund in the time or by vote of a majority of the outstanding Shares of the Fund (as defined in the 1940 Act).
MANAGEMENT FEES. For its services, the Fund pays the Investment Manager a monthly fee equal on an annual basis to 0.75% of its average daily net assets up to $200,000,000, reduced to a fee of 0.675% of such net assets in excess of $200,000,000, and further reduced to a fee of 0.60% of such net assets in excess of $1,300,000,000. Each class of Shares pays a portion of the fee, determined by the proportion of the Fund that it represents. The Investment Manager will comply with any applicable state regulations which may require the Investment Manager to make reimbursements to the Fund in the event that the Fund's aggregate operating expenses, including the management fee, but generally excluding interest, taxes, brokerage commissions and extraordinary expenses, are in excess of specific applicable limitations. The strictest rule currently applicable to the Fund is 2.5% of the first $30,000,000 of net assets, 2% of the next $70,000,000 of net assets and 1.5% of the remainder.
During the fiscal years ended August 31, 1995, 1994, and 1993, the Investment Manager received from the Fund fees of $37,081,820, $29,634,284, and $22,294,296, respectively, pursuant to the Agreement.
TEMPLETON GLOBAL ADVISORS LIMITED. The Investment Manager is an indirect wholly owned subsidiary of Franklin, a publicly traded company whose shares are listed on the NYSE. Charles B. Johnson (a Director and officer of the Fund) and Rupert H. Johnson, Jr. are principal shareholders of Franklin and own, respectively, approximately 20% and 16% of its outstanding shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
BUSINESS MANAGER. Templeton Global Investors, Inc. performs certain administrative functions as Business Manager for the Fund, including:
o providing office space, telephone, office equipment and
o paying compensation of the Fund's officers for services
o authorizing expenditures and approving bills for payment on behalf of the Fund;
o supervising preparation of annual and semiannual reports to Shareholders, notices of dividends, capital gain distributions and tax credits, and attending to
routine correspondence and other communications with
o daily pricing of the Fund's investment portfolio and preparing and supervising publication of daily quotations of the bid and asked prices of the Fund's Shares, earnings reports and other
o monitoring relationships with organizations serving the Fund, including the Custodian and printers;
o providing trading desk facilities to the Fund;
o supervising compliance by the Fund with recordkeeping requirements under the 1940 Act and the rules and regulations thereunder, with state regulatory requirements, maintaining books and records for the Fund (other than those maintained by the Custodian and Transfer Agent), and preparing and filing tax reports other than the Fund's income tax returns;
o monitoring the qualifications of tax-deferred retirement plans providing for investment in Shares of
o providing executive, clerical and secretarial help needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly fee equal on an annual basis to 0.15% of the first $200,000,000 of the Fund's average daily net assets, reduced to 0.135% annually of such net assets in excess of $200,000,000, further reduced to 0.1% annually of such net assets in excess of $700,000,000, and further reduced to 0.075% annually of such net assets in excess of $1,200,000,000. Each class of Shares pays a portion of the fee, determined by the proportion of the Fund that it represents. Since the Business Manager's fee covers services often provided by investment advisers to other funds, the Fund's combined expenses for advisory and administrative services together may be higher than those of some other investment companies. During the fiscal years ended August 31, 1995, 1994, and 1993, the Business Manager (and, prior to April 1, 1993, Templeton Funds Management, Inc., the previous business manager) received business management fees of $5,069,519, $4,138,659, and $3,221,160, respectively.
The Business Manager is relieved of liability to the Fund for any act or omission in the course of its performance under the Business Management Agreement, in the absence of willful misfeasance, bad faith, gross negligence or its duties and obligations under the Agreement. The Business Management Agreement may be terminated by the Fund at any time on 60 days' written notice without payment of penalty, provided that such termination by the Fund shall be directed or approved by vote of a majority of the Directors of the Fund in office at the time or by vote of a majority of the outstanding voting securities of the Fund, and shall terminate automatically and immediately in the event of its assignment.
Templeton Global Investors, Inc. is an indirect wholly owned subsidiary of Franklin.
CUSTODIAN AND TRANSFER AGENT. The Chase Manhattan Bank, N.A. serves as Custodian of the Fund's assets, which are maintained at the Custodian's principal office, MetroTech Center, Brooklyn, New York 11245, and at the offices of its branches and agencies throughout the world. The Custodian has entered into agreements with foreign sub-custodians approved by the Directors pursuant to Rule 17f-5 under the 1940 Act. The Custodian, its branches and sub-custodians generally domestically, and frequently abroad, do not actually hold certificates for the securities in their custody, but instead have book records with domestic and foreign securities depositories, which in turn have book records with the transfer agents of the issuers of the securities. Compensation for the services of the Custodian is based on a schedule of charges agreed on from time to time.
Franklin Templeton Investor Services, Inc. serves as the Fund's Transfer Agent. Services performed by the Transfer Agent include processing purchase, transfer and redemption orders; making dividend payments, capital gain distributions and reinvestments; and handling routine communications with Shareholders. The Transfer Agent receives from the Fund an annual fee of $13.74 per Shareholder account plus out-of-pocket expenses, such fee to be adjusted each year to reflect changes in the Department of Labor Consumer Price Index.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005, is legal counsel for the Fund.
INDEPENDENT ACCOUNTANTS. The firm of McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, serves as independent accountants for the Fund. Its audit services comprise examination of the Fund's financial statements and review of the Fund's filings with the Securities and Exchange Commission ("SEC") and the Internal Revenue Service ("IRS").
REPORTS TO SHAREHOLDERS. The Fund's fiscal year ends on August 31. Shareholders are provided at least semiannually with reports showing the Fund's portfolio and other information, including an annual report with financial statements audited by the independent accountants. Shareholders who would like to receive an interim quarterly report may phone the Fund Information Department at 1-800/DIAL BEN.
The Investment Manager is responsible for selecting members of securities exchanges, brokers and dealers (such members, brokers and dealers being hereinafter referred to as "brokers") for the execution of the Fund's portfolio transactions consistent with the Fund's brokerage policy and, when applicable, the negotiation of commissions in connection therewith. All decisions and placements are made in accordance with the following principles:
1. Purchase and sale orders are usually placed with brokers who are selected by the Investment Manager as able to achieve "best execution" of such orders. "Best execution" shall mean prompt and reliable execution at the most favorable securities price, taking into account the other provisions hereinafter set forth. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, without limitation, the overall direct net economic result to the Fund (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future, and the financial strength and stability of the broker. Such considerations are judgmental and are weighed by the Investment Manager in determining the overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the Investment Manager shall take into account its past experience as to brokers qualified to achieve "best execution," including brokers who specialize in any foreign securities held by the Fund.
3. The Investment Manager is authorized to allocate brokerage business to brokers who have provided brokerage and research services, as such services are defined in Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for the Fund and/or other accounts, if any, for which the Investment Manager exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act), and, as to transactions as to which fixed minimum commission rates are not applicable, to cause the Fund to pay a commission for effecting a securities transaction in excess of the amount another broker would have charged for effecting that transaction, if the Investment Manager determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's overall responsibilities with respect to the Fund and the other accounts, if any, as to which it exercises investment discretion. In reaching such determination, the Investment Manager is not required to place or attempt to place a specific dollar value on the research or execution services of a broker or on the portion of any commission reflecting either of said services. In demonstrating that such determinations were made in good faith, the Investment Manager shall be prepared to show that all commissions were allocated and paid for purposes contemplated by the Fund's brokerage policy; that the research services provided lawful and appropriate assistance to the Investment Manager in the performance of its investment decision-making responsibilities, and that commissions were within a reasonable range. The determination that commissions were within a reasonable range shall be based on any available information as to the level of commissions known to be charged by other brokers on comparable transactions, but there shall be taken into account the Fund's policies that (i) obtaining a low commission is deemed secondary to obtaining a favorable securities price, since it is recognized that usually it is more beneficial to the Fund to obtain a favorable price than to pay the lowest commission; and (ii) the quality, comprehensiveness, and frequency of research studies which are provided for the Fund and the Investment Manager are useful to the Investment Manager in performing its advisory services under its Investment Management Agreement with the Fund. Research services provided by brokers are considered to be in addition to, and not in lieu of, services required to be performed by the Investment Manager under its Investment Management Agreement. Research furnished by brokers through whom the Fund effects securities transactions may be used by the Investment Manager for any of its accounts, and not all such research may be used by the Investment Manager for the Fund. When execution of portfolio transactions is allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of various services provided by the broker.
4. Purchases and sales of portfolio securities within the United States other than on a securities exchange shall be executed with primary market makers acting as principal, except where, in the judgment of the Investment Manager, better prices and execution may be obtained on a commission basis or from other sources.
5. Sales of the Fund's Shares (which shall be deemed to include also shares of other companies registered under the 1940 Act which have either the same investment adviser or an investment adviser affiliated with the Investment Manager) made by a broker are one factor among others to be taken into account in recommending and in deciding to allocate portfolio transactions (including agency transactions, principal transactions, purchases in underwritings or tenders in response to tender offers) for the account of the Fund to that broker; provided that the broker shall furnish "best execution," as defined in paragraph 1 above, and that such allocation shall be within the scope of the Fund's other policies as stated above; and provided further, that in every allocation made to a broker in which the sale of Shares is taken into account there shall be no increase in the amount of the commissions or other compensation paid to such broker beyond a reasonable commission or other compensation determined, as set forth in paragraph 3 above, on the basis of best execution alone or best execution plus research services, without taking account of or placing any value upon such sale of Shares.
Insofar as known to management, no Director or officer of the Fund, nor the Investment Manager or Principal Underwriter or any person affiliated with either of them, has any material direct or indirect interest in any broker employed by or on behalf of the Fund. Neither the Principal Underwriter nor Templeton Global Strategic Services S.A. (see "Principal Underwriter") has ever executed any purchase or sale transactions for the Fund's portfolio or participated in commissions on any such transactions, and neither has any intention of doing so in the future. The total brokerage commissions on the portfolio transactions for the Fund during the fiscal years ended August 31, 1995, 1994, and 1993 (not including any spreads or concessions on principal transactions) were $8,559,000, $6,914,000, and $4,154,000, respectively. All portfolio transactions are allocated to broker-dealers only when their prices and execution, in the good faith judgment of the
Investment Manager, are equal to the best available within the scope of the Fund's policies. There is no fixed method used in determining which broker-dealers receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Fund's Shares may be purchased and redeemed. See "How to Buy Shares of the Fund" and "How to Sell Shares of the Fund."
Net asset value per Share is determined as of the scheduled closing of the NYSE (generally 4:00 p.m., New York time), every Monday through Friday (exclusive of national business holidays). The Fund's offices will be closed, and net asset value will not be calculated, on those days on which the NYSE is closed, which currently are: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business in New York on each day on which the NYSE is open. Trading of European or Far Eastern securities generally, or in a particular country or countries, may not take place on every New York business day. Furthermore, trading takes place in various foreign markets on days which are not business days in New York and on which the Fund's net asset value is not calculated. The Fund calculates net asset value per Share, and therefore effects sales, redemptions and repurchases of its Shares, as of the close of the NYSE once on each day on which that Exchange is open. Such calculation does not take place contemporaneously with the determination of the prices of many of the portfolio securities used in such calculation and if events occur which materially affect the value of those foreign securities, they will be valued at fair market value as determined by the management and approved in good faith by the Board of Directors.
The Board of Directors may establish procedures under which the Fund may suspend the determination of net asset value for the whole or any part of any period during which (1) the NYSE is closed other than for customary weekend and holiday closings, (2) trading on the NYSE is restricted, (3) an emergency exists as a result of which disposal of securities owned by the Fund is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or (4) for such other period as the SEC may by order permit for the protection of the holders of the Fund's Shares.
OWNERSHIP AND AUTHORITY DISPUTES. In the event of disputes involving multiple claims of ownership or authority to control a Shareholder's account, the Fund has the right (but has no obligation) to: (1) freeze the account and require the written agreement of all persons deemed by the Fund to have a potential property interest in the account, prior to executing instructions regarding the account; or (2) interplead disputed funds or accounts with a court of competent jurisdiction. Moreover, the Fund may surrender ownership of all or a portion of an account to the IRS in response to a Notice of Levy.
In addition to the special purchase plans described in the Prospectus, other special purchase plans also are available:
TAX-DEFERRED RETIREMENT PLANS. The Fund offers its Shareholders the opportunity to participate in the following types of retirement plans:
o For individuals whether or not covered by other
o For simplified employee pensions;
o For employees of tax-exempt organizations; and
o For corporations, self-employed individuals and partnerships.
Capital gains and income received by the foregoing plans generally are exempt from taxation until distribution from the plans. Investors considering participation in any such plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan. Additional information, including the fees and charges with respect to all of these plans, is available upon request to the Principal Underwriter. No distribution under a retirement plan will be made until Franklin Templeton Trust Company ("FTTC") receives the participant's election on IRS Form W-4P (available on request from FTTC) and such other documentation as it deems necessary, as to whether or not U.S. income tax is to be withheld from such distribution.
INDIVIDUAL RETIREMENT ACCOUNT (IRA). All individuals (whether or not covered by qualified private or governmental retirement plans) may purchase Shares of the Fund pursuant to an IRA. However, contributions to an IRA by an individual who is covered by a qualified private or governmental plan may not be tax-deductible depending on the individual's income. Custodial services for IRAs are available through FTTC. Disclosure statements summarizing certain aspects of IRAs are furnished to all persons investing in such accounts, in accordance with IRS regulations.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRA). For employers who wish to establish a simplified form of employee retirement program investing in Shares of the Fund, there are available Simplified Employee Pensions invested in IRA Plans. Details and materials relating to these Plans will be furnished upon request to the Principal Underwriter.
RETIREMENT PLAN FOR EMPLOYEES OF TAX-EXEMPT ORGANIZATIONS (403(B)). Employees of public school systems and certain types of charitable organizations may enter into a deferred compensation arrangement for the purchase of Shares of the Fund without being taxed currently on the investment. Contributions which are made by the employer through salary reduction are excludable from the gross income of the employee. Such deferred compensation plans, which are intended to qualify under Section 403(b) of the Internal Revenue Code of 1986, as amended (the "Code"), are available through the Principal Underwriter. Custodial services are provided by FTTC.
QUALIFIED PLAN FOR CORPORATIONS, SELF-EMPLOYED INDIVIDUALS AND PARTNERSHIPS. For employers who wish to purchase Shares of the Fund in conjunction with employee retirement plans, there is a prototype master plan which has been approved by the IRS. A "Section 401(k) plan" is also available. FTTC furnishes custodial services for these plans. For further details, including custodian fees and plan administration services, see the master plan and related material which is available from the Principal Underwriter.
LETTER OF INTENT. Purchasers who intend to invest $50,000 or more in Class I Shares of the Fund or any other fund in the Franklin Group of Funds and the Templeton Family of Funds, except Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, Templeton Variable Products Series Fund, Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin Templeton Funds"), within 13 months (whether in one lump sum or in installments, the first of which may not be less than 5% of the total intended amount and each subsequent installment not less than $25 unless the investor is a qualifying employee benefit plan (the "Benefit Plan"), including automatic investment and payroll deduction plans), and to beneficially hold the total amount of such Class I Shares fully paid for and outstanding simultaneously for at least one full business day before the expiration of that period, should execute a Letter of Intent ("LOI") on the form provided in the Shareholder
Application in the Prospectus. Payment for not less than 5% of the total intended amount must accompany the executed LOI unless the investor is a Benefit Plan. Except for purchases of Shares by a Benefit Plan, those Class I Shares purchased with the first 5% of the intended amount stated in the LOI will be held as "Escrowed Shares" for as long as the LOI remains unfulfilled. Although the Escrowed Shares are registered in the investor's name, his full ownership of them is conditional upon fulfillment of the LOI. No Escrowed Shares can be redeemed by the investor for any purpose until the LOI is fulfilled or terminated. If the LOI is terminated for any reason other than fulfillment, the Transfer Agent will redeem that portion of the Escrowed Shares required and apply the proceeds to pay any adjustment that may be appropriate to the sales commission on all Class I Shares (including the Escrowed Shares) already purchased under the LOI and apply any unused balance to the investor's account. The LOI is not a binding obligation to purchase any amount of Shares, but its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to an LOI may be included under a subsequent LOI executed within 90 days of such purchase. In this case, an adjustment will be made at the end of 13 months from the effective date of the LOI at the net asset value per Share then in effect, unless the investor makes an earlier written request to the Principal Underwriter upon fulfilling the purchase of Shares under the LOI. In addition, the aggregate value of any Shares, including Class II Shares, purchased prior to the 90-day period referred to above may be applied to purchases under a current LOI in fulfilling the total intended purchases under the LOI. However, no adjustment of sales charges previously paid on purchases prior to the 90-day period will be made.
If an LOI is executed on behalf of a benefit plan (such plans are described under "How to Buy Shares of the Fund -- Net Asset Value Purchases (Both Classes)" in the Prospectus), the level and any reduction in sales charge for these employee benefit plans will be based on actual plan participation and the projected investments in the Franklin Templeton Funds under the LOI. Benefit Plans are not subject to the requirement to reserve 5% of the total intended purchase, or to any penalty as a result of the early termination of a plan, nor are Benefit Plans entitled to receive retroactive adjustments in price for investments made before executing LOIs.
SPECIAL NET ASSET VALUE PURCHASES. As discussed in the Prospectus under "How to Buy Shares of the Fund -- Description of Special Net Asset Value Purchases," certain categories of investors may purchase Class I Shares of the Fund at net asset value (without a front-end or contingent deferred sales charge). Franklin Templeton Distributors, Inc. ("FTD") or one of its affiliates may make payments, out of its own resources, to securities dealers who initiate and are responsible for such purchases, as indicated below. FTD may make these payments in the form of contingent advance payments, which may require reimbursement from the securities dealers with respect to certain redemptions made within 12 months of the calendar month following purchase, as well as other conditions, all of which may be imposed by an agreement between FTD, or its affiliates, and the securities dealer.
The following amounts will be paid by FTD or one of its affiliates, out of its own resources, to securities dealers who initiate and are responsible for (i) purchases of most equity and fixed-income Franklin Templeton Funds made at net asset value by certain designated retirement plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but less than $2 million, plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most fixed-income Franklin Templeton Funds made at net asset value by non-designated retirement plans: 0.75% on sales of $1 million but less than $2 million, plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more. These payment breakpoints are reset every 12 months for purposes of additional purchases. With respect to purchases made at net asset value by certain trust companies and trust departments of banks and certain retirement plans of organizations with collective retirement plan assets of $10 million or more, FTD, or one of its affiliates, out of its own resources, may pay up to 1% of the amount invested.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's Shares are available to such banks' discretionary trust funds at net asset value. The banks may charge service fees to their customers who participate in the discretionary trusts. Pursuant to agreements, a portion of such service fees may be paid to FTD, or an affiliate of FTD to help defray expenses of maintaining a service office in Taiwan, including expenses related to local literature fulfillment and communication facilities.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash; however, the Fund may pay the redemption price in whole or in part by a distribution in kind of securities from the portfolio of the Fund, in lieu of cash, in conformity with applicable rules of the SEC. In such circumstances, the securities distributed would be valued at the price used to compute the Fund's net assets value. If Shares are redeemed in kind, the redeeming Shareholder might incur brokerage costs in converting the assets into cash. A Fund is obligated to redeem Shares solely in cash up to the lesser of $250,000 or 1% of its net assets during any 90-day period for any one Shareholder.
The Fund intends normally to pay a dividend at least once annually representing substantially all of its net investment income (which includes, among other items, dividends and interest) and to distribute at least annually any realized capital gains. By so doing and meeting certain diversification of assets and other requirements of the Code, the Fund intends to qualify annually as a regulated investment company under the Code. The status of the Fund as a regulated investment company does not involve government supervision of management or of its investment practices or policies. As a regulated investment company, the Fund generally will be relieved of liability for United States Federal income tax on that portion of its net investment income and net realized capital gains which it distributes to its Shareholders. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement also are subject to a nondeductible 4% excise tax. To prevent application of the excise tax, the Fund intends to make distributions in accordance with the calendar year distribution requirement.
Dividends of net investment income and net short-term capital gains are taxable to Shareholders as ordinary income. Distributions of net investment income may be eligible for the corporate dividends-received deduction to the extent attributable to the Fund's qualifying dividend income. However, the alternative minimum tax applicable to corporations may reduce the benefit of the dividends-received deduction. Distributions of net capital gains (the excess of net long-term capital gains over net short-term capital losses) designated by the Fund as capital gain dividends are taxable to Shareholders as long-term capital gains, regardless of the length of time the Fund's Shares have been held by a Shareholder, and are not eligible for the dividends-received deduction. Generally, dividends and distributions are taxable to Shareholders, whether received in cash or reinvested in Shares of the Fund. Any distributions that are not from the Fund's investment company taxable income or net capital gain may be characterized as a return of capital to Shareholders or, in some cases, as capital gain. Shareholders will be notified annually as to the Federal tax dividends and distributions they receive and any tax withheld thereon.
Distributions by the Fund reduce the net asset value of the Fund Shares. Should a distribution reduce the net asset value below a Shareholder's cost basis, the distribution nevertheless would be taxable to the Shareholder as ordinary income or capital gain as described above, even though, from an investment standpoint, it may constitute a partial return of capital. In particular, investors should be careful to consider the tax implication of buying Shares just prior to a distribution by the Fund. The price of Shares purchased at that time includes the amount of the forthcoming distribution, but the distribution will generally be taxable to them.
The Fund may invest in stocks of foreign companies that are classified under the Code as passive foreign investment companies ("PFICs"). In general, a foreign company is classified as a PFIC if at least one-half of its assets constitute investment-type assets or 75% or more of its gross income is investment-type income. Under the PFIC rules, an "excess distribution" received with respect to PFIC stock is treated as having been realized ratably over the period during which the Fund held the PFIC stock. The Fund itself will be subject to tax on the portion, if any, of the excess distribution that is allocated to the Fund's holding period in prior taxable years (and an interest factor will be added to the tax, as if the tax had actually been payable in such prior taxable years) even though the Fund distributes the corresponding income to Shareholders. Excess distributions include any gain from the sale of PFIC stock as well as certain distributions from a PFIC. All excess distributions are taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect to PFIC stock. Under an election that currently may be available, the Fund generally would be required to include in its gross income its share of the earnings of a PFIC on a current basis, regardless of whether any distributions are received from the PFIC. If this election were made, the special rules, discussed above, relating to the taxation of excess distributions, would not apply. In addition, another election may be available that would involve marking to market the Fund's PFIC shares at the end of each taxable year (and on certain other dates prescribed in the Code), with the result that unrealized gains are treated as though they were realized. If this election were made, tax at the fund level under the PFIC rules would generally be eliminated, but the Fund could, in limited circumstances, incur nondeductible interest charges. The Fund's intention to qualify annually as a regulated investment company may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things, the character of gains, the amount of gain or loss and the timing of the recognition of income with respect to PFIC stock, as well as subject the Fund itself to tax on certain income from PFIC stock, the amount that must be distributed to Shareholders, and which will be taxed to Shareholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to a fund that did not invest in PFIC stock.
Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. If more than 50% of the value of the Fund's total assets at the close of its taxable year consists of securities of foreign corporations, the Fund will be eligible and intends to elect to "pass through" to the Fund's Shareholders the amount of foreign taxes paid by the Fund. Pursuant to this election, a Shareholder will be required to include in gross income (in addition to taxable dividends actually received) his pro rata share of the foreign taxes paid by the Fund, and will be entitled either to deduct (as an itemized deduction) his pro rata share of foreign income and similar taxes in computing his taxable income or to use it as a foreign tax credit against his U.S. Federal income tax liability, subject to limitations. No deduction for foreign taxes may be claimed by a Shareholder who does not itemize deductions, but such a Shareholder may be eligible to claim the foreign tax credit (see below). Each Shareholder will be notified within 60 days after the close of the Fund's taxable year whether the foreign taxes paid by the Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it may not exceed the Shareholder's U.S. tax attributable to his foreign source taxable income. For this purpose, if the pass-through election is made, the source of the Fund's income flows through to its Shareholders. With respect to the Fund, gains from the sale of securities will be treated as derived from U.S. sources and certain currency fluctuation gains, including fluctuation gains from foreign currency-denominated debt securities, receivables and payables, will be treated as ordinary income derived from U.S. sources. The limitation on the foreign tax credit is applied separately to foreign source passive income (as defined for purposes of the foreign tax credit), including the foreign source passive income passed through by the Fund. Shareholders may be unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by the Fund. Foreign taxes may not be deducted in computing alternative minimum taxable income and the foreign tax credit can be used to offset only 90% of the alternative minimum tax (as computed under the Code for purposes of this limitation) imposed on corporations and individuals. If the Fund is not eligible to make the election to "pass through" to its Shareholders its foreign taxes, the foreign income taxes it pays generally will reduce investment company taxable income and the distributions by the Fund will be treated as United States source income.
Certain options and futures contracts in which the Fund may invest are "section 1256 contracts." Gains or losses on section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses ("60/40"); however, foreign currency gains or losses (as discussed below) arising from certain section 1256 contracts may be treated as ordinary income or loss. Also, section 1256 contracts held by the Fund at the end of each taxable year (and on certain other dates as prescribed pursuant to the Code) are "marked to market" with the result that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by the Fund may result in "straddles" for U.S. Federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by the Fund. In addition, losses realized by a Fund on positions that are part of the straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the taxable year in which the losses are realized. Because only a few regulations implementing the straddle rules have been promulgated, the tax consequences to the Fund of hedging transactions are not entirely clear. The hedging transactions may increase the amount of short-term capital gain realized by a Fund which is taxed as ordinary income when distributed to Shareholders.
The Fund may make one or more of the elections available under the Code which are applicable to straddles. If the Fund makes any of the elections, the amount, character, and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary according to the election(s) made. The rules applicable under certain of the elections may operate to accelerate the recognition of gains or losses from the affected straddle positions.
Because application of the straddle rules may affect the character of gains or losses, defer losses and/or accelerate the recognition of gains or losses from the affected straddle positions, the amount which must be distributed to Shareholders and which will be taxed to Shareholders as ordinary income or long-term capital gain may be increased or decreased as compared to a fund that did not engage in such hedging transactions.
Requirements relating to the Fund's tax status as a regulated investment company may limit the extent to which the Fund will be able to engage in transactions in options and futures contracts.
The Fund may accrue and report interest income on discount bonds such as zero coupon bonds or pay-in-kind securities, even though the Fund receives no cash interest until the security's maturity or payment date. In order to qualify for beneficial tax treatment afforded regulated investment companies, and to generally be relieved of Federal tax liabilities, the Fund must distribute substantially all of its net investment income and gains to Shareholders on an annual basis. Thus, the Fund may have to dispose of portfolio securities under disadvantageous circumstances to generate cash or leverage itself by borrowing cash in order to satisfy the distribution requirement.
Some of the debt securities may be purchased by the Fund at a discount which exceeds the original issue discount on such debt securities, if any. This additional discount represents market discount for Federal income tax purposes. The gain realized on the disposition of any taxable debt security having market discount will be treated as ordinary income to the extent it does not exceed the accrued market discount on such debt security. Generally, market discount accrues on a daily basis for each day the debt security is held by the Fund at a constant rate over the time remaining to the debt security's maturity or, at the election of the Fund, at a constant yield to maturity which takes into account the semiannual compounding of interest.
Under the Code, gains or losses attributable to fluctuations in foreign currency exchange rates which occur between the time the Fund accrues income or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain financial contracts and options, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date of disposition also are treated as ordinary gain or loss. These gains and losses, referred to under the Code as "section 988" gains and losses, may increase or decrease the amount of the Fund's net investment income to be distributed to its Shareholders as ordinary income. For example, fluctuations in exchange rates may increase the amount of income that a Fund must distribute in order to qualify for treatment as a regulated investment company and to prevent application of an excise tax on undistributed income. Alternatively, fluctuations in exchange rates may decrease or eliminate income available for distribution. If section 988 losses exceed other net investment income during a taxable year, the Fund would not be able to make ordinary dividend distributions, or distributions made before the losses were realized would be recharacterized as a return of capital to Shareholders for Federal income tax purposes, rather than as an ordinary dividend, reducing each Shareholder's basis in his Fund Shares, or as a capital gain.
Upon the sale or exchange of his Shares, a Shareholder generally will realize a taxable gain or loss depending upon his basis in the Shares. Such gain or loss will be treated as capital gain or loss if the Shares are capital assets in the Shareholder's hands, and generally will be long-term if the Shareholder's holding period for the Shares is more than one year and generally otherwise will be short-term. Any loss realized on a sale or exchange will be disallowed to the extent that the Shares disposed of are replaced (including replacement through the reinvesting of dividends and capital gain distributions in the Fund) within a period of 61 days beginning 30 days before and ending 30 days after the disposition of the Shares. In such a case, the basis of the Shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a Shareholder on the sale of Fund Shares held by the Shareholder for six months or less will be treated for Federal income tax purposes as a long-term capital loss to the extent of any distributions of long-term capital gains received by the Shareholder with respect to such Shares.
In some cases, Shareholders will not be permitted to take sales charges into account for purposes of determining the amount of gain or loss realized on the disposition of their Shares. This prohibition generally applies where (1) the Shareholder incurs a sales charge in acquiring the stock of a regulated investment company, (2) the stock is disposed of before the 91st day after the date on which it was acquired, and (3) the Shareholder subsequently acquires Shares of the same or another regulated investment company and the otherwise applicable sales charge is reduced or eliminated under a "reinvestment right" received upon the initial purchase of shares of stock. In that case, the gain or loss recognized will be determined by excluding from the tax basis of the Shares exchanged all or a portion of the sales charge incurred in acquiring those Shares. This exclusion applies to the extent that the otherwise applicable sales charge with respect to the newly acquired Shares is reduced as a result of having incurred a sales charge initially. Sales charges affected by this rule are treated as if they were incurred with respect to the stock acquired under the reinvestment right. This provision may be applied to successive acquisitions of shares of stock.
The Fund generally will be required to withhold Federal income tax at a rate of 31% ("backup withholding") from dividends paid, capital gain distributions, and redemption proceeds to Shareholders if (1) the Shareholder fails to furnish the Fund with the Shareholder's correct taxpayer identification number or social security number and to make such certifications as the Fund may require, (2) the IRS notifies the Shareholder or the Fund that the Shareholder has failed to report properly certain interest and dividend income to the IRS and to respond to notices to that effect, or (3) when required to do so, the Shareholder fails to certify that he is not subject to backup withholding. Any amounts withheld may be credited against the Shareholder's Federal income tax liability.
Ordinary dividends and taxable capital gain distributions declared in October, November, or December with a record date in such month and paid during the following January will be treated as having been paid by the Fund and received by Shareholders on December 31 of the calendar year in which declared, rather than the calendar year in which the dividends are actually received.
Distributions also may be subject to state, local and foreign taxes. Shareholders are advised to consult their own tax advisers for details with respect to the particular tax consequences to them of an investment in either Fund. U.S. tax rules applicable to foreign investors may differ significantly from those outlined above. In particular, Shareholders of the Fund who are citizens or residents of Germany, the Netherlands, Luxembourg or other countries are specifically advised to consult their tax advisers with respect to the U.S. and foreign tax consequences of an investment in the Fund.
Franklin Templeton Distributors, Inc. ("FTD" or the "Principal Underwriter"), P.O. Box 33030, St. Petersburg, Florida 33733-8030, toll free telephone (800) 237-0738, is the Principal Underwriter of the Fund's Shares. FTD is a wholly owned subsidiary of Franklin.
The Fund, pursuant to Rule 12b-1 under the 1940 Act, has adopted a Distribution Plan with respect to each class of Shares (the "Plans"). Under the Plan adopted with respect to Class I Shares, the Fund may reimburse the Principal Underwriter or others quarterly (subject to a limit of 0.25% per annum of the Fund's average daily net assets attributable to Class I Shares) for costs and expenses incurred by FTD or others in connection with any activity which is primarily intended to result in the sale of Fund Shares. Under the Plan adopted with respect to Class II Shares, the Fund will pay FTD or others quarterly
(subject to a limit of 1.00% per annum of the Fund's average daily assets attributable to Class II Shares of which up to 0.25% of such net assets may be paid to dealers for personal service and/or maintenance of Shareholder accounts) for costs and expenses incurred by FTD or others in connection with any activity which is primarily intended to result in the sale of the Fund's Shares. Payments to FTD or others could be for various types of activities, including (1) payments to broker-dealers who provide certain services of value to the Fund's Shareholders (sometimes referred to as a "trail fee"); (2) reimbursement of expenses relating to selling and servicing efforts or of organizing and conducting sales seminars; (3) payments to employees or agents of the Principal Underwriter who engage in or support distribution of Shares; (4) payments of the costs of preparing, printing and distributing prospectuses and reports to prospective investors and of printing and advertising expenses; (5) payment of dealer commissions and wholesaler compensation in connection with sales of Fund Shares and interest or carrying charges in connection therewith; and (6) such other similar services as the Fund's Board of Directors determines to be reasonably calculated to result in the sale of Shares. Under the Plan adopted with respect to Class I Shares, the costs and expenses not reimbursed in any one given quarter (including costs and expenses not reimbursed because they exceed 0.25% of the Fund's average daily net assets attributable to Class I Shares) may be reimbursed in subsequent quarters or years.
During the fiscal year ended August 31, 1995, FTD incurred costs and expenses of $13,939,769 in connection with distribution of Class I Shares of the Fund, which amount was reimbursed by the Fund pursuant to the Plan and costs and expenses of $230,790 in connection with distribution of Class II Shares of the Fund, which amount was reimbursed by the Fund pursuant to the Plan. FTD has informed the Fund that it had no unreimbursed expenses for Class I Shares of the Fund under the Plan at August 31, 1995. In the event that the Plan adopted with respect to Class I Shares is terminated, the Fund will not be liable to FTD for any unreimbursed expenses that had been carried forward from previous months or years. During the fiscal year ended August 31, 1995, FTD spent, pursuant to the Plans, with respect to Class I Shares the following amounts on: compensation to dealers, $11,336,949; sales promotion, $284,760; printing, $655,526; advertising, $1,396,358; and wholesale costs and expenses, $266,176; and with respect to Class II Shares the following amounts on: compensation to dealers, $16,410; sales promotion, $212; printing, $500; advertising, $680; and wholesale costs and expenses, $212,988.
The Distribution Agreement provides that the Principal Underwriter will use its best efforts to maintain a broad distribution of the Fund's Shares among bona fide investors and may sign selling contracts with responsible dealers as well as sell to individual investors. The Shares are sold to the public only at the Offering Price in effect at the time of sale, and the Fund receives not less than the full net asset value of the Shares sold. The discount between the Offering Price and the net asset value may be retained by the Principal Underwriter or it may reallow all or any part of such discount to dealers. During the fiscal years ended August 31, 1995, 1994, and 1993, FTD (and, prior to June 1, 1993, Templeton Funds Distributor, Inc.) retained of such discount $5,685,601, $5,682,478, and $3,162,262, or approximately 14.66%, 16.12%, and 22.30% of the gross sales commissions, respectively.
The Distribution Agreement provides that the Fund shall pay the costs and expenses incident to registering and qualifying its Shares for sale under the Securities Act of 1933 and under the applicable securities laws of the jurisdictions in which the Principal Underwriter desires to distribute the Shares, and for preparing, printing and distributing prospectuses and reports to Shareholders. The Principal Underwriter is responsible for the cost of printing additional copies of prospectuses and reports to Shareholders used for selling purposes. (The Fund pays costs of preparation, set-up and initial supply of the Fund's prospectus for existing Shareholders.)
The Distribution Agreement is subject to renewal from year to year in accordance with the provisions of the 1940 Act and terminates automatically in the event of its assignment. The Distribution Agreement may be terminated without penalty by either party on 60 days' written notice to the other, provided termination by the Fund shall be approved by the Board of Directors or a majority (as defined in the 1940 Act) of the Shareholders. The Principal Underwriter is relieved of liability for any act or omission in the course of its performance of the Distribution Agreement, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations.
FTD is the Principal Underwriter of the Shares of the Fund throughout the world, except for Europe, Hong Kong and other parts of Asia, and such other countries or territories as it might hereafter relinquish to another principal underwriter. Templeton Global Strategic Services (DEUTSCHLAND) GmbH ("Templeton Strategic Services"), whose office address is Taunusanlage 11, 60329 Frankfurt am Main, Germany is principal underwriter for sale of the Shares in all countries in Europe. The Fund has also entered into a non-exclusive underwriting agreement with Templeton Franklin Investment Services (Asia) Limited ("Templeton Investment Services"), whose office address is 2701 Shui On Centre, Hong Kong as principal underwriter for sale of the Shares in Hong Kong and other parts of Asia. The terms of the underwriting agreements with Templeton Strategic Services and Templeton Investment Services are substantially similar to those of the Distribution Agreement with FTD. Templeton Strategic Services and Templeton Investment Services are indirect wholly owned subsidiaries of Franklin.
Franklin Templeton Distributors, Inc. is the principal underwriter for the other Templeton Funds.
The Shares have non-cumulative voting rights so that the holders of a plurality of the Shares voting for the election of Directors at a meeting at which 50% of the outstanding Shares are present can elect all the Directors and, in such event, the holders of the remaining Shares voting for the election of Directors will not be able to elect any person or persons to the Board of Directors.
The Fund may, from time to time, include its total return in advertisements or reports to Shareholders or prospective investors. Quotations of average annual total return for the Fund will be expressed in terms of the average annual compounded rate of return for periods in excess of one year or the total return for periods less than one year of a hypothetical investment in the Fund over periods of one, five and ten years, calculated pursuant to the following formula: P(1 + T)n = ERV (where P = a hypothetical initial payment of $1,000, T = the average annual total return for periods of one year or more or the total return for periods of less than one year, n = the number of years, and ERV = the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period). All total return figures reflect the deduction of the maximum initial sales charge and deduction of a proportional share of Fund expenses on an annual basis, and assume that all dividends and distributions are reinvested when paid. The average annual total return for the one-, five- and ten-year periods ended August 31, 1995 was 3.21%, 13.67% and 14.22%, respectively.
Performance information for the Fund may be compared, in reports and promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones Industrial Average, or other unmanaged indices so that investors may compare the Fund's results with those of a group of unmanaged securities widely regarded by investors as representative of the securities market in general; (ii) other groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely used independent research firm which ranks mutual funds by overall performance, investment objectives and assets, or tracked by other services, companies, publications, or persons who rank mutual funds on overall performance or other criteria; and (iii) the Consumer Price Index (measure for inflation) to assess the real rate of return from an investment in the Fund. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of a hypothetical investment in the Fund during the particular time period on which the calculations are based. Performance information should be considered in light of the Fund's investment objective and policies, characteristics and quality of the portfolio and the market conditions during the given time period, and should not be considered as a representation of what may be achieved in the future.
From time to time, the Fund and the Investment Manager may also refer to the following information:
(1) The Investment Manager's and its affiliates' market share of international equities managed in mutual funds prepared or published by Strategic Insight or a similar statistical organization.
(2) The performance of U.S. equity and debt markets relative to foreign markets prepared or published by Morgan Stanley Capital International or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets as prepared or published by the International Finance Corporation, Morgan Stanley Capital International or a similar financial organization.
(4) The geographic and industry distribution of the Fund's portfolio and the Fund's top ten holdings.
(5) The gross national product and populations, including age characteristics, literacy rates, foreign investment improvements due to a liberalization of securities laws and a reduction of foreign exchange controls, and improving communication technology, of various countries as published by various statistical organizations.
(6) To assist investors in understanding the different returns and risk characteristics of various investments, the Fund may show historical returns of various investments and published indices (E.G., Ibbotson Associates, Inc. Charts and Morgan Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder services.
(9) Allegorical stories illustrating the importance of persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative to industry standards as published by Lipper Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment management philosophy and approach, including its worldwide search for undervalued or "bargain" securities and its diversification by industry, nation and type of stocks or other securities.
(12) Quotations from the Templeton organization's founder, Sir John Templeton,* advocating the virtues of diversification and long-term investing, including the following:
o "Never follow the crowd. Superior performance is possible only if you invest differently from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
* Sir John Templeton sold the Templeton organization to Franklin Resources, Inc. in October, 1992 and resigned from the Fund's Board on April 16, 1995. He is no longer involved with the investment management process.
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of investment."
o "When buying stocks, search for bargains among quality stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else, there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or negative too often."
In addition, the Fund and the Investment Manager may also refer to the number of Shareholders in the Fund or the aggregate number of shareholders of the Franklin Templeton Funds or the dollar amount of fund and private account assets under management in advertising materials.
The financial statements included in the Fund's Annual Report to Shareholders dated August 31, 1995 are incorporated herein by reference. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-11T18:06:52 |
0000889812-96-000022 | 0000889812-96-000022_0000.txt | U.S. SECURITIES AND EXCHANGE COMMISSION
Annual Notice of Securities Sold
Read instructions at end of Form before preparing Form. Please print or type.
1. Name and address of issuer:
Mitchell Hutchins/Kidder Peabody Tax Exempt Money Fund
2. Name of each series or class of funds for which this notice is filed:
3. Investment Company Act File Number:
Securities Act File Number: 2-81820
4. Last day of fiscal year for which this notice is filed:
5. Check box if this notice is being filed more than 180 days after the close of the issuer's fiscal year for purposes of reporting securities sold after the close of the fiscal year but before termination of the issuer's 24f-2 declaration:
6. Date of termination of issuer's declaration under rule 24f-2(a)(1), if applicable (see Instruction A.6):
7. Number and amount of securities of the same class or series which had been registered under the Securities Act of 1933 other than pursuant to rule 24f-2 in a prior fiscal year, but which remained unsold at the beginning of the fiscal year:
8. Number and amount of securities registered during the fiscal year other than pursuant to rule 24f-2:
9. Number and aggregate sale price of securities sold during the fiscal year:
10. Number and aggregate sale price of securities sold during the fiscal year in reliance upon registration pursuant to rule 24f-2:
11. Number and aggregate sale price of securities issued during the fiscal year in connection with dividend reinvestment plans, if applicable (see Instruction B.7):
12. Calculation of registration fee:
(i) Aggregate sale price of securities sold during the fiscal year in reliance on rule 24f-2 (from Item
(ii) Aggregate price of shares issued reinvestment plans (from Item 11,
(iii) Aggregate price of shares redeemed or repurchased during the fiscal
(iv) Aggregate price of shares redeemed applied as a reduction to filing fees pursuant to rule 24e-2 (if
(v) Net aggregate price of securities sold and issued during the fiscal year in reliance on rule 24f-2 [line (i), plus line (ii), less line (iii), plus line (iv)] (if applicable): (vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or other applicable law or regulation (see Instruction C.6):
(vii) Fee due [line (i) or line (v)
multiplied by line (vi)]: 0
Instruction: Issuers should complete lines (ii), (iii), (iv), and (v) only if the form is being filed within 60 days after the close of the issuer's fiscal year. See Instruction C.3.
13. Check box if fees are being remitted to the Commission's lockbox depository as described in section 3a of the Commission's Rules of Informal and Other Procedures (17 CFR 202.3a).
Date of mailing or wire transfer of filing fees to the Commission's lockbox depository:
This report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.
By (Signature and Title) /s/ Paul Schubert
Please print the name and title of the signing officer below the signature. | 24F-2NT | 24F-2NT | 1996-01-12T00:00:00 | 1996-01-12T15:19:34 |
0000950115-96-000013 | 0000950115-96-000013_0004.txt | Office of SECRETARY OF STATE
I, Glenn C. Kenton Secretary of State of the State of Delaware, do hereby certify that the Certificate of Incorporation of the "HCI, INC.", was received and filed in this office the eighth day of December, A.D. 1977, at 9 o'clock A.M.
And I do hereby further certify that the said "HCI, INC.", filed a Certificate of Agreement of Merger, changing its corporate title to "MEDIQ INCORPORATED", on the thirty-first day of December, A.D. 1980, at 9 o'clock A.M.
And I do hereby further certify that the aforesaid Corporation is duly incorporated under the laws of the State of Delaware and is in good standing and has a legal corporate existence so far as the records of this office show and is duly authorized to transact business.
And I do hereby further certify that the said "MEDIQ INCORPORATED", is the last known title of record of the aforesaid Corporation.
In Testimony Whereof, I have hereunto set my hand and official seal at Dover this seventeenth day of March in the year of our Lord one thousand nine hundred and eighty-one.
Glenn C. Kenton, Secretary of State laws of the States of Delaware, Pennsylvania, New Jersey and Nevada, do hereby agree as follows: 1. Merger. The Constituent Corporations other than HCI shall be merged with and into HCI (thereafter to be known as MEDIQ INCORPORATED) on the effective date hereinafter set forth in accordance with the applicable laws of the states of Delaware New Jersey, Pennsylvania and Nevada, and on the terms and conditions set forth in this Plan and Agreement of Merger. From and after such effective date, HCI shall be the surviving corporation (the "Surviving Corporation") and shall continue to do business as a corporation organized and existing under the laws of the State of Delaware, unaffected and-unimpaired by the Merger with all rights, privileges, immunities and powers, and subject to all the duties and liabilities of a corporation organized and existing under the laws of the State o Delaware. 2. Certificate of Incorporation of Surviving Corporation. The Certificate of Incorporation of the Surviving Corporation, upon the effective date of this merger, shall be and shall read as follows: I. The corporate name is MEDIQ INCORPORATED. II. The address of the registered office of the Corporation in the State of Delaware is 901 Market Street in the City of Wilmington, County of New Castle. The registered agent in charge thereof is Corporation Guarantee and Trust Company.
III. The nature of the business or objects or purposes to be transacted, promoted or carried on by the Corporation are as follows: To buy, sell, lease, dispose of, distribute, import, export, manufacture, produce, and trade and in general deal in and with all materials, devices, implements, goods, wares, merchandise, and services of any and every character, either as principal, broker, or agent of others; To construct, repair, operate and maintain, trade and deal in any and all kinds of machinery. and any and all kinds of mechanical apparatus, and any and all kinds of fixtures and To manufacture, purchase or otherwise acquire, invest in, own, create a security interest in, pledge, sell, assign, transfer, rent, lease or otherwise dispose of; trade, deal in, and deal with goods, wares, merchandise and personal property of every class and description: To acquire, and to pay, for in cash, stock, bonds or other indebtedness of this Corporation or otherwise, the good will, rights, assets and property and to undertake or assume the whole or any part of the obligations or liabilities of, any person, firm, association or corporation; To subscribe, for, purchase or otherwise acquire, own, hold, invest, in, sell, assign, transfer, exchange, pledge, mortgage, grant security interests in or otherwise deal and trade in, or with, shares of stock, bonds, pledges, obligations, contracts, leases, evidences of indebtedness, or securities of any company corporation or association, domestic or foreign, and of any governmental or quasi-governmental entity or authority; To receive, collect, hold, and dispose of, interest, dividend; and income of and from any of the shares of stock, bonds, coupons, promissory notes, pledges, obligations, contracts, leases, evidence of indebtedness, securities or other property held or owned by it; To issue bonds, debentures or obligations of this Corporation and borrow money on the note or notes of this Corporation for any of the objects or purposes of the Corporation and to secure the same by pledge, mortgage, deed, security interest, or trust or otherwise in or upon any property, real or personal, of any kind and nature. at any time owned by the Corporation; To purchase, hold, sell and transfer the shares of its To do anything and everything necessary, suitable convenient, or proper for the accomplishment of any of the purposes or the attainment of one or more of the objects herein enumerated, or incidental to the powers herein named, or which shall at any time appear conducive or expedient to the benefit or protection of the Corporation, and in general to carry on any other business in connection with the foregoing; to have and exercise all the powers conferred by the laws of the State of
Delaware upon corporations formed under the General Corporation Law of the State of Delaware and to do any, and all of the acts and things hereinabove set forth to the same extent as natural persons might or could do. The foregoing clauses shall be construed both as objects and powers; and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of the Corporation. IV. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 100,000 shares of preferred stock of a par value of $100.00 per share, and 10,000,000 shares of common stock of a par value of $1.00 per share. The preferred stock may be issued with the voting rights, designations, preferences, qualification, privileges, limitations, options, conversion rights, and other special rights, if any, as shall be stated or expressed in the resolution or resolutions providing for the issuance of such stock, adopted by the Board of Directors. Authority is hereby expressly granted to and vested in the Board of Directors to authorize the issuance of the shares of the preferred stock and to fix by resolution or Resolutions the terms thereof, including without limitation, the following: a. The dividends payable and preferences in respect
b. The terms and conditions an which, and the price or prices at which, such shares may be made subject to c. The rights of such shares upon the voluntary or involuntary dissolution of, or upon any other distribution of the d Whether or not such shares shall be made convertible into, or exchangeable for, shares of any other classes or of any series of any other class or classes of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments, if any, at which, and the other terms and conditions upon which, any such conversion or exchange may be made; and e. Whether or not such shares shall be entitled to other special rights in addition to those in the Articles provided for. No stockholder of the Corporation shall by reason of his holding shares of any class have any pre-emptive or preferential right to purchase or subscribe to any shares of any class of this Corporation, now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any Class, now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights of such stockholder, other than such rights, if any, as the Board of Directors, in its discretion from time to time may grant and at such price as the Board of Directors in its discretion may fix; and the Board of Directors may issue shares of any class of this Corporation, or any notes debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any class, either in whole or in part, to the existing stockholders of any class. Except as otherwise specifically required by law or as specifically provided in the resolutions of the Board of Directors authorizing the issuance of the preferred stock, the exclusive voting power of the Corporation shall be vested in the common stock of the Corporation. Each holder of common stock shall be entitled to one vote for each share held by such holder. The holders of the shares of the Corporation's common stock shall not be entitled to cumulative voting in voting for directors, i.e. they shall not be entitled in so voting to multiply the number of votes to which they are entitled by the number of directors to be elected by them in the same election. V. The name and address of the Incorporator is as follows: Ira S. Pim, Jr. 2225 Land Title Building
VI. The Corporation is to have perpetual existence. VII. Private property of the shareholders shall not be subject to the payment of corporate debts to any extent whatsoever.
VIII. All corporate powers of the Corporation shall be exercised by the Board of Directors except as otherwise provided by law. Directors need not be shareholders. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board designate an executive Committee and one or more other committees, each committee to consist of two or more of the directors of the Corporation, which, to the extent provided in such resolution or resolutions or in the By-Laws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it. The number of the directors of the Corporation shall be fixed from time to time by the By-Laws, and may be altered from time to time by amendment.of the By-Laws, but never shall be less than three. The By-Laws may also prescribe the number of directors necessary to constitute a quorum of the Board, which number shall not be more than a majority nor less than one-third of the total number of directors, and in no event less than two directors. The shareholders and the directors may hold their meetings, and the Corporation may have an office or offices, outside the State of Delaware if the By-Laws so provide, and the books and records of the Corporation may be kept outside the State of Delaware to the extent permitted by the laws of that State.
None of the directors need be a resident of the State of Delaware. Subject to By-Laws made by the shareholders the Board of Directors may make By-Laws and from time-to-time may alter, amend, or repeal any By-Laws, but any By-Laws made by the Board of Directors may be altered, amended, or repealed by the shareholders at any annual meeting or at any special meeting, provided that notice of such proposed alteration, amendment or repeal is included in the notice of such special meeting. The Board of Directors shall have power from time to time to fix the amount to be reserved by the Corporation over and above its capital stock paid in and to fix and determine and to vary the amount of the working capital of the Corporation, and to direct. and determine he use and disposition of the working capital and of any surplus or net profits over and above the capital stock paid in. The Board of Directors may from time to time, in such manner and upon such terms and.conditions as the Board of Directors may determine, enter into, establish, reestablish, amend, alter,or repeal, and may put into effect and carry out, agreements or plans for distributing, selling, or granting options on shares of stock of the Corporation or any other securities or property of the Corporation, to or for the benefit of the officers and employees of the Corporation or any of them, or for their participation in any manner in the profits of the Corporation, in addition to or apart from their regular compensation, or for providing such officers and employees, or any of them, at the expense of the Corporation, in whole or in part, with medical services, insurance against accident, sickness, or death, pensions or payments during old age, disability, or unemployment, and education, housing, social service, recreation, or other aids and benefits for their relief or general welfare. The Board of Directors from time to time shall determine whether and to what extent and at what times and place a and under what conditions and regulations the accounts and books of the Corporation, or any of them, shall be open to the inspection of the shareholders, and no shareholder shall have any right to inspect any account, book, or document of the Corporation, except as conferred by statute or as authorized by resolution of the Board of Directors. In addition to the powers and authorities hereinbefore or by statute expressly conferred upon them, the Board of Directors may exercise all such powers and do all such acts and things as maybe .exercised or done by the Corporation, subject, nevertheless, to the express provisions of the laws of Delaware, of this Certificate of Incorporation; and of the By-Laws, of the Corporation. In the absence of fraud, no contractor other transaction of the corporation shall be affected or invalidated in any way by the fact that any of the directors of the Corporation are in any wise interested in or connected other party to such contract or transaction or are themselves parties to such contract or transaction, provided that such interest shall be, fully disclosed or otherwise known to the Board of Directors at its meeting at which such contract or transaction is authorized or confirmed; and provided further that at the meeting of the Board of Directors authorizing or confirming such con.tract or transaction there shall be present a quorum of directors not so interested or connected and such contractor transaction shall be ap proved by a majority of such quorum, which majority shall consist of directors not so interested or connected. Any such contract, transaction, or act of the Corporation or of the Board of Directors or by any committee, thereof which shall be required to be, and shall be ratified by the holders of a majority of the; shares of stock of the Corporation having voting power and voting at any annual meeting or at any special meeting called for such purpose, shall be as valid and as binding as though ratified by every shareholder of the Corporation. Any director of the Corporation may vote upon any contract or other transaction between the Corporation and any subsidiary or affiliated Corporation without regard to the fact that he is also a director of such subsidiary or affiliated corporation. IX. The Corporation re.serves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation in the manner now and hereafter prescribed by statute; and all rights herein conferred upon the shareholders are granted subject to this reservation. 3. By-Laws of Surviving Corporation. The By-Laws of HCI in force on the effective date of the merger shall be the By-Laws of the Surviving Corporation until altered, amended or repealed. 4. Directors and Officers. (a) The following persons shall be and become the directors of the Surviving Corporation upon the effective date of the merger and shall hold office until the first annual meeting of the shareholders of the Surviving Corporation after the effective date of the merger and until their respective successors are elected and shall have duly qualified: Bernard B. Rotko, M.D. Eugene M. Schloss, Jr.
If on the effective date of the merger a vacancy shall exist in the Board of Directors of the Surviving Corporation for any reason whatsoever, such vacancy may be filled by the Board of Directors of the Surviving Corporation as provided in its By-Laws. (b) The first annual meeting of the shareholders of the Surviving Corporation after the effective date of the merger, shall be the annual meeting provided for in its By-Laws, for the fiscaL year ending September 30, 1981.
(c) The following persons shall be executive or administrative officers of the Surviving Corporation, from and after the effective date of the merger, subject to the provisions of the By-Laws of the Surviving Corporation, and shall hold office until the first annual meeting of the directors of the Surviving Corporation after the effective date of the merger and until their respective successors are elected and shall have duly qualified: Bernard B. Rotko. M.D. Chairman of the Board Lionel H. FeLzer Vice President Harvey J. Comita, Vice President Norman E. Martin Vice President Ian J. Berg Vice President Eugene M. Schloss, Jr. Secretary
The Board of Directors.shall elect or appoint such additional officers as they shall determine, subject to the provisions of the By-Laws of the Surviving Corporation. If, on the effective date of the merger a vacancy shall existing any office, for any reason whatsoever, such vacancy may be filled by the Board of Directors of the Surviving Corporation as provided in its By-Laws. (d) The first regular meeting of the Board of Directors of the Surviving Corporation after the effective date of the merger shall be held as soon as practicable thereafter. 5. Conversion of Shares of the Constituent Corporations. The manner of converting the outstanding shares of the capital stock of the Constituent Corporations into the new shares of the common capital stock of the Surviving Corporation created by Paragraph 2 of this Plan and Agreement of Merger (which shares for such purpose shall be validly issued, fully paid and non-assessable) shall be as follows: (a) Each common share without par value of A-PRN outstanding on the effective date of the merger shall be changed and converted into 451.005 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (b) Each common share of the par value of $1 of HCI outstanding on the effective date of the merger shall be changed and converted into 27.465 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon he issued and outstanding. (c) Each common share of the par value of $1 of HOSQUIP outstanding on the effective date of the merger shall be changed and converted into 16.240 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (d) Each common share of the par value of $1 of MMG outstanding on the effective date of the merger shall be changed and converted into 115.64 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (e) Each common share of the par value of $1 of Olney outstanding on the effective date of the merger shall be changed and converted into 1.0144 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (f) Each common share of the par value of $100 of Oxford outstanding on the effective date of the merger shall be changed and converted into 85.593 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (g) Each common share of the par value of $.01 of Pan-Optics Outstanding on the effective date of the merger shall be changed and converted into .94738 shares of the Common Stock of the Surviving Corporation. which shares of common stock of the Surviving Corporation shall thereupon be issued and outstanding. (h) Each common share of the par value of $1 of RERM outstanding on the effective date of the merger shall be changed and converted into 1.542 shares of the Common Stock of the Surviving Corporation, which shares of common stock of the Surviving Corporation Shall thereupon be issued and outstanding. (i) Each common share of each class of the par value of $.01 of FMC outstanding on the effective date of the merger shall be changed and converted into .00204 shares of the Surviving Corporation, which shares common stock of the Surviving Corporation shall thereupon be issued and outstanding, unless dissenters' rights are exercised. (j) Each common share of the par value of $10 of Medifac outstanding on the effective date of the merger shall be changed and converted into 413.54 shares of the Common Stock of the Surviving Corporation, which shares of Common stock of the Surviving Corporation shall thereupon be issued and outstanding. 6. Effect of Merger. Upon this merger becoming effective: (a) The separate corporate existence of each of the Constituent Corporations, except HCI, and the Surviving Corporation shall become the owner, without other transfer or further act or deed, of all of the rights, privileges, powers, property franchises, estates and interests every kind of the Constituent Corporations, as effectually the property the Surviving Corporation as they were of the respective Constituent Corporations; and the Surviving Corporation shall be subject to all debt and liabilities of the Constituent Corporations in the same manner as the Surviving Corporation had itself incurred them; and the Surviving Corporation shall be subject to all of the restrictions, disabilities duties of each of the merged Constituent Corporations shall not revert be in any way impaired by reason of this merger; and rights of credits and liens upon any property of any of Constituent Corporations shall be preserved unimpaired. (b) The assets and liabilities of the merged Constituent Corporation shall be taken up on the books of the Surviving Corporation in the amount at which they shall at that time be carried on the books of each of the merged Constituent Corporations.
7. Right to Amend Certificate of Incorporation. The Surviving Corporation shall have, and reserves hereby, the right to amend, alter, change or repeal its amended Certificate of Incorporation in the manner now or hereafter prescribed by the Statute; and all rights or powers conferred herein and in such amended Certificate of Incorporation on shareholders, directors and officers are subject to this reservation. 8. Submission to Shareholders. This Plan and Agreement of Merger shall be submitted to the shareholders of each of the Constituent Corporations hereto for approval, at meetings to be held on or before the filing hereof. or otherwise approved by the unanimous written consent of all shareholders of each such respective Constituent Corporation in the manner provided by the applicable laws of the States of Delaware, Pennsylvania, New Jersey and Nevada respectively. Upon such required approval, the proper officers of each Constituent Corporation shall, and hereby are authorized and directed to, perform all such further acts and execute and deliver to the proper authorities for filing, all documents as the same may be necessary or proper to render effective the merger contemplated by this Plan and Agreement. 9. Prohibited Actions. From and after the date hereof, and prior to the effective date of the merger, none of the Constituent Corporations will engage in any activity or transaction other than in the ordinary course of business without first obtaining the approval of the others. None of the
Constituent Corporations will declare or pay any dividend on its stock of any class prior to the effective date of this merger. 10. Expenses of Merger. The Surviving Corporation shall pay all expenses of carrying this Plan and Agreement into effect and of accomplishing the merger, not paid by the merged Constituent Corporations, prior to the effective date of the merger. 11. Delivery of Deed and Instruments. From time to time, as and when requested by the Surviving Corporation or by its successors or assigns, each of the Constituent Corporations shall execute and deliver, or cause to be executed and delivered, all deeds and other instruments and shall take, or cause to be taken, all such other and further actions as the Surviving Corporation may deem necessary and desirable in order more fully to vest in and confirm to the Surviving Corporation title to and possession or all the property, rights, privileges, powers and franchises referred to in Paragraph 1 hereof, and otherwise to carry out the intent and purposes of this Plan and Agreement of Merger. For the convenience of the parties, and to facilitate the filing and recording of this Plan and Agreement of Merger, any number of counterparts hereof maybe executed and each such executed counterpart shall be deemed to be original instrument. 12. Service of Process. The Secretaries of State of the States of Pennsylvania, New Jersey and Nevada are hereby designated as the agents for the serviced of process upon the Surviving Corporation in any proceeding for the enforcement of any obligation of any Constituent Corporation formerly incorporated in their respective states. 13. Abandonment of Merger. Anything herein or elsewhere to the contrary notwithstanding, this Plan and Agreement of Merger may be terminated and abandoned before it becomes effective: (a) By mutual consent of the Boards of Directors of (b) By the Board of Directors of any of the Constituent Corporations if any material litigation shall be pending or threatened against or affecting any of the Constituent Corporations, or any of their respective assets, or the merger; which litigation, in the judgment of such Board, renders it inadvisable to proceed with the merger. 12. Effective Date of Merger. Notwithstanding the date upon which this Agreement and Plan of Merger and/or any Certificate or other document required in connection therewith, shall be filed and/or recorded and/or certified by the Secretary of State of Delaware, Pennsylvania, New Jersey or Nevada, or recorded in any other office in which the same shall be required, this Plan and Agreement of Merger shall be effective as of the close of business on December 31, 1980, for accounting purposes only.
IN WITNESS WHEREOF, each of the Constituent Corporations has caused this Plan and Agreement of Merger to be executed by its respective duly authorized officers and its Corporate Seal affixed, the day and year first above written.
By: /s/ Lee F. Weiler Lee F. Weiler, Vice President
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr., Secretary
By: /s/ Lionel H. Felzer
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr., Secretary
By: /s/ Lionel H. Felzer
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr., Secretary
By: /s/ Lionel H. Felzer Lionel H. Felzer, Vice President
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr.
By: /s/ Bernard B. Rotko Bernard B. Rotko, M.D., President
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr., Secretary
By: /s/ Lionel H. Felzer
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr.
By: /s/ Lionel H. Felzer Lionel H. Felzer, Vice President
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr.
R. H. Realty Management, Inc.
By: /s/ Lionel H. Felzer
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr., Secretary
By: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr., President
By: /s/ Peter I. Bentivegna
Attest: /s/ Eugene M. Schloss Eugene M. Schloss, Esq., Secretary
I, EUGENE M. SCHLOSS, JR., Secretary, of HCI, INC., a corporation organized and existing under the laws of the State of Delaware, hereby certify, as such secretary and under the seal of the aid corporation, that the Plan and Agreement of Merger to which this certificate is attached, after having been first duly signed on behalf of said corporation by the President and Secretary of HCI, INC., a corporation of the State of Delaware, was duly submitted to the sole stockholder of said HCI, INC. for the purpose of considering and taking action upon said Plan and Agreement of Merger, that 1,000 shares of stock of said corporation were on said date issued and outstanding and that the holder of 1,000 shares voted by he execution of a written consent in favor of said Plan and Agreement of Merger and the holders of no shares voted against same, the said affirmative vote representing at least a majority of the total number of shares of the outstanding capital stock of said corporation, and that thereby the Plan and Agreement of Merger, was at said meeting duly adopted as the act of the stockholders of said HCI, INC., and the duly adopted agreement of the said corporation.
WITNESS my hand and seal of said HCI, INC. on this 30th day of December 1980.
/s/ EUGENE M. SCHLOSS, JR. EUGENE M. SCHLOSS, JR. SECRETARY
THE ABOVE PLAN AND AGREEMENT OF MERGER, having been executed by the President and Secretary of each corporate party hereto, and having been adopted separately by the stockholders of each corporate party thereto, in accordance with the provisions of, the General Corporation Law of the State of Delaware, and the fact having been certified on said Plan and Agreement of Merger by the Secretary of each corporate party thereto, the Vice President and Secretary of RCI, INC., a Delaware corporation, do now hereby execute the said Plan and Agreement of Merger under the corporate seals of the said corporation by the Authority of the directors and stockholders thereof, as the respective act, deed and agreement of each of said corporation, on the 30th day of December, 1980.
By: /s/ BERNARD J. KORMAN BERNARD J. KORMAN, VICE PRESIDENT
Attest: /s/ EUGENE M. SCHLOSS JR. EUGENE M. SCHLOSS JR., SECRETARY
MEDIQ Incorporated, a corporation organized and existing under and by virtue of t he General Corporation Law of the State of Delaware; does hereby certify: FIRST: That the Board of Directors of this Corporation, at a meeting duly convened pursuant to notice, at which a quorum was present and acting throughout, adopted a resolution proposing and declaring advisable the following amendment to the Corporation's certificate of Incorporation: RESOLVED, that the Certificate of Incorporation of this Corporation be amended by changing Article IV so that, as ended, that Article shall be read in its entirety as follows: am
"IV. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 100,000 shares of preferred stock of a par value of $100.00 per share, and 25,000,000 shares of common stock of a par value of $1.00 per share. The preferred stock may be issued with the voting rights, designations, preferences, qualifications, privileges, limitations, options, conversion rights, and other special rights, if any, as shall be stated or expressed in the resolution or resolutions providing for the issuance of such by the Board of Directors. Authority is, hereby expressly granted to and vested in the Board of Directors to authorize the issuance of the shares of the preferred stock and to fix by resolution or resolutions the terms thereof, including without limitation, the following: a. The dividends payable and preferences in respect b. The terms and conditions on which, and the price or prices at which, such shares may be made subject to redemption; c. The rights of such shares upon the voluntary or involuntary dissolution of, or upon any other distribution of the d. Whether or not such shares shall be made convertible into, or exchangeable for, shares of any other classes or of any series. of any other class or classes of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments, if any, at which, and the other terms and conditions upon which, any such conversion or exchange may be made; and e. Whether or not such shares shall be entitled to other special rights in addition to those in the Articles provided for. No stockholder of the Corporation shall, by reason of his holding shares of any class, have any preemptive or preferential right to purchase or subscribe to any shares of any class of this Corporation, now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into, or carrying options or warrants to purchase, shares of any class, now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights or such stockholder, other than such rights, if any, as the Board of Directors, its discretion, from time to time may grant, and at such price as the Board of Directors, in its discretion, may fix; and the Board of Directors may issue shares of any class of this Corporation, or any.notes, debentures, bonds or other securities convertible into, or carrying options or warrants to purchase, shares of any class, either in whole or in part, to the existing stockholders of any class. Except as otherwise specifically required by law or as Specifically provided in the resolutions of the Board of Directors authorizing the issuance of the preferred stock, the exclusive voting power of the Corporation shall be vested in the common stock of the Corporation. Each holder of common stock shall be entitled to one vote for each share held by such holder. The holders of the shares of the Corporation's common stock shall not be entitled to cumulative voting in voting for directors; i.e. they shall not be entitled in so voting, to multiply the number of votes to which they are entitled by the number of directors to be elected by them in the same election." SECOND: That the Stockholders of the Corporation, at a meeting duly convened pursuant to notice, at which a quorum was present and acting throughout, have given consent to the amendment in accordance with the provisions of the General Corporation Law of the State of Delaware. THIRD: That the amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of the Corporation will not be reduced, under or by reason of said amendment. IN WITNESS WHEREOF, MEDIQ Incorporated has caused this Certificate of Amendment to be signed by Bernard J. Korman, its President, and attested by Eugene M. Schloss, Jr., its Secretary, this 28th day of February, 1984.
By: /s/ Bernard J. Korman
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr., Secretary
Office of the Secretary of State
I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "MEDIQ INCORPORATED" FILED IN THIS OFFICE ON THE SEVENTEENTH DAY OF MARCH, A.D. 1993, AT 3 O'CLOCK P.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDINGS.
* * * * * * * * * *
William T. Quillen, Secretary of State
The undersigned, being the Senior Vice President Chief Financial officer of MEDIQ incorporated, certifies that in accordance with Section 242 of the Delaware General Corporation Law, the following amendment to the Certificate of Incorporation was duly considered and approved by the holders of a majority of the voting power of the outstanding shares qualified to vote thereon at the annual meeting of stockholders duly called and held on March 17, 1993: RESOLVED, that the first sentence of Article IV of the Certificate of Incorporation of this Corporation shall read in its entirety as follows:
"The total number of shares of all classes of stock which the Company shall have the authority to issue is 20,000,000 shares of Preferred Stock of a par value of $.50 per share and 40,000,000 shares of Common Stock of a par value of $1.00 per share.
IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this Certificate to be signed by it Senior Vice President Chief Financial Officer, Michael F. Sandler, and attested by its Secretary, Eugene M. Schloss, Jr., this 17th day of March, 1993.
By: /s/ Michael F. Sandler
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr., Secretary
OFFICE OF SECRETARY OF STATE
I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF MEDIQ INCORPORATED FILED IN THIS OFFICE ON THE TWENTY-SEVENTH DAY OF FEBRUARY, A.D. 1987. AT 3:30 O'CLOCK P.M. * * * * * * * * * *
Michael Harkins, Secretary of State
The undersigned, being vice President of MEDIQ Incorporated (the "Corporation"), certifies that in accordance with Section 242 of the Delaware General Corporation Law the following amendment to the Certificate of Incorporation was duly considered and approved by the holders of a majority of the voting power of the outstanding shares qualified to vote thereon at the annual meeting of stockholders duly called and held on February 27, 1987:
RESOLVED, that the Corporation amend its Certificate of Incorporation as permitted by Section 102 (b) (7) of the General Corporation Law of the State of Delaware, by adding a new Article X thereto, as follows:
"X. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)'for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the amended Delaware General Corporation Law. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any elimination or limitation of the personal
liability of a director of the corporation existing at the time of such repeal or modification."
IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this certificate to be signed by its Vice President, Ian J. Berg and attested by its Assistant Secretary, Jordan W. Felzer this 27th day of February, 1987.
By: /s/ Ian J. Berg Ian J. Berg, Vice President
Attest: /s/ Jordan W. Felzer
before me this 27th day of February, 1987.
OFFICE OF SECRETARY OF STATE
I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF STOCK DESIGNATION OF MEDIQ INCORPORATED FILED IN THIS OFFICE ON THE TWENTY-FIRST DAY OF MAY, A.D. 1986, AT 9 O'CLOCK A.M.
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Michael Harkins, Secretary of State
UNDER SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW, MEDIQ Incorporated, a Delaware Corporation (the "Corporation"), certifies as follows: FIRST: Under the authority contained in Article IV of the Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation has designated 100,000 of the authorized but unissued shares of Preferred Stock of the Corporation, par value $100 per share, as shares of "Series A Preferred Stock." SECOND: The following resolution was duly adopted by the Board of Directors, and such resolution has not been modified and is in full force and effect on the date hereof: RESOLVED, that the Board of Directors hereby designates, from the authorized but unissued shares of Preferred Stock of the Corporation, par value $100 per share (the "Preferred Stock"), a series of Preferred Stock to consist of 100,000 shares, and hereby fixes the voting powers, designations, preferences, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the shares of such series, in addition to those set forth in the Certificate of Incorporation as follows: (a) Designation. The designation of the series of Preferred Stock created by this resolution shall be "Series A
Preferred Stock" and the number of shares constituting the Series A Preferred Stock shall be 100,000 shares. The number of authorized shares of the Series A Preferred Stock may be increased or reduced by further resolution duly adopted by the Board of Directors and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such increase or reduction has been so authorized. (b) Dividends. (1) The annual rate of cash dividends on each share of the Series A Preferred Stock shall be equal to one hundred twenty times the then current rate of cash dividends payable on each share of Common Stock of the Corporation, par value $1 per share (the "Common Stock"), including any extraordinary dividends or distributions, whether payable in cash or other property, except a dividend payable solely in shares of any class of capital stock of the Corporation. Notwithstanding the foregoing, however, at such time as the shareholders of the Corporation shall approve an amendment of the Corporation's Certificate of Incorporation to increase the authorized Preferred Stock to not less than 20,000,000 shares and such amendment shall have been filed in Delaware in accordance with the Delaware General Corporation Law (the "Effective Date"), the Board of Directors hereby authorizes a 200-for-1 stock split of the Series A Preferred Stock, resulting in the designation (under Paragraph (a)) hereby of
Series A Preferred Stock (the "Preferred Stock Split"), and as of the Effective Date the above annual rate of cash dividends on each share of Series A Preferred Stock shall be equal to 60% of the then current rate of cash dividends payable on each share of Common Stock. In calculating the amount of any dividend payable on the Series A Preferred Stock, such dividend shall be rounded to the closest one-hundredth of one cent ($.0001). (2) Dividends of shares of Series A Preferred Stock may be paid to holders of Series A Preferred Stock, if a dividend of shares of Common Stock at the same rate per share is paid simultaneously to holders of Common Stock, and dividends of Common Stock may be paid to holders of Common Stock, if a dividend of shares of Series A Preferred Stock at the same rate per share is paid simultaneously to holders of Series A Preferred Stock. Dividends shall be payable, where, as and if declared by the Board of Directors, provided, however, that concurrently with the declaration of any dividend on the Common Stock, the Corporation shall declare the requisite dividend on the Series A Preferred Stock. Each such dividend shall be paid to the holders of record of shares of the Series A Preferred Stock as they appear on the stock books of the Corporation on such record date, not more than 60 or less than 10 days preceding the payment date thereof, as shall be fixed by the Board of Directors or a duly authorized Committee thereof.
(3) Notwithstanding the foregoing provisions of this Paragraph (b), dividends on the Series A Preferred Stock may not be paid if (i) the Corporation is insolvent or would be rendered insolvent thereby or (ii) such payment would impair the Corporation's capital. (c) Conversion into Common Stock. (1) At such time as the shareholders of the Corporation shall approve an amendment of the Corporation's Certificate of Incorporation to increase the authorized common stock Of the Corporation to not less than 50,000,000 shares of common stock (the "Common Stock Increase"), and such amendment shall have been filed in Delaware in accordance with the Delaware General Corporation law, the shares of Series A Preferred Stock (after giving effect to the Preferred Stock Split) shall thereafter be convertible, at the option of the holder thereof, at any time into fully paid and nonassessable shares of Common Stock of the Corporation at an initial rate (the "conversion rate"), subject to adjustment as hereinafter provided, of one share of Common Stock for each share of Series A Preferred Stock. If the shareholders of the Corporation shall not have approved the Common Stock Increase, then the shares of Series A Preferred Stock shall not be convertible into shares of common stock as set forth above and all the provisions in this Paragraph (c) shall be null and void and shall be of no further force or effect. Any holder who converts the shares of Series A Preferred Stock after the record date for any dividend payment on shares of Series A Preferred Stock but prior to such dividend payment date shall nonetheless be entitled to receive any such dividend. (2) In order to convert shares of Series A Preferred Stock into Common Stock, the holder thereof shall surrender the certificate or certificates for such shares of Series A Preferred Stock, duly endorsed to the Corporation or in blank, at the office of the Transfer Agent for Series A Preferred Stock (or at such other place as may be designated by the Corporation), shall give written notice to the Corporation at said office that such holder elects to convert said shares of Series A Preferred Stock, and shall state in writing therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. As soon as practicable thereafter, the Corporation shall issue or deliver at said office to the person for whose account such shares of Series A Preferred Stock were so surrendered, or to the nominee or nominees of such person, certificates for the number of full shares of Common Stock to be issued as aforesaid, together with a cash adjustment in respect of any fraction of a share as hereinafter provided if not convertible into a number of whole shares. Subject to the following provisions of this subparagraph (c)(2), such conversion shall be deemed to have been made as of the date of such surrender of certificates for the shares of Series A Preferred Stock to be converted; and the person or persons entitled to receive Common Stock issuable upon the conversion of such shares of Series A Preferred Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date. The Corporation shall not be required to convert any shares of Series A Preferred Stock, and no surrender of shares of Series A Preferred Stock shall be effective for that purpose, while the stock transfer books of the Corporation are closed for any purpose, but the surrender of shares of Series A Preferred Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books, but at the conversion rate in effect at the date of such surrender. (3) The number of shares of Common Stock into which the shares of Series A Preferred Stock shall be convertible shall be subject to adjustment from time to time as detailed below; provided, however, that if an adjustment in the shares of Series A Preferred Stock is required and made pursuant to Paragraph (g) hereof, no adjustment under this Paragraph (c)(3) shall be made on account of the transaction that required the aforementioned adjustment under Paragraph (g): (i) In case the Corporation shall (A) subdivide its outstanding shares of Common Stock, (B) combine its outstanding shares of Common Stock into a smaller number of shares or (C) issue by reclassification of its shares of Common Stock any shares of the capital stock of the Corporation, then the conversion rate in effect immediately
shall be adjusted as provided below so that the holder of any share of Series A Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of the capital stock of the Corporation which he would have owned or have been entitled to receive after the happening of any of the events described above, had such share of Series A Preferred Stock been converted on or immediately prior to the effective date of such subdivision, combination or reclassification, as the case may be. An adjustment made pursuant to this clause (i) shall become effective at the opening of business on the business day next following the effective date of a subdivision, combination or reclassification. (ii) In case the Corporation shall issue rights or warrants (excluding the right to convert the Series A Preferred Stock into Common Stock as provided herein) to all holders of its Common Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to purchase shares of Common Stock at a price per share less than the current market price per share (as defined in clause (v) below) of Common Stock at the record date mentioned below, the number of shares of Common Stock into which each share of Series A Preferred Stock shall thereafter be convertible shall be determined by multiplying the
number of shares of Common Stock into which such share of Series A Preferred Stock was theretofore convertible by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on the record date for the issuance of such rights or warrants plus the number of additional shares offered for subscription or purchase, and the denominator of which shall be the number of shares of Common Stock outstanding on the record date for the issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such current market price. Such adjustment shall be made when ever such rights or warrants are issued, and shall become effective at the opening of business on the business day next following the record date for the determination of the shareholders entitled to receive such rights or warrants. (iii) In case the Corporation shall distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends to the extent payable under applicable state law) or rights to subscribe applicable to its Common Stock (excluding those referred to in clause (ii) above), then in, each such case the number of shares of Common Stock into which each share of Series A
shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such share of Series A Preferred Stock was theretofore convertible by a fraction, the numerator of which shall be the current market price per share (as defined in clause (v) below) of Common Stock on the date of such distribution, and the denominator of which shall be such current market price per share of the Common Stock less the then fair market value (as determined by the Board, whose determination shall be conclusive and described in a statement filed with the Transfer Agent) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights applicable to one share of the Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall be come effective at the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such distribution. (iv) The corporation may make such adjustments in the conversion rate, in addition to those required by the foregoing provisions, as it considers to be advisable in order that any event treated for federal income tax purposes as a dividend
of stock or stock rights shall not be taxable to the recipients. (v) For the purpose of any computation under clauses (ii) and (iii) above and clause (x) below, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the 30 consecutive business days commencing 45 business days before the day in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the American Exchange, or, if the Common Stock is not then listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is then listed or admitted to trading, or if not then listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices as furnished by any New York Stock Exchange firm selected from time to time by the Corporation for the purpose. (vi) All calculations under this subparagraph (c) shall be made to the nearest one- hundredth of a share. (vii) Whenever the number of shares of Common Stock deliverable upon the conversion of each
share of Series A Preferred Stock shall be adjusted pursuant to the provisions of this subparagraph (3), the Corporation shall promptly (i) file with the Transfer Agent a certificate, signed by the Chairman of the Board or the President or a Vice President of the Corporation, and (ii) mail to all record holders of shares of Series A Preferred Stock, at their last addresses as they shall appear upon the stock registry books of the Corporation, a notice setting forth the increased or decreased number of shares of Common Stock thereafter deliverable upon the conversion of each share of Series A Preferred Stock. The certificate filed with the Transfer Agent shall show in reasonable detail the method of calculation and the facts requiring such adjustment and upon which such calculation is based. (viii) For the purposes of this subparagraph (3), the term "Common Stock" shall mean (a) the class of stock designated as the Common Stock of the Corporation at the date of initial issuance of Series A Preferred Stock, or (b) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time the holder co of any share of Series A Preferred
Stock surrendered for conversion shall become entitled to receive any shares of the Corporation other than shares of its Common Stock, thereafter the number of such other shares so receivable upon conversion of any share of Series A Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in clauses (i) through (v), inclusive. (ix) After the shares of Series A Preferred Stock become convertible, at all times a sufficient number of shares of the authorized but unissued shares of the class of stock to be issued upon conversion of the Series A Preferred Stock shall be reserved by the Corporation for the purpose of converting all shares of Series A Preferred Stock at the time outstanding. (x) The Corporation shall not be required, in connection with any conversion of Series A Preferred Stock, to issue a fraction of a share of its Common Stock nor to deliver any stock certificate representing a fraction thereof, but in lieu thereof the Corporation shall make a cash payment equal to such fraction multiplied by the market price of the Common Stock on the date of conversion. (xi) In case at any time the Corporation shall propose:
(A) to pay any dividend payable in shares upon its Common Stock or make any distribution (other than cash dividends) to the holders of its Common Stock; or (B) to offer for subscription to the holders of its Common Stock any additional shares of any class or any other rights; or (C) any capital reorganization or reclassification of its shares (except a change in par value), or the consolidation or merger of the Corporation with another liquidation or winding up of the Corporation; then, and in any one or more of said cases, the Corporation shall cause at least fifteen days' prior notice of the date on which (a) the books of the Corporation shall close, or a record shall be taken for such stock dividend, distribution or subscription rights or (b) such capital reorganization, liquidation or winding up shall take place, as the case may be, to be mailed to the Transfer Agents for the Series A Preferred Stock and for the Common Stock and to the holders of record of the Series A Preferred Stock.
(xii) In case the Corporation or any successor company shall consolidate or merge with, or sell all or substantially all of its assets to, any other company, the right which the holders of Series A Preferred Stock have to receive additional shares of Common Stock on conversion of their Series A Preferred Stock on account of any adjustment made pursuant to the provisions of this subparagraph (3) shall continue and be preserved in respect of any stock or other securities of the successor company into which the Series A Preferred Stock shall thereafter become convertible. (xiii) Irrespective of any adjustments in the initial conversion rate, certificates representing shares of the Series A Preferred Stock theretofore or thereafter issued which express the initial conversion rate shall nevertheless be valid for all purposes. (d) Voting Rights. (1) Except as otherwise set forth in this resolution and except in statutory proceedings in which, and then only to the extent to which, their vote is at the time required by law, on matters subject to a vote by holders of the Common Stock, the holders of Series A Preferred Stock shall be entitled to 2,000 votes per share; provided, however, that upon the occurrence of the Preferred Stock Split, the holders of Series A Preferred Stock shall thereafter be entitled to 10 votes for each share of Series A Preferred Stock held. On all such matters the holders of shares of Series A Preferred Stock and shares of Common Stock shall vote together and not as separate classes, except as otherwise required by law and except as provided in Paragraph (d)(3) below. (2) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, and except as may otherwise be provided with respect to a series of Preferred Stock in the Certificate of Designation for that series, the consent of holders of at least 66 2/3% of the shares of the Series A Preferred Stock at the time outstanding, voting as a single class, given in person or by proxy, by vote at a meeting called for that purpose (or consented to in writing by such holders), shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any provisions of the Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designation, preference and rights or any similar document relating to any series of Preferred Stock) which would adversely affect the preferences, rights or powers of the Series A Preferred Stock. (3) Notwithstanding anything to the contrary herein contained, the rights of the holders of Series A Preferred Stock to vote in the election of Directors shall be limit ed to the extent that the holders of Series A Preferred Stock shall not have the right to elect any person who is not an officer or employee of the Corporation ("Outside Director'), and each such
Outside Director will be elected by the Common shareholders voting as a separate class; provided, however, that this Paragraph (d)(3) shall become null and void and shall be of no further force or effect (i) if the number of outstanding shares of Series A Preferred Stock should decrease below an amount equal to 15% of the aggregate number of the then outstanding shares of Series A Preferred Stock and Common Stock, (ii) the Company's securities are no longer listed and traded on the American Stock Exchange, or (iii) the American Stock Exchange shall change its policies and procedures with respect to the conditions under which the Exchange will approve the listing of securities that are entitled to voting rights in excess of one vote per share. (4) Corporate Notices and Report. The Corporation shall transmit to the holders of Series A Preferred Stock (a) all quarterly, annual and other reports sent by the Corporation to its shareholders generally and (b) all notices and reports required by law or the Corporation's Certificate of Incorporation to be furnished by the Corporation to holders of Common Stock. (e) Liquidation Rights. (1) Upon the dissolution, liquidation or winding up of the Corporation, the holders of the shares Of the Series A Preferred Stock shall be entitled to receive from assets of the Corporation available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to the
Preferred Stock upon liquidation, an amount equal to $100 per share (as appropriately adjusted for stock splits and recapitalizations); provided, however, that upon the occurrence of the Preferred Stock Split, the above liquidation amount shall thereafter be equal to $.SO per share (as appropriately adjusted for any future stock splits and recapitalizations). (2) None of the sale, transfer or lease of all or substantially all of the property or business of the Corporation, the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation or any dissolution, liquidation, winding up or reorganization of the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Paragraph (e), provided that in each case effective provision is made in the Certificate of Incorporation of the resulting and surviving corporation or otherwise for the protection of the rights of the holders of Series A Preferred Stock. (3) If after the payment to the holders of the shares of the Series A Preferred Stock of the full preferential amounts provided for in this Paragraph (e), assets or surplus funds remaining this Corporation upon any dissolution, liquidation or winding up of the Corporation then the holders of the Series A Preferred Stock shall be entitled to share in all such remaining assets or surplus funds in the same manner as if all shares of Series A Preferred Stock had been converted into Common Stock as provided herein. (4) In the event the assets of the Corporation available for distribution to the holders of shares of the Series A Preferred Stock upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to Paragraph (e)(1), no such distribution shall be made on account of any shares of any other class or series of preferred stock ranking on a parity with the shares of the Series A Preferred Stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the shares of the Series A Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. (f) Ranking. For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (1) Prior to shares of the Series A Preferred Stock, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends, or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of the Series A Preferred Stock.
(2) On a parity with shares of the Series A Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share be different from those of the Series A Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends, or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of the Series A Preferred Stock; and (3) Junior to shares of the Series A Preferred Stock, either as to dividends or upon liquidation, if the holders of shares of the Series A Preferred Stock shall be entitled to receipt of dividends, or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of such class or classes. (g) Adjustment. (1) The number of shares of Series A Preferred Stock outstanding shall be subject to adjustment as follows: (A) If and whenever the Corporation shall declare any dividend or distribution on the Common Stock payable in shares of Common Stock, the Corporation shall, concurrently with the declaration of such dividend or distribution on the
Common Stock, declare an equivalent dividend or distribution, as the case may be, on the shares of Series A Preferred Stock. The terms and provisions of any such dividend or distribution declared on such shares shall be identical to the terms and provisions of any such dividend or distribution declared on the Common Stock, except that the dividend or distribution declared on the shares of Series A Preferred Stock shall be payable in shares of Series A Preferred Stock. Without limiting the generality of the foregoing, whenever any such dividend or distribution payable in shares of Common Stock and Series A Preferred Stock are declared on the Common Stock and Series A Preferred Stock, respectively, (i) the number of shares payable in respect of the dividend or distribution on the Common Stock and the dividend or distribution on the shares of Series A Preferred Stock shall be the same in respect of each outstanding share of Common Stock and Series A Preferred Stock, and (ii) the record and payment dates, respectively, in respect of the dividend or distribution on the Common Stock and the dividend or distribution on Series A Preferred Stock shall be the same. If and whenever the Corporation shall declare any dividend or distribution on the Common Stock payable in shares of the capital stock of the Corporation (excluding those referred to in the preceding paragraph), the Corporation shall, concurrently with the declaration of such dividend or distribution, declare an identical dividend or distribution, as the case may be, on the shares of Series A Preferred Stock.
(B) If and whenever the Corporation shall grant rights or warrants to the holders of Common Stock, as such, entitling them (for a period of not more than 45 days after the record date fixed for the issuance of such rights or warrants) to subscribe for or to purchase (i) shares of Common Stock (or securities convertible into shares of Common Stock) or (ii) shares of any other capital stock of the Corporation (or securities convertible into any capital stock of the Corporation), the Corporation shall, concurrently with the granting of such rights or warrants to the holders of Common Stock, grant to the holders of the shares of Series A Preferred Stock equivalent rights or warrants. The terms and provisions of any such rights or warrants granted to the holders of the shares of Series A Preferred Stock shall be identical to the terms and provisions of any such rights or warrants granted to the holders of Common Stock, except that the rights or warrants granted to the holders of the shares of Series A Preferred Stock, as a result of rights or warrants granted holders of Common Stock to subscribe for or to purchase shares of Common Stock (or securities convertible into Common Stock), shall be rights or warrants to subscribe for or to purchase shares of Series A Preferred Stock (or securities convertible into shares of Series A Preferred Stock). Without limiting the generality of the foregoing, whenever any such rights or warrants to subscribe for or to purchase shares of Common Stock (or securities convertible into shares of Common Stock) and Series securities convertible into shares of Series A Preferred Stock) are granted to the holders of Common Stock and Series A Preferred Stock, respectively, (i) the number of such rights or warrants granted in respect of each outstanding share of Common Stock and Series A Preferred Stock shall be identical, (ii) the number of shares of Common Stock, Series A Preferred Stock and shares of any other capital stock purchasable upon exercise of each such right or warrant granted to the respective holders of Common Stock and Series A Preferred Stock shall be identical, and (iii) the ratio of the price per share of Common Stock to the price per share of Series A Preferred Stock, each purchasable upon exercise of such rights or warrants granted to the respective holders of Common Stock and Series A Preferred Stock, shall be identical to the ratio of the Current Market Price (as hereinafter defined) of a share of Common Stock to the Current Market Price of a share of Series A Preferred Stock. If and whenever the Corporation shall grant rights to the holders of Series A Preferred Stock, as such, entitling them (for a period of not more than 45 days after the record date fixed for the issuance of such rights) to subscribe for or to purchase at a price per share less than the Current Market Price per share (as defined in paragraph (g)(6) hereof) (i) shares of Series A Preferred Stock (or securities convertible into shares of Series A Preferred Stock) or (ii) shares of any other capital stock of the Corporation (or securities convertible into any capital stock of the concurrently with the granting of such rights to the holders of Series A Preferred Stock, grant to the holders of the shares of Common Stock equivalent rights. The terms and provisions of any such rights granted to the holders of the shares of Common Stock shall be identical to the terms and provisions of any such rights granted to the holders of Series A Preferred Stock, except that the rights granted to the holders of the shares of Common Stock, as a result of rights granted holders of Series A Preferred Stock to subscribe for or to purchase shares of Series A Preferred Stock (or securities convertible into shares of Series A Preferred Stock), shall be rights to subscribe for or to purchase shares of Common Stock (or securities convertible into shares of Common Stock). Without limiting the generality of the foregoing, whenever any such rights to subscribe for or to purchase shares of Series A Preferred Stock (or securities convertible into shares of Series A Preferred Stock) and Common Stock (or securities convertible into shares of Common Stock) are granted to the holders of Series A Preferred Stock and Common Stock, respectively, (i) the number of such rights granted in respect of each outstanding share of Common Stock and Series A Preferred Stock shall be identical, (ii) the number of shares of Common Stock, Series A Preferred Stock and shares of any other capital stock purchasable upon exercise of each such right granted to the respective holders of Common Stock and Series A Preferred Stock shall be identical, and (iii) the ratio of the price per share of Common Stock to the price per share of Series A each purchasable upon exercise of such rights granted to the respective holders of Common Stock and Series A Preferred Stock shall be identical to the ratio of the Current Market Price (as hereinafter defined) of a share of Common Stock to the Current Market Price of a share of Series A Preferred Stock. (C) The Corporation shall not split or subdivide or combine its outstanding shares of Common Stock unless, currently therewith, the Corporation shall make a proportionate split or subdivision or combination of the outstanding shares of Series A Preferred Stock. (2) In the event of an increase or decrease, as the case may be, pursuant to Paragraphs (g)(1)(A) and (C) hereof, in the number of shares of Series A Preferred Stock outstanding, the liquidation preference per share of Series A Preferred Stock shall be proportionately decreased or increased, as the case may be, so that the aggregate liquidation preference on all outstanding shares of Series A Preferred Stock shall be unchanged. (3) Irrespective of any of the adjustments in the number of shares of Series A Preferred Stock, stock certificates theretofore or thereafter issued may continue to express the number of shares as are stated in a similar stock certificate issuable initially or at some subsequent time and such number of shares of Series A Preferred Stock specified therein shall be deemed to have been so adjusted. Fractional shares resulting from any adjustment pursuant to this Paragraph (g) shall be treated in the same manner as fractional shares resulting from the same adjustment to the Common Stock. (4) Shares of Series A Preferred Stock and Common Stock at any time owned by the Corporation shall not be deemed to be outstanding for purposes of any computation herein. (5) In the case of any event which requires that an adjustment to increase the number of shares of Series A Preferred Stock be made effective as of a record date, the Corporation may elect to defer issuing the additional shares of Series A Preferred Stock until the occurrence of such event; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (6) For the purpose of any computation herein, the Current Market Prices per share of Common Stock, Series A Preferred Stock or any other capital stock (or securities convertible into any of such securities) on any date shall be the average of the highest reported bid and the lowest reported asked prices at the close of business as reported by the National Association of Securities Dealers Automated Quotation System, or if the Common Stock or.Series A Preferred Stock is listed on a national securities exchange, the average of the closing sale prices on the principal stock exchange on which the Common Stock or Series A Preferred Stock is listed, in each case for 30 consecutive trading days commencing 45 trading days before the date in question. In the absence of one or more such quotations, the Board of Directors shall determine the current Market Price on the basis of such quotation or other valuation method as it, in its sole discretion, considers appropriate. (7) No adjustment shall be made because the Corporation issues, in exchange for cash, property or services, shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock, or securities carrying the right to purchase shares of Common Stock or such convertible or exchangeable securities. Furthermore, no adjustment need be made under this Paragraph (g) for sale of shares of Common Stock pursuant to a Corporation plan providing for reinvestment of dividends or interest. (8) Whenever the number of shares of Series A Preferred Stock is adjusted, as herein provided, the Corporation shall promptly mail by first class, postage prepaid, to each holder notice of such adjustment or adjustments, setting forth the number of shares of Series A Preferred Stock after such adjustment, together with a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such notice shall be conclusive evidence of the correctness of such adjustment. (9) The Corporation will pay any and all taxes that may be payable in respect of the issuance or delivery of additional shares of this Series upon adjustment pursuant hereto. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involving issue and delivery of Series A Preferred Stock in the name other than in which the outstanding shares of Series A Preferred Stock so adjusted were registered and no such issue and delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid. (h) Restrictions on Certain Action. So long as any shares of Series A Preferred Stock are outstanding, the Corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for the purpose by the holders of record, of the applicable percentage stated below of the holders of the shares of Series A Preferred Stock then outstanding, (1) Without the consent, given as aforesaid, of such holders of at least 66 2/3% of the outstanding shares of (a) Authorize (or increase the authorized number of shares of) any class of stock ranking senior to the Series A Preferred Stock in any respect ('Prior Stock') or any class of stock ranking on a parity with the Series A Preferred Stock ("Parity Stock"); or (b) Make any changes in the preferences, qualifications, limitations, restrictions or special or relative rights of the Series A Preferred Stock so as to affect the Series A Preferred Stock adversely; or (2) Without the consent, given as aforesaid, of such holders of at least a majority of the outstanding shares of Series A Preferred Stock, merge or consolidate with any other corporation, or sell or otherwise dispose of all or substantially all of its assets, unless (i) under the terms of such merger, consolidation or sale or other disposition of assets (A) the Series A Preferred Stock shall remain outstanding with no adverse changes in its preferences, qualifications, limitations, restrictions or special or relative rights or (B) each holder of Series A Preferred Stock shall receive, in exchange for such Series A Preferred Stock, securities of the surviving, resulting or acquiring entity which shall in the aggregate possess preferences, qualifications, limitations, restrictions or special or relative rights which are at least as favorable as those possessed by the Series A Preferred Stock immediately prior to the effective date of such merger, consolidation or sale or other disposition of assets, and adequate provision shall be made whereby such securities received in exchange for the Series A Preferred Stock shall thereafter be convertible into the number of shares of Common Stock (or into such shares of stock, securities or assets as may be issuable or payable with respect to, or in exchange for, the number of shares of common Stock or the other shares of stock, securities or assets, as the case may be) into which the Series A Preferred Stock would have been convertible immediately prior to such merger, consolidation or sale or other disposition of assets, and (ii) immediately after such merger, consolidation or sale or other disposition of assets, there shall be no shares of Prior Stock or Parity Stock outstanding (except to the extent that any Prior Stock or Parity Stock shall have been issued in accordance with the provisions of this paragraph (h) prior thereto). (i) Reissuance of Shares. Shares of Series A Preferred Stock which have been purchased, or which have been converted into shares of stock of any other class or classes, shall have the status of authorized and unissued shares of Preferred Stock and may be reissued as part of a series of which they were originally a part or may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board or as part of any other series of Preferred Stock, all subject to the conditions or restrictions on issuance set forth in any resolution or resolutions adopted by the Board providing for the issue of any series of Preferred Stock and the filing of the appropriate Certificate of Designation in accordance with the Delaware General Corporation law. (j) No Other Rights. The shares of the Series A Preferred Stock shall not have any relative, participating, optional or other special rights and powers other than as set forth above in this Certificate of Designation and in the certificate of Incorporation of the Corporation.
(k) Amendment. The Board of Directors shall have the power to resolve any ambiguity or correct any error in this Certificate of Designation and its action in so doing, as evidenced by a Board resolution, shall be final and conclusive. IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this Certificate to be signed by its President, Bernard J. Korman, and attested by its Secretary, Eugene M. Schloss, Jr., this 20th day of May, 1986.
By: /s/ Bernard J. Korman
OFFICE OF SECRETARY OF STATE
I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF MEDIQ INCORPORATED FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF JULY, A.D. 1986, AT 3:30 O'CLOCK P.M. * * * * * * * * * *
Michael Harkins, Secretary of State
The undersigned, being the Senior Vice President Finance of MEDIQ Incorporated, certifies that the following amendment to the Certificate of Incorporation was duly considered and approved by the holders of a majority of the outstanding stock qualified to vote thereon at a special meeting duly called and held on July 14, 1986, in accordance with Section 242 of the Delaware General Corporation Law: RESOLVED, that the Certificate of Incorporation of the Company be amended by changing the first sentence of Article IV so that as amended the first sentence of such Article shall read in its entirety as follows.,
"The total number of shares of all classes of stock which the Company shall have the authority to issue is 200,000,000 shares of Preferred Stock of a par value of $.SO per share and 200,000,000 shares of Common Stock of a par value of $1.00 per share."
IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this certificate to be signed by its Senior Vice President Finance, Lionel Felzer, and attested by its Secretary, Eugene M. Schloss, Jr., this 11th day of July, 1986.
By: /s/ Lionel H. Felzer Senior Vice President - Finance
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr.
OFFICE OF SECRETARY OF STATE
I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF STOCK DESIGNATION OF MEDIQ INCORPORATED FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF JULY, A.D. 1986, AT 3:31 O'CLOCK P.M.
* * * * * * * * * *
Michael Harkins, Secretary of State
The undersigned being the Senior Vice President Finance of MEDIQ Incorporated, certifies that the following increase to the Certificate of Designation of MEDIQ incorporated filed on May 21, 1986 was duly considered and approved by the Board of Directors of MEDIQ Incorporated, and such resolution has not been modified and is in full force and effect oh the date hereof, all in accordance with Section 151(g) of the Delaware General Corporation Law: RESOLVED, that,the Board of Directors hereby designates, effective upon approval by shareholders of an increase in the authorized shares of Preferred Stock to 200,000,000 shares and a reduction in the par value of such stock to $.50 per share, that the number of shares constituting the Series A Preferred Stock of the Company shall.be 20,000,000 shares.
IN WITNESS WHEREOF, MEDIQ Incorporated has caused its corporate seal to be hereunto affixed and this increase to the
Certificate of Designation to be signed by its Senior Vice President - Finance, Lionel Felzer, and attested by its Secretary, Eugene M. Schloss, Jr., this 11th day of July, 1986.
By: /s/ Lionel H. Felzer Senior Vice President - Finance
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr.
OFFICE OF SECRETARY OF STATE
I, GLENN C. KENTON, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF MEDIQ INCORPORATED FILED IN THIS OFFICE ON THE TWELFTH DAY OF MARCH, A.D. 1984, AT 9 O'CLOCK A.M.
* * * * * * * * * *
Michael Harkins, Secretary of State
MEDIQ Incorporated, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware; does hereby certify: FIRST: That the Board of Directors of this Corporation, at a meeting duly convened pursuant to notice, at which a quorum was present and acting throughout, adopted a resolution proposing and declaring advisable the following amendment to the Corporation's Certificate of Incorporation: RESOLVED, that the Certificate of incorporation of this Corporation be amended by changing Article IV so that, as amended, that Article shall be read in its entirety as follows:
"IV. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 100,000 shares of preferred stock of a par value of $100.00 per share, and 25,000,000 shares of common stock of a par value of $1.00 per share. The preferred stock may be issued with the voting rights, designations, preferences, qualifications, privileges, limitations, options, conversion rights and other special rights, if any, as shall be stated or expressed in the resolution or resolutions providing for the issuance of such the Board of Directors. Authority is hereby expressly granted to and vested in the Board of Directors to authorize the issuance of the shares of the preferred stock and to fix by resolution or resolutions the terms thereof, including without limitation, the following: a. The dividends Payable And preferences in respect to the payment thereof; b. The terms and conditions on which, and the price or prices at which, such shares may be made subject to c. The rights of such shares upon the voluntary or involuntary dissolution of, or upon any other distribution of the assets of, the Corporation; d. Whether or not such shares shall be made convertible into, or exchangeable for, shares of any other classes or of any series. of any other class or classes of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments, if any, at which, and the other terms and conditions upon which, any such conversion or exchange may be made; and e. Whether or not such shares shall be entitled to other special rights in addition to those in the Articles provided for. No stockholder of the Corporation shall, by reason of his holding shares of any class, have any preemptive or preferential right to purchase or subscribe to any shares of any class of this Corporation, now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into, or carrying options or warrants to purchase, shares of any class, now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights or such stockholder, other than such rights, if any, as the Board of Directors, in its discretion, from time to time may grant, and at such price as the Board of Directors, in its discretion, may fix; and the Board of Directors may issue shares of any class of this Corporation, or any notes, debentures, bonds or other securities convertible into, or carrying options or warrants to purchase, shares of any class, either in whole or in part, to the existing stockholders of any class. Except as otherwise specifically required by law or as specifically provided in the resolutions of the Board of Directors authorizing the issuance of the preferred stock, the exclusive voting power of the Corporation shall be vested in the common stock of the Corporation. Each holder of common stock shall be entitled to one vote for each share held by such holder. The holders of the shares of the Corporation's common stock shall not be entitled to cumulative voting in voting for directors; i.e. they shall not be entitled in so voting, to multiply the number of votes to which they are entitled by the number of directors to be elected by them in the same election. SECOND: That the Stockholders of the Corporation, at a meeting duly convened pursuant to notice, at which a quorum was present and acting throughout, have given consent to the amendment in accordance with the provisions of the General Corporation Law of the State of Delaware. THIRD: That the amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the,capital of the Corporation will not be reduced, under or by reason of said amendment. IN WITNESS WHEREOF, MEDIQ Incorporated has caused this Certificate of Amendment to be signed by Bernard J. Korman, its President, and attested by Eugene M. Schloss, Jr., its Secretary, this 28th day of February, 1984.
By: /s/ Bernard J. Korman
Attest: /s/ Eugene M. Schloss Jr. Eugene M. Schloss Jr. | 10-K405 | EX-3.1 | 1996-01-12T00:00:00 | 1996-01-12T11:57:13 |
0000950147-96-000014 | 0000950147-96-000014_0005.txt | <DESCRIPTION>AMENDED AND RESTATED LOAN AGREEMENT
AMENDED AND RESTATED LOAN AGREEMENT EXHIBIT 10.4
PARTIES: Borrower: CONTINENTAL HOMES HOLDING CORP., a Delaware corporation.
Borrower 7001 North Scottsdale Road
Bank: BANK ONE, ARIZONA, NA, a national banking association formerly known as THE VALLEY NATIONAL BANK OF ARIZONA.
Bank Address: Western Region Real Estate
AGREEMENT: For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Bank agree as follows:
3.1.1.; 3.2 Commitment Expiration Date: November 30, 1996.
3.2 and 5.1.6 Purpose of Advances: Working capital and general corporate purposes to be applied (i) to pay costs and expenses incurred in the ordinary course of Borrower's primary lines of business consisting of the acquisition, development and subdivision of land for residential purposes and the construction and sale of residential dwellings to the general public; (ii) to pay interest due under the Note, the Unused Commitment Fee and the Commitment Fee; (iii) to pay amounts due under the Set Aside Agreement; or (iv) to pay amounts due to be reimbursed to Bank for letters of credit issued pursuant to this Agreement. Advances shall not be available for purposes not described above.
3.6.2 Unused Commitment Fee Rate: 1/4% per annum.
2. DEFINITIONS. In this Agreement, the following terms shall have the following meanings:
"Acquisition Debt" means (i) Debt or Preferred Stock of any Person existing at the time such Person becomes a Subsidiary of Borrower, including but not limited to Debt or Preferred Stock incurred or created in connection with, or in contemplation of, such Person becoming a Subsidiary of Borrower (but excluding Debt of such Person which is extinguished, retired or repaid in connection with such Person becoming a Subsidiary of Borrower), (ii) Debt incurred or created by any Subsidiary of Borrower in connection with the transaction or series of transactions pursuant to which such Person became a Subsidiary of Borrower or (iii) Debt incurred or created by any Subsidiary of Borrower in connection with the acquisition of substantially all of the assets of an operating unit or business of another Person, provided that, in the case of Debt incurred or created pursuant to clause (ii) or (iii) hereof, such Subsidiary had no other prior assets or operations prior to such acquisition, transaction or series of transactions other than Credit Extensions/Contributions permitted by Section 7.9 or made by a Person other than Borrower or any of its Subsidiaries.
"Adjusted Debt" means all Debt of Borrower on a consolidated basis plus all accounts payable and other accrued expenses of Borrower on a consolidated basis, excluding Debt arising from "mortgage banking and title operations" of CHMC and Travis Title, and excluding the indebtedness of Borrower evidenced by the Convertible Notes and the Subordinated Notes, all as shown on a consolidated balance sheet of Borrower prepared in accordance with GAAP and approved by Bank.
"Adjusted Debt to Net Worth Ratio" of any Person means the ratio of all of such Person's then outstanding Adjusted Debt, on a consolidated basis, excluding Mortgage Debt, to Net Worth at the end of the fiscal quarter ended immediately preceding the date of determination.
"Advance" means an advance under the Commitment.
"Affiliate" of any Person means (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person and (ii) any other Person that beneficially owns at least 10% of the voting common stock of such Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Agreement" means this Loan Agreement as it may be amended, modified, extended, renewed, restated, or supplemented from time to time.
"Approvals and Permits" means each and all approvals, authorizations, bonds, consents, certificates, franchises, licenses, permits, registrations, qualifications, and other actions and rights granted by or filings with any Persons necessary, appropriate, or desirable for ownership or lease by Borrower of its assets and property or for the conduct of the business and operations of Borrower.
"Bank Facility" means, collectively, one or more commitments from one or more banks or other lending institutions to lend funds together with any and all agreements, documents and instruments from time to time delivered in connection therewith as such commitment or any such agreements, documents or instruments may be in effect or amended, amended and restated, renewed, extended, restructured, supplemented or otherwise modified from time to time and any credit agreement, loan agreement, note purchase agreement, indenture or other agreement, document or instrument refinancing, refunding or otherwise replacing such Bank Facility, whether or not with the same agent, trustee, representative lenders or holders, and, subject to the proviso to the next succeeding sentence, irrespective of any changes in the terms and conditions thereof. Without limiting the generality of the foregoing, the term "Bank Facility" shall include any amendment, amendment and restatement, renewal, extension, restructuring, supplement or modification to any Bank Facility and all refundings, refinancings and replacements of any Bank Facility, including any agreement (i) extending the maturity of any Debt incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers or guarantors thereunder, provided that such borrowers and issuers include one or more of Borrower and its Subsidiaries and their respective successors and assigns, (iii) increasing the amount of Debt incurred thereunder or available to be borrowed thereunder, provided that on the date thereof such Debt would not be prohibited by clause (b) of the definition of Permitted Debt, or (iv) otherwise altering the terms and conditions thereof in a manner not prohibited by the terms of this Agreement.
"Beneficial Owner" means as defined in Rule 13d-3, as in effect on the date of the execution of this Agreement, promulgated by the Commission under the Exchange Act.
"Borrower Loan Documents" means the Loan Documents executed or delivered by Borrower from time to time.
"Business Day" means a day of the year on which banks are not required or authorized to close in Phoenix, Arizona.
"Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of capital stock of such Person and all warrants or options to acquire such capital stock.
"Carlsbad Property" means the 417 acres owned by the Carlsbad Subsidiary in Carlsbad, California, located in San Diego County.
"Carlsbad Subsidiary" means Rancho Carillo, Inc., a Delaware corporation and a Subsidiary of Borrower.
"CHI" means Continental Homes, Inc., a Delaware corporation and a Subsidiary of Borrower.
"CHICC" means CHI Construction Company, an Arizona corporation and a Subsidiary of CHI.
"Change in Control" means that any Person, together with its Affiliates or associates, is or becomes the Beneficial Owner, directly or indirectly, through a purchase, merger or other acquisition transaction, of shares of capital stock of Borrower entitling such person to exercise in excess of 50% of the total voting power of all shares of capital stock of Borrower entitled to vote in elections of directors.
"CHMC" means CH Mortgage Company, a Colorado corporation formerly known as American Western Mortgage Company and a Subsidiary of CHI.
"Collateral" means the property, interests in property, and rights to property securing any or all Obligations from time to time.
"Commission" means The Securities and Exchange Commission.
"Commitment" means the agreement of Bank in Sections 3.1 and 3.2 to issue Letters of Credit and to make Advances pursuant to the terms and conditions in the Letter of Credit Agreements and herein.
"Commitment Amount" has the meaning specified in Section 1.
"Consolidated Interest Expense" of any Person means, for any period, the aggregate amount of interest which, in accordance with GAAP, would be included on an income statement for such Person and its Subsidiaries on a consolidated basis, whether expensed directly, or included as a component of cost of goods sold, or allocated to joint ventures or otherwise (including, but not limited to, imputed interest included on capitalized lease obligations, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, the net costs associated with hedging obligations, amortization of other financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount or premium, if any, and all other non-cash interest expense), excluding interest expense related to such Person's mortgage banking operations, plus the product of (x) the sum of (i) cash dividends paid on any Preferred Stock of such Person plus (ii) cash dividends, the principal amount of any debt securities issued as a dividend, the liquidation value of any Preferred Stock issued as a dividend and the fair market value (as determined by such Person's board of directors in good faith) of any other non-cash dividends, in each case, paid on any Preferred Stock of any Subsidiary of such Person (other than a wholly-owned Subsidiary), times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective aggregate federal, state and local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Incurred" of any Person means, for any period, (a) the aggregate amount of interest which, in accordance with GAAP, would be included on an income statement for such Person and its Subsidiaries on a consolidated basis, whether expensed directly, or included as a component of cost of goods sold, or allocated to joint ventures or otherwise (including, but not limited to, imputed interest included on capitalized lease obligations, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, the net costs associated with hedging obligations, amortization of other financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount or premium, if any, and all other non-cash interest expense), excluding interest expense related to such Person's mortgage banking operations, plus or minus, without duplication, (b) the difference between capitalized interest for such period and the interest component of cost of goods sold for such period, plus (c) the product of (x) the sum of (i) cash dividends paid on any Preferred Stock of such Person plus (ii) cash dividends, the principal amount of any debt securities issued as a dividend, the liquidation value of any Preferred Stock issued as a dividend and the fair market value (as determined by such Person's board of directors in good faith) of any other non-cash dividends, in each case, paid on any Preferred Stock of any Subsidiary of such Person (other than a wholly-owned Subsidiary), times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective aggregate federal, state and local tax rate of such Person, expressed as a decimal.
"Consolidated Net Income" of any Person, for any period, means the net income (loss) of such Person and its Subsidiaries for such period, determined on a consolidated basis, in accordance with GAAP, provided that, without duplication, (i) the net income of any Person, other than a Subsidiary which is consolidated with such Person, in which such Person or any of its Subsidiaries has a joint interest with a third party shall be included only to the extent of the amount of dividends or distributions actually paid in cash to such Person or a Subsidiary during such period, (ii) the net income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) the net income of any Subsidiary of such Person shall be excluded to the extent such Subsidiary is prohibited, directly or indirectly, from distributing such net income or any portion thereof to such Person and (iv) all extraordinary gains and losses (after taxes) that would be included on an income statement for such Person on a consolidated basis for such period shall be excluded.
"Consolidated Non-cash Charges" of any Person means, for any period, the aggregate depreciation, amortization and other non-cash charges (other than reserves or expenses established in anticipation of future cash requirements such as reserves for taxes and uncollectible accounts) of such Person and its Subsidiaries, on a consolidated basis, for such period, as determined in accordance with GAAP, provided that Consolidated Non-cash Charges shall exclude (i) any charges that are not included for the purpose of determining Consolidated Net Income, (ii) any charges that are included for the purpose of determining Consolidated Interest Expense or Consolidated Tax Expense and (iii) any charges representing capitalized selling, general and administrative expenses that are expensed during such period as cost of goods sold.
"Consolidated Tax Expense" of any Person means, for any period, the aggregate of the tax expense of such Person and its Subsidiaries for such period, determined on a consolidated basis, in accordance with GAAP.
"Convertible Notes" means Borrower's $35,000,000.00 6-7/8% Convertible Subordinated Notes due 2002, issued in connection with the Convertible Notes Indenture.
"Convertible Notes Indenture" means that certain Indenture, dated March 15, 1992, between Borrower and Manufacturers and Traders Trust Company, as trustee, with respect to the Convertible Notes.
"Coverage Ratio" of any Person means the ratio of such Person's EBITDA to its Consolidated Interest Incurred for the four fiscal quarters ending immediately prior to the date of determination. Notwithstanding clause (ii) of the definition of Consolidated Net Income, if the Debt which is being Incurred is Acquisition Debt, the Coverage Ratio shall be determined after giving effect to both the Consolidated Interest Incurred related to the Incurrence of such Acquisition Debt and the EBITDA (x) of the Person becoming a Subsidiary of such Person or (y) in the case of an acquisition of assets that constitute substantially all of an operating unit or business, relating to the assets being acquired by such Person.
"Credit Extensions/Contributions" means any direct or indirect advance, loan or other extension of credit or capital contribution to, or any purchase or acquisition of capital stock, bonds, notes, debentures or other securities issued or owned by, any other Person, including, without limitation, payments by Borrower or any of its Subsidiaries to a Person other than Borrower or any of its Subsidiaries in connection with an acquisition in which Acquisition Debt is Incurred.
"Debt" means, as to any Person, without duplication, (a) any indebtedness of such Person for borrowed money, (b) all indebtedness of such Person evidenced by bonds, debentures, notes, letters of credit, drafts or similar instruments, (c) all indebtedness of such Person to pay the deferred purchase price of property or services, but not including accounts payable and accrued expenses arising in the ordinary course of business, (d) all capitalized lease obligations of such Person, (e) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person or guaranteed by such Person, (f) Redeemable Stock, and (g) all Debt of others guaranteed by such Person. The amount of Debt of any Person at any date pursuant to clauses (a)-(d) and (f) above shall be as would appear as a liability upon a balance sheet of such Person prepared on a consolidated basis in accordance with GAAP.
"EBITDA" for any Person, for any period, means, without duplication, the Consolidated Net Income of such Person plus, to the extent deducted in calculating Consolidated Net Income, the sum of (a) Consolidated Tax Expense, (b) Consolidated Interest Expense and (c) Consolidated Non-cash Charges.
"ERISA" means the Employee Retirement Income Security Act of 1974 and the regulations and published interpretations thereunder, as in effect from time to time.
"Event of Default" has the meaning specified in the Note and the other Loan Documents.
"Exchange Act" means The Securities Exchange Act of 1934, as amended.
"Existing Debt" means all of the Debt of Borrower and its Subsidiaries that is outstanding on the date of this Agreement and listed on Schedule I hereto.
"GAAP" means generally accepted accounting principles consistently applied.
"Governmental Authority" means any government, any court, and any agency, authority, body, bureau, department, or instrumentality of any government.
"Guaranty" or "Guaranties" means individually and collectively, the payment guaranties of Guarantors of even date herewith.
"Guarantors" means both of the following: CHICC and CHI.
"Incur," "Incurred," "Incurring," "Incurrence" means with respect to any Person, that such Person has directly or indirectly created, incurred, assumed, guaranteed, or otherwise become liable for any Debt or other obligation.
"Indenture" means that certain Indenture, dated as of August 1, 1992 between Borrower and Fidelity Bank, National Association, as Trustee, with respect to the Public Notes, as amended by that First Supplemental Indenture dated March 22, 1994.
"Intangible Assets" of any Person means such Person's goodwill, patents, trademarks, copyrights, and all other items which would be treated as intangibles on the consolidated balance sheet of Borrower and its Subsidiaries prepared in accordance with GAAP.
"Letter of Credit Agreement" means Bank's standard form Application and Agreement for Commercial Letter of Credit, Bank's standard form Application for Standby Letter of Credit and Standby Letter of Credit Agreement, or other standard application and agreement for letters of credit in use by Bank from time to time.
"Letters of Credit" means the letters of credit in Bank's standard form from time to time issued pursuant to Section 3.1.
"Lien or Encumbrance" and "Liens and Encumbrances" mean, respectively, each and all of the following: (i) any lease or other right to use; (ii) any assignment as security, conditional sale, grant in trust, lien, mortgage, pledge, security interest, title retention arrangement, other encumbrance, or other interest or right securing the payment of money or the performance of any other liability or obligation, whether voluntarily or involuntarily created and whether arising by agreement, document, or instrument, under any law, ordinance, regulation, or rule (federal, state, or local), or otherwise; and (iii) any option, right of first refusal, other right to acquire, or other interest or right.
"Liquidity" means with respect to any Person, the amount of that Person's unencumbered cash and unencumbered cash equivalents (including amounts on deposit with Bank pursuant to Section 6.14 hereof) as determined in accordance with GAAP, plus, in the case of Borrower, (i) the portion of the Commitment Amount that is undisbursed and available for disbursement at the time of each determination of Liquidity, (ii) the amount of the Warehouse Facility that is undisbursed and available for disbursement at the time of each determination of Liquidity, and (iii) the amount of other Bank Facilities that is undisbursed and available for disbursement at the time of each determination of Liquidity.
"Loan Documents" means this Agreement, the Note, the Letter of Credit Agreements executed and delivered by Borrower in connection with the Letters of Credit from time to time, the Set Aside Agreement, and any other agreements, documents, or instruments from time to time evidencing, guarantying, securing, or otherwise relating to the Note, as they may be amended, modified, extended, renewed, or supplemented from time to time.
"Loan Party" means Borrower, the Guarantors, and each other Person that from time to time is or becomes obligated to Bank under any Loan Document or grants any Collateral.
"Material Adverse Change" means any change in the assets, business, financial condition, operations, prospects, or results of operations of any Loan Party or any other event or condition that in the reasonable opinion of Bank (i) could affect the likelihood of performance by any Loan Party of any of the Obligations, (ii) could affect the ability of any Loan Party to perform any of the Obligations, (iii) could affect the legality, validity, or binding nature of any of the Obligations or any Lien or Encumbrance securing any of the Obligations, or (iv) could affect the priority of any Lien or Encumbrance securing any of the Obligations.
"Mortgage Debt" means such mortgage banking debt as would be listed on the consolidated balance sheet of Borrower prepared in accordance with GAAP.
"Net Worth" of any Person means, at any date, the aggregate of capital, surplus and retained earnings of such Person as would be shown on a consolidated balance sheet of such Person prepared in accordance with GAAP, adjusted to exclude (to the extent included) investments by such Person and its Subsidiaries in joint ventures and the amount of equity attributable to Affiliates other than Subsidiaries of such Person, and, solely for purposes of determining Borrower's compliance with the covenant set forth in Section 6.12.3, adjusted to include (to the extent excluded), in Borrower's case, the indebtedness of Borrower evidenced by the Convertible Notes and the Subordinated Notes.
"Non-Recourse Debt" means Debt or other obligations to the extent that the liability for such Debt or other obligations does not extend to Borrower or any of its Subsidiaries (other than the Subsidiary incurring such Debt or which holds title to any property securing such Debt) for any deficiency, including liability by reason of any agreement by Borrower or any of its Subsidiaries to maintain the financial condition of, keep-well or otherwise support the credit of the Subsidiary incurring such Debt.
"Note" means the Amended and Restated Promissory Note, dated of even date herewith, of Borrower payable to Bank, as it may be amended, modified, extended, renewed, restated, or supplemented from time to time.
"Obligations" means the obligations of the Loan Parties under the Loan Documents (including, without limitation, the obligation to pay Reimbursement Amounts and amounts under the Set Aside Agreement).
(a) Debt evidenced by the Public Notes;
(b) Debt Incurred under or in respect of this Agreement or any other Bank Facility (including any guarantees related thereto) for working capital or general corporate purposes, Debt evidenced by letters of credit (including letters of credit issued pursuant to this Agreement), and guarantees of Debt of the Great Singing Hills joint venture in excess of amounts committed on the date of the Indenture and which are Incurred after the date of the Indenture; provided that the aggregate amount of all such Debt outstanding at any time pursuant to this clause (b) may not exceed $30,000,000;
(c) Debt Incurred by CHMC under the Warehouse Facility;
(d) Debt of Borrower to any of its Subsidiaries or of any Subsidiary of Borrower to Borrower or to any other Subsidiary of Borrower, provided that such Debt is evidenced by a promissory note that is not pledged to any Person (other than to secure the
(e) Existing Debt (without duplication of Debt indicated under clauses (a)-(d) above) of Borrower and its Subsidiaries;
(f) Non-Recourse Debt Incurred by the Carlsbad Subsidiary in an amount not to exceed $18,000,000 at any time outstanding;
(g) Debt in respect of performance, completion, guarantee, surety and similar bonds or banker's acceptances provided by Borrower or any of its Subsidiaries in the ordinary course of business;
(h) Purchase Money Obligations incurred in the ordinary course of business in an amount not exceeding $5,000,000.00 at any time
(i) Acquisition Debt of a Subsidiary of Borrower which, if Incurred by Borrower, would be permitted pursuant to Section 7.5.2
(k) Debt evidenced by the Convertible Notes and the Subordinated Notes.
"Permitted Exceptions" with respect to Borrower and its Subsidiaries means (i) Liens and Encumbrances securing the Obligations; (ii) Liens and Encumbrances securing the Warehouse Facility, provided that such Liens and Encumbrances shall not extend to any assets other than the mortgages, promissory notes and other collateral that secures mortgage loans made by CHMC; (iii) Liens and Encumbrances on assets of Borrower or any Subsidiary of Borrower securing the Bank Facility; provided that the Liens and Encumbrances granted in respect of the Bank Facility shall not extend to assets having a book value in the aggregate in excess of two times the amount committed under the Bank Facility; (iv) Liens and Encumbrances securing Non-Recourse Debt incurred by the Carlsbad Subsidiary; provided that such Liens shall not extend to any assets of Borrower or any of its Subsidiaries other than the Carlsbad Subsidiary; (v) Liens and Encumbrances for taxes, assessments or governmental charges or claims that either (a) are not yet delinquent or (b) are being contested in good faith by appropriate proceedings and as to which appropriate reserves have been established or other provisions have been made in accordance with GAAP; (vi) statutory Liens and Encumbrances of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other Liens and Encumbrances imposed by law and arising in the ordinary course of business; (vii) Liens and Encumbrances (other than any Lien or Encumbrance imposed by ERISA) deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (viii) Liens and Encumbrances incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, progress payments, government contracts and other obligations of like nature (exclusive of obligations for the payment of borrowed money), in each case, incurred in the ordinary course of business; (ix) attachment or judgment Liens and Encumbrances not giving rise to an Event of Default or Unmatured Event of Default; (x) easements, rights-of-way, restrictions and other similar charges or encumbrances not materially interfering with the ordinary conduct of the business of Borrower or any of its Subsidiaries; (xi) leases or subleases granted to others not materially interfering with the ordinary conduct of the business of Borrower or any of its Subsidiaries; (xii) Liens and Encumbrances with respect to Acquisition Debt; provided that such Liens and Encumbrances do not extend to any other assets of Borrower or the assets of any of Borrower's other Subsidiaries; (xiii) Liens securing Refinancing Debt; provided that such Liens only extend to the assets securing the Debt being refinanced, and such refinanced Debt was previously secured and such Liens and Encumbrances do not extend to any other assets of Borrower or to the assets of Borrower's other Subsidiaries; (xiv) Liens securing Purchase Money Obligations (including capitalized lease obligations); (xv) Liens existing on the date of this Agreement; and (xvi) any contract to sell an asset provided such sale is otherwise permitted under this Agreement (and the foregoing shall not constitute a consent of Bank to a sale or obligate Bank to consent to a sale).
"Permitted Payments" means, with respect to Borrower or any of its Subsidiaries, (i) the redemption, repurchase or other acquisition or retirement of any shares of any class of Capital Stock in exchange for (including any exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares), or out of the proceeds of a substantially concurrent issue and sale (other than to a Subsidiary) of, shares of Capital Stock (other than Redeemable Stock) of Borrower, provided that the proceeds of any such issuance and sale of shares of capital stock of Borrower shall not be included in determination of amounts available for Restricted Payments, (ii) any dividend or other distribution on any shares of its Capital Stock payable by a Subsidiary to Borrower or another of its Subsidiaries, or (iii) any wages or other compensation paid by Borrower or any of its Subsidiaries to their employees.
"Person" means any individual, corporation, partnership, association, trust or other entity or organization, including a government or political subdivision or agency or instrumentality thereof.
"Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued after the date of this Agreement, and including, without limitation, all classes and series of preferred or preference stock.
"Public Notes" means Borrower's $110,000,000.00 12% Senior Notes due 1999.
"Purchase Money Obligations" means Debt of any Person secured by Liens (i) on property purchased, acquired, or constructed by such Person or its Subsidiaries after the date of the Indenture and used in the ordinary course of business by such Person and (ii) securing the payment of all or any part of the purchase price or construction cost of such assets and limited to the property so acquired and improvements thereof; provided that such Debt is incurred no later than 90 days after the acquisition of such property or completion of such construction or improvements.
"Redeemable Stock" means, with respect to any Person, any class or series of Capital Stock of such Person that is redeemable at the option of the holder (except pursuant to a change in control provision that does not (i) cause such Capital Stock to become redeemable in circumstances which would not constitute a Change in Control and (ii) require Borrower to pay the redemption price therefor prior to the repayment in full of all Obligations, the expiration of all Letters of Credit, and the expiration of the Commitment), or is subject to mandatory redemption or otherwise matures prior to the final stated maturity of the Public Notes.
"Refinancing Debt" means Debt that refunds, refinances or extends the Public Notes, Existing Debt (other than Existing Debt repaid with the net proceeds of Advances pursuant to this Agreement) or other Debt incurred by Borrower or its Subsidiaries pursuant to the terms of the Indenture and this Agreement, but only to the extent that (i) the Refinancing Debt is subordinated to the Obligations and the Public Notes to the same extent as the Debt being refunded, refinanced or extended, if at all, (ii) the Refinancing Debt is scheduled to mature either (a) no earlier than the Debt being refunded, refinanced or extended, or (b) after the maturity date of the Public Notes, (iii) the portion, if any, of the Refinancing Debt that is scheduled to mature on or prior to the maturity date of the Public Notes has a Weighted Average Life to Maturity at the time such Refinancing Debt is Incurred that is equal to or greater than the Weighted Average Life to Maturity of the portion of the Debt being refunded, refinanced or extended that is scheduled to mature on or prior to the maturity date of the Public Notes, (iv) the obligor of such Refinancing Debt shall be Borrower or the same obligor as the Debt being refunded, refinanced or extended, and (v) the gross proceeds of such Refinancing Debt is an amount that is equal to or less than the aggregate principal amount then outstanding under the Debt being refunded, refinanced or extended.
"Reimbursement Amount" means the amount Borrower is obligated to pay to Bank under a Letter of Credit Agreement in respect of a draft drawn or drawn and accepted under the respective Letter of Credit, which amount shall be the amount of the draft or acceptance and all costs, expenses, fees, and other amounts then payable by Borrower to Bank under the Letter of Credit Agreements.
"Restricted Payments" means, with respect to any Person (i) any dividend or other distribution on any shares of such Person's Capital Stock (except dividends or distributions in additional shares of Capital Stock other than Redeemable Stock), (ii) any payment on account of the purchase, redemption or other acquisition of (a) any shares of such Person's Capital Stock or (b) any option, warrant or other right to acquire shares of such Person's Capital Stock, (iii) any Credit Extensions/Contributions to Affiliates Incurred after the date of the Indenture; provided, that for purposes of this provision an individual shall not be deemed to be an Affiliate of Borrower or any of its Subsidiaries solely because such individual is employed by Borrower or any of its Subsidiaries or, (iv) any principal payment, redemption, repurchase, defeasance or other acquisition or retirement (other than the retirement of any Subordinated Notes upon conversion of such of the Subordinated Notes pursuant to the terms of the Subordinated Notes Indenture), prior to scheduled principal payment or scheduled maturity, of Debt of Borrower or its Subsidiaries which is subordinated in right of payment to the Public Notes and the Note, provided, however, that with respect to Borrower and its Subsidiaries, Restricted Payments shall not include (a) any payment described in clause (i), (ii) or (iii) above made to Borrower or any of its Subsidiaries (other than the Carlsbad Subsidiary (in the case of clause (iii)) or any of its Subsidiaries which has liability in respect of Acquisition Debt) by Borrower or any of its Subsidiaries, or (b) any underwritten call of the Subordinated Notes or other Debt of Borrower which is convertible into Capital Stock (other than Redeemable Stock) but only to the extent Borrower is not required to make any redemption or principal payments in respect of Debt subject to such underwritten call (other than redemption and principal payments which are covered by the net proceeds received by Borrower from a concurrent sale of Capital Stock (other than Redeemable Stock) to the underwriters effecting such underwritten call).
"Set Aside Agreement" has the meaning set forth in Section 3.5.
"Set Aside Amount" has the meaning set forth in Section 3.5.
"Standard Number of Days" means the standard number of days established by Bank from time to time to allow for delivery to Bank of drafts drawn under Letters of Credit presented to financial institutions other than Bank for delivery to Bank. Bank may change such number of days at any time and from time to time in its absolute and sole discretion without notice to Borrower and may have a different number of days for commercial letters of credit and standby letters of credit.
"Subordinated Notes" means Borrower's $86,250,000.00 6-7/8% Convertible Subordinated Notes due 2002, issued in connection with the Subordinated Notes Indenture.
"Subordinated Notes Indenture" means that certain Indenture dated November 1, 1995 between Borrower and Manufacturers and Traders Trust Company, as trustee, with respect to the Subordinated Notes.
"Subsidiary" and "Subsidiaries" mean, with respect to any Person, (i) any corporation of which a majority of the capital stock having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions is at the time directly or indirectly owned by such Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) any partnership or joint venture at least a majority of the voting power of which is at the time directly or indirectly owned by such Person or one or more of the other Subsidiaries of that Person or a combination or successor thereof.
"Tangible Net Worth" of any Person means such Person's Net Worth less such Person's Intangible Assets. "Unmatured Event of Default" means any condition or event that with notice, passage of time, or both would be an Event of Default.
"Warehouse Facility" means the Second Amended and Restated Warehousing Credit and Security Agreement dated as of July 1, 1995 between Bank and CHMC, as the same may be amended, modified, extended, renewed, restated and supplemented from time to time.
"Weighted Average Life to Maturity" means, when applied to any Debt or portion thereof, if applicable, at any date, the number of years obtained by dividing (i) the then outstanding principal amount of such Debt or portion thereof, if applicable, into (ii) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment.
3. LETTERS OF CREDIT AND LOAN FACILITY.
3.1.1 Issuance of Letters of Credit. Subject to the terms and conditions of this Agreement and the Letter of Credit Agreements and subject to the policies, procedures, and requirements of Bank in effect from time to time for issuance of Letters of Credit (including, without limitation, payment of letter of credit fees), Bank agrees to issue, from time to time on or before the Commitment expiration date specified in Section 1, Letters of Credit upon request by and for the account of Borrower, provided that as to each requested Letter of Credit Borrower has delivered to Bank a completed and executed Letter of Credit Agreement, and provided further that the date that is the Standard Number of Days after the last date for payment of drafts drawn or drawn and accepted under a requested Letter of Credit is before the Commitment expiration date specified in Section 1. Each reference in this Agreement to "issue" or "issuance" or other forms of such words in relation to Letters of Credit shall also include any extension or renewal of a Letter of Credit. Upon occurrence of an Event of Default or an Unmatured Event of Default, Bank, in its absolute and sole discretion and without notice, may suspend the commitment to issue Letters of Credit. In addition, upon occurrence of an Event of Default, Bank, in its absolute and sole discretion and without notice, may terminate the commitment to issue Letters of Credit.
3.1.2 Issuance Procedure. To obtain a Letter of Credit, Borrower shall complete and execute a Letter of Credit Agreement and submit it to the letter of credit department of Bank and to the address of Bank specified on the first page of this Agreement. In no event shall Bank have any obligation to act upon an oral request for a Letter of Credit or any request that otherwise does not conform to Bank's policies and procedures. Upon receipt of a completed and executed Letter of Credit Agreement, Bank will process the application in accordance with the policies, procedures, and requirements of Bank then in effect. If the application meets the requirements of Bank and is within the policies of Bank then in effect, Bank will issue the requested Letter of Credit; provided, however, that unless otherwise agreed by Bank in its sole and absolute discretion Borrower shall be entitled to request that Bank issue Letters of Credit only in connection with, and as security for, the construction of offsite improvements by Borrower for residential subdivisions being developed by Borrower in the ordinary course of Borrower's business.
3.1.3 Reimbursement of Bank for Payment of Drafts Drawn or Drawn and Accepted Under Letters of Credit. The obligation of Borrower to reimburse Bank for payment by Bank of drafts drawn or drawn and accepted under a Letter of Credit shall be as provided in the respective Letter of Credit Agreement. Bank will notify Borrower of payment by Bank of a draft drawn or drawn and accepted under a Letter of Credit and of the respective Reimbursement Amount and will give Borrower the election (i) to pay the Reimbursement Amount pursuant to the respective Letter of Credit Agreement or (ii) to pay the Reimbursement Amount by Bank making an Advance subject to the terms and conditions of this Agreement and applying the proceeds of the Advance to pay the Reimbursement Amount. If Borrower does not communicate to Bank its election within two Business Days after notification by Bank of payment of the draft or acceptance, Borrower shall be deemed to have elected to pay the Reimbursement Amount by Bank making an Advance hereunder, provided that if the terms and conditions in this Agreement for an Advance hereunder are not satisfied, Borrower shall be deemed to have elected to pay the Reimbursement Amount pursuant to the Letter of Credit Agreement. Each Advance to pay a Reimbursement Amount will be dated the date that Bank pays the respective draft or acceptance and will accrue interest from and after such date. If Borrower is to pay the Reimbursement Amount pursuant to the Letter of Credit Agreement, Borrower shall also pay to Bank interest on the Reimbursement Amount from and including the date Bank pays the respective draft or acceptance at the Interest Rate (as defined in the Note) until the Reimbursement Amount and such interest are paid in full, provided that if Borrower fails to pay the Reimbursement Amount and accrued interest thereon within five (5) days after notification by Bank to Borrower of payment of the respective draft or acceptance, interest thereafter will accrue at the Default Rate (as such term is defined in the Note). Such interest shall be computed on the basis of a 360-day year and accrue on a daily basis for the actual number of days elapsed. Notwithstanding the above, if Borrower elects or is deemed to have elected to pay the Reimbursement Amount pursuant to the Letter of Credit Agreement and fails to pay the Reimbursement Amount and interest thereon within five (5) days after notification by Bank to Borrower, Bank, in its absolute and sole discretion and without notice to Borrower and regardless of whether the terms and conditions in this Agreement for Advances are satisfied, may make an Advance under this Agreement in the amount of the Reimbursement Amount and accrued interest thereon and apply the proceeds of such Advance to pay the Reimbursement Amount and accrued interest.
3.2 Loan Facility. Subject to the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower from time to time on or before the Commitment expiration date specified in Section 1. Proceeds of Advances may be used only to pay Reimbursement Amounts due to Bank under Letter of Credit Agreements, amounts due to Bank under the Set Aside Agreement, and for any other purposes described in Section 1. Advances shall be on a revolving basis. Advances prepaid may be re-borrowed subject to the terms and the conditions herein. Although the outstanding principal of the Note may be zero from time to time, the Loan Documents shall remain in full force and effect until the Commitment terminates, all Letters of Credit have expired or are drawn in full, all drafts drawn or drawn and accepted under all Letters of Credit have been paid in full, and all Obligations are paid and performed in full. Upon occurrence of an Event of Default, an Unmatured Event of Default or the violation of any of the financial covenants set forth in Section 6.12.1, 6.12.2 or 6.12.3 hereof (regardless of whether such violation otherwise is an Event of Default or Unmatured Event of Default), Bank, in its absolute and sole discretion and without notice, may suspend the commitment to make Advances. In addition, upon the occurrence of an Event of Default, Bank, in its absolute and sole discretion and without notice, may terminate the commitment to make Advances. The obligation of Borrower to repay Advances is evidenced by the Note.
3.3 Requests for Letters of Credit and Advances. Letters of Credit may be issued and Advances may be made, in accordance with the terms hereof, by Bank at the written request of the Person or Persons designated in a signature authorization form delivered to Bank from time to time by Borrower. Such Person or Persons are hereby authorized by Borrower to request Letters of Credit and Advances, to execute and deliver Letter of Credit Agreements, and to direct disposition of the proceeds of Advances until written notice of the revocation of such authority is received from Borrower by Bank and Bank has had a reasonable time to act upon such notice. Bank shall have no duty to monitor for Borrower or to report to Borrower the use of Letters of Credit or proceeds of Advances. Advances shall be disbursed by Bank into an account of Borrower with Bank, provided, however, that Advances to pay Reimbursement Amounts shall be paid to Bank.
3.4 Limit on Letters of Credit and Advances. Anything in the Loan Documents to the contrary notwithstanding, the sum from time to time of (i) the aggregate amount of outstanding and undrawn Letters of Credit, (ii) the aggregate amount of outstanding and unpaid drafts drawn and accepted under Letters of Credit, (iii) the aggregate amount of unpaid Reimbursement Amounts, (iv) the Set Aside Amount less any portion of the Set Aside Amount that has been advanced by Bank pursuant to this Agreement and thereafter repaid by Borrower, and (v) the amount of outstanding and unpaid Advances shall not exceed the Commitment Amount. In addition, anything in the Loan Documents to the contrary notwithstanding, the sum from time to time of the amounts described in clauses (i), (ii), (iii) and (iv) of the immediately preceding sentence shall not exceed ten percent (10%) of the Commitment Amount.
3.5 Set Aside Agreement. Borrower and Bank have entered into (or may enter into after execution hereof) a Set Aside Agreement (the "Set Aside Agreement") in connection with a loan from Bank to Surprise Village North L.L.C. and Continental Traditions L.L.C., which loan relates to certain real property located in Surprise, Arizona. Pursuant to the terms of the Set Aside Agreement, Borrower agreed to "set aside" a portion of the Commitment Amount in the sum of $1,500,000.00 (the "Set Aside Amount") for purposes of paying certain release prices as more fully described therein. Bank, from time to time in its sole and absolute discretion and without notice to Borrower and regardless of whether the terms and conditions in this Agreement for Advances are satisfied, may make an Advance under this Agreement in the amount owed under the Set Aside Agreement and apply the proceeds of such Advance to pay such amount.
3.6 Fees. As additional consideration for the Commitment, Borrower agrees to pay to Bank the following fees, which shall be earned by Bank on the date due under the Loan Documents and shall be non-refundable to Borrower:
3.6.1 Commitment Fee. A fee for the Commitment in the amount set forth in Section 1, payable on or before the date hereof.
3.6.2 Unused Commitment Fee. An unused commitment fee computed at the rate per annum set forth in Section 1 on the unused portion of the Commitment Amount, calculated from the date hereof and payable monthly in arrears. For each month (or portion thereof), the unused commitment fee shall be equal to (a) the Commitment Amount minus (b) the "average monthly outstandings" for the month (or portion thereof) with respect to which the unused commitment fee is being computed, with the resulting number multiplied by (c) one-twelfth (1/12th) of the annual fee. As used herein, "average monthly outstandings" means the sum of the outstanding amount of the Advances on each day during the month (or portion thereof for which the fee is being computed) with respect to which the unused commitment fee is being computed, divided by the number of days in that month (or portion thereof). If the Unused Commitment Fee is being computed for less than a full month, the percentage used in clause (c) above shall be computed on a daily basis for the number of days for which the fee is being computed.
3.6.3 Attorneys' Costs, Expenses, and Fees. Attorneys' costs, expenses, and fees for Bank's counsel in the amount specified by Bank, payable on or before the date hereof.
4. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AGREEMENT AND THE COMMITMENT.
4.1 Conditions Precedent to Closing and Commitment. This Agreement and the Commitment shall become effective only upon satisfaction of the following conditions precedent, as determined by Bank in its absolute and sole discretion:
4.1.1 Representations and Warranties Accurate. The representations and warranties by each Loan Party in the Loan Documents are correct on and as of the date of this Agreement as though made on and as of such date.
4.1.2 No Event of Default or Unmatured Event of Default. No condition or event has occurred that is an Event of Default or an Unmatured Event of Default.
4.1.3 No Material Adverse Change. No Material Adverse Change has occurred.
4.1.4 Receipt of Documents. Bank has received the following duly executed by the parties thereto and in form and substance satisfactory to Bank in its absolute and sole discretion. 4.1.4.1 Loan Documents. The Loan Documents. 4.1.4.2 Corporate or Partnership Documents. If any Loan Party is a corporation, limited liability company, or a partnership, certified copies of (a) resolutions of its board of directors, members, or partners, as the case may be, authorizing such Loan Party to execute, deliver, and perform pursuant to its Loan Documents and to grant to Bank the Liens and Encumbrances provided in the Loan Documents and certifying the names and signatures of the officers or partners, as the case may be, of such Loan Party authorized to execute the Loan Documents on behalf of such Loan Party, (b) the certificate of incorporation and bylaws, articles of organization, limited liability company operating agreement, or partnership agreement, as the case may be, of such Loan Party, (c) a certificate of good standing as a corporation, limited liability company, or limited partnership, as the case may be, from such Loan Party's State of organization, and if not Arizona, a certificate of qualification as a foreign corporation, limited liability company, or limited partnership, as the case may be, authorized to transact business in the State of Arizona, from the State of Arizona.
4.1.5 Completion of Filings. Bank has received evidence of the completion of all filings to establish or maintain the perfection and the priority of the Liens and Encumbrances granted in the Loan Documents.
4.1.6 Payment of Costs, Expenses, and Fees. All costs, expenses, and fees to be paid by the Loan Parties on or before the effectiveness of this Agreement shall have been paid in full.
4.1.7 Opinion Letter. Bank has received a favorable opinion from Borrower's in-house counsel in form and substance satisfactory to Bank and its counsel.
4.1.8 Financial Statements. Bank has received financial statements including, without limitation, a balance sheet, cash flow statement and income statement, of Borrower and each other Loan Party (or consolidated statements reflecting such information with respect to Borrower and the other Loan Parties), certified by Borrower and each other Loan Party.
4.1.9 Commitment Fee. Borrower has paid the Commitment Fee.
4.1.10 Other Items. Bank has received such other items or documents as Bank may require.
4.2 Conditions Precedent to Advances and the Issuance of Letters of Credit. Bank's obligation to make Advances or to issue Letters of Credit shall become effective only upon satisfaction by Borrower, at Borrower's sole cost and expense, of the conditions precedent set forth in Section 4.1 and the following conditions precedent with respect to each Advance or Letter of Credit.
4.2.1 Representations and Warranties. The representations and warranties by the Loan Parties in the Loan Documents are correct on and as of the date of each Advance or the date of issuance of each Letter of Credit, as applicable, as though made on and as of such date and after giving effect to such Advance or issuance.
4.2.2 No Event of Default or Unmatured Event of Default: Compliance with Certain Financial Covenants. No condition or event has occurred that is an Event of Default or an Unmatured Event of Default both before and after giving effect to such Advance or issuance. Borrower is in compliance with the financial covenants set forth in Section 6.12.1, 6.12.2 and 6.12.3 hereof both before and after giving effect to such Advance or issuance.
4.2.3 No Material Adverse Change. No Material Adverse Change has occurred.
4.2.4 Draw Request. With respect to any Advance, Bank has received a draw request in the form of Exhibit A hereto from Borrower, not less than one (1) Business Day prior to the date for which such Advance is requested, specifying the amount of the Advance requested and supported by such documentation as Bank may require.
4.2.5 Letters of Credit. With respect to any Letter of Credit, Borrower shall have complied with the terms and conditions of Section 3 hereof.
4.2.6 Other Items. Bank has received such other items or documents as Bank may require.
Borrower hereby authorizes Bank, and Bank reserves the right in its absolute and sole discretion, to verify any documents and information submitted to Bank in connection with this Agreement. Bank may elect, in its absolute and sole discretion, to waive any of the foregoing conditions precedent. Any such waiver shall be effective only if (i) it is in writing executed by Bank, (ii) it specifically identifies the condition precedent, and (iii) it states whether the condition precedent is waived as a requirement of the effectiveness of this Agreement, the effectiveness of the Commitment, and/or as a requirement for a particular Advance or Letter of Credit. Any such waiver shall be limited to the condition(s) precedent specifically described therein and the requirements therein. Delay or failure by Bank to insist on satisfaction of any condition of an Advance or issuance of a Letter of Credit shall not be a waiver of such condition precedent or any other .condition precedent. If Borrower is unable to satisfy any condition precedent of an Advance or a Letter of Credit, the making of the Advance or issuance of the Letter of Credit shall not preclude Bank from thereafter declaring the condition or event causing such inability to be an Event of Default.
5. BORROWER REPRESENTATIONS AND WARRANTIES.
5.1 Closing Representations and Warranties. Borrower represents and warrants to Bank as of the date of this Agreement:
5.1.1 Corporate, Limited Liability Company, or Partnership Existence and Authorization. If Borrower is a corporation, a limited liability company, or a partnership, Borrower is validly existing, and in the case of a corporation or limited liability company is in good standing, under the laws of the jurisdiction of its formation or organization and has the requisite power and authority to execute, deliver, and perform Borrower Loan Documents. The execution, delivery, and performance by Borrower of Borrower Loan Documents have been duly authorized by all requisite action by or on behalf of Borrower and will not conflict with, or result in a violation of or a default under, the certificate of incorporation and bylaws, the limited liability company operating agreement, or the partnership agreement of Borrower, as the case may be. If Borrower is not formed or organized under the laws of the State of Arizona, Borrower is qualified to do business as a foreign corporation, limited liability company, or partnership, as the case may be, and in the case of a corporation or limited liability company is in good standing, under the law of the State of Arizona.
5.1.2 No Approvals. No approval, authorization, bond, consent, certificate, franchise, license, permit, registration, qualification, or other action or grant by or filing with any Person is required in connection with the execution, delivery, or performance by Borrower of Borrower Loan Documents.
5.1.3 No Conflicts. The execution, delivery, and performance by Borrower of Borrower Loan Documents will not conflict with, or result in a violation of or a default under: any applicable law, ordinance, regulation, or rule (federal, state, or local); any judgment, order, or decree of any arbitrator, other private adjudicator, or Governmental Authority to which Borrower is a party or by which Borrower or any of the assets or property of Borrower is bound; any of the Approvals or Permits; or any agreement, document, or instrument to which Borrower is a party or by which Borrower or any of the assets or property of Borrower is bound (including, without limitation, any agreement, document or instrument in connection with the Public Notes, the Convertible Notes, the Subordinated Notes, any Bank Facility and any other Existing Indebtedness). This Agreement and the Commitment constitute a "Bank Facility" as that term is defined in the Indenture; the Obligations constitute "Permitted Debt" as that term is defined in the Indenture; the Obligations rank pari passu with the Public Notes and are senior to the Convertible Notes and the Subordinated Notes.
5.1.4 Execution and Delivery and Binding Nature of Borrower Loan Documents. The Borrower Loan Documents have been duly executed and delivered by or on behalf of Borrower. The Borrower Loan Documents are legal, valid, and binding obligations of Borrower, enforceable in accordance with their terms against Borrower, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization, or similar laws and by equitable principles of general application.
5.1.5 Accurate Information. All information in any loan application, financial statement, certificate, or other document and all other information delivered by or on behalf of Borrower to Bank in obtaining the Commitment is correct and complete, and there are no omissions therefrom that result in any such information being incomplete, incorrect, or misleading as of the date thereof. There has been no Material Adverse Change as to Borrower since the date of such information. All financial statements heretofore delivered to Bank by Borrower were prepared in accordance with the requirements set forth in this Agreement and accurately present the financial condition and results of operations of Borrower as at the dates thereof and for the periods covered thereby.
5.1.6 Purpose of Advances. The purpose of the Advances is as set forth in Section 1.
5.1.7 Legal Proceedings: Hearings, Inquiries, and Investigations. Except as disclosed to Bank in writing prior to the date of this Agreement, (i) no legal proceeding is pending or, to best knowledge of Borrower, threatened before any arbitrator, other private adjudicator, or Governmental Authority to which Borrower is a party or by which Borrower or any assets or property of Borrower may be bound or affected that if resolved adversely to Borrower could result in a Material Adverse Change, and to the best knowledge of Borrower, there exist no facts that would form any basis for any of the foregoing, and (ii) no hearing, inquiry, or investigation relating to Borrower or any assets or property of Borrower is pending or, to the best knowledge of Borrower, threatened by any Governmental Authority.
5.1.8 No Event of Default or Unmatured Event of Default. No Event of Default and no Unmatured Event of Default has occurred and is continuing. No event of default or event which with notice or lapse of time or both would become an event of default has occurred or is continuing with respect to the Public Notes, the Convertible Notes, the Subordinated Notes, any Bank Facility, or any other Debt of Borrower.
5.1.9 Approvals and Permits: Assets and Property. Borrower has obtained and there are in full force and effect all Approvals and Permits. Borrower owns or leases all assets and property necessary for conduct of the business and operations of Borrower. Such assets and property are not subject to any Liens and Encumbrances, other than Permitted Exceptions.
5.1.10 Taxes. Borrower has filed or caused to be filed all tax returns (federal, state, and local) required to be filed by Borrower and has paid all taxes and other amounts shown thereon to be due (including, without limitation, any interest and penalties).
5.1.11 ERISA. Borrower is in compliance with ERISA. No Reportable Event or Prohibited Transaction (as defined in ERISA) or termination of any plan has occurred and no notice of termination has been filed with respect to any plan established or maintained by Borrower and subject to ERISA. Borrower has not incurred any material funding deficiency within the meaning of ERISA or any material liability to the Pension Benefit Guaranty Corporation in connection with any such plan established or maintained by Borrower. Borrower is not a party to any Multiemployer Plan (as defined in ERISA).
5.1.12 Environmental Matters. The information in any environmental questionnaire delivered to Bank is accurate and complete with no material omissions therefrom as of the date thereof. To the best knowledge of Borrower after due investigation, Borrower is in compliance in all material respects with all environmental, all health, and all safety laws, ordinances, regulations, and rules (federal, state, and local) applicable to Borrower, the assets or property of Borrower, the business or operations of Borrower, or the products or services of Borrower. Borrower does not have any material existing or contingent liability in connection with any disposal, generation, manufacture, processing, production, release, storage, transportation, treatment, or use of any hazardous or toxic substance or waste.
5.1.13 Investment Company Act. Borrower is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Borrower is not a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended.
5.1.14 Margin Securities. Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of Advances will be used to purchase or carry any margin stock or extend credit to others for the purpose of purchasing or carrying margin stock or for any purpose that -violates or is inconsistent with Regulation X of the Board of Governors.
5.2 Representations and Warranties Upon Requests for Advances or Letters of Credit. Each request for an Advance or a Letter of Credit shall be a representation and warranty by Borrower to Bank that the representations and warranties in this Section 5 are correct and complete as of the date of the Advance or the issuance of the Letter of Credit and that the conditions precedent in Section 4 are satisfied as of the date of the Advance or the issuance of the Letter of Credit.
5.3 Representations and Warranties Upon Delivery of Financial Statements, Documents and Other Information. Each delivery by Borrower to Bank of financial statements, other documents, or information after the date of this Agreement (including, without limitation, documents and information delivered in obtaining an Advance or Letter of Credit) shall be a representation and warranty that such financial statements, other documents, or information is correct and complete, that there are no omissions therefrom that result in such financial statements, other documents, or information being incomplete, incorrect, or misleading as of the date thereof, and that such financial statements accurately present the financial condition and results of operations of Borrower as at the dates thereof and for the periods covered thereby.
6. BORROWER AFFIRMATIVE COVENANTS. Until the Commitment terminates in full, until all Letters of Credit expire or are drawn in full until all drafts drawn or drawn and accepted under Letters of Credit are paid in full, and until the Obligations are paid and performed in full, Borrower agrees that, unless Bank otherwise agrees in writing in Bank's absolute and sole discretion:
6.1 Corporate, Limited Liability Company, or Partnership Existence. If Borrower is a corporation, a limited liability company, or a partnership, Borrower shall continue to be validly existing, and in the case of a corporation or a limited liability company in good standing, under the law of the jurisdiction of its organization or formation. If Borrower is not formed or organized under the laws of the State of Arizona, Borrower shall continue to be qualified to do business as a foreign corporation, limited liability company, or partnership, as the case may be, and in the case of a corporation or limited liability company to be in good standing, under the law of the State of Arizona.
6.2 Books and Records; Access By Bank. Borrower will maintain a single, standard, modern system of accounting (including, without limitation, a single, complete, and accurate set of books and records of its assets, business, financial condition, operations, property, prospects, and results of operations) in accordance with good accounting practices. During business hours Borrower will give representatives of Bank access to all assets, books, documents, property, and records of Borrower and will permit such representatives to inspect such assets and property and to audit, copy, examine, and make excerpts from such books, documents, and records.
6.3 Information and Statements. Borrower shall furnish to Bank:
6.3.1 Monthly Financial Statements. As soon as available and in any event within thirty (30) days after the end of each calendar month, a balance sheet, statements of income and, at Bank's request, reconciliation of net worth of Borrower and each Guarantor for the immediately preceding month, all in reasonable detail and certified by the chief financial officers of Borrower, and each Guarantor, subject, however, to year-end audit adjustments.
6.3.2 Quarterly Financial Statements. As soon as available and in any event within forty-five (45) days after the end of each of the first three quarters in each fiscal year, unaudited consolidated financial statements of Borrower and its Subsidiaries (including, without limitation, cash flow reports), as contained in its Form 10-Q quarterly reports to the Commission for the relevant three, six and nine month periods.
6.3.3 Annual Financial Statements. As soon as available and in any event within ninety (90) days after the end of each fiscal year of Borrower, (i) the consolidated (and, if required by Bank, the consolidating) financial statements of Borrower and its Subsidiaries as contained in its Form 10-K annual report to the Commission, and (ii) copies of the consolidated (and, if required by Bank, the consolidating) balance sheet of Borrower and its Subsidiaries as of the end of such fiscal year, and statements of income and retained earnings and a statement of cash flow of Borrower for such fiscal year, in each case setting forth in comparative form the figures for the preceding fiscal year of Borrower, all in reasonable detail, prepared in accordance with GAAP, which financial statements shall be audited by independent certified public accountants satisfactory to Bank, and accompanied by an unqualified opinion of such accountants with respect to such financial statements. As soon as available and in any event within ten (10) days prior to the beginning of each fiscal year, Borrower shall furnish to Bank a budget, and cash flow projection for that fiscal year.
6.3.4 Officer's Certificate. Together with each delivery of financial statements pursuant to Sections 6.3.1 through 6.3.3 above, an officer's certificate of Borrower and each Guarantor stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and conditions of Borrower and each Guarantor during the accounting period covered by such financial statements, and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as of the date of the officer's certificate, of any Event of Default or Unmatured Event of Default or, if any Event of Default or Unmatured Event of Default existed or exists, specifying the nature and period of the existence thereof and what action Borrower has taken, is taking, and proposes to take with respect thereto. Together with each quarterly financial statement required pursuant to Section 6.3.2, Borrower shall provide an officer's certificate in the form of Exhibit B hereto with respect to compliance with the financial and other covenants set forth in any documents relating to the Public Notes, any documents relating to any Bank Facility, or this Agreement.
6.3.5 Filings, Etc. As and when filed, copies of all regular or periodic financial and other reports, if any, which Borrower or any Guarantor shall file with the Commission or any other Governmental Authority.
6.3.6 Sales Reports. As soon as available and in any event at least once each month, sales, inventory and backlog reports on each homebuilding Subsidiary of Borrower.
6.3.7 Required Backup. Upon request by Bank from time to time, "consolidating" statements and other detail required by Bank with respect to any of the financial statements described in Sections 6.3.1 through 6.3.3 above.
6.3.8 Other Information. Such other information concerning Borrower and the assets, business, financial condition, operations, property, prospects, and results of operations of Borrower as Bank reasonably requests from time to time.
6.4 Law; Judgments; Material Agreements; Approvals and Permits. Borrower shall comply with all laws, ordinances, regulations, and rules (federal, state, and local) and all judgments, orders, and decrees of any arbitrator, other private adjudicator, or Government Authority relating to Borrower or the assets, business, operations, or property of Borrower. Borrower shall comply in all material respects with all material agreements, documents, and instruments to which Borrower is a party or by which Borrower or any of the assets or property of Borrower is bound or affected. Borrower shall obtain and maintain in full force and effect all Approvals and Permits and shall comply with all conditions and requirements of all Approvals and Permits.
6.5 Taxes and Other Indebtedness. Borrower will pay and discharge (i) before delinquency all taxes, assessments, and governmental charges or levies imposed upon it, upon its income or profits, or upon any of its assets or property (except to the extent permitted to be contested pursuant to clause (v) of the definition of Permitted Exceptions), (ii) when due all lawful claims (including, without limitation, claims for labor, materials, and supplies), that, if unpaid, might become a Lien or Encumbrance upon any of its assets or property, and (iii) when due all its other Debt.
6.6 Assets and Property. Borrower will maintain, keep, and preserve all of its assets and property (tangible and intangible) necessary or useful in the proper conduct of its business and operations in good working order and condition, ordinary wear and tear excepted.
6.7 Insurance. In addition to any insurance required under any of the other Loan Documents, Borrower shall maintain workmen's compensation insurance, product and public liability insurance, insurance on its assets and property now or hereafter owned, and such other forms of insurance as is customary in the industry of Borrower, against such casualties, risks, and contingencies, in such amounts, and with such insurance companies as are satisfactory to Bank, in its reasonable discretion. Borrower shall deliver to Bank from time to time as Bank may request, schedules setting forth all insurance then in effect and copies of policies.
6.8 Environmental Laws. Without limiting the generality of Section 6.4, Borrower shall comply with all environmental, all health, and all safety laws, ordinances, regulations, and rules (federal, state, local, and foreign) applicable to Borrower, the business or operations of Borrower, the assets or property of Borrower, or the products or services of Borrower. Borrower shall not dispose of, generate, manufacture, process, produce, release, transport, or treat or otherwise store or use any hazardous or toxic substances or wastes. Borrower shall notify Bank immediately of any environmental inquiry or claim from any Governmental Authority or other Person relating to Borrower or any assets, property, business, operations, product, or service of Borrower.
6.9 ERISA. Borrower will fund each Defined Benefit Plan and Defined Contribution Plan (as such terms are defined in ERISA) so that there is never an Accumulated Funding Deficiency (as defined in Section 412 of the Internal Revenue Code of 1986, as amended).
6.10 Further Assurances. Borrower shall promptly execute, acknowledge, and deliver and, as appropriate, cause to be duly filed and recorded such additional agreements, documents, and instruments and do or cause to be done such other acts as Bank may reasonably request from time to time to better assure, perfect, preserve, and protect the interest of Bank in the Collateral and the rights and remedies of Bank under the Loan Documents.
6.11 Costs and Expenses of Borrower's Performance of Covenants and Satisfaction of Conditions. Borrower will perform all of its obligations and satisfy all conditions under the Loan Documents at its sole cost and expense.
6.12 Financial Covenants. Except as otherwise noted, all financial computations shall be made in accordance with GAAP. Until the Commitment terminates in full, until all Letters of Credit expire or are drawn in full, until all drafts drawn or drawn and accepted under Letters of Credit are paid in full, and until the Obligations are paid and performed in full, Borrower agrees that, unless Bank otherwise agrees in writing in Bank's absolute and sole discretion, as of the end of each quarterly fiscal period, Borrower shall maintain:
6.12.1 Tangible Net Worth. A minimum Tangible Net Worth in the amount of $90,000,000.00.
6.12.2 Liquidity. A minimum Liquidity of $5,000,000.00.
6.12.3 Adjusted Debt to Net Worth Ratio. An Adjusted Debt to Net Worth Ratio of not more than 1.50 to 1.
6.13 Clean-Up. With respect to (i) the six-month period commencing on November 30, 1995 and ending on May 31, 1996, Borrower shall not have any Advances outstanding pursuant to this Agreement for a period of at least fifteen (15) or thirty (30) consecutive days, (as elected by Borrower) and (ii) the period commencing on June 1, 1996 and ending on the Commitment expiration date specified in Section 1, Borrower shall not have any Advances outstanding pursuant to this Agreement for a period of at least thirty (30) or fifteen (15) consecutive days (as elected by Borrower, such that the period elected by Borrower in clause (ii) is different than the period elected by Borrower in Clause (i)).
6.14 Compensating Balances. Borrower shall at all times maintain on deposit with Bank (i) free, collected, non-interest-bearing compensating balances in the amount of not less than $500,000.00 and (ii) such additional compensating balance deposits (which may be interest bearing) as may be necessary to cause the total deposits maintained at Bank (including amounts maintained pursuant to clause (i) of this sentence) to be equal to or greater than two-thirds of the total deposits maintained by Borrower with all financial institutions.
6.15 Appraisals. Bank shall have the right, which Bank may exercise from time to time, to obtain appraisals of Borrower's real estate assets. All such appraisals shall be in form and reflect values satisfactory to Bank. Borrower shall cooperate in any such appraisals and Borrower shall pay all costs and expenses, including appraisal and appraisal review fees incurred or charged by Bank in connection therewith; provided that Borrower shall be obligated to pay such costs and expenses only if and to the extent such appraisals are required (i) by the consistent application of Bank's internal policies and procedures that are generally applicable to secured or unsecured loans made by Bank to Persons engaged in businesses similar to that of Borrower, (ii) by applicable laws, rules and regulations or (iii) in connection with the exercise of Bank's rights under Section 8 hereof.
7. BORROWER NEGATIVE COVENANTS. Until the Commitment terminates in full, until all Letters of Credit expire or are drawn in full, until all drafts drawn or drawn and accepted under Letters of Credit are paid in full, and until the Obligations are paid and performed in full, Borrower agrees that, unless Bank otherwise agrees in Bank's absolute and sole discretion:
7.1 Corporate, Limited Liability Company, and Partnership Restrictions. If Borrower, or any Subsidiary, is a corporation, a limited liability company, or a partnership, Borrower shall not and, except for sales of stock in the Carlsbad Subsidiary, shall not permit any Subsidiary to, issue any capital stock or other securities of or any limited liability company interest or partnership interest in Borrower, or any Subsidiary, or grant any option (except in connection with employee stock option plans), right-of-first-refusal, warrant, or other right to purchase any capital stock or other securities of or any limited liability company interest or partnership interest in Borrower or any Subsidiary. Borrower shall not be dissolved or liquidated and shall not permit any Subsidiary to be dissolved or liquidated. Borrower shall not, and shall not permit any Subsidiary to, amend, modify, restate, supplement, or terminate its certificate of incorporation or bylaws, its limited liability company operating agreement, or its partnership agreement, as the case may be. Borrower shall not, and shall not permit any Subsidiary to, reorganize itself or consolidate with or merge into any other corporation or permit any other corporation to be merged into Borrower. Any provision of this Section 7.1 to the contrary notwithstanding, this Section 7.1 shall not restrict or limit the issuance of Common Stock that is authorized but unissued as of the date hereof or held in treasury as of the date hereof if and to the extent such issuance is made in satisfaction of Borrower's obligation to permit conversion of the Convertible Notes to Common Stock pursuant to the terms of such notes. Provisions of this Agreement other than this Section 7.1 that appear to contemplate or refer to sales or issuances of capital stock or other securities, but do not expressly authorize such sales or issuances, shall not be deemed to be consent of Bank to any such sales or issuances.
7.2 Change in or Reacquisition of Ownership Interests in Borrower. Borrower will not suffer to occur or exist, whether occurring voluntarily or involuntarily, after the date of this Agreement any change in the legal or beneficial ownership of any capital stock of any Subsidiary (except for sales of stock in the Carlsbad Subsidiary), without the prior written consent of Bank in its absolute and sole discretion.
7.3 Name, Fiscal Year, Accounting Method, and Lines of Business. Borrower shall not change its name, fiscal year, or method of accounting. Borrower shall not directly or indirectly, engage in any business other than the line(s) of business in which Borrower is engaged on the date of this Agreement, discontinue any existing line(s) of business, or substantially alter its method of doing business.
7.4 Acquisition of All or Substantially All Assets. Borrower shall not, and shall not permit any Subsidiary to, acquire by purchase, lease, or otherwise all or substantially all the assets of any other Person.
7.5.1 General Prohibition. Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, Incur any Debt except Permitted Debt. No Permitted Debt shall contain any terms or conditions that would conflict with or be violated by any of Bank's rights hereunder, including without limitations, Bank's rights pursuant to Section 8 hereof.
7.5.2 Additional Debt Allowed. Notwithstanding Section 7.5.1 hereof, and subject to the immediately succeeding paragraph, Borrower may Incur Debt if, at the time such Debt is so Incurred and after giving effect thereto and the application of the proceeds therefrom, each of the following is true: (i) Borrower has a Coverage Ratio of not less than 2.2 to 1.0; (ii) Borrower is in compliance with Section 6.12 hereof and (iii) no Event of Default or Unmatured Event of Default has occurred.
Borrower shall not Incur any Debt (other than the Obligations and Permitted Debt) that is pari passu with the Public Notes or the Obligations or requires any principal payment, redemption payment or sinking fund payment thereon, in whole or in part, to be made prior to or at the final stated maturity of the Public Notes or the Obligations; provided that entering into an agreement that requires Borrower to make an offer to purchase outstanding Debt upon the occurrence of certain specified events shall not be deemed to be restricted by this paragraph.
For purposes of this Section 7.5, any waiver, extension or continuation of any or all mandatory prepayments or installment payments or the maturity date of any of the Debt Incurred pursuant to this Section 7.5 shall not be or be deemed to be the Incurrence of Debt by Borrower.
7.6 Limitations on Liens and Encumbrances. Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien or Encumbrance upon or with respect to any assets of Borrower or any such Subsidiary, whether now owned or hereafter acquired, or on any income or profits therefrom; provided that the foregoing shall not prohibit Permitted Exceptions.
7.7 Limitations on Sales, Transfers, etc. Borrower will not, directly or indirectly, and will not permit any of its Subsidiaries to, sell, assign, transfer or otherwise dispose of any Capital Stock of any Subsidiary or sell, assign, transfer or otherwise dispose of any assets of Borrower or any Subsidiary except for (i) sales or issuance of stock expressly permitted pursuant to Section 7.1 hereof, (ii) sales of assets in the ordinary course of business of any Subsidiary, and (iii) sales to Borrower or a wholly-owned Subsidiary of Borrower (except as such sales may be prohibited by the next sentence). Borrower will not, directly or indirectly, permit the Carlsbad subsidiary to sell, assign, transfer or otherwise dispose of all or a portion of the Carlsbad Property to Borrower or any of its Subsidiaries (other than the Carlsbad Subsidiary).
7.8 Limitation on Operating Losses. Borrower shall not cause or permit (i) Borrower's Consolidated Net Income to be less than zero in each of two consecutive fiscal quarters, and (ii) Borrower's Consolidated Net Income to be a loss of greater than $2,500,000 in any fiscal quarter. For the purpose of determining Consolidated Net Income in this Section 7.8, Borrower shall not be required to include losses to the extent resulting from adjustments to the net realizable value of assets required pursuant to GAAP.
7.9 Limitation on Restricted Payments. Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, make any Restricted Payment, if, after giving effect thereto:
(a) an Event of Default or an Unmatured Event of Default shall have occurred and be continuing, or
(b) the aggregate amount of all Restricted Payments (giving effect to Restricted Payments that are Credit Extensions/Contributions only to the extent then outstanding) made by Borrower and its Subsidiaries (the amount expended or distributed for such purposes, if other than in cash, to be determined in good faith by the board of directors of Borrower) from and after the date hereof shall exceed the sum of:
(i) the aggregate of 50% of the Consolidated Net Income of Borrower accrued for the period (taken as one accounting period) commencing with February 1, 1993 to and including the first full month ended immediately prior to the date of such calculation (or, in the event Consolidated Net Income is a deficit, then minus 100% of such
(ii) the aggregate net cash proceeds received by Borrower for the period (taken as one accounting period) commencing with February 1, 1993 to and including the first full month ended immediately prior to the date of such calculation from the issuance or sale (other than to a Subsidiary of Borrower) of its Capital Stock (other than Redeemable Stock), including the principal amount of any Subordinated Notes or other convertible securities issued for cash that are converted to Capital Stock from and after the date of this Agreement, and options, warrants and rights to purchase its Capital Stock (other than
(iii) amounts received by Borrower or any of its Subsidiaries representing a return of capital or Credit Extensions/Contributions made to the Great Singing Hills joint venture outstanding on the date
The foregoing clauses (a) and (b) will not prevent (i) Permitted Payments, (ii) the payment of any dividend within 60 days after the date of its declaration if such dividend could have been made on the date of its declaration in compliance with the foregoing provisions, and (iii) the repurchase or redemption of shares of Capital Stock from any officer, director or employee of Borrower or its Subsidiaries whose employment has been terminated or who has died or become disabled in an aggregate amount not to exceed $500,000 per annum; provided that amounts paid pursuant to clause (iii) shall reduce amounts available for future Restricted Payments.
8.1 Bank's Right to Demand Security. Upon the occurrence of any Event of Default, Bank shall have all of the rights and remedies provided pursuant to the Note, the other Loan Documents and applicable law. Without limiting the foregoing, upon the occurrence of an Event of Default resulting from a violation of the covenants set forth in Sections 6.12.1. 6.12.2, 6.12.3, 6.13. 6.14 or 7.8 hereof or the Events of Default set forth in paragraphs 9 or 13 in the definition of such term in the Note, Bank may, in its sole and absolute discretion, and in addition to its other rights and remedies, demand (a "Security Demand") and accept Collateral as security for the Obligations, which security shall be on such terms and conditions as Bank may elect in its sole and absolute discretion, and Borrower shall provide such security and comply with such requirements, subject only to the limitation on such security set forth in the definition of "Permitted Liens" in the Indenture. Without limiting the foregoing, the terms and conditions upon which Bank will require and accept such Collateral may include the following:
8.1.1 Type of Collateral. Any such Collateral shall consist of real property and improvements owned by Borrower or a Subsidiary of Borrower and not subject to Liens and Encumbrances (except as approved by Bank). Within five (5) Business Days after the giving of a Security Demand, Borrower shall provide Bank with a listing of all such real property and improvements and Bank shall have the right to select the Collateral from such list in the following order of preference (i) homes under construction located in the metropolitan Phoenix, Arizona area, (ii) improved single family lots located in the metropolitan Phoenix, Arizona area, (iii) lots under development located in the metropolitan Phoenix, Arizona area, (iv) vacant land located in the metropolitan Phoenix, Arizona area, (v) real estate located elsewhere in Arizona, (vi) real estate located in Colorado, and (vii) real estate located in California. Except as set forth in Section 8.1, Bank shall be entitled to select the quantity of such property to be provided as Collateral.
8.1.2 Appraisals. Bank shall receive and approve such appraisals or other evidence of the value of such property as Bank may require in its sole and absolute discretion.
8.1.3 Environmental Questionnaire. An environmental questionnaire and disclosure statement completed and signed by Borrower and CHI and/or CHICC covering the current and former condition and uses of such property and adjacent property, and, if required by Bank, followed by such environmental site assessments and investigations that Bank my require, all of which shall be acceptable to Bank in its sole and absolute discretion.
8.1.4 Security Documents. Borrower and such Subsidiaries shall execute such deeds of trust, security agreements and other security documents and instruments as Bank may require in its sole and absolute discretion.
8.1.5 Other Documents. Borrower and such Subsidiaries shall executed and deliver such other documents and instruments, and perform such other acts, as Bank may require in its sole and absolute discretion.
8.1.6 Title Insurance. Bank shall receive such title insurance policies and endorsements thereto with respect to such deeds of trust as Bank may require in its sole and absolute discretion, which title insurance policies shall contain only those exceptions and limitations as shall be acceptable to Bank.
8.1.7 No Defaults. No other Event of Default or Unmatured Event of Default shall have occurred and be continuing.
8.1.8 Attorney Opinions. Bank shall receive such opinions of in-house counsel for Borrower as Bank may request in its sole and absolute discretion, including, without limitation, opinions that the execution and delivery of such deeds of trust and other security documents does not conflict with, violate, or cause a default under, the terms and conditions of any agreement, document, instrument, or indenture to which Borrower or any Subsidiary is a party or by which it is bound or affected, and that the transfer of such security to Bank does not constitute a voidable preference or fraudulent conveyance under applicable state or federal law.
8.1.9 Cost and Expenses. Borrower shall pay all of Bank's costs and expenses in connection with the foregoing including, without limitation, appraisal fees, appraisal review fees, recording fees, title insurance fees, escrow fees, and attorneys' fees.
8.2 Effect of Security. Borrower's compliance with Section 8.1 shall not waive any Event of Default or Unmatured Event of Default or otherwise be deemed to modify or release any of Borrower's obligations hereunder, except to the extent such waiver, release or modification is expressly set forth in a written agreement signed by Bank and in form and content satisfactory to Bank in its sole and absolute discretion.
9. BANK'S OBLIGATIONS TO BORROWER ONLY. The obligations of Bank under this Agreement are for the benefit of Borrower only. No other Person shall have any rights hereunder or be a third-party beneficiary hereof.
10. PROVISIONS IN THE NOTE GOVERN THIS AGREEMENT. This Agreement is subject to certain terms and provisions in the Note, to which reference is made for a statement of such terms and provisions.
11. COUNTERPART EXECUTION. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Agreement to physically form one document.
(a) Binding Arbitration. Bank and Borrower hereby agree that all controversies and claims arising directly or indirectly out of this Agreement and the Loan Documents, shall at the written request of any party be arbitrated pursuant to the applicable rules of the American Arbitration Association. The arbitration shall occur in the State of Arizona. Judgment upon any award rendered by the arbitrator(s) may be entered in any court having jurisdiction. The Federal Arbitration Act shall apply to the construction and interpretation of this arbitration agreement.
(b) Arbitration Panel. A single arbitrator shall have the power to render a maximum award of one hundred thousand dollars. When any party files a claim in excess of this amount, the arbitration decision shall be made by the majority vote of three arbitrators. No arbitrator shall have the power to restrain any act of any party.
(c) Provisional Remedies: Self Help And Foreclosure. No provision of subparagraph (a) shall limit the right of any party to exercise self help remedies, to foreclose against any real or personal property collateral, or to obtain any provisional or ancillary remedies (including but not limited to injunctive relief or the appointment off a receiver) from a court of competent jurisdiction. At Bank's option, it may enforce its right under a mortgage by judicial foreclosure, and under a deed of trust either by exercise of power of sale or by judicial foreclosure. The institution and maintenance of any remedy permitted above shall not constitute a waiver of the rights to submit any controversy or claim to arbitration. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding.
13. AMENDED AND RESTATED. This Agreement amends and restates in its entirety that Loan Agreement between Borrower and Bank dated February 25, 1993, as thereafter amended, providing for a loan by Bank to Borrower in the amount of $10,000,000.00. All outstanding advances under said loan agreement shall be deemed outstanding Advances under this Agreement and the Note.
DATED as of the date first above stated.
BANK ONE, ARIZONA, NA, a national as THE VALLEY NATIONAL BANK OF
By: /s/ Rhonda R. Williams
CONTINENTAL HOMES HOLDING CORP., a
By: /s/ Kenda B. Gonzales | 10-Q | EX-10.4 | 1996-01-12T00:00:00 | 1996-01-12T16:40:21 |
0000950115-96-000013 | 0000950115-96-000013_0001.txt | <DESCRIPTION>AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION
This Amendment No. 1 to Agreement and Plan of Reorganization is entered into as of this 24th day of October, 1995 by and between MMI Medical, Inc., a California corporation ("MMI") and MEDIQ, Incorporated, a Delaware corporation ("MEDIQ").
WHEREAS, MMI, MEDIQ and certain other parties entered into that certain Agreement of Merger and Plan of Reorganization (the "Agreement") dated as of May 18, 1994 pursuant to which MEDIQ Equipment and Maintenance Services, Inc., a subsidiary of MEDIQ was merged with a subsidiary of MMI;
WHEREAS, pursuant to the Agreement, MMI agreed to use reasonable efforts to cause all Registrable Securities (as defined in the Agreement) to be registered under the 1933 Act as soon as reasonably practical after the filing of its annual report of Form 10-K for the fiscal year ending April 28, 1995;
WHEREAS, MMI and MEDIQ have agreed to modify the timing of MMI's agreement to effect such registration.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties and agreements contained herein, the parties hereto hereby agree as follows:
1. Section 11.2(a) of the Agreement is hereby amended to read in full as follows:
(a) MMI shall employ its reasonable efforts to cause all Registrable Securities to be registered under the 1933 Act as soon as reasonably practicable during the first quarter of calendar 1996; provided, however, that if MMI shall furnish to MEDIQ a certificate signed by its President stating that, in the good faith judgment of the board of directors of MMI, it would be detrimental to MMI or its shareholders for a registration statement to be filed in the near future, the MMI shall have the right to defer the filing of a registration statement with respect to such Registrable Securities until such time as the board of directors of MMI deems advisable, but in no event later than April 30, 1996, and thereafter shall employ its reasonable efforts to cause all Registrable Securities to be registered under the 1933 Act as soon as practicable.
MMI shall be obligated to effect only one registration pursuant to this Article XI.
2. All defined terms used herein which are not otherwise defined shall have the meanings set forth in the Agreement.
3. Except where inconsistent with the express terms of this Amendment No. 1, all provisions of the Agreement as originally entered into prior to the date hereof shall remain in full force ad effect.
4. This Amendment shall be governed by and construed in accordance with the laws of the State of California as applied to contracts between California residents made and to be performed entirely within the State of California.
5. This amendment may be executed in any number of counterparts by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute one in the same agreement.
IN WITNESS WHEREOF, each of the parties has caused this Amendment No. 1 to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. | 10-K405 | EX-2.1(B) | 1996-01-12T00:00:00 | 1996-01-12T11:57:13 |
0000950168-96-000043 | 0000950168-96-000043_0005.txt | RESOLUTIONS OF THE BOARD OF DIRECTORS OF
WHEREAS, by resolutions adopted by the Board of Directors (the "Board") of the Corporation at a meeting duly called and held on September 27, 1995, this Committee was appointed by the Board (the "Committee") in connection with the issuance of up to an aggregate principal amount of $3,000,000,000 of the Corporation's unsecured debt securities (either senior or subordinated and including medium-term notes), and shares of its preferred stock and shares of its common stock (collectively, the "Securities") to be offered on terms to be determined by the Committee; and
WHEREAS, on September 29, 1995 the Corporation filed a Registration Statement on Form S-3, Registration No. 33-63097 (the "Registration Statement"), with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, with respect to the Securities which are to be offered on a delayed or continuous basis, which Registration Statement was amended on November 13, 1995 and was declared effective on November 24, 1995;
WHEREAS, no stop order suspending the effectiveness of the Registration Statement has been received by the Corporation and no proceedings for that purpose have been instituted or threatened against the Corporation; and
WHEREAS, the Committee has determined that issuing up to $1,500,000,000 in aggregate principal amount of debt securities on behalf of the Corporation through a medium-term note program utilizing unsecured senior and subordinated notes with varying maturities and interest rates is advisable and in the
NOW, THEREFORE, BE IT RESOLVED, that the Corporation hereby establishes and there is hereby authorized to be issued medium-term notes, which may be a series of senior debt securities, designated as the Senior Medium-Term Notes, Series E (the "Senior Medium-Term Notes") and a series of subordinated debt securities, designated as the Subordinated Medium-Term Notes, Series E (the "Subordinated Medium-Term Notes" and, together with the Senior Medium-Term Notes, the "Medium-Term Notes"), which Medium-Term Notes shall be subject to the terms and entitled to the benefits of the Indenture dated as of January 1, 1995, between the Corporation and First Trust of New York, N.A. as successor trustee to BankAmerica National Trust Company, as trustee (the Senior Trustee"), in the case of Senior Medium-Term Notes, and the Indenture dated as of January 1, 1995, between the Corporation and The Bank of New York, as trustee (the
"Subordinated Trustee"), in the case of Subordinated Medium-Term Notes, all of which Medium-Term Notes shall be issued under the Registration Statement in an aggregate principal amount not in excess of $1,500,000,000;
RESOLVED FURTHER, that the Chairman of the Board and Chief Executive Officer, the Chief Financial Officer, any Senior Vice President or any Associate General Counsel and the Secretary or any Assistant Secretary of the Corporation are hereby authorized and empowered to execute and deliver, and this Committee hereby approves, the form of United States Master Distribution Agreement (the "Distribution Agreement"), dated as of January 10, 1996, among the Corporation and the Agents (as defined therein), in the form presented to the Committee and attached hereto as Exhibit A, relating, among other things, to the sale of the Medium-Term Notes and to the indemnification of and contribution to the Agents, with such changes as such officers may deem necessary or appropriate, the execution thereof being conclusive evidence of such approval;
RESOLVED FURTHER, that any of the Chairman of the Board and Chief Executive Officer, the Chief Financial Officer, any Senior Vice President or the Treasurer of the Corporation (each, an "Authorized Officer") hereby is authorized and empowered to determine from time to time the method and terms of the sale of any Medium-Term Notes, including but not limited to the selection of the persons, if any, to act as agent for the Corporation from time to time in connection with the sale of any Medium-Term Notes and the approval of administrative procedures relating to the issuance and transfer of such Medium-Term Notes;
RESOLVED FURTHER, that each Authorized Officer hereby is authorized and empowered to determine all of the specific terms and provisions of any Medium-Term Notes to be sold by the Corporation from time to time and the conditions of the sale thereof, including but not limited to (i) the specified time or times of any offering of Medium-Term Notes, (ii) whether the Medium-Term Notes to be sold will be Senior Medium-Term Notes or Subordinated Medium-Term Notes, (iii) the additional designation of such series of Medium-Term Notes, if any, (iv) the date or dates on which such Medium-Term Notes will be issued, (v) the method of and date for sale and delivery of such Medium-Term Notes, (vi) whether such Medium-Term Notes will be sold to an agent as principal or through an agent as agent for the Corporation, or whether the Corporation will sell such Medium- Term Notes directly on its own behalf, (vii) the fee or commission to be paid in connection with any such sale, (viii) the aggregate principal amount of such Medium-Term Notes which may be authenticated and delivered at any such time, (ix) the date or dates on which the principal of such Medium-Term Notes is payable, (x) the rate or rates per annum, and, if applicable, the method for determining such rate or rates, if any, at which such Medium-Term Notes will bear interest (which may be fixed or floating), the dates or dates from which such interest shall accrue, the date or dates on which such interest shall be payable and the record date or dates for the interest payable on any such Medium-Term Notes on any interest payment date; (xi) the place or places at which the principal of (and premium, if any, on) and any interest on such Medium-Term Notes shall be payable, any such Medium-Term Notes may be surrendered for registration or transfer or exchange and notices and demands to or upon the corporation in respect of such Medium-Term Notes may be served, which may or may not be the same place and which may or may not be maintained in the City of New York, if different from that specified herein; (xii) the denominations in which such Medium-Term Notes are authorized to be issued, if different from that specified herein; (xiii) any provisions relating to the mandatory redemption of such Medium-Term Notes by the Corporation or redemption of the Medium-Term Notes at the option of the holder, (xiv) any sinking fund to be provided in connection with such Medium-Term Notes; (xv) whether such Medium-Term Notes will be original issue discount; (xvi) the person or persons who, from time to time, will serve as calculation agent with respect to such Medium-Term Notes, if different from that specified herein; (xvii) any provisions relating to the extension of maturity of, or the renewal of, Medium-Term Notes or the conversion of such Medium- Term Notes into other securities of the Corporation; and (xviii) any other terms and provisions of the
RESOLVED FURTHER, that the Medium-Term Notes shall be issued in registered form and, unless otherwise determined by an Authorized Officer, such Medium-Term Notes shall be issued in book-entry only form, represented by one or more global notes registered in the name of The Depository Trust Company or its nominee, in denominations of $1,000 or any integral multiple thereof, and shall be dated the date of authentication; and the forms of registered Senior Medium-Term Notes and the forms of registered Subordinated Medium-Term Notes presented to this Committee and attached hereto as Exhibit B and Exhibit C, respectively, together with such modifications as are appropriate to reflect the determinations of any Authorized Officer, are hereby in all respects approved;
RESOLVED FURTHER, that the Administrative Procedures dated as of January 10, 1996 (the "Procedures") attached hereto as Exhibit D, are hereby approved in all respects, and the proper officers of the Corporation are authorized and empowered to direct the issuance of Medium-Term Notes from time to time in accordance with such Procedures, as such Procedures may be revised from time to time with the approval of any Authorized Officer or Senior Vice President of the
RESOLVED FURTHER, that the Medium-Term Notes shall be executed in the name of and on behalf of the Corporation by any of the Chairman and Chief Executive Officer, the Chief Financial Officer, or any Senior Vice President or Vice corporate seal thereon shall be attested by the Secretary or any Assistant Secretary, and the signatures of the Chairman and Chief Executive Officer, the Chief Financial Officer, any Senior Vice President or Vice President, the Secretary and any Assistant Secretary may be in the form of facsimile signatures of the present or any future Chairman and Chief Executive Officer, Chief Financial Officer or Vice President, Secretary or Assistant Secretary, and should any officer of the Corporation who signs, or whose facsimile signature appears upon, any of the Medium-Term Notes, cease to be such an officer prior to the issuance of such Medium-Term Notes, the Medium-Term Note so signed or bearing such facsimile signature shall, nevertheless, be valid, and, without prejudice to the use of the facsimile signatures of any other officer as hereinbefore authorized, the facsimile signatures of Hugh L. McColl, Jr., Chairman and Chief Executive Officer of the Corporation, and of James W. Kiser, Secretary of the Corporation, are hereby expressly approved and accepted;
RESOLVED FURTHER, that pursuant to the provisions of the respective Indentures, each of the Chairman of the Board and Chief Executive Officer, the Chief Financial Officer, any Senior Vice President or any Associate General Counsel of the Corporation is hereby authorized and empowered to cause the Medium-Term Notes, upon execution thereof, to be delivered to the trustee under the applicable Indenture, or to any agent designated by such trustee, for authentication and delivery and to deliver to said trustee or agent thereof, as the case may be, the written order of the Corporation for the authentication and delivery of the Medium-Term Notes, if necessary;
RESOLVED FURTHER, that, unless and until otherwise determined by an Authorized Officer, The Bank of New York hereby initially is appointed the agent for the Corporation for the registration, transfer, exchange and payment of the Medium-Term Notes (the "Paying Agent"), and is authorized to be appointed by the Trustee as authenticating agent, and that the corporate trust office of said bank located at 101 Barclay Street, New York, New York 10286, hereby is designated, pursuant to the provisions of Section 4.02 of the respective Indentures, as the office or agency of the Corporation where the Medium-Term Notes may be presented for registration, transfer, exchange and payment, and the proper officers of the Corporation are hereby authorized and empowered to execute and deliver any documents required by the respective trustees under the Indentures, or by the Paying Agent, with respect to such appointment of The Bank of New York, or any other person as any Authorized Officer shall determine, as Paying Agent for the Corporation;
RESOLVED FURTHER, that, unless and until otherwise determined by an Authorized Officer, The Bank of New York initially is appointed agent for the calculation of interest with respect to the Medium-Term Notes as described in the Prospectus of the Corporation dated November 24, 1995, as supplemented by the Prospectus Supplement of the Corporation dated January 10, 1996, a copy of which is attached hereto as Exhibit E, and the proper officers of the Corporation are hereby authorized and empowered to execute and deliver any documents required by The Bank of New York, with respect to such appointment, or by any other person who may so be appointed by an Authorized Officer;
RESOLVED FURTHER, that whenever either of the respective trustees under the Indentures shall, in its capacity as trustee, deem it expedient, it may apply to counsel (which may be counsel for the Corporation) for advice or instructions, and, for its actions and good faith in such agency capacity, including but not limited to action in reliance on such advice or instructions or on advice of its own counsel, the Corporation shall fully protect and hold harmless that agent from and against any liability;
RESOLVED FURTHER, that the officers of the Corporation be, and they hereby are, authorized and directed to do any and all things necessary, appropriate or convenient to carry into effect the foregoing resolutions. | 8-K | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T15:18:58 |
0000950124-96-000208 | 0000950124-96-000208_0000.txt | __x__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1995 OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
Box 156, East Highway 91, Lindsay, Nebraska 68644 (Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Common Stock, $1.00 par value 4,313,297 Title of Class Outstanding as of January 3, 1996
Exhibit index is located on page 2.
Total number of pages 15.
LINDSAY MANUFACTURING CO. AND CONSOLIDATED SUBSIDIARIES
November 30, 1995 and 1994 and August 31, 1995 (in thousands, except share amounts)
The accompanying notes are an integral part of the financial statements.
For the three months ended November 30, 1995 and 1994 (in thousands, except per share amounts)
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended November 30, 1995 and 1994
The accompanying notes are an integral part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the registrant's annual Form 10-K filing. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Lindsay Manufacturing Co. (Lindsay) August 31, 1995 Annual Report to Stockholders.
In the opinion of management the unaudited consolidated financial statements of Lindsay reflect all adjustments of a normal recurring nature necessary to present a fair statement of the results of operations for the respective interim periods. The results for interim periods are not necessarily indicative of trends or results expected for a full year.
2. Cash Equivalents, Marketable Securities and Long-Term Marketable Securities Cash equivalents are included at cost, which approximates market. At November 30, 1995, Lindsay's cash equivalents were held primarily by one financial institution. Marketable securities and long-term marketable securities are categorized as held-to-maturity or available-for-sale. Investments in the held-to-maturity category are carried at amortized cost. Investments in the available-for-sale category are carried at fair value with unrealized gains and losses as a separate component of stockholders' equity. Lindsay considers all highly liquid investments with maturities of three months or less to be cash equivalents, while those having maturities in excess of three months are classified as marketable securities or as long-term marketable securities when maturities are in excess of one year. Marketable securities and long-term marketable securities consist of investment-grade municipal bonds.
There are no investments in the available-for-sale category included in Marketable securities at November 30, 1995. Investments in the held-to-maturity category are included in Marketable securities ($21.3 million) and Long-term marketable securities ($31.1 million). The total amortized cost, gross unrealized holding gains, gross unrealized holding losses, and aggregate fair value for held-to-maturity securities are $52.4 million, $0.4 million, $0.0 million, and $52.8 million, respectively. There have not been any sales of held-to-maturity securities during the first quarter of Fiscal 1996. In the held-to-maturity category, $21.3 million in securities mature within one year and $31.1 million have maturities ranging from one to three years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for all inventories.
The estimated percentage distribution between major classes of inventory before reserves is as follows:
4. Property, Plant and Equipment Property, plant and equipment are stated at cost.
5. Commitments and Contingent Liabilities The consolidated balance sheet reflects a reserve of $2.1 million at November 30, 1995, compared to $1.9 million at August 31, 1995, reflecting an increase to the reserve of $0.3 million and costs of $0.1 million during the first quarter of Fiscal 1996 for continued implementation of environmental remediation plans for aquifer and soil and shallow groundwater contaminations. In 1987 the insurer agreed to reimburse Lindsay for remediation costs incurred by Lindsay. The insurer reduced its reimbursement of remediation costs in early 1990. In late 1990, Lindsay filed suit against the insurer. The insurer completely stopped reimbursement of remediation costs in 1991 and in 1992 the insurer filed a counterclaim against Lindsay for previously reimbursed
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Commitments and Contingent Liabilities - Continued remediation costs. In December 1995 the court dismissed Lindsay's suit against the insurer and entered a judgement in the amount of $2.4 million in favor of the insurer. Lindsay is in the process of appealing the dismissal of it's case against the insurer and the judgement against Lindsay. The Company has recorded a probable insurance recovery in other current assets. In the opinion of management, resolution of these matters, for which provision has not been made, will not have a material adverse affect on Lindsay's consolidated financial condition, however, an adverse outcome of these matters could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period.
The Company and its subsidiaries are defendants in various legal actions arising from other issues in the course of their business activities. In the opinion of management, resolution of these actions will not result in a material adverse effect on Lindsay's consolidated financial position, results of operations or cash flows.
Lindsay carries property insurance, with a $10,000 deductible, for replacement value of all of its buildings and non-auto equipment.
6. Net Earnings Per Share Primary net earnings per share are calculated by dividing the earnings by the weighted average number of common and common equivalent (stock options) shares outstanding of 4,497,938 and 4,863,751 for the three months ended November 30, 1995 and 1994, respectively. The difference between shares for primary and fully diluted earnings per share was not significant in any period.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table provides highlights for the first quarter of Fiscal Year 1996 compared with the first quarter of Fiscal Year 1995.
As the above table displays, operating revenues for the three month period ended November 30, 1995 were 23.4 percent ($5.2 million) higher than the first quarter of Fiscal 1995. This increase was the net result of increases of 15 percent ($2.1 million) in North American irrigation equipment revenues and 189 percent ($3.1 million) in export irrigation equipment revenues more than offsetting a 3 percent ($0.2 million) reduction in diversified products revenue.
During the first quarter of Fiscal 1996, North American irrigation equipment revenue and demand continued to be favorably impacted by ongoing emphasis by farmers to conserve water, energy, and labor. Additionally, during the quarter, Lindsay conducted several sales and marketing programs which served to encourage dealers and customers to take early delivery of irrigation equipment in preparation for the spring planting season. This may have, to some extent, resulted in sales being pulled forward from our second and third quarters, enabling the company to better service our dealers during the peak North American selling season of January through May.
As anticipated, export irrigation equipment revenue for the first quarter of fiscal 1996 was favorably impacted by increased sales to irrigation equipment dealers in the Mexican and Latin American, Australian and Western European markets. The slight decrease in diversified products revenue during the first quarter of fiscal 1996 as compared to the first quarter of fiscal 1995 was the net result of an increase in outsource manufacturing sales being more than offset by a reduction in revenues from large diameter steel tubing.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Gross margin for the three months ended November 30, 1995 was 23.5 percent, up from 22.6 percent of the prior year's comparable period. First quarter gross margin benefited from higher manufacturing efficiencies, stable raw material costs and a favorable pricing environment.
First quarter fiscal 1996's selling, general and administrative, and engineering and research expenses were, in total, almost equal to the prior year's comparative period, increasing only $27,000. Higher general and administrative and engineering and research expenses were partially offset by a reduction in selling expenses.
The effective tax rate for the first quarter of fiscal 1996 was 30.0 percent as compared to 32.0 percent for the comparative period of fiscal 1995. Due the federal income tax exempt status of interest income from its municipal bond investments and state economic developement tax credits, Lindsay benefits from an effective tax rate which is lower than the combined federal and state statutory rates, currently estimated at 38.0 percent.
Lindsay's equity of $69.6 million at November 30, 1995 increased from $68.7 million at August 31, 1995, due to net earnings of $3.0 million, less $2.2 million used to repurchase 65,600 shares of common stock per Lindsay's previously announced stock repurchase plan. Lindsay's equity at November 30, 1994 was $70.1 million.
Lindsay's cash and short-term marketable securities totaled $22.6 million at November 30, 1995, as compared to $23.3 million at August 31, 1995, and $14.9 million at November 30, 1994. Receivables of $15.3 million at November 30, 1995 increased $4.9 million from $10.4 million at August 31, 1995 and $4.3 million from $11.0 million at November 30, 1994 due to the higher level of North American and export irrigation equipment sales activity during November 1995 and a marketing program that offered extended payment terms to our dealers. Inventories at November 30, 1995 totaled $6.3 million, higher than their $5.4 million balance at August 31, 1995 and $6.0 million balance at November 30, 1994, but continuing in an acceptable range. At November 30, 1995, Lindsay had $31.1 million invested in long-term marketable securities which represent intermediate term (one to three year maturities) municipal debt. This is down from $34.0 million at August 31, 1995 and $46.6 million at November 30, 1994.
Current liabilities of $18.8 million at November 30, 1995 are higher than their $15.9 million balance at August 31, 1995 and lower than their $19.6 million balance at November 30, 1994. The increase from August 31, 1995 is principally due to increased trade payables, international dealer prepayments and higher accruals for taxes payable. The decrease from November 30, 1994 is primarily due to lower accruals for legal settlements, environmental remediation and international dealer commissions partially offset by increased trade payables and higher accruals for taxes payable and payroll and vacation pay.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Capital expenditures totaling $1,373,000 for the first quarter of 1996 were used primarily for upgrading manufacturing plant equipment. Lindsay expects its Fiscal 1996 capital expenditures to be approximately $3.0 to $3.5 million which will be used principally to improve Lindsay's existing facilities and expand its manufacturing capabilities.
Lindsay believes its capitalization (including cash and marketable securities balances) and operating cash flow are sufficient to cover expected working capital needs, planned capital expenditures and continued repurchases of common stock.
Irrigation equipment sales are seasonal by nature. Farmers generally order systems to be delivered and installed before the growing season. Shipments to North American customers usually peak during March and April for the spring planting period. Lindsay's expansion into diversified products complements its irrigation operations by using available capacity and reducing seasonality.
Lindsay's domestic and international irrigation equipment sales are highly dependent upon the need for irrigated agricultural production, which in turn, depends upon many factors, including total worldwide crop production, the profitability of agricultural production, commodity prices, aggregate net farm income, governmental policies regarding the agricultural sector, water and energy conservation policies, and regularity of rainfall.
Approximately 17 and 7 percent of Lindsay's operating revenues for the first quarter of 1996 and 1995 respectively, were generated from export sales. For the full year of 1995, approximately 10 percent of Lindsay's operating revenues were generated from export sales. Lindsay does not believe it has significant exposure to foreign currency translation risks because its export sales are all in U.S. dollars and are generally all shipped against prepayments or irrevocable letters of credit which are confirmed by a U.S. bank.
In October 1995, FASB issued statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans and transactions in which goods or services are the consideration received for the issuance of equity instruments. This statement requires that an employer's financial statements include certain disclosures about stock-based employee compensation regardless of the method used to account for them. Adoption is required for fiscal years, beginning after December 15, 1995, Lindsay's Fiscal 1997 or earlier. Lindsay expects to continue its accounting in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees".
Lindsay is a party to a number of lawsuits arising from environmental and other issues in the ordinary course of its business. Management does not believe that these lawsuits, either individually or in the aggregate, are likely to have a material adverse effect on Lindsay's financial condition, results of operations or cash flows.
Environmental contamination at Lindsay's manufacturing facility occurred in 1982 when a drill, operated by a sub-contractor installing groundwater monitoring wells, punctured a silt and sand lens and an underlying clay layer beneath a clay-lined lagoon. The 1982 puncture of the clay layer caused acid and solvent leachate to enter the sand and gravel aquifer.
Since 1983, Lindsay has worked actively with the Nebraska Department of Environmental Control ("NDEC") to remediate this contamination by purging and treating the aquifer. In October 1989, the Environmental Protection Agency ("EPA") added Lindsay to the list of priority Superfund sites. In 1988, a sampling which was performed in connection with an investigation of the extent of aquifer groundwater contamination, revealed solvent contamination (volatile organic compounds) in the soil and shallow groundwater in three locations at and in the vicinity of the plant. Under a 1988 agreement with the EPA and NDEC, Lindsay conducted a Remedial Investigation/Feasibility Study ("RI/FS"). This study was completed in June 1990. Lindsay does not believe that there is any other soil or groundwater contamination at the manufacturing facility.
In September 1990, the EPA issued its Record of Decision ("ROD") selecting a plan for completing the remediation of both contaminations. The plan selected for aquifer remediation was in line with Lindsay's expectations. However, the plan for remediation of the soil and shallow groundwater contamination proposed a higher degree of remediation than the company had previously expected. Therefore, Lindsay recognized an additional $2.9 million accrual in the fourth quarter of Fiscal 1990. The selected plan implementation was delayed until finalization of the Consent Decree in April 1992. Due to this delay, Lindsay recognized an additional accrual of $0.6 million in the fourth quarter of Fiscal 1991 and $0.8 million in the fourth quarter of Fiscal 1992. The final remediation plans were approved in 1993 and 1994 and the remediation plans were fully implemented during Fiscal 1995.
The total balance sheet reserve for this remediation was $2.1 million at November 30, 1995 compared to $1.9 million at Fiscal 1995 year end, reflecting an increase to the reserve of $0.3 million and costs of $0.1 million during Fiscal 1996 for the continued implementation of the plans.
Lindsay believes that the current reserve is sufficient to cover the estimated total cost for complete remediation of both the aquifer and soil and shallow groundwater contaminations under the final plans. Lindsay believes that its insurer should cover costs associated with the contamination of the aquifer that was caused by the puncture of the clay layer in 1982. However, Lindsay and the insurer are in litigation over the extent of the insurance coverage. (See Note 5. Commitments and Contingent Liabilities) If the EPA or the NDEC require remediation which is in addition to or different from the current plan and depending on the success of Lindsay's litigation against the insurer, this reserve could increase or decrease depending on the nature of the change in events.
Item 6. Exhibits and Reports on Form 8-K
4 - Specimen Form of Common Stock Certificate incorporated by reference to Exhibit 4 of Amendment No. 3 to the Company's Registration Statement on Form S-1 (Registration No. 33-23084), filed September 23, 1988. 11 - Statement re Computation of Per Share Earnings.
(b) Reports on Form 8-K -
No Form 8-K was filed during the quarter ended November 30, 1995.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: January 10, 1996 Bruce C. Karsk Vice President - Finance, Treasurer and Secretary; Principal Financial and Accounting Officer
Date: January 10, 1996 Ralph J. Kroenke | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T12:09:28 |
0000950124-96-000212 | 0000950124-96-000212_0003.txt | <DESCRIPTION>NOTE CONVERSION AGREE. - CONFIA/CO.
This Agreement is entered into as of the 29th day of September, 1995 by and between Rodman & Renshaw Capital Group, Inc. (the "Company") and Confia, S.A., Institucion de Banca Multiple, Abaco Grupo Financiero, a banking corporation incorporated under the laws of the United Mexican States ("Confia").
WHEREAS, Confia has loaned the Company $14,000,000, all of which is outstanding, and the Company has requested that Confia lend the Company an additional $2,500,000 on or prior to September 30, 1995 to fund the payment of such amount which is due to a third party lender on or before such date, and to issue a standby letter of credit for the account of the Company in the amount of $6,000,000 to make available sale/leaseback financing from a third party
WHEREAS, the additional credit requested by the Company would cause the aggregate credit to exceed the amount of the line of credit Confia had
WHEREAS, all of the credit provided by Confia to the Company is unsecured and the loans have been effectively subordinated as a result of the Company lending the proceeds of the loans to its wholly-owned subsidiary, Rodman & Renshaw, Inc., on a subordinated basis;
WHEREAS, the Company is in urgent need of the requested additional financing to continue the operations of Rodman & Renshaw, Inc., the Company's
WHEREAS, the Company has determined that no reasonable alternative source of financing currently is available;
WHEREAS, Abaco Casa de Bolsa, S.A. de C.V., Abaco Grupo Financiero, Confia's sister company ("Abaco"), owns 67% of the issued and outstanding
WHEREAS, to induce Confia to provide the requested financing the Company is agreeing on the terms and conditions set forth herein to grant Confia the right to convert the outstanding amount of credit referred to above in addition to the credit to be extended pursuant to the request of the Company, into shares of the Company's common stock at a conversion price equal to the book value per share of the common stock determined on the date of conversion in accordance with this Agreement; and
WHEREAS, the Company would derive substantial benefit from the conversion of its indebtedness to Confia into equity.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties agree as follows:
1. Certain Definitions. The terms defined in this Section 1 shall have the meanings herein specified.
Common Stock. The term "Common Stock" shall mean all shares now or hereafter authorized of any class of Common Stock of the Company and any other stock of the Company howsoever designated, authorized after the date hereof, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in the distribution of the assets and earnings of the Company without limit as to per share amount.
Conversion Price. The term "Conversion Price" shall mean the price per share of Common Stock used to determine the number of shares of Common Stock deliverable upon conversion of the Notes, which price shall be determined on a floating basis and shall equal the book value per share of Common Stock from time to time determined in accordance with generally accepted accounting principles from the Company's financial statements for the most recent fiscal quarter (or fiscal year end if more recent) as to which financial statements have been filed with a governmental or regulatory authority prior to the date of the conversion, subject to further adjustment in accordance with the provisions of Section 7 below.
Holder. The term "Holder" shall mean any person who at the time shall be the registered holder of a Note, provided that such person is Confia, Abaco or an affiliated company.
Letter of Credit. The term "Letter of Credit" shall have the meaning set forth in the first "WHEREAS" clause.
Note. The term "Note" shall mean (i) any promissory note issued by the Company to Confia on or prior to September 30, 1995 and representing indebtedness for borrowed money and (ii) the promissory note to be issued by the Company representing potential indebtedness for reimbursement from any drawdown of the Letter of Credit, provided that the obligations under such promissory note are contingent upon, and such promissory note shall not be deemed outstanding for purposes of this Agreement until, payment by Confia to the beneficiary of the Letter of Credit upon a drawdown, and in such event the outstanding principal amount thereof shall be equal to the aggregate of such payments by Confia.
2. Additional Financing. Confia agrees to lend the Company $2,500,000 on or prior to September 30, 1995 for the purpose of funding the repayment of subordinated indebtedness to a third party which is due on such date. Confia further agrees to issue a standby letter of credit for the account of the Company in the amount of $6,000,000 for the purpose of making available to the Company the Letter of Credit.
3. Aggregate Financing. Including the amount of the Letter of Credit and the amount to be loaned pursuant to the terms hereof, the aggregate principal amount of the credit outstanding from Confia to the Company is $22,500,000.
4. Book Value of Shares. The book value per share of Common Stock determined in accordance with this Agreement as of June 30, 1995 and, accordingly, the Conversion Price as of the date hereof, subject to adjustment, is $3.04.
5.1. Conversion. Upon and after satisfaction of the condition set forth in Section 5.2 below, any Holder has the right, at its option, at any time prior to payment in full of the principal payment of any Note, to convert such Note, in accordance with the provisions of Section 6 hereof, in whole or in part, to the extent outstanding and convertible under Section 5.2, into fully paid and nonassessable shares of Common Stock of the Company. The number of shares of Common Stock into which a Note may be converted ("Conversion Shares") shall be determined by dividing the aggregate outstanding principal amount of a Note together with any accrued interest to the date of conversion by the Conversion Price in effect at the time of such conversion; provided, however, that the number, character and Conversion Price of such shares of Common Stock are subject to adjustment as provided in Section 7 below.
5.2. Conversion Condition. So long as the New York Stock Exchange Inc. ("NYSE") stockholder approval requirements shall be applicable, a Note shall be convertible only to the extent that such conversion is approved by the stockholders of the Company, if so required. The parties understand that no stockholder approval would be required for any conversion of Notes made in connection with a rights offering to all stockholders at a per share cash price equal to the Conversion Price pursuant to which the stockholders (other than Abaco whose rights to purchase shares in the offering would be deemed exercised and consummated by the conversion) could purchase the number of shares proportional to the number of shares issued upon conversion ("Rights Offering").
6.1 Notice of Conversion. Before the Holder shall be entitled to convert a Note into shares of Common Stock it shall give written notice to the Company at the principal corporate office of the Company, of the election to convert a Note in whole or in part, as the case may be, pursuant to Section 5, shall surrender the Note, duly endorsed, and shall designate in writing the name or names in which the certificate or certificates for shares of Common Stock are to be issued, provided that such person must be Confia, Abaco or an affiliated company thereof. Such conversion shall be deemed to have been made immediately upon the date of surrender of the Note and the person or persons receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date.
6.2 Delivery of Stock Certificates and Replacement Note. As promptly as practicable after the conversion of a Note pursuant to Section 5, the Company at its expense will issue and deliver to the Holder of a Note at the registered address of the Holder a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion (bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to the Company), together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Agreement. If less than the entire outstanding portion of the Note is converted, then the Company at its expense together with the share certificates will deliver to the Holder a replacement note identical to the Note surrendered except in the principal amount of the remaining principal balance.
6.3 Mechanics and Effect of Conversion. No fractional shares of Common Stock shall be issued upon conversion of a Note. In lieu of the Company issuing any fractional shares to the Holder upon the conversion of a Note, the Company shall pay to the Holder the amount of outstanding principal that is not so converted, such payment to be made as soon as practicable after conversion of a Note by wire transfer to an account designated by the Holder. Upon conversion of the entire principal amount of a Note, the Company shall be forever released from all its obligations and liabilities under such Note, except that the Company shall be obligated to pay the Holder, within ten (10) days after the date of such conversion, any interest accrued and unpaid or unconverted to and including the date of such conversion, and no more.
7. Merger, Sale of Assets, etc. If at any time while any Note, or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (iii) a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as a part of such reorganization, merger, consolidation, sale or transfer, the Conversion Price shall be appropriately adjusted so that the Holder shall thereafter be entitled to receive upon conversion of a Note, during the period specified herein, the number of shares of stock or other securities or property of the successor corporation resulting from such reorganization, merger, transfer that a holder of the shares deliverable upon conversion of a Note would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if the Note had been converted immediately before such reorganization, merger, consolidation, sale or transfer. The foregoing provisions of this Section 7 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the conversion of a Note. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Agreement with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Agreement shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon conversion of a Note.
8. Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the Notes such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of the Notes; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the entire outstanding principal amount of the Notes, together with accrued interest thereon, in addition to such other remedies as shall be available to the holder of the Notes, the Company will use its best efforts to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.
(a) Whenever the Conversion Price or number of shares into which the Notes are convertible shall be adjusted pursuant to Section 7 hereof, the Company shall issue a certificate signed by its Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Conversion Price and number of shares into which the Notes are convertible after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first-class mail, postage prepaid) to the Holder.
(b) In the event of:
(i) any taking by the Company of a record of the holders of any class of securities of the Company for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the same rate as that of the last such cash dividend theretofore paid) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right,
(ii) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to any other person or any consolidation or merger involving the Company, or
(iii) any voluntary or involuntary dissolution, liquidation or winding-up of he Company,
the Company will mail to the holder of the Notes at least ten (10) days prior to the earliest date specified therein, a notice specifying:
(A) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right, and
(B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding-up is expected to become effective and the record date for determining stockholders entitled to vote thereon.
10. Assignment. Subject to the restrictions on transfer imposed by applicable law, the rights and obligations of the Company and Confia shall be binding upon and benefit the successors and permitted assigns of the parties, provided, however, that the rights of Confia may be assigned only to Abaco or another affiliated company thereof.
11. No Stockholder Rights. Nothing contained in this Agreement shall be construed as conferring upon the Holder or any other person the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company; and no dividends shall be payable or accrued in respect of any Note or the shares of Common Stock obtainable hereunder until, and only to the extent that, the Note shall have been converted.
12. Stockholder Approval/Rights Offering. On one or more occasions, the Holder may at its election require the Company (i) to call a special meeting of its stockholders as soon as practicable after such request to approve the conversion of Notes into shares of Common Stock in accordance with the terms hereof, (ii) include such approval on the agenda of the next annual meeting of stockholders, or (iii) conduct a Rights Offering as soon as practicable after such request, and in any such case to promptly cause the shares issued upon conversion to be listed on the NYSE. In the case of clauses (i) or (ii) above, Confia agrees to cause Abaco and all of its affiliated companies to vote all of the shares of the Company held by it for such approval. In the event that any Notes are converted and clause (iii) is not elected in connection therewith, Confia and the Company agree that a Rights Offering will be made within one year after the conversion of the Notes at a price per share equal to the Conversion Price used in such conversion.
13. Investment Intent. Any shares of Common Stock which may be acquired upon conversion of the Notes will be acquired by Confia or its assigns or designees for their own account and not with a view to, or for resale in connection with, any distribution. Confia acknowledges that it is aware of the applicable limitations under the Securities Act of 1933, as amended, upon the sale of any such shares of Common Stock and that accordingly, certificates representing such shares may bear an appropriate legend.
14. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of Delaware, excluding that body of law relating to conflict of laws.
A. Amendment, Modification and Waiver. This Agreement may be amended, modified and supplemented, in writing only, by mutual consent of the parties hereto. No failure on the part of any party to exercise any right, power or privilege hereunder shall operate as a waiver.
B. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument.
C. Headings; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Agreement. Except where otherwise indicated, all references herein to sections refer to sections hereof.
D. Entire Agreement. This Agreement contains the entire understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.
RODMAN & RENSHAW CAPITAL GROUP, INC.
By: /s/ Charles W. Daggs, III Name: Charles W. Daggs, III
CONFIA, S.A., INSTITUCION DE BANCA MULTIPLE,
By: /s/ Mario S. Velasco Coppel Name: Mario S. Velasco Coppel | SC 13D | EX-3 | 1996-01-12T00:00:00 | 1996-01-12T13:22:08 |
0000950134-96-000090 | 0000950134-96-000090_0000.txt | <DESCRIPTION>STAGECOACH TRUST SUPPLEMENT DATED 1/2/96
SUPPLEMENT DATED JANUARY 2, 1996 TO THE PROSPECTUS DATED JUNE 28, 1995 AND THE STATEMENT OF ADDITIONAL INFORMATION
Effective January 1, 1996, BZW Barclays Global Fund Advisors ("BGFA") replaced Wells Fargo Bank, N.A. ("Wells Fargo") as investment adviser to each of the LifePath 2000, LifePath 2010, LifePath 2020, LifePath 2030 and LifePath 2040 Master Series (the "Master Series") of Master Investment Portfolio. BGFA was created by the reorganization of Wells Fargo Nikko Investment Advisors ("WFNIA"), the former sub-adviser to each Master Series, with and into an affiliate of Wells Fargo Institutional Trust Company, N.A. ("WFITC"). Pursuant to an Investment Advisory Contract with each Master Series, BGFA provides investment guidance and policy direction in connection with the management of each Master Series' assets. The same WFNIA investment professionals that were previously responsible for the day-to-day management of each Master Series' investment portfolio will continue to manage each Master Series' investment portfolio using the approach developed by WFNIA. BGFA is entitled to receive as compensation for its advisory services to each Master Series a monthly fee at the annual rate of 0.55% of the average daily net assets of such Master Series. Effective January 1, 1996, each Master Series no longer retains a sub-investment adviser. BGFA is an indirect subsidiary of Barclays Bank PLC and is located at 45 Fremont Street, San Francisco, CA 94105. As of January 1, 1996, BGFA and its affiliates provide investment advisory services for over $220 billion of assets.
Effective January 1, 1996, WFITC, due to a change in control of its outstanding voting securities, became a wholly owned subsidiary of BZW Barclays Global Investors Holdings Inc. (formerly, The Nikko Building U.S.A., Inc.) and was renamed BZW Barclays Global Investors, N.A. ("BGI"). BGI currently acts as custodian to each Master Series. BGFA is a subsidiary of BGI. BGI will not be entitled to receive compensation for its custodial services so long as BGFA is entitled to receive fees for providing investment advisory services to the Master Series. The principal business address of BGI is 45 Fremont Street, San Francisco, California 94105.
Each of the Master Series has adopted a "defensive" 12b-1 Plan (a "Plan"). The Plan will not increase the overall level of fees or other expenses of the Master Series or the Funds.
The Prospectus describing the Institutional Class Shares of the LifePath Funds, the Prospectus describing the Retail Class Shares of the LifePath Funds and the Statement of Additional Information describing each Class are each hereby amended accordingly. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T12:14:46 |
0000899733-96-000001 | 0000899733-96-000001_0000.txt | CERTIFICATION AND NOTICE OF TERMINATION OF REGISTRATION UNDER SECTION 12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR SUSPENSION OF DUTY TO FILE REPORTS UNDER SECTIONS 13 AND 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
(Exact name of registrant as specified in its charter)
(Title of each class of securities covered by this Form)
(Titles of all other classes of securities for which a duty to file reports under section 13(a) or 15(d) remains)
Please place an X in the box(es) to designate the appropriate rule provision(s) relied upon to terminate or suspend the duty to file reports:
Rule 12g-4(a)(1)(i) [ ] Rule 12h-3(b)(1)(i) [ ] Rule 12g-4(a)(1)(ii) [ ] Rule 12h-3(b)(1)(ii) [ ] Rule 12g-4(a)(2)(i) [ ] Rule 12h-3(b)(2)(i) [ ] Rule 12g-4(a)(2)(ii) [ ] Rule 12h-3(b)(2)(ii) [ ]
Approximate number of holders of record as of the certification
Pursuant to the requirements of the Securities Exchange Act of 1934 Nu-West Industries, Inc. has caused this certification/notice to be signed on its behalf by the undersigned duly authorized person.
Date: __January 12, 1996____ By: __/s/Dorothy E.A. Bower_ Dorothy E.A. Bower, General Counsel Instruction: This form is required by Rules 12g-4, 12h-3 and 15d-6 of the General Rules and Regulations under the Securities Exchange Act of 1934. The registrant shall file with the Commission three copies of Form 15, one of which shall be manually signed. It may be signed by an officer of the registrant, by counsel or by any other duly authorized person. The name and title of the person signing the form shall be typed or printed under the signature. | 15-12G | 15-12G | 1996-01-12T00:00:00 | 1996-01-12T11:22:19 |
0000950134-96-000104 | 0000950134-96-000104_0000.txt | <DESCRIPTION>FORM 8-K/A DATED NOVEMBER 30, 1995
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported)
CONTINENTAL MORTGAGE AND EQUITY TRUST (Exact Name of Registrant as Specified in its Charter)
(State of Incorporation) (Commission (IRS Employer
10670 North Central Expressway, Suite 300, Dallas, TX 75231 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 692-4700
(Former Name or Former Address, if Changed Since Last Report)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
This Form 8-K/A amends a Form 8-K Current Report dated November 30, 1995 and filed December 27, 1995 by Continental Mortgage and Equity Trust (the "Trust") and provides required financial statements that were not available at the date of the original filing.
(a) Pro forma financial information:
Pro forma statements of operations are presented for the year ended December 31, 1994 and the nine months ended September 30, 1995. A pro forma balance sheet as of September 30, 1995 is also presented.
A summary of the pro forma transactions follows:
In November 1995, the Trust purchased Willow Wick Apartments, a 104 unit apartment complex in North Augusta, South Carolina for $1.5 million, exclusive of commissions and closing costs. The Trust paid $595,000 in cash and assumed the existing first mortgage in the amount of $930,000. The mortgage bears interest at a rate of 7% per annum, requires monthly payments of principal and interest of $8,000 and matures in January 2013.
In December 1995, the Trust purchased Heritage on the River Apartments, a 301 unit apartment complex in Jacksonville, Florida for $7.9 million, exclusive of commissions and closing costs. The Trust paid $1.4 million in cash, assumed the existing first mortgage in the amount of $6.3 million and the seller provided additional financing in the amount of $193,000. The mortgages bear interest at a variable rate, currently 9.18% per annum, require monthly payments of interest only and mature in December 1998.
The combined $9.4 million purchase price of Willow Wick and Heritage on the River Apartments is approximately 5.1% of the Trust's consolidated assets at December 31, 1994. Although not a significant acquisition in themselves, when aggregated with the other acquisitions completed by the Trust in 1995 as described below, such acquisitions constitute a significant acquisition.
In addition to the Willow Wick and Heritage on the River Apartments acquisitions discussed above, the Trust purchased two other apartment complexes and two commercial properties in 1995. The properties, located in Virginia, Texas and Florida, were purchased for a total of $26.0 million in separate transactions from unaffiliated sellers, and represent approximately 14.2% of the Trust's consolidated assets at December 31, 1994. The Trust paid a total of $5.1 million in cash and financed the remainder of the purchase prices. The mortgages bear interest at rates ranging from 6.0% to 9.9% and mature from 1997 to 2002.
The pro forma statements of operations present the Trust's operations as if the transactions described above had occurred at the beginning of each of the periods presented.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Financial statements of property acquired:
CONTINENTAL MORTGAGE AND EQUITY TRUST
CONTINENTAL MORTGAGE AND EQUITY TRUST CONSOLIDATED BALANCE SHEET - Continued
(1) Assumes acquisition of Willow Wick and Heritage on the River Apartments by the Trust on January 1, 1995. The effects of all other 1995 property purchases are included in the September 30, 1995 actual balances.
CONTINENTAL MORTGAGE AND EQUITY TRUST NINE MONTHS ENDED SEPTEMBER 30, 1995
(1) Assumes acquisition by the Trust on January 1, 1995.
CONTINENTAL MORTGAGE AND EQUITY TRUST YEAR ENDED DECEMBER 31, 1994
(1) Assumes acquisition by the Trust on January 1, 1994.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized.
Date: January 12, 1996 By: /s/ Thomas A. Holland
CONTINENTAL MORTGAGE AND EQUITY TRUST
CURRENT REPORT ON FORM 8-K/A | 8-K/A | 8-K | 1996-01-12T00:00:00 | 1996-01-12T16:31:53 |
0000899243-96-000018 | 0000899243-96-000018_0000.txt | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS
Incorporated in California Federal Employer No. 94-1441151
11171 Sun Center Drive, Suite 120, Rancho Cordova, CA 95670 Mail Address: P.O. Box 580, Rancho Cordova, CA 95741 Telephone: Area Code (916) 852-8005
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Capital Stock Outstanding as of November 29, 1995 - 5,047,619 shares
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS
PART I - FINANCIAL INFORMATION
See accompanying notes to condensed consolidated financial statements.
(in thousands except per share amounts)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Description of Business and Significant Accounting Policies:
American Recreation Centers, Inc. and its subsidiaries (the Company) operate bowling centers in California, Texas, Wisconsin, Oklahoma, Kentucky and Missouri.
There have been no changes in the Company's significant accounting policies as set forth in the Company's annual report. These unaudited financial statements as of November 29, 1995 and for the thirteen and twenty-six week periods ended November 29, 1995 and November 23, 1994 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Reflecting the sale of The Right Start, Inc. on August 4, 1995, its revenues and expenses are no longer consolidated in ARC's operating income and expenses. Right Start's profit or loss is now shown as "Discontinued Operations" in ARC's statement of income. Prior year statements have been restated to reflect this change.
NOTE 2 - Long-term Debt:
Long-term debt is comprised of the following (in thousands):
The results of operations for these thirteen and twenty-six week periods are not necessarily indicative of the results to be expected for the entire year. Bowling is highly seasonal with revenue during the first quarter normally not exceeding 18% to 22% of those for a full year. Second quarter revenue typically represents between 25% to 27% of the full year.
NOTE 4 - Earnings Per Share of Common Stock:
Earnings per share is computed on the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Common stock equivalents include the Company's stock options. The weighted average number of common shares and common stock equivalents outstanding were 5,059,557 and 5,018,905 for the thirteen week periods ended November 29, 1995 and November 23, 1994; and 5,057,241 and 5,011,323 for the twenty-six week periods then ended.
NOTE 5 - Acquisitions and Dispositions:
In July 1994, the Company's 90 percent-owned partnership sold its Budget Mini- Storage facility in Milpitas, California for $3,600,000. Proceeds were used to retire $2,500,000 in long-term debt and to acquire bowling centers in Milwaukee, Wisconsin. The Company recorded an after-tax gain of approximately $1,000,000, or $.21 per share.
On September 16, 1994, the Company's 85 percent-owned joint venture, American Red Carpet, completed the acquisition of substantially all of the Red Carpet bowling chain in Milwaukee, Wisconsin. The $8,000,000 purchase price included the land, building and equipment of six bowling centers totaling 316 lanes.
The sale of the Budget Mini-Storage and the acquisition of the Milwaukee centers was accounted for as a like-kind exchange for income tax purposes.
NOTE 6 - Gain on Sale of The Right Start, Inc.:
On August 4, 1995, the Company sold its 62.5 percent ownership in The Right Start, Inc. for $11,811,000 in cash and recorded a $2,251,000 after-tax gain, equal to $.45 per share, in the first quarter of fiscal 1996. Also, the Company received an option to reacquire up to 400,000 shares of The Right Start, Inc. common stock at exercise prices ranging from $3.30 to $6.00 over a seven year period. In connection with the transaction, the Company has agreed to reimburse The Right Start, Inc. up to $680,000 should it be unable to sustain ordinary loss treatment for its deferred loss tax carry-forward and it have sufficient taxable income in or before its fiscal year 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating revenue for the second quarter of fiscal 1996 rose slightly to $11.5 million from $11.4 million in the prior year. Net income from continuing operations for the quarter was $383,000, or $.08 per share compared to $429,000, also $.08 per share last year.
Operating revenue for the six months ended November 29, 1995 increased 3% from $19.7 million to $20.3 million. Net income from continuing operations for the same period declined from $975,000, or $.18 per share in the year earlier period to a loss of $271,000, or $.05 per share. However, last year's results included a gain from the sale of a mini-warehouse totaling $1.07 million, or $.21 per share.
Discontinued operations includes the gain on sale of the Company's investment in The Right Start, Inc. on August 4, 1995 and the Company's share of that entity's operations through the date of sale for fiscal 1996, and for the six months ended November 23, 1994 for fiscal 1995. The sale price for the Company's 3,937,000 shares was $11,811,000 cash plus an option to reacquire up to 400,000 shares of The Right Start's common stock at exercise prices ranging from $3.30 to $6.00 over a seven year period.
Second quarter bowling revenue increased 1% from $11.2 million to $11.3 million due to the acquisition near the beginning for the second quarter last year of six centers in Milwaukee, Wisconsin. Revenue for comparable centers was down 3% as a 5% increase in revenue in our Texas centers was more than offset by a nearly 6% decline in our California centers. Revenue at the five Mid-America centers was flat. California's revenue decline is attributable to an industry- wide downturn in California where revenue at both Company-owned and competitors lag behind our non-California centers and the rest of the industry. Furthermore, unseasonably dry and mild weather in the important fall months also hurt open play and league lineage in California. Marketing activities have been intensified in California in an effort to increase bowler traffic.
Bowling operating income for the second quarter declined 16% from $1.6 million to $1.3 million. Incremental second quarter operating profit from the acquisition of the six Milwaukee centers was not enough to offset the loss of revenue at comparable centers. The second quarter decline in operating income at comparable centers was $277,000, the same as the decline in revenue at those centers.
Revenue for the six months ended in November rose 4% from $19.2 million to $19.9 million due to the Milwaukee centers acquisition. Comparable center revenue declined 2%. California center revenue was off almost 5% for the period, while Texas center revenue climbed 5%. Mid-America centers were off less than 1%.
Operating income for the six months declined from $1.4 million to $975,000, primarily due to the Milwaukee centers acquisition. These centers, which traditionally operate at a loss during the summer months which constitute the Company's first quarter, were not owned during last year's first quarter. This year, they contributed a $200,000 loss for that period. (Second quarter and year-to-date results for these centers are profitable). Operating income from comparable centers for the six month period declined 10%, or 105,000 due to a $333,000 decline in revenue at those centers. The decline in operating income was less than the decline in revenue due to improved cost controls, particularly in staffing costs.
Late in 1995, the Company embarked upon a plan to test the concept of broadening the Company's operations form one that offers primarily bowling as family entertainment into one that offers a broader menu of recreation options, with bowling being only one alternative. Two test locations were recently completed. Ten bowling lanes of a former 60-lane center in San Jose, California was converted to space that provides for other forms of entertainment and expanded food and beverage operations targeted primarily to families with young children. This facility opened late in the second quarter of 1996. Secondly, a 49,000 square foot family entertainment center in Addison, Texas opened in the middle of December. This facility blends bowling with other recreation formats designed to attract young adult customers. Both concepts are designed to create a broader base of entertainment revenue in our facilities. Future expansion of these concepts will be based on the results of these two tests.
Other operating activities include the Company's non-bowling real estate activities. The decline in the revenue and operating income from these activities was due to the sale of the Budget Mini-Storage in Milpitas, California (see Gain on Property Transactions below) and results of the Company's Sun Center office building. Two substantial tenants were recently lost to lease expiration, which impacted the project's revenue and profitability. These tenants have now been replaced and the building is over 90% leased.
Corporate expense includes the costs of the corporate office and staff, shareholder relations, directors' fees, professional and consulting fees, and other costs not allocable to operating activities.
During the first quarter of last year, the Company's 90% owned partnership sold its Budget Mini-Storage facility for $3.6 million. Proceeds were used to retire $2.5 million in long-term debt and to acquire the six Red Carpet bowling centers in Milwaukee, Wisconsin.
At November 29, 1995, the Company had $11.6 million available under an unused bank commitment. Advances can be used to acquire, construct or refurbish bowling centers or to acquire other compatible recreation businesses and would bear interest at the prime rate plus .75%. An 85% owned joint venture has $2.7 million available under a separate bank commitment that can be used for the acquisition of bowling centers. Advances under this facility would bear interest at the prime rate plus 1%.
The Company also maintains various line-of-credit arrangements to augment seasonal shortfalls in working capital. At November 29, 1995 and November 23, 1994, there were no borrowings outstanding under the Company's $2 million line- of-credit. Advances under this line would bear interest at the prime rate plus .5%. There was $400,000 outstanding at November 23, 1994 under a $1 million line-of-credit which is designated for use by one of the Company's wholly-owned subsidiaries. There were no borrowings outstanding under this line at November 29, 1995. Any advances would bear interest at the prime rate plus 1%.
The Company has paid quarterly cash dividends for over 27 consecutive years. The second quarter dividend of $.0625 per share represents a 4% increase over last year when the quarterly dividend was $.06 per share.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date 1-12-96 Robert A. Crist
Date 1-12-96 Karen B. Wagner Karen B. Wagner, Vice President/Treasurer | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T16:50:02 |
0000883053-96-000008 | 0000883053-96-000008_0002.txt | 1.1(a) Copy of Standard Terms and Conditions of Trust between John Nuveen & Co. Incorporated, Depositor, and The Chase Manhattan Bank (National Association), Trustee. Filed as Exhibit 1.1(A) to the Sponsor's Registration Statement filed with respect to Series 823 (File No. 33-62325) and is incorporated herein by reference.
1.1(b) Trust Indenture and Agreement (to be supplied by amendment).
1.2* Copy of Certificate of Incorporation, as amended, of John Nuveen & Co. Incorporated, Depositor.
1.3** Copy of amendment of Certificate of Incorporation changing name of Depositor to John Nuveen & Co. Incorporated.
2.1 Copy of Certificate of Ownership (included in Exhibit 1.1(A) and Incorporated herein by reference).
3.1 Opinion of counsel as to legality of securities being registered (to be supplied by amendment).
3.2 Opinion of counsel as to Federal income tax status of securities being registered (to be supplied by amendment).
3.3 Consents of special state counsel to the Fund for state tax matters to use of their names in the Prospectus (to be supplied by amendment).
4.1 Consent of Standard + Poor's Corporation (to be supplied by amendment).
4.2 Consent of Kenny S+P Evaluation Services (to be supplied by amendment).
4.3 Consent of Carter, Ledyard & Milburn (to be supplied by amendment).
6.1 List of Directors and Officers of Depositor and other related information (incorporated by reference to Form S-6 [File No. 33-62325] filed on September 7, 1995 on behalf of Nuveen Tax-Exempt Unit Trust, Series 823).
*Incorporated by reference to Form N-8B-2 (File No. 811-1547) filed on behalf of Nuveen Tax-Exempt Unit Trust, Series 16.
**Incorporated by reference to Form N-8B-2 (File No. 811-2198) filed on behalf of Nuveen Tax-Exempt Unit Trust, Series 37. | S-6EL24 | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T15:54:26 |
0000719271-96-000007 | 0000719271-96-000007_0000.txt | [x] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number - 0-12321
State of Incorporation - Delaware IRS Employer Identification No. - 46-0278762
9393 West 110th Street, Suite 100, Overland Park, Kansas 66210 Telephone Number - (913) 451-2800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x . No.___.
Indicate the number of shares outstanding of each of the issuer's classes of common stock.
Common Stock, $0.01 par value as of August 9, 1995
PART I - FINANCIAL INFORMATION
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include Anuhco and all of its subsidiary companies ("the Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and have not been examined or reviewed by independent public accountants. In the opinion of management, all adjustments necessary to present fairly the results of operations have been made.
Pursuant to SEC rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements unless significant changes have taken place since the end of the most recent fiscal year. Anuhco believes that the disclosures contained herein, when read in conjunction with the financial statements and notes included, or incorporated by reference, in Anuhco's Form 10-K, filed with the SEC on March 10, 1995, are adequate to make the information presented not misleading. It is suggested, therefore, that these statements be read in conjunction with the statements and notes included, or incorporated by reference, in the aforementioned report on Form 10-K.
The Company accounts for income taxes in accordance with the liability method as required in the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The impact of significant temporary differences and carryforwards representing deferred tax assets and liabilities is determined utilizing the enacted tax rates expected to be in effect when such differences reverse. At December 31, 1994 the Company had utilized substantially all of its net operating loss and tax credit carryforwards, but anticipated the generation of additional tax attributes during 1995 from the continued winddown of its subsidiary, American Freight System, Inc. ("AFS") - See Note 6. The provision for income taxes during the second quarter and first six months represents the estimated tax provision, net of any such additional tax attributes to be generated by AFS.
In September 1988, the employees of Crouse Cartage Company ("Crouse Cartage"); a wholly owned subsidiary of Anuhco, approved the establishment of a profit sharing plan ("the Plan"). The Plan is structured to allow all employees (union and non-union) to ratably share 50% of Crouse Cartage's income before income taxes (excluding extraordinary items and gains or losses on the sale of assets) in return for a 15% reduction in their wages. Plan distributions are made on a quarterly basis. The Plan was recertified in 1991 and 1994, and shall continue in effect at least through March 31, 1998, or until a replacement of the Collective Bargaining Agreement is reached between the parties, whichever is later. The accompanying consolidated balance sheet for the period ended June 30, 1995 includes an accrual for profit sharing costs of $1,021,507. The accompanying consolidated statements of income include profit sharing costs of $1,021,507 and $2,186,690 for the second quarter and six months of 1995, respectively.
In September 1988, Crouse Cartage entered into a multi-year credit agreement with a commercial bank which provided for maximum borrowings equaling the lesser of $2,500,000 or the borrowing base, as defined in such agreement. In July, 1994 the term of this agreement was extended to June 30, 1996. There was no outstanding balance on this revolving line of credit at June 30, 1995.
Income per share is based on the average number of common shares outstanding during each period. The average number of common shares so computed was 7,555,234 and 7,554,424 for the quarter and year to date periods ending June 30, 1995, respectively, and 7,543,470 and 7,543,006 for the quarter and year to date periods ending June 30, 1994, respectively.
Under the provisions of a Joint Plan of Reorganization ("the Joint Plan"), AFS is responsible for the administration of pre-July 12, 1991 creditor claims and conversion of assets owned before that date. As claims are allowed and cash is available, distributions to the creditors occur. The Joint Plan also provides for distributions to Anuhco as unsecured creditor distributions occur in excess of 50% of allowed claims. Anuhco also receives the full benefit of any remaining assets of AFS through its ownership of AFS stock, if unsecured creditors receive distributions, including interest, equivalent to 130% of their claims.
AFS has made full payment of all its resolved claims and liabilities. In June 1995, AFS paid an additional dividend of $6.8 million to Anuhco. The remaining AFS net assets are estimated to have net realizable value of $14.9 million. The primary assets include over $14 million in cash and deposits and $4 million of receivables. Gross unresolved claims, primarily related to workers' compensation insurance coverage, are approximately $10 million.
AFS is in the process of resolving these claims, however until this process is completed the amount of liabilities cannot be ascertained. The ultimate resolution of the amounts, validity and priority of recorded liabilities and other claims is uncertain at this time. Accordingly, AFS net assets reflect estimated amounts due on such liabilities and claims.
7. Acquisition of Premium Finance Subsidiary
On May 31, 1995, Anuhco completed the acquisition of all of the issued and outstanding stock of Agency Premium Resource, Inc. and Subsidiary ("APR"). The purchase price, together with payments for certain services to be rendered by the sellers after closing, was approximately $11.5 million. In addition to the Stock Purchase Agreement by which Anuhco acquired all of the APR stock, Anuhco entered into a consulting agreement with Seafield Capital Corporation ("Seafield"), the former majority shareholder of APR, and an employment agreement with C. Ted McCarter, APR's president and chief executive officer. Under the former, Anuhco is entitled to consult with Seafield regarding APR for three years. Under the latter, APR is entitled to the continuation of Mr. McCarter's services as president and chief executive officer for five years. This transaction was accounted for as a purchase. Anuhco utilized a portion of its available cash to consummate the purchase. The terms of the acquisition and the purchase price resulted from negotiations between Anuhco and the APR shareholders, Seafield and APR's Chief Executive Officer, C. Ted McCarter.
APR offers premium financing and related services through approved insurance agencies, primarily throughout the midwestern United States. Its wholly owned subsidiary, Agency Services, Inc., provides motor vehicle report services throughout the same geographic area.
In connection with the purchase of APR, Anuhco recorded goodwill of $2.3 million, which will be amortized on the straight-line basis over 15 years, and a software and service agreement of $1.0 million, which will be amortized over 5 years.
APR has an agreement with a financial institution whereby it can sell undivided interests in a designated pool of accounts receivable, up to a maximum of $30 million, on an ongoing basis. Anuhco has assumed certain guarantees of the securitized receivables, $21.5 million as of June 30, 1995. The securitized receivables are reflected as sold and therefore not included in the accompanying consolidated balance sheet.
The following reflects the operating results of Anuhco for the second quarter and six months ended June 30, 1995 and 1994, assuming the acquisition occurred as of the beginning of each of the respective periods:
The pro forma results of operations are not necessarily indicative of the actual results that would have been obtained had the acquisition been made at the beginning of the respective periods, or of results which may occur in the future.
8. Restatement of Previously Issued Financial Statements
The accompanying financial statements for the quarter and six months ended June 30, 1995 have been restated to reclassify the recognition of certain tax benefits, related to the AFS Net Assets, from Income from Continuing Operations to Income from Discontinued Operations, as follows:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Second quarter and six months ended June 30, 1995 compared to the second quarter and six months ended June 30, 1994.
With the acquisition of APR on May 31, 1995, Anuhco now operates in two distinct industries; transportation, through its subsidiary, Crouse Cartage; and insurance premium finance, through its subsidiary, APR.
Transportation - A comparative summary of transportation operating expenses as a percent of transportation operating revenue follows:
Operating Revenue - The changes in transportation operating revenue are summarized in the following table (in thousands):
Less-than-truckload ("LTL") operating revenues fell by 5.2% in the second quarter of 1995 as compared to the same period of 1994. This decline for the current quarter is in comparison to the record quarter achieved by Crouse Cartage in 1994 due to the teamsters union strike against certain competitors and the closing of a regional competitor. During the second quarter of 1994, Crouse Cartage's freight volumes rose over 30%, compared to the same period of 1993, with minimal rate discounting due to the shortage of capacity within the industry. While Crouse Cartage has maintained a substantial portion of the additional freight volumes, LTL tonnage fell 3.4% in the second quarter of 1995. The trucking industry, including Crouse Cartage, was adversely impacted by the softening of the economy and competitive market pressures on freight rates during the second quarter of 1995.
LTL operating revenues rose 5.9% in the six months ended June 30, 1995, as compared to the six months ended June 30, 1994. This was the net result of the continuation of the post-strike impacts during the first quarter of 1995 in comparison to the pre-strike first quarter of 1994 and the relative decline in second quarter 1995 revenues discussed above. Total LTL tonnage was 6.7% higher for the six months of 1995.
Truckload operating revenues rose 1.9% and 3.6%, respectively, for the second quarter and six months of 1995, on increased numbers of TL shipments hauled of 1.2% and 3.6%, respectively. A 0.7% improvement in TL revenue per shipment in the second quarter of 1995 added to the volume increase in that period.
Operating Expenses - Crouse Cartage's operating expenses as a percentage of operating revenue, or operating ratio, rose from 92.3% to 96.1%, for the second quarter, and from 94.0% to 95.8%, for the six months of 1994 and 1995, respectively. These increases are primarily the result of higher salaries, wages and employee benefits costs caused by; (1) a contractual increase in wages effective April 1, 1995, and (2) contractual increase as a percentage of union scale for those additional employees hired to handle the increased freight volumes during and after the April, 1994 teamsters strike. Operating supplies and expenses also increased as a percentage of operating revenue for the second quarter and six months of 1995 as compared to the same periods of 1994, primarily due to higher fuel costs.
Premium Finance - The operating results of APR for the month of June 1995 are included in the second quarter and six months 1995 operating results. During the month of June 1995, APR financed $5.2 million in insurance premiums. APR's operating results were not material to Anuhco's consolidated operating revenue or net income for the second quarter or six months ended June 30, 1995.
In connection with the acquisition of APR, Anuhco recorded one- time expenses of approximately $300,000.
Other - As a result of its strong cash position, Anuhco recorded substantial increases in interest income for the second quarter and six months ended June 30, 1995, from the corresponding periods of 1994. Anuhco's effective tax rate for the second quarter and six months of 1995 was 43%. No provision was recorded during those periods of 1994 due to the company's utilization of certain tax net operating loss attributes. During the second quarter and six months of 1995, the Company recognized income from discontinued operations relating to additional deferred tax benefits.
The Company's financial condition remained strong at June 30, 1995 with no debt and over $34 million in cash and investments at the Anuhco level, as well as over $14 million in cash and investments included in the net assets of AFS. In June 1995, AFS paid a dividend of $6.8 million to Anuhco. During the second quarter of 1995 Anuhco completed the acquisition of APR and related software and services using $11.5 million in available funds. In addition, during the first six months of 1995, Crouse Cartage has purchased $3.8 million of operating property and equipment, without incurring any long term indebtedness.
In connection with the acquisition of APR, the Company became the guarantor of an agreement under which APR sells undivided interests in a designated pool of accounts receivable on an ongoing basis. The maximum allowable receivables to be sold under this agreement is $30 million and a total of $21.5 million of such receivables had been securitized as of June 30, 1995. This agreement has been extended by amendment to September 30, 1995. The Company has pledged $22.8 million of short-term investments to provide additional security to the receivable purchaser until a replacement financing arrangement is obtained. The Company is currently negotiating a replacement credit facility which it expects to close under similar terms. The Company has sufficient available cash and investments to finance APR's operations, even if an acceptable financing arrangement is not closed prior to the termination of the current arrangement.
On June 26, 1995, the Company adopted a program to repurchase up to 10% of its outstanding shares of common stock. This program was activated in July 1995 and is being funded from available cash and investments.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Reference is made to Item 3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting of Shareholders was held on May 23, 1995.
(b) The board of directors previously reported to the Commission was re-elected in its entirety.
(c) The matters voted upon at the Annual Meeting were as follows:
(1) All seven nominees for director were re-elected as follows:
(2) The selection of Arthur Andersen, LLP, as independent public accountants was ratified with 5,633,206 shares voting for, 46,979 shares voting against, 37,017 shares abstaining and 90,705 shares not voted by brokers.
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
2(a) Stock Purchase Agreement dated May 23, 1995 by and among Anuhco, Inc., Seafield Capital Corporation and C. Ted McCarter.
10(a) Consulting and Assignment Agreement dated May 31, 1995 by and between Seafield Capital Corporation and Anuhco, Inc.
10(b)(i) Receivables Purchase Agreement by and among Agency Premium Resource, Inc., Seafield Capital Corporation and Continental Bank N.A. dated July 16, 1993.
10(b)(ii) First Amendment to Receivables Purchase Agreement by and among Agency Premium Resource, Inc., Seafield Capital Corporation and Continental Bank N.A. dated September 15, 1993.
10(b)(iii) Second Amendment to Receivables Purchase Agreement by and among Agency Premium Resource, Inc., Seafield Capital Corporation and Continental Bank N.A. dated August 29, 1994.
10(b)(iv) Third Amendment to Receivables Purchase Agreement and Assumption Agreement by and among Agency Premium Resource, Inc., Seafield Capital Corporation, Anuhco, Inc. and Bank of America Illinois dated May 31, 1995.
19(a) Report to Shareholders for the Second Quarter, 1995, dated August 10, 1995.
(b) Reports on Form 8-K
(1) A Current Report on Form 8-K, dated May 23, 1995, was filed on May 23, 1995 to report the execution of definitive agreements for the acquisition of all of the outstanding stock of Agency Premium Resource, Inc. and Subsidiary.
(2) A Current Report on Form 8-K, dated May 31, 1995, was filed on June 15, 1995 to report the completion of the acquisition of all of the outstanding stock of Agency Premium Resource, Inc. and Subsidiary.
(3) Amendment Number 1 to Current Report on Form 8-K, dated May 31, 1995, was filed on July 21, 1995 to report the completion of the acquisition of all of the outstanding stock of Agency Premium Resource, Inc. and Subsidiary. The financial statements filed were as follows:
I. Historical Financial Statements of Agency Premium Resource, Inc. and Subsidiary (business acquired).
Condensed Interim Financial Statements (unaudited)
Consolidated Balance Sheet as of March 31, 1995
Consolidated Statements of Earnings for the Three Months Ended March 31, 1995 and 1994
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1995 and 1994
Notes to Condensed Interim Financial Statements
Report for KPMG Peat Marwick LLP, dated February 9,
Consolidated Balance Sheets as of December 31, 1994
Consolidated Statements of Earnings for the years ended December 31, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1993
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994 and 1993
Notes to Consolidated Financial Statements
II. Condensed Pro Forma Financial Statements of Anuhco, Inc. and Agency Premium Resource, Inc. (Unaudited)
Description of Pro Forma Financial Statements
Condensed Pro Forma Balance Sheet at March 31, 1995
Condensed Pro Forma Statement of Earnings for the year ended December 31, 1994
Condensed Pro Forma Statement of Earnings for the three months ended March 31, 1995
Notes to Pro Forma Financial Statements
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By: /s/ Timothy P. O'Neil
2(a) Stock Purchase Agreement dated May 23, 1995 by and among Anuhco, Inc., Seafield Capital Corporation and C. Ted McCarter (incorporated by reference from Exhibit 2(a) to the Current Report on Form 8-K dated May 31, 1995 filed by the Company with the Commission).
10(a) Consulting and Assignment Agreement dated May 31, 1995 by and between Seafield Capital Corporation and Anuhco, Inc. (incorporated by reference from Exhibit 10(a) to the Current Report on Form 8-K dated May 31, 1995 filed by the Company with the Commission).
10(b)(i) Receivables Purchase Agreement by and among Agency Premium Resource, Inc., Seafield Capital Corporation and Continental Bank N.A. dated July 16, 1993. (incorporated by reference from Exhibit 10(b)(i) to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1995).
10(b)(ii) First Amendment to Receivables Purchase Agreement by and among Agency Premium Resource, Inc., Seafield Capital Corporation and Continental Bank N.A. dated September 15, 1993 (incorporated by reference from Exhibit 10(b)(ii) to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1995).
10(b)(iii) Second Amendment to Receivables Purchase Agreement by and among Agency Premium Resource, Inc., Seafield Capital Corporation and Continental Bank N.A. dated August 29, 1994 (incorporated by reference from Exhibit 10(b)(iii) to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1995).
10(b)(iv) Third Amendment to Receivables Purchase Agreement and Assumption Agreement by and among Agency Premium Resource, Inc., Seafield Capital Corporation, Anuhco, Inc. and Bank of America Illinois dated May 31, 1995 (incorporated by reference from Exhibit 10(b)(iv) to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1995).
19(a) Report to Shareholders for the Second Quarter, 1995, dated August 10, 1995 (incorporated by reference from Exhibit 19(a) to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1995). | 10-Q/A | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T14:47:30 |
0000931763-96-000004 | 0000931763-96-000004_0000.txt | PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 27, 1995
(Exact name of registrant as specified in its charter)
(State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.)
2180 West State Road 434, Suite 6136, Longwood, FL 32779 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 865-5995
(Former name or former address, if changed since last report)
On December 27, 1995, the Registrant refinanced $1,080,096.49 mortgage and other indebtedness of Don Bell Industries, Inc. ("Don Bell"), a wholly-owned subsidiary of the Registrant acquired in September 1995, and replaced the Registrant's previous $350,000 operating line of credit facility with a $500,000 operating line, with the proceeds of three loans made to the Registrant by The Bank of Winter Park (the "Bank") pursuant to a Loan and Security Agreement among the Registrant, its direct and indirect wholly-owned subsidiaries (hereinafter "Subsidiary" or "Subsidiaries"), and the Bank (the "Loan Agreement"). A copy of the Loan Agreement is filed as Exhibit 1 to this Report and incorporated by reference herein. The Loan Agreement superseded the Loan Agreement dated as of February 13, 1995 among the Registrant, its Subsidiaries and the Bank.
The Loan Agreement provides for the borrowing by the Registrant from the Bank up to the principal sum of $1,590,000 through the following loan facilities:
The Loan Agreement provides that the Bank will loan to the Registrant up to the principal amount of $500,000 from time to time under a revolving line of credit. Provided the Registrant is not in default, outstanding amounts under the credit line may be repaid or reborrowed from time to time subject to the terms, conditions and limitations set forth in the Loan Agreement. The outstanding principal amounts under the credit line bear interest at the rate of 1% above the prime interest rate as announced by the Wall Street Journal ("Prime Rate"). The Registrant is required to pay interest monthly on all principal amounts outstanding under the credit line for a period of two years until December 27, 1997, at which time all outstanding principal and accrued but unpaid interest becomes due and payable.
The Loan Agreement also provides for a mortgage loan to the Registrant in the principal amount of $840,000, bearing interest at the rate of 1.5% above the Prime Rate. The Registrant is required to make monthly payments of principal and interest in the amount of $8,106.18 (subject to adjustment upon changes in the applicable interest rate) for a period of five years, based upon a 20-year amortization schedule, with a balloon payment of the remaining principal balance and accrued but unpaid interest, if any, being due on December 27, 2000.
The Loan Agreement also provides for a term loan to the Registrant in the principal amount of $250,000, bearing interest at the rate of 2% above the Prime Rate and repayable in monthly installments of principal in the amount of $4,166.67, plus accrued interest, for a period of five years until December 27, 2000.
At the December 27, 1995 closing under the Loan Agreement, $1,080,096.49 of the net proceeds from the loans was used to repay certain long-term and current mortgage and other indebtedness of Don Bell. The Registrant also took down $39,117.50 under the $500,000 credit line (bringing total borrowings under the credit line to $289,117.00 at December 27, 1995) to pay loan closing costs.
The Loan Agreement contains certain covenants of the Registrant, including the following:
(a) The Registrant is required to maintain a tangible net worth (i.e., total assets minus total liabilities minus any intangible assets as defined under generally accepted accounting principles) of no less than $750,000, to be measured at the end of each fiscal quarter of the Registrant commencing December 31, 1995;
(b) The Registrant is required to maintain an interest coverage ratio, defined as earnings before interest and taxes divided by interest, of no less than 3-to-1, to be measured at each fiscal year end commencing June 30, 1996;
(c) The Registrant is required to maintain a cash flow coverage, defined as net income plus depreciation divided by current maturities of long term debt and capitalized leases, of no less than 2.5-to-1.0 at each fiscal year end commencing June 30, 1996;
(d) The Registrant is prohibited, without the Bank's written consent, from making other borrowings or incurring any other direct or indirect, fixed or contingent indebtedness in excess of an aggregate of $100,000.00; however, the Registrant has the right to acquire the stock or assets of another corporation or entity in exchange for capital stock of the Registrant, provided the Registrant and its Subsidiaries on a consolidated basis continue to satisfy the applicable representations, warranties and covenants contained in the Loan Agreement and provided that neither the Registrant nor any of its Subsidiaries assumes any debt of the acquired corporation or entity.
All obligations of the Registrant under the Loan Agreement are secured by security interests granted by the Registrant and each of the Subsidiaries in their respective accounts receivable and inventory, by a security interest in equipment of Don Bell, and by the separate continuing guaranties of the Subsidiaries. The guaranty obligations of the Subsidiaries are joint and several. The $840,000 mortgage loan is secured by a first mortgage on the Don Bell manufacturing facility and underlying real property located in Volusia County, Florida. The obligations under the $500,000 credit line and the $250,000 term loan are also secured by a first mortgage from the Registrant to the Bank on the Registrant's real property and improvements in Steuben County, Indiana. The $250,000 term loan is also further secured by a second mortgage on certain other real property of Don Bell located in Volusia County, Florida.
In the event the Registrant fails to pay any monetary obligation within 10 days after the date due, or in the event the Registrant or any Subsidiary fails to remedy or cure to the satisfaction of the Bank any representation, warranty or covenant of the Registrant or any of the Subsidiaries within 30 days after written notice from the Bank, or if there is a change in the Registrant's present executive management without the prior written approval of the Bank, the Bank has the right to accelerate the maturity of all obligations of the Registrant under the Loan Agreement and exercise all rights granted to the Bank with respect to the collateral securing such obligations.
The foregoing summary description of certain material terms of the Loan Agreement is qualified in its entirety by reference to the actual terms and provisions of such document.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
1. Loan and Security Agreement dated December 27, 1995 between and among La-Man Corporation, Heritage Packaging Services, Inc., Nevada SEMCO, Inc., J.M. Stewart Corporation, J.M. Stewart Industries, Inc., Vision Trust Marketing, Inc., TracTel Communications, Inc., Don Bell Industries, Inc., Don Bell Industries of Nevada, Inc., and The Bank of Winter Park.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 8-K to be signed on its behalf by the undersigned hereunto duly authorized.
January 12, 1996 By: /s/ J. William Brandner President and Chief Executive Officer | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T15:21:44 |
0000950009-96-000027 | 0000950009-96-000027_0000.txt | Filed Pursuant to Rule 424(b)(3) Registration Nos. 33-55787 and 33-64179
PRICING SUPPLEMENT NO. 20, dated January 11, 1996 (To Prospectus dated December 20, 1995 and Prospectus Supplement dated December 20, 1995)
Due 9 Months or More From Date of Issue
Original Issue Date: January 17, 1996
Stated Maturity: January 20, 1998
Interest Payment Dates: February 15 and August 15
(If other than U.S. Dollars, see attachment hereto)
Option to Receive Payments in Specified Currency: [ ] Yes [ ] No (Applicable only if Specified Currency is other than U.S. Dollars)
(Applicable only if Specified Currency is other than U.S. Dollars)
Redemption: [X] The Notes cannot be redeemed prior to maturity. [ ] The Notes may be redeemed prior to maturity.
The Redemption Price shall initially be % of the principal amount of the Notes to be redeemed and shall decline at each anniversary of the initial Redemption Date by % of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount.
Repayment: [X] The Notes cannot be repaid prior to maturity. [ ] The Notes can be repaid prior to maturity at the option of the holder of the Notes.
Discount Notes: [ ] Yes [X] No
Agent's Discount or Commission: .25%
Agent's Capacity: [X] Agent [ ] Principal
Net proceeds to Company (if sale to Agent as principal):
Agent: [X] Merrill Lynch & Co. [ ] Salomon Brothers Inc | 424B3 | 424B3 | 1996-01-12T00:00:00 | 1996-01-12T15:19:28 |
0000807882-96-000001 | 0000807882-96-000001_0000.txt | Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant /X/ Filed by a Party other that the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2) / / Definitive Additional Materials / / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement)
Paying of Filing Fee (Check the appropriate box): /X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-7(i)(2). / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / 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 transaction 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 Rule 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 of 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:
You are cordially invited to attend the Annual Meeting of Stockholders of Foodmaker, Inc. to be held at 2:00 p.m. on Friday, February 16, 1996, at the Radisson Hotel, Royal Ballroom, 1433 Camino del Rio South, San Diego, California.
We hope you will attend in person. If you plan to do so, please indicate in the space provided on the enclosed proxy. Whether you plan to attend the meeting or not, we urge you to sign, date and return the enclosed proxy as soon as possible in the postage-paid envelope provided. This will ensure representation of your shares in the event that you are unable to attend the meeting.
The matters expected to be acted upon at the meeting are described in detail in the attached Notice of Meeting and Proxy Statement.
The Directors and Officers of the Company look forward to meeting with you.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on February 16, 1996
The Annual Meeting of Stockholders of Foodmaker, Inc. will be held at 2:00 p.m. on Friday, February 16, 1996, at the Radisson Hotel, Royal Ballroom, 1433 Camino del Rio South, San Diego, California. The meeting will be held to vote upon the following proposals:
1. To elect nine directors to serve until the next Annual Meeting of Stockholders and until their successors are elected and qualified;
2. To ratify the appointment of KPMG Peat Marwick LLP as independent
3. To act upon such other matters as may properly come before the meeting or any postponement or adjournment thereof.
Only stockholders of record at the close of business on December 29, 1995, will be entitled to vote at the meeting.
By Order of the Board of Directors
This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Foodmaker, Inc., a Delaware corporation ("Foodmaker" or the "Company"), for use at the Annual Meeting of Stockholders (the "Meeting") to be held at 2:00 p.m. on Friday, February 16, 1996, and all adjournments and postponements thereof. This Proxy Statement and form of proxy were mailed to stockholders on or about January 12, 1996.
The cost of preparing, assembling and mailing the Notice of Annual Meeting of Stockholders, Proxy Statement and form of proxy and the solicitation of proxies will be paid by Foodmaker.
The close of business on December 29, 1995 has been fixed as the record date for the determination of stockholders entitled to notice of and to vote at the Meeting. On that date, there were 38,802,195 shares of Foodmaker common stock, $.01 par value (the "Common Stock"), outstanding. Each share is entitled to one vote on any matter that may be presented for consideration and action by the stockholders.
Proxies will be voted FOR management's nominees for election as directors and FOR Proposal 2, unless the stockholder otherwise directs in the proxy. Where the stockholder has appropriately directed how the proxy is to be voted, it will be voted accordingly. The proxy may be revoked at any time before it is voted at the Meeting by submitting written notice of revocation to the Secretary of Foodmaker, or by filing a duly executed proxy bearing a later date. A proxy will not be voted if the stockholder who executed it is present at the Meeting and elects to vote the shares represented thereby in person.
NOMINEES FOR ELECTION AS DIRECTORS
The directors of Foodmaker are elected annually. The term of office of all present directors expires on the date of the Meeting, at which time all nine directors are to be elected to serve for the ensuing year and until their successors are elected and qualified. The nominees of management for election as directors are set forth below along with certain information regarding these nominees. Should any nominee become unavailable to serve as a director, the proxies will be voted for such other person as the Board of Directors shall designate. To the best of Foodmaker's knowledge, all nominees are and will be available to serve.
The following table provides certain information about each of the Company's directors as of January 1, 1996:
Name Age Positions with the Company Since Michael E. Alpert(5) 53 Director 1992 Paul T. Carter(2)(5) 73 Director 1991 Charles W. Duddles 55 Executive Vice President, 1988 Edward Gibbons(1)(2)(3)(4)(5) 59 Director 1985 Jack W. Goodall(1) 57 Chairman of the Board, 1985 Leonard I. Green(1)(2)(3)(4) 62 Director 1985 Robert J. Nugent 54 Executive Vice President, 1988 Officer of Jack In The Box L. Robert Payne(1)(2)(4)(5) 62 Director 1986 Christopher V. Walker 49 Director 1988
(1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Stock Option and Compensation Committees. (4) Member of the Investment Committee. (5) Member of the Corporate Oversight Committee.
During the past five years, the business experience, principal occupations, and the employment of the nominees has been as follows:
Mr. Alpert was a partner in the San Diego Office of the law firm of Gibson, Dunn & Crutcher for more than five years prior to his retirement on August 1, 1992. He is currently Advisory Counsel to Gibson, Dunn & Crutcher. Gibson, Dunn & Crutcher provides legal services from time to time to the Company.
Mr. Carter has been an insurance consultant for the Government Division of Corroon & Black Corporation since February 1987. From February 1987 until December 1990, he was also a consultant to the San Diego Unified School District on insurance matters. He retired in February 1987 as Chairman and Chief Executive Officer of Corroon & Black Corporation, Southwestern Region and as Director and Senior Vice President of Corroon & Black Corporation, New York.
Mr. Duddles has been Executive Vice President and Chief Administrative Officer of the Company since May 1988. He has been Chief Financial Officer of the Company since October 1985 and was Senior Vice President from October 1985 to May 1988. He was previously Vice President and Controller of the Company from August 1979 to July 1981 and Senior Vice President, Finance and Administration from August 1981 to October 1985.
Mr. Gibbons has been a general partner of Gibbons, Goodwin, van Amerongen ("GGvA"), successor to Gibbons, Green, van Amerongen ("Gibbons Green"), an investment banking firm specializing in management buyouts, for more than five years preceding the date hereof. Mr. Gibbons is also a director of Robert Half International, Inc.
Mr. Goodall has been President of the Company since April 1970, Chief Executive Officer of the Company since February 1979 and Chairman since October 1985. He was also Chairman and Chief Executive Officer of Family Restaurants, Inc. from January 1994 until his resignation in 1995. He was a director of Grossmont Bank, a wholly-owned subsidiary of Bancomer, S.A., from 1980 until October 1995, and has been a director of Van Camp Seafood Company, Inc. since April 1992 and a director of Thrifty Payless, Inc. since October 1992. He has been a director of Ralcorp Holdings, Inc. since March 1994.
Mr. Green has been a general partner of Leonard Green & Partners, an investment firm, since June 1989. Until June 28, 1989 and for more than five years preceding that date, he was a partner of Gibbons Green. Mr. Green is also a director of Horace Mann Companies, Kash n' Karry Food Stores, Inc., Australian Resources N.L., Carr-Gottstein Foods Co., Thrifty Payless, Inc. and United Merchandising Corp.
Mr. Nugent has been Executive Vice President of the Company since February 1985 and President and Chief Operating Officer of the Jack In The Box Division of the Company since May 1988. He was Executive Vice President- Operations and Marketing from February 1985 to May 1988. He was previously Division Vice President of the Company from August 1979 to April 1982 and Corporate Vice President-Restaurant Operations from April 1982 through January 1985.
Mr. Payne was Chairman of the Board of Grossmont Bank, a wholly-owned subsidiary of Bancomer, S.A., from February 1974 until October 1995, and President and Chief Executive Officer of Multi-Ventures, Inc. since February 1976. Multi-Ventures, Inc. is a real estate development and investment company that is also the managing partner of the San Diego Mission Valley Hilton. He was a principal in the Company prior to its acquisition by its former parent Ralston Purina Company in 1968.
Mr. Walker has been a Managing Director of Trust Company of the West since April 1995. He was a general partner of Leonard Green & Partners, an investment firm, from September 1989 until March 1995. He was associated with Gibbons Green from November 1985 and was a partner thereof from January 1989 until September 1989.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
During fiscal 1995, the Board of Directors had an Executive Committee, an Audit Committee, a Stock Option Committee, an Investment Committee, a Corporate Oversight Committee and a Compensation Committee. Foodmaker does not have a Nominating Committee.
The Executive Committee, consisting of Messrs. Gibbons, Goodall, Green and Payne, may exercise all the authority of the Board in the management of the Company in the intervals between meetings of the Board of Directors. In 1995, the Executive Committee held two meetings.
The Audit Committee, consisting of Messrs. Carter, Gibbons, Green, and Payne, directs the internal and external audit activities of Foodmaker as deemed appropriate. The Audit Committee held one meeting in 1995.
The Stock Option Committee and the Compensation Committee, both consisting of Messrs. Gibbons and Green, held no formal meetings in 1995. However, stock options were granted on several occasions by unanimous written consents.
The Investment Committee, consisting of Messrs. Gibbons, Green and Payne, held no meetings in 1995 but took action by unanimous written consent on one occasion.
The Corporate Oversight Committee, consisting of Messrs. Alpert, Carter, Gibbons and Payne, which was established to report to the Board of Directors regarding any conflicts of interest which may arise in the relationship between the Company and Family Restaurants, Inc., held no meetings in 1995.
In 1995, the Board of Directors held four general meetings and on one occasion acted by unanimous written consent. Each director, other than Mr. Gibbons, attended more than 75% of the aggregate of the general meetings and the meetings of committees on which such director serves.
Directors who are also officers of Foodmaker or its subsidiaries receive no additional compensation for their services as directors. The independent directors of the Company receive compensation consisting of an $18,000 annual retainer and $1,500 for each Board of Directors' meeting attended in person. No additional compensation is paid for actions taken by the Board of Directors by written consent or participating in telephonic meetings. Under the Company's Deferred Compensation Plan for Non-Management Directors, each independent director may defer any portion or all of such compensation. Amounts deferred under the plan's equity option are immediately converted to stock equivalents at the then current market price of the Company's common stock and matched at a 25% rate by the Company. A director's stock equivalent account is distributed in cash, based upon the ending number of stock equivalents and the market value of the Company's common stock, at the conclusion of the director's service as a member of the Board of Directors. All of the independent directors have elected to defer their compensation pursuant to this plan since its adoption on February 17, 1995.
Pursuant to the Company's Non-Employee Director Stock Option Plan, commencing February 17, 1995 and annually thereafter upon election to the Board, each independent director also receives a stock option to purchase 10,000 shares of the Company's common stock at the market value, as defined, on the date of grant.
Additionally, the Company paid Mr. Carter $15,000 in fiscal 1995 and intends to pay him the same amount in fiscal 1996 for consultation services relating to insurance matters. Except as described below under "Compensation Committee Interlocks and Insider Participation", no additional compensation is paid to other members of the Board of Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 15, 1995, information with respect to beneficial ownership of voting securities of the Company by (i) each person who is known to the Company to be the beneficial owner of more than 5% of any class of the Company's voting securities, (ii) each director of the Company, (iii) each executive officer listed in the executive compensation table herein and (iv) all directors and executive officers of the Company as a group. The Capital Group Companies, Inc.(2). . . . . . . . 4,262,100 11.0% The Prudential Insurance Company of America(3). . . 4,132,617 10.7% Jack W. Goodall . . . . . . . . . . . . . . . . . . 1,088,973 2.8% Robert J. Nugent. . . . . . . . . . . . . . . . . . 704,771 1.8% Charles W. Duddles. . . . . . . . . . . . . . . . . 494,793 1.3% Kenneth R. Williams . . . . . . . . . . . . . . . . 431,206 1.1% Edward Gibbons(4) . . . . . . . . . . . . . . . . . 349,736 * Paul L. Schultz . . . . . . . . . . . . . . . . . . 171,903 * Leonard I. Green(5) . . . . . . . . . . . . . . . . 166,695 * L. Robert Payne . . . . . . . . . . . . . . . . . . 71,000 * Paul T. Carter. . . . . . . . . . . . . . . . . . . 28,750 * Christopher V. Walker . . . . . . . . . . . . . . . 22,000 * Michael E. Alpert . . . . . . . . . . . . . . . . . 10,000 * All directors and executive officers as a group (20 persons) . . . . . . . . . . . . . 4,166,909 10.4%
* Less than one percent
(1) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares as of a given date which such person has the right to acquire within 60 days after such date. For purposes of computing the percentage of outstanding shares held by each person or group of persons named above on a given date, any security which such person or persons has the right to acquire within 60 days after such date is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Messrs. Goodall, Nugent, Duddles, Williams, Gibbons, Schultz, Green, Payne, Carter, Walker and Alpert have the right to acquire within 60 days of the above date, 385,000, 200,000, 135,000, 150,000, 10,000, 75,833, 10,000, 46,000, 16,750, 10,000 and 10,000, respectively, of the shares reflected above as beneficially owned.
(2) According to the most recent filing on Schedule 13G, Capital Guardian Trust Company and Capital Research and Management Company, operating subsidiaries of The Capital Group Companies, Inc., exercised as of December 31, 1994, investment discretion with respect to 2,432,100 and 1,830,000 shares, respectively, and sole voting power with respect to 1,735,700 of such shares, all of which are owned by various institutional investors. The address of The Capital Group Companies, Inc. is 333 South Hope Street, Los Angeles, CA 90071.
(3) According to the most recent filing on Schedule 13G, The Prudential Insurance Company of America ("Prudential"), as of November 30, 1995, held 4,114,617 shares in its general account and another 18,000 shares in various accounts for the benefit of its clients but over which Prudential may have direct or indirect voting and/or investment discretion. Prudential's address is Prudential Plaza, Newark, NJ 07102-3777.
(4) Includes 25,000 shares owned by Mr. Gibbons' wife.
(5) Includes 107,235 shares owned by TG Limited, a general partnership in which Mr. Green is the managing partner.
The following table sets forth information concerning the annual and long-term compensation of the Company's chief executive officer and the other four most highly compensated executive officers of the Company for services in all capacities to the Company and its subsidiaries during the fiscal years indicated. Bonus amounts were accrued during the year and paid shortly thereafter.
Stock Option Grants in Fiscal 1995
Set forth below is information with respect to options granted to Mr. Williams and Mr. Schultz during the 1995 fiscal year. No options were granted during the year to the other named executive officers in the Summary Compensation Table.
Option Exercises in Fiscal 1995 and Fiscal Year-End Values
Set forth below is information with respect to options exercised by the named executive officers during the 1995 fiscal year, and the number and value of unexercised stock options held by the named executive officers at the end of the fiscal year.
Report of the Board of Directors and Stock Option Committee on Executive
The Board of Directors has the primary responsibility for determining executive compensation. There are also Compensation and Stock Option Committees each composed of not less than two non-employee independent directors. Executive compensation is designed to (a) provide compensation opportunities that will attract, motivate and retain highly qualified managers and executives, and (b) provide salary and other rewards that are closely linked to Company, team, and individual performance, focused on achievement of annual business plans and longer term incentives linked to increases in stockholder value. The Chief Executive Officer recommends the compensation to be paid to executive officers of the Company other than himself; final determination of the amount of compensation rests with the non-employee members of the Board of Directors. Board members who are also executive officers do not participate in discussions about, nor do they vote on, recommendations concerning their respective compensation.
The Company's executive officer compensation program is comprised of base salary, bonus opportunity, long-term incentive compensation in the form of stock options, and other benefits such as health insurance.
It is the objective of the Company to maintain base salaries that are within the upper mid-range of amounts paid to senior executives with comparable qualifications, experience and responsibilities at other companies engaged in the same or similar business as the Company. The Performance Bonus Plan provides for a bonus as a percent of base salary which is dependent upon the Company's performance level achieved and the job classification of the individual.
The purpose of the Performance Bonus Plan is to reward key employees, executives and officers for achievement of corporate and/or division goals relating to earnings. The performance bonuses for the named executives for fiscal 1995 were considered appropriate based on the Company's recovery to profitable operations in the last half of the year and are reflected in the Summary Compensation Table.
The 1992 Employee Stock Incentive Plan forms the basis for the Company's long-term incentive plan for officers and key managers. The purpose of the Plan is to enable the Company and its subsidiaries to attract, retain and motivate employees by providing for or increasing the proprietary interests of such employees in the Company. During 1995, a stock option was granted to Mr. Williams for the purchase of 25,000 shares of Common Stock at $5.125 per share, exercisable 50% on May 11, 1995 and November 11, 1995. Mr. Schultz also received stock options for the purchase of 12,500 shares of Common Stock at $5.00 per share, exercisable 50% on June 2, 1995 and December 2, 1995, and 10,000 shares at $6.50 per share, exercisable one-third on October 2, 1995, 1996 and 1997. All options were granted at the market price on the dates of grant.
This report is submitted by the Board of Directors and the Stock Option Committee.
Board of Directors Stock Option Committee Michael E. Alpert Leonard I. Green Edward Gibbons Paul T. Carter Robert J. Nugent Leonard I. Green Charles W. Duddles L. Robert Payne Edward Gibbons Christopher V. Walker
This report will not be deemed to be incorporated by reference in any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this report by reference.
Compensation Committee Interlocks and Insider Participation
During fiscal 1995, the members of the Board of Directors were primarily responsible for determining executive compensation. Mr. Goodall, who is an executive officer and also a member of the Board of Directors, participated in discussions to the extent of making recommendations concerning the compensation of executive officers other than himself. In addition, the Company is a party to the transactions described below in which Edward Gibbons, Leonard I. Green and/or Christopher V. Walker, who are members of the Board of Directors, have a material interest.
Transactions with GGvA - Pursuant to an agreement which expired on December 31, 1994, the Company paid GGvA a monthly fee of $75,000 plus expenses. Under this agreement, subject to certain conditions, GGvA provided management consulting and financial planning services to the Company, including assistance in strategic planning, negotiating and structuring bank loans and exploring potential acquisitions, mergers and restructurings for the Company. The contacts and expertise provided in these areas enhanced the Company's opportunities and management's expertise in these matters. Mr. Gibbons, who is a director of Foodmaker, is a general partner of GGvA and GGvA is the general partner of The Fulcrum III Limited Partnership and The Second Fulcrum III Limited Partnership (collectively "Fulcrum III"), Delaware limited partnerships. Fulcrum III owned 17,521,106 shares, or approximately 45%, of the Company's common stock until such stock was distributed to the Fulcrum III partners in November 1995. The specialized consulting services provided by GGvA did overlap somewhat with Mr. Gibbon's role as director, for which he did not receive any additional compensation. Since the expiration of this agreement, the Company has compensated Mr. Gibbons on the same basis as other independent directors. The amount of the fee paid to GGvA was determined by negotiations between the management of the Company and GGvA, and approved by the Board of Directors of the Company. The Company believes that the terms of its agreement with GGvA were comparable to what could have been obtained from an unrelated, but equally qualified, third party. Family Restaurants, Inc. Transactions - On January 27, 1994, Foodmaker, Apollo FRI Partners, L.P. ("Apollo") and Green Equity Investors, L.P. ("GEI"), whose general partner is Leonard Green & Partners, acquired Restaurant Enterprises Group, Inc. ("REGI"), a company that owns, operates and franchises various including El Torito, Carrows and Coco's. Contemporaneously, REGI changed its name to Family Restaurants, Inc. ("FRI"). Concurrently, Foodmaker contributed its entire Chi-Chi's Mexican restaurant chain to FRI in exchange for a 39% equity interest in FRI, valued at $62 million, a five-year warrant to acquire 111,111 additional shares at $240 per share, which would increase its equity interest to 45%, and approximately $173 million in cash ($208 million less the face amount of Chi-Chi's debt assumed, aggregating approximately $35 million). Apollo and GEI, respectively, contributed $62 million and $29 million in cash and held approximate 39% and 18% equity positions in FRI. Management of FRI hold the remaining equity positions in FRI. The net cash received was used by Foodmaker to repay all of the debt outstanding under its then existing bank credit facility, which was terminated, and to reduce other debt, to the extent permitted by the Company's financing agreements, and to provide funds for capital expenditures and general corporate purposes.
As a result of negative publicity regarding the nutritional value of Mexican food, and resulting sales declines, FRI wrote off the goodwill attributable to Chi-Chi's in their fourth quarter ended December 25, 1994. The Company recorded in its first quarter of 1995 the complete write-down of its 39% investment in FRI as a result of the goodwill write-off.
During 1995 Mr. Goodall resigned as Chief Executive Officer of FRI and disposed of his equity interest in FRI for a nominal amount. As part of Mr. Goodall's separation agreement, FRI forgave the unpaid balance of approximately $700,000 under the note originally issued by Mr. Goodall as partial payment for his shares.
Because of FRI's continuing substantial losses and resulting increased borrowing requirements, the major FRI stockholders were required to purchase a participation with respect to any additional advances by the banks to FRI. Rather than become liable for these advances, the Company, by an agreement dated November 20, 1995, transferred all of its stock and warrants to Apollo. Since the Company's investment in FRI was previously written off in fiscal 1995, the consummation of this agreement subsequent to the date of the financial statements will have no effect on the financial condition or results of operations of the Company.
Retirement Plan. The Company maintains a retirement plan (the "Retirement Plan"), which was adopted effective October 21, 1985 and restated effective as of January 1, 1989. The Retirement Plan is a defined benefit plan covering eligible regular employees employed in an administrative, clerical, or restaurant hourly capacity who have completed 1,000 Hours of Service and reached age 21. The Retirement Plan provides that a participant retiring at age 65 will receive an annual retirement benefit equal in amount to one percent of Final Average Pay multiplied by Benefit Service plus .4% of Final Average Pay in excess of Covered Compensation multiplied by Benefit Service, subject to grandfathered minimum benefit accruals under the previous plan as of December 31, 1988. The .4% portion of the calculation is limited to a maximum of 35 years of service. The Employee Retirement Income Security Act of 1974 ("ERISA") and various tax laws may cause a reduction in the annual retirement benefit payable under the Retirement Plan. (The preceding capitalized terms are defined in the Retirement Plan.)
Although normal retirement is age 65, benefits may begin as early as age 55 if service requirements defined in the Retirement Plan are met. Benefits payable are reduced for early commencement.
Supplemental Retirement Plan. The Company established a non-qualified supplemental retirement plan for selected executives effective April 2, 1990, known as the Supplemental Executive Retirement Plan. The plan provides for a percentage of replacement income based on Service and Final Average Compensation (each as defined in the plan). The target replacement income from all Company funded sources based upon a maximum of 30 full years of service is 60% of Final Average Compensation. For those executives whose service lengths are less than 30 years, the target percentage of 60% is reduced by applying a factor determined by dividing the number of full years of actual service by 30. The plan is unfunded and represents an unsecured claim against the Company.
Easy$aver Plus Plan. Effective October 21, 1985, the Company adopted the Foodmaker Savings Investment Plan, currently named the Foodmaker Easy$aver Plus Plan (the "E$P"), which includes a cash-or-deferred arrangement under Section 401(k) of the Internal Revenue Code. Eligible regular full-time employees who have completed at least one year of service and reached age 21 qualify for the E$P. Participants in the E$P may defer up to 12% of their pay on a pre-tax basis. In addition, the Company contributes on a participant's behalf an amount equal to 50% of the first 4% of compensation that is deferred by the participant.
Deferred Compensation Plan. Since January 1, 1989, all executive officers and certain other members of management of the Company have been excluded from participation in the E$P. Effective April 2, 1990, all such persons were offered an opportunity to participate in a non-qualified deferred compensation plan established by the Company. Participants of the plan, known as the Capital Accumulation Plan for Executives, may defer up to 15% of base and/or bonus pay. The Company matches 100% of the first 3% of participant deferrals. Benefits paid under such plan also include an interest component. The plan is unfunded and participant accounts represent unsecured claims against the Company.
Summary of Retirement and Other Deferred Benefits. The following table shows estimated annual benefits payable to participants as a straight life annuity. The benefits are derived from some or all of the following Company funded sources: Retirement Plan, Company match dollars in the E$P, Company match dollars in the Deferred Compensation Plan, Supplemental Retirement Plan and Social Security (50% of primary insurance amount).
Estimated Annual Benefits Based on Years of Service Earnings 10 15 20 25 30 ------------- -------- -------- -------- -------- -------- $ 100,000. . . . $ 20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 200,000. . . . 40,000 60,000 80,000 100,000 120,000 300,000. . . . 60,000 90,000 120,000 150,000 180,000 400,000. . . . 80,000 120,000 160,000 200,000 240,000 500,000. . . . 100,000 150,000 200,000 250,000 300,000 600,000. . . . 120,000 180,000 240,000 300,000 360,000 800,000. . . . 160,000 240,000 320,000 400,000 480,000 1,000,000. . . . 200,000 300,000 400,000 500,000 600,000 1,200,000. . . . 240,000 360,000 480,000 600,000 720,000
At October 1, 1995, the number of years of service under the retirement plans for Messrs. Goodall, Nugent, Duddles, Williams and Schultz was 27, 16, 22, 25 and 20, respectively; and the amount of eligible compensation for each of these individuals approximates the amounts reflected as salary and bonus in the Summary Compensation Table.
At the beginning of the fiscal year, Sharon Payne, daughter of L. Robert Payne, a director of the Company, held a 20.6% equity interest in Foodmex, Inc. ("Foodmex"), which franchises and operates ten Jack In The Box restaurants in Mexico. The majority of the funds invested by Ms. Payne in Foodmex were loaned to her by Mr. Payne; the loan was secured by Ms. Payne's equity position in Foodmex. During the year, Mr. Payne acquired the interest of his daughter in Foodmex and, in December 1995, entirely disposed of all interest to other Foodmex shareholders. He retains no equity or other interest in Foodmex.
As a franchisee of the Company, Foodmex has various financial obligations to the Company for franchise fees and other trade accounts payable, which had been approximately $280,000 per month but have declined to approximately $120,000 per month. As a result of the devaluation of the Mexican Peso, Foodmex encountered severe financial difficulties and became unable to meet its obligations on a current basis. Therefore, Foodmex has been required to pay in advance for its food and supplies purchased from the Company and has entered into an agreement for the payment, over an extended period without interest, of the accumulated arrearage of approximately $830,000 and a portion of the royalties accruing during 1996. In addition, the Company has agreed to waive late charges accrued through December 1995, upon timely and satisfactory completion of the established payment schedule. The Company believes the terms of the credit and franchise agreements are no more favorable to the franchisee than could have been obtained by an entirely unrelated third party.
The following graph compares the cumulative return to holders of the Company's Common Stock at the end of each fiscal year since the initial public offering on March 4, 1992 with the Standard & Poor's ("S&P") 500 Index and Nations Restaurant News ("NRN") Stock Index for the same period. The comparison assumes $100 was invested on March 4, 1992 in the Company's Common Stock and in each of the comparison groups, and assumes reinvestment of dividends. The Company paid no dividends during the periods.
[A LINE GRAPH CHART WAS INCLUDED HEREIN WHICH GRAPHICALLY
March 4, September 27, October 3, October 2, October 1, 1992 1992 1993 1994 1995 -------- ------------- ---------- ---------- ---------- Foodmaker, Inc. 100 70 65 38 38 S&P 500 Index 100 101 113 113 143 NRN Stock Index 100 102 122 124 177
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, each executive officer, director and beneficial owner of more than 10% of the Company's Common Stock is required to file certain forms with the Securities and Exchange Commission. A report of beneficial ownership of the Company's Common Stock on Form 3 is due at the time such person becomes subject to the reporting requirements and a report on Form 4 or Form 5 must be filed to reflect changes thereafter. Based on written statements and copies of forms provided to the Company by persons subject to the reporting requirements, the Company believes that all such reports required to be filed by such persons during fiscal 1995 were filed on a timely basis, except that late Forms 4 were filed by William F. Motts reflecting the transfer of stock pursuant to a marital termination agreement; and L. Robert Payne and the Payne Family Trust upon purchasing stock.
The Board of Directors has appointed KPMG Peat Marwick LLP as independent accountants to examine the consolidated accounts of the Company for the fiscal year ending September 29, 1996, subject to ratification by stockholders. KPMG Peat Marwick LLP has acted as accountants for Foodmaker since 1986. The firm will be represented at the Meeting and will have the opportunity to make a statement and respond to appropriate questions from stockholders.
Foodmaker's management is not aware of any other matters to come before the Meeting. If any matter not mentioned herein is properly brought before the Meeting, the persons named in the enclosed proxy will have discretionary authority to vote all proxies with respect thereto in accordance with their best judgment.
Any stockholder proposal intended to be presented at the 1997 Annual Meeting of Stockholders and to be included in the Company's proxy statement and form of proxy for that meeting must be received by the Company, directed to the attention of the Secretary, on or before September 16, 1996. Any such proposals must comply in all respects with the rules and regulations of the Securities and Exchange Commission.
1995 ANNUAL REPORT AND FORM 10-K
A copy of the 1995 Annual Report to Stockholders accompanies this Proxy Statement. Foodmaker's Annual Report on Form 10-K for the year ended October 1, 1995, as filed with the Securities and Exchange Commission, contains detailed information concerning Foodmaker and its operations which is not included in the 1995 Annual Report. A COPY OF THE 1995 FORM 10-K WILL BE FURNISHED TO STOCKHOLDERS WITHOUT CHARGE UPON REQUEST IN WRITING TO: Foodmaker Treasury Department, 9330 Balboa Avenue, San Diego, California 92123-1516.
By Order of the Board of Directors,
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOODMAKER, INC. FOR ANNUAL MEETING OF STOCKHOLDERS ON FEBRUARY 16, 1996 AT 2:00 P.M. RADISSON HOTEL, ROYAL BALLROOM, 1433 CAMINO DEL RIO SOUTH, SAN DIEGO, CA
The undersigned hereby appoints Jack W. Goodall, Charles W. Duddles and William E. Rulon and each of them, acting by a majority or by one of them if only one is acting, as lawful proxies, with full power of substitution, for and in the name of the undersigned, to vote on behalf of the undersigned, with all the powers the undersigned would possess if personally present at the Annual Meeting of Stockholders of Foodmaker, Inc., a Delaware corporation ("Foodmaker"), on February 16, 1996, and any postponements or adjournments thereof. The above named proxies are instructed to vote all the undersigned's shares of stock on the proposals set forth in the Notice of Annual Meeting and Proxy Statement as specified on the other side hereof and are authorized in their discretion to vote upon such other business as may properly come before the meeting or any postponement or adjournment thereof. This proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, this proxy will be voted "FOR" all nominees listed and "FOR" Proposal 2. The Board of Directors recommends a vote FOR the above proposals.
(Continued, and to be marked, dated and signed, on the other side)
^ FOLD AND DETACH HERE ^
FEBRUARY 16, 1996 AT 2:00 P.M.
1433 CAMINO DEL RIO SOUTH, SAN DIEGO, CA
1. ELECTION OF DIRECTORS FOR WITHHOLD Nominees: Michael E. Alpert, Paul T. listed (except to vote for all Carter, Charles W. Duddles, as withheld) nominees listed Edward Gibbons, Jack W. / / / / Robert J. Nugent, L. Robert Payne and Christopher V. Walker.
(Instruction: To withhold authority to
2. Ratification of appointment of KPMG Peat FOR AGAINST ABSTAIN Marwick LLP as independent accountants. / / / / / /
3. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting.
I plan to attend the meeting. YES NO
Stockholder(s), please sign above exactly as name appears hereon; in the case of joint holders, all should sign. Fiduciaries should add their full title to their signature. Corporations should sign in full corporate name by an authorized officer. Partnerships should sign in partnership name by an authorized person. PLEASE SIGN, DATE AND RETURN PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. ^ FOLD AND DETACH HERE ^
Annual Meeting of Stockholders, February 16, 1996
shares of stock, with respect to the following:
1. Election of Directors: Michael E. Alpert, Paul T. Carter, Charles W. Duddles, Edward Gibbons, Jack W. Goodall, Leonard I. Green, Robert J. Nugent, L. Robert Payne and Christopher V. Walker. / / FOR all nominees listed. / / FOR all nominees listed except____________________________________ / / WITHHOLD AUTHORITY to vote for all nominees listed.
2. Ratification of appointment of KPMG Peat Marwick LLP as independent accountants. / / FOR / / AGAINST / / ABSTAIN
INSTRUCTION: If ballot is cast by proxy, print stockholder name above or, if multiple stockholders, print "Proxies Filed" above.
Proxy signature (if ballot is cast by proxy) | DEF 14A | DEF 14A | 1996-01-12T00:00:00 | 1996-01-12T15:34:04 |
0000948630-96-000002 | 0000948630-96-000002_0000.txt | <DESCRIPTION>BT ADVISOR FUNDS PRE-EFF. #3/AMEND. #3
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1996 File Nos. 33-62103 and 811-7347
THE SECURITIES ACT OF 1933
THE INVESTMENT COMPANY ACT OF 1940
(Exact Name of Registrant as Specified in Charter)
6 ST. JAMES AVENUE, BOSTON MASSACHUSETTS 02116 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 423-0800
(Name and Address of Agent for Service)
Burton S. Leibert, Esq. Anne B. McMillen Willkie Farr & Gallagher Bankers Trust Company One Citicorp Center One Bankers Trust Plaza 153 East 53rd Street 130 Liberty Street New York, New York 10022-4669 New York, New York 10006
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
PURSUANT TO RULE 24F-2(A)(1), REGISTRANT HEREBY DECLARES THAT AN INDEFINITE NUMBER OF ITS SHARES OF BENEFICIAL INTEREST (PAR VALUE $0.00001 PER SHARE) IS BEING REGISTERED BY THIS REGISTRATION STATEMENT.
BT Investment Portfolios, International Equity Portfolio and Capital Appreciation Portfolio have also executed this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
ITEM NO. HEADINGS IN PROSPECTUS
1. Cover Page . . . . . . . . . . .Cover Page
2. Synopsis . . . . . . . . . . . .The Funds -- Expense Summary
Information . . . . . . . . . .Not applicable
Registrant . . . . . . . . . . .Cover Page; The Funds -- Who May Want to Invest; The Funds in Detail -- Risk Factors and Certain Securities
5. Management of the Fund . . . . .The Funds -- Expense Summary; The Funds in Detail -- Management of the
6. Capital Stock and Other Securities . . . . . . . . . . .Cover Page; The Funds in Detail -- Performance; Your Account -- Types of Accounts, How to Buy Shares, How to Sell Shares; Shareholder and Account Policies -- Dividends, Capital Gains Sales Charge Reductions and Waivers,
7. Purchase of Securities Being Offered . . . . . . . . . . . .Your Account -- How to Buy Shares; Shareholder and Account Policies --
8. Redemption or Repurchase . . . .Your Account -- How to Sell Shares; Shareholder and Account Policies --
9. Pending Legal Proceedings . . .Not applicable
Part B Headings in Statement of
10. Cover Page . . . . . . . . . . .Cover Page
11. Table of Contents . . . . . . .Table of Contents
History . . . . . . . . . . . .Not applicable
Policies . . . . . . . . . . . .Risk Factors and Certain Securities
14. Management of the Fund . . . . .Management of the Trust and the
15. Control Persons and Principal Holders of Securities . . . . .Management of the Trust and the 16. Investment Advisory and Other Services . . . . . . . . . . . .Management of the Trust and the
17. Brokerage Allocation and Other Practices . . . . . . . . . . .Risk Factors and Certain Securities
18. Capital Stock and Other Securities . . . . . . . . . . .Organization of the Trust; (see also
19. Purchase, Redemption and Pricing of Securities Being Offered . .Valuation of Securities; Redemptions
20. Tax Status . . . . . . . . . . .Taxation (see also Prospectus-- "Dividends, Capital Gains and Taxes")
21. Underwriters . . . . . . . . . .See Prospectus--"Breakdown of Expenses"
22. Calculations of Yield Quotations of Money Market Funds . . . . .Performance Information
23. Financial Statements . . . . . .Financial Statements
Prospectus - Institutional Class Shares
Equity 500 Equal Weighted Index Fund
Institutional Equity 500 Index Fund
BT Advisor Funds (the "Trust") is an open-end, management investment company (mutual fund) which currently consists of ten funds. With the exception of the Institutional Equity 500 Index Fund (the "Equity 500 Index Fund"), each of the diversified funds listed above (each, a "Fund") is a separate series of the Trust and each offers two classes of shares. The shares offered by this prospectus are the Institutional Class Shares (the "Shares"). The Equity 500 Index Fund is a series of BT Institutional Funds, an open-end management investment company (together with the Trust, the "Trusts"). Each Fund seeks to replicate as closely as possible the performance of a selected market index before the deduction of the expenses, allocable to the Shares of the Fund and the corresponding Portfolio (the "Expenses"). There is no assurance, however, that each Fund will achieve its stated objective.
Unlike other open-end management investment companies (mutual funds), each Fund seeks to achieve its investment objective by investing all of its investable assets ("Assets") in the corresponding Portfolio which is a separate fund with an identical investment objective. See "Special Information Concerning Master- Feeder Fund Structure" on page __.
Bankers Trust Company ("Bankers Trust") is the investment adviser (the "Adviser") of each Portfolio.
Please read this Prospectus before investing, and keep it on file for future reference. It contains important information, including how each Fund invests and the services available to shareholders.
To learn more about each Fund and its investments, investors can obtain a copy of the Funds' Statement of Additional Information (the "SAI"), dated January , 1996, which contains each Portfolio's most recent financial report and portfolio listing. The SAI has been filed with the Securities and Exchange Commission (the "SEC") and is incorporated herein by reference . For a free copy of this document, call (800) 730-1313 or contact the Trusts at 6 St. James Avenue, Boston, MA 02116, or a Service Agent.
Mutual fund shares are not deposits or obligations of, or guaranteed by, Bankers Trust or any depository institution. Shares are not insured by the FDIC, the Federal Reserve Board or any other agency, and are subject to investment risk, including the possible loss of principal.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Trusts seek to achieve the investment objective of each Fund by investing all the Assets of the Fund in the corresponding Portfolio.
The U.S. Bond Index Fund seeks to replicate as closely as possible (before deduction of Expenses) the investment performance of the Lehman Brothers Aggregate Bond Index (the "Aggregate Bond Index"), a broad market weighted index which encompasses U.S. Treasury and agency securities, corporate investment grade bonds, international (dollar-denominated) investment grade bonds, and mortgage-backed securities. The Fund will be invested primarily in fixed income securities of the U.S. Government or any agency thereof, publicly issued fixed rate domestic debt of industrial, financial, and utility corporations, and U.S. dollar denominated fixed income securities of foreign and supranational entities issued publicly in the United States. The Fund will also invest in mortgage pass-through securities issued by the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association. The U.S. Bond Index Fund invests all of its Assets in the U.S. Bond Index Portfolio.
The Equity 500 Equal Weighted Index Fund seeks to replicate as closely as possible the total return of the Standard & Poor's 500 Equal Weighted Index (the "S&P 500 Equal Weighted Index"). The S&P 500 Equal Weighted Index is comprised of all stocks that make up the Standard & Poor's 500 Composite Stock Price Index with each security having the same weight. The S&P 500 Equal Weighted Index is re-balanced to these equal weights at the end of each calendar month. The Fund will include the common stock of each company included in the S&P 500, other than Bankers Trust New York Corporation, in such a manner that the market value of the Fund's holding of each stock will be approximately equal to the market value of each other stock held in the Fund. The Equity 500 Equal Weighted Index Fund invests all of its Assets in the Equity 500 Equal Weighted Index Portfolio.
The Small Cap Index Fund seeks to replicate as closely as possible (before deduction of Expenses) the total return of the Russell 2000 Small Stock Index (the "Russell 2000"), an index consisting of 2,000 small-capitalization common stocks. The Fund will include the common stock of one or more companies included in the Russell 2000 Index, on the basis of computer-generated statistical data, that are deemed representative of the industry diversification of the entire Russell 2000 Index. The Small Cap Index Fund invests all of its Assets in the Small Cap Index Portfolio.
The EAFE(R) Equity Index Fund seeks to replicate as closely as possible (before deduction of Expenses) the total return of the Morgan Stanley Capital International Europe, Australia, Far East (EAFE) Index with net dividends (the "EAFE Index"), a capitalization-weighted index containing approximately 1,100 equity securities of companies located outside the United States. The Fund will be invested primarily in equity securities of business enterprises organized and domiciled outside of the United States or for which the principal trading market is outside the United States. Statistical methods will be employed to replicate the Index by buying most of the relevant Index securities. Securities purchased for the Fund will generally, but not necessarily, be traded on a foreign securities exchange. The EAFE(R) Equity Index Fund invests all of its Assets in the International Equity Index Portfolio.
The EAFE index is the exclusive property of Morgan Stanley. Morgan Stanley Capital International is a service mark of Morgan Stanley and has been licensed for use by Bankers Trust Company.
The Equity 500 Index Fund seeks to replicate as closely as possible (before deduction of Expenses) the total return of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500"), an index emphasizing large-capitalization stocks. The Fund will include the common stock of those companies included in the S&P 500, other than Bankers Trust New York Corporation, selected on the basis of computer generated statistical data, that are deemed representative of the industry diversification of the entire S&P 500. The Equity 500 Index Fund invests all of its Assets in the Equity 500 Index Portfolio.
WHO MAY WANT TO INVEST
Shares of each Fund are offered through this Prospectus to institutional investors.
The Portfolios are not managed according to traditional methods of "active" investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Portfolios, utilizing a "passive" or "indexing" investment approach and attempt to duplicate the investment performance of their respective indices through statistical procedures.
The U.S. Bond Index Portfolio represents all major sectors of the investment grade fixed-income securities markets. The U.S. Bond Index Fund may be a suitable investment vehicle for those investors seeking ownership in the "bond market" as a whole, without regard to particular sectors. The U.S. Bond Index Fund is also suitable for those investors with common stock holdings who are seeking a complementary fixed-income investment to create a more balanced asset mix.
The Equity 500 Equal Weighted, Small Cap Index, International Equity Index and Equity 500 Index Funds may be appropriate for investors who are willing to ride out domestic and/or foreign stock market fluctuations in pursuit of potentially higher long-term returns. Each corresponding Portfolio invests for growth and does not pursue income. Over time, stocks, although more volatile, have shown greater growth potential than other types of securities. In the shorter term, however, stock prices can fluctuate dramatically in response to market factors.
The EAFE(R) Equity Index Fund may be appropriate for investors who want to pursue their investment goals in markets outside of the United States. By including international investments in their portfolio, investors can achieve an extra level of diversification and also participate in opportunities around the world. However, there are additional risks involved with international investing. The performance of international funds depends upon currency values, the political and regulatory environment, and overall economic factors in the countries in which a Portfolio invests.
The Trusts are intended to be a long-term investment vehicle and is not designated to provide investors with a means of speculating on short-term market movements. Investors who engage in excessive account activity generate additional costs which are borne by all the Trusts' shareholders. In order to minimize such costs, each Trust has adopted the following policies. Each Trust reserves the right to reject any purchase request (including exchange purchases from other BT Advisor Funds portfolios) that is reasonably deemed to be disruptive to efficient portfolio management, either because of the timing of the investment or previous excessive trading by the investor. Additionally, each Trust has adopted exchange privilege limitations as described in the section "Exchange Limitations." Finally, each Trust reserves the right to suspend the offering of its shares.
Each Fund is not in itself a balanced investment plan. Investors should consider their investment objective and tolerance for risk when making an investment decision. When investors sell their Fund Shares, they may be worth more or less than what they paid for them.
The value of each Portfolio's investments varies based on many factors. The value of bonds fluctuates based on changes in domestic or foreign interest rates, the credit quality of the issuer, market conditions, and other economic and political news. In general, bond prices rise when interest rates fall, and vice versa. This effect is usually more pronounced for longer-term securities. Lower-quality securities offer higher yields, but also carry more risk.
Stock values fluctuate, sometimes dramatically, in response to the activities of individual companies and general market and economic conditions. Over time, however, stocks have shown greater long-term growth potential than other types of securities.
Because many foreign investments are denominated in foreign currencies, changes in the value of these currencies can significantly affect the EAFE(R) Equity Index Fund's share price. General economic factors in the various world markets can also impact the value of an investor's investment. When an investor sell their Fund Shares, they may be worth more or less than what they paid for them. See "Risk Factors and Certain Securities and Investment Practices" for more information.
Annual operating expenses are paid out of the assets of each Portfolio and Fund. Each Portfolio pays an investment advisory fee and an administrative services fee to Bankers Trust. Each Fund incurs expenses such as maintaining shareholder records and furnishing shareholder statements. Each Fund must provide financial reports.
The following table provides: (i) a summary of expenses relating to purchases and sales of the Shares of each Fund and the annual operating expenses of the Fund and expenses of the corresponding Portfolio, in the aggregate, as a percentage of average daily net assets of each Fund; and (ii) an example illustrating the dollar cost of such expenses on a $1,000 investment in each Fund. The Trustees of each Trust believe that the Expenses of each Fund and expenses of the corresponding Portfolio, in the aggregate, will be less than or approximately equal to the expenses which the Fund would incur if each Trust retained the services of an investment adviser and the Assets of each Fund were invested directly in the type of securities being held by the corresponding Portfolio.
Maximum Sales Charge on Purchases (as a percentage of offering price) None*
Maximum Sales Charge on Reinvested
Shareholder transaction expenses are charges paid when investors buy, sell, exchange, or hold Shares of a Fund. See "Transaction Details," on page __, for an explanation of how and when these charges apply.
* A transaction fee of 0.25% is deducted from purchases, redemptions and exchanges into and out of the Small Cap Index Fund and the EAFE(R) Equity Index Fund. These transaction fees are paid to the respective Funds and are deducted automatically from the amount invested, exchanged or redeemed. The fee applies to all redemptions and an initial investment in either of these Funds and all subsequent purchases (including purchases made by exchange from another BT Advisor Funds Fund), but not to reinvested dividend or capital gain distributions.
The purpose of the 0.25% transaction fee is to allocate transaction costs associated with purchases, redemptions and exchanges to investors making those purchases, redemptions and exchanges, thus insulating existing shareholders from those transaction costs. These costs include: (1) brokerage costs; (2) the effect of the "bid-ask" spread in small and medium sized company stock and international markets; and (3) taxes in some countries. Since the investors, not the Fund, bears these costs, the Fund is expected to be able track its benchmark index more closely.
(after reimbursement or waiver) 0.10%
(after reimbursements or waivers) 0.15% (after reimbursements or waivers) 0.25%
Equity 500 Equal Weighted Index Fund (after reimbursement or waiver) 0.15% (after reimbursements or waivers) 0.15% (after reimbursements or waivers) 0.30%
(after reimbursement or waiver) 0.10% (after reimbursements or waivers) 0.15% (after reimbursements or waivers) 0.25%
(after reimbursement or waiver) 0.20% (after reimbursements or waivers) 0.20% (after reimbursements or waivers) 0.40%
(after reimbursement or waiver) 0.07% (after reimbursements or waivers) 0.03% (after reimbursements or waivers) 0.10%
Expense Table Example: An investor would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period:
U.S. Bond Index Fund 1 year 3 years
Equity 500 Equal Weighted Index Fund 1 year 3 years
Small Cap Index Fund 1 year 3 years
EAFE(R)Equity Index Fund 1 year 3 years
Equity 500 Index Fund 1 year 3 years 5 year 10 years
The expense table and the example above show the costs and expenses that an investor will bear directly or indirectly as a shareholder of a Fund. Bankers Trust has voluntarily agreed to waive a portion of its investment advisory fee with respect to each Portfolio. Without such waiver, each Portfolio's investment advisory fee would be equal to the following: U.S. Bond Index Portfolio --0.15%; Equity 500 Equal Weighted Index Portfolio -- 0.25%; Small Cap Index Portfolio -- 0.15%; E(R) Equity Index Portfolio --0.25%; and Equity 500 Index Portfolio -- 0.10%. The expense table and the example reflect a voluntary undertaking by Bankers Trust or Signature Broker-Dealer Services, Inc. ("SBDS"), as the distributor (the "Distributor") of the Shares of each Fund, to waive or reimburse expenses such that the total operating expenses of each Fund and the corresponding Portfolio, with the exception of the Equity 500 Index Fund and Equity 500 Index Portfolio, (as a percentage of the Fund's average daily net assets) would be equal to the following: U.S. Bond Index Portfolio -- 0.25%; Equity 500 Equal Weighted Index Portfolio -- 0.30%; Small Cap Index Portfolio -- 0.25%; and FE(R) Equity Index Portfolio -- 0.40%. In the absence of this undertaking, assuming total assets of $100 million in each Fund, it is estimated that "Total Operating Expenses" would be as follows: U.S. Bond Index Fund -- 0.55%; Equity 500 Equal Weighted Index Fund -- 0.60%; Small Cap Index Fund -- 0.55%; and E(R) Equity Index Fund -- 0.65%. With respect to the Equity 500 Index Fund and the Equity 500 Index Portfolio, in the absence of this undertaking, for the fiscal year ended December 31, 1994, the total operating expenses would have been equal to approximately 0.23% of the Fund's average net assets annually. The example should not be considered a representation of past or future expenses and actual expenses may be greater or less than those shown. Moreover, while each example assumes a 5% annual return, actual performance will vary and may result in a return greater or less than 5%.
Currently, the Funds (with the exception of the Equity 500 Index Fund) have issued two classes of Shares. The Funds offer by separate prospectus another class of Shares. Because the expenses vary between the classes, performance will vary with respect to each class. Additional information concerning the Funds' other class of Shares is available from Bankers Trust, as administrator at (800) 730-1313.
For more information about each Fund's and each Portfolio's expenses see "Management of the Trusts and the Portfolios" and "Valuation Details."
The following table shows the selected data for a share outstanding, total investment return, ratios to average net assets and other supplemental data of the Equity 500 Index Fund for the periods indicated. The Fund's Annual Report has been audited by Coopers & Lybrand L.L.P., the Fund's independent accountants, whose report thereon appears in the Fund's Annual Report. The Fund's Annual Report and Semi-Annual Report are incorporated by reference in the Fund's SAI.
The Trusts seek to achieve the investment objective of each Fund by investing all of its Assets in the corresponding Portfolio, which has the same investment objective as the Fund. Since the investment characteristics of each Fund will correspond directly to those of the corresponding Portfolio, the following is a discussion of the various investments of and techniques employed by each Portfolio. Additional information about the investment policies of each Portfolio appears in "Risk Factors and Certain Securities and Investment Practices" in this Prospectus and in the Funds' SAI. There can be no assurance that the investment objective of either a Fund or the corresponding Portfolio will be achieved.
The U.S. Bond Index Portfolio seeks to replicate as closely as possible (before deduction of Expenses) the investment performance of the Aggregate Bond Index, a broad market weighted index which encompasses four major classes of investment grade fixed-income securities in the United States: U.S. Treasury and agency securities, corporate bonds, international (dollar-denominated) bonds, and mortgage-backed securities, with maturities greater than one year.
As of September 30, 1995, the major classes of fixed-income securities represented the following proportions of the Index's total market value:
The U.S. Bond Index Portfolio will be unable to hold all of the individual issues which comprise the Index because of the large number of securities involved. Instead, the Portfolio will hold a representative sample of the securities in the Index, selecting one or two issues to represent entire "classes" or types of securities in the Index. The Portfolio will be constructed so as to match as closely as possible the composition of the Index by investing in fixed-income securities approximating their relative proportion of the Index's total market value.
At the broadest level, the U.S. Bond Index Portfolio will seek to hold securities and other investments which reflect the weighting of the major asset classes in the Index, these classes include U.S. Treasury and agency securities, corporate bonds, and mortgage-backed securities. For example, if U.S. Treasury and agency securities represent approximately 60% of the Index's interest rate risk, then approximately 60% of the Portfolio's interest rate risk will come from such securities and other investments. Similarly, if corporate bonds represent 20% of the interest rate risk of the Index, then they will represent approximately 20% of the interest rate risk of the Portfolio. Such a sampling technique is expected to be an effective means of substantially replicating the income and capital returns provided by the Index before deduction of Fund and Portfolio expenses.
The Portfolio may, from time to time, substitute one type of investment grade bond for another. For instance, a Portfolio may hold more short-term corporate bonds (and, in turn, hold fewer short U.S. Treasury bonds) than represented in the Index so as to increase income. This corporate substitution strategy will entail the assumption of additional credit risk; however, substantial diversification within the corporate sector should moderate issue-specific credit risk. Overall, credit risk is expected to be very low for the U.S. Bond Index Portfolio.
Fixed-income securities will be primarily of investment grade quality - i.e., those rated at least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB-by Standard & Poor's Corporation ("S&P"). Securities rated Baa or BBB possess some speculative characteristics.
The Portfolio may invest in U.S. Treasury bills, notes and bonds and other "full faith and credit" obligations of the U.S. Government and in U.S. Government agency securities, which are debt obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government ("U.S. Government Securities"). Such "agency" securities may not be backed by the "full faith and credit" of the U.S. Government. Such U.S. Government agencies may include the Federal Farm Credit Banks, the Resolution Trust Corporation and the Government National Mortgage Association. Even though they all carry top (AAA) credit ratings, "agency" obligations are not explicitly guaranteed by the U.S. Government and so are perceived as somewhat riskier than comparable Treasury bonds.
As a mutual fund investing primarily in fixed-income securities, the Portfolio is subject to interest rate, income, call and credit risks. Since the Portfolio also invests in mortgage-backed securities, it is also subject to prepayment risk. See "Risk Factors and Certain Securities and Investment Practices."
The Equity 500 Equal Weighted Index Portfolio seeks to replicate as closely as possible the total return of the S&P 500 Equal Weighted Index. The S&P 500 Equal Weighted Index is comprised of all stocks that make up the Standard & Poor's 500 Composite Stock Price Index with each security having the same weight. The S&P 500 Equal Weighted Index is re-balanced to these equal weights at the end of each calendar month. The S&P 500 Equal Weighted Index is calculated by Wilshire Associates. Investing in a fund designed to replicate this benchmark provides investors with diversified equity exposure with a small cap tilt and value investment attributes.
The Equity 500 Equal Weighted Index Portfolio allocates its assets equally among the equity securities which compose the S&P 500 Equal Weighted Index. The Portfolio may omit or remove any S&P 500 Equal Weighted Index stock from the Portfolio if, following objective criteria, Bankers Trust judges the stock to be insufficiently liquid or believes the merit of the investment has been substantially impaired by extraordinary events or financial conditions. Bankers Trust will not purchase the stock of Bankers Trust New York Corporation, which is included in the Index, and instead will overweight its holdings of companies engaged in similar businesses.
The Equity 500 Equal Weighted Index Fund and the Equity 500 Equal Weighted Index Portfolio are not sponsored, endorsed, sold or promoted by Wilshire Associates. Wilshire makes no representation or warranty, express or implied, to the shareholders of the Fund or investors in the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Fund or the Portfolio particularly or the ability of the index to track general stock market performance.
The Small Cap Index Portfolio seeks to replicate as closely as possible (before deduction of expenses of the Fund and corresponding Portfolio) the total return of the Russell 2000.
The Russell 2000 Index is composed of approximately 2,000 small-capitalization common stocks. A company's stock market capitalization is the total market value of its floating outstanding shares. As of September 30, 1995, the average stock market capitalization of the Russell 2000 was $280 million and the weighted average stock market capitalization of the Russell 2000 was $480 million.
The Small Cap Portfolio is neither sponsored by nor affiliated with the Frank Russell Company. Frank Russell's only relationship to the Portfolio is the licensing of the use of the Russell 2000 Small Stock Index. Frank Russell Company is the owner of the trademarks and copyrights relating to the Russell indices.
The Small Cap Portfolio invests in a statistically selected sample of the approximately 2,000 stocks included in the Russell 2000 Index. The stocks of the Russell 2000 to be included in the Small Cap Index Portfolio will be selected utilizing a statistical sampling technique known as "optimization." This process selects stocks for the Portfolio so that various industry weightings, market capitalizations and fundamental characteristics (e.g. price-to-book, price-to- earnings, debt-to-asset ratios, and dividend yields) closely approximate those of the Russell 2000. For instance, if 10% of the capitalization of the Russell 2000 consists of utility companies with relatively small capitalizations, then the Small Cap Portfolio is constructed so that approximately 10% of the Portfolio's assets are invested in the stocks of utility companies with relatively small capitalizations. The stocks held by the Portfolio are weighted to make the Portfolio's aggregate investment characteristics similar to those of the Russell 2000 Index as a whole.
The EAFE(R) Equity Index Portfolio seeks to replicate as closely as possible (before deduction of expenses of the Fund and corresponding Portfolio) the total return of the EAFE Index. The Portfolio attempts to achieve this objective by investing in a statistically selected sample of the equity securities included in the EAFE Index.
The EAFE Index is a capitalization-weighted index containing approximately 1,100 equity securities of companies located outside the United States. The countries currently included in the EAFE Index are Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and United Kingdom.
Inclusion of a security in the EAFE Index in no way implies an opinion by Morgan Stanley as to its attractiveness as an investment. Neither the Fund nor the Portfolio is neither sponsored by nor affiliated with Morgan Stanley.
The EAFE(R) Equity Index Portfolio is constructed to have aggregate investment characteristics similar to those of the EAFE Index. The Portfolio invests in a statistically selected sample of the securities included in the EAFE Index, although not all companies within a country will be represented in the Portfolio at the same time. Stocks are selected for inclusion in the Portfolio based on country of origin, market capitalization, yield, volatility and industry sector. Banker Trust will manage the Portfolio using advanced statistical techniques to determine which stocks are to be purchased or sold to replicate the EAFE Index. From time to time, adjustments may be made in the Portfolio because of changes in the composition of the EAFE Index, but such changes should be infrequent.
This Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan Stanley makes no representation or warranty, express or implied, to the owners of this Fund or any member of the public regarding the advisability of investing in securities generally or in this Fund particularly or the ability of the EAFE Index to track general stock market performance. Morgan Stanley is the licensor of certain trademarks, service marks and trade names of Morgan Stanley and of the EAFE Index which is determined, composed and calculated by Morgan Stanley without regard to the issuer of this Fund or this Fund. Morgan Stanley has no obligation to take the needs of the issuer of this Fund or the owners of this Fund into consideration in determining, composing or calculating the EAFE Index. Inclusion of a security in the EAFE Index in no way implies an opinion by Morgan Stanley as to its attractiveness as an investment. Morgan Stanley is not responsible for and has not participated in the determination of the timing of, quantities of this Fund to be issued or in the determination or calculation of the equation by which this Fund is redeemable for cash. Morgan Stanley has no obligation or liability to owners of this Fund in connection with the administration, marketing or trading of this Fund. This Fund is neither sponsored by nor affiliated with Morgan Stanley.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE INDEXES FROM SOURCES WHICH MORGAN STANLEY CONSIDERS RELIABLE, MORGAN STANLEY DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA INCLUDED THEREIN. MORGAN STANLEY MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE PRODUCTS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEXES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. MORGAN STANLEY MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The Equity 500 Index Portfolio seeks to replicate as closely as possible (before deduction of expenses of the Fund and the corresponding Portfolio) the total return of the S&P 500.
The S&P 500 is an index of 500 common stocks, most of which trade on the New York Stock Exchange Inc. (the "NYSE"). Bankers Trust believes that the S&P 500 is representative of the performance of publicly traded common stocks in the U.S. in general.
In seeking to replicate the performance of the S&P 500, before deduction of Fund and Portfolio expenses, Bankers Trust will attempt over time to allocate the Equity 500 Index Portfolio's investment among common stocks in approximately the same proportions as they are represented in as the S&P 500, beginning with the heaviest weighted stocks that make up a larger portion of the Index's value.
Bankers Trust generally will seek to match the composition of the S&P 500 but usually will not invest the Equity 500 Index Portfolio's stock portfolio to mirror the Index exactly. Because of the difficulty and expense of executing relatively small stock transactions, the Portfolio may not always be invested in the less heavily weighted S&P 500 stocks, and may at times have its portfolio weighted differently from the S&P 500, particularly if the Portfolio has a low level of assets. In addition, the Portfolio may omit or remove any S&P 500 stock from the Portfolio if, following objective criteria, Bankers Trust judges the stock to be insufficiently liquid or believes the merit of the investment has been substantially impaired by extraordinary events or financial conditions. Bankers Trust will not purchase the stock of Bankers Trust New York Corporation, which is included in the Index, and instead will overweight its holdings of companies engaged in similar businesses.
About the S&P 500. The S&P 500 is composed of 500 common stocks, which are chosen by S&P on a statistical basis to be included in the Index. The inclusion of a stock in the S&P 500 in no way implies that S&P believes the stock to be an attractive investment. The 500 securities, most of which trade on the NYSE, represented, as of September 30, 1995, approximately 81% of the market value of all U.S. common stocks. Each stock in the S&P 500 is weighted by its market value. Bankers Trust believes that the performance of the S&P 500 is representative of the performance of publicly traded common stocks in general. The composition of the S&P 500 is determined by S&P and is based on such factors as the market capitalization and trading activity of each stock and its adequacy as a representation of stocks in a particular industry group, and may be changed from time to time.
The Equity 500 Index Fund and the Equity 500 Index Portfolio are not sponsored, endorsed, sold or promoted by Standard & Poor's Corporation. S&P makes no representation or warranty, express or implied, to the shareholders of the Fund or investors in the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Fund or the Portfolio particularly or the ability of the S&P 500 to track general stock market performance.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 or any data included therein.
S&P makes no warranty, express or implied, as to the results to be obtained by the Fund or the Portfolio, owners of the Fund or the Portfolio, or any other person or entity from the use of the S&P 500 or any data included therein. S&P makes no express or implied warranties and hereby expressly disclaims all such warranties of merchantability or fitness for a particular purpose or use with respect to the S&P 500 or any data included therein.
For more information about the performance of the S&P 500, see "Appendix."
Over time, the correlation between the performance of each Fund, before the deduction of Expenses, and the respective Index is expected to be 0.95 or higher before deduction of Expenses of the Fund and expenses of the Portfolio. A correlation of 1.00 would indicate perfect correlation, which would be achieved when the net asset value of the Fund, including the value of its dividend and any capital gain distributions, increases or decreases in exact proportion to changes in the Index. Each Fund's ability to track its respective index may be affected by, among other things, transaction costs, administration and other expenses incurred by the Funds or the corresponding Portfolio, changes in either the composition of the Index or the assets of a Portfolio, and the timing and amount of Portfolio investor contributions and withdrawals, if any. In the unlikely event that a high correlation is not achieved, the Trusts' Boards of Trustees will consider alternatives. Because each Portfolio seeks to track the respective index, Bankers Trust will not attempt to judge the merits of any particular stock as an investment.
Under normal circumstances, each Portfolio will invest at least 80% of its assets in the securities of its respective Index.
As diversified funds, no more than 5% of the assets of each Portfolio may be invested in the securities of one issuer (other than U.S. Government Securities), except that up to 25% of each Portfolio's assets may be invested without regard to this limitation. Each Portfolio will not invest more than 25% of its assets in the securities of issuers in any one industry. These are fundamental investment policies of the Portfolios which may not be changed without investor approval. No more than 15% of each Portfolio's net assets may be invested in illiquid or not readily marketable securities (including repurchase agreements and time deposits maturing in more than seven days). Additional investment policies of each Portfolio are contained in the SAI.
Each Portfolio may maintain up to 25% of its assets in short-term debt securities and money market instruments to meet redemption requests or to facilitate investment in the securities of the respective Index. Securities index futures contracts and related options, warrants, convertible securities and swap agreements may be used for several reasons: to simulate full investment in the underlying Index while retaining a cash balance for fund management purposes, to facilitate trading, or to reduce transaction costs or to seek higher investment returns when a futures contract, option, warrant, convertible security or swap agreement is priced more attractively than the underlying equity security or Index. These instruments may be considered derivatives. See "Risk Factors and Certain Securities and Investment Practices -- Derivatives."
The use of derivatives for non-hedging purposes may be considered speculative. While each of these securities can be used as leveraged investments, a Portfolio may not use them to leverage its net assets. No Portfolio will invest in such instruments as part of a temporary defensive strategy (such as altering the aggregate maturity of the Portfolio) to protect the Portfolio against potential market declines.
Each Portfolio may lend its investment securities and purchase securities on a when-issued and a delayed delivery basis. The U.S. Bond Index Portfolio may invest in mortgage-related and other asset-backed securities. The EAFE(R) Equity Index Portfolio may engage in foreign currency forward and futures transactions for the purpose of enhancing portfolio returns or hedging against foreign exchange risk arising from the Portfolio's investment or anticipated investment in securities denominated in foreign currencies. See "Risk Factors and Certain Securities and Investment Practices" for more information about the investment practices of the Portfolios.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of instruments in which a Portfolio may invest and strategies Bankers Trust may employ in pursuit of a Portfolio's investment objective. A summary of risks and restrictions associated with these instrument types and investment practices is included as well.
Bankers Trust may not buy all of these instruments or use all of these techniques to the full extent permitted unless it believes that doing so will help a Portfolio achieve its goal. Holdings and recent investment strategies are described in the financial reports of a Fund and the corresponding Portfolio, which are sent to Fund shareholders twice a year. For a free SAI or financial report, call a Service Agent.
Fixed Income Security Risk - U.S. Bond Index Fund Investors in the U.S. Bond Index Fund are exposed to four types of risk from fixed income securities. (1) Interest rate risk is the potential for fluctuations in bond prices due to changing interest rates. (2) Income risk is the potential for a decline in a Portfolio's income due to falling market interest rates. (3) Credit risk is the possibility that a bond issuer will fail to make timely payments of either interest or principal to the Portfolio. (4) Prepayment risk or call risk is the likelihood that, during periods of falling interest rates, securities with high stated interest rates will be prepaid (or "called") prior to maturity, requiring the Portfolio to invest the proceeds at generally lower interest rates.
Market Risk - Equity 500 Index Fund, Equity 500 Equal Weighted Index Fund, Small Cap Index Fund and EAFE(R) Equity Index Fund As mutual funds investing primarily in common stocks, these Portfolios are subject to market risk -- i.e., the possibility that common stock prices will decline over short or even extended periods. The U.S. and foreign stock markets tend to be cyclical, with periods when stock prices generally rise and periods when prices generally decline.
Risks of Investing in Medium- and Small-Capitalization Stocks - Small Cap Index Fund Historically, medium- and small-capitalization stocks have been more volatile in price that the larger-capitalization stocks included in the S&P 500. Among the reasons for the greater price volatility of these securities are the less certain growth prospects of smaller firms, the lower degree of liquidity in the markets for such stocks, and the greater sensitivity of medium- and small-size companies to changing economic conditions. In addition to exhibiting greater volatility, medium- and small-size company stocks may fluctuate independently of larger company stocks. Medium- and small-size company stocks may decline in price as large company stocks rise, or rise in prices as large company stocks decline.
Risks of Investing in Foreign Securities - EAFE(R) Equity Index Portfolio Investors should realize that investing in securities of foreign issuers involves considerations not typically associated with investing in securities of companies organized and operated in the United States. Investors should realize that the value of a Portfolio's foreign investments may be adversely affected by changes in political or social conditions, diplomatic relations, confiscatory taxation, expropriation, nationalization, limitation on the removal of funds or assets, or imposition of (or change in) exchange control or tax regulations in foreign countries. In addition, changes in government administrations or economic or monetary policies in the United States or abroad could result in appreciation or depreciation of portfolio securities and could favorably or unfavorably affect the Portfolio's operations. Furthermore, the economies of individual foreign nations may differ from the U.S. economy, whether favorably areas such as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position; it may also be more difficult to obtain and enforce a judgment against a foreign issuer. In general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States. Any foreign investments made by the Portfolio must be made in compliance with U.S. and foreign currency restrictions and tax laws restricting the amounts and types of foreign investments.
Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of the net assets of the Portfolio as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates. In order to protect against uncertainty in the level of future foreign currency exchange rates, the Portfolio is also authorized to enter into certain foreign currency exchange transactions. Furthermore, the Portfolio's foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities of U.S. companies. The settlement periods for foreign securities, which are often longer than those for securities of U.S. issuers, may affect portfolio liquidity. Finally, there may be less government supervision and regulation of securities exchanges, brokers and issuers in foreign countries than in the United States.
Special Information Concerning Master-Feeder Fund Structure Unlike other open-end management investment companies (mutual funds) which directly acquire and manage their own portfolio securities, each Fund seeks to achieve its investment objective by investing all of its Assets in the corresponding Portfolio, a separate registered investment company with the same investment objectives as the Fund. Therefore, an investor's interest in the Portfolio's securities is indirect, like investments in other investment companies and pooled investment vehicles. In addition to selling a beneficial interest to the corresponding Fund, each Portfolio may sell beneficial interests to other mutual funds or institutional investors. Such investors will invest in a Portfolio on the same terms and conditions and will pay a proportionate share of the Portfolio's expenses. However, the other investors investing in a Portfolio are not required to sell their shares at the same public offering price as the Fund due to variations in sales commissions and other operating expenses. Therefore, investors in a Fund should be aware that these differences may result in differences in returns experienced by investors in the different funds that invest in the Portfolio. Such differences in returns are also present in other mutual fund structures. Information concerning other holders of interests in the Portfolio is available from Bankers Trust, as the Administrator, at (800) 730-1313.
The master-feeder structure has been developed relatively recently, so shareholders should carefully consider this investment approach.
Smaller funds investing in a Portfolio may be materially affected by the actions of larger funds investing in the Portfolio. For example, if a large fund withdraws from a Portfolio, the remaining funds may experience higher pro rata operating expenses, thereby producing lower returns (however, this possibility exists as well for traditionally structured funds which have large institutional investors). Additionally, a Portfolio may become less diverse, resulting in increased portfolio risk. Also, funds with a greater pro rata ownership in a Portfolio could have effective voting control of the operations of the Portfolio. Except as permitted by the SEC, whenever a Trust is requested to vote on matters pertaining to a Portfolio, the Trust will hold a meeting of shareholders of the Fund and will cast all of its votes in the same proportion as the votes of the Fund's shareholders. Fund shareholders who do not vote will not affect a Trust's votes at the Portfolio meeting. The percentage of a Trust's votes representing Fund shareholders not voting will be voted by the Trustees or officers of a Trust in the same proportion as the Fund shareholders who do, in fact, vote. Certain changes in the Portfolio's investment objectives, policies or restrictions may require the Fund to withdraw its interest in the Portfolio. Any such withdrawal could result in a distribution "in kind" of portfolio securities (as opposed to a cash distribution from the Portfolio). If securities are distributed, the Fund could incur brokerage, tax or other charges in converting the securities to cash. In addition, the distribution in kind may result in a less diversified portfolio of investments or adversely affect the liquidity of the Fund. Notwithstanding the above, there are other means for meeting redemption requests, such as borrowing.
A Fund may withdraw its investment from the Portfolio at any time, if the Board of Trustees of a Trust determines that it is in the best interests of the shareholders of the Fund to do so. Upon any such withdrawal, the Board of Trustees of the Trust would consider what action might be taken, including the investment of all the Assets of the Fund in another pooled investment entity having the same investment objectives as the Fund or the retaining of an investment adviser to manage the Fund's Assets in accordance with the investment policies described herein with respect to the corresponding Portfolio.
Each Fund's investment objective is not a fundamental policy and may be changed upon notice to but without the approval of the Fund's shareholders. If there is a change in a Fund's investment objective, the Fund's shareholders should consider whether the Fund remains an appropriate investment in light of their then-current needs. The investment objective of each Portfolio is also not a fundamental policy. Shareholders of the Funds will receive 30 days prior written notice with respect to any change in the investment objective of a Fund or the corresponding Portfolio. See "Risk Factors and Certain Securities and Investment Practices" in the SAI for a description of the fundamental policies of each Portfolio that cannot be changed without approval by "the vote of a majority of the outstanding voting securities" (as defined in the Investment Company Act of 1940, as amended (the "1940 Act") of the Portfolio.
For descriptions of the investment objective, policies and restrictions of each Portfolio, see "The Funds in Detail" herein and "Risk Factors and Certain Securities and Investment Practices" in this Prospectus and in the SAI. For descriptions of the management of the Trusts and the Portfolios, see "Management of the Trusts and the Portfolios" herein and in the SAI. For descriptions of the expenses of the Portfolio, see "The Funds--Expense Summary,"
herein and "Management of the Trusts and the Portfolios" herein and in the SAI.
Short-Term Investments. Each Portfolio may invest in certain short-term fixed income securities. Such securities may be used to invest uncommitted cash balances, to maintain liquidity to meet shareholder redemptions or to serve as collateral for the obligations underlying a Portfolio's investment in securities index futures or related options or warrants. These securities include: obligations issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities or by any of the states, repurchase agreements, time deposits, certificates of deposit, bankers' acceptances and commercial paper.
U.S. Government Securities are obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities. Some U.S. Government securities, such as Treasury bills, notes and bonds, are supported by the full faith and credit of the United States; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality.
Securities Lending. Each Portfolio may lend its investment securities to qualified institutional investors for either short-term or long-term purposes of realizing additional income. Loans of securities by a Portfolio will be collateralized by cash, letters of credit, or securities issued or guaranteed by the U.S. Government or its agencies. The collateral will equal at least 100% of the current market value of the loaned securities, and such loans may not exceed 30% of the value of a Portfolio's net assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible loss of rights in the collateral should the borrower fail financially. In determining whether to lend securities, Bankers Trust will consider all relevant facts and circumstances, including the creditworthiness of the borrower.
When Issued and Delayed Delivery Securities. Each Portfolio may purchase securities on a when-issued or delayed delivery basis. Delivery of and payment for these securities may take place as long as a month or more after the date of the purchase commitment. The value of these securities is subject to market fluctuation during this period and no income accrues to the Portfolio until settlement takes place. The Portfolio maintains with the Custodian a segregated account containing high grade liquid securities in an amount at least equal to these commitments.
Mortgage-Related Securities. As part of its effort to duplicate the investment performance of its Index, the U.S. Bond Index Portfolio may invest in mortgage-backed securities. Mortgage-backed securities represent an interest in an underlying pool of mortgages. Unlike ordinary fixed-income securities, which generally pay a fixed rate of interest and return principal upon maturity, mortgage-backed securities repay both interest income and principal as part of their periodic payments. Because the mortgages underlying mortgage-backed certificates can be prepaid at any time by homeowners or corporate borrowers, mortgage-backed securities give rise to certain unique "pre-payment" risks. See "Risk Factors and Certain Securities and Investment Practices."
The U.S. Bond Index Portfolio may purchase mortgage-backed securities issued by the Government National Mortgage Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA), and the Housing Authority (FHA). GNMA securities are guaranteed by the U.S. Government as to the timely payment of principal and interest; securities from other Government-sponsored entities are generally not secured by an explicit pledge of the U.S. Government. The U.S. Bond Index Portfolio may also invest in conventional mortgage securities, which are packaged by private corporation and are not guaranteed by the U.S. Government. Mortgage securities that are guaranteed by the U.S. Government are guaranteed only as to the timely payment of principal and interest. The market value of such securities is not guaranteed and may fluctuate.
Each Portfolio may invest in various instruments that are commonly known as derivatives. Generally, a derivative is a financial arrangement, the value of which is based on, or "derived" from, a traditional security, asset, or market index. Some "derivatives" such as mortgage-related and other asset-backed securities are in many respects like any other investment, although they may be more volatile or less liquid than more traditional debt securities. There are, in fact, many different types of derivatives and many different ways to use them. There are a range of risks associated with those uses. Futures and options are commonly used for traditional hedging purposes to attempt to protect a fund from exposure to changing interest rates, securities prices, or currency exchange rates and as a low cost method of gaining exposure to a particular securities market without investing directly in those securities. Derivatives will not be used to increase portfolio risk above the level that could be achieved using only traditional investment securities or to acquire exposure to changes in the value of assets or indexes that by themselves would not be purchased for the Portfolio.
Securities Index Futures and Related Options. Each Portfolio may enter into securities index futures contracts and related options provided that not more than 5% of its assets are required as a margin deposit for futures contracts or options [and provided that not more than 20% of a Portfolio's assets are invested in futures and options at any time.] When a Portfolio has cash from new investments in the Portfolio or holds a portion of its assets in money market instruments, it may enter into index futures or options to attempt to increase its exposure to the market. Strategies the Portfolio could use to accomplish this include purchasing futures contracts, writing put options, and purchasing call options. When the Portfolio wishes to sell securities, because of shareholder redemptions or otherwise, it may use index futures or options to hedge against market risk until the sale can be completed. These strategies could include selling futures contracts, writing call options, and purchasing put options.
Swap Agreements. Each Portfolio may enter into swap agreements only to the extent that obligations under such agreements represent not more than 10% of the
Portfolio's total assets. Swap agreements are contracts between parties in which one party agrees to make payments to the other party based on the change in market value of a specified index or asset. In return, the other party agrees to make payments to the first party based on the return of a different specified index or asset.
Although swap agreements entail the risk that a party will default on its payment obligations thereunder, a Portfolio will minimize this risk by entering into agreements that mark to market no less frequently than quarterly. Swap agreements also bear the risk that a Portfolio will not be able to meet its obligation to the counterparty. This risk will be mitigated by investing a Portfolio in the specific asset for which it is obligated to pay a return.
Warrants. Each Portfolio's investment in warrants will not exceed more than 5% of its assets (2% with respect to warrants not listed on the New York or American Stock Exchanges). Warrants are instruments which entitle the holder to buy underlying equity securities at a specific price for a specific period of time.
A warrant tends to be more volatile than its underlying securities and ceases to have value if it is not exercised prior to its expiration date. In addition, changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying securities.
Convertible Securities. Each Portfolio may invest in convertible securities which are a bond or preferred stock which may be converted at a stated price within a specific period of time into a specified number of shares of common stock of the same or different issuer. Convertible securities are senior to common stock in a corporation's capital structure, but usually are subordinated to non-convertible debt securities. While providing a fixed income stream --generally higher in yield than in the income derived from a common stock but lower than that afforded by a non-convertible debt security -- a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation of common stock into which it is convertible.
In general, the market value of a convertible security is the higher of its investment value (its value as a fixed income security) or its conversion value (the value of the underlying shares of common stock if the security is converted). As a fixed income security, the market value of a convertible security generally increases when interest rates decline and generally decreases when interest rates rise; however, the price of a convertible security generally increases as the market value of the underlying stock increases, and generally decreases as the market value of the underlying stock declines. Investments in convertible securities generally entail less risk than investments in the common stock of the same issuer.
Further risks associated with the use of futures contracts, options, warrants, convertible securities and swap agreements. The risk of loss associated with futures contracts in some strategies can be substantial due to both the low margin deposits required and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in an immediate and substantial loss or gain. However, the Portfolios will not use futures contracts, options, warrants, convertible securities and swap agreements for speculative purposes or to leverage their net assets. Accordingly, the primary risks associated with the use of futures contracts, options, warrants, convertible securities and swap agreements by the Portfolios are: (i) imperfect correlation between the change in market value of the securities held by a Portfolio and the prices of futures contracts, options, warrants, convertible securities and swap agreements; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position prior to its maturity date. The risk of imperfect correlation will be minimized by investing only in those contracts whose behavior is expected to resemble that of a Portfolio's underlying securities. The risk that a Portfolio will be unable to close out a futures position will be minimized by entering into stock transactions on an exchange with an active and liquid secondary market. However options, warrants, convertible securities and swap agreements purchased or sold over-the-counter may be less liquid than exchange-traded securities. Illiquid securities, in general, may not represent more than 15% of the net assets of a Portfolio.
Foreign Currency Forward, Futures and Related Options Transactions. The EAFE(R) Equity Index Portfolio may enter into foreign currency forward and foreign currency futures contracts in order to maintain the same currency exposure as the EAFE Index. The Portfolio may not enter into such contracts as a way of protecting against anticipated adverse changes in exchange rates between foreign currencies and the U.S. dollar. A foreign currency forward contract is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. Such contracts do not eliminate fluctuations in the underlying prices of securities held by the Portfolios. Although such contracts tend to minimize the risk of loss due to a decline in the value of a currency that has been sold forward, and the risk of loss due to an increase in the value of a currency that has been purchased forward, at the same time they tend to limit any potential gain that might be realized should the value of such currency increase.
Asset Coverage. To assure that a Portfolio's use of futures and related options, as well as when-issued and delayed-delivery securities, interest rate swaps and foreign currency forward futures and related options transactions are not used to achieve excessive investment leverage, a Portfolio will cover such transactions, as required under applicable interpretations of the SEC, either by owning the underlying securities, entering into an off-setting transaction, or by establishing a segregated account with the Portfolio's custodian containing high grade liquid debt securities in an amount at all times equal to or exceeding the Portfolio's commitment with respect to these instruments or contracts.
The frequency of Portfolio transactions-the Portfolio's portfolio turnover rate- will vary from year to year depending on market conditions and the Portfolio's cash flows. Each Portfolio's annual portfolio turnover rate is not expected to exceed 100%. The Equity 500 Index Portfolio's portfolio turnover rate for the years ended December 31, 1994 and 1993 was 21% and 31%, respectively.
Each Portfolio's recent strategies and holdings, and the corresponding Fund's performance, is detailed twice a year in the Funds' financial reports (not available during the first year for each Fund other than the Equity 500 Index Fund), which are sent to all Fund shareholders.
For current Fund performance or a free copy of the Funds' financial report, please contact a Service Agent.
Mutual fund performance is commonly measured as total return and/or yield. Each Fund's performance is affected by the expenses of that Fund.
Total return is the change in value of an investment in a Fund over a given period, assuming reinvestment of any dividends and capital gains. A cumulative total return reflects actual performance over a stated period of time. An average annual total return is a hypothetical rate of return that, if achieved annually, would have produced the same cumulative total return if performance had been constant over the entire period. Average annual total return calculations smooth out variations in performance; they are not the same as actual year-by- year results. Average annual total returns covering periods of less than one year assume that performance will remain constant for the rest of the year.
Yield refers to the income generated by an investment in a Fund over a given period of time, expressed as an annual percentage rate. Yields are calculated according to a standard that is required for all stock and bond funds. Because this differs from other accounting methods, the quoted yield may not equal the income actually paid to shareholders. This difference may be significant for a Fund investing in a Portfolio whose investments are denominated in foreign currencies.
The 30-day SEC yield for the period ended September 30, 1995, for the Equity 500 Index Fund was 2.30% .
Performance information may include comparisons of a Fund's investment results to various unmanaged indices or results of other mutual funds or investment or savings vehicles. From time to time, Fund rankings may be quoted from various sources, such as Lipper Analytical Services, Inc., Value Line and Morningstar, Inc.
Unlike some bank deposits or other investments which pay a fixed yield for a stated period of time, the total return of a Fund will vary depending upon interest rates, the current market value of the securities held by the corresponding Portfolio and changes in the expenses of the Fund or Portfolio. In addition, during certain periods for which total return may be provided, Bankers Trust or SBDS may have voluntarily agreed to waive portions of their fees, or reimburse certain operating expenses of a Fund or Portfolio, on a month-to-month basis. Such waivers will have the effect of increasing the Fund's net income (and therefore its yield and total return) during the period such waivers are in effect.
Total returns and yields are based on past results and are not an indication of future performance.
MANAGEMENT OF THE TRUSTS AND THE PORTFOLIOS
The Trusts and each Portfolio is governed by a Board of Trustees which is responsible for protecting the interests of investors. A majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of each Trust or the Portfolio, as the case may be, have adopted written procedures reasonably appropriate to deal with potential conflicts of interest arising from the fact that the same individuals are Trustees of the Trusts and the Portfolios, up to and including creating separate boards of trustees. See "Management of the Trusts and the Portfolios" in the SAI for more information with respect to the Trustees and officers of the Trusts and each Portfolio.
The Trusts have not retained the services of an investment adviser since the Trusts seek to achieve the investment objective of each Fund by investing all the Assets of the Fund in the corresponding Portfolio. Each Portfolio has retained the services of Bankers Trust as investment adviser.
Bankers Trust Company and Its Affiliates
Bankers Trust Company, a New York banking corporation with principal offices at 280 Park Avenue, New York, New York 10017, is a wholly owned subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a variety of general banking and trust activities and is a major wholesale supplier of financial services to the international and domestic institutional market.
As of September 30, 1995, Bankers Trust New York Corporation was the seventh largest bank holding company in the United States with total assets of approximately $104 billion. Bankers Trust is a worldwide merchant bank dedicated to servicing the needs of corporations, governments, financial institutions and private clients through a global network of over 120 offices in more than 40 countries. Investment management is a core business of Bankers Trust, built on a tradition of excellence from its roots as a trust bank founded in 1903. The scope of Bankers Trust's investment management capability is unique due to its leadership positions in both active and passive quantitative management and its presence in major equity and fixed income markets around the world. Bankers Trust is one of the nation's largest and most experienced investment managers with approximately $200 billion in assets under management globally. Of that total, approximately $83 billion are in U.S. equity index assets alone. When bond and international funds are included, Bankers Trust manages approximately $96 billion in total index assets. This makes Bankers Trust one of the nation's leading managers of index funds.
Bankers Trust has more than 50 years of experience managing retirement assets for the nations's largest corporations and institutions. In the past, these clients have been serviced through separate account and commingled fund structures. Now, the BT Family of Funds brings Bankers Trust's extensive investment management expertise - once available to only the largest institutions in the U.S. - to individual investors. Bankers Trust's officers have had extensive experience in managing investment portfolios having objectives similar to those of each portfolio.
Bankers Trust, subject to the supervision and direction of the Board of Trustees of each Portfolio, manages each Portfolio in accordance with the Portfolio's investment objective and stated investment policies, makes investment decisions for the Portfolio, places orders to purchase and sell securities and other financial instruments on behalf of the Portfolio and employs professional investment managers and securities analysts who provide research services to the Portfolio. Bankers Trust may utilize the expertise of any of its world wide subsidiaries and affiliates to assist it in its role as investment adviser. All orders for investment transactions on behalf of a Portfolio are placed by Bankers Trust with broker-dealers and other financial intermediaries that it selects, including those affiliated with Bankers Trust. A Bankers Trust affiliate will be used in connection with a purchase or sale of an investment for the Portfolio only if Bankers Trust believes that the affiliate's charge for the transaction does not exceed usual and customary levels. The Portfolio will not invest in obligations for which Bankers Trust or any of its affiliates is the ultimate obligor or accepting bank. The Portfolio may, however, invest in the obligations of correspondents and customers of Bankers Trust.
The Investment Advisory Agreements provide for each Portfolio to pay Bankers Trust a fee from each Portfolio, accrued daily and paid monthly, equal on an annual basis to the following percentages of the average daily net assets of the Portfolio for its then-current fiscal year: U.S. Bond Index Portfolio, 0.15%; Equity 500 Equal Weighted Index Portfolio, 0.25%; Small Cap Index Portfolio, 0.15%; EAFE(R) Equity Index Portfolio, 0.25%; and Equity 500 Index Portfolio, 0.10%.
Bankers Trust has been advised by its counsel that, in counsel's opinion, Bankers Trust currently may perform the services for the Trusts and the Portfolios described in this Prospectus and the SAI without violation of the Glass-Steagall Act or other applicable banking laws or regulations. State laws on this issue may differ from the interpretations of relevant Federal law, and banks and financial institutions may be required to register as dealers pursuant to state securities law.
Bankers Trust investment personnel may invest in securities for their own account pursuant to a code of ethics that establishes procedures for personal investing and restricts certain transactions.
Frank Salerno, Managing Director of Bankers Trust, is responsible for the management of the Equity 500 Equal Weighted Index Portfolio, the Small Cap Portfolio and the Equity 500 Index Portfolio. Mr. Salerno oversees administration, management and trading of international and domestic equity index strategies. He has been employed by Bankers Trust since 1981 and has managed the Portfolios' assets since each Portfolio commenced operations.
Richard J. Vella, Managing Director of Bankers Trust, is responsible for the day-to-day management of the E(R) Equity Index Portfolio. Mr. Vella has been employed by Bankers Trust since 1985 and has ten years of trading and investment experience.
Under its Administration and Services Agreement with each Trust, Bankers Trust calculates the net asset value of each Fund and generally assists the Board of Trustees of the Trust in all aspects of the administration and operation of the Funds. The Administration and Services Agreement provides for the respective Trust to pay Bankers Trust a fee, accrued daily and paid monthly equal on an annual basis to the following percentages of the average daily net assets of the Fund, attributable to the Class, for its then-current fiscal year: U.S. Bond Index Fund, 0.20%; Equity 500 Equal Weighted Index Fund, 0.15%; Small Cap Index Fund, 0.20%; EAFE(R) Equity Index Fund, 0.15%; and Equity 500 Index Fund, 0.05%.
Under an Administration and Services Agreement with each Portfolio, Bankers Trust calculates the value of the assets of the Portfolio and generally assists the respective Board of Trustees in all aspects of the administration and operation of the Portfolios. The Administration and Services Agreement provides for each Portfolio to pay Bankers Trust a fee, accrued daily and paid monthly, equal on an annual basis to the following percentages of the Portfolio's average daily net assets for its then-current fiscal year: U.S. Bond Index Portfolio, 0.05%; Equity 500 Equal Weighted Index Portfolio, 0.05%; Small Cap Index Portfolio, 0.05%; EAFE(R) Equity Index Portfolio, 0.10%; and Equity 500 Index Portfolio, 0.05%. Under each Administration and Services Agreement, Bankers or more of its responsibilities to others, including SBDS, at Bankers Trust's expense.
Under its Distribution Agreement with each Trust, SBDS, as Distributor, serves as the Trusts' principal underwriter on a best efforts basis. In addition, SBDS provides the Trusts with office facilities. SBDS is a wholly owned subsidiary of Signature Financial Group, Inc. ("SFG"). SFG and its affiliates currently provide administration and distribution services for other registered investment companies. The principal business address of SFG and SBDS is 6 St. James Avenue, Boston, Massachusetts 02116.
Bankers Trust acts as custodian of the assets of the Trusts and each Portfolio and serves as the transfer agent (the "Transfer Agent") for the Trusts and each Portfolio under the Administration and Services Agreement with the Trusts and each Portfolio.
The account guidelines that follow may not apply to certain Funds or to certain retirement accounts. Some of the services and features of this Prospectus may not be available to you. Certain features of the Funds, such as minimum initial or subsequent investment amounts, may be modified in these programs, and administrative charges may be imposed for the services rendered.
The different ways to set up (register) your account with Bankers Trust are listed below.
The account guidelines that follow may not apply to certain Funds or to certain retirement accounts. If your employer offers a Fund through a retirement program, contact your employer for more information. Otherwise, call your Service Agent directly.
Ways to Set Up Your Account
For your general investment needs Individual accounts are owned by one person. Joint accounts can have two or more owners (tenants). Joint accounts may be joint tenants in common or joint tenants with rights of survivorship.
To shelter your retirement savings from taxes Retirement plans allow individuals to shelter investment income and capital gains from current taxes. In addition, contributions to these accounts may be deductible. Retirement accounts require special applications and typically have lower minimums.
o Individual Retirement Accounts (IRAs) allow anyone of legal age under 70 1/2 with earned income to invest up to $2,000 per tax year. Individuals can also invest in a spouse's IRA if the spouse has earned income of less than $250.
o Rollover IRAs retain special tax advantages for certain distributions from employer sponsored retirement plans.
o Simplified Employee Pension Plans (SEP-IRAs) provide small business owners or those with self-employed income (and their eligible employees) with many of the same advantages as a Keogh, but with fewer administrative requirements.
o 401(k) Plans allow employees of corporations of all sizes to contribute a percentage of their wages on a tax deferred basis. These accounts need to be established by the trustee of the plan.
Money Purchase/Profit Sharing Plans (Keogh Plans) are tax deferred pension accounts designated for employees of unincorporated businesses or for persons who are self-employed.
Gifts or Transfers to a Minor (UGMA, UTMA) To invest for a child's education or
These custodial accounts provide a way to give money to a child and obtain tax benefits. An individual can give up to $10,000 a year per child without paying federal gift tax. Depending on state laws, you can set up a custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Contact your Service Agent.
For money being invested by a trust
The trust must be established before an account can be opened.
For investment needs of corporations, associations, partnerships, or other groups Contact your Service Agent.
Shares are purchased at the Fund's net asset value ("NAV") next calculated after your investment is received and accepted. The NAV is normally calculated at 4:00 p.m. Eastern time.
Investment in the Company and Special Processing. As institutional funds, Shares of the Funds are offered exclusively to retirement programs and arrangements ("Programs") through their plan sponsors, to Individual Retirement Accounts and to certain institutional investors. Sponsors of a Program or their agents are referred to as "Program Sponsor(s)" or "Program Administrator(s)" and individual employees participating in a Program are referred to as "Participant(s)" and individual investors who separate from a program are referred to as "Continuing Participant(s). Endowments, foundations, insurance companies and other institutional investors are referred to as "Other Institutional Investors". The term "shareholders" refers to each or all of these categories as well as to Individual Retirement Accounts, as appropriate.
Investments by Participants are made through their Program Sponsor's recordkeeper, who is responsible for transmitting all orders for the purchase, redemption or exchange of Shares of the Funds. The availability of each Fund, and the procedures for investing, depend upon the provisions of the Program and whether the Program Sponsor has contracted with the Trusts or their transfer agent for special processing services, including subaccounting. Continuing Participants, other institutional investors and Individual Retirement Account investors must arrange for services through BT Institutional Service Center, the Manager, by contacting them at (800) 368-4031, P.O. Box 419210, Kansas City, MO 64141-6210.
If you are placing your order through a Service Agent, it is the responsibility of your Service Agent to transmit your order to buy Shares to the Transfer Agent before 4:00 p.m. Eastern time.
The Transfer Agent must receive payment within three business days after an order for Shares is placed; otherwise your purchase order may be canceled and you could be held liable for resulting fees and/or losses.
Share certificates are not available for Shares of the Funds.
If you are new to the BT Family of Funds, complete and sign an account application and mail it along with your check. If there is no account application accompanying this Prospectus, call your Service Agent or Bankers Trust.
If you already have money invested in a fund in the BT Family of Funds, you can:
o Mail an account application with a check, o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of Funds or o Contact your Service Agent.
If you are investing through a tax-sheltered retirement plan, such as an IRA, for the first time, you will need a special application. Contact your Service Agent or Bankers Trust for more information and a retirement account application.
Minimum Investment (excluding retirement plans)
To Open an Account $5 million
To Add to an Account No minimum
For further information on opening an account, please consult your Service Agent or refer to the account application.
You can arrange to take money out of your fund account at any time by selling (redeeming) some or all of your Shares. Your Shares shall be sold at the next NAV calculated after an order is received by the Transfer Agent. NAV is normally calculated at 4:00 p.m. Eastern time.
To sell Shares in a retirement account, your request must be made in writing, except for exchanges to other eligible funds in the BT Family of Funds which can be requested by phone or in writing. For information on retirement distributions contact your Service Agent or call 1-800- 677-7596.
If you are selling some but not all of your non-retirement account Shares, leave at least $1,000,000 worth of Shares in the account to keep it open.
To sell Shares by bank wire you will need to sign up for these services in advance when completing your account application.
Certain requests must include a signature guarantee. It is designed to protect you and Bankers Trust from fraud. Your request must be made in writing and include a signature guarantee if any of the following situations apply:
o You wish to redeem more than $100,000 worth of Shares, o Your account registration has changed within the last 30 days, o The check is being mailed to a different address than the one on your account
o The check is being made payable to someone other than the account owner, o The redemption proceeds are being transferred to a Bankers Trust account with a different registration, or o You wish to have redemption proceeds wired to a non-predesignated bank account.
You should be able to obtain a signature guarantee from a bank, broker, dealer, credit union (if authorized under state law), securities exchange or association, clearing agency, or savings association. A notary public cannot provide a signature guarantee.
Write a "letter of instruction" with:
o The Fund's name and Fund's number, o Your Fund account number, o The dollar amount or number of Shares to be redeemed and o Any other applicable requirements listed in the following table.
Deliver your letter to your Service Agent , or mail it to the following address:
210 West 10th Street, 8th Floor
Unless otherwise instructed, the Transfer Agent will send a check to the record address.
Additional Information about Selling Shares
The BT Family of Funds provides a variety of services to help you manage your account.
Statements and reports that your Service Agent or the Transfer Agent will send to you include the following:
o Confirmation statements (after every transaction that affects your account balance , including distributions or your account registration)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed, even if you have more than one account in the Fund. Call your Service Agent if you need additional copies of financial reports.
Exchange privilege. You may sell your Shares and buy Shares of other funds in the BT Family of Funds by telephone or in writing.
Note that exchanges out of a Fund may be limited to four per calendar year and that they may have tax consequences for you. For detail on policies and restrictions governing exchanges including circumstances under which a shareholder's exchange privilege may be suspended or revoked, see page ___.
Systematic Investment, Withdrawal and Exchange Program
One easy way to pursue your financial goals is to invest money regularly. The BT Family of Funds offers convenient services that let you transfer money into your fund account, out of your fund account or between fund accounts automatically. While regular investment plans do not guarantee a profit and will not protect you against loss in a declining market, they can be an excellent way to invest for retirement, a home, educational expenses, and other long-term financial goals. Certain restrictions apply for retirement accounts. Call your Service Agent for more information.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes substantially all of its net income and capital gains to shareholders each year. Each Fund distributes capital gains annually. Normally, income dividends for the Equity 500 Index Fund and Equity 500 Equal Weighted Index Fund are distributed quarterly; income dividends for the Small Cap Index Fund and EAFE(R) Equity Index Fund are distributed annually; and income dividends for the U.S. Bond Index Fund are distributed monthly.
When you open an account, specify on your account application how you want to receive distributions. The Trust offers four options:
1. Reinvestment Option. Your dividend and capital gain distributions will be automatically reinvested in additional Shares of the Fund. If you do not indicate a choice on your application you will be assigned this option.
2. Income-Earned Option. Your capital gain distributions will be automatically reinvested in additional Shares of the Fund, but you will be sent a check for each dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital gain distributions.
4. Automatic Dividends Program. Your dividend and capital gain distributions be automatically invested in Shares of another fund in the BT Family of Funds as long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, those checks will be reinvested in your account at the current NAV and your election may be converted to the Reinvestment Option. You may change distribution option at anytime by notifying the Transfer Agent in writing.
For retirement accounts, all distributions are automatically reinvested. When you are over 59 1/2 years old, you can receive distributions in cash. If distributions from a retirement account for any taxable year following the year in which the participant reaches age 70 1/2 are less than the "minimum required distribution" for that taxable year, an excise tax equal to 50% of the deficiency may be imposed by the Internal Revenue Service (the "IRS"). The trustee or custodian of such a retirement account will be responsible for reporting distributions from such accounts to the IRS.
When each of the Funds deducts a distribution from its NAV, the reinvestment price is the applicable Fund's NAV at the close of business that day. Distribution checks will be mailed within seven days, or longer for a December ex-dividend date.
As with any investment, you should consider how an investment in the Funds could affect you. Below are some of the Funds' tax implications. If your account is not a tax-deferred retirement account beware of these tax implications.
Taxes on Distributions. Distributions from the Funds are subject to federal income tax and may also be subject to state or local taxes. Annual Statements as to the federal tax status of distributions, and distributions that are attributable to state and local income and personal taxes, if applicable, will be mailed to shareholders shortly after the end of the year. If living outside the United States, your distributions from the Funds could also be taxed by the country in which you reside.
For federal tax purposes, income and short-term capital gain distributions from each of the Funds are taxed as dividends; long-term capital gain distributions are taxed as long-term capital gains.
Mutual fund dividends from U.S. government securities are generally free from state and local income taxes. However, particular states may limit this benefit, and some types of securities, such as repurchase agreements and some agency- backed securities, may not qualify for the benefit. In addition, some states may impose intangible property taxes. You should consult your own tax adviser for details and up-to-date information on the tax laws in your state.
Distributions are taxable when they are paid, whether you take them in cash or reinvest them. However, distributions declared in December and paid in January are taxable as if they were paid on December 31.
Every January, the Transfer Agent will send the IRS a statement showing the taxable distributions paid to you in the previous year.
Taxes on Transactions. Your redemptions, including exchanges, are subject to capital gains tax. A capital gain or loss is the difference between the cost of your Shares and the price you receive when you sell them.
Whenever you sell Shares of a Fund, the Transfer Agent will send you or your Service Agent a confirmation statement showing how many Shares you sold and at what price. You also receive a consolidated transaction statement at least quarterly. However, it is up to you or your tax preparer to determine whether this sale resulted in a capital gain and, if so, the amount of tax to be paid. Be sure to keep your regular account statements; the information they contain will be essential in calculating the amount of your capital gains.
"Buying a dividend." If you buy Shares just before a Fund deducts a capital gain distribution or dividend distribution, as applicable, from its NAV, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution.
Currency considerations. If a Fund's dividends exceed its taxable income in any year, which is sometimes the result of currency-related losses, all or a portion of the Fund's dividends may be treated as a return of capital to shareholders for tax purposes. To minimize the risk of a return of capital, each of the Funds may adjust its dividends to take currency fluctuations into account, which may cause the dividends to vary. Any return of capital will reduce the cost basis of your Shares, which will result in a higher reported capital gain or a lower reported capital loss when you sell your Shares. The statement you receive in January will specify whether any distributions included a return of capital.
Undistributed net gains from currency transactions, if any, will generally be distributed as a separate dividend in December.
There are tax requirements that all Funds must follow in order to avoid federal taxation. In its effort to adhere to these requirements, a Fund may have to limit its investment activity in some types of instruments.
With the exception of the EAFE(R) Equity Index Fund, the Funds are open for business each day the NYSE is open. Each Fund's NAV is calculated as of the close of regular trading on the NYSE, currently 4:00 p.m. Eastern time. The EAFE(R) Equity Index Fund will not process orders on any day when either the NYSE or the Tokyo Stock Exchange is closed. Orders received on such days will be priced on the next day the Fund computes its NAV. As such, investors may experience a delay in purchasing or redeeming Shares of the EAFE(R) Equity Index Fund.
A Fund's NAV is the value of a single Share. The NAV of each Fund is computed by dividing the value of the Fund's Assets (i.e., the value of its investment in the Portfolio and other assets), less all liabilities, allocable to the Institutional Class Shares by the total number of its Shares outstanding. Each Portfolio's securities and other assets are valued primarily on the basis of market quotations or, if quotations are not readily available, by Bankers Trust pursuant to procedures adopted by the Portfolio's Board of Trustees. These procedures require Bankers Trust to value such a security at the same value as an equivalent security which is readily marketable and, in making such comparisons, to consider all relevant factors under applicable guidelines of the SEC.
When investors sign their account application, they will be asked to certify that their social security or taxpayer identification number is correct and that they are not subject to 31% backup withholding for failing to report income to the IRS. If investors violate IRS regulations, the IRS can require a Fund to withhold 31% of their taxable distributions and redemptions.
Investors may initiate many transactions by telephone: A Service Agent or the Transfer Agent may only be liable for losses resulting from unauthorized transactions if they do not follow reasonable procedures designed to verify the identity of the caller. A Service Agent or the Transfer Agent will request personalized security codes or other information, and may also record calls. Investors should verify the accuracy of the confirmation statements immediately after receipt. If investors do not want the ability to redeem and exchange by telephone, they should call their Service Agent or the Transfer Agent for instructions. Additional documentation may be required from corporations, associations and certain fiduciaries.
Each Fund reserves the right to suspend the offering of Shares for a period of time. Each Fund also reserves the right to reject any specific purchase order, including certain purchases by exchange. Purchase orders may be refused if, in Bankers Trust's opinion, they would disrupt management of a Fund.
When investors place an order to buy Shares, their Shares will be purchased at the next NAV or offering price, as applicable, calculated after the order is received and accepted by the Transfer Agent. Note the following:
o All checks should be made payable to the specific Fund.
o All purchases must be made in U.S. dollars and checks must be drawn on U.S. banks.
o The Funds do not accept third party checks, except those payable to an existing shareowner who is a natural person (not a corporation or partnership), credit cards or cash.
o When making a purchase with more than one check, each check must have a value of at least $50.
o Each Fund reserves the right to limit the number of checks processed at one time.
o If a check does not clear, the purchase will be cancelled and the investor could be liable for any losses or fees a Fund or the Transfer Agent has incurred.
o When purchases are made by check or periodic automatic investment, redemptions will not be allowed until the investment being redeemed has been in the account for 15 business days.
o Direct Purchases: In the case of the U.S. Bond Index Fund, investors begin to earn dividends as of the first business day following the day
o Automated Order Purchases: In the case of the U.S. Bond Index Fund, investors begin to earn dividends as of the business day an order is
Automated Orders Purchase. Shares of the Funds can be purchased or sold through Service Agents utilizing an automated order placement and settlement system that guarantees payment for orders on a specified date.
To avoid the collection period associated with check purchases, investors should consider buying Shares by bank wire, U.S. Postal money order, U.S. Treasury
check, or Federal Reserve check.
When investors place an order to sell Shares, Shares will be sold at the next NAV calculated after the order is received and accepted. Note the following:
o Normally, redemption proceeds will be mailed on the next business day, but if making immediate payment could adversely affect a Fund it may take up to seven days to pay you.
o Shares of the Funds will earn dividends through the date of redemption; however, in the case of the U.S. Bond Index Fund, Shares redeemed on a Friday or prior to a holiday will continue to earn dividends until the next business day.
o Each Fund may hold payment on redemptions until it is reasonably satisfied that investments made by check have been collected which can take up to seven business days.
o Redemptions may be suspended or payment dates postponed when the NYSE is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC.
The Transfer Agent may charge a fee for special services, such as providing historical account documents, that are beyond the normal scope of its services.
As a shareholder, investors have the privilege of exchanging Shares of a Fund for Shares of other funds in the BT Family of Funds at NAV. However, investors should note the following:
o The Fund an investor exchanges into must be registered for sale in their state.
o Investors may only exchange between accounts that are registered in the same name, address, and taxpayer identification number.
o Before exchanging into a Fund, investors should read its Prospectus.
o Exchanges between the Funds described in this Prospectus and Funds described in other BT Family of Funds' Prospectuses are restricted during the 90 days following purchase. Exchanges among Funds described in this Prospectus are permitted any time after purchase.
o If an investor exchanges into the EAFE(R) Equity Index Fund on a day when the NYSE or the Tokyo Stock Exchange is closed, the exchange out of the other BT Fund will be processed on that day, but the EAFE(R) Equity Index Fund Shares will not be purchase until the day the EAFE(R) Equity Index Fund reopens. If an investor exchanges out of the EAFE(R) Equity Index Fund on a day when the NYSE is open and the Tokyo Stock Exchange is closed, the exchange will be delayed until the EAFE(R) Equity Index Fund reopens.
o Exchanges may have tax consequences for you.
o Because excessive trading can hurt Fund performance and shareholders, each Fund reserves the right to temporarily or permanently terminate the exchange privilege of any investor who makes more than four exchanges out of the Fund per calendar year. Accounts under common ownership or control, including accounts with the same taxpayer identification number, will be counted together for purposes of the four exchange limit.
o Each Fund reserves the right to refuse exchange purchases by any person or group if, in Bankers Trust's judgment, the Fund would be unable to invest the money effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected.
o Exchanges may be restricted or refused if a Fund receives or anticipates simultaneous orders affecting significant portions of the Fund's assets. In particular, a pattern of exchanges that coincide with a "market timing" strategy may be disruptive to a Fund.
o Although the Funds will attempt to give prior notice whenever they are reasonably able to do so, they may impose these restrictions at any time. The Funds reserve the right to terminate or modify the exchange privilege in the future on 60 days' notice to shareholders.
ADDITIONAL INFORMATION ABOUT THE TRUST AND PORTFOLIOS
Each Fund is a mutual fund: an investment that pools shareholders' money and invests it toward a specified goal. Each Fund (with the exception of the Equity 500 Index Fund) is a separate diversified series of BT Advisor Funds, a Massachusetts business trust. The Equity 500 Index Fund is a separate diversified series of BT Institutional Funds. Each Fund (with the exception of the Equity 500 Index Fund) offers two classes of Shares of beneficial interest, Institutional Class Shares and Advisor Class Shares. Each of the U.S. Bond Index Portfolio, Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio, and EAFE(R) Equity Index Portfolio is a separate diversified series of BT Investment Portfolios, a New York master trust fund. The Equity 500 Index Portfolio is a New York trust.
Each Portfolio (other than the Equity 500 Index Portfolio) is a separate subtrust (or "Series") of BT Investment Portfolios. Each Trust and BT Investment Portfolios reserves the right to add additional series in the future. The Trust also reserves the right to issue additional classes of Shares of each Fund.
The Trusts or a Portfolio may hold special meetings and mail proxy materials. These meetings may be called to elect or remove trustees, change fundamental policies, approve Portfolio's investment advisory agreement, or for other purposes. Shareholders not attending these meetings are encouraged to vote by proxy. Each Trust's Transfer Agent will mail proxy materials in advance, including a voting card and information about the proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of each Fund will have one vote for each full share held and proportionate, fractional votes for fractional shares held. A separate vote of one of the Funds or classes is required on any matter affecting only that Fund or class on which shareholders are entitled to vote. Shareholders of a Fund or class are not entitled to vote on Trust matters that do not affect that Fund or class, respectively, and do not require a separate vote of the Fund or class. All series of each Trust and all classes will vote together on certain matters, such as electing trustees or approving independent public auditors. There normally will be no meetings of shareholders for the purpose of electing Trustees unless and until such time as less than a majority of Trustees holding office have been elected by shareholders, at which time the Trustees then in office will call a shareholders' meeting for the election of Trustees. Any Trustee may be removed from office upon the vote of shareholders holding at least two-thirds of that Trust's outstanding shares at a meeting called for that purpose. The Trustees are required to call such a meeting upon the written request of shareholders holding at least 10% of that Trust's outstanding shares. Each Trust will also assist shareholders in communicating with one another as provided for in the 1940 Act.
Each series of a Trust will vote separately on any matter involving the corresponding Portfolio. Shareholders of all of the series of a Trust will, however, vote together to elect Trustees of that Trust and for certain other matters. Under certain circumstances, the shareholders of one or more series could control the outcome of these votes. The series of BT Investment Portfolios will vote together or separately on matters in the same manner, and in the same circumstances, as do the series of the Trusts. As with the Trusts, the investors in one or more series of BT Investment Portfolios could control the outcome of these votes.
The Trusts are each an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust of each of BT Investment Portfolios and the Equity 500 Index Portfolio provides that each Fund and other entities investing in a Portfolio (e.g., other investment companies, insurance company separate accounts and common and commingled trust funds) will each be liable for all obligations of that Portfolio. However, the risk of a Fund incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance existed and a Portfolio itself was unable to meet its obligations. Accordingly, the Trustees of the Trusts believe that neither the Funds nor their shareholders will be adversely affected by reason of the Funds' investing in the Portfolios. No series of BT Investment Portfolios has any preference over any other series.
Prospectus - Advisor Class Shares
Equity 500 Equal Weighted Index Fund
BT Investment Equity 500 Index Fund
BT Advisor Funds (the "Trust") is an open-end, management investment company (mutual fund) which currently consists of ten funds. With the exception of the BT Investment Equity 500 Index Fund (the "Equity 500 Index Fund"), each of the diversified funds listed above (each, a "Fund") is a separate series of the Trust and each offers two classes of shares. The shares offered by this prospectus are the Advisor Class Shares (the "Shares"). The Equity 500 Index Fund is a series of BT Pyramid Mutual Funds, an open-end management investment company (together with the Trust, the "Trusts"). Each Fund seeks to replicate as closely as possible the performance of a selected market index before the deduction of the expenses allocable to the Shares of the Fund and the corresponding Portfolio (the "Expenses"). There is no assurance, however, that each Fund will achieve its stated objective.
Unlike other open-end management investment companies (mutual funds), each Fund seeks to achieve its investment objective by investing all of its investable assets ("Assets") in the corresponding Portfolio which is a separate fund with an identical investment objective. See "Special Information Concerning Master- Feeder Fund Structure" on page __.
Bankers Trust Company ("Bankers Trust") is the investment adviser (the "Adviser") of each Portfolio.
Please read this Prospectus before investing, and keep it on file for future reference. It contains important information, including how each Fund invests and the services available to shareholders.
To learn more about each Fund and its investments, investors can obtain a copy of the Funds' Statement of Additional Information (the "SAI"), dated January , 1996, which contains each Portfolio's most recent financial report and portfolio listing. The SAI has been filed with the Securities and Exchange Commission (the "SEC") and is incorporated herein by reference . For a free copy of this document, call (800) 730-1313 or contact the Trusts at 6 St. James Avenue, Boston, MA 02116, or an Investment Professional.
Mutual fund shares are not deposits or obligations of, or guaranteed by, Bankers Trust or any depository institution. Shares are not insured by the FDIC, the Federal Reserve Board or any other agency, and are subject to investment risk, including the possible loss of principal.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUNDS -- WHO MAY WANT TO INVEST -- INVESTMENT PRINCIPLES AND RISKS Each Fund's overall approach to investing. -- EXPENSE SUMMARY Each Fund's annual operating expenses. -- FUND FINANCIAL HIGHLIGHTS Selected data for a share outstanding, total investment return, ratios to average net assets and other supplemental data for the Fund. THE FUNDS IN DETAIL -- INVESTMENT OBJECTIVES AND POLICIES -- RISK FACTORS AND CERTAIN SECURITIES AND -- SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND -- SECURITIES AND INVESTMENT PRACTICES -- PERFORMANCE How each Fund has done over time. -- MANAGEMENT OF THE TRUSTS AND THE PORTFOLIOS
ACCOUNT INFORMATION -- TYPES OF ACCOUNTS Different ways to setup retirement plans.
-- HOW TO BUY SHARES Opening an account and making additional investments. -- HOW TO SELL SHARES Taking money out and closing your account. -- INVESTOR SERVICES To help you manage your account. ACCOUNT POLICIES -- DIVIDENDS, CAPITAL GAINS AND TAXES -- VALUATION DETAILS Share price calculations and the timing of purchases and redemptions.
-- ADDITIONAL INFORMATION ABOUT THE Trusts
The Trusts seek to achieve the investment objective of each Fund by investing all the Assets of the Fund in the corresponding Portfolio.
The U.S. Bond Index Fund seeks to replicate as closely as possible (before deduction of Expenses) the investment performance of the Lehman Brothers Aggregate Bond Index (the "Aggregate Bond Index"), a broad market weighted index which encompasses U.S. Treasury and agency securities, corporate investment grade bonds, international (dollar-denominated) investment grade bonds, and mortgage-backed securities. The Fund will be invested primarily in fixed income securities of the U.S. Government or any agency thereof, publicly issued fixed rate domestic debt of industrial, financial, and utility corporations, and U.S. dollar denominated fixed income securities of foreign and supranational entities issued publicly in the United States. The Fund will also invest in mortgage pass-through securities issued by the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association. The U.S. Bond Index Fund invests all of its Assets in the U.S. Bond Index Portfolio.
The Equity 500 Equal Weighted Index Fund seeks to replicate as closely as possible the total return of the Standard & Poor's 500 Equal Weighted Index (the "S&P 500 Equal Weighted Index"). The S&P 500 Equal Weighted Index is comprised of all stocks that make up the Standard & Poor's 500 Composite Stock Price Index with each security having the same weight. The S&P 500 Equal Weighted Index is re-balanced to these equal weights at the end of each calendar month. The Fund will include the common stock of each company included in the S&P 500, other than Bankers Trust New York Corporation, in such a manner that the market value of the Fund's holding of each stock will be approximately equal to the market value of each other stock held in the Fund. The Equity 500 Equal Weighted Index Fund invests all of its Assets in the Equity 500 Equal Weighted Index Portfolio.
The Small Cap Index Fund seeks to replicate as closely as possible (before deduction of Expenses) the total return of the Russell 2000 Small Stock Index (the "Russell 2000"), an index consisting of 2,000 small-capitalization common stocks. The Fund will include the common stock of one or more companies included in the Russell 2000 Index, on the basis of computer-generated statistical data, that are deemed representative of the industry diversification of the entire Russell 2000 Index. The Small Cap Index Fund invests all of its Assets in the Small Cap Index Portfolio.
The EAFE(R) Equity Index Fund seeks to replicate as closely as possible (before deduction of Expenses) the total return of the Morgan Stanley Capital International Europe, Australia, Far East (EAFE) Index with net dividends (the "EAFE Index"), a capitalization-weighted index containing approximately 1,100 equity securities of companies located outside the United States. The Fund will be invested primarily in equity securities of business enterprises organized and domiciled outside of the United States or for which the principal trading market is outside the United States. Statistical methods will be employed to replicate the Index by buying most of the relevant Index securities. Securities purchased for the Fund will generally, but not necessarily, be traded on a foreign securities exchange. The EAFE(R) Equity Index Fund invests all of its Assets in the EAFE(R) Equity Index Portfolio.
The EAFE index is the exclusive property of Morgan Stanley. Morgan Stanley Capital International is a service mark of Morgan Stanley and has been licensed for use by Bankers Trust Company.
The Equity 500 Index Fund seeks to replicate as closely as possible (before deduction of Expenses) the total return of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500"), an index emphasizing large-capitalization stocks. The Fund will include the common stock of those companies included in the S&P 500, other than Bankers Trust New York Corporation, selected on the basis of computer generated statistical data, that are deemed representative of the industry diversification of the entire S&P 500. The Equity 500 Index Fund invests all of its Assets in the Equity 500 Index Portfolio.
WHO MAY WANT TO INVEST
Shares of each Fund are offered through this Prospectus to investors who engage an Investment Professional.
The Portfolios are not managed according to traditional methods of "active" investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Portfolios, utilizing a "passive" or "indexing" investment approach and attempt to duplicate the investment performance of their respective indices through statistical procedures.
The U.S. Bond Index Portfolio represents all major sectors of the investment grade fixed-income securities markets. The U.S. Bond Index Fund may be a suitable investment vehicle for those investors seeking ownership in the "bond market" as a whole, without regard to particular sectors. The U.S. Bond Index Fund is also suitable for those investors with common stock holdings who are seeking a complementary fixed-income investment to create a more balanced asset mix.
The Equity 500 Equal Weighted, Small Cap Index, EAFE(R) Equity Index and Equity 500 Index Funds may be appropriate for investors who are willing to ride out domestic and/or foreign stock market fluctuations in pursuit of potentially higher long-term returns. Each corresponding Portfolio invests for growth and does not pursue income. Over time, stocks, although more volatile, have shown greater growth potential than other types of securities. In the shorter term, however, stock prices can fluctuate dramatically in response to market factors.
The EAFE(R) Equity Index Fund may be appropriate for investors who want to pursue their investment goals in markets outside of the United States. By including international investments in their portfolio, investors can achieve an extra level of diversification and also participate in opportunities around the world. However, there are additional risks involved with international investing. The performance of international funds depends upon currency values, the political and regulatory environment, and overall economic factors in the countries in which a Portfolio invests.
The Trust is intended to be a long-term investment vehicle and is not designated to provide investors with a means of speculating on short-term market movements. Investors who engage in excessive account activity generate additional costs which are borne by all the Trusts' shareholders. In order to minimize such costs, each Trust has adopted the following policies. Each Trust reserves the right to reject any purchase request (including exchange purchases from other BT Advisor Funds portfolios) that is reasonably deemed to be disruptive to efficient portfolio management, either because of the timing of the investment or previous excessive trading by the investor. Additionally, each Trust has adopted exchange privilege limitations as described in the section "Exchange Limitations." Finally, each Trust reserves the right to suspend the offering of its shares.
Each Fund is not in itself a balanced investment plan. Investors should consider their investment objective and tolerance for risk when making an investment decision. When an investor sells their Fund Shares, they may be worth more or less than what they paid for them.
The value of each Portfolio's investments varies based on many factors. The value of bonds fluctuates based on changes in domestic or foreign interest rates, the credit quality of the issuer, market conditions, and other economic and political news. In general, bond prices rise when interest rates fall, and vice versa. This effect is usually more pronounced for longer-term securities. Lower-quality securities offer higher yields, but also carry more risk.
Stock values fluctuate, sometimes dramatically, in response to the activities of individual companies and general market and economic conditions. Over time, however, stocks have shown greater long-term growth potential than other types of securities.
Because many foreign investments are denominated in foreign currencies, changes in the value of these currencies can significantly affect the EAFE(R) Equity Index Fund's share price. General economic factors in the various world markets can also impact the value of an investors investment. When investors sell Fund Shares, they may be worth more or less than what they paid for them. See "Risk Factors and Certain Securities and Investment Practices" for more information.
Annual operating expenses are paid out of the assets of each Portfolio and Fund. Each Portfolio pays an investment advisory fee and an administrative services fee to Bankers Trust. Each Fund incurs expenses such as maintaining shareholder records and furnishing shareholder statements. Each Fund must provide financial reports.
The following table provides: (i) a summary of expenses relating to purchases and sales of the Shares of each Fund and the annual operating expenses of the Fund and expenses of the corresponding Portfolio, in the aggregate, as a percentage of average daily net assets of each Fund; and (ii) an example illustrating the dollar cost of such expenses on a $1,000 investment in each Fund. The Trustees of each Trust believe that the Expenses of each Fund and expenses of the corresponding Portfolio, in the aggregate, will be less than or approximately equal to the expenses which the Fund would incur if the Trusts retained the services of an investment adviser and the Assets of each Fund were invested directly in the type of securities being held by the corresponding Portfolio.
Maximum Sales Charge on Purchases (as a percentage of offering price) None*
Maximum Sales Charge on Reinvested
Shareholder transaction expenses are charges paid when investors buy, sell, exchange, or hold Shares of a Fund. See "Account Information," on page __, for an explanation of how and when these charges apply.
* A transaction fee of 0.50% is deducted from redemptions and exchanges out of the Small Cap Index Fund and the EAFE(R) Equity Index Fund. These transaction fees are paid to the respective Funds and are deducted automatically from the amount redeemed.
The purpose of the 0.50% transaction fee is to allocate transaction costs associated with redemptions and exchanges to investors making those redemptions and exchanges, thus insulating existing shareholders from those transaction costs. These costs include: (1) brokerage costs; (2) the effect of the "bid-ask" spread in small and medium sized company stock and international markets; and (3) taxes in some countries. Since the investors, not the Fund, bears these costs, the Fund is expected to be able track its benchmark index more closely.
(after reimbursement or waiver) 0.10% (after reimbursements or waivers) 0.25%
(after reimbursements or waivers) 0.35%
Equity 500 Equal Weighted Index Fund (after reimbursement or waiver) 0.15% (after reimbursements or waivers) 0.50% (after reimbursements or waivers) 0.65%
(after reimbursement or waiver) 0.10% (after reimbursements or waivers) 0.35% (after reimbursements or waivers) 0.45%
(after reimbursement or waiver) 0.20% (after reimbursements or waivers) 0.45% (after reimbursements or waivers) 0.65%
(after reimbursement or waiver) 0.07% (after reimbursements or waivers) 0.18% (after reimbursements or waivers) 0.25%
Expense Table Example: An investor would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period:
U.S. Bond Index Fund 1 year 3 years
Equity 500 Equal Weighted Index Fund 1 year 3 years
Small Cap Index Fund 1 year 3 years
EAFE(R)Equity Index Fund 1 year 3 years
Equity 500 Index Fund 1 year 3 years 5 year 10 years
The expense table and the example above show the costs and expenses that an investor will bear directly or indirectly as a shareholder of a Fund. Bankers Trust has voluntarily agreed to waive a portion of its investment advisory fee with respect to each Portfolio. Without such waiver, each Portfolio's investment advisory fee would be equal to the following: U.S. Bond Index Portfolio --0.15%; Equity 500 Equal Weighted Index Portfolio -- 0.25%; Small Cap Index Portfolio -- 0.15%; E(R) Equity Index Portfolio -- 0.25%; and Equity 500 Index Portfolio -- 0.10%. The expense table and the example reflect a voluntary undertaking by Bankers Trust or Signature Broker-Dealer Services, Inc. ("SBDS"), as the distributor (the "Distributor") of the Shares of each Fund, to waive or reimburse expenses such that the total operating expenses of each Fund and the corresponding Portfolio, with the exception of the Equity 500 Index Fund and Equity 500 Index Portfolio, (as a percentage of the Fund's average daily net assets) would be equal to the following: U.S. Bond Index Fund -- 0.35%; Equity 500 Equal Weighted Index Fund -- 0.65%; Small Cap Index Fund -- 0.45%; and EAFE(R) Equity Index Fund -- 0.65%. In the absence of this undertaking, assuming total assets of $100 million in each Fund, it is estimated that "Total Operating Expenses" would be as follows: U.S. Bond Index Portfolio -- 0.55%; Equity 500 Equal Weighted Index Portfolio -- 0.75%; Small Cap Index Portfolio -- 0.60%; and EAFE(R) Equity Index Portfolio -- 0.80%. With respect to the Equity 500 Index Fund and the Equity 500 Index Portfolio, in the absence of this undertaking, for the fiscal year ended December 31, 1994, the total operating expenses would have been equal to approximately 0.54% of the Fund's average net assets annually. The example should not be considered a representation of past or future expenses and actual expenses may be greater or less than those shown. Moreover, while each example assumes a 5% annual return, actual performance will vary and may result in a return greater or less than 5%.
Currently, the Funds (with the exception of the Equity 500 Index Fund) have issued two classes of Shares. The Funds offer by separate prospectus another class of Shares. Because the expenses vary between the classes, performance will vary with respect to each class. Additional information concerning the Funds' other class of Shares is available from Bankers Trust, as administrator at (800) 730-1313.
For more information about each Fund's and each Portfolio's expenses see "Management of the Trusts and the Portfolios" and "Valuation Details."
The following table shows the selected data for a share outstanding, total investment return, ratios to average net assets and other supplemental data of the Equity 500 Index Fund for the periods indicated. The Fund's Annual Report been audited by Coopers & Lybrand L.L.P., the Fund's independent accountants, whose report thereon appears in the Fund's Annual Report. The Fund's Annual Report and Semi-Annual Report are incorporated by reference in the Fund's SAI.
The Trusts seek to achieve the investment objective of each Fund by investing all of its Assets in the corresponding Portfolio, which has the same investment objective as the Fund. Since the investment characteristics of each Fund will correspond directly to those of the corresponding Portfolio, the following is a discussion of the various investments of and techniques employed by each Portfolio. Additional information about the investment policies of each Portfolio appears in "Risk Factors and Certain Securities and Investment Practices" in this Prospectus and in the Funds' SAI. There can be no assurance that the investment objective of either a Fund or the corresponding Portfolio will be achieved.
The U.S. Bond Index Portfolio seeks to replicate as closely as possible (before deduction of Expenses) the investment performance of the Aggregate Bond Index, a broad market weighted index which encompasses four major classes of investment grade fixed-income securities in the United States: U.S. Treasury and agency securities, corporate bonds, international (dollar-denominated) bonds, and mortgage-backed securities, with maturities greater than one year.
As of September 30, 1995, the major classes of fixed-income securities represented the following proportions of the Index's total market value:
The U.S. Bond Index Portfolio will be unable to hold all of the individual issues which comprise the Index because of the large number of securities involved. Instead, the Portfolio will hold a representative sample of the securities in the Index, selecting one or two issues to represent entire "classes" or types of securities in the Index. The Portfolio will be constructed so as to match as closely as possible the composition of the Index by investing securities approximating their relative proportion of the Index's total market value.
At the broadest level, the U.S. Bond Index Portfolio will seek to hold securities and other investments which reflect the weighting of the major asset classes in the Index, these classes include U.S. Treasury and agency securities, corporate bonds, and mortgage-backed securities. For example, if U.S. Treasury and agency securities represent approximately 54% of the Index's interest rate risk, then approximately 54% of the Portfolio's interest rate risk will come from such securities and other investments. Similarly, if corporate bonds represent 14% of the interest rate risk of the Index, then they will represent approximately 14% of the interest rate risk of the Portfolio. Such a sampling technique is expected to be an effective means of substantially replicating the income and capital returns provided by the Index before deduction of Fund and Portfolio expenses.
The Portfolio may, from time to time, substitute one type of investment grade bond for another. For instance, a Portfolio may hold more short-term corporate bonds (and, in turn, hold fewer short U.S. Treasury bonds) than represented in the Index so as to increase income. This corporate substitution strategy will entail the assumption of additional credit risk; however, substantial diversification within the corporate sector should moderate issue-specific credit risk. Overall, credit risk is expected to be very low for the U.S. Bond Index Portfolio.
Fixed-income securities will be primarily of investment grade quality - i.e., those rated at least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB-by Standard & Poor's Corporation ("S&P"). Securities rated Baa or BBB possess some speculative characteristics.
The Portfolio may invest in U.S. Treasury bills, notes and bonds and other "full faith and credit" obligations of the U.S. Government and in U.S. Government agency securities, which are debt obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government ("U.S. Government Securities"). Such "agency" securities may not be backed by the "full faith and credit" of the U.S. Government. Such U.S. Government agencies may include the Federal Farm Credit Banks, the Resolution Trust Corporation and the Government National Mortgage Association. Even though they all carry top (AAA) credit ratings, "agency" obligations are not explicitly guaranteed by the U.S. Government and so are perceived as somewhat riskier than comparable Treasury bonds.
As a mutual fund investing primarily in fixed-income securities, the Portfolio is subject to interest rate, income, call and credit risks. Since the Portfolio also invests in mortgage-backed securities, it is also subject to prepayment risk. See "Risk Factors and Certain Securities and Investment Practices."
The Equity 500 Equal Weighted Index Portfolio seeks to replicate as closely as possible the total return of the S&P 500 Equal Weighted Index. The S&P 500 Equal Weighted Index is comprised of all stocks that make up the Standard & Poor's 500 Composite Stock Price Index with each security having the same weight. The S&P 500 Equal Weighted Index is re-balanced to these equal weights at the end of calendar month. Investing in a fund designed to replicate this benchmark provides investors with diversified equity exposure with a small cap tilt and value investment attributes.
The Equity 500 Equal Weighted Index Portfolio allocates its assets equally among the equity securities which compose the S&P 500 Equal Weighted Index. The Portfolio may omit or remove any S&P 500 Equal Weighted Index stock from the Portfolio if, following objective criteria, Bankers Trust judges the stock to be insufficiently liquid or believes the merit of the investment has been substantially impaired by extraordinary events or financial conditions. Bankers Trust will not purchase the stock of Bankers Trust New York Corporation, which is included in the Index, and instead will overweight its holdings of companies engaged in similar businesses.
The Equity 500 Equal Weighted Index Fund and the Equity 500 Equal Weighted Index Portfolio are not sponsored, endorsed, sold or promoted by Wilshire Associates. Wilshire makes no representation or warranty, express or implied, to the shareholders of the Fund or investors in the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Fund or the Portfolio particularly or the ability of the index to track general stock market performance.
The Small Cap Index Portfolio seeks to replicate as closely as possible (before deduction of expenses of the Fund and corresponding Portfolio) the total return of the Russell 2000.
The Russell 2000 Index is composed of approximately 2,000 small-capitalization common stocks. A company's stock market capitalization is the total market value of its floating outstanding shares. As of September 30, 1995, the average stock market capitalization of the Russell 2000 was $280 million and the weighted average stock market capitalization of the Russell 2000 was $480 million.
The Small Cap Portfolio is neither sponsored by nor affiliated with the Frank Russell Company. Frank Russell's only relationship to the Portfolio is the licensing of the use of the Russell 2000 Small Stock Index. Frank Russell Company is the owner of the trademarks and copyrights relating to the Russell indices.
The Small Cap Portfolio invests in a statistically selected sample of the approximately 2,000 stocks included in the Russell 2000 Index. The stocks of the Russell 2000 to be included in the Small Cap Index Portfolio will be selected utilizing a statistical sampling technique known as "optimization." This process selects stocks for the Portfolio so that various industry weightings, market capitalizations and fundamental characteristics (e.g. price-to-book, price-to- earnings, debt-to-asset ratios, and dividend yields) closely approximate those of the Russell 2000. For instance, if 10% of the capitalization of the Russell 2000 consists of utility companies with relatively small capitalizations, then the Small Cap Portfolio is constructed so that approximately 10% of the Portfolio's assets are invested in the stocks of utility companies with relatively small capitalizations. The stocks held by the Portfolio are weighted to make the Portfolio's aggregate investment characteristics similar to those of the Russell 2000 Index as a whole.
The EAFE(R) Equity Index Portfolio seeks to replicate as closely as possible (before deduction of expenses of the Fund and corresponding Portfolio) the total return of the EAFE Index. The Portfolio attempts to achieve this objective by investing in a statistically selected sample of the equity securities included in the EAFE Index.
The EAFE Index is a capitalization-weighted index containing approximately 1,100 equity securities of companies located outside the United States. The countries currently included in the EAFE Index are Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and United Kingdom.
Inclusion of a security in the EAFE Index in no way implies an opinion by Morgan Stanley as to its attractiveness as an investment. Neither the Fund nor the Portfolio is neither sponsored by nor affiliated with Morgan Stanley.
The EAFE(R) Equity Index Portfolio is constructed to have aggregate investment characteristics similar to those of the EAFE Index. The Portfolio invests in a statistically selected sample of the securities included in the EAFE Index, although not all companies within a country will be represented in the Portfolio at the same time. Stocks are selected for inclusion in the Portfolio based on country of origin, market capitalization, yield, volatility and industry sector. Banker Trust will manage the Portfolio using advanced statistical techniques to determine which stocks are to be purchased or sold to replicate the EAFE Index. From time to time, adjustments may be made in the Portfolio because of changes in the composition of the EAFE Index, but such changes should be infrequent.
This Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan Stanley makes no representation or warranty, express or implied, to the owners of this Fund or any member of the public regarding the advisability of investing in securities generally or in this Fund particularly or the ability of the EAFE Index to track general stock market performance. Morgan Stanley is the licensor of certain trademarks, service marks and trade names of Morgan Stanley and of the EAFE Index which is determined, composed and calculated by Morgan Stanley without regard to the issuer of this Fund or this Fund itself. Morgan Stanley has no obligation to take the needs of the issuer of this Fund or the owners of this Fund into consideration in determining, composing or calculating the EAFE Index. Inclusion of a security in the EAFE Index in no way implies an opinion by Morgan Stanley as to its attractiveness as an investment. Morgan Stanley is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of this Fund to be issued or in the determination or calculation of the equation by which this Fund is redeemable for cash. Morgan Stanley has no obligation or liability to owners of this Fund in connection with the administration, marketing or trading of this Fund. This Fund is neither sponsored by nor affiliated with Morgan Stanley.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE INDEXES FROM SOURCES WHICH MORGAN STANLEY CONSIDERS RELIABLE, MORGAN STANLEY DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA INCLUDED THEREIN. MORGAN STANLEY MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE PRODUCTS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEXES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. MORGAN STANLEY MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The Equity 500 Index Portfolio seeks to replicate as closely as possible (before deduction of expenses of the Fund and the corresponding Portfolio) the total return of the S&P 500.
The S&P 500 is an index of 500 common stocks, most of which trade on the New York Stock Exchange Inc. (the "NYSE"). Bankers Trust believes that the S&P 500 is representative of the performance of publicly traded common stocks in the U.S. in general.
In seeking to replicate the performance of the S&P 500, before deduction of Fund and Portfolio expenses, Bankers Trust will attempt over time to allocate the Equity 500 Index Portfolio's investment among common stocks in approximately the same proportions as they are represented in as the S&P 500, beginning with the heaviest weighted stocks that make up a larger portion of the Index's value.
Bankers Trust generally will seek to match the composition of the S&P 500 but usually will not invest the Equity 500 Index Portfolio's stock portfolio to mirror the Index exactly. Because of the difficulty and expense of executing relatively small stock transactions, the Portfolio may not always be invested in the less heavily weighted S&P 500 stocks, and may at times have its portfolio weighted differently from the S&P 500, particularly if the Portfolio has a low level of assets. In addition, the Portfolio may omit or remove any S&P 500 stock from the Portfolio if, following objective criteria, Bankers Trust judges the stock to be insufficiently liquid or believes the merit of the investment has been substantially impaired by extraordinary events or financial conditions. Bankers Trust will not purchase the stock of Bankers Trust New York Corporation, which is included in the Index, and instead will overweight its holdings of companies engaged in similar businesses.
About the S&P 500. The S&P 500 is composed of 500 common stocks, which are chosen by S&P on a statistical basis to be included in the Index. The inclusion of a stock in the S&P 500 in no way implies that S&P believes the stock to be an attractive investment. The 500 securities, most of which trade on the NYSE, represented, as of September 30, 1995, approximately 81% of the market value of all U.S. common stocks. Each stock in the S&P 500 is weighted by its market value. Bankers Trust believes that the performance of the S&P 500 is representative of the performance of publicly traded common stocks in general. The composition of the S&P 500 is determined by S&P and is based on such factors as the market capitalization and trading activity of each stock and its adequacy as a representation of stocks in a particular industry group, and may be changed from time to time.
The Equity 500 Index Fund and the Equity 500 Index Portfolio are not sponsored, endorsed, sold or promoted by Standard & Poor's Corporation. S&P makes no representation or warranty, express or implied, to the shareholders of the Fund or investors in the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Fund or the Portfolio particularly or the ability of the S&P 500 to track general stock market performance.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 or any data included therein.
S&P makes no warranty, express or implied, as to the results to be obtained by the Fund or the Portfolio, owners of the Fund or the Portfolio, or any other person or entity from the use of the S&P 500 or any data included therein. S&P makes no express or implied warranties and hereby expressly disclaims all such warranties of merchantability or fitness for a particular purpose or use with respect to the S&P 500 or any data included therein.
For more information about the performance of the S&P 500, see "Appendix B" in the SAI.
Over time, the correlation between the performance of each Fund, before the deduction of Expenses, and the respective Index is expected to be 0.95 or higher before deduction of Expenses of the Fund and expenses of the Portfolio. A correlation of 1.00 would indicate perfect correlation, which would be achieved when the net asset value of the Fund, including the value of its dividend and any capital gain distributions, increases or decreases in exact proportion to changes in the Index. Each Fund's ability to track its respective index may be affected by, among other things, transaction costs, administration and other expenses incurred by the Funds or the corresponding Portfolio, changes in either the composition of the Index or the assets of a Portfolio, and the timing and amount of Portfolio investor contributions and withdrawals, if any. In the unlikely event that a high correlation is not achieved, the Trusts' Boards of Trustees will consider alternatives. Because each Portfolio seeks to track the respective index, Bankers Trust will not attempt to judge the merits of any particular stock as an investment.
Under normal circumstances, each Portfolio will invest at least 80% of its assets in the securities of its respective Index.
As diversified funds, no more than 5% of the assets of each Portfolio may be invested in the securities of one issuer (other than U.S. Government Securities), except that up to 25% of each Portfolio's assets may be invested without regard to this limitation. Each Portfolio will not invest more than 25% in the securities of issuers in any one industry. These are fundamental investment policies of the Portfolios which may not be changed without investor approval. No more than 15% of each Portfolio's net assets may be invested in illiquid or not readily marketable securities (including repurchase agreements and time deposits maturing in more than seven days). Additional investment policies of each Portfolio are contained in the SAI.
Each Portfolio may maintain up to 25% of its assets in short-term debt securities and money market instruments to meet redemption requests or to facilitate investment in the securities of the respective Index. Securities index futures contracts and related options, warrants, convertible securities and swap agreements may be used for several reasons: to simulate full investment in the underlying Index while retaining a cash balance for fund management purposes, to facilitate trading, or to reduce transaction costs or to seek higher investment returns when a futures contract, option, warrant, convertible security or swap agreement is priced more attractively than the underlying equity security or Index. These instruments may be considered derivatives. See "Risk Factors and Certain Securities and Investment Practices -- Derivatives."
The use of derivatives for non-hedging purposes may be considered speculative. While each of these securities can be used as leveraged investments, a Portfolio may not use them to leverage its net assets. No Portfolio will invest in such instruments as part of a temporary defensive strategy (such as altering the aggregate maturity of the Portfolio) to protect the Portfolio against potential market declines.
Each Portfolio may lend its investment securities and purchase securities on a when-issued and a delayed delivery basis. The U.S. Bond Index Portfolio may invest in mortgage-related and other asset-backed securities. The EAFE(R) Equity Index Portfolio may engage in foreign currency forward and futures transactions for the purpose of enhancing portfolio returns or hedging against foreign exchange risk arising from the Portfolio's investment or anticipated investment in securities denominated in foreign currencies. See "Risk Factors and Certain Securities and Investment Practices" for more information about the investment practices of the Portfolios.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of instruments in which a Portfolio may invest and strategies Bankers Trust may employ in pursuit of a Portfolio's investment objective. A summary of risks and restrictions associated with these instrument types and investment practices is included as well.
Bankers Trust may not buy all of these instruments or use all of these techniques to the full extent permitted unless it believes that doing so will help a Portfolio achieve its goal. Holdings and recent investment strategies are described in the financial reports of a Fund and the corresponding Portfolio, which are sent to Fund shareholders twice a year. For a free SAI or financial report, call an Investment Professional.
Fixed Income Security Risk - U.S. Bond Index Fund Investors in the U.S. Bond Index Fund are exposed to four types of risk from fixed income securities. (1) Interest rate risk is the potential for fluctuations in bond prices due to changing interest rates. (2) Income risk is the potential for a decline in a Portfolio's income due to falling market interest rates. (3) Credit risk is the possibility that a bond issuer will fail to make timely payments of either interest or principal to the Portfolio. (4) Prepayment risk or call risk is the likelihood that, during periods of falling interest rates, securities with high stated interest rates will be prepaid (or "called") prior to maturity, requiring the Portfolio to invest the proceeds at generally lower interest rates.
Market Risk - Equity 500 Index Fund, Equity 500 Equal Weighted Index Fund, Small Cap Index Fund and EAFE(R) Equity Index Fund As mutual funds investing primarily in common stocks, these Portfolios are subject to market risk -- i.e., the possibility that common stock prices will decline over short or even extended periods. The U.S. and foreign stock markets tend to be cyclical, with periods when stock prices generally rise and periods when prices generally decline.
Risks of Investing in Medium- and Small-Capitalization Stocks - Small Cap Index Fund Historically, medium- and small-capitalization stocks have been more volatile in price that the larger-capitalization stocks included in the S&P 500. Among the reasons for the greater price volatility of these securities are the less certain growth prospects of smaller firms, the lower degree of liquidity in the markets for such stocks, and the greater sensitivity of medium- and small-size companies to changing economic conditions. In addition to exhibiting greater volatility, medium- and small-size company stocks may fluctuate independently of larger company stocks. Medium- and small-size company stocks may decline in price as large company stocks rise, or rise in prices as large company stocks decline.
Risks of Investing in Foreign Securities - EAFE(R) Equity Index Portfolio Investors should realize that investing in securities of foreign issuers involves considerations not typically associated with investing in securities of companies organized and operated in the United States. Investors should realize that the value of a Portfolio's foreign investments may be adversely affected by changes in political or social conditions, diplomatic relations, confiscatory taxation, expropriation, nationalization, limitation on the removal of funds or assets, or imposition of (or change in) exchange control or tax regulations in foreign countries. In addition, changes in government administrations or economic or monetary policies in the United States or abroad could result in appreciation or depreciation of portfolio securities and could favorably or unfavorably affect the Portfolio's operations. Furthermore, the economies of individual foreign nations may differ from the U.S. economy, whether favorably or unfavorably, in areas such as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position; it may also be more difficult to obtain and enforce a judgment against a foreign issuer. In general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States.
made by the Portfolio must be made in compliance with U.S. and foreign currency restrictions and tax laws restricting the amounts and types of foreign investments.
Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of the net assets of the Portfolio as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates. In order to protect against uncertainty in the level of future foreign currency exchange rates, the Portfolio is also authorized to enter into certain foreign currency exchange transactions. Furthermore, the Portfolio's foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities of U.S. companies. The settlement periods for foreign securities, which are often longer than those for securities of U.S. issuers, may affect portfolio liquidity. Finally, there may be less government supervision and regulation of securities exchanges, brokers and issuers in foreign countries than in the United States.
Special Information Concerning Master-Feeder Fund Structure Unlike other open-end management investment companies (mutual funds) which directly acquire and manage their own portfolio securities, each Fund seeks to achieve its investment objective by investing all of its Assets in the corresponding Portfolio, a separate registered investment company with the same investment objectives as the Fund. Therefore, an investor's interest in the Portfolio's securities is indirect, like investments in other investment companies and pooled investment vehicles. In addition to selling a beneficial interest to the corresponding Fund, each Portfolio may sell beneficial interests to other mutual funds or institutional investors. Such investors will invest in a Portfolio on the same terms and conditions and will pay a proportionate share of the Portfolio's expenses. However, the other investors investing in a Portfolio are not required to sell their shares at the same public offering price as the Fund due to variations in sales commissions and other operating expenses. Therefore, investors in a Fund should be aware that these differences may result in differences in returns experienced by investors in the different funds that invest in the Portfolio. Such differences in returns are also present in other mutual fund structures. Information concerning other holders of interests in the Portfolio is available from Bankers Trust, as the Administrator, at (800) 730-1313.
The master-feeder structure has been developed relatively recently, so shareholders should carefully consider this investment approach.
Smaller funds investing in a Portfolio may be materially affected by the actions of larger funds investing in the Portfolio. For example, if a large fund withdraws from a Portfolio, the remaining funds may experience higher pro rata operating expenses, thereby producing lower returns (however, this possibility exists as well for traditionally structured funds which have large institutional investors). Additionally, a Portfolio may become less diverse, resulting in increased portfolio risk. Also, funds with a greater pro rata ownership in a Portfolio could have effective voting control of the operations of the Portfolio. Except as permitted by the SEC, whenever a Trust is requested to vote on matters pertaining to a Portfolio, each Trust will hold a meeting of shareholders of the Fund and will cast all of its votes in the same proportion as the votes of the Fund's shareholders. Fund shareholders who do not vote will not affect a Trust's votes at the Portfolio meeting. The percentage of a Trust's votes representing Fund shareholders not voting will be voted by the Trustees or officers of the Trust in the same proportion as the Fund shareholders who do, in fact, vote. Certain changes in the Portfolio's investment objectives, policies or restrictions may require the Fund to withdraw its interest in the Portfolio. Any such withdrawal could result in a distribution "in kind" of portfolio securities (as opposed to a cash distribution from the Portfolio). If securities are distributed, the Fund could incur brokerage, tax or other charges in converting the securities to cash. In addition, the distribution in kind may result in a less diversified portfolio of investments or adversely affect the liquidity of the Fund. Notwithstanding the above, there are other means for meeting redemption requests, such as borrowing.
A Fund may withdraw its investment from the Portfolio at any time, if the Board of Trustees of a Trust determines that it is in the best interests of the shareholders of the Fund to do so. Upon any such withdrawal, the Board of Trustees of the Trust would consider what action might be taken, including the investment of all the Assets of the Fund in another pooled investment entity having the same investment objectives as the Fund or the retaining of an investment adviser to manage the Fund's Assets in accordance with the investment policies described herein with respect to the corresponding Portfolio.
Each Fund's investment objective is not a fundamental policy and may be changed upon notice to but without the approval of the Fund's shareholders. If there is a change in a Fund's investment objective, the Fund's shareholders should consider whether the Fund remains an appropriate investment in light of their then-current needs. The investment objective of each Portfolio is also not a fundamental policy. Shareholders of the Funds will receive 30 days prior written notice with respect to any change in the investment objective of a Fund or the corresponding Portfolio. See "Risk Factors and Certain Securities and Investment Practices" in the SAI for a description of the fundamental policies of each Portfolio that cannot be changed without approval by "the vote of a majority of the outstanding voting securities" (as defined in the Investment Company Act of 1940, as amended (the "1940 Act") of the Portfolio.
For descriptions of the investment objective, policies and restrictions of each Portfolio, see "The Funds in Detail" herein and "Risk Factors and Certain Securities and Investment Practices" in this Prospectus and in the SAI. For descriptions of the management of the Trusts and the Portfolios, see "Management of the Trusts and the Portfolios" herein and in the SAI. For descriptions of the expenses of the Portfolio, see "The Funds--Expense Summary," herein and "Management of the Trusts and the Portfolios" herein and in the SAI.
Short-Term Investments. Each Portfolio may invest in certain short-term fixed income securities. Such securities may be used to invest uncommitted cash balances, to maintain liquidity to meet shareholder redemptions or to serve as collateral for the obligations underlying a Portfolio's investment in securities index futures or related options or warrants. These securities include: obligations issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities or by any of the states, repurchase agreements, time deposits, certificates of deposit, bankers' acceptances and commercial paper.
U.S. Government Securities are obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities. Some U.S. Government securities, such as Treasury bills, notes and bonds, are supported by the full faith and credit of the United States; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality.
Securities Lending. Each Portfolio may lend its investment securities to qualified institutional investors for either short-term or long-term purposes of realizing additional income. Loans of securities by a Portfolio will be collateralized by cash, letters of credit, or securities issued or guaranteed by the U.S. Government or its agencies. The collateral will equal at least 100% of the current market value of the loaned securities, and such loans may not exceed 30% of the value of a Portfolio's net assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible loss of rights in the collateral should the borrower fail financially. In determining whether to lend securities, Bankers Trust will consider all relevant facts and circumstances, including the creditworthiness of the borrower.
When Issued and Delayed Delivery Securities. Each Portfolio may purchase securities on a when-issued or delayed delivery basis. Delivery of and payment for these securities may take place as long as a month or more after the date of the purchase commitment. The value of these securities is subject to market fluctuation during this period and no income accrues to the Portfolio until settlement takes place. The Portfolio maintains with the Custodian a segregated account containing high grade liquid securities in an amount at least equal to these commitments.
Mortgage-Related Securities. As part of its effort to duplicate the investment performance of its Index, the U.S. Bond Index Portfolio may invest in mortgage-backed securities. Mortgage-backed securities represent an interest in an underlying pool of mortgages. Unlike ordinary fixed-income securities, which generally pay a fixed rate of interest and return principal upon maturity, mortgage-backed securities repay both interest income and principal as part of their periodic payments. Because the mortgages underlying mortgage-backed certificates can be prepaid at any time by homeowners or corporate borrowers, mortgage-backed securities give rise to certain unique "pre-payment" risks. See "Risk Factors and Certain Securities and Investment Practices."
The U.S. Bond Index Portfolio may purchase mortgage-backed securities issued by the Government National Mortgage Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA), and the Federal Housing Authority (FHA). GNMA securities are guaranteed by the
U.S. Government as to the timely payment of principal and interest; securities from other Government-sponsored entities are generally not secured by an explicit pledge of the U.S. Government. The U.S. Bond Index Portfolio may also invest in conventional mortgage securities, which are packaged by private corporation and are not guaranteed by the U.S. Government. Mortgage securities that are guaranteed by the U.S. Government are guaranteed only as to the timely payment of principal and interest. The market value of such securities is not guaranteed and may fluctuate.
Each Portfolio may invest in various instruments that are commonly known as derivatives. Generally, a derivative is a financial arrangement, the value of which is based on, or "derived" from, a traditional security, asset, or market index. Some "derivatives" such as mortgage-related and other asset-backed securities are in many respects like any other investment, although they may be more volatile or less liquid than more traditional debt securities. There are, in fact, many different types of derivatives and many different ways to use them. There are a range of risks associated with those uses. Futures and options are commonly used for traditional hedging purposes to attempt to protect a fund from exposure to changing interest rates, securities prices, or currency exchange rates and as a low cost method of gaining exposure to a particular securities market without investing directly in those securities. Derivatives will not be used to increase portfolio risk above the level that could be achieved using only traditional investment securities or to acquire exposure to changes in the value of assets or indexes that by themselves would not be purchased for the Portfolio.
Securities Index Futures and Related Options. Each Portfolio may enter into securities index futures contracts and related options provided that not more than 5% of its assets are required as a margin deposit for futures contracts or options and provided that not more than 20% of a Portfolio's assets are invested in futures and options at any time. When a Portfolio has cash from new investments in the Portfolio or holds a portion of its assets in money market instruments, it may enter into index futures or options to attempt to increase its exposure to the market. Strategies the Portfolio could use to accomplish this include purchasing futures contracts, writing put options, and purchasing call options. When the Portfolio wishes to sell securities, because of shareholder redemptions or otherwise, it may use index futures or options to hedge against market risk until the sale can be completed. These strategies could include selling futures contracts, writing call options, and purchasing put options.
Swap Agreements. Each Portfolio may enter into swap agreements only to the extent that obligations under such agreements represent not more than 10% of the Portfolio's total assets. Swap agreements are contracts between parties in which one party agrees to make payments to the other party based on the change in market value of a specified index or asset. In return, the other party agrees to make payments to the first party based on the return of a different specified index or asset.
Although swap agreements entail the risk that a party will default on its payment obligations thereunder, a Portfolio will minimize this risk by entering into agreements that mark to market no less frequently than quarterly. Swap agreements also bear the risk that a Portfolio will not be able to meet its obligation to the counterparty. This risk will be mitigated by investing a Portfolio in the specific asset for which it is obligated to pay a return.
Warrants. Each Portfolio's investment in warrants will not exceed more than 5% of its assets (2% with respect to warrants not listed on the New York or American Stock Exchanges). Warrants are instruments which entitle the holder to buy underlying equity securities at a specific price for a specific period of time.
A warrant tends to be more volatile than its underlying securities and ceases to have value if it is not exercised prior to its expiration date. In addition, changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying securities.
Convertible Securities. Each Portfolio may invest in convertible securities which are a bond or preferred stock which may be converted at a stated price within a specific period of time into a specified number of shares of common stock of the same or different issuer. Convertible securities are senior to common stock in a corporation's capital structure, but usually are subordinated to non-convertible debt securities. While providing a fixed income stream --generally higher in yield than in the income derived from a common stock but lower than that afforded by a non-convertible debt security -- a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation of common stock into which it is convertible.
In general, the market value of a convertible security is the higher of its investment value (its value as a fixed income security) or its conversion value (the value of the underlying shares of common stock if the security is converted). As a fixed income security, the market value of a convertible security generally increases when interest rates decline and generally decreases when interest rates rise; however, the price of a convertible security generally increases as the market value of the underlying stock increases, and generally decreases as the market value of the underlying stock declines. Investments in convertible securities generally entail less risk than investments in the common stock of the same issuer.
Further risks associated with the use of futures contracts, options, warrants, convertible securities and swap agreements. The risk of loss associated with futures contracts in some strategies can be substantial due to both the low margin deposits required and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in an immediate and substantial loss or gain. However, the Portfolios will not use futures contracts, options, warrants, convertible securities and swap agreements for speculative purposes or to leverage their net assets. Accordingly, the primary risks associated with the use of futures contracts, options, warrants, convertible securities and swap agreements by the Portfolios are: (i) imperfect correlation between the change in market value of the securities held by a Portfolio and the prices of futures contracts, options, warrants, convertible securities and swap agreements; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position prior to its maturity date. The risk of imperfect correlation will be minimized by investing only in those contracts whose behavior is expected to resemble that of a Portfolio's underlying securities. The risk that a Portfolio will be unable to close out a futures position will be minimized by entering into stock transactions on an exchange with an active and liquid secondary market. However options, warrants, convertible securities and swap agreements purchased or sold over-the-counter may be less liquid than exchange-traded securities. Illiquid securities, in general, may not represent more than 15% of the net assets of a Portfolio.
Foreign Currency Forward, Futures and Related Options Transactions. The EAFE(R) Equity Index Portfolio may enter into foreign currency forward and foreign currency futures contracts in order to maintain the same currency exposure as the EAFE Index. The Portfolio may not enter into such contracts as a way of protecting against anticipated adverse changes in exchange rates between foreign currencies and the U.S. dollar. A foreign currency forward contract is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. Such contracts do not eliminate fluctuations in the underlying prices of securities held by the Portfolios. Although such contracts tend to minimize the risk of loss due to a decline in the value of a currency that has been sold forward, and the risk of loss due to an increase in the value of a currency that has been purchased forward, at the same time they tend to limit any potential gain that might be realized should the value of such currency increase.
Asset Coverage. To assure that a Portfolio's use of futures and related options, as well as when-issued and delayed-delivery securities, interest rate swaps and foreign currency forward futures and related options transactions are not used to achieve excessive investment leverage, a Portfolio will cover such transactions, as required under applicable interpretations of the SEC, either by owning the underlying securities, entering into an off-setting transaction, or by establishing a segregated account with the Portfolio's custodian containing high grade liquid debt securities in an amount at all times equal to or exceeding the Portfolio's commitment with respect to these instruments or contracts.
The frequency of Portfolio transactions-the Portfolio's portfolio turnover rate- will vary from year to year depending on market conditions and the Portfolio's cash flows. Each Portfolio's annual portfolio turnover rate is not expected to exceed 100%. The Equity 500 Index Portfolio's portfolio turnover rate for the years ended December 31, 1994 and 1993 was 21% and 31%, respectively.
Each Portfolio's recent strategies and holdings, and the corresponding Fund's performance, is detailed twice a year in the Funds' financial reports (not available during the first year for each Fund other than the Equity 500 Index Fund), which are sent to all Fund shareholders.
For current Fund performance or a free copy of the Funds' financial report, please contact an Investment Professional.
Mutual fund performance is commonly measured as total return and/or yield. Each Fund's performance is affected by the expenses of that Fund.
Total return is the change in value of an investment in a Fund over a given period, assuming reinvestment of any dividends and capital gains. A cumulative total return reflects actual performance over a stated period of time. An average annual total return is a hypothetical rate of return that, if achieved annually, would have produced the same cumulative total return if performance had been constant over the entire period. Average annual total return calculations smooth out variations in performance; they are not the same as actual year-by- year results. Average annual total returns covering periods of less than one year assume that performance will remain constant for the rest of the year.
Total return for Period From for the period from commencement Total return commencement of of operations for 1 year ended operations through through
(a) Fund commenced operations on December 31, 1992.
Yield refers to the income generated by an investment in a Fund over a given period of time, expressed as an annual percentage rate. Yields are calculated according to a standard that is required for all stock and bond funds. Because this differs from other accounting methods, the quoted yield may not equal the income actually paid to shareholders. This difference may be significant for a Fund investing in a Portfolio whose investments are denominated in foreign currencies.
The 30-day SEC yield for the period ended September 30, 1995 for the Equity 500 Index Fund was 2.30%.
Performance information may include comparisons of a Fund's investment results to various unmanaged indices or results of other mutual funds or investment or savings vehicles. From time to time, Fund rankings may be quoted from various sources, such as Lipper Analytical Services, Inc., Value Line and Morningstar, Inc.
Unlike some bank deposits or other investments which pay a fixed yield for a stated period of time, the total return of a Fund will vary depending upon interest rates, the current market value of the securities held by the corresponding Portfolio and changes in the expenses of the Fund or Portfolio. In addition, during certain periods for which total return may be provided, Bankers Trust or SBDS may have voluntarily agreed to waive portions of their fees, or reimburse certain operating expenses of a Fund or Portfolio, on a month-to-month basis. Such waivers will have the effect of increasing the Fund's net income (and therefore its yield and total return) during the period such waivers are in effect.
Total returns and yields are based on past results and are not an indication of future performance.
MANAGEMENT OF THE TRUSTS AND THE PORTFOLIOS
The Trusts and each Portfolio is governed by a Board of Trustees which is responsible for protecting the interests of investors. A majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trusts or the Portfolio, as the case may be, have adopted written procedures reasonably appropriate to deal with potential conflicts of interest arising from the fact that the same individuals are Trustees of the Trusts and the Portfolios, up to and including creating separate boards of trustees. See "Management of the Trusts and the Portfolios" in the SAI for more information with respect to the Trustees and officers of the Trusts and each Portfolio.
The Trusts have not retained the services of an investment adviser since the Trusts seek to achieve the investment objective of each Fund by investing all the Assets of the Fund in the corresponding Portfolio. Each Portfolio has retained the services of Bankers Trust as investment adviser.
Bankers Trust Company and Its Affiliates Bankers Trust Company, a New York banking corporation with principal offices at 280 Park Avenue, New York, New York 10017, is a wholly owned subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a variety of general banking and trust activities and is a major wholesale supplier of financial services to the international and domestic institutional market.
As of September 30, 1995, Bankers Trust New York Corporation was the ninth largest bank holding company in the United States with total assets of approximately $104 billion. Bankers Trust is a worldwide merchant bank dedicated to servicing the needs of corporations, governments, financial institutions and private clients through a global network of over 120 offices in more than 40 countries. Investment management is a core business of Bankers Trust, built on a tradition of excellence from its roots as a trust bank founded in 1903. The scope of Bankers Trust's investment management capability is unique due to its leadership positions in both active and passive quantitative management and its presence in major equity and fixed income markets around the world. Bankers Trust is one of the nation's largest and most experienced investment managers with approximately $200 billion in assets under management globally. Of that total, approximately $83 billion are in U.S. equity index assets alone. When bond and international funds are included, Bankers Trust manages approximately $96 billion in total index assets. This makes Bankers Trust one of the nation's leading managers of index funds.
Bankers Trust has more than 50 years of experience managing retirement assets for the nation's largest corporations and institutions. In the past, these clients have been serviced through separate account and commingled fund structures. Now, the BT Family of Funds brings Bankers Trust's extensive investment management expertise - once available to only the largest institutions in the U.S. - to individual investors. Bankers Trust's officers have had extensive experience in managing investment portfolios having objectives similar to those of each Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of Trustees of each Portfolio, manages each Portfolio in accordance with the Portfolio's investment objective and stated investment policies, makes investment decisions for the Portfolio, places orders to purchase and sell securities and other financial instruments on behalf of the Portfolio and employs professional investment managers and securities analysts who provide research services to the Portfolio. Bankers Trust may utilize the expertise of any of its world wide subsidiaries and affiliates to assist it in its role as investment adviser. All orders for investment transactions on behalf of a Portfolio are placed by Bankers Trust with broker-dealers and other financial intermediaries that it selects, including those affiliated with Bankers Trust. A Bankers Trust affiliate will be used in connection with a purchase or sale of an investment for the Portfolio only if Bankers Trust believes that the affiliate's charge for the transaction does not exceed usual and customary levels. The Portfolio will not invest in obligations for which Bankers Trust or any of its affiliates is the ultimate obligor or accepting bank. The Portfolio may, however, invest in the obligations of correspondents and customers of Bankers Trust.
The Investment Advisory Agreements provide for each Portfolio to pay Bankers Trust receives a fee from each Portfolio, accrued daily and paid monthly, equal on an annual basis to the following percentages of the average daily net assets of the Portfolio for its then-current fiscal year: U.S. Bond Index Portfolio, 0.15%; Equity 500 Equal Weighted Index Portfolio, 0.25%; Small Cap Index Portfolio, 0.15%; EAFE(R) Equity Index Portfolio, 0.25%; and Equity 500 Index Portfolio, 0.10%.
Bankers Trust has been advised by its counsel that, in counsel's opinion, Bankers Trust currently may perform the services for the Trusts and the Portfolios described in this Prospectus and the SAI without violation of the Glass-Steagall Act or other applicable banking laws or regulations. State laws on this issue may differ from the interpretations of relevant Federal law, and banks and financial institutions may be required to register as dealers pursuant to state securities law.
Frank Salerno, Managing Director of Bankers Trust, is responsible for the management of the Equity 500 Equal Weighted Index Portfolio, the Small Cap Portfolio and the Equity 500 Index Portfolio. Mr. Salerno oversees administration, management and trading of international and domestic equity index strategies. He has been employed by Bankers Trust since 1981 and has managed the Portfolios' assets since each Portfolio commenced operations.
Richard J. Vella, Managing Director of Bankers Trust, is responsible for the day-to-day management of the E(R) Equity Index Portfolio. Mr. Vella has been employed by Bankers Trust since 1985 and has ten years of trading and investment experience.
Louis R. D'Arienzo, Vice President of Bankers Trust, is responsible for the day- to-day management of the U.S. Bond Index Portfolio. Mr. D'Arienzo has been employed by Bankers Trust since 1981 and has twelve years of trading and investment experience in fixed income securities.
Under its Administration and Services Agreement with each Trust, Bankers Trust calculates the net asset value of each Fund and generally assists the Board of Trustees of the Trust in all aspects of the administration and operation of the Funds. The Administration and Services Agreement provides for the respective Trust to pay Bankers Trust a fee, accrued daily and paid monthly equal on an annual basis to the following percentages of the average daily net assets of the Fund, attributable to the Class, for its then-current fiscal year: U.S. Bond Index Fund, 0.20%; Equity 500 Equal Weighted Index Fund, 0.30%; Small Cap Index Fund, 0.25%; EAFE(R) Equity Index Fund, 0.30%; and Equity 500 Index Fund, 0.30%.
Under an Administration and Services Agreement with each Portfolio, Bankers Trust calculates the value of the assets of the Portfolio and generally assists the respective Board of Trustees in all aspects of the administration and operation of the Portfolios. The Administration and Services Agreement provides for each Portfolio to pay Bankers Trust a fee, accrued daily and paid monthly, equal on an annual basis to the following percentages of the Portfolio's average daily net assets for its then-current fiscal year: U.S. Bond Index Portfolio, 0.05%; Equity 500 Equal Weighted Index Portfolio, 0.05%; Small Cap Index Portfolio, 0.05%; EAFE(R) Equity Index Portfolio, 0.10%; and Equity 500 Index Portfolio, 0.05%. Under each Administration and Services Agreement, Bankers Trust may delegate one or more of its responsibilities to others, including SBDS, at Bankers Trust's expense.
Under its Distribution Agreement with each Trust, SBDS, as Distributor, serves as the Trusts' principal underwriter on a best efforts basis. In addition, SBDS provides the Trusts with office facilities. SBDS is a wholly owned subsidiary of Signature Financial Group, Inc. ("SFG"). SFG and its affiliates currently provide administration and distribution services for other registered investment companies. The principal business address of SFG and SBDS is 6 St. James Avenue, Boston, Massachusetts 02116.
Bankers Trust acts as custodian of the assets of the Trusts and each Portfolio and serves as the transfer agent (the "Transfer Agent") for the Trusts and each Portfolio under the Administration and Services Agreement with the Trusts and each Portfolio.
Read your Investment Professional's program materials in conjunction with this Prospectus for details of services that may differ from those described in the Prospectus and for additional fees that may apply. Some of the services and features of this Prospectus may not be available to you. Certain features of the Funds, such as minimum initial or subsequent investment amounts, may be modified in these programs, and administrative charges may be imposed for the services rendered.
The different ways to set up (register) your account with BT Advisor Funds are listed below.
The account guidelines that follow may not apply to certain Funds or to certain retirement accounts. If your employer offers a Fund through a retirement program, contact your employer for more information. Otherwise, call your Investment Professional directly.
Ways to Set Up Your Account
For your general investment needs Individual accounts are owned by one person. Joint accounts can have two or more owners (tenants). Joint accounts may be joint tenants in common or joint tenants with rights of survivorship.
To shelter your retirement savings from taxes Retirement plans allow individuals to shelter investment income and capital gains from current taxes. In addition, contributions to these accounts may be tax deductible. Retirement accounts require special applications and typically have lower minimums.
o Individual Retirement Accounts (IRAs) allow anyone of legal age under 70 1/2 with earned income to invest up to $2,000 per tax year. Individuals can also invest in a spouse's IRA if the spouse has earned income of less than $250.
o Rollover IRAs retain special tax advantages for certain distributions from employer sponsored retirement plans.
o Simplified Employee Pension Plans (SEP-IRAs) provide small business owners or those with self-employed income (and their eligible employees) with many of the same advantages as a Keogh, but with fewer administrative requirements.
o 401(k) Plans allow employees of corporations of all sizes to contribute a percentage of their wages on a tax deferred basis. These accounts need to be established by the trustee of the plan.
Money Purchase/Profit Sharing Plans (Keogh Plans) are tax deferred pension accounts designated for employees of unincorporated businesses or for persons who are self-employed.
Gifts or Transfers to a Minor (UGMA, UTMA) To invest for a child's education or These custodial accounts provide a way to give money to a child and obtain tax benefits. An individual can give up to $10,000 a year per child without paying federal gift tax. Depending on state laws, you can set up a custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Contact your Investment Professional.
For money being invested by a trust The trust must be established before on account can be opened.
For investment needs of corporations, associations, partnerships, or other groups Contact your Investment Professional.
Shares are purchased at the Fund's net asset value ("NAV") next calculated after your investment is received and accepted. The NAV is normally calculated at 4:00 p.m. Eastern time.
If you are placing your order through an Investment Professional, it is the responsibility of your Investment Professional to transmit your order to buy Shares to the Transfer Agent before 4:00 p.m. Eastern time.
The Transfer Agent must receive payment within three business days after an order for Shares is placed; otherwise your purchase order may be canceled and you could be held liable for resulting fees and/or losses.
Share certificates are not available for Shares of the Funds.
If you are new to BT Advisor Funds, complete and sign an account application and mail it along with your check. If there is no account application accompanying this Prospectus, call your Investment Professional.
If you already have money invested in a fund in the BT Family of Funds you can:
o Mail an account application with a check, o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of Funds or
o Contact your Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an IRA, for the first time, you will need a special application. Contact your Investment Professional for more information and a retirement account application.
To Open an Account $2,500 For retirement accounts $ 500 Through automatic investment plans $1,000
To Add to an Account $ 250 For retirement accounts $ 100 Through automatic investment plan $ 100
For further information on opening an account, please consult your Investment Professional or refer to the account application.
You can arrange to take money out of your fund account at any time by selling (redeeming) some or all of your Shares. Your Shares shall be sold at the next NAV calculated after an order is received by the Transfer Agent. NAV is normally calculated at 4:00 p.m. Eastern time.
To sell Shares in a retirement account, your request must be made in writing, except for exchanges to other eligible funds in the BT Family of Funds, which can be requested by phone or in writing. For information on retirement distributions contact your Investment Professional or call 1-800- 677-7596.
If you are selling some but not all of your non-retirement account Shares, leave at least $1,000 worth of Shares in the account to keep it open.
To sell Shares by bank wire you will need to sign up for these services in advance when completing your account application.
Certain requests must include a signature guarantee. It is designed to protect you and Bankers Trust from fraud. Your request must be made in writing and include a signature guarantee if any of the following situations apply:
o You wish to redeem more than $100,000 worth of Shares, o Your account registration has changed within the last 30 days, o The check is being mailed to a different address than the one on your account o The check is being made payable to someone other than the account owner, o The redemption proceeds are being transferred to a BT account with a different o You wish to have redemption proceeds wired to a non-predesignated bank account.
You should be able to obtain a signature guarantee from a bank, broker, dealer, credit union (if authorized under state law), securities exchange or association, clearing agency, or savings association. A notary public cannot provide a signature guarantee.
Write a "letter of instruction" with:
o The Fund's name and Fund's number, o Your Fund account number, o The dollar amount or number of Shares to be redeemed and o Any other applicable requirements listed in the following table.
Deliver your letter to your Investment Professional, or mail it to the following address:
210 West 10th Street, 8th Floor
Unless otherwise instructed, the Transfer Agent will send a check to the record address.
Additional Information About Selling Shares
BT Advisor Funds provide a variety of services to help you manage your account.
Statements and reports that your Investment Professional or the Transfer Agent will send to you include the following:
o Confirmation statements (after every transaction that affects your account balance, including distributions or your account registration)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed, even if you have more than one account in the Fund. Call your Investment Professional if you need additional copies of financial reports.
Exchange privilege. You may sell your Shares and buy Shares of other BT Funds by telephone or in writing.
Note that exchanges out of a Fund may be limited to four per calendar year and that they may have tax consequences for you. For detail on policies and restrictions governing exchanges including circumstances under which a shareholder's exchange privilege may be suspended or revoked, see page ___.
Systematic Withdrawal Program lets you set up periodic redemptions from your account.
To establish call your Investment Professional or call 1-800-730-1313 after your account is open. The accounts from which the withdrawals be processed must have a minimum balance of $10,000.
One easy way to pursue your financial goals is to invest money regularly. BT Funds offer convenient services that let you transfer money into your fund account, out of your fund account, or between fund accounts automatically. While regular investment plans do not guarantee a profit and will not protect you against loss in a declining market, they can be an excellent way to invest for retirement, a home, educational expenses, and other long-term financial goals. Certain restrictions apply for retirement accounts. Call your Investment Professional for more information.
To move money from your bank account to a BT Advisor Funds Fund
Minimum Minimum Frequency Setting up or changing
$1,000 $100 Monthly, bimonthly, For a new account, quarterly or semi- complete the the application.
To move money from one fund in the BT Family of Funds to another.
Minimum Frequency Setting up or changing
$100 Monthly, quarterly, To establish, call your semi-annually or Investment Professional after annually both accounts are open.
To change the amount or -1313. Call at least two business days prior to your date.
The account from which the minimum balance of $10,000. The account into which the must have a minimum of $1,000.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes substantially all of its net income and capital gains to shareholders each year. Each Fund distributes capital gains annually. Normally, income dividends for the Equity 500 Index Fund and Equity 500 Equal Weighted
Index Fund are distributed quarterly; income dividends for the Small Cap Index Fund and EAFE(R) Equity Index Fund are distributed annually; and income dividends for the U.S. Bond Index Fund are distributed monthly.
When you open an account, specify on your account application how you want to receive distributions. The Trusts offer four options:
1. Reinvestment Option. Your dividend and capital gain distributions will be automatically reinvested in additional Shares of the Fund. If you do not indicate a choice on your application you will be assigned this option.
2. Income-Earned Option. Your capital gain distributions will be automatically reinvested in additional Shares of the Fund, but you will be sent a check for each dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital gain distributions.
4. Automatic Dividends Program. Your dividend and capital gain distributions be automatically invested in another fund in the BT Family of Funds as long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, those checks will be reinvested in your account at the current NAV and your election may be converted to the Reinvestment Option. You may change distribution option at anytime by notifying the Transfer Agent in writing.
For retirement accounts, all distributions are automatically reinvested. When you are over 59 1/2 years old, you can receive distributions in cash. If distributions from a retirement account for any taxable year following the year in which the participant reaches age 70 1/2 are less than the "minimum required distribution" for that taxable year, an excise tax equal to 50% of the deficiency may be imposed by the Internal Revenue Service (the "IRS"). The administrator, trustee or custodian of such a retirement account will be responsible for reporting distributions from such accounts to the IRS.
When each of the Funds deducts a distribution from its NAV, the reinvestment price is the applicable Fund's NAV at the close of business that day. Distribution checks will be mailed within seven days, or longer for a December ex-dividend date.
As with any investment, you should consider how an investment in the Funds could affect you. Below are some of the Funds' tax implications. If your account is not a tax-deferred retirement account beware of these tax implications.
Taxes on Distributions. Distributions from the Funds are subject to federal income tax and may also be subject to state or local taxes. Annual Statements as to the federal tax status of distributions, and distributions that are attributable to state and local income and personal taxes, if applicable, will be mailed to shareholders shortly after the end of the year. If living outside the United States, your distributions from the Funds could also be taxed by the country in which you reside.
For federal tax purposes, income and short-term capital gain distributions from each of the Funds are taxed as dividends; long-term capital gain distributions are taxed as long-term capital gains.
Mutual fund dividends from U.S. government securities are generally free from state and local income taxes. However, particular states may limit this benefit, and some types of securities, such as repurchase agreements and some agency- backed securities, may not qualify for the benefit. In addition, some states may impose intangible property taxes. You should consult your own tax adviser for details and up-to-date information on the tax laws in your state.
Distributions are taxable when they are paid, whether you take them in cash or reinvest them. However, distributions declared in December and paid in January are taxable as if they were paid on December 31.
Every January, the Transfer Agent will send the IRS a statement showing the taxable distributions paid to you in the previous year.
Taxes on Transactions. Your redemptions, including exchanges, are subject to capital gains tax. A capital gain or loss is the difference between the cost of your Shares and the price you receive when you sell them.
Whenever you sell Shares of a Fund, the Transfer Agent will send you or your Investment Professional a confirmation statement showing how many Shares you sold and at what price. You also receive a consolidated transaction statement at least quarterly. However, it is up to you or your tax preparer to determine whether this sale resulted in a capital gain and, if so, the amount of tax to be paid. Be sure to keep your regular account statements; the information they contain will be essential in calculating the amount of your capital gains.
"Buying a dividend." If you buy Shares just before a Fund deducts a capital gain distribution or dividend distribution, as applicable, from its NAV, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution.
Currency considerations. If a Fund's dividends exceed its taxable income in any year, which is sometimes the result of currency-related losses, all or a portion of the Fund's dividends may be treated as a return of capital to shareholders for tax purposes. To minimize the risk of a return of capital, each of the Funds may adjust its dividends to take currency fluctuations into account, which may cause the dividends to vary. Any return of capital will reduce the cost basis of your Shares, which will result in a higher reported capital gain or a lower reported capital loss when you sell your Shares. The statement you receive in January will specify whether any distributions included a return of capital.
Undistributed net gains from currency transactions, if any, will generally be distributed as a separate dividend in December.
There are tax requirements that all Funds must follow in order to avoid federal taxation. In its effort to adhere to these requirements, a Fund may have to limit its investment activity in some types of instruments.
With the exception of the EAFE(R) Equity Index Fund, the Funds are open for business each day the NYSE is open. Each Fund's NAV is calculated as of the close of regular trading on the NYSE, currently 4:00 p.m. Eastern time. The EAFE(R) Equity Index Fund will not process orders on any day when either the NYSE or the Tokyo Stock Exchange is closed. Orders received on such days will be priced on the next day the Fund computes its NAV. As such, investors may experience a delay in purchasing or redeeming Shares of the EAFE(R) Equity Index Fund.
A Fund's NAV is the value of a single Share. The NAV of each Fund is computed by dividing the value of the Fund's Assets (i.e., the value of its investment in the Portfolio and other assets), less all liabilities, allocable to the Advisor Class Shares by the total number of its Shares outstanding. Each Portfolio's securities and other assets are valued primarily on the basis of market quotations or, if quotations are not readily available, by Bankers Trust pursuant to procedures adopted by the Portfolio's Board of Trustees. These procedures require Bankers Trust to value such a security at the same value as an equivalent security which is readily marketable and, in making such comparisons, to consider all relevant factors under applicable guidelines of the SEC.
When investors sign their account application, they will be asked to certify that their social security or taxpayer identification number is correct and that they are not subject to 31% backup withholding for failing to report income to the IRS. If investors violate IRS regulations, the IRS can require a Fund to withhold 31% of their taxable distributions and redemptions.
Investors may initiate many transactions by telephone: An Investment Professional or the Transfer Agent may only be liable for losses resulting from unauthorized transactions if they do not follow reasonable procedures designed to verify the identity of the caller. An Investment Professional or the Transfer Agent will request personalized security codes or other information, and may also record calls. Investors should verify the accuracy of the confirmation statements immediately after receipt. If investors do not want the ability to redeem and exchange by telephone, they should call their Investment Professional or the Transfer Agent for instructions. Additional documentation may be required from corporations, associations and certain fiduciaries.
Each Fund reserves the right to suspend the offering of Shares for a period of time. Each Fund also reserves the right to reject any specific purchase order, including certain purchases by exchange. Purchase orders may be refused if, in Bankers Trust's opinion, they would disrupt management of a Fund.
When investors place an order to buy Shares, their Shares will be purchased at the next NAV or offering price, as applicable, calculated after the order is received and accepted by the Transfer Agent. Note the following:
o All checks should be made payable to the specific Fund.
o All purchases must be made in U.S. dollars and checks must be drawn on U.S. banks.
o The Funds do not accept third party checks, except those payable to an existing shareowner who is a natural person (not a corporation or partnership), credit cards or cash.
o When making a purchase with more than one check, each check must have a value of at least $50.
o Each Fund reserves the right to limit the number of checks processed at one time.
o If a check does not clear, the purchase will be cancelled and the investor could be liable for any losses or fees a Fund or the Transfer Agent has incurred.
o When purchase are made by check or periodic automatic investment, redemptions will not be allowed until the investment being redeemed has been in the account for 15 business days.
o Direct Purchases: In the case of the U.S. Bond Index Fund, investors begin to earn dividends as of the first business day following the day
o Automated Order Purchases: In the case of the U.S. Bond Index Fund, investors begin to earn dividends as of the business day an order is
Automated Orders Purchase. Shares of the Funds can be purchased or sold through Investment Professionals utilizing an automated order placement and settlement system that guarantees payment for orders on a specified date.
To avoid the collection period associated with check purchases, investors should consider buying Shares by bank wire, U.S. Postal money order, U.S. Treasury
check, or Federal Reserve check.
When investors place an order to sell Shares, Shares will be sold at the next NAV calculated after the order is received and accepted. Note the following:
o Normally, redemption proceeds will be mailed on the next business day, but if making immediate payment could adversely affect a Fund it may take up to seven days to pay you.
o Shares of the Funds will earn dividends through the date of redemption; however, in the case of the U.S. Bond Index Fund, Shares redeemed on a Friday or prior to a holiday will continue to earn dividends until the next business day.
o Each Fund may hold payment on redemptions until it is reasonably satisfied that investments made by check have been collected which can take up to seven business days.
o Redemptions may be suspended or payment dates postponed when the NYSE is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC.
The Transfer Agent reserves the right to deduct an annual maintenance fee of $12.00 from accounts with a value of less than $2,500 (including any amount paid as a sales charge). The fee, which is payable to the Transfer Agent, is designed to offset in part the relatively higher costs of servicing smaller accounts.
If a non-retirement account balance falls below $1,000, the investor will be given 30 days' notice to reestablish the minimum balance. If the investor does not increase their balance, the Transfer Agent reserves the right to close the account and send the proceeds to the investor. The investor's Shares will be redeemed at the NAV on the day the account is closed.
The Transfer Agent may charge a fee for special services, such as providing historical account documents, that are beyond the normal scope of its services.
As a shareholder, investors have the privilege of exchanging Shares of a Fund for Shares of other funds in the BT Family of Funds at NAV. However, investors should note the following:
o The Fund an investor exchanges into must be registered for sale in their state.
o Investors may only exchange between accounts that are registered in the same name, address, and taxpayer identification number.
o Before exchanging into a Fund, investors should read its Prospectus.
o Exchanges between the Funds described in this Prospectus and Funds described in other BT Funds' Prospectuses are restricted during the 90 days following purchase. Exchanges among Funds described in this Prospectus are permitted any time after purchase.
o If an investor exchanges into the EAFE(R) Equity Index Fund on a day when the NYSE or the Tokyo Stock Exchange is closed, the exchange out of the other BT Fund will be processed on that day, but the EAFE(R) Equity Index Fund Shares will not be purchase until the day the EAFE(R) Equity Index Fund reopens. If an investor exchanges out of the EAFE(R) Equity Index Fund on a day when the NYSE is open and the Tokyo Stock Exchange is closed, the exchange will be delayed until the EAFE(R) Equity Index Fund reopens.
o Exchanges may have tax consequences for you.
o Because excessive trading can hurt Fund performance and shareholders, each Fund reserves the right to temporarily or permanently terminate the exchange privilege of any investor who makes more than four exchanges out of the Fund per calendar year. Accounts under common ownership or control, including accounts with the same taxpayer identification number, will be counted together for purposes of the four exchange limit.
o Each Fund reserves the right to refuse exchange purchases by any person or group if, in Bankers Trust's judgment, the Fund would be unable to invest the money effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected.
o Exchanges may be restricted or refused if a Fund receives or anticipates simultaneous orders affecting significant portions of the Fund's assets. In particular, a pattern of exchanges that coincide with a "market timing" strategy may be disruptive to a Fund.
o Although the Funds will attempt to give prior notice whenever they are reasonably able to do so, they may impose these restrictions at any time. The Funds reserve the right to terminate or modify the exchange privilege in the future on 60 days' notice to shareholders.
ADDITIONAL INFORMATION ABOUT THE TRUSTS AND PORTFOLIOS
Each Fund is a mutual fund: an investment that pools shareholders' money and invests it toward a specified goal. Each Fund (with the exception of the Equity 500 Index Fund) is a separate diversified series of BT Advisor Funds, a Massachusetts business trust. The Equity 500 Index Fund is separate diversified series of BT Pyramid Mutual Funds. Each Fund (with the exception of the Equity 500 Index Fund) offers two classes of Shares of beneficial interest, Advisor Class Shares and Institutional Class Shares. Each of the U.S. Bond Index Portfolio, Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio, and EAFE(R) Equity Index Portfolio is a separate diversified series of BT Investment Portfolios, a New York master trust fund. The Equity 500 Index Portfolio is a New York trust.
Each Portfolio (other than the Equity 500 Index Portfolio) is a separate subtrust (or "Series") of BT Investment Portfolios. Each Trust and BT Investment Portfolios reserves the right to add additional series in the future. The Trust also reserves the right to issue additional classes of Shares of each Fund.
The Trusts or a Portfolio may hold special meetings and mail proxy materials. These meetings may be called to elect or remove trustees, change fundamental policies, approve Portfolio's investment advisory agreement, or for other purposes. Shareholders not attending these meetings are encouraged to vote by proxy. Each Trust's Transfer Agent will mail proxy materials in advance, including a voting card and information about the proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of each Fund will have one vote for each full share held and proportionate, fractional votes for fractional shares held. A separate vote of one of the Funds or classes is required on any matter affecting only that Fund or class on which shareholders are entitled to vote. Shareholders of a Fund or class are not entitled to vote on Trust matters that do not affect that Fund or class, respectively, and do not require a separate vote of the Fund or class. All series of each Trust and all classes will vote together on certain matters, such as electing trustees or approving independent public auditors. There normally will be no meetings of shareholders for the purpose of electing Trustees unless and until such time as less than a majority of Trustees holding office have been elected by shareholders, at which time the Trustees then in office will call a shareholders' meeting for the election of Trustees. Any Trustee may be removed from office upon the vote of shareholders holding at least two-thirds of that Trust's outstanding shares at a meeting called for that purpose. The Trustees are required to call such a meeting upon the written request of shareholders holding at least 10% of that Trust's outstanding shares. Each Trust will also assist shareholders in communicating with one another as provided for in the 1940 Act.
Each series of a Trust will vote separately on any matter involving the corresponding Portfolio. Shareholders of all of the series of a Trust will, however, vote together to elect Trustees of that Trust and for certain other matters. Under certain circumstances, the shareholders of one or more series could control the outcome of these votes. The series of BT Investment Portfolios will vote together or separately on matters in the same manner, and in the same circumstances, as do the series of the Trusts. As with the Trusts, the investors in one or more series of BT Investment Portfolios could control the outcome of these votes.
The Trusts are each an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust of each of BT Investment Portfolios and the Equity 500 Index Portfolio provides that each Fund and other entities investing in a Portfolio (e.g., other investment companies, insurance company separate accounts and common and commingled trust funds) will each be liable for all obligations of that Portfolio. However, the risk of a Fund incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance existed and a Portfolio itself was unable to meet its obligations. Accordingly, the Trustees of the Trusts believe that neither the Funds nor their shareholders will be adversely affected by reason of the Funds' investing in the Portfolios. No series of BT Investment Portfolios has any preference over any other series.
BT ADVISOR FUNDS -- INSTITUTIONAL CLASS SHARES
EQUITY 500 EQUAL WEIGHTED INDEX FUND INSTITUTIONAL EQUITY 500 INDEX FUND
BT Advisor Funds (the "Trust") is comprised of ten funds. The funds listed above (with the exception of Institutional Equity 500 Index Fund) (each, a "Fund") are each a series of the Trust and offers two classes of shares (each a "Class" and collectively the "Classes"). This Statement of Additional Information describes the Institutional Class Shares. Institutional Equity 500 Index Fund (the "Equity 500 Index Fund") is a series of the BT Institutional Funds (together with the Trust, the "Trusts").
Risk Factors and Certain Securities and Investment Practices Performance Information . . . . . . . . . . . . . . . . . . Valuation of Securities; Redemptions and Purchases in Kind . Management of the Trusts and the Portfolios . . . . . . . . Organization of the Trusts . . . . . . . . . . . . . . . . . Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements . . . . . . . . . . . . . . . . . . . .
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . Appendix B . . . . . . . . . . . . . . . . . . . . . . . . .
As described in the Prospectus, the Trusts seek to achieve the investment objectives of each Fund by investing all the investable assets ("Assets") of the Fund in a diversified open-end management investment company (or a series thereof) having the same investment objectives as such Fund. These investment companies are, respectively, Equity 500 Index Portfolio and BT Investment Portfolios. U. S. Bond Index Portfolio, Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio and EAFE(R) Equity Index Portfolio are each a series of BT Investment Portfolios.
Since the investment characteristics of the Funds will correspond directly to those of the respective Portfolio in which the Fund invests all of its Assets, the following is a discussion of the various investments of and techniques employed by the Portfolios.
Shares of the Funds are sold by Signature Broker-Dealer Services, Inc. ("Signature"), the Trusts' Distributor, to clients and customers (including affiliates and correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolios' Adviser, and to clients and customers of other organizations.
The Trusts' Prospectus for the Funds is dated January , 1996. The Prospectus provides the basic information investors should know before investing and may be obtained without charge by calling the Trust at the telephone number listed below or by contacting your Investment Professional. This Statement of Additional Information, which is not a Prospectus, is intended to provide additional information regarding the activities and operations of the Trusts and should be read in conjunction with the Funds' Prospectus. This Statement of Additional Information is not an offer of any Fund for which an investor has not received a Prospectus. Capitalized terms not otherwise defined in this Statement of Additional Information have the meanings accorded to them in the Fund's Prospectus.
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR SIGNATURE BROKER-DEALER SERVICES, INC.
6 ST. JAMES AVENUE BOSTON, MASSACHUSETTS 02116 (800) 422-6577
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The investment objective(s) of each Fund is described in that Fund's Prospectus. There can, of course, be no assurance that any Fund will achieve its investment objective(s).
Each Fund seeks to achieve its investment objective by investing all of its Assets in the corresponding Portfolio. The Trusts may withdraw a Fund's investment from the corresponding Portfolio at any time if the Board of Trustees of the respective Trust determines that it is in the best interests of the Fund to do so.
Since the investment characteristics of each Fund will correspond directly to those of the corresponding Portfolio, the following is a discussion of the various investments of and techniques employed by each Portfolio.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit are receipts issued by a depository institution in exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded in the secondary market prior to maturity. Bankers' acceptances typically arise from short-term credit arrangements designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix A to this Statement of Additional Information.
ILLIQUID SECURITIES. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the 1933 Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain securities that are not registered under the 1933 Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale of such investments to the general public or to certain institutions may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which allows a broader institutional trading market for securities otherwise subject to restriction on their resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the 1933 Act of resales of certain securities to qualified institutional buyers. The Adviser anticipates that the market for certain restricted securities such as institutional commercial paper will expand further as a result of this regulation and the development of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities in each Portfolio's portfolio under the supervision of the Portfolio's Board of Trustees. In reaching liquidity decisions, the Adviser will consider, among other things, the following factors: (i) the frequency of trades and quotes for the security; (ii) the number of dealers and other potential purchasers wishing to purchase or sell the security; (iii) dealer undertakings to make a market in the security and (iv) the nature of the security and of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer).
LENDING OF PORTFOLIO SECURITIES. Each Portfolio has the authority to lend portfolio securities to brokers, dealers and other financial organizations. The Portfolio will not lend securities to Bankers Trust, Signature or their affiliates. By lending its securities, a Portfolio can increase its income by continuing to receive interest on the loaned securities as well as by either investing the cash collateral in short-term securities or obtaining yield in the form of interest paid by the borrower when U.S. Government obligations are used as collateral. There may be risks of delay in receiving additional collateral or risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. A Portfolio will adhere to the following conditions whenever its securities are loaned: (i) the Portfolio must receive at least 100 percent cash collateral or equivalent securities from the borrower; (ii) the borrower must increase this collateral whenever the market value of the securities including accrued interest rises above the level of the collateral; (iii) the Portfolio must be able to terminate the loan at any time; (iv) the Portfolio must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (v) the Portfolio may pay only reasonable custodian fees in connection with the loan; and (vi) voting rights on the loaned securities may pass to the borrower; provided, however, that if a material event adversely affecting the investment occurs, the Board of Trustees of the Portfolio must terminate the loan and regain the right to vote the securities.
SHORT-TERM INSTRUMENTS. When a Portfolio experiences large cash inflows through the sale of securities and desirable equity securities, that are consistent with the Portfolio's investment objective, which are unavailable in sufficient quantities or at attractive prices, the Portfolio may hold short-term investments for a limited time pending availability of such equity securities. Short-term instruments consist of foreign and domestic: (i) short-term obligations of sovereign governments, their agencies, instrumentalities, authorities or political subdivisions; (ii) other short-term debt securities rated AA or higher by S&P or Aa or higher by Moody's or, if unrated, of comparable quality in the opinion of Bankers Trust; (iii) commercial paper; (iv) bank obligations, including negotiable certificates of deposit, time deposits and banker's acceptances; and (v) repurchase agreements. At the time the Portfolio invests in commercial paper, bank obligations or repurchase agreements, the issuer of the issuer's parent must have outstanding debt rated AA or higher by S&P or Aa or higher by Moody's or outstanding commercial paper or bank obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such instrument must be of comparable quality in the opinion of Bankers Trust. These instruments may be denominated in U.S dollars or in foreign currencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase securities on a when-issued or delayed delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the purchase commitment. The purchase price and the interest rate payable, if any, on the securities are fixed on the purchase commitment date or at the time the settlement date is fixed. The value of such securities is subject to market fluctuation and no interest accrues to a Portfolio until settlement takes place. At the time a Portfolio makes the commitment to purchase securities on a when-issued or delayed delivery basis, it will record the transaction, reflect the value each day of such securities in determining its net asset value and, if applicable, calculate the maturity for the purposes of average maturity from that date. At the time of settlement a when-issued security may be valued at less than the purchase price. To facilitate such acquisitions, each Portfolio will maintain with the Custodian a segregated account with liquid assets, consisting of cash, U.S. Government securities or other appropriate securities, in an amount at least equal to such commitments. On delivery dates for such transactions, each Portfolio will meet its obligations from maturities or sales of the securities held in the segregated account and/or from cash flow. If a Portfolio chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any other portfolio obligation, incur a gain or loss due to market fluctuation. It is the current policy of each Portfolio not to enter into when-issued commitments exceeding in the aggregate 15% of the market value of the Portfolio's total assets, less liabilities other than the obligations created by when-issued commitments.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each Portfolio may invest in obligations issued or guaranteed by U.S. Government agencies or instrumentalities. These obligations may or may not be backed by the "full faith and credit" of the United States. In the case of securities not backed by the full faith and credit of the United States, each Portfolio must look principally to the federal agency issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. Securities in which each Portfolio may invest that are not backed by the full faith and credit of the United States include, but are not limited to, obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal Service, each of which has the right to borrow from the U.S. Treasury to meet its obligations, and obligations of the Federal Farm Credit System and the Federal Home Loan Banks, both of whose obligations may be satisfied only by the each issuing agency. Securities which are backed by the full faith and credit of the United States include obligations of the Government National Mortgage Association, the Farmers Home Administration, and the Export-Import Bank.
EQUITY INVESTMENTS. With the exception of the U.S. Bond Index Portfolio, each Portfolio may invest in equity securities listed on any domestic or foreign securities exchange or traded in the over-the-counter market as well as certain restricted or unlisted securities. They may or may not pay dividends or carry voting rights. Common stock occupies the most junior position in a company's capital structure.
SWAP AGREEMENTS. Swap agreements are contracts entered into by two parties, primarily institutional investors, for periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or swapped between the parties are calculated with respect to a notional amount, I.E., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a basket of securities representing a particular index. The notional amount of the swap agreement is only a fictive basis on which to calculate the obligations which the parties to a swap agreement have agreed to exchange. A Portfolio's obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). A Portfolio's obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of a segregated account consisting of cash, U.S. Government securities, or high grade debt obligations, to avoid any potential leveraging of the Portfolio's portfolio.
The use of swap agreements will be successful in furthering its investment objective will depend on the Adviser's ability to correctly predict whether certain types of investments are likely to produce greater returns than other investments. Swap agreements may be considered to be illiquid because they are two party contracts and because they may have terms of greater than seven days. Moreover, a Portfolio bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. A Portfolio will enter into swap agreements only with counterparties that would be eligible for consideration as repurchase agreement counterparties under the Portfolio's repurchase agreement guidelines. Certain restrictions imposed on the Portfolios by the Internal Revenue Code may limit the Portfolios' ability to use swap agreements. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a Portfolio's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity Exchange Act (the "CEA") and, therefore, are not regulated as futures or commodity option transactions under the CEA, pursuant to regulations approved by the Commodity Futures Trading Commission (the "CFTC") effective February 22, 1993. To qualify for this exemption, a swap agreement must be entered into by eligible participants, which includes the following, provided the participant's total assets exceed established levels: a bank or trust company, savings association or credit union, insurance company, investment company subject to regulation under the Investment Company Act of 1940, as amended (the "1940 Act"), commodity pool, corporation, partnership, proprietorship, organization, trust or other entity, employee benefit plan, governmental entity, broker-dealer, futures commission merchant, natural person, or regulated foreign person. To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employee benefit plans must have asset exceeding $5 million. In addition, an eligible swap transaction must meet three conditions. First, the swap agreement may not be part of a fungible class of agreements that are standardized as to their material economic terms. Second, the creditworthiness of parties with actual or potential obligations under the swap agreement must be a material consideration in entering into or determining the terms of the swap agreement, including pricing, cost or credit enhancement terms. Third, swap agreements may not be entered into and traded on or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on existing exclusions for swaps, such as the Policy Statement issued in July 1989 which recognized a "safe harbor" for swap transactions from regulation as futures or commodity option transactions under the CEA or its regulations. The Policy Statement applies to swap transactions settled in cash that: (i) have individually tailored terms; (ii) lack exchange style offset and the use of a clearing organization or margin system; (iii) are undertaken in conjunction with a line of business; and (iv) are not marketed to the public.
REVERSE REPURCHASE AGREEMENTS. The Portfolios may borrow funds for temporary or emergency purposes, such as meeting larger than anticipated redemption requests, and not for leverage, by among other things, agreeing to sell portfolio securities to financial institutions such as banks and broker-dealers and to repurchase them at a mutually agreed date and price (a "reverse repurchase agreement"). At the time a Portfolio enters into a reverse repurchase agreement it will place in a segregated custodial account cash, U.S. Government Obligations or high-grade debt obligations having a value equal to the including accrued interest. Reverse repurchase agreements involve the risk that the market value of the securities sold by a Portfolio may decline below the repurchase price of those securities. Reverse repurchase agreements are considered to be borrowings by a Portfolio.
WARRANTS. Warrants entitle the holder to buy common stock from the issuer at a specific price (the strike price) for a specific period of time. The strike price of warrants sometimes is much lower than the current market price of the underlying securities, yet warrants are subject to similar price fluctuations. As a result, warrants may be more volatile investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with respect to the underlying securities and do not represent any rights in the assets of the issuing company. Also, the value of the warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to the expiration date.
CONVERTIBLE SECURITIES. Convertible securities may be a debt security or preferred stock which may be converted into common stock or carries the right to purchase common stock. Convertible securities entitle the holder to exchange the securities for a specified number of shares of common stock, usually of the same company, at specified prices within a certain period of time.
The terms of any convertible security determine its ranking in a company's capital structure. In the case of subordinated convertible debentures, the holders' claims on assets and earnings are subordinated to the claims of other creditors, and are senior to the claims of preferred and common shareholders. In the case of convertible preferred stock, the holders' claims on assets and earnings are subordinated to the claims of all creditors and are senior to the claims of common shareholders.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate instrumentality of the United States within the Department of Housing and Urban Development. The National Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal of and interest on certificates that are based on and backed by a pool of mortgage loans insured by the Federal Housing Administration under the Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of Veterans Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of other eligible mortgage loans. The Housing Act provides that the full faith and credit of the U.S. Government is pledged to the payment of all amounts that may be required to be paid under any GNMA guaranty. In order to meet its obligations under such guaranty, Ginnie Mae is authorized to borrow from the U.S. Treasury with no limitations as to amount.
The Ginnie Mae Certificates in which the U.S. Bond Index Portfolio will invest will represent a pro rata interest in one or more pools of the following types of mortgage loans: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate graduated payment mortgage loans; (iii) fixed-rate growing equity mortgage loans; (iv) fixed-rate mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on multifamily residential properties under construction; (vi) mortgage loans on completed multifamily projects; (vii) fixed-rate mortgage loans as to which escrowed funds are used to reduce the borrower's monthly payments during the early years of the mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that provide for adjustments in payments based on periodic changes in interest rates or in other payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise specified above, will be fully-amortizing loans secured by first liens on one- to four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act of 1938. The obligations of FNMA are not backed by the full faith and credit of the U.S. Government.
Each Fannie Mae Certificate will represent a pro rata interest in one or more pools of FHA Loans, VA Loans or conventional mortgage loans (I.E., mortgage loans that are not insured or guaranteed by any governmental agency) of the following types: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate growing equity mortgage loans; (iii) fixed-rate graduated payment mortgage loans; (iv) variable rate mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed-rate and adjustable mortgage loans secured by multifamily projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the United States created pursuant to the Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations solely of Freddie Mac and are not backed by the full faith and credit of the U.S. Government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The mortgage loans underlying the Freddie Mac Certificates will consist of fixed-rate or adjustable rate mortgage loans with original terms to maturity of between ten and thirty years, substantially all of which are secured by first liens on one-to four-family residential properties or multifamily projects. Each mortgage loan must meet the applicable standards set forth in the FHLMC Act. A Freddie Mac Certificate group may include whole loans, participating interests in whole loans and undivided interests in whole loans and participations comprising another Freddie Mac Certificate group.
ADJUSTABLE RATE MORTGAGES - INTEREST RATE INDICES. Adjustable rate mortgages in which the U.S. Bond Index Portfolio invests may be adjusted on the basis of one of several indices. The One Year Treasury Index is the figure derived from the average weekly quoted yield on U.S. Treasury Securities adjusted to a constant maturity of one year. The Cost of Funds Index reflects the monthly weighted average cost of funds of savings and loan associations and savings banks whose home offices are located in Arizona, California and Nevada (the "FHLB Eleventh District") that are member institutions of the Federal Home Loan Bank of San Francisco (the "FHLB of San Francisco"), as computed from statistics tabulated and published by the FHLB of San Francisco. The FHLB of San Francisco normally announces the Cost of Funds Index on the last working day of the month following the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index and may cause the Cost of Funds Index to move in a manner different from indices based upon specific interest rates, such as the One Year Treasury Index. Because of the various origination dates and maturities of the liabilities of members of the FHLB Eleventh District upon which the Cost of Funds Index is based, among other things, at any time the Cost of Funds Index may not reflect the average prevailing market interest rates on new liabilities of similar maturities. There can be no assurance that the Cost of Funds Index will necessarily move in the same direction or at the same rate as prevailing interest rates since as longer term deposits or borrowings mature and are renewed at market interest rates, the Cost of Funds Index will rise or fall depending upon the differential between the prior and the new rates on such deposits and borrowings. In addition, dislocations in the thrift industry in recent years have caused and may continue to cause the cost of funds of thrift institutions to change for reasons unrelated to changes in general interest rate levels. Furthermore, any movement in the Cost of Funds Index as compared to other indices based upon specific interest rates may be affected by changes instituted by the FHLB of San Francisco in the method used to calculate the Cost of Funds Index. To the extent that the Cost of Funds Index may reflect interest changes on a more delayed basis than other indices, in a period of rising interest rates, any increase may produce a higher yield later than would be produced by such other indices, and in a period of declining interest rates, the Cost of Funds Index may remain higher than other market interest rates which may result in a higher level of principal prepayments on mortgage loans which adjust in accordance with the Cost of Funds Index than mortgage loans which adjust in accordance with other indices.
LIBOR, the London interbank offered rate, is the interest rate that the most creditworthy international banks dealing in
U.S. dollar-denominated deposits and loans charge each other for large dollar-denominated loans. LIBOR is also usually the base rate for large dollar-denominated loans in the international market. LIBOR is generally quoted for loans having rate adjustments at one, three, six or twelve month intervals.
ASSET-BACKED SECURITIES. The asset-backed securities in which the U.S. Bond Index Portfolio may invest are limited to those which are readily marketable, dollar-denominated and rated BBB or higher by Standard & Poor's Corporation ("S&P") or Baa or higher by Moody's Investors Services, Inc. ("Moody's"). Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities do not have the benefit of the same type of security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to avoid payment of certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicer to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES--TYPES OF CREDIT SUPPORT. The mortgage-backed securities in which the U.S. Bond Index Portfolio may invest are limited to those relating to residential mortgages. Mortgage-backed securities and asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failure by obligors on underlying assets to make payments, such securities may contain elements of credit support. Such credit support falls into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the pass-through of payments due on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default enhances the likelihood of ultimate payment of the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a combination of such approaches. The U.S. Bond Index Portfolio will not pay any additional fees for such credit support, although the existence of credit support may increase the price of a security.
The ratings of mortgage-backed securities and asset-backed securities for which third-party credit enhancement provides liquidity protection or protection against losses from default are generally dependent upon the continued creditworthiness of the provider of the credit enhancement. The ratings of such securities could be subject to reduction in the event of deterioration in the creditworthiness of the credit enhancement provider even in cases where the delinquency and loss experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction include "senior-subordinated securities" (multiple class securities with one or more classes subordinate to other classes as to the payment of principal thereof and interest thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class), creation of "reserve funds" (where cash or investments, sometimes funded from a portion of the payments on the underlying assets, are held in reserve against future losses) and "over-collateralization" (where the scheduled payments on, or the principal amount of, the underlying assets exceed those required to make payment of the securities and pay any servicing or other fees). The degree of credit support provided for each issue is generally based on historical information with respect to the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that which is anticipated could adversely affect the return on an investment in such a security.
STRIPPED MORTGAGE-BACKED SECURITIES. The cash flows and yields on IO and PO classes are extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets. For example, a rapid or slow rate of principal payments may have a material adverse effect on the yield to maturity of IOs or POs, respectively. If the underlying mortgage assets experience greater than anticipated prepayments of principal, an investor may fail to recoup fully its initial investment in an IO class of a stripped mortgage-backed security, even if the IO class is rated AAA or Aaa. Conversely, if the underlying mortgage assets experience slower than anticipated prepayments of principal, the yield on a PO class will be affected more severely than would be the case with a traditional mortgage-backed security.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING HONG KONG, MALAYSIA, SINGAPORE AND JAPAN. Many Asian countries may be subject to a greater degree of social, political and economic instability than is the case in the United States and European countries. Such instability may result from (i) authoritarian governments or military involvement in political and economic decision-making; (ii) popular unrest associated with demands for improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious and racial disaffection.
The economies of most of the Asian countries are heavily dependent upon international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners, principally, the United States, Japan, China and the European Community. The enactment by the United States or other principal trading partners of protectionist trade legislation, reduction of foreign investment in the local economies and general declines in the international securities markets could have a significant adverse effect upon the securities markets of the Asian countries.
Hong Kong's impending return to Chinese dominion in 1997 has not initially had a positive effect on its economic growth which was vigorous in the 1980s. However, authorities in Beijing have agreed to maintain a capitalist system for 50 years that, along with Hong Kong's economic growth, continued to further strong stock market returns. In preparation for 1997, Hong Kong has to develop trade with China, where it is the largest foreign investor, while also maintaining its longstanding export relationship with the United States. Spending on infrastructure improvements is a significant priority of the colonial government while the private sector continues to diversify abroad based on its position as an established international trade center in the Far East.
The Hong Kong stock market is undergoing a period of growth and change which may result in trading volatility and difficulties in the settlement and recording of transactions, and in interpreting and applying the relevant law and regulations.
The Malaysian economy continued to perform well, growing at an average annual rate of 9% from 1987 through 1991. This placed Malaysia as one of the fastest growing economies in the Asian-Pacific region. Malaysia has become the world's third-largest producer of semiconductor devices (after the US and Japan) and the world's largest exporter of semiconductor devices. More remarkable is the country's ability to achieve rapid economic growth with relative price stability (2% inflation over the past five years) as the government followed prudent fiscal/monetary policies. Malaysia's high export dependence level leaves it vulnerable to a recession in the Organization for Economic Cooperation and Development countries or a fall in world commodity prices.
Singapore has an open entrepreneurial economy with strong service and manufacturing sectors and excellent international trading links derived from its entrepot history. During the 1970's and early 1980's, the economy expanded rapidly, achieving an average annual growth rate of 9%. Per capita GDP is among
Asia. Singapore holds a position as a major oil refining and services center.
Investing in Japanese securities may involve the risks associated with investing in foreign securities generally. In addition, because it invests in Japan, the EAFE(R) Equity Index Portfolio will be subject to the general economic and political conditions in Japan.
Share prices of companies listed on Japanese stock exchanges and on the Japanese OTC market reached historical peaks (which were later referred to as the "bubble") as well as historically high trading volumes in 1989 and 1990. Since then, stock prices in both markets decreased significantly, with listed stock prices reaching their lowest levels in the third quarter of 1992 and OTC stock prices reaching their lowest levels in the fourth quarter of 1992. During the period from January 1, 1989 through December 31, 1994, the highest Nikkei stock average and Nikkei OTC average were 38,915.87 and 4,149.20, respectively, and the lowest for each were 14,309.41 and 1,099.32, respectively. There can be no assurance that additional market corrections will not occur.
The common stocks of many Japanese companies continue to trade at high price earnings ratios in comparison with those in the United States, even after the recent market decline. Differences in accounting methods make it difficult to compare the earnings of Japanese companies with those of companies in other countries, especially the United States.
Since the EAFE(R) Equity Index Portfolio invests in securities denominated in yen, changes in exchange rates between the U.S. dollar and the yen affect the U.S. dollar value of the EAFE(R) Equity Index Portfolio's assets. Such rate of exchange is determined by forces of supply and demand on the foreign exchange markets. These forces are in turn affected by the international balance of payments and other economic, political and financial conditions, government intervention, speculation and other factors.
Japanese securities held by the EAFE(R) Equity Index Portfolio are not registered with the SEC nor are the issuers thereof subject to its reporting requirements. There may be less publicly available information about issuers of Japanese securities than about U.S. companies and such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject.
Japan's success in exporting its products has generated a sizeable trade surplus. Such trade surplus has caused tensions at times between Japan and some of its trading partners. In particular, Japan's trade relations with the United States have recently been the subject of discussion and negotiation between the two nations. The United States has imposed certain measures designed to address trade issues in specific industries. These measures and similar measures in the future may adversely affect the performance of the EAFE(R) Equity Index Portfolio.
Japan's economy has typically exhibited low inflation and low interest rates. There can be no assurance that low inflation and low interest rates will continue, and it is likely that a reversal of such factors would adversely affect the Japanese economy. Moreover, the Japanese economy may differ, favorably or unfavorably, from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993 a coalition government was formed which, for the first time since 1955, did not include the Liberal Democratic Party. Since mid-1993, there have been several changes in leadership in Japan. What, if any, effect the current political situation will have on prospective regulatory reforms of the economy in Japan cannot be predicted. Recent and future developments in Japan and neighboring Asian countries may lead to changes in policy that might adversely affect the EAFE(R) Equity Index Portfolio.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments draws upon the Adviser's skill and experience with respect to such instruments and usually depends on the Adviser's ability to forecast interest rate and currency exchange rate movements correctly. Should interest or exchange rates move in an unexpected manner, a Portfolio may not achieve the anticipated benefits of futures contracts or options on futures contracts or may realize losses and thus will be in a worse position than if such strategies had not been used. In addition, the correlation between movements in the price of futures contracts or options on futures contracts and movements in the price of the securities and currencies hedged or used for cover will not be perfect and could produce unanticipated losses.
Successful use of the futures contract and related options are subject to special risk considerations. A liquid secondary market for any futures or options contract may not be available when a futures or options position is sought to be closed. In addition, there may be an imperfect correlation between movements in the securities or currency in the Portfolio. Successful use of futures or options contracts is further dependent on Bankers Trust's ability to correctly predict movements in the securities or foreign currency markets and no assurance can be given that its judgement will be correct. Successful use of options on securities or stock indices are subject to similar risk considerations. In addition, by writing covered call options, the Portfolio gives up the opportunity, while the option is in effect, to profit from any price increase in the underlying securities above the options exercise price.
FUTURES CONTRACTS. Each Portfolio may enter into contracts for the purchase or sale for future delivery of fixed-income securities, foreign currencies, or contracts based on financial indices including any index of U.S. Government securities, foreign government securities or corporate debt securities. U.S. futures contracts have been designed by exchanges which have been designated "contracts markets" by the CFTC, and must be executed through a futures commission merchant, or brokerage firm, which is a member of the relevant contract market. Futures contracts trade on a number of exchange markets, and, through their clearing corporations, the exchanges guarantee performance of the contracts as between the clearing members of the exchange. Each Portfolio may enter into futures contracts which are based on debt securities that are backed by the full faith and credit of the U.S. Government, such as long-term U.S. Treasury Bonds, Treasury Notes, GNMA modified pass-through mortgage-backed securities and three-month U.S. Treasury Bills. A Portfolio may also enter into futures contracts which are based on bonds issued by entities other than the U.S. Government.
At the same time a futures contract is purchased or sold, the Portfolio must allocate cash or securities as a deposit payment ("initial deposit"). It is expected that the initial deposit would be approximately 1 1/2% to 5% of a contract's face value. Daily thereafter, the futures contract is valued and the payment of "variation margin" may be required, since each day the Portfolio would provide or receive cash that reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments are made to recognize differences in value arising from the delivery of securities with a different interest rate from that specified in the contract. In some (but not many) cases, securities called for by a futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or acquisition of securities, in most cases the contractual obligation is fulfilled before the date of the contract without having to make or take delivery of the securities. The offsetting of a contractual obligation is accomplished by buying (or selling, as the case may be) on a commodities exchange an identical futures contract calling for delivery in the same month. Such a transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the securities. Since all transactions in the futures market are through a clearinghouse associated with the exchange on which the contracts are traded, the Portfolio will incur brokerage fees when it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case of a Portfolio which holds or intends to acquire fixed-income securities, is to attempt to protect the Portfolio from fluctuations in interest or foreign exchange rates without actually buying or selling fixed-income securities or foreign currencies. For example, if interest rates were expected to increase, the Portfolio might enter into futures contracts for the sale of debt securities. Such a sale would have much the same effect as selling an equivalent value of the debt securities owned by the Portfolio. If interest rates did increase, the value of the debt security in the Portfolio would decline, but the value of the futures contracts to the Portfolio would increase at approximately the same rate, thereby keeping the net asset value of the Portfolio from declining as much as it otherwise would have. The Portfolio could accomplish similar results by selling debt securities and investing in bonds with short maturities when interest rates are expected to increase. However, since the futures market is more liquid than the cash market, the use of futures contracts as an investment technique allows the Portfolio to maintain a defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures contracts may be purchased to attempt to hedge against anticipated purchases of debt securities at higher prices. Since the fluctuations in the value of futures contracts should be similar to those of debt securities, a Portfolio could take advantage of the anticipated rise in the value of debt securities without actually buying them until the market had stabilized. At that time, the futures contracts could be liquidated and the Portfolio could then buy debt securities on the cash market. To the extent a Portfolio enters into futures contracts for this purpose, the assets in the segregated asset account maintained to cover the Portfolio's obligations with respect to such futures contracts will consist of cash, cash equivalents or high quality liquid debt securities from its portfolio in an amount equal to the difference between the fluctuating market value of such futures contracts and the aggregate value of the initial and variation margin payments made by the Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to differences in the nature of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate trends by the Adviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes that use of such contracts will benefit the Portfolios, if the Adviser's investment judgment about the general direction of interest rates is incorrect, a Portfolio's overall performance would be poorer than if it had not entered into any such contract. For example, if a Portfolio has hedged against the possibility of an increase in interest rates which would adversely affect the price of debt securities held in its portfolio and interest rates decrease instead, the Portfolio will lose part or all of the benefit of the increased value of its debt securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if a Portfolio has insufficient cash, it may have to sell debt securities from its portfolio to meet daily variation margin requirements. Such sales of bonds may be, but will not necessarily be, at increased prices which reflect the rising market. A Portfolio may have to sell securities at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. Each Portfolio may purchase and write options on futures contracts for hedging purposes. The purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the price of the futures contract upon which it is based or the price of the underlying debt securities, it may or may not be less risky than ownership of the futures contract or underlying debt securities. As with the purchase of futures contracts, when a Portfolio is not fully invested it may purchase a call option on a futures contract to hedge against a market advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the underlying security or foreign currency which is deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price, a Portfolio will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Portfolio's portfolio holdings. The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the underlying security or foreign currency which upon exercise of the futures contract. If the futures price at expiration of the option is higher than the exercise price, the Portfolio will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities which the Portfolio intends to purchase. If a put or call option the Portfolio has written is exercised, the Portfolio will incur a loss which will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Portfolio's losses from existing options on futures may to some extent be reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some respects to the purchase of protective put options on portfolio securities. For example, a Portfolio may purchase a put option on a futures contract to hedge its portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on a futures contract is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased.
The Board of Trustees of each Portfolio has adopted the requirement that futures contracts and options on futures contracts be used as a hedge and may also use stock index futures on continual basis to equitize cash so that the fund may maintain 100% equity exposure. In addition to this requirement, the Board of Trustees of each Portfolio has also adopted a restriction that the Portfolio will not enter into any futures contracts or options on futures contracts if immediately thereafter the amount of margin deposits on all the futures contracts of the Portfolio and premiums paid on outstanding options on futures contracts owned by the Portfolio (other than those entered into for bona fide hedging purposes) would exceed 5% of the market value of the total assets of the Portfolio.
OPTIONS ON FOREIGN CURRENCIES. The EAFE(R) Equity Index Portfolio may purchase and write options on foreign currencies for hedging purposes in a manner similar to that in which futures contracts on foreign currencies, or forward contracts, will be utilized. For example, a decline in the dollar value of a foreign currency in which portfolio securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of portfolio securities, the Portfolio may purchase put options on the foreign currency. If the value of the currency does decline, the Portfolio will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, the EAFE(R) Equity Index Portfolio may purchase call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to the Portfolio deriving from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Portfolio could sustain losses on transactions in foreign currency options which would require it to forego a portion or all of the benefits of advantageous changes in such rates.
The EAFE(R) Equity Index Portfolio may write options on foreign currencies for the same types of hedging purposes. For example, where the Portfolio anticipates a decline in the dollar value of foreign currency denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the options will most likely not be exercised, and the diminution in value of portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the EAFE(R) Equity Index Portfolio could write a put option on the relevant currency which, if rates move in the manner projected, will expire unexercised and allow the Portfolio to hedge such increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Portfolio would be required to purchase or sell the underlying currency at a loss which may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Portfolio also may be required to forego all or a portion of the benefits which might otherwise have been obtained from favorable movements in exchange rates.
The EAFE(R) Equity Index Portfolio intends to write covered call options on foreign currencies. A call option written on a foreign currency by the Portfolio is "covered" if the Portfolio owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by its Custodian) upon conversion or exchange of other foreign currency held in its portfolio. A call option is also covered if the Portfolio has a call on the same foreign currency and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Portfolio in cash, U.S. Government securities and other high quality liquid debt securities in a segregated account with its custodian.
The EAFE(R) Equity Index Portfolio also intends to write call options on foreign currencies that are not covered for cross-hedging purposes. A call option on a foreign currency is for cross-hedging purposes if it is not covered, but is designed to provide a hedge against a decline in the U.S. dollar value of a security which the Portfolio owns or has the right to acquire and which is denominated in the currency underlying the option due to an adverse change in the exchange rate. In such circumstances, the Portfolio collateralizes the option by maintaining in a segregated account with its custodian, cash or U.S. Government securities or other high quality liquid debt securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. Unlike transactions entered into by a Portfolio in futures contracts, options on foreign currencies and forward contracts are not traded on contract markets regulated by the CFTC or (with the exception of certain foreign currency options) by the SEC. To the contrary, such instruments are traded through financial institutions acting as market-makers, although foreign currency options are also traded on certain national securities exchanges such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. Similarly, options on currencies may be traded over-the-counter. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, the option writer and a trader of forward contracts could lose amounts substantially in excess of their initial investments, due to the margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within the jurisdiction of the SEC, as are other securities traded on such exchanges. As a result, many of the protections provided to traders on organized exchanges will be available with respect to such transactions. In particular, all foreign Forward currency option positions entered into on a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation (the "OCC"), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting a Portfolio to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of the availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in applicable foreign countries for this purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on the OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies are traded over-the-counter and involve liquidity and credit risks which may not be present in the case of exchange-traded currency options. A Portfolio's ability to terminate over-the-counter options will be more limited than with exchange-traded options. It is also possible that broker-dealers participating in over-the-counter options transactions will not fulfill their obligations. Until such time as the staff of the SEC changes its position, each Portfolio will treat purchased over-the-counter options and assets used to cover written over-the-counter options as illiquid securities. With respect to options written with primary dealers in U.S. Government securities pursuant to an agreement requiring a closing purchase transaction at a formula price, the amount of illiquid securities may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward contracts and options on foreign currencies may be traded on foreign exchanges. Such transactions are subject to the risk of governmental actions affecting trading in or the prices of foreign currencies or securities. The value of such positions also could be adversely affected by: (i) other complex foreign political and economic factors; (ii) lesser availability than in the United States of data on which to make trading decisions; (iii) delays in the Portfolio's ability to act upon economic events occurring in foreign markets during nonbusiness hours in the United States; (iv) the imposition of different settlement terms and procedures and margin requirements than in the United States; and (v) lesser trading volume.
OPTIONS ON SECURITIES. Each Portfolio may write (sell) covered call and put options to a limited extent on its portfolio securities ("covered options") in an attempt to increase income. However, the Portfolio may forgo the benefits of appreciation on securities sold or may pay more than the market price on securities acquired pursuant to call and put options written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser of the option the right to buy the underlying security at the price specified in the option (the "exercise price") by exercising the option at any time during the option period. If the option expires unexercised, the Portfolio will realize income in an amount equal to the premium received for writing the option. If the option is exercised, a decision over which the Portfolio has no control, the Portfolio must sell the underlying security to the option holder at the exercise price. By writing a covered call option, the Portfolio forgoes, in exchange for the premium less the commission ("net premium"), the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser of the option the right to sell the underlying security to the Portfolio at the specified exercise price at any time during the option period. If the option expires unexercised, the Portfolio will realize income in the amount of the premium received for writing the option. If the put option is exercised, a decision over which the Portfolio has no control, the Portfolio must purchase the underlying security from the option holder at the exercise price. By writing a covered put option, the Portfolio, in exchange for the net premium received, accepts the risk of a decline in the market value of the underlying security below the exercise price. The Portfolio will only write put options involving securities for which a determination is made at the time the option is written that the Portfolio wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or put option by purchasing an option with the same exercise price and expiration date as the option previously written. This transaction is called a "closing purchase transaction." The Portfolio will realize a profit or loss for a closing purchase transaction if the amount paid to purchase an option is less or more, as the case may be, than the amount received from the sale thereof. To close out a position as a purchaser of an option, the Portfolio, may make a "closing sale transaction" which involves liquidating the Portfolio's position by selling the option previously purchased. Where the Portfolio cannot effect a closing purchase transaction, it may be forced to incur brokerage commissions or dealer spreads in selling securities it receives or it may be forced to hold underlying securities until an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium received by the Portfolio is included in the liability section of the Portfolio's Statement of Assets and Liabilities as a deferred credit. The amount of the deferred credit will be subsequently marked to market to reflect the current market value of the option written. The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. If an option expires on its stipulated expiration date or if the Portfolio enters into a closing purchase transaction, the Portfolio will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold), and the deferred credit related to such option will be eliminated. If a call option is exercised, the Portfolio will realize a gain or loss from the sale of the underlying security and the proceeds of the sale will be increased by the premium originally received. The writing of covered call options may be deemed to involve the pledge of the securities against which the option is being written. Securities against which call options are written will be segregated on the books of the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in which it may invest. The Portfolio would normally purchase a call option in anticipation of an increase in the market value of such securities. The purchase of a call option would entitle the Portfolio, in exchange for the premium paid, to purchase a security at a specified price during the option period. The Portfolio would ordinarily have a gain if the value of the securities increased above the exercise price sufficiently to cover the premium and would have a loss if the value of the securities remained at or below the exercise price during the option period.
A Portfolio would normally purchase put options in anticipation of a decline in the market value of securities in its portfolio ("protective puts") or securities of the type in which it is permitted to invest. The purchase of a put option would entitle the Portfolio, in exchange for the premium paid, to sell a security, which may or may not be held in the Portfolio's portfolio, at a specified price during the option period. The purchase of protective puts is designed merely to offset or hedge against a decline in the market value of the Portfolio's portfolio securities. Put options also may be purchased by the Portfolio for the purpose of affirmatively benefiting from a decline in the price of securities which the Portfolio does not own. The Portfolio would ordinarily recognize a gain if the value of the securities decreased below the exercise price sufficiently to cover the premium and would recognize a loss if the value of the securities remained at or above the exercise price. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of underlying portfolio securities.
Each Portfolio has adopted certain other nonfundamental policies concerning option transactions which are discussed below. The Portfolio's activities in options may also be restricted by the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying securities markets that cannot be reflected in the option markets. It is impossible to predict the volume of trading that may exist in such options, and there can be no assurance that viable exchange markets will develop or continue.
A Portfolio may engage in over-the-counter options transactions with broker-dealers who make markets in these options. At present, approximately ten broker-dealers, including several of the largest primary dealers in U.S. Government securities, make these markets. The ability to terminate over-the-counter option positions is more limited than with exchange-traded option positions because the predominant market is the issuing broker rather than an exchange, and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. To reduce this risk, the Portfolio will purchase such options only from broker-dealers who are primary government securities dealers recognized by the Federal Reserve Bank of New York and who agree to (and are expected to be capable of) entering into closing transactions, although there can be no guarantee that any such option will be liquidated at a favorable price prior to expiration. The Adviser will monitor the creditworthiness of dealers with whom the Portfolio enters into such options transactions under the general supervision of the Portfolios' Trustees.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, each Portfolio may also purchase and write (sell) call and put options on securities indices. Such options give the holder the right to receive a cash settlement during the term of the option based upon the difference between the exercise price and the value of the index. Such options will be used for the purposes described above under "Options on Securities."
EAFE(R) Equity Index Portfolio may, to the extent allowed by Federal and state securities laws, invest in securities indices instead of investing directly in individual foreign securities.
Options on securities indices entail risks in addition to the risks of options on securities. The absence of a liquid secondary market to close out options positions on securities indices is more likely to occur, although the Portfolio generally will only purchase or write such an option if the Adviser believes the option can be closed out.
Use of options on securities indices also entails the risk that trading in such options may be interrupted if trading in certain securities included in the index is interrupted. The Portfolio will not purchase such options unless the Adviser believes the market is sufficiently developed such that the risk of trading in such options is no greater than the risk of trading in options on securities.
Price movements in a Portfolio's portfolio may not correlate precisely with movements in the level of an index and, therefore, the use of options on indices cannot serve as a complete hedge. Because options on securities indices require settlement in cash, the Adviser may be forced to liquidate portfolio securities to meet settlement obligations.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because each Portfolio may buy and sell securities denominated in currencies other than the U.S. dollar and receives interest, dividends and sale proceeds in currencies other than the U.S. dollar, each Portfolio from time to time may enter into foreign currency exchange transactions to convert to and from different foreign currencies and to convert foreign currencies to and from the U.S. dollar. A Portfolio either enters into these transactions on a spot (I.E., cash) basis at the spot rate prevailing in the foreign currency exchange market or uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Portfolio to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract. Forward foreign currency exchange contracts establish an exchange rate at a future date. These contracts are transferable in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward foreign currency exchange contract generally has no deposit requirement and is traded at a net price without commission. Each Portfolio maintains with its custodian a segregated account of high grade liquid assets in an amount at least equal to its obligations under each forward foreign currency exchange contract. Neither spot transactions nor forward foreign currency exchange contracts eliminate fluctuations in the prices of the Portfolio's securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline.
Each Portfolio may enter into foreign currency hedging transactions in an attempt to protect against changes in foreign currency exchange rates between the trade and settlement dates of specific securities transactions or changes in exchange rates that would adversely affect a portfolio position or an anticipated investment position. Since consideration of the prospect for currency parities will be incorporated into Bankers Trust's long-term investment decisions, a Portfolio will not routinely enter into foreign currency hedging transactions with respect to security transactions; however, Bankers Trust believes that it is important to have the flexibility to enter into foreign currency hedging transactions when it determines that the transactions would be in the Portfolio's best interest. Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of such securities between the date the forward contract is entered into and the date it matures. The projection of currency market movements is extremely difficult, and the successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may in the future assert authority to regulate forward contracts. In such event the Portfolio's ability to utilize forward contracts in the manner set forth in the Prospectus may be restricted. Forward contracts may reduce the potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Portfolio than if it had not entered into such contracts. The use of foreign currency forward contracts may not eliminate fluctuations in the underlying U.S. dollar equivalent value of the prices of or rates of return on a Portfolio's foreign currency denominated portfolio securities and the use of such techniques will subject a Portfolio to certain risks.
The matching of the increase in value of a forward contract and the decline in the U.S. dollar equivalent value of the foreign currency denominated asset that is the subject of the hedge generally will not be precise. In addition, a Portfolio may not always be able to enter into foreign currency forward contracts at attractive prices and this will limit the Portfolio's ability to use such contract to hedge or cross-hedge its assets. Also, with regard to a Portfolio's use of cross-hedges, there can be no assurance that historical correlations between the movement of certain foreign currencies relative to the U.S. dollar will continue. Thus, at any time poor correlation may exist between movements in the exchange rates of the foreign currencies underlying a Portfolio's cross-hedges and the movements in the exchange rates of the foreign currencies in which the Portfolio's assets that are the subject of such cross-hedges are denominated.
The ratings of rating services represent their opinions as to the quality of the securities that they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and are not absolute standards of quality. Although these ratings are an initial criterion for selection of portfolio investments, Bankers Trust also makes its own evaluation of these securities, subject to review by the Board of Trustees. After purchase by a Portfolio, an obligation may cease to be rated or its rating may be reduced below the minimum required for purchase by the Portfolio. Neither event would require a Fund to eliminate the obligation from its portfolio, but Bankers Trust will consider such an event in its determination of whether a Fund should continue to hold the obligation. A description of the ratings used herein and in the Funds' Prospectus is set forth in the Appendix A herein.
The following investment restrictions are "fundamental policies" of each Fund and each Portfolio and may not be changed with respect to the Fund or the Portfolio without the approval of a "majority of the outstanding voting securities" of the Fund or the Portfolio, as the case may be. "Majority of the outstanding voting securities" under the 1940 Act, and as used in this Statement of Additional Information and the Prospectus, means, with respect to the Fund (or the Portfolio), the lesser of (i) 67% or more of the outstanding voting securities of the Fund (or of the total beneficial interests of the Portfolio) present at a meeting, if the holders of more than 50% of the outstanding voting securities of the Fund or of the total beneficial interests of the Portfolio) are present or represented by proxy or (ii) more than 50% of the outstanding voting securities of the Fund (or of the total beneficial interests of the Portfolio). Whenever the Trust is requested to vote on a fundamental policy of a Portfolio, the Trust will hold a meeting of the corresponding Fund's shareholders and will cast its vote as instructed by that Fund's shareholders. Fund shareholders who do not vote will not affect the Trust's votes at the Portfolio meeting. The percentage of the Trust's votes representing Fund shareholders not voting will be voted by the Trustees of the Trust in the same proportion as the Fund shareholders who do, in fact, vote.
As a matter of fundamental policy, no Portfolio (or Fund) may (except that no investment restriction of a Fund shall prevent a Fund from investing all of its Assets in an open-end investment company with substantially the same investment objectives):
(1) borrow money or mortgage or hypothecate assets of the Portfolio (Fund), except that in an amount not to exceed 1/3 of the current value of the Portfolio's (Fund's) assets, it may borrow money as a temporary measure for extraordinary or emergency purposes and enter into reverse repurchase agreements or dollar roll transactions, and except that it may pledge, mortgage or hypothecate not more than 1/3 of such assets to secure such borrowings (it is intended that money would be borrowed only from banks and only either to accommodate requests for the withdrawal of beneficial interests (redemption of shares) while effecting an orderly liquidation of portfolio securities or to maintain liquidity in the event of an unanticipated failure to complete a portfolio security transaction or other similar situations) or reverse repurchase agreements, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered a pledge of assets for purposes of this restriction and except that assets may be pledged to secure letters of credit solely for the purpose of participating in a captive insurance company sponsored by the Investment Company Institute; for additional related restrictions, see clause (i) under the caption "State and Federal Restrictions" below (as an operating policy, the Portfolios may not engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as the Portfolios (Trust or the Funds) may technically be deemed an underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the Portfolio's (Fund's) portfolio securities and provided that any such loans not exceed 30% of the Portfolio's (Fund's) total assets (taken at market value); (b) through the use of repurchase agreements or the purchase of short-term obligations; or (c) by purchasing a portion of an issue of debt securities of types distributed publicly or privately (under current regulations, the Portfolio's (Fund's) fundamental policy with respect to 20% risk weighing for financial institutions prevent the Portfolio (Fund) from engaging in securities
(4) purchase or sell real estate (including limited partnership interests but excluding securities secured by real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (except futures and option contracts) in the ordinary course of business (except that the Portfolio (Trust) may hold and sell, for the Portfolio's (Fund's) portfolio, real estate acquired as a result of the Portfolio's (Fund's)
(5) concentrate its investments in any particular industry (excluding U.S. Government securities), but if it is deemed appropriate for the achievement of a Portfolio's (Fund's) investment objective(s), up to 25% of its total assets may be invested in any one industry; and
(6) issue any senior security (as that term is defined in the 1940 Act) if such issuance is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered to be the issuance of a senior security for purposes of this restriction.
STATE AND FEDERAL RESTRICTIONS. In order to comply with certain state and Federal statutes and policies each Portfolio (or the Trust, on behalf of each Fund) will not as a matter of operating policy (except that no operating policy shall prevent a Fund from investing all of its Assets in an open-end investment company with substantially the same investment objectives):
(i) borrow money (including through reverse repurchase or forward roll transactions) for any purpose in excess of 5% of the Portfolio's (Fund's) total assets (taken at cost), except that the Portfolio (Fund) may borrow for temporary or emergency purposes up to 1/3 of its total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of the Portfolio's (Fund's) total assets (taken at market value), provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, and reverse repurchase agreements are not considered a pledge of assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin, except that such short-term credit as may be necessary for the clearance of purchases and sales of securities may be obtained and except that deposits of initial deposit and variation margin may be made in connection with the purchase, ownership, holding or sale of futures;
(iv) sell securities it does not own such that the dollar amount of such short sales at any one time exceeds 25% of the net equity of the Portfolio (Fund), and the value of securities of any one issuer in which the Portfolio (Fund) is short exceeds the lesser of 2.0% of the value of the Portfolio's (Fund's) net assets or 2.0% of the securities of any class of any U.S. issuer and, provided that short sales may be made only in those securities which are fully listed on a national securities exchange or a foreign exchange (This provision does not include the sale of securities of the Portfolio (Fund) contemporaneously owns or has the right to obtain securities equivalent in kind and amount to those sold, i.e., short sales against the box.) (the Portfolios (Funds) have no current intention to engage in short selling);
(v) invest for the purpose of exercising control or
(vi) purchase securities issued by any investment company except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, or except when such purchase, though not made in the open market, is part of a plan of merger or consolidation; provided, however, that securities of any investment company will not be purchased for the Portfolio (Fund) if such purchase at the time thereof would cause: (a) more than 10% of the Portfolio's (Fund's) total assets (taken at the greater of cost or market value) to be invested in the securities of such issuers; (b) more than 5% of the Portfolio's (Fund's) total assets (taken at the greater of cost or market value) to be invested in any one investment company; or (c) more than 3% of the outstanding voting securities of any such issuer to be held for the Portfolio (Fund); provided further that, except in the case of a merger or consolidation, the Portfolio (Fund) shall not purchase any securities of any open-end investment company unless the Portfolio (Fund) (1) waives the investment advisory fee with respect to assets invested in other open-end investment companies and (2) incurs no sales charge in connection with the investment;
(vii) invest more than 10% of the Portfolio's (Fund's) total assets (taken at the greater of cost or market value) in securities (excluding Rule 144A securities) that are restricted as to resale under the 1933 Act;
(viii) invest more than 15% of the Portfolio's (Fund's) total assets (taken at the greater of cost or market value) in (a) securities (including Rule 144A securities) that are restricted as to resale under the 1933 Act, and (b) securities that are issued by issuers which (including predecessors) have been in operation less than three years (other than U.S. Government securities), provided, however, that no more than 5% of the Portfolio's (Fund's) total assets are invested in securities issued by issuers which (including predecessors) have been in operation less than three years;
(ix) with respect to 75% of the Portfolio's (Fund's) total assets, purchase securities of any issuer if such purchase at the time thereof would cause the Portfolio (Fund) to hold more than 10% of any class of securities of such issuer, for which purposes all indebtedness of an issuer shall be deemed a single class and all preferred stock of an issuer shall be deemed a single class, except that futures or option contracts shall not be subject to this
(x) with respect to 75% of its assets, invest more than 5% of its total assets in the securities (excluding U.S. Government securities) of any one issuer;
(xi) invest in securities issued by an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Portfolio (Trust), or is an officer or partner of the Adviser, if after the purchase of the securities of such issuer for the Portfolio (Fund) one or more of such persons owns beneficially more than 1/2 of 1% of the shares or both, all taken at market value, of such issuer, and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, all taken at market value;
(xii) invest in warrants (other than warrants acquired by the Portfolio (Fund) as part of a unit or attached to securities at the time of purchase) if, as a result, the investments (valued at the lower of cost or market) would exceed 5% of the value of the Portfolio's (Fund's) net assets or if, as a result, more than 2% of the Portfolio's (Fund's) net assets would be invested in warrants not listed on a recognized United States or foreign stock exchange, to the extent permitted by applicable state securities laws;
(xiii) write puts and calls on securities unless each of the following conditions are met: (a) the security underlying the put or call is within the Investment Practices of the Portfolio (Fund) and the option is issued by the Options Clearing Corporation, except for put and call options issued by non-U.S. entities or listed on non-U.S. securities or commodities exchanges; (b) the aggregate value of the obligations underlying the puts determined as of the date the options are sold shall not exceed 5% of the Portfolio's (Fund's) net assets; (c) the securities subject to the exercise of the call written by the Portfolio (Fund) must be owned by the Portfolio (Fund) at the time the call is sold and must continue to be owned by the Portfolio (Fund) until the call has been exercised, has lapsed, or the Portfolio (Fund) has purchased a closing call, and such purchase has been confirmed, thereby extinguishing the Portfolio's (Fund's) obligation to deliver securities pursuant to the call it has sold; and (d) at the time a put is written, the Portfolio (Fund) establishes a segregated account with its custodian consisting of cash or short-term U.S. Government securities equal in value to the amount the Portfolio (Fund) will be obligated to pay upon exercise of the put (this account must be maintained until the put is exercised, has expired, or the Portfolio (Fund) has purchased a closing put, which is a put of the same series as the one previously written); and
(xiv) buy and sell puts and calls on securities, stock index futures or options on stock index futures, or financial futures or options on financial futures unless such options are written by other persons and: (a) the options or futures are offered through the facilities of a national securities association or are listed on a national securities or commodities exchange, except for put and call options issued by non-U.S. entities or listed on non-U.S. securities or commodities exchanges; (b) the aggregate premiums paid on all such options which are held at any time do not exceed 20% of the Portfolio's (Fund's) total net assets; and (c) the aggregate margin deposits required on all such futures or options thereon held at any time do not exceed 5% of the Portfolio's (Fund's) total assets.
There will be no violation of any investment restriction if that restriction is complied with at the time the relevant action is taken notwithstanding a later change in market value of an investment, in net or total assets, in the securities rating of the investment, or any other later change.
Each Fund will comply with the state securities laws and regulations of all states in which it is registered. Each Portfolio will comply with the permitted investments and investment limitations in the securities laws and regulations of all states in which the corresponding Fund, or any other registered investment company investing in the Portfolio, is registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities, futures contracts and options on such securities and futures for each Portfolio, the selection of brokers, dealers and futures commission merchants to effect transactions and the negotiation of brokerage commissions, if any. Broker-dealers may receive brokerage commissions on portfolio transactions, including options, futures and options on futures transactions and the purchase and sale of underlying securities upon the exercise of options. Orders may be directed to any broker-dealer or futures commission merchant, including to the extent and in the manner permitted by applicable law, Bankers Trust or its subsidiaries or affiliates. Purchases and sales of certain portfolio securities on behalf of a Portfolio are frequently placed by the Adviser with the issuer or a primary or secondary market-maker for these securities on a net basis, without any brokerage commission being paid by the Portfolio. Trading does, however, involve transaction costs. Transactions with dealers serving as market-makers reflect the spread between the bid and asked prices. Transaction costs may also include fees paid to third parties for information as to potential purchasers or sellers of securities. Purchases of underwritten issues may be made which will include an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage commissions paid (to the extent applicable) in placing orders for the purchase and sale of securities for a Portfolio taking into account such factors as price, commission (negotiable in the case of national securities exchange transactions), if any, size of order, difficulty of execution and skill required of the executing broker-dealer through familiarity with commissions charged on comparable transactions, as well as by comparing commissions paid by the Portfolio to reported commissions paid by others. The Adviser reviews on a routine basis commission rates, execution and settlement services performed, making internal and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions for a Portfolio with a broker to pay a brokerage commission (to the extent applicable) in excess of that which another broker might have charged for effecting the same transaction on account of the receipt of research, market or statistical information. The term "research, market or statistical information" includes advice as to the value of securities; the advisability of investing in, purchasing or selling securities; the availability of securities or purchasers or sellers of securities; and furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the National Association of Securities Dealers, Inc. and such other policies as the Trustees of the Portfolio may determine, the Adviser may consider sales of shares of the Trust and of other investment company clients of Bankers Trust as a factor in the selection of broker-dealers to execute portfolio transactions. Bankers Trust will make such allocations if commissions are comparable to those charged by nonaffiliated, qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide research services to the extent permitted by law. Bankers Trust may use this research information in managing each Portfolio's assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is no intention to place portfolio transactions with particular brokers or dealers or groups thereof. In effecting transactions in over-the-counter securities, orders are placed with the principal market-makers for the security being traded unless, after exercising care, it appears that more favorable results are available otherwise.
Although certain research, market and statistical information from brokers and dealers can be useful to a Portfolio and to the Adviser, it is the opinion of the management of the Portfolios that such information is only supplementary to the Adviser's own research effort, since the information must still be analyzed, weighed and reviewed by the Adviser's staff. Such information may be useful to the Adviser in providing services to clients other than the Portfolios, and not all such information is used by the Adviser in connection with the Portfolios. Conversely, such information provided to the Adviser by brokers and dealers through whom other clients of the Adviser effect securities transactions may be useful to the Adviser in providing services to the Portfolios.
In certain instances there may be securities which are suitable for a Portfolio as well as for one or more of the Adviser's other clients. Investment decisions for a Portfolio and for the Adviser's other clients are made with a view to respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as a Portfolio is concerned. However, it is believed that the ability of a Portfolio to participate in volume transactions will produce better executions for the Portfolio.
For the years ended December 31, 1994 and 1993, Equity 500 Index Portfolio paid brokerage commissions in the amount of $97,069 and $63,408, respectively.
From time to time, quotations of a Fund's performance may be included in advertisements, sales literature or shareholder reports. These performance figures are calculated in the following manner:
YIELD: Yields for a Fund used in advertising are computed by dividing the Fund's interest and dividend income for a given 30-day or one-month period, net of expenses, by the average number of shares entitled to receive distributions during the period, dividing this figure by the Fund's net asset value per share at the end of the period, and annualizing the result (assuming compounding of income) in order to arrive at an annual percentage rate. Income is calculated for purpose of yield quotations in accordance with standardized methods applicable to all stock and bond mutual funds. Dividends from equity investments are treated as if they were accrued on a daily basis, solely for the purpose of yield calculations. In general, interest income is reduced with respect to bonds trading at a premium over their par value by subtracting a portion of the premium from income on a daily basis, and is increased with respect to bonds trading at a discount by adding a portion of the discount to daily income. Capital gains and losses generally are excluded from the calculation.
Income calculated for the purposes of calculating a Fund's yield differs from income as determined for other accounting purposes. Because of the different accounting methods used,
and because of the compounding assumed in yield calculations, the yield quoted for a Fund may differ from the rate of distributions of the Fund paid over the same period or the rate of income reported in the Fund's financial statements.
TOTAL RETURN: A Fund's average annual total return is calculated for certain periods by determining the average annual compounded rates of return over those periods that would cause an investment of $1,000 (made at the maximum public offering price with all distributions reinvested) to reach the value of that investment at the end of the periods. A Fund may also calculate total return figures which represent aggregate performance over a period or year-by-year performance.
PERFORMANCE RESULTS: Any total return quotation provided for a Fund should not be considered as representative of the performance of the Fund in the future since the net asset value and public offering price of shares of the Fund will vary based not only on the type, quality and maturities of the securities held in the corresponding Portfolio, but also on changes in the current value of such securities and on changes in the expenses of the Fund and the corresponding Portfolio. These factors and possible differences in the methods used to calculate total return should be considered when comparing the total return of a Fund to total returns published for other investment companies or other investment vehicles. Total return reflects the performance of both principal and income.
Comparison of the quoted nonstandardized performance of various investments is valid only if performance is calculated in the same manner. Since there are different methods of calculating performance, investors should consider the effect of the methods used to calculate performance when comparing performance of a Fund with performance quoted with respect to other investment companies or types of investments.
In connection with communicating its performance to current or prospective shareholders, a Fund also may compare these figures to the performance of other mutual funds tracked by mutual fund rating services or to unmanaged indices which may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs.
Evaluations of a Fund's performance made by independent sources may also be used in advertisements concerning the Fund. Sources for a Fund's performance information could include the following:
ASIAN WALL STREET JOURNAL, a weekly Asian newspaper that often reviews U.S. mutual funds investing internationally.
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that periodically reviews mutual fund performance data.
BUSINESS WEEK, a national business weekly that periodically reports the performance rankings and ratings of a variety of mutual funds investing abroad.
CHANGING TIMES, THE KIPLINGER MAGAZINE, a monthly investment advisory publication that periodically features the performance of a variety of securities.
CONSUMER DIGEST, a monthly business/financial magazine that includes a "Money Watch" section featuring financial news.
FINANCIAL TIMES, Europe's business newspaper, which features from time to time articles on international or country-specific funds.
FINANCIAL WORLD, a general business/financial magazine that includes a "Market Watch" department reporting on activities in the mutual fund industry.
FORBES, a national business publication that from time to time reports the performance of specific investment companies in the mutual fund industry.
FORTUNE, a national business publication that periodically rates the performance of a variety of mutual funds.
GLOBAL INVESTOR, a European publication that periodically reviews the performance of U.S. mutual funds investing internationally.
INVESTOR'S DAILY, a daily newspaper that features financial, economic and business news.
LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a weekly publication of industry-wide mutual fund averages by type of fund.
MONEY, a monthly magazine that from time to time features both specific funds and the mutual fund industry as a whole.
MORNINGSTAR INC., a publisher of financial information and mutual fund research.
NEW YORK TIMES, a nationally distributed newspaper which regularly covers financial news.
PERSONAL INVESTING NEWS, a monthly news publication that often reports on investment opportunities and market conditions.
PERSONAL INVESTOR, a monthly investment advisory publication that includes a "Mutual Funds Outlook" section reporting on mutual fund performance measures, yields, indices and portfolio holdings.
SUCCESS, a monthly magazine targeted to the world of entrepreneurs and growing business, often featuring mutual fund performance data.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically reports mutual fund performance data.
VALUE LINE, a biweekly publication that reports on the largest 15,000 mutual funds.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which regularly covers financial news.
WEISENBERGER INVESTMENT COMPANIES SERVICES, an annual compendium of information about mutual funds and other investment companies, including comparative data on funds' backgrounds, management policies, salient features, management results, income and dividend records, and price ranges.
WORKING WOMEN, a monthly publication that features a "Financial Workshop" section reporting on the mutual fund/financial industry.
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations maturing in 60 days or less), including listed securities and securities for which price quotations are available, will normally be valued on the basis of market valuations furnished by a pricing service. Short-term debt obligations and money market securities maturing in 60 days or less are valued at amortized cost, which approximates market.
Securities for which market quotations are not available are valued by Bankers Trust pursuant to procedures adopted by each Portfolio's Board of Trustees. It is generally agreed that securities for which market quotations are not readily available should not be valued at the same value as that carried by an equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are recognized in the codification effected by SEC Financial Reporting Release No. 1 ("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that there is "no automatic formula" for calculating the value of restricted securities. It recommends that the best method simply is to consider all relevant factors before making any calculation. According to FRR 1 such factors would include consideration of the:
type of security involved, financial statements, cost at date of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of purchase, special reports prepared by analysts, information as to any transactions or offers with respect to the security, existence of merger proposals or tender offers affecting the security, price and extent of public trading in similar securities of the issuer or comparable companies, and other relevant matters.
To the extent that a Portfolio purchases securities which are restricted as to resale or for which current market quotations are not available, the Adviser of the Portfolio will value such securities based upon all relevant factors as outlined in FRR 1.
The Trust, on behalf of each Fund, and each Portfolio reserve the right, if conditions exist which make cash payments undesirable, to honor any request for redemption or repurchase order by making payment in whole or in part in readily marketable securities chosen by the Trust, or the Portfolio, as the case may be, and valued as they are for purposes of computing the Fund's or the Portfolio's net asset value, as the case may be (a redemption in kind). If payment is made to a Fund shareholder in securities, an investor, including the Fund, the shareholder may incur transaction expenses in converting these securities into cash. The Trust, on behalf of each Fund, and each Portfolio have elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of which each Fund and each Portfolio are obligated to redeem shares or beneficial interests, as the case may be, with respect to any one investor during any 90-day period, solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund or the Portfolio, as the case may be, at the beginning of the period.
Each Portfolio has agreed to make a redemption in kind to the corresponding Fund whenever the Fund wishes to make a redemption in kind and therefore shareholders of the Fund that receive redemptions in kind will receive portfolio securities of the corresponding Portfolio and in no case will they receive a security issued by the Portfolio. The Portfolio has advised the Trust that the Portfolio will not redeem in kind except in circumstances in which the Fund is permitted to redeem in kind or unless requested by the Fund.
Each investor in a Portfolio, including the corresponding Fund, may add to or reduce its investment in the Portfolio on each day the Portfolio determines its net asset value. At the close of each such business day, the value of each investor's beneficial interest in the Portfolio will be determined by multiplying the net asset value of the Portfolio by the percentage, effective for that day, which represents that investor's share of the aggregate beneficial interests in the Portfolio. Any additions or withdrawals which are to be effected as of the close of business on that day will then be effected. The the aggregate beneficial interests in the Portfolio will then be recomputed as the percentage equal to the fraction (i) the numerator of which is the value of such investor's investment in the Portfolio as of the close of business on such day plus or minus, as the case may be, the amount of net additions to or withdrawals from the investor's investment in the Portfolio effected as of the close of business on such day, and (ii) the denominator of which is the aggregate net asset value of the Portfolio as of the close of business on such day plus or minus, as the case may be, the amount of net additions to or withdrawals from the aggregate investments in the Portfolio by all investors in the Portfolio. The percentage so determined will then be applied to determine the value of the investor's interest in the Portfolio as the close of business on the following business day.
Each Fund may, at its own option, accept securities in payment for shares. The securities delivered in payment for shares are valued by the method described under "Net Asset Value" as of the day the Fund receives the securities. This is a taxable transaction to the shareholder. Securities may be accepted in payment for shares only if they are, in the judgment of Bankers Trust, appropriate investments for the Fund's corresponding Portfolio. In addition, securities accepted in payment for shares must: (i) meet the investment objective and policies of the acquiring Fund's corresponding Portfolio; (ii) be acquired by the applicable Fund for investment and not for resale (other than for resale to the Fund's corresponding Portfolio); (iii) be liquid securities which are not restricted as to transfer either by law or liquidity of market; and (iv) if stock, have a value which is readily ascertainable as evidenced by a listing on a stock exchange, over-the-counter market or by readily available market quotations from a dealer in such securities. When securities are used as payment for shares or as a redemption in kind from the fund, the transaction fee will not be assessed. However, the shareholder will be charged the costs associated with receiving or delivering the securities. These costs include security movement costs and taxes and registration costs. Each Fund reserves the right to accept or reject at its own option any and all securities offered in payment for its shares.
MANAGEMENT OF THE TRUST AND THE PORTFOLIOS
Each Board of Trustees is composed of persons experienced in financial matters who meet throughout the year to oversee the activities of the Funds or Portfolios they represent. In addition, the Trustees review contractual arrangements with companies that provide services to the Funds/Portfolios and review the Funds' performance.
The Trustees and officers of the Trusts and Portfolios and their principal occupations during the past five years are set forth below. Their titles may have varied during that period. Asterisks indicate those Trustees who are "interested persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated, the address of each Trustee and officer is 6 St. James Avenue, Boston, Massachusetts.
TRUSTEES OF THE BT ADVISOR FUNDS
HARRY VAN BENSCHOTEN -- Trustee; retired (since 1987); Corporate Vice President, Newmont Mining Corporation (prior to 1987); Director, Canada Life Insurance Company of New York and Competitive Technologies, Inc., a public company listed on the American Stock Exchange. His address is 6581 Ridgewood Drive, Naples, Florida 33963.
PHILIP W. COOLIDGE* -- President and Trustee; Chairman, Chief Executive Officer and President, Signature Financial Group, Inc. ("SFG") (since December, 1988) and Signature (since April, 1989).
MARTIN J. GRUBER -- Trustee; Chairman of the Finance Department and Nomura Professor of Finance, Leonard N. Stern School of Business, New York University (since 1964).
BRUCE E. LANGTON -- Trustee; Retired; Director, Adela Investment Co. and University Patents, Inc.; formerly Assistant Treasurer of IBM Corporation (until 1986). His address is 99 Jordan Lane, Stamford, Connecticut 06903.
TRUSTEES OF BT INSTITUTIONAL FUNDS
RICHARD J. HERRING -- Trustee; Professor, Finance Department, The Wharton School, University of Pennsylvania. His address is The Wharton School, University of Pennsylvania Finance Department, 3303 Steinberg Hall/Dietrich Hall, Philadelphia, Pennsylvania 19104.
BRUCE E. LANGTON -- Trustee; retired; Director, Adela Investment Co. and University Patents, Inc.; formerly Assistant Treasurer of IBM Corporation (until 1986). His address is 99 Jordan Lane, Stamford, Connecticut 06903.
CHARLES P. BIGGAR -- Trustee; Retired; Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill Richards Inc.; formerly Vice President of International Business Machines and President of the National Services and the Field Engineering Divisions of IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
PHILIP W. COOLIDGE* -- President and Trustee; Chairman, Chief Executive Officer and President, SFG (since December, 1988) and Signature (since April, 1989).
PHILIP SAUNDERS, JR. -- Trustee; Principal, Philip Saunders Associates (Consulting); former Director of Financial Industry
Consulting, Wolf & Company; President, John Hancock Home Mortgage Corporation; and Senior Vice President of Treasury and Financial Services, John Hancock Mutual Life Insurance Company, Inc. His address is 445 Glen Road, Weston, Massachusetts 02193.
CHARLES P. BIGGAR -- Trustee; Retired; Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill Richards Inc.; formerly Vice President of International Business Machines and President of the National Services and the Field Engineering Divisions of IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
S. LELAND DILL -- Trustee; Retired; Director, Coutts & Co. Group, Coutts & Co. (U.S.A.) International; Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick; Director, Vinters International Company Inc.; General Partner of Pemco (an investment company registered under the 1940 Act). His address is 5070 North Ocean Drive, Singer Island, Florida 33404.
RICHARD J. HERRING -- Trustee; Professor, Finance Department, The Wharton School, University of Pennsylvania. His address is The Wharton School, University of Pennsylvania Finance Department, 3303 Steinberg Hall/Dietrich Hall, Philadelphia, Pennsylvania 19104.
PHILIP W. COOLIDGE* -- President and Trustee; Chairman, Chief Executive Officer and President, SFG (since December, 1988) and Signature (since April, 1989).
OFFICERS OF THE TRUSTS AND PORTFOLIOS
Unless otherwise specified, each officer listed below holds the same position with each Trust and each Portfolio.
JOHN R. ELDER - Treasurer; Vice President, SFG (since April, 1995); Treasurer, Phoenix Family of Mutual Funds (prior to April, 1995); Audit Manager, Price Waterhouse (prior to 1983).
DAVID G. DANIELSON -- Assistant Treasurer; Assistant Manager, SFG (since May, 1991); Graduate Student, Northeastern University (from April, 1990 to March, 1991); Tax Accountant & Systems Analyst, Putnam Companies (prior to March, 1990). JAMES S. LELKO, JR. -- Assistant Treasurer; Assistant Manager, SFG (since January 1993); Senior Tax Compliance Accountant, Putnam Investments (prior to December 1992).
BARBARA M. O'DETTE -- Assistant Treasurer; Assistant Treasurer, SFG (since December, 1988) and Signature (since April, 1989); Administrative Controller, Massachusetts Financial Services Company (prior to December, 1988).
DANIEL E. SHEA -- Assistant Treasurer; Assistant Manager, SFG (since November 1993); Supervisor and Senior Technical Advisor, Putnam Investments (prior to November 1993).
THOMAS M. LENZ -- Secretary; Vice President and Associate General Counsel, SFG (since November, 1989); Assistant Secretary, Signature (since February, 1991); Attorney, Ropes & Gray (prior to November, 1989).
LINDA T. GIBSON -- Assistant Secretary; Legal Counsel and Assistant Secretary, SFG (since May, 1992); Assistant Secretary, Signature (since October, 1992); student, Boston University School of Law (September, 1989 to May, 1992); Product Manager, SFG (January, 1989 to September, 1989).
MOLLY S. MUGLER -- Assistant Secretary; Legal Counsel and Assistant Secretary, SFG (since December, 1988); Assistant Secretary, Signature (since April, 1989).
ANDRES E. SALDANA -- Assistant Secretary; Legal Counsel, SFG (since November, 1992); Assistant Secretary, Signature (since September, 1993); Attorney, Ropes & Gray (September, 1990 to November, 1992); law student, Yale Law School (September, 1987 to May, 1990).
Messrs. Coolidge, Danielson, Elder, Lelko, Lenz, Saldana and Shea and Mss. Gibson, Mugler and O'Dette also hold similar positions for other investment companies for which Signature or an affiliate serves as the principal underwriter.
No person who is an officer or director of Bankers Trust is an officer or Trustee of the Trusts or the Portfolios. No director, officer or employee of Signature or any of its affiliates will receive any compensation from the Trusts or the Portfolios for serving as an officer or Trustee of the Trusts or the Portfolios.
Each Portfolio and International Equity, Capital Appreciation, Cash Management, Treasury Money, Tax Free Money, NY Tax Free Money, Utility, Short/Intermediate U.S. Government Securities, Intermediate Tax Free, Asset Management and BT Investment Portfolios (together with the Trusts, the "Fund Complex") collectively pay each Trustee who is not a director, officer or employee of the Adviser, the Distributor, the Administrator or any of their affiliates an annual fee of $10,000, respectively, per annum plus $1,250, respectively, per meeting attended and reimburses them for travel and out-of-pocket expenses.
For the year ended December 31, 1994, the BT Institutional Equity 500 Index Fund accrued Trustees fees equal to $5,058. For the year ended December 31, 1994, the Equity 500 Index Portfolio accrued Trustees fees of $2,059.
Bankers Trust reimbursed the BT Institutional Equity 500 Index Fund and Equity 500 Index Portfolio for a portion of its their Trustees fees for the period above. See "Investment Adviser" and "Administrator" below.
As of January 5, 1996, the Trustees and officers of the Trusts and the Portfolios owned in the aggregate less than 1% of the shares of any Fund or Trust (all series taken together).
Under the terms of each Portfolio's investment advisory agreement with Bankers Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio subject to the supervision and direction of the Board of Trustees of the Portfolio. Bankers Trust will: (i) act in strict conformity with each Portfolio's Declaration of Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may from time to time be amended; (ii) manage each Portfolio in accordance with the Portfolio's investment objectives, restrictions and policies; (iii) make investment decisions for each Portfolio; and (iv) place purchase and sale orders for securities and other financial instruments on behalf of each Portfolio.
Bankers Trust bears all expenses in connection with the performance of services under each Advisory Agreement. The Trust and each Portfolio bears certain other expenses incurred in its operation, including: taxes, interest, brokerage fees and commissions, if any; fees of Trustees of the Trust or the Portfolio who are not officers, directors or employees of Bankers Trust, Signature or any of their affiliates; SEC fees and state Blue Sky qualification fees; charges of custodians and transfer and dividend disbursing agents; certain insurance premiums; outside auditing and legal expenses; costs of maintenance of corporate existence; costs attributable to investor services, including, without limitation, telephone and personnel expenses; costs of preparing and printing prospectuses and statements of additional information for regulatory purposes and for distribution to existing shareholders; costs of shareholders' reports and meetings of shareholders, officers and Trustees of the Trust or the Portfolio; and any extraordinary expenses.
For the years ended December 31, 1994 and 1993, Bankers Trust accrued $428,346 and $74,893, respectively, in compensation for investment advisory services provided to the Equity 500 Index Portfolio. During the same periods, Bankers Trust reimbursed $249,230 and $72,112, respectively, to the Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial banking relationships with the issuers of obligations which may be purchased on behalf of the Portfolios, including outstanding loans to such issuers which could be repaid in whole or in part with the proceeds of securities so purchased. Such affiliates deal, trade and invest for their own accounts in such obligations and are among the leading dealers of various types of such obligations. Bankers Trust has informed the Portfolios that, in making its investment decisions, it does not obtain or use material inside information in its possession or in the possession of any of its affiliates. In making investment recommendations for the Portfolios, Bankers Trust will not inquire or take into consideration whether an issuer of securities proposed for purchase or sale by a Portfolio is a customer of Bankers Trust, its parent or its subsidiaries or affiliates and, in dealing with its customers, Bankers Trust, its parent, subsidiaries and affiliates will not inquire or take into consideration whether securities of such customers are held by any fund managed by Bankers Trust or any such affiliate.
The Institutional Class Shares' prospectus contains disclosure as to the amount of Bankers Trust's investment advisory and administration and services fees, including waivers thereof. Bankers Trust may not recoup any of its waived investment advisory or administration and services fees. Such waivers by Bankers Trust shall stay in effect for at least 12 months.
Under the administration and services agreements, Bankers Trust is obligated on a continuous basis to provide such administrative services as the Board of Trustees of the Trusts and the Portfolios reasonably deem necessary for the proper administration of the Trusts or the Portfolios. Bankers Trust will: generally assist in all aspects of each class of shares of each Funds' and Portfolios' operations; supply and maintain office facilities (which may be in Bankers Trust's own offices), statistical and research data, data processing services, clerical, accounting, bookkeeping and recordkeeping services (including without limitation the maintenance of such books and records as are required under the 1940 Act and the rules thereunder, except as maintained by other agents), internal auditing, executive and administrative services, and stationery and office supplies; prepare reports to shareholders or investors; prepare and file tax returns; supply financial information and supporting data for reports to and filings with the SEC and various state Blue Sky authorities; supply supporting documentation for meetings of the Board of Trustees; provide monitoring reports and assistance regarding compliance with Declarations of Trust, by-laws, investment objectives and policies and with Federal and state securities laws; arrange for appropriate insurance coverage; calculate net asset values, net income and realized capital gains or losses; and negotiate arrangements with, and supervise and coordinate the activities of, agents and others to supply services.
Pursuant to a sub-administration agreement (the "Sub-Administration Agreement"), Signature performs such sub-administration duties for the Trusts and the Portfolios as from time to time may be agreed upon by Bankers Trust and Signature. The Sub-Administration Agreement provides that Signature will receive such compensation as from time to time may be agreed upon by Signature and Bankers Trust. All such compensation will be paid by Bankers Trust.
For the years ended December 31, 1994 and 1993, Bankers Trust accrued $139,997 and $36,735, respectively in compensation for administrative and other services provided to BT Institutional Equity 500 Index Fund. During the same periods, Bankers Trust reimbursed $194,084 and $112,866, respectively, to BT Institutional Equity 500 Index Fund to cover expenses.
For the years ended December 31, 1994 and 1993, Bankers Trust received $214,173 and $37,446, respectively, in compensation for administrative and other services provided to the Equity 500 Index Portfolio.
Bankers Trust has agreed that if in any fiscal year the aggregate expenses of any Fund and its respective Portfolio (including fees pursuant to the Advisory Agreement, but excluding interest, taxes, brokerage and, if permitted by the relevant state securities commissions, extraordinary expenses) exceed the expense limitation of any state having jurisdiction over a Fund or Class, Bankers Trust will reimburse that Fund for the excess expense to the extent required by state law. As of the date of this Statement of Additional Information, the most restrictive annual expense limitation applicable to any Fund or Class is 2.50% of the Fund's or Class' first $30 million of average annual net assets, 2.00% of the next $70 million of average annual net assets and 1.50% of the remaining average annual net assets.
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as Custodian for the Trusts and for the Portfolios pursuant to the administration and services agreements. As Custodian, it holds the Funds' and each Portfolio's assets. Bankers Trust also serves as transfer agent of the Trusts and of each Portfolio pursuant to the respective administration and services agreement. Under its transfer agency agreement with the Trusts, Bankers Trust maintains the shareholder account records for each Class of shares of each Fund, handles certain communications between shareholders and the Trusts and causes to be distributed any dividends and distributions payable by the Trusts. Bankers Trust may be reimbursed by the Funds or the Portfolios for its out-of-pocket expenses. Bankers Trust will comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
The Trusts and Bankers Trust have agreed that each Trust may use "BT" as part of its name for so long as Bankers Trust serves as investment adviser to the Portfolios. The Trusts have acknowledged that the term "BT" is used by and is a property right of certain subsidiaries of Bankers Trust and that those subsidiaries and/or Bankers Trust may at any time permit others to use that term.
Each Trust may be required, on 60 days' notice from Bankers Trust at any time, to abandon use of the acronym "BT" as part of its name. If this were to occur, the Trustees would select an appropriate new name for each Trust, but there would be no other material effect on the Trusts, their shareholders or activities.
Bankers Trust has been advised by its counsel that in its opinion Bankers Trust may perform the services for the Portfolios contemplated by the Advisory Agreements and other activities for the Funds and the Portfolios described in the Prospectuses and this Statement of Additional Information without violation of the Glass-Steagall Act or other applicable banking laws or regulations. However, counsel has pointed out that future changes in either Federal or state statutes and regulations concerning the permissible activities of banks or trust companies, as well as future judicial or administrative decisions or interpretations of present and future statutes and regulations, might prevent Bankers Trust from continuing to perform those services for the Trusts and the Portfolios. State laws on this issue may differ from the interpretations of relevant Federal law and banks and financial institutions may be required to register as dealers pursuant to state securities law. If the circumstances described above should change, the Boards of Trustees would review the relationships with Bankers Trust and consider taking all actions necessary in the circumstances.
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022-4669, serves as Counsel to the Trusts and each Portfolio. Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas City, Missouri 64105, acts as Independent Accountants of the Trusts and each Portfolio.
Shares of each Trust do not have cumulative voting rights, which means that holders of more than 50% of the shares voting for the election of Trustees can elect all Trustees. Shares are transferable but have no preemptive, conversion or subscription rights. Shareholders generally vote by Fund, except with respect to the election of Trustees and the ratification of the selection of independent accountants.
Massachusetts law provides that shareholders could under certain circumstances be held personally liable for the obligations of each Trust. However, each Trust's Declaration of Trust disclaims shareholder liability for acts or obligations of the respective Trust and requires that notice of this disclaimer be given in each agreement, obligation or instrument entered into or executed by a Trust or a Trustee. The Declaration of Trust provides for indemnification from each Trust's property for all losses and expenses of any shareholder held personally liable for the obligations of each Trust. Thus, the risk of a incurring financial loss on account of shareholder liability is limited to circumstances in which each Trust itself would be unable to meet its obligations, a possibility that a Trust believes is remote. Upon payment of any liability incurred by a Trust, the shareholder paying the liability will be entitled to reimbursement from the general assets of the respective Trust. The Trustees intend to conduct the operations of each Trust in a manner so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of that Trust.
The Trusts intend to qualify annually and to elect each Fund to be treated as a regulated investment company under the Code.
To qualify as a regulated investment company, each Fund must, among other things: (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies or other income derived with respect to its business of investing in such stock, securities or currencies; (b) derive less than 30% of its gross income from the sale or other disposition of certain assets (namely, in the case of the Fund, (i) stock or securities; (ii) options, futures, and forward contracts (other than those on foreign currencies); and (iii) foreign currencies (including options, futures, and forward contracts on such currencies) not directly related to the Fund's principal business of investing in stock or securities (or options and futures with respect to stocks or securities)) held less than three months (the 30% Limitation"); (c) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund's assets is represented by cash and cash items (including receivables), U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Fund's total assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies); and (d) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) and its net tax-exempt interest income, if any, each taxable year.
As a regulated investment company, each Fund will not be subject to U.S. Federal income tax on its investment company taxable income and net capital gains (the excess of net long-term capital gains over net short-term capital losses), if distributes to shareholders. The Fund intends to distribute to its shareholders, at least annually, substantially all of its investment company taxable income and net capital gains. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To prevent imposition of the excise tax, the Fund must distribute during each calendar year an amount equal to the sum of: (i) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year; (ii) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses, as prescribed by the Code) for the one-year period ending on October 31 of the calendar year; and (iii) any ordinary income and capital gains for previous years that was not distributed during those years. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by the Fund in October, November or December with a record date in such a month and paid by the Fund during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. To prevent application of the excise tax, the Fund intends to make its distributions in accordance with the calendar year distribution requirement.
Each Fund shareholder will also receive, if appropriate, various written notices after the close of the Fund's prior taxable year as to the Federal income status of his dividends and distributions which were received from the Fund during the Fund's prior taxable year. Shareholders should consult their tax advisers as to any state and local taxes that may apply to these dividends and distributions. The dollar amount of dividends excluded from Federal income taxation and the dollar amount subject to such income taxation, if any, will vary for each shareholder depending upon the size and duration of each shareholder's investment in the Fund. To the extent that the Fund earns taxable net investment income, the Fund intends to designate as taxable dividends the same percentage of each dividend as its taxable net investment income bears to its total net investment income earned. Therefore, the percentage of each dividend designated as taxable, if any, may vary.
FOREIGN SECURITIES. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine the effective rate of foreign tax in advance since the amount of the EAFE(R) Equity Index Portfolio's assets to be invested in various countries will vary.
If the EAFE(R) Equity Index Portfolio is liable for foreign taxes, and if more than 50% of the value of the Portfolio's total assets at the close of its taxable year consists of stocks or securities of foreign corporations, it may make an election pursuant to which certain foreign taxes paid by it would be treated as having been paid directly by shareholders of the entities, such as the corresponding Fund, which have invested in the Portfolio. Pursuant to such election, the amount of foreign taxes paid will be included in the income of the corresponding Fund's shareholders, and such Fund shareholders (except tax-exempt shareholders) may, subject to certain limitations, claim either a credit or deduction for the taxes. Each such Fund shareholder will be notified after the close of the Portfolio's taxable year whether the foreign taxes paid will "pass through" for that year and, if so, such notification will designate (a) the shareholder's portion of the foreign taxes paid to each such country and (b) the portion which represents income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit in any year will generally be subject to a separate limitation for "passive income," which includes, among other items of income, dividends, interest and certain foreign currency gains. Because capital gains realized by the Portfolio on the sale of foreign securities will be treated as U.S.source income, the available credit of foreign taxes paid with respect to such gains may be restricted by this limitation.
Dividends paid out of the Fund's investment company taxable income will be taxable to a U.S. shareholder as ordinary income. Distributions of net capital gains, if any, designated as capital gain dividends are taxable as long-term capital gains, regardless of how long the shareholder has held the Fund's shares, and are not eligible for the dividends-received deduction. Shareholders receiving distributions in the form of additional shares, rather than cash, generally will have a cost basis in each such share equal to the net asset value of a share of the Fund on the reinvestment date. Shareholders will be notified annually as to the U.S. Federal tax status of distributions.
The Portfolios are not subject to Federal income taxation. Instead, the Fund and other investors investing in a Portfolio must take into account, in computing their Federal income tax liability, their share of the Portfolio's income, gains, losses, deductions, credits and tax preference items, without regard to whether they have received any cash distributions from the Portfolio.
Distributions received by a Fund from the corresponding Portfolio generally will not result in the Fund recognizing any gain or loss for Federal income tax purposes, except that: (i) gain will be recognized to the extent that any cash distributed exceeds the Fund's basis in its interest in the Portfolio prior to the distribution; (ii) income or gain may be realized if the distribution is made in liquidation of the Fund's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio; and (iii) loss may be recognized if the distribution is made in liquidation of the Fund's entire interest in the Portfolio and consists solely of cash and/or unrealized receivables. A Fund's basis in its interest in the corresponding Portfolio generally will equal the amount of cash and the basis of any property which the Fund invests in the Portfolio, increased by the Fund's share of income from the Portfolio, and decreased by the amount of any cash distributions and the basis of any property distributed from the Portfolio.
Any gain or loss realized by a shareholder upon the sale or other disposition of shares of a Class of the Fund, or upon receipt of a distribution in complete liquidation of a Fund, generally will be a capital gain or loss which will be long-term or short-term, generally depending upon the shareholder's holding period for the shares. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced (including shares acquired pursuant to a dividend reinvestment plan) within a period of 61 days beginning 30 days before and ending 30 days after disposition of the shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of a Class' shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gains received by the shareholder with respect to such shares.
Income received by a Portfolio from sources within foreign countries may be subject to withholding and other taxes imposed by such countries.
A Fund may be required to withhold U.S. Federal income tax at the rate of 31% of all taxable distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. Federal income tax liability.
The tax consequences to a foreign shareholder of an investment in a Fund may be different from those described herein. Foreign shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
Each Trust is organized as a Massachusetts business trust and, under current law, neither the Trusts nor any Fund is liable for any income or franchise tax in the Commonwealth of Massachusetts, provided that the Fund continues to qualify as a regulated investment company under Subchapter M of the Code. The investment by each Fund in the corresponding Portfolio does not cause the Fund to be liable for any income or franchise tax in the State of New York.
BT Investment Portfolios and Equity 500 Index Portfolio are each a New York master trust fund. Each Portfolio is not subject to any income or franchise tax in the State of New York or the Commonwealth of Massachusetts.
Fund shareholders may be subject to state and local taxes on their Fund distributions. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
The Statement of Assets and Liabilities and report of Independent Accountants for each Fund and Portfolio, except the BT Institutional Equity 500 Index Fund Portfolio, are attached hereto.
The following financial statements for the BT Institutional Equity 500 Index Fund and Equity 500 Index Portfolio are incorporated herein by reference from its current reports to shareholders filed with the SEC pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder. A copy of each such report will be provided, without charge, to each person receiving this Statement of Additional Information.
BT INSTITUTIONAL EQUITY 500 INDEX FUND
Statement of Assets and Liabilities, December 31, 1994 Statement of Operations for the Year Ended December 31, 1994 Statement of Changes in Net Assets for the Years Ended December 31, 1994 and 1993 Financial Highlights: Selected Ratios and Supplemental Each of the Periods Indicated
Statement of Assets and Liabilities, Statement of Operations, for the Six Months Ended
Statement of Changes in Net Assets for the Six Months Ended June 30, 1995 (Unaudited) and for the Year Ended
Financial Highlights: Selected Ratios and Supplemental
Each of the Periods Indicated
Statement of Assets and Liabilities, Statement of Operations for the Year Ended Statement of Changes in Net Assets for the Years Ended December 31, 1994 and 1993
Financial Highlights: Selected Ratios and Supplemental
Each of the Periods Indicated
Statement of Assets and Liabilities, June 30, 1995 Statement of Operations, for the Six Months Ended Statement of Changes in Net Assets for the Six Months June 30, 1995 (Unaudited) and for the Year Ended Financial Highlights: Selected Ratios and Supplemental
Each of the Periods Indicated (Unaudited) Schedule of Portfolio Investments, June 30, 1995
Notes to Financial Statements (Unaudited)
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the Institutional U.S. Bond Index Fund (one of the Funds comprising BT Global Investors) as of January 2, 1996. This financial statement is the responsibility of the Fund's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the Institutional U.S. Bond Index Fund of BT Global Investors as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
INSTITUTIONAL U.S. BOND INDEX FUND STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST ($10.00 / 1 SHARES OUTSTANDING) . . . . . . . . .$ 10.00
(1) BT Advisor Funds, a Massachusetts business trust (the "Trust"), was organized on July 24, 1995 and has been inactive since that date with respect to Institutional U.S. Bond Index Fund (the "Fund") except for matters relating to the organization of the Trust, the Fund's establishment and designation as a series of the Trust, and the registration under the Securities Act of 1933 of the Fund's shares of beneficial interest ("Shares") and the sale of one Share ("Initial Shares") of the Fund to Signature Financial Group, Inc. ("SFG"). The Trust will invest all of the Fund's investable assets in U.S. Bond Index Portfolio (the "Portfolio"), a series of BT Investment Portfolios, an investment company registered under the Investment Company Act of 1940, as amended. The Fund is one of ten series of the Trust.
(2) Organization expenses of the Fund are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Fund. The amount paid by the Trust on any redemption by SFG or any other then-current holder of the Initial Shares of the Fund will be reduced by a portion of any unamortized organization expenses of the Fund and the Portfolio, determined by the proportion of the number of the Initial Shares of the Fund redeemed to the number of the Initial Shares of the Fund then outstanding after taking into account any prior redemptions of the Initial Shares of the Fund. The amount of such reduction in excess of the unamortized organization expenses of the Fund shall be contributed by the Fund to the Portfolio.
(3) The Trust has entered into an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the Institutional Equity 500 Equal Weighted Index Fund (one of the Funds comprising BT Global Investors) as of January 2, 1996. This financial statement is the responsibility of the Fund's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the Institutional Equity 500 Equal Weighted Index Fund of BT Global Investors as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
INSTITUTIONAL EQUITY 500 EQUAL WEIGHTED INDEX FUND STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST ($10.00 / 1 SHARES OUTSTANDING) . . . . . . . . .$ 10.00
(1) BT Advisor Funds, a Massachusetts business trust (the "Trust"), was organized on July 24, 1995 and has been inactive since that date with respect to Institutional Equity 500 Equal Weighted Index Fund (the "Fund") except for matters relating to the organization of the Trust, the Fund's establishment and designation as a series of the Trust, and the registration under the Securities Act of 1933 of the Fund's shares of beneficial interest ("Shares") and the sale of one Share ("Initial Shares") of the Fund to Signature Financial Group, Inc. ("SFG"). The Trust will invest all of the Fund's investable assets in Equity 500 Equal Weighted Portfolio (the "Portfolio"), a series of BT Investment Portfolios, an investment company registered under the Investment Company Act of 1940, as amended. The Fund is one of ten series of the Trust.
(2) Organization expenses of the Fund are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Fund. The amount paid by the Trust on any redemption by SFG or any other then-current holder of the Initial Shares of the Fund will be reduced by a portion of any unamortized organization expenses of the Fund and the Portfolio, determined by the proportion of the number of the Initial Shares of the Fund redeemed to the number of the Initial Shares of the Fund then outstanding after taking into account any prior redemptions of the Initial Shares of the Fund. The amount of such reduction in excess of the unamortized organization expenses of the Fund shall be contributed by the Fund to the Portfolio.
(3) The Trust has entered into an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the Institutional Small Cap Index Fund (one of the Funds comprising BT Global Investors) as of January 2, 1996. This financial statement is the responsibility of the Fund's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the Institutional Small Cap Index Fund of BT Global Investors as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
INSTITUTIONAL SMALL CAP INDEX FUND STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST ($10.00 / 1 SHARES OUTSTANDING) . . . . . . . . .$ 10.00
(1) BT Advisor Funds, a Massachusetts business trust (the "Trust"), was organized on July 24, 1995 and has been inactive since that date with respect to Institutional Small Cap Index Fund (the "Fund") except for matters relating to the organization of the Trust, the Fund's establishment and designation as a series of the Trust, and the registration under the Securities Act of 1933 of the Fund's shares of beneficial interest ("Shares") and the sale of one Share ("Initial Shares") of the Fund to Signature Financial Group, Inc. ("SFG"). The Trust will invest all of the Fund's investable assets in Small Cap Index Portfolio (the "Portfolio"), a series of BT Investment Portfolios, an investment company registered under the Investment Company Act of 1940, as amended. The Fund is one of ten series of the Trust.
(2) Organization expenses of the Fund are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Fund. The amount paid by the Trust on any redemption by SFG or any other then-current holder of the Initial Shares of the Fund will be reduced by a portion of any unamortized organization expenses of the Fund and the Portfolio, determined by the proportion of the number of the Initial Shares of the Fund redeemed to the number of the Initial Shares of the Fund then outstanding after taking into account any prior redemptions of the Initial Shares of the Fund. The amount of such reduction in excess of the unamortized organization expenses of the Fund shall be contributed by the Fund to the Portfolio.
(3) The Trust has entered into an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the Institutional EAFE Equity Index Fund (one of the Funds comprising BT Global Investors) as of January 2, 1996. This financial statement is the responsibility of the Fund's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the Institutional EAFE Equity Index Fund of BT Global Investors as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
INSTITUTIONAL EAFE(R) EQUITY INDEX FUND
STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
NET ASSET VALUE PER SHARE OF BENEFICIAL
INTEREST ($10.00 / 1 SHARES OUTSTANDING) . . . . . . . . .$ 10.00
(1) BT Advisor Funds, a Massachusetts business trust (the "Trust"), was organized on July 24, 1995 and has been inactive since that date with respect to Institutional EAFE(R) Equity Index Fund (the "Fund") except for matters relating to the organization of the Trust, the Fund's establishment and designation as a series of the Trust, and the registration under the Securities Act of 1933 of the Fund's shares of beneficial interest ("Shares") and the sale of one Share ("Initial Shares") of the Fund to Signature Financial Group, Inc. ("SFG"). The Trust will invest all of the Fund's investable assets in EAFE(R) Equity Index Portfolio (the "Portfolio"), a series of BT Investment Portfolios, an investment company registered under the Investment Company Act of 1940, as amended. The Fund is one of ten series of the Trust.
(2) Organization expenses of the Fund are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Fund. The amount paid by the Trust on any redemption by SFG or any other then-current holder of the Initial Shares of the Fund will be reduced by a portion of any unamortized organization expenses of the Fund and the Portfolio, determined by the proportion of the number of the Initial Shares of the Fund redeemed to the number of the Initial Shares of the Fund then outstanding after taking into account any prior redemptions of the Initial Shares of the Fund. The amount of such reduction in excess of the unamortized organization expenses of the Fund shall be contributed by the Fund to the Portfolio.
(3) The Trust has entered into an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the U.S. Bond Index Portfolio (one of the Portfolios comprising BT Investment Portfolios) as of January 2, 1996. This financial statement is the responsibility of the Portfolio's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the U.S. Bond Index Portfolio of BT Investment Portfolios as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
(1) BT Investment Portfolios, a New York master trust, (the "Portfolio Trust") was organized on March 27, 1993 and has been inactive since that date with respect to U.S. Bond Index Portfolio (the "Portfolio") except for matters relating to the Portfolio's establishment and designation as a subtrust or series of the Portfolio Trust, and the sale of a beneficial interest therein at the purchase price of $10.00 to BT Advisor Funds --Institutional U.S. Bond Index Fund (the "Fund") (the "Initial Interests"). The Portfolio is one of fifteen series of the Portfolio Trust.
(2) Organization expenses of the Portfolio are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Portfolio. Any amount received by the Portfolio from the Fund as a result of a redemption by Signature Financial Group, Inc. will be applied so as to reduce the amount of unamortized organization expenses. The amount paid by the Portfolio Trust on any withdrawal by the Fund of an Initial Interest in the Portfolio will be reduced by a portion of any unamortized organization expenses of the Portfolio, determined by the proportion of the amount of the Initial Interest withdrawn to the aggregate amount of the Initial Interests in the Portfolio then-outstanding after taking into account any prior withdrawals of any of the Initial Interests in the Portfolio.
(3) At 4:00 p.m., New York time, on each business day of the Portfolio, the value of an investor's beneficial interest in the Portfolio is equal to the product of (i) the aggregate net asset value of the Portfolio multiplied by (ii) the percentage representing that investor's share of the aggregate beneficial interests in the Portfolio effective for that day.
(4) The Portfolio Trust has entered into an Investment Advisory Agreement with Bankers Trust Company and an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Portfolio Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the Equity 500 Equal Weighted Index Portfolio (one of the Portfolios comprising BT Investment Portfolios) as of January 2, 1996. This financial statement is the responsibility of the Portfolio's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the Equity 500 Equal Weighted Index Portfolio of BT Investment Portfolios as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
(1) BT Investment Portfolios, a New York master trust, (the "Portfolio Trust") was organized on March 27, 1993 and has been inactive since that date with respect to Equity 500 Equal Weighted Index Portfolio (the "Portfolio") except for matters relating to the Portfolio's establishment and designation as a subtrust or series of the Portfolio Trust, and the sale of a beneficial interest therein at the purchase price of $10.00 to BT Advisor Funds -- Institutional Equity 500 Equal Weighted Index Fund (the "Fund") (the "Initial Interests"). The Portfolio is one of fifteen series of the Portfolio Trust.
(2) Organization expenses of the Portfolio are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Portfolio. Any amount received by the Portfolio from the Fund as a result of a redemption by Signature Financial Group, Inc. will be applied so as to reduce the amount of unamortized organization expenses. The amount paid by the Portfolio Trust on any withdrawal by the Fund of an Initial Interest in the Portfolio will be reduced by a portion of any unamortized organization expenses of the Portfolio, determined by the proportion of the amount of the Initial Interest withdrawn to the aggregate amount of the Initial Interests in the Portfolio then-outstanding after taking into account any prior withdrawals of any of the Initial Interests in the Portfolio.
(3) At 4:00 p.m., New York time, on each business day of the Portfolio, the value of an investor's beneficial interest in the Portfolio is equal to the product of (i) the aggregate net asset value of the Portfolio multiplied by (ii) the percentage representing that investor's share of the aggregate beneficial interests in the Portfolio effective for that day.
(4) The Portfolio Trust has entered into an Investment Advisory Agreement with Bankers Trust Company and an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Portfolio Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the Small Cap Index Portfolio (one of the Portfolios comprising BT Investment Portfolios) as of January 2, 1996. This financial statement is the responsibility of the Portfolio's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the Small Cap Index Portfolio of BT Investment Portfolios as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
(1) BT Investment Portfolios, a New York master trust, (the "Portfolio Trust") was organized on March 27, 1993 and has been inactive since that date with respect to Small Cap Index Portfolio (the "Portfolio") except for matters relating to the Portfolio's establishment and designation as a subtrust or series of the Portfolio Trust, and the sale of a beneficial interest therein at the purchase price of $10.00 to BT Advisor Funds --Institutional Small Cap Index Fund (the "Fund") (the "Initial Interests"). The Portfolio is one of fifteen series of the Portfolio Trust.
(2) Organization expenses of the Portfolio are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Portfolio. Any amount received by the Portfolio from the Fund as a result of a redemption by Signature Financial Group, Inc. will be applied so as to reduce the amount of unamortized organization expenses. The amount paid by the Portfolio Trust on any withdrawal by the Fund of an Initial Interest in the Portfolio will be reduced by a portion of any unamortized organization expenses of the Portfolio, determined by the proportion of the amount of the Initial Interest withdrawn to the aggregate amount of the Initial Interests in the Portfolio then-outstanding after taking into account any prior withdrawals of any of the Initial Interests in the Portfolio.
(3) At 4:00 p.m., New York time, on each business day of the Portfolio, the value of an investor's beneficial interest in the Portfolio is equal to the product of (i) the aggregate net asset value of the Portfolio multiplied by (ii) the percentage representing that investor's share of the aggregate beneficial interests in the Portfolio effective for that day.
(4) The Portfolio Trust has entered into an Investment Advisory Agreement with Bankers Trust Company and an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Portfolio Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the EAFE Equity Index Portfolio (one of the Portfolios comprising BT Investment Portfolios) as of January 2, 1996. This financial statement is the responsibility of the Portfolio's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the EAFE Equity Index Portfolio of BT Investment Portfolios as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . .
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
(1) BT Investment Portfolios, a New York master trust, (the "Portfolio Trust") was organized on March 27, 1993 and has been inactive since that date with respect to EAFE(R) Equity Index Portfolio (the "Portfolio") except for matters relating to the Portfolio's establishment and designation as a subtrust or series of the Portfolio Trust, and the sale of a beneficial interest therein at the purchase price of $10.00 to BT Advisor Funds --Institutional EAFE(R) Equity Index Fund (the "Fund") (the "Initial Interests"). The Portfolio is one of fifteen series of the Portfolio Trust.
(2) Organization expenses of the Portfolio are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Portfolio. Any amount received by the Portfolio from the Fund as a result of a redemption by Signature Financial Group, Inc. will be applied so as to reduce the amount of unamortized organization expenses. The amount paid by the Portfolio Trust on any withdrawal by the Fund of an Initial Interest in the Portfolio will be reduced by a portion of any unamortized organization expenses of the Portfolio, determined by the proportion of the amount of the Initial Interest withdrawn to the aggregate amount of the Initial Interests in the Portfolio then-outstanding after taking into account any prior withdrawals of any of the Initial Interests in the Portfolio.
(3) At 4:00 p.m., New York time, on each business day of the Portfolio, the value of an investor's beneficial interest in the Portfolio is equal to the product of (i) the aggregate net asset value of the Portfolio multiplied by (ii) the percentage representing that investor's share of the aggregate beneficial interests in the Portfolio effective for that day.
(4) The Portfolio Trust has entered into an Investment Advisory Agreement with Bankers Trust Company and an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Portfolio Trust.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered as medium-grade obligations, i.e. they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such, bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both (good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked short-comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating classification from Aa through B in its corporate bond system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed but debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being paid.
D - Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating will also be used upon the filing of a bankruptcy petition if debt service payments are jeopardized.
The tables on the following pages shows the performance of the S&P 500, the Russell 2000, the Aggregate Bond Index and the EAFE Index for the periods indicated. Stock prices fluctuated widely during the period but were higher at the end than at the beginning. The results shown should not be considered as a representation of the income or capital gain or loss which may be generated by the respective Index in the future. Nor should this be considered as a representation of the past or future performance of the Fund.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX*
LEHMAN BROTHERS AGGREGATE BOND INDEX*
*Source: Lipper Analytical Services, Inc. RUSSELL 2000 SMALL STOCK INDEX*
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX*
*Source: Morgan Stanley Capital International (MSCI) EAFE Index
STANDARD & POOR'S 500 EQUAL WEIGHTED WILSHIRE INDEX
Signature Broker-Dealer Services, Inc. BT ADVISOR FUNDS - 6 St. James Avenue INSTITUTIONAL CLASS SHARES Boston, MA 02116 U.S. BOND INDEX FUND (617) 423-0800 EQUITY 500 EQUAL WEIGHTED INDEX INVESTMENT ADVISER OF EACH PORTFOLIO INSTITUTIONAL EQUITY
Bankers Trust Company STATEMENT OF
280 Park Avenue ADDITIONAL INFORMATION New York, NY 10017 JANUARY , 1996
1100 Main Street, Suite 900
BT ADVISOR FUNDS -- ADVISORS CLASS SHARES
EQUITY 500 EQUAL WEIGHTED INDEX FUND BT INVESTMENT EQUITY 500 INDEX FUND
BT Advisor Funds (the "Trust") is comprised of ten funds. The funds listed above (with the exception of BT Investment Equity 500 Index Fund) (each, a "Fund") are each a series of the Trust and offers two classes of shares (each a "Class" and collectively the "Classes"). This Statement of Additional Information describes the Advisor Class Shares. BT Investment Equity 500 Index Fund (the "Equity 500 Index Fund") is a series of the BT Pyramid Mutual Funds (together with the Trust, the "Trusts").
Risk Factors and Certain Securities and Investment Practices. . . Performance Information . . . . . . . . . . . . . . . . . . . . . Valuation of Securities; Redemptions and Purchases in Kind . . . . Management of the Trusts and the Portfolios . . . . . . . . . . . Organization of the Trusts . . . . . . . . . . . . . . . . . . . . Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements . . . . . . . . . . . . . . . . . . . . . . .
Appendix A. . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix B. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As described in the Prospectus, the Trusts seek to achieve the investment objectives of each Fund by investing all the investable assets ("Assets") of the Fund in a diversified open-end management investment company (or a series thereof) having the same investment objectives as such Fund. These investment companies are, respectively, Equity 500 Index Portfolio and BT Investment Portfolios. U.S. Bond Index Portfolio, Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio and EAFE(R) Equity Index Portfolio are each a series of BT Investment Portfolios.
Since the investment characteristics of the Funds will correspond directly to those of the respective Portfolio in which the Fund invests all of its Assets, the following is a discussion of the various investments of and techniques employed by the Portfolios.
Shares of the Funds are sold by Signature Broker-Dealer Services, Inc. ("Signature"), the Trusts' Distributor, to clients and customers (including affiliates and correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolios' Adviser, and to clients and customers of other organizations.
The Trusts' Prospectus for the Funds is dated , 1995. The Prospectus provides the basic information investors should know before investing and may be obtained without charge by calling the Trust at the telephone number listed below or by contacting your Investment Professional. This Statement of Additional Information, which is not a Prospectus, is intended to provide additional information regarding the activities and operations of the Trusts and should be read in conjunction with the Funds' Prospectus. This Statement of Additional Information is not an offer of any Fund for which an investor has not received a Prospectus. Capitalized terms not otherwise defined in this Statement of Additional Information have the meanings accorded to them in the Fund's Prospectus.
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR SIGNATURE BROKER-DEALER SERVICES, INC.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The investment objective(s) of each Fund is described in that Fund's Prospectus. There can, of course, be no assurance that any Fund will achieve its investment objective(s).
Each Fund seeks to achieve its investment objective by investing all of its Assets in the corresponding Portfolio. The Trusts may withdraw a Fund's investment from the corresponding Portfolio at any time if the Board of Trustees of the respective Trust determines that it is in the best interests of the Fund to do so.
Since the investment characteristics of each Fund will correspond directly to those of the corresponding Portfolio, the following is a discussion of the various investments of and techniques employed by each Portfolio.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit are receipts issued by a depository institution in exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded in the secondary market prior to maturity. Bankers' acceptances typically arise from short-term credit arrangements designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts.
For a description of commercial paper ratings, see Appendix A to this Statement of Additional Information.
ILLIQUID SECURITIES. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the 1933 Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain securities that are not registered under the 1933 Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale of such investments to the general public or to certain institutions may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which allows a broader institutional trading market for securities otherwise subject to restriction on their resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the 1933 Act of resales of certain securities to qualified institutional buyers. The Adviser anticipates that the market for certain restricted securities such as institutional commercial paper will expand further as a result of this regulation and the development of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities in each Portfolio's portfolio under the supervision of the Portfolio's Board of Trustees. In reaching liquidity decisions, the Adviser will consider, among other things, the following factors: (i) the frequency of trades and quotes for the security; (ii) the number of dealers and other potential purchasers wishing to purchase or sell the security; (iii) dealer undertakings to make a market in the security and (iv) the nature of the security and of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer).
LENDING OF PORTFOLIO SECURITIES. Each Portfolio has the authority to lend portfolio securities to brokers, dealers and other financial organizations. The Portfolio will not lend securities to Bankers Trust, Signature or their affiliates. By lending its securities, a Portfolio can increase its income by continuing to receive interest on the loaned securities as well as by either investing the cash collateral in short-term securities or obtaining yield in the form of interest paid by the borrower when U.S. Government obligations are used as collateral. There may be risks of delay in receiving additional collateral or risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. A Portfolio will adhere to the following conditions whenever its securities are loaned: (i) the Portfolio must receive at least 100 percent cash collateral or equivalent securities from the borrower; (ii) the borrower must increase this collateral whenever the market value of the securities including accrued interest rises above the level of the collateral; (iii) the Portfolio must be able to terminate the loan at any time; (iv) the Portfolio must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (v) the Portfolio may pay only reasonable custodian fees in connection with the loan; and (vi) voting rights on the loaned securities may pass to the borrower; provided, however, that if a material event adversely affecting the investment occurs, the Board of Trustees of the Portfolio must terminate the loan and regain the right to vote the securities.
SHORT-TERM INSTRUMENTS. When a Portfolio experiences large cash inflows through the sale of securities and desirable equity securities, that are consistent with the Portfolio's investment objective, which are unavailable in sufficient quantities or at attractive prices, the Portfolio may hold short-term investments for a limited time pending availability of such equity securities. Short-term instruments consist of foreign and domestic: (i) short-term obligations of sovereign governments, their agencies, instrumentalities, authorities or political subdivisions; (ii) other short-term debt securities rated AA or higher by S&P or Aa or higher by Moody's or, if unrated, of comparable quality in the opinion of Bankers Trust; (iii) commercial paper; (iv) bank obligations, including negotiable certificates of deposit, time deposits and banker's acceptances; and (v) repurchase agreements. At the time the Portfolio invests in commercial paper, bank obligations or repurchase agreements, the issuer of the issuer's parent must have outstanding debt rated AA or higher by S&P or Aa or higher by Moody's or outstanding commercial paper or bank obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such instrument must be of comparable quality in the opinion of Bankers Trust. These instruments may be denominated in U.S dollars or in foreign currencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase securities on a when-issued or delayed delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the purchase commitment. The purchase price and the interest rate payable, if any, on the securities are fixed on the purchase commitment date or at the time the settlement date is fixed. The value of such securities is subject to market fluctuation and no interest accrues to a Portfolio until settlement takes place. At the time a Portfolio makes the commitment to purchase securities on a when-issued or delayed delivery basis, it will record the transaction, reflect the value each day of such securities in determining its net asset value and, if applicable, calculate the maturity for the purposes of average maturity from that date. At the time of settlement a when-issued security may be valued at less than the purchase price. To facilitate such acquisitions, each Portfolio will maintain with the Custodian a segregated account with liquid assets, consisting of cash, U.S. Government securities or other appropriate securities, in an amount at least equal to such commitments. On delivery dates for such transactions, each Portfolio will meet its obligations from maturities or sales of the securities held in the segregated account and/or from cash flow. If a Portfolio chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any other portfolio obligation, incur a gain or loss due to market fluctuation. It is the current policy of each Portfolio not to enter into when-issued commitments exceeding in the aggregate 15% of the market value of the Portfolio's total assets, less liabilities other than the obligations created by when-issued commitments.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each Portfolio may invest in obligations issued or guaranteed by U.S. Government agencies or instrumentalities. These obligations may or may not be backed by the "full faith and credit" of the United States. In the case of securities not backed by the full faith and credit of the United States, each Portfolio must look principally to the federal agency issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. Securities in which each Portfolio may invest that are not backed by the full faith and credit of the United States include, but are not limited to, obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal Service, each of which has the right to borrow from the U.S. Treasury to meet its obligations, and obligations of the Federal Farm Credit System and the Federal Home Loan Banks, both of whose obligations may be satisfied only by the each issuing agency. Securities which are backed by the full faith and credit of the United States include obligations of the Government National Mortgage Association, the Farmers Home Administration, and the Export-Import Bank.
EQUITY INVESTMENTS. With the exception of the U.S. Bond Index Portfolio, each Portfolio may invest in equity securities listed on any domestic or foreign securities exchange or traded in the over-the-counter market as well as certain restricted or unlisted securities. They may or may not pay dividends or carry voting rights. Common stock occupies the most junior position in a company's capital structure.
SWAP AGREEMENTS. Swap agreements are contracts entered into by two parties, primarily institutional investors, for periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or swapped between the parties are calculated with respect to a notional amount, I.E., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a basket of securities representing a particular index. The notional amount of the swap agreement is only a fictive basis on which to calculate the obligations which the parties to a swap agreement have agreed to exchange. A Portfolio's obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). A Portfolio's obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of a segregated account consisting of cash, U.S. Government securities, or high grade debt obligations, to avoid any potential leveraging of the Portfolio's portfolio.
The use of swap agreements will be successful in furthering its investment objective will depend on the Adviser's ability to correctly predict whether certain types of investments are likely to produce greater returns than other investments. Swap agreements may be considered to be illiquid because they are two party contracts and because they may have terms of greater than seven days. Moreover, a Portfolio bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. A Portfolio will enter into swap agreements only with counterparties that would be eligible for consideration as repurchase agreement counterparties under the Portfolio's repurchase agreement guidelines. Certain restrictions imposed on the Portfolios by the Internal Revenue Code may limit the Portfolios' ability to use swap agreements. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a Portfolio's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity Exchange Act (the "CEA") and, therefore, are not regulated as futures or commodity option transactions under the CEA, pursuant to regulations approved by the Commodity Futures Trading Commission (the "CFTC") effective February 22, 1993. To qualify for this exemption, a swap agreement must be entered into by eligible participants, which includes the following, provided the participant's total assets exceed established levels: a bank or trust company, savings association or credit union, insurance company, investment company subject to regulation under the Investment Company Act of 1940, as amended (the "1940 Act"), commodity pool, corporation, partnership, proprietorship, organization, trust or other entity, employee benefit plan, governmental entity, broker-dealer, futures commission merchant, natural person, or regulated foreign person. To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employee benefit plans must have asset exceeding $5 million. In addition, an eligible swap transaction must meet three conditions. First, the swap agreement may not be part of a fungible class of agreements that are standardized as to their material economic terms. Second, the creditworthiness of parties with actual or potential obligations under the swap agreement must be a material consideration in entering into or determining the terms of the swap agreement, including pricing, cost or credit enhancement terms. Third, swap agreements may not be entered into and traded on or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on existing exclusions for swaps, such as the Policy Statement issued in July 1989 which recognized a "safe harbor" for swap transactions from regulation as futures or commodity option transactions under the CEA or its regulations. The Policy Statement applies to swap transactions settled in cash that: (i) have individually tailored terms; (ii) lack exchange style offset and the use of a clearing organization or margin system; (iii) are undertaken in conjunction with a line of business; and (iv) are not marketed to the public.
REVERSE REPURCHASE AGREEMENTS. The Portfolios may borrow funds for temporary or emergency purposes, such as meeting larger than anticipated redemption requests, and not for leverage, by among other things, agreeing to sell portfolio securities to financial institutions such as banks and broker-dealers and to repurchase them at a mutually agreed date and price (a "reverse repurchase agreement"). At the time a Portfolio enters into a reverse repurchase agreement it will place in a segregated custodial account cash, U.S. Government Obligations or high-grade debt obligations having a value equal to the including accrued interest. Reverse repurchase agreements involve the risk that the market value of the securities sold by a Portfolio may decline below the repurchase price of those securities. Reverse repurchase agreements are considered to be borrowings by a Portfolio.
WARRANTS. Warrants entitle the holder to buy common stock from the issuer at a specific price (the strike price) for a specific period of time. The strike price of warrants sometimes is much lower than the current market price of the underlying securities, yet warrants are subject to similar price fluctuations. As a result, warrants may be more volatile investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with respect to the underlying securities and do not represent any rights in the assets of the issuing company. Also, the value of the warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to the expiration date.
CONVERTIBLE SECURITIES. Convertible securities may be a debt security or preferred stock which may be converted into common stock or carries the right to purchase common stock. Convertible securities entitle the holder to exchange the securities for a specified number of shares of common stock, usually of the same company, at specified prices within a certain period of time.
The terms of any convertible security determine its ranking in a company's capital structure. In the case of subordinated convertible debentures, the holders' claims on assets and earnings are subordinated to the claims of other creditors, and are senior to the claims of preferred and common shareholders. In the case of convertible preferred stock, the holders' claims on assets and earnings are subordinated to the claims of all creditors and are senior to the claims of common shareholders.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate instrumentality of the United States within the Department of Housing and Urban Development. The National Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal of and interest on certificates that are based on and backed by a pool of mortgage loans insured by the Federal Housing Administration under the Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of Veterans Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of other eligible mortgage loans. The Housing Act provides that the full faith and credit of the U.S. Government is pledged to the payment of all amounts that may be required to be paid under any GNMA guaranty. In order to meet its obligations under such guaranty, Ginnie Mae is authorized to borrow from the U.S. Treasury with no limitations as to amount.
The Ginnie Mae Certificates in which the U.S. Bond Index Portfolio will invest will represent a pro rata interest in one or more pools of the following types of mortgage loans: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate graduated payment mortgage loans; (iii) fixed-rate growing equity mortgage loans; (iv) fixed-rate mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on multifamily residential properties under construction; (vi) mortgage loans on completed multifamily projects; (vii) fixed-rate mortgage loans as to which escrowed funds are used to reduce the borrower's monthly payments during the early years of the mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that provide for adjustments in payments based on periodic changes in interest rates or in other payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise specified above, will be fully-amortizing loans secured by first liens on one- to four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act of 1938. The obligations of FNMA are not backed by the full faith and credit of the U.S. Government.
Each Fannie Mae Certificate will represent a pro rata interest in one or more pools of FHA Loans, VA Loans or conventional mortgage loans (I.E., mortgage loans that are not insured or guaranteed by any governmental agency) of the following types: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate growing equity mortgage loans; (iii) fixed-rate graduated payment mortgage loans; (iv) variable rate mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed-rate and adjustable mortgage loans secured by multifamily projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the United States created pursuant to the Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations solely of Freddie Mac and are not backed by the full faith and credit of the U.S. Government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The mortgage loans underlying the Freddie Mac Certificates will consist of fixed-rate or adjustable rate mortgage loans with original terms to maturity of between ten and thirty years, substantially all of which are secured by first liens on one- to four-family residential properties or multifamily projects. Each mortgage loan must meet the applicable standards set forth in the FHLMC Act. A Freddie Mac Certificate group may include whole loans, participating interests in whole loans and undivided interests in whole loans and participations comprising
ADJUSTABLE RATE MORTGAGES - INTEREST RATE INDICES. Adjustable rate mortgages in which the U.S. Bond Index Portfolio invests may be adjusted on the basis of one of several indices. The One Year Treasury Index is the figure derived from the average weekly quoted yield on U.S. Treasury Securities adjusted to a constant maturity of one year. The Cost of Funds Index reflects the monthly weighted average cost of funds of savings and loan associations and savings banks whose home offices are located in Arizona, California and Nevada (the "FHLB Eleventh District") that are member institutions of the Federal Home Loan Bank of San Francisco (the "FHLB of San Francisco"), as computed from statistics tabulated and published by the FHLB of San Francisco. The FHLB of San Francisco normally announces the Cost of Funds Index on the last working day of the month following the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index and may cause the Cost of Funds Index to move in a manner different from indices based upon specific interest rates, such as the One Year Treasury Index. Because of the various origination dates and maturities of the liabilities of members of the FHLB Eleventh District upon which the Cost of Funds Index is based, among other things, at any time the Cost of Funds Index may not reflect the average prevailing market interest rates on new liabilities of similar maturities. There can be no assurance that the Cost of Funds Index will necessarily move in the same direction or at the same rate as prevailing interest rates since as longer term deposits or borrowings mature and are renewed at market interest rates, the Cost of Funds Index will rise or fall depending upon the differential between the prior and the new rates on such deposits and borrowings. In addition, dislocations in the thrift industry in recent years have caused and may continue to cause the cost of funds of thrift institutions to change for reasons unrelated to changes in general interest rate levels. Furthermore, any movement in the Cost of Funds Index as compared to other indices based upon specific interest rates may be affected by changes instituted by the FHLB of San Francisco in the method used to calculate the Cost of Funds Index. To the extent that the Cost of Funds Index may reflect interest changes on a more delayed basis than other indices, in a period of rising interest rates, any increase may produce a higher yield later than would be produced by such other indices, and in a period of declining interest rates, the Cost of Funds Index may remain higher than other market interest rates which may result in a higher level of principal prepayments on mortgage loans which adjust in accordance with the Cost of Funds Index than mortgage loans which adjust in accordance with other indices.
LIBOR, the London interbank offered rate, is the interest rate that the most creditworthy international banks dealing in U.S. dollar-denominated deposits and loans charge each other for large dollar-denominated loans. LIBOR is also rate for large dollar-denominated loans in the international market. LIBOR is generally quoted for loans having rate adjustments at one, three, six or twelve month intervals.
ASSET-BACKED SECURITIES. The asset-backed securities in which the U.S. Bond Index Portfolio may invest are limited to those which are readily marketable, dollar-denominated and rated BBB or higher by Standard & Poor's Corporation ("S&P") or Baa or higher by Moody's Investors Services, Inc. ("Moody's"). Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities do not have the benefit of the same type of security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to avoid payment of certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicer to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES--TYPES OF CREDIT SUPPORT. The mortgage-backed securities in which the U.S. Bond Index Portfolio may invest are limited to those relating to residential mortgages. Mortgage-backed securities and asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failure by obligors on underlying assets to make payments, such securities may contain elements of credit support. Such credit support falls into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the pass-through of payments due on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default enhances the likelihood of ultimate payment of the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a combination of such approaches. The U.S. Bond Index Portfolio will not pay any additional fees for such credit support, although the existence of credit support may increase the price of a security.
The ratings of mortgage-backed securities and asset-backed securities for which third-party credit enhancement provides liquidity protection or protection against losses from default are generally dependent upon the continued creditworthiness of the provider of the credit enhancement. The ratings of such securities could be subject to reduction in the event of deterioration in the creditworthiness of the credit enhancement provider even in cases where the delinquency and loss experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction include "senior-subordinated securities" (multiple class securities with one or more classes subordinate to other classes as to the payment of principal thereof and interest thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class), creation of "reserve funds" (where cash or investments, sometimes funded from a portion of the payments on the underlying assets, are held in reserve against future losses) and "over-collateralization" (where the scheduled payments on, or the principal amount of, the underlying assets exceed those required to make payment of the securities and pay any servicing or other fees). The degree of credit support provided for each issue is generally based on historical information with respect to the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that which is anticipated could adversely affect the return on an investment in such a security.
STRIPPED MORTGAGE-BACKED SECURITIES. The cash flows and yields on IO and PO classes are extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets. For example, a rapid or slow rate of principal payments may have a material adverse effect on the yield to maturity of IOs or POs, respectively. If the underlying mortgage assets experience greater than anticipated prepayments of principal, an investor may fail to recoup fully its initial investment in an IO class of a stripped mortgage-backed security, even if the IO class is rated AAA or Aaa. Conversely, if the underlying mortgage assets experience slower than anticipated prepayments of principal, the yield on a PO class will be affected more severely than would be the case with a traditional mortgage-backed security.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING HONG KONG, MALAYSIA, SINGAPORE AND JAPAN. Many Asian countries may be subject to a greater degree of social, political and economic instability than is the case in the United States and European countries. Such instability may result from (i) authoritarian governments or military involvement in political and economic decision-making; (ii) popular unrest associated with demands for improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious and racial disaffection.
The economies of most of the Asian countries are heavily dependent upon international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners, principally, the United States, Japan, China and the European Community. The enactment by the United States or other principal trading partners of protectionist trade legislation, reduction of foreign investment in the local economies and general declines in the international securities markets could have a significant adverse effect upon the securities markets of the Asian countries.
Hong Kong's impending return to Chinese dominion in 1997 has not initially had a positive effect on its economic growth which was vigorous in the 1980s. However, authorities in Beijing have agreed to maintain a capitalist system for 50 years that, along with Hong Kong's economic growth, continued to further strong stock market returns. In preparation for 1997, Hong Kong has to develop trade with China, where it is the largest foreign investor, while also maintaining its longstanding export relationship with the United States. Spending on infrastructure improvements is a significant priority of the colonial government while the private sector continues to diversify abroad based on its position as an established international trade center in the Far East.
The Hong Kong stock market is undergoing a period of growth and change which may result in trading volatility and difficulties in the settlement and recording of transactions, and in interpreting and applying the relevant law and regulations.
The Malaysian economy continued to perform well, growing at an average annual rate of 9% from 1987 through 1991. This placed Malaysia as one of the fastest growing economies in the Asian-Pacific region. Malaysia has become the world's third-largest producer of semiconductor devices (after the US and Japan) and the world's largest exporter of semiconductor devices. More remarkable is the country's ability to achieve rapid economic growth with relative price stability (2% inflation over the past five years) as the government followed prudent fiscal/monetary policies. Malaysia's high export dependence level leaves it vulnerable to a recession in the Organization for Economic Cooperation and Development countries or a fall in world commodity prices.
Singapore has an open entrepreneurial economy with strong service and manufacturing sectors and excellent international trading links derived from its entrepot history. During the 1970's and early 1980's, the economy expanded rapidly, achieving an average annual growth rate of 9%. Per capita GDP is among the highest in Asia. Singapore holds a position as a major oil refining and services center.
Investing in Japanese securities may involve the risks associated with investing in foreign securities generally. In addition, because it invests in Japan, the EAFE(R) Equity Index Portfolio will be subject to the general economic and political conditions in Japan.
Share prices of companies listed on Japanese stock exchanges and on the Japanese OTC market reached historical peaks (which were later referred to as the "bubble") as well as historically high trading volumes in 1989 and 1990. Since then, stock prices in both markets decreased significantly, with listed stock prices reaching their lowest levels in the third quarter of 1992 and OTC stock prices reaching their lowest levels in the fourth quarter of 1992. During the period from January 1, 1989 through December 31, 1994, the highest Nikkei stock average and Nikkei OTC average were 38,915.87 and 4,149.20, respectively, and the lowest for each were 14,309.41 and 1,099.32, respectively. There can be no assurance that additional market corrections will not occur.
The common stocks of many Japanese companies continue to trade at high price earnings ratios in comparison with those in the United States, even after the recent market decline. Differences in accounting methods make it difficult to compare the earnings of Japanese companies with those of companies in other countries, especially the United States.
Since the EAFE(R) Equity Index Portfolio invests in securitieS denominated in yen, changes in exchange rates between the U.S. dollar and the yen affect the U.S. dollar value of the EAFE(R) Equity Index Portfolio's assets. Such rate of exchange is determined by forces of supply and demand on the foreign exchange markets. These forces are in turn affected by the international balance of payments and other economic, political and financial conditions, government intervention, speculation and other factors.
Japanese securities held by the EAFE(R) Equity Index Portfolio are not registered with the SEC nor are the issuers thereof subject to its reporting requirements. There may be less publicly available information about issuers of Japanese securities than about U.S. companies and such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject.
Although the Japanese economy has grown substantially over the past four decades, recently the rate of growth had slowed substantially. During 1991, 1992 and 1993, the Japanese economy grew at rates of 4.3%, 1.1% and 0.1%, respectively, as measured by real gross domestic product.
Japan's success in exporting its products has generated a sizeable trade surplus. Such trade surplus has caused tensions at times between Japan and some of its trading partners. In particular, Japan's trade relations with the United recently been the subject of discussion and negotiation between the two nations. The United States has imposed certain measures designed to address trade issues in specific industries. These measures and similar measures in the future may adversely affect the performance of the EAFE(R) Equity Index Portfolio.
Japan's economy has typically exhibited low inflation and low interest rates. There can be no assurance that low inflation and low interest rates will continue, and it is likely that a reversal of such factors would adversely affect the Japanese economy. Moreover, the Japanese economy may differ, favorably or unfavorably, from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993 a coalition government was formed which, for the first time since 1955, did not include the Liberal Democratic Party. Since mid-1993, there have been several changes in leadership in Japan. What, if any, effect the current political situation will have on prospective regulatory reforms of the economy in Japan cannot be predicted. Recent and future developments in Japan and neighboring Asian countries may lead to changes in policy that might adversely affect the EAFE(R) Equity Index Portfolio.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments draws upon the Adviser's skill and experience with respect to such instruments and usually depends on the Adviser's ability to forecast interest rate and currency exchange rate movements correctly. Should interest or exchange rates move in an unexpected manner, a Portfolio may not achieve the anticipated benefits of futures contracts or options on futures contracts or may realize losses and thus will be in a worse position than if such strategies had not been used. In addition, the correlation between movements in the price of futures contracts or options on futures contracts and movements in the price of the securities and currencies hedged or used for cover will not be perfect and could produce unanticipated losses.
Successful use of the futures contract and related options are subject to special risk considerations. A liquid secondary market for any futures or options contract may not be available when a futures or options position is sought to be closed. In addition, there may be an imperfect correlation between movements in the securities or currency in the Portfolio. Successful use of futures or options contracts is further dependent on Bankers Trust's ability to correctly predict movements in the securities or foreign currency markets and no assurance can be given that its judgement will be correct. Successful use of options on securities or stock indices are subject to similar risk considerations. In addition, by writing covered call options, the Portfolio gives up the opportunity, while the option is in effect, to profit from any price increase in the underlying securities above the options exercise price.
FUTURES CONTRACTS. Each Portfolio may enter into contracts for the purchase or sale for future delivery of fixed-income securities, foreign currencies, or contracts based on financial indices including any index of U.S. Government securities, foreign government securities or corporate debt securities. U.S. futures contracts have been designed by exchanges which have been designated "contracts markets" by the CFTC, and must be executed through a futures commission merchant, or brokerage firm, which is a member of the relevant contract market. Futures contracts trade on a number of exchange markets, and, through their clearing corporations, the exchanges guarantee performance of the contracts as between the clearing members of the exchange. Each Portfolio may enter into futures contracts which are based on debt securities that are backed by the full faith and credit of the U.S. Government, such as long-term U.S. Treasury Bonds, Treasury Notes, GNMA modified pass-through mortgage-backed securities and three-month U.S. Treasury Bills. A Portfolio may also enter into futures contracts which are based on bonds issued by entities other than the U.S. Government.
At the same time a futures contract is purchased or sold, the Portfolio must allocate cash or securities as a deposit payment ("initial deposit"). It is expected that the initial deposit would be approximately 1 1/2% to 5% of a contract's face value. Daily thereafter, the futures contract is valued and the payment of "variation margin" may be required, since each day the Portfolio would provide or receive cash that reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments are made to recognize differences in value arising from the delivery of securities with a different interest rate from that specified in the contract. In some (but not many) cases, securities called for by a futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or acquisition of securities, in most cases the contractual obligation is fulfilled before the date of the contract without having to make or take delivery of the securities. The offsetting of a contractual obligation is accomplished by buying (or selling, as the case may be) on a commodities exchange an identical futures contract calling for delivery in the same month. Such a transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the securities. Since all transactions in the futures market are made, offset or fulfilled through a clearinghouse associated with the exchange on which the contracts are traded, the Portfolio will incur brokerage fees when it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case of a Portfolio which holds or intends to acquire fixed-income securities, is to attempt to protect the Portfolio from fluctuations in interest or foreign exchange rates without actually buying or selling fixed-income securities or foreign currencies. For example, if interest rates were expected to increase, the Portfolio might enter into futures contracts for the sale of debt securities. Such a sale would have much the same effect as selling an equivalent value of the debt securities owned by the Portfolio. If interest rates did increase, the value of the debt security in the Portfolio would decline, but the value of the futures contracts to the Portfolio would increase at approximately the same rate, thereby keeping the net asset value of the Portfolio from declining as much as it otherwise would have. The Portfolio could accomplish similar results by selling debt securities and investing in bonds with short maturities when interest rates are expected to increase. However, since the futures market is more liquid than the cash market, the use of futures contracts as an investment technique allows the Portfolio to maintain a defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures contracts may be purchased to attempt to hedge against anticipated purchases of debt securities at higher prices. Since the fluctuations in the value of futures contracts should be similar to those of debt securities, a Portfolio could take advantage of the anticipated rise in the value of debt securities without actually buying them until the market had stabilized. At that time, the futures contracts could be liquidated and the Portfolio could then buy debt securities on the cash market. To the extent a Portfolio enters into futures contracts for this purpose, the assets in the segregated asset account maintained to cover the Portfolio's obligations with respect to such futures contracts will consist of cash, cash equivalents or high quality liquid debt securities from its portfolio in an amount equal to the difference between the fluctuating market value of such futures contracts and the aggregate value of the initial and variation margin payments made by the Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to differences in the nature of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate trends by the Adviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes that use of such contracts will benefit the Portfolios, if the Adviser's investment judgment about the general direction of interest rates is incorrect, a Portfolio's overall performance would be poorer than if it had not entered into any such contract. For example, if a Portfolio has hedged against the possibility of an increase in interest rates which would adversely affect the price of debt securities held in its portfolio and interest rates decrease instead, the Portfolio will lose part or all of the benefit of the increased value of its debt securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if a Portfolio has insufficient cash, it may have to sell debt securities from its portfolio to meet daily variation margin requirements. Such sales of bonds may be, but will not necessarily be, at increased prices which reflect the rising market. A Portfolio may have to sell securities at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. Each Portfolio may purchase and write options on futures contracts for hedging purposes. The purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the price of the futures contract upon which it is based or the price of the underlying debt securities, it may or may not be less risky than ownership of the futures contract or underlying debt securities. As with the purchase of futures contracts, when a Portfolio is not fully invested it may purchase a call option on a futures contract to hedge against a market advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the underlying security or foreign currency which is deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price, a Portfolio will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Portfolio's portfolio holdings. The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the underlying security or foreign currency which is deliverable upon exercise of the futures contract. If the futures price at expiration of the option is higher than the exercise price, the Portfolio will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities which the Portfolio intends to purchase. If a put or call option the Portfolio has written is exercised, the Portfolio will incur a loss which will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Portfolio's losses from existing options on futures may to some extent be reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some respects to the purchase of protective put options on portfolio securities. For example, a Portfolio may purchase a put option on a futures contract to hedge its portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on a futures contract is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased.
The Board of Trustees of each Portfolio has adopted the requirement that futures contracts and options on futures contracts be used as a hedge and may also use stock index futures on continual basis to equitize cash so that the fund may maintain 100% equity exposure. In addition to this requirement, the Board of Trustees of each Portfolio has also adopted a restriction that the Portfolio will not enter into any futures contracts or options on futures contracts if immediately thereafter the amount of margin deposits on all the futures contracts of the Portfolio and premiums paid on outstanding options on futures contracts owned by the Portfolio (other than those entered into for bona fide hedging purposes) would exceed 5% of the market value of the total assets of the Portfolio.
OPTIONS ON FOREIGN CURRENCIES. The EAFE(R) Equity Index Portfolio may purchase and write options on foreign currencies for hedging purposes in a manner similar to that in which futures contracts on foreign currencies, or forward contracts, will be utilized. For example, a decline in the dollar value of a foreign currency in which portfolio securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of portfolio securities, the Portfolio may purchase put options on the foreign currency. If the value of the currency does decline, the Portfolio will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, the EAFE(R) Equity Index Portfolio may purchase call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to the Portfolio deriving from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Portfolio could sustain losses on transactions in foreign currency options which would require it to forego a portion or all of the benefits of advantageous changes in such rates.
The EAFE(R) Equity Index Portfolio may write options on foreign currencies for the same types of hedging purposes. For example, where the Portfolio anticipates a decline in the dollar value of foreign currency denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the options will most likely not be exercised, and the diminution in value of portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the EAFE(R) Equity Index Portfolio could write a put option on the relevant currency which, if rates move in the manner projected, will expire unexercised and allow the Portfolio to hedge such increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Portfolio would be required to purchase or sell the underlying currency at a loss which may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Portfolio also may be required to forego all or a portion of the benefits which might otherwise have been obtained from favorable movements in exchange rates.
The EAFE(R) Equity Index Portfolio intends to write covered call options on foreign currencies. A call option written on a foreign currency by the Portfolio is "covered" if the Portfolio owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by its Custodian) upon conversion or exchange of other foreign currency held in its portfolio. A call option is also covered if the Portfolio has a call on the same foreign currency and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Portfolio in cash, U.S. Government securities and other high quality liquid debt securities in a segregated account with its custodian.
The EAFE(R) Equity Index Portfolio also intends to write call options on foreign currencies that are not covered for cross-hedging purposes. A call option on a foreign currency is for cross-hedging purposes if it is not covered, but is designed to provide a hedge against a decline in the U.S. dollar value of a security which the Portfolio owns or has the right to acquire and which is denominated in the currency underlying the option due to an adverse change in the exchange rate. In such circumstances, the Portfolio collateralizes the option by maintaining in a segregated account with its custodian, cash or U.S. Government securities or other high quality liquid debt securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. Unlike transactions entered into by a Portfolio in futures contracts, options on foreign currencies and forward contracts are not traded on contract markets regulated by the CFTC or (with the exception of certain foreign currency options) by the SEC. To the contrary, such instruments are traded through financial institutions acting as market-makers, although foreign currency options are also traded on certain national securities exchanges such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. Similarly, options on currencies may be traded over-the-counter. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, the option writer and a trader of forward contracts could lose amounts substantially in excess of their initial investments, due to the margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within the jurisdiction of the SEC, as are other securities traded on such exchanges. As a result, many of the protections provided to traders on organized exchanges will be available with respect to such transactions. In particular, all foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting a Portfolio to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of the availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in applicable foreign countries for this purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on the OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies are traded over-the-counter and involve liquidity and credit risks which may not be present in the case of exchange-traded currency options. A Portfolio's ability to terminate over-the-counter options will be more limited than with exchange-traded options. It is also possible that broker-dealers participating in over-the-counter options transactions will not fulfill their obligations. Until such time as the staff of the SEC changes its position, each Portfolio will treat purchased over-the-counter options and assets used to cover written over-the-counter options as illiquid securities. With respect to options written with primary dealers in U.S. Government securities pursuant to an agreement requiring a closing purchase transaction at a formula price, the amount of illiquid securities may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward contracts and options on foreign currencies may be traded on foreign exchanges. Such transactions are subject to the risk of governmental actions affecting trading in or the prices of foreign currencies or securities. The value of such positions also could be adversely affected by: (i) other complex foreign political and economic factors; (ii) lesser availability than in the United States of data on which to make trading decisions; (iii) delays in the Portfolio's ability to act upon economic events occurring in foreign markets during nonbusiness hours in the United States; (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States; and (v) lesser trading volume.
OPTIONS ON SECURITIES. Each Portfolio may write (sell) covered call and put options to a limited extent on its portfolio securities ("covered options") in an attempt to increase income. However, the Portfolio may forgo the benefits of appreciation on securities sold or may pay more than the market price on securities acquired pursuant to call and put options written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser of the option the right to buy the underlying security at the price specified in the option (the "exercise price") by exercising the option at any time during the option period. If the option expires unexercised, the Portfolio will realize income in an amount equal to the premium received for writing the option. If the option is exercised, a decision over which the Portfolio has no control, the Portfolio must sell the underlying security to the option holder at the exercise price. By writing a covered call option, the Portfolio forgoes, in exchange for the premium less the commission ("net premium"), the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser of the option the right to sell the underlying security to the Portfolio at the specified exercise price at any time during the option period. If the option expires unexercised, the Portfolio will realize income in the amount of the premium received for writing the option. If the put option is exercised, a decision over which the Portfolio has no control, the Portfolio must purchase the underlying security from the option holder at the exercise price. By writing a covered put option, the Portfolio, in exchange for the net premium received, accepts the risk of a decline in the market value of the underlying security below the exercise price. The Portfolio will only write put options involving securities for which a determination is made at the time the option is written that the Portfolio wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or put option by purchasing an option with the same exercise price and expiration date as the option previously written. This transaction is called a "closing purchase transaction." The Portfolio will realize a profit or loss for a closing purchase transaction if the amount paid to purchase an option is less or more, as the case may be, than the amount received from the sale thereof. To close out a position as a purchaser of an option, the Portfolio, may make a "closing sale transaction" which involves liquidating the Portfolio's position by selling the option previously purchased. Where the Portfolio cannot effect a closing purchase transaction, it may be forced to incur brokerage commissions or dealer spreads in selling securities it receives or it may be forced to hold underlying securities until an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium received by the Portfolio is included in the liability section of the Portfolio's Statement of Assets and Liabilities as a deferred credit. The amount of the deferred credit will be subsequently marked to market to reflect the current market value of the option written. The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. If an option expires on its stipulated expiration date or if the Portfolio enters into a closing purchase transaction, the Portfolio will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold), and the deferred credit related to such option will be eliminated. If a call option is exercised, the Portfolio will realize a gain or loss from the sale of the underlying security and the proceeds of the sale will be increased by the premium originally received. The writing of covered call options may be deemed to involve the pledge of the securities against which the option is being written. Securities against which call options are written will be segregated on the books of the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in which it may invest. The Portfolio would normally purchase a call option in anticipation of an increase in the market value of such securities. The purchase of a call option would entitle the Portfolio, in exchange for the premium paid, to purchase a security at a specified price during the option period. The Portfolio would ordinarily have a gain if the value of the securities increased above the exercise price sufficiently to cover the premium and would have a loss if the value of the securities remained at or below the exercise price during the option period.
A Portfolio would normally purchase put options in anticipation of a decline in the market value of securities in its portfolio ("protective puts") or securities of the type in which it is permitted to invest. The purchase of a put option would entitle the Portfolio, in exchange for the premium paid, to sell a security, which may or may not be held in the Portfolio's portfolio, at a specified price during the option period. The purchase of protective puts is designed merely to offset or hedge against a decline in the market value of the Portfolio's portfolio securities. Put options also may be purchased by the Portfolio for the purpose of affirmatively benefiting from a decline in the price of securities which the Portfolio does not own. The Portfolio would ordinarily recognize a gain if the value of the securities decreased below the exercise price sufficiently to cover the premium and would recognize a loss if the value of the securities remained at or above the exercise price. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of underlying portfolio securities.
Each Portfolio has adopted certain other nonfundamental policies concerning option transactions which are discussed below. The Portfolio's activities in options may also be restricted by the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying securities markets that cannot be reflected in the option markets. It is impossible to predict the volume of trading that may exist in such options, and there can be no assurance that viable exchange markets will develop or continue.
A Portfolio may engage in over-the-counter options transactions with broker-dealers who make markets in these options. At present, approximately ten broker-dealers, including several of the largest primary dealers in U.S. Government securities, make these markets. The ability to terminate over-the-counter option positions is more limited than with exchange-traded option positions because the predominant market is the issuing broker rather than an exchange, and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. To reduce this risk, the Portfolio will purchase such options only from broker-dealers who are primary government securities dealers recognized by the Federal Reserve Bank of New York and who agree to (and are expected to be capable of) entering into closing transactions, although there can be no guarantee that any such option will be liquidated at a favorable price prior to expiration. The Adviser will monitor the creditworthiness of dealers with whom the Portfolio enters into such options transactions under the general supervision of the Portfolios' Trustees.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, each Portfolio may also purchase and write (sell) call and put options on securities indices. Such options give the holder the right to receive a cash settlement during the term of the option based upon the difference between the exercise price and the value of the index. Such options will be used for the purposes described above under "Options on Securities."
EAFE(R) Equity Index Portfolio may, to the extent allowed by Federal and state securities laws, invest in securities indices instead of investing directly in individual foreign securities.
Options on securities indices entail risks in addition to the risks of options on securities. The absence of a liquid secondary market to close out options positions on securities indices is more likely to occur, although the Portfolio generally will only purchase or write such an option if the Adviser believes the option can be closed out.
Use of options on securities indices also entails the risk that trading in such options may be interrupted if trading in certain securities included in the index is interrupted. The Portfolio will not purchase such options unless the Adviser believes the market is sufficiently developed such that the risk of trading in such options is no greater than the risk of trading in options on securities.
Price movements in a Portfolio's portfolio may not correlate precisely with movements in the level of an index and, therefore, the use of options on indices cannot serve as a complete hedge. Because options on securities indices require settlement in cash, the Adviser may be forced to liquidate portfolio securities to meet settlement obligations.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because each Portfolio may buy and sell securities denominated in currencies other than the U.S. dollar and receives interest, dividends and sale proceeds in currencies other than the U.S. dollar, each Portfolio from time to time may enter into foreign currency exchange transactions to convert to and from different foreign currencies and to convert foreign currencies to and from the U.S. dollar. A Portfolio either enters into these transactions on a spot (I.E., cash) basis at the spot rate prevailing in the foreign currency exchange market or uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Portfolio to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract. Forward foreign currency exchange contracts establish an exchange rate at a future date. These contracts are transferable in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward foreign currency exchange contract generally has no deposit requirement and is traded at a net price without commission. Each Portfolio maintains with its custodian a segregated account of high grade liquid assets in an amount at least equal to its obligations under each forward foreign currency exchange contract. Neither spot transactions nor forward foreign currency exchange contracts eliminate fluctuations in the prices of the Portfolio's securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline.
Each Portfolio may enter into foreign currency hedging transactions in an attempt to protect against changes in foreign currency exchange rates between the trade and settlement dates of specific securities transactions or changes in foreign currency exchange rates that would adversely affect a portfolio position or an anticipated investment position. Since consideration of the prospect for currency parities will be incorporated into
Bankers Trust's long-term investment decisions, a Portfolio will not routinely enter into foreign currency hedging transactions with respect to security transactions; however, Bankers Trust believes that it is important to have the flexibility to enter into foreign currency hedging transactions when it determines that the transactions would be in the Portfolio's best interest. Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of such securities between the date the forward contract is entered into and the date it matures. The projection of currency market movements is extremely difficult, and the successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may in the future assert authority to regulate forward contracts. In such event the Portfolio's ability to utilize forward contracts in the manner set forth in the Prospectus may be restricted. Forward contracts may reduce the potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Portfolio than if it had not entered into such contracts. The use of foreign currency forward contracts may not eliminate fluctuations in the underlying U.S. dollar equivalent value of the prices of or rates of return on a Portfolio's foreign currency denominated portfolio securities and the use of such techniques will subject a Portfolio to certain risks.
The matching of the increase in value of a forward contract and the decline in the U.S. dollar equivalent value of the foreign currency denominated asset that is the subject of the hedge generally will not be precise. In addition, a Portfolio may not always be able to enter into foreign currency forward contracts at attractive prices and this will limit the Portfolio's ability to use such contract to hedge or cross-hedge its assets. Also, with regard to a Portfolio's use of cross-hedges, there can be no assurance that historical correlations between the movement of certain foreign currencies relative to the U.S. dollar will continue. Thus, at any time poor correlation may exist between movements in the exchange rates of the foreign currencies underlying a Portfolio's cross-hedges and the movements in the exchange rates of the foreign currencies in which the Portfolio's assets that are the subject of such cross-hedges are denominated.
The ratings of rating services represent their opinions as to the quality of the securities that they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and are not absolute standards of quality. Although these ratings are an initial criterion for selection of portfolio investments, Bankers Trust also makes its own evaluation of these securities, subject to review by the Board of Trustees. After purchase by a Portfolio, an obligation may cease to be rated or its rating may be reduced below the minimum required for purchase by the Portfolio. Neither event would require a Fund to eliminate the obligation from its portfolio, but Bankers Trust will consider such an event in its determination of whether a Fund should continue to hold the obligation. A description of the ratings used herein and in the Funds' Prospectus is set forth in Appendix A herein.
The following investment restrictions are "fundamental policies" of each Fund and each Portfolio and may not be changed with respect to the Fund or the Portfolio without the approval of a "majority of the outstanding voting securities" of the Fund or the Portfolio, as the case may be. "Majority of the outstanding voting securities" under the 1940 Act, and as used in this Statement of Additional Information and the Prospectus, means, with respect to the Fund (or the Portfolio), the lesser of (i) 67% or more of the outstanding voting securities of the Fund (or of the total beneficial interests of the Portfolio) present at a meeting, if the holders of more than 50% of the outstanding voting securities of the Fund or of the total beneficial interests of the Portfolio) are present or represented by proxy or (ii) more than 50% of the outstanding voting securities of the Fund (or of the total beneficial interests of the Portfolio). Whenever the Trust is requested to vote on a fundamental policy of a Portfolio, the Trust will hold a meeting of the corresponding Fund's shareholders and will cast its vote as instructed by that Fund's shareholders. Fund shareholders who do not vote will not affect the Trust's votes at the Portfolio meeting. The percentage of the Trust's votes representing Fund shareholders not voting will be voted by the Trustees of the Trust in the same proportion as the Fund shareholders who do, in fact, vote.
As a matter of fundamental policy, no Portfolio (or Fund) may (except that no investment restriction of a Fund shall prevent a Fund from investing all of its Assets in an open-end investment company with substantially the same investment objectives):
(1) borrow money or mortgage or hypothecate assets of the Portfolio (Fund), except that in an amount not to exceed 1/3 of the current value of the Portfolio's (Fund's) assets, it may borrow money as a temporary measure for extraordinary or emergency purposes and enter into reverse repurchase agreements or dollar roll transactions, and except that it may pledge, mortgage or hypothecate not more than 1/3 of such assets to secure such borrowings (it is intended that money would be borrowed only from banks and only either to accommodate requests for the withdrawal of beneficial interests (redemption of shares) while effecting an orderly liquidation of portfolio securities or to maintain liquidity in the event of an unanticipated failure to complete a portfolio security transaction or other similar situations) or reverse repurchase agreements, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered a pledge of assets for purposes of this restriction and except that assets may be pledged to secure letters of credit solely for the purpose of participating in a captive insurance company sponsored by the Investment Company Institute; for additional related restrictions, see clause (i) under the caption "State and Federal Restrictions" below (as an operating policy, the Portfolios may not engage in dollar roll
(2) underwrite securities issued by other persons except insofar as the Portfolios (Trust or the Funds) may technically be deemed an underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the Portfolio's (Fund's) portfolio securities and provided that any such loans not exceed 30% of the Portfolio's (Fund's) total assets (taken at market value); (b) through the use of repurchase agreements or the purchase of short-term obligations; or (c) by purchasing a portion of an issue of debt securities of types distributed publicly or privately (under current regulations, the Portfolio's (Fund's) fundamental policy with respect to 20% risk weighing for financial institutions prevent the Portfolio (Fund) from engaging in securities
(4) purchase or sell real estate (including limited partnership interests but excluding securities secured by real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (except futures and option contracts) in the ordinary course of business (except that the Portfolio (Trust) may hold and sell, for the Portfolio's (Fund's) portfolio, real estate acquired as a result of the Portfolio's (Fund's)
(5) concentrate its investments in any particular industry (excluding U.S. Government securities), but if it is deemed appropriate for the achievement of a Portfolio's (Fund's) investment objective(s), up to 25% of its total assets may be invested in any one industry; and
(6) issue any senior security (as that term is defined in the 1940 Act) if such issuance is specifically prohibited by the 1940 Act or the rules and regulations promulgated thereunder, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and margin, are not considered to be the issuance of a senior security for purposes of this restriction.
STATE AND FEDERAL RESTRICTIONS. In order to comply with certain state and Federal statutes and policies each Portfolio (or the Trust, on behalf of each Fund) will not as a matter of operating policy (except that no operating policy shall prevent a Fund from investing all of its Assets in an open-end investment company with substantially the same investment objectives):
(i) borrow money (including through reverse repurchase or forward roll transactions) for any purpose in excess of 5% of the Portfolio's (Fund's) total assets (taken at cost), except that the Portfolio (Fund) may borrow for temporary or emergency purposes up to 1/3 of
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of the Portfolio's (Fund's) total assets (taken at market value), provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, and reverse repurchase agreements are not considered a pledge of assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin, except that such short-term credit as may be necessary for the clearance of purchases and sales of securities may be obtained and except that deposits of initial deposit and variation margin may be made in connection with the purchase, ownership, holding or sale
(iv) sell securities it does not own such that the dollar amount of such short sales at any one time exceeds 25% of the net equity of the Portfolio (Fund), and the value of securities of any one issuer in which the Portfolio (Fund) is short exceeds the lesser of 2.0% of the value of the Portfolio's (Fund's) net assets or 2.0% of the securities of any class of any U.S. issuer and, provided that short sales may be made only in those securities which are fully listed on a national securities exchange or a foreign exchange (This provision does not include the sale of securities of the Portfolio (Fund) contemporaneously owns or has the right to obtain securities equivalent in kind and amount to those sold, i.e., short sales against the box.) (the Portfolios (Funds) have no current intention to engage in short selling);
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, or except when such purchase, though not made in the open market, is part of a plan of merger or consolidation; provided, however, that securities of any investment company will not be purchased for the Portfolio (Fund) if such purchase at the time thereof would cause: (a) more than 10% of the Portfolio's (Fund's) total assets (taken at the greater of cost or market value) to be invested in the securities of such issuers; (b) more than 5% of the Portfolio's (Fund's) total assets (taken at the greater of cost or market value) to be invested in any one investment company; or (c) more than 3% of the outstanding voting securities of any such issuer to be held for the Portfolio (Fund); provided further that, except in the case of a merger or consolidation, the Portfolio (Fund) shall not purchase any securities of any open-end investment company unless the Portfolio (Fund) (1) waives the investment advisory fee with respect to assets invested in other open-end investment companies and (2) incurs no sales charge in connection with the investment;
(vii) invest more than 10% of the Portfolio's (Fund's) total assets (taken at the greater of cost or market value) in securities (excluding Rule 144A securities) that are restricted as to resale
(viii) invest more than 15% of the Portfolio's (Fund's) total assets (taken at the greater of cost or market value) in (a) securities (including Rule 144A securities) that are restricted as to resale under the 1933 Act, and (b) securities that are issued by issuers which (including predecessors) have been in operation less than three years (other than U.S. Government securities), provided, however, that no more than 5% of the Portfolio's (Fund's) total assets are invested in securities issued by issuers which (including predecessors) have been in operation less than three years;
(ix) with respect to 75% of the Portfolio's (Fund's) total assets, purchase securities of any issuer if such purchase at the time thereof would cause the Portfolio (Fund) to hold more than 10% of any class of securities of such issuer, for which purposes all indebtedness of an issuer shall be deemed a single class and all preferred stock of an issuer shall be deemed a single class, except that futures or option contracts shall not be subject to this
(x) with respect to 75% of its assets, invest more than 5% of its total assets in the securities (excluding U.S. Government securities)
(xi) invest in securities issued by an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Portfolio (Trust), or is an officer or partner of the Adviser, if after the purchase of the securities of such issuer for the Portfolio (Fund) one or more of such persons owns beneficially more than 1/2 of 1% of the shares or securities, or both, all taken at market value, of such issuer, and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, all taken at market value;
(xii) invest in warrants (other than warrants acquired by the Portfolio (Fund) as part of a unit or attached to securities at the time of purchase) if, as a result, the investments (valued at the lower of cost or market) would exceed 5% of the value of the Portfolio's (Fund's) net assets or if, as a result, more than 2% of the Portfolio's (Fund's) net assets would be invested in warrants not listed on a recognized United States or foreign stock exchange, to the extent permitted by applicable state securities laws;
(xiii) write puts and calls on securities unless each of the following conditions are met: (a) the security underlying the put or call is within the Investment Practices of the Portfolio (Fund) and the option is issued by the Options Clearing Corporation, except for put and call options issued by non-U.S. entities or listed on non-U.S. securities or commodities exchanges; (b) the aggregate value of the obligations underlying the puts determined as of the date the options are sold shall not exceed 5% of the Portfolio's (Fund's) net assets; (c) the securities subject to the exercise of the call written by the Portfolio (Fund) must be owned by the Portfolio (Fund) at the time the call is sold and must continue to be owned by the Portfolio (Fund) until the call has been exercised, has lapsed, or the Portfolio (Fund) has purchased a closing call, and such purchase has been confirmed, thereby extinguishing the Portfolio's (Fund's) obligation to deliver securities pursuant to the call it has sold; and (d) at the time a put is written, the Portfolio (Fund) establishes a segregated account with its custodian consisting of cash or short-term U.S. Government securities equal in value to the amount the Portfolio (Fund) will be obligated to pay upon exercise of the put (this account must be maintained until the put is exercised, has expired, or the Portfolio (Fund) has purchased a closing put, which is a put of the same series as the one previously written); and
(xiv) buy and sell puts and calls on securities, stock index futures or options on stock index futures, or financial futures or options on financial futures unless such options are written by other persons and: (a) the options or futures are offered through the facilities of a national securities association or are listed on a national securities or commodities exchange, except for put and call options issued by non-U.S. entities or listed on non-U.S. securities or commodities exchanges; (b) the aggregate premiums paid on all such options which are held at any time do not exceed 20% of the Portfolio's (Fund's) total net assets; and (c) the aggregate margin deposits required on all such futures or options thereon held at any time do not exceed 5% of the Portfolio's (Fund's) total assets.
There will be no violation of any investment restriction if that restriction is complied with at the time the relevant action is taken notwithstanding a later change in market value of an investment, in net or total assets, in the securities rating of the investment, or any other later change.
Each Fund will comply with the state securities laws and regulations of all states in which it is registered. Each Portfolio will comply with the permitted investments and investment limitations in the securities laws and regulations of all states in which the corresponding Fund, or any other registered investment company investing in the Portfolio, is registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities, futures contracts and options on such securities and futures for each Portfolio, the selection of brokers, dealers and futures commission merchants to effect transactions and the negotiation of brokerage commissions, if any. Broker-dealers may receive brokerage commissions on portfolio transactions, including options, futures and options on futures transactions and the purchase and sale of underlying securities upon the exercise of options. Orders may be directed to any broker-dealer or futures commission merchant, including to the extent and in the manner permitted by applicable law, Bankers Trust or its subsidiaries or affiliates. Purchases and sales of certain portfolio securities on behalf of a Portfolio are frequently placed by the Adviser with the issuer or a primary or secondary market-maker for these securities on a net basis, without any brokerage commission being paid by the Portfolio. Trading does, however, involve transaction costs. Transactions with dealers serving as market-makers reflect the spread between the bid and asked prices. Transaction costs may also include fees paid to third parties for information as to potential purchasers or sellers of securities. Purchases of underwritten issues may be made which will include an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage commissions paid (to the extent applicable) in placing orders for the purchase and sale of securities for a Portfolio taking into account such factors as price, commission (negotiable in the case of national securities exchange transactions), if any, size of order, difficulty of execution and skill required of the executing broker-dealer through familiarity with commissions charged on comparable transactions, as well as by comparing commissions paid by the Portfolio to reported commissions paid by others. The Adviser reviews on a routine basis commission rates, execution and settlement services performed, making internal and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the Securities Exchange Act of 1934, as amended, when placing portfolio transactions for a Portfolio with a broker to pay a brokerage commission (to the extent applicable) in excess of that which another broker might have charged for effecting the same transaction on account of the receipt of research, market or statistical information. The term "research, market or statistical information" includes advice as to the value of securities; the advisability of investing in, purchasing or selling securities; the availability of securities or purchasers or sellers of securities; and furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the National Association of Securities Dealers, Inc. and such other policies as the Trustees of the Portfolio may determine, the Adviser may consider sales of shares of the Trust and of other investment company clients of Bankers Trust as a factor in the selection of broker-dealers to execute portfolio transactions. Bankers Trust will make such allocations if commissions are comparable to those charged by nonaffiliated, qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide research services to the extent permitted by law. Bankers Trust may use this research information in managing each Portfolio's assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is no intention to place portfolio transactions with particular brokers or dealers or groups thereof. In effecting transactions in over-the-counter securities, orders are placed with the principal market-makers for the security being traded unless, exercising care, it appears that more favorable results are available otherwise.
Although certain research, market and statistical information from brokers and dealers can be useful to a Portfolio and to the Adviser, it is the opinion of the management of the Portfolios that such information is only supplementary to the Adviser's own research effort, since the information must still be analyzed, weighed and reviewed by the Adviser's staff. Such information may be useful to the Adviser in providing services to clients other than the Portfolios, and not all such information is used by the Adviser in connection with the Portfolios. Conversely, such information provided to the Adviser by brokers and dealers through whom other clients of the Adviser effect securities transactions may be useful to the Adviser in providing services to the Portfolios.
In certain instances there may be securities which are suitable for a Portfolio as well as for one or more of the Adviser's other clients. Investment decisions for a Portfolio and for the Adviser's other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as a Portfolio is concerned. However, it is believed that the ability of a Portfolio to participate in volume transactions will produce better executions for the Portfolio.
For the years ended December 31, 1994 and 1993, Equity 500 Index Portfolio paid brokerage commissions in the amount of $97,069 and $63,408, respectively.
From time to time, quotations of a Fund's performance may be included in advertisements, sales literature or shareholder reports. These performance figures are calculated in the following manner:
YIELD: Yields for a Fund used in advertising are computed by dividing the Fund's interest and dividend income for a
given 30-day or one-month period, net of expenses, by the average number of shares entitled to receive distributions during the period, dividing this figure by the Fund's net asset value per share at the end of the period, and annualizing the result (assuming compounding of income) in order to arrive at an annual percentage rate. Income is calculated for purpose of yield quotations in accordance with standardized methods applicable to all stock and bond mutual funds. Dividends from equity investments are treated as if they were accrued on a daily basis, solely for the purpose of yield calculations. In general, interest income is reduced with respect to bonds trading at a premium over their par value by subtracting a portion of the premium from income on a daily basis, and is increased with respect to bonds trading at a discount by adding a portion of the discount to daily income. Capital gains and losses generally are excluded from the calculation.
Income calculated for the purposes of calculating a Fund's yield differs from income as determined for other accounting purposes. Because of the different accounting methods used, and because of the compounding assumed in yield calculations, the yield quoted for a Fund may differ from the rate of distributions of the Fund paid over the same period or the rate of income reported in the Fund's financial statements.
TOTAL RETURN: A Fund's average annual total return is calculated for certain periods by determining the average annual compounded rates of return over those periods that would cause an investment of $1,000 (made at the maximum public offering price with all distributions reinvested) to reach the value of that investment at the end of the periods. A Fund may also calculate total return figures which represent aggregate performance over a period or year-by-year performance.
PERFORMANCE RESULTS: Any total return quotation provided for a Fund should not be considered as representative of the performance of the Fund in the future since the net asset value and public offering price of shares of the Fund will vary based not only on the type, quality and maturities of the securities held in the corresponding Portfolio, but also on changes in the current value of such securities and on changes in the expenses of the Fund and the corresponding Portfolio. These factors and possible differences in the methods used to calculate total return should be considered when comparing the total return of a Fund to total returns published for other investment companies or other investment vehicles. Total return reflects the performance of both principal and income.
Comparison of the quoted nonstandardized performance of various investments is valid only if performance is calculated in the same manner. Since there are different methods of calculating performance, investors should consider the effect of the methods used to calculate performance when comparing performance of a Fund with performance quoted with respect to other investment companies or types of investments.
In connection with communicating its performance to current or prospective shareholders, a Fund also may compare these figures to the performance of other mutual funds tracked by mutual fund rating services or to unmanaged indices which may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs.
Evaluations of a Fund's performance made by independent sources may also be used in advertisements concerning the Fund. Sources for a Fund's performance information could include the following:
ASIAN WALL STREET JOURNAL, a weekly Asian newspaper that often reviews U.S. mutual funds investing internationally.
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that periodically reviews mutual fund performance data.
BUSINESS WEEK, a national business weekly that periodically reports the performance rankings and ratings of a variety of mutual funds investing abroad.
CHANGING TIMES, THE KIPLINGER MAGAZINE, a monthly investment advisory publication that periodically features the performance of a variety of securities.
CONSUMER DIGEST, a monthly business/financial magazine that includes a "Money Watch" section featuring financial news.
FINANCIAL TIMES, Europe's business newspaper, which features from time to time articles on international or country-specific funds.
FINANCIAL WORLD, a general business/financial magazine that includes a "Market Watch" department reporting on activities in the mutual fund industry.
FORBES, a national business publication that from time to time reports the performance of specific investment companies in the mutual fund industry.
FORTUNE, a national business publication that periodically rates the performance of a variety of mutual funds.
GLOBAL INVESTOR, a European publication that periodically reviews the performance of U.S. mutual funds investing internationally.
INVESTOR'S DAILY, a daily newspaper that features financial,
LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a weekly publication of industry-wide mutual fund averages by type of fund.
MONEY, a monthly magazine that from time to time features both specific funds and the mutual fund industry as a whole.
MORNINGSTAR INC., a publisher of financial information and mutual fund research.
NEW YORK TIMES, a nationally distributed newspaper which regularly covers financial news.
PERSONAL INVESTING NEWS, a monthly news publication that often reports on investment opportunities and market conditions.
PERSONAL INVESTOR, a monthly investment advisory publication that includes a "Mutual Funds Outlook" section reporting on mutual fund performance measures, yields, indices and portfolio holdings.
SUCCESS, a monthly magazine targeted to the world of entrepreneurs and growing business, often featuring mutual fund performance data.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically reports mutual fund performance data.
VALUE LINE, a biweekly publication that reports on the largest 15,000 mutual funds.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which regularly covers financial news.
WEISENBERGER INVESTMENT COMPANIES SERVICES, an annual compendium of information about mutual funds and other investment companies, including comparative data on funds' backgrounds, management policies, salient features, management results, income and dividend records, and price ranges.
WORKING WOMEN, a monthly publication that features a "Financial Workshop" section reporting on the mutual fund/financial industry.
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations maturing in 60 days or less), including listed securities and securities for which price quotations are available, will normally be valued on the basis of market valuations furnished by a pricing service. Short-term debt obligations and money market securities maturing in 60 days or less are valued at amortized cost, which approximates market.
Securities for which market quotations are not available are valued by Bankers Trust pursuant to procedures adopted by each Portfolio's Board of Trustees. It is generally agreed that securities for which market quotations are not readily available should not be valued at the same value as that carried by an equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are recognized in the codification effected by SEC Financial Reporting Release No. 1 ("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that there is "no automatic formula" for calculating the value of restricted securities. It recommends that the best method simply is to consider all relevant factors before making any calculation. According to FRR 1 such factors would include consideration of the:
type of security involved, financial statements, cost at date of purchase, size of holding, discount from market value of unrestricted securities of the same class at the time of purchase, special reports prepared by analysts, information as to any transactions or offers with respect to the security, existence of merger proposals or tender offers affecting the security, price and extent of public trading in similar securities of the issuer or comparable companies, and other relevant matters.
To the extent that a Portfolio purchases securities which are restricted as to resale or for which current market quotations are not available, the Adviser of the Portfolio will value such securities based upon all relevant factors as outlined in FRR 1.
The Trust, on behalf of each Fund, and each Portfolio reserve the right, if conditions exist which make cash payments undesirable, to honor any request for redemption or repurchase order by making payment in whole or in part in readily marketable securities chosen by the Trust, or the Portfolio, as the case may be, and valued as they are for purposes of computing the Fund's or the Portfolio's net asset value, as the case may be (a redemption in kind). If payment is made to a Fund shareholder in securities, an investor, including the Fund, the shareholder may incur transaction expenses in converting these securities into cash. The Trust, on behalf of each Fund, and each Portfolio have elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of which each Fund and each Portfolio are obligated to redeem shares or beneficial interests, as the case may be, with respect to any one investor during any 90-day period, solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund or the Portfolio, as the case may be, at the
Each Portfolio has agreed to make a redemption in kind to the corresponding Fund whenever the Fund wishes to make a redemption in kind and therefore shareholders of the Fund that receive redemptions in kind will receive portfolio securities of the corresponding Portfolio and in no case will they receive a security issued by the Portfolio. The Portfolio has advised the Trust that the Portfolio will not redeem in kind except in circumstances in which the Fund is permitted to redeem in kind or unless requested by the Fund.
Each investor in a Portfolio, including the corresponding Fund, may add to or reduce its investment in the Portfolio on each day the Portfolio determines its net asset value. At the close of each such business day, the value of each investor's beneficial interest in the Portfolio will be determined by multiplying the net asset value of the Portfolio by the percentage, effective for that day, which represents that investor's share of the aggregate beneficial interests in the Portfolio. Any additions or withdrawals which are to be effected as of the close of business on that day will then be effected. The investor's percentage of the aggregate beneficial interests in the Portfolio will then be recomputed as the percentage equal to the fraction (i) the numerator of which is the value of such investor's investment in the Portfolio as of the close of business on such day plus or minus, as the case may be, the amount of net additions to or withdrawals from the investor's investment in the Portfolio effected as of the close of business on such day, and (ii) the denominator of which is the aggregate net asset value of the Portfolio as of the close of business on such day plus or minus, as the case may be, the amount of net additions to or withdrawals from the aggregate investments in the Portfolio by all investors in the Portfolio. The percentage so determined will then be applied to determine the value of the investor's interest in the Portfolio as the close of business on the following business day.
Each Fund may, at its own option, accept securities in payment for shares. The securities delivered in payment for shares are valued by the method described under "Net Asset Value" as of the day the Fund receives the securities. This is a taxable transaction to the shareholder. Securities may be accepted in payment for shares only if they are, in the judgment of Bankers Trust, appropriate investments for the Fund's corresponding Portfolio. In addition, securities accepted in payment for shares must: (i) meet the investment objective and policies of the acquiring Fund's corresponding Portfolio; (ii) be acquired by the applicable Fund for investment and not for resale (other than for resale to the Fund's corresponding Portfolio); (iii) be liquid securities which are not restricted as to transfer either by law or liquidity of market; and (iv) if stock, have a value which is readily ascertainable as evidenced by a listing on a stock exchange, over-the-counter market or by readily available market quotations from a dealer in such securities. When securities are used as payment for shares or as a redemption in kind from the fund, the transaction fee will not be assessed. However, the shareholder will be charged the costs associated with receiving or delivering the securities. These costs include security movement costs and taxes and registration costs. Each Fund reserves the right to accept or reject at its own option any and all securities offered in payment for its shares.
MANAGEMENT OF THE TRUST AND THE PORTFOLIOS
Each Board of Trustees is composed of persons experienced in financial matters who meet throughout the year to oversee the activities of the Funds or Portfolios they represent. In addition, the Trustees review contractual arrangements with companies that provide services to the Funds/Portfolios and review the Funds' performance.
The Trustees and officers of the Trusts and Portfolios and their principal occupations during the past five years are set forth below. Their titles may have varied during that period. Asterisks indicate those Trustees who are "interested persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated, the address of each Trustee and officer is 6 St. James Avenue, Boston, Massachusetts.
TRUSTEES OF THE BT ADVISOR FUNDS
HARRY VAN BENSCHOTEN -- Trustee; retired (since 1987); Corporate Vice President, Newmont Mining Corporation (prior to 1987); Director, Canada Life Insurance Company of New York and Competitive Technologies, Inc., a public company listed on the American Stock Exchange. His address is 6581 Ridgewood Drive, Naples, Florida 33963.
PHILIP W. COOLIDGE* -- President and Trustee; Chairman, Chief Executive Officer and President, Signature Financial Group, Inc. ("SFG") (since December, 1988) and Signature (since April, 1989).
MARTIN J. GRUBER -- Trustee; Chairman of the Finance Department and Nomura Professor of Finance, Leonard N. Stern School of Business, New York University (since 1964).
BRUCE E. LANGTON -- Trustee; Retired; Director, Adela Investment Co. and University Patents, Inc.; formerly Assistant Treasurer of IBM Corporation (until 1986). His address is 99 Jordan Lane, Stamford, Connecticut 06903.
TRUSTEES OF BT PYRAMID MUTUAL FUNDS
HARRY VAN BENSCHOTEN -- Trustee; retired (since 1987); Corporate Vice President, Newmont Mining Corporation (prior to 1987); Director, Canada Life Insurance Company of New York and
Competitive Technologies, Inc., a public company listed on the American Stock Exchange. His address is 6581 Ridgewood Drive, Naples, Florida 33963.
MARTIN J. GRUBER -- Trustee; Chairman of the Finance Department and Nomura Professor of Finance, Leonard N. Stern School of Business, New York University (since 1964).
KELVIN J. LANCASTER -- Trustee; Professor, Department of Economics, Columbia University. His address is 35 Claremont Avenue, New York, New York 10027.
PHILIP W. COOLIDGE* -- President and Trustee; Chairman, Chief Executive Officer and President, SFG (since December, 1988) and Signature (since April, 1989).
PHILIP SAUNDERS, JR. -- Trustee; Principal, Philip Saunders Associates (Consulting); former Director of Financial Industry Consulting, Wolf & Company; President, John Hancock Home Mortgage Corporation; and Senior Vice President of Treasury and Financial Services, John Hancock Mutual Life Insurance Company, Inc. His address is 445 Glen Road, Weston, Massachusetts 02193.
CHARLES P. BIGGAR -- Trustee; Retired; Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill Richards Inc.; formerly Vice President of International Business Machines and President of the National Services and the Field Engineering Divisions of IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
S. LELAND DILL -- Trustee; Retired; Director, Coutts & Co. Group, Coutts & Co. (U.S.A.) International; Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick; Director, Vinters International Company Inc.; General Partner of Pemco (an investment company registered under the 1940 Act). His address is 5070 North Ocean Drive, Singer Island, Florida 33404.
RICHARD J. HERRING -- Trustee; Professor, Finance Department, The Wharton School, University of Pennsylvania. His address is The Wharton School, University of Pennsylvania Finance Department, 3303 Steinberg Hall/Dietrich Hall, Philadelphia, Pennsylvania 19104.
PHILIP W. COOLIDGE* -- President and Trustee; Chairman, Chief Executive Officer and President, SFG (since December, 1988) and Signature (since April, 1989).
OFFICERS OF THE TRUSTS AND PORTFOLIOS
Unless otherwise specified, each officer listed below holds the same position with each Trust and each Portfolio.
JOHN R. ELDER - Treasurer; Vice President, SFG (since April, 1995); Treasurer, Phoenix Family of Mutual Funds (prior to April, 1995); Audit Manager, Price Waterhouse (prior to 1983).
DAVID G. DANIELSON -- Assistant Treasurer; Assistant Manager, SFG (since May, 1991); Graduate Student, Northeastern University (from April, 1990 to March, 1991); Tax Accountant & Systems Analyst, Putnam Companies (prior to March, 1990). JAMES S. LELKO, JR. -- Assistant Treasurer; Assistant Manager, SFG (since January 1993); Senior Tax Compliance Accountant, Putnam Investments (prior to December 1992).
BARBARA M. O'DETTE -- Assistant Treasurer; Assistant Treasurer, SFG (since December, 1988) and Signature (since April, 1989); Administrative Controller, Massachusetts Financial Services Company (prior to December, 1988).
DANIEL E. SHEA -- Assistant Treasurer; Assistant Manager, SFG (since November 1993); Supervisor and Senior Technical Advisor, Putnam Investments (prior to November 1993).
THOMAS M. LENZ -- Secretary; Vice President and Associate General Counsel, SFG (since November, 1989); Assistant Secretary, Signature (since February, 1991); Attorney, Ropes & Gray (prior to November, 1989).
LINDA T. GIBSON -- Assistant Secretary; Legal Counsel and Assistant Secretary, SFG (since May, 1992); Assistant Secretary, Signature (since October, 1992); student, Boston University School of Law (September, 1989 to May, 1992); Product Manager, SFG (January, 1989 to September, 1989).
MOLLY S. MUGLER -- Assistant Secretary; Legal Counsel and Assistant Secretary, SFG (since December, 1988); Assistant Secretary, Signature (since April, 1989).
ANDRES E. SALDANA -- Assistant Secretary; Legal Counsel, SFG (since November, 1992); Assistant Secretary, Signature (since September, 1993); Attorney, Ropes & Gray (September, 1990 to November, 1992); law student, Yale Law School (September, 1987 to May, 1990).
Messrs. Coolidge, Danielson, Elder, Lelko, Lenz, Saldana and Shea and Mss. Gibson, Mugler and O'Dette also hold similar positions for other investment companies for which Signature or an affiliate serves as the principal underwriter.
No person who is an officer or director of Bankers Trust is an officer or Trustee of the Trusts or the Portfolios. No director, officer or employee of Signature or any of its affiliates will receive any compensation from the Trusts or the Portfolios for serving as an officer or Trustee of the Trusts or the Portfolios. Each Portfolio and International Equity, Capital Appreciation,
Cash Management, Treasury Money, Tax Free Money, NY Tax Free Money, Utility, Short/Intermediate U.S. Government Securities, Intermediate Tax Free, Asset Management and BT Investment Portfolios (together with the Trusts, the "Fund Complex") collectively pay each Trustee who is not a director, officer or employee of the Adviser, the Distributor, the Administrator or any of their affiliates an annual fee of $10,000, respectively, per annum plus $1,250, respectively, per meeting attended and reimburses them for travel and out-of-pocket expenses.
For the year ended December 31, 1994, the BT Investment Equity 500 Index Fund accrued Trustees fees equal to $2,059. For the year ended December 31, 1994, the Equity 500 Index Portfolio accrued Trustees fees of $2,059.
Bankers Trust reimbursed the BT Investment Equity 500 Index Fund and Equity 500 Index Portfolio for a portion of its their Trustees fees for the period above. See "Investment Adviser" and "Administrator" below.
As of January 5, 1996, the Trustees and officers of the Trusts and the Portfolios owned in the aggregate less than 1% of the shares of any Fund or Trust (all series taken together).
Under the terms of each Portfolio's investment advisory agreement with Bankers Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio subject to the supervision and direction of the Board of Trustees of the Portfolio. Bankers Trust will: (i) act in strict conformity with each Portfolio's Declaration of Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may from time to time be amended; (ii) manage each Portfolio in accordance with the Portfolio's investment objectives, restrictions and policies; (iii) make investment decisions for each Portfolio; and (iv) place purchase and sale orders for securities and other financial instruments on behalf of each Portfolio.
Bankers Trust bears all expenses in connection with the performance of services under each Advisory Agreement. The Trust and each Portfolio bears certain other expenses incurred in its operation, including: taxes, interest, brokerage fees and commissions, if any; fees of Trustees of the Trust or the Portfolio who are not officers, directors or employees of Bankers Trust, Signature or any of their affiliates; SEC fees and state Blue Sky qualification fees; charges of custodians and transfer and dividend disbursing agents; certain insurance premiums; outside auditing and legal expenses; costs of maintenance of corporate existence; costs attributable to investor services, including, without limitation, telephone and personnel expenses; costs of preparing and printing prospectuses and statements of additional information for regulatory purposes and for distribution to existing shareholders; costs of shareholders' reports and meetings of shareholders, officers and Trustees of the Trust or the Portfolio; and any extraordinary expenses.
For the years ended December 31, 1994 and 1993, Bankers Trust accrued $428,346 and $74,893, respectively, in compensation for investment advisory services provided to the Equity 500 Index Portfolio. During the same periods, Bankers Trust reimbursed $249,230 and $72,112, respectively, to the Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial banking relationships with the issuers of obligations which may be purchased on behalf of the Portfolios, including outstanding loans to such issuers which could be repaid in whole or in part with the proceeds of securities so purchased. Such affiliates deal, trade and invest for their own accounts in such obligations and are among the leading dealers of various types of such obligations. Bankers Trust has informed the Portfolios that, in making its investment decisions, it does not obtain or use material inside information in its possession or in the possession of any of its affiliates. In making investment recommendations for the Portfolios, Bankers Trust will not inquire or take into consideration whether an issuer of securities proposed for purchase or sale by a Portfolio is a customer of Bankers Trust, its parent or its subsidiaries or affiliates and, in dealing with its customers, Bankers Trust, its parent, subsidiaries and affiliates will not inquire or take into consideration whether securities of such customers are held by any fund managed by Bankers Trust or any such affiliate.
The Advisor Class Shares' prospectus contains disclosure as to the amount of Bankers Trust's investment advisory and administration and services fees, including waivers thereof. Bankers Trust may not recoup any of its waived investment advisory or administration and services fees. Such waivers by Bankers Trust shall stay in effect for at least 12 months.
Under the administration and services agreements, Bankers Trust is obligated on a continuous basis to provide such administrative services as the Board of Trustees of the Trusts and the Portfolios reasonably deem necessary for the proper administration of the Trusts or the Portfolios. Bankers Trust will: generally assist in all aspects of each class of shares of each Funds' and Portfolios' operations; supply and maintain office facilities (which may be in Bankers Trust's own offices), statistical and research data, data processing services, clerical, accounting, bookkeeping and recordkeeping services (including without limitation the maintenance of such books and records as are required under the 1940 Act and the rules thereunder, except as maintained by other agents), internal auditing, executive and administrative services, and stationery and office supplies; prepare reports to shareholders or investors; prepare and file tax returns; supply financial information and supporting data for reports to and filings with the SEC and various state Blue Sky authorities; supply supporting documentation for meetings of the Board of Trustees; provide monitoring reports and assistance regarding compliance with Declarations of Trust, by-laws, investment objectives and policies and with Federal and state securities laws; arrange for appropriate insurance coverage; calculate net asset values, net income and realized capital gains or losses; and negotiate arrangements with, and supervise and coordinate the activities of, agents and others to supply services.
Pursuant to a sub-administration agreement (the "Sub-Administration Agreement"), Signature performs such sub-administration duties for the Trusts and the Portfolios as from time to time may be agreed upon by Bankers Trust and Signature. The Sub-Administration Agreement provides that Signature will receive such compensation as from time to time may be agreed upon by Signature and Bankers Trust. All such compensation will be paid by Bankers Trust.
For the years ended December 31, 1994 and 1993, Bankers Trust accrued $447,359 and $4,277, respectively in compensation for administrative and other services provided to BT Investment Equity 500 Index Fund. During the same periods, Bankers Trust reimbursed $341,939 and $24,566, respectively, to BT Investment Equity 500 Index Fund to cover expenses.
For the years ended December 31, 1994 and 1993, Bankers Trust received $214,173 and $37,446, respectively, in compensation for administrative and other services provided to the Equity 500 Index Portfolio.
Bankers Trust has agreed that if in any fiscal year the aggregate expenses of any Fund and its respective Portfolio (including fees pursuant to the Advisory Agreement, but excluding interest, taxes, brokerage and, if permitted by the relevant state securities commissions, extraordinary expenses) exceed the expense limitation of any state having jurisdiction over a Fund or Class, Bankers Trust will reimburse that Fund for the excess expense to the extent required by state law. As of the date of this Statement of Additional Information, the most restrictive annual expense limitation applicable to any Fund or Class is 2.50% of the Fund's or Class' first $30 million of average annual net assets, 2.00% of the next $70 million of average annual net assets and 1.50% of the remaining average annual net assets.
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as Custodian for the Trusts and for the Portfolios pursuant to the administration and services agreements. As Custodian, it holds the Funds' and each Portfolio's assets. Bankers Trust also serves as transfer agent of the Trusts and of each pursuant to the respective administration and services agreement. Under its transfer agency agreement with the Trusts, Bankers Trust maintains the shareholder account records for each Class of shares of each Fund, handles certain communications between shareholders and the Trusts and causes to be distributed any dividends and distributions payable by the Trusts. Bankers Trust may be reimbursed by the Funds or the Portfolios for its out-of-pocket expenses. Bankers Trust will comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
The Trusts and Bankers Trust have agreed that each Trust may use "BT" as part of its name for so long as Bankers Trust serves as investment adviser to the Portfolios. The Trusts have acknowledged that the term "BT" is used by and is a property right of certain subsidiaries of Bankers Trust and that those subsidiaries and/or Bankers Trust may at any time permit others to use that term.
Each Trust may be required, on 60 days' notice from Bankers Trust at any time, to abandon use of the acronym "BT" as part of its name. If this were to occur, the Trustees would select an appropriate new name for each Trust, but there would be no other material effect on the Trusts, their shareholders or activities.
Bankers Trust has been advised by its counsel that in its opinion Bankers Trust may perform the services for the Portfolios contemplated by the Advisory Agreements and other activities for the Funds and the Portfolios described in the Prospectuses and this Statement of Additional Information without violation of the Glass-Steagall Act or other applicable banking laws or regulations. However, counsel has pointed out that future changes in either Federal or state statutes and regulations concerning the permissible activities of banks or trust companies, as well as future judicial or administrative decisions or interpretations of present and future statutes and regulations, might prevent Bankers Trust from continuing to perform those services for the Trusts and the Portfolios. State laws on this issue may differ from the interpretations of relevant Federal law and banks and financial institutions may be required to register as dealers pursuant to state securities law. If the circumstances described above should change, the Boards of Trustees would review the relationships with Bankers Trust and consider taking all actions necessary in the circumstances.
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022-4669, serves as Counsel to the Trusts and each Portfolio. Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas City, Missouri 64105 acts
Independent Accountants of the Trusts and each Portfolio.
Shares of each Trust do not have cumulative voting rights, which means that holders of more than 50% of the shares voting for the election of Trustees can elect all Trustees. Shares are transferable but have no preemptive, conversion or subscription rights. Shareholders generally vote by Fund, except with respect to the election of Trustees and the ratification of the selection of independent accountants.
Massachusetts law provides that shareholders could under certain circumstances be held personally liable for the obligations of each Trust. However, each Trust's Declaration of Trust disclaims shareholder liability for acts or obligations of the respective Trust and requires that notice of this disclaimer be given in each agreement, obligation or instrument entered into or executed by a Trust or a Trustee. The Declaration of Trust provides for indemnification from each Trust's property for all losses and expenses of any shareholder held personally liable for the obligations of each Trust. Thus, the risk of a shareholder's incurring financial loss on account of shareholder liability is limited to circumstances in which each Trust itself would be unable to meet its obligations, a possibility that a Trust believes is remote. Upon payment of any liability incurred by a Trust, the shareholder paying the liability will be entitled to reimbursement from the general assets of the respective Trust. The Trustees intend to conduct the operations of each Trust in a manner so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of that Trust.
The Trusts intend to qualify annually and to elect each Fund to be treated as a regulated investment company under the Code.
To qualify as a regulated investment company, each Fund must, among other things: (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies or other income derived with respect to its business of investing in such stock, securities or currencies; (b) derive less than 30% of its gross income from the sale or other disposition of certain assets (namely, in the case of the Fund, (i) stock or securities; (ii) options, futures, and forward contracts (other than those on foreign currencies); and (iii) foreign currencies (including options, futures, and forward contracts on such currencies) not directly related to the Fund's principal business of investing in stock or securities (or options and futures with respect to stocks or securities)) held less than three months
Limitation"); (c) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund's assets is represented by cash and cash items (including receivables), U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Fund's total assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies); and (d) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) and its net tax-exempt interest income, if any, each taxable year.
As a regulated investment company, each Fund will not be subject to U.S. Federal income tax on its investment company taxable income and net capital gains (the excess of net long-term capital gains over net short-term capital losses), if any, that it distributes to shareholders. The Fund intends to distribute to its shareholders, at least annually, substantially all of its investment company taxable income and net capital gains. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To prevent imposition of the excise tax, the Fund must distribute during each calendar year an amount equal to the sum of: (i) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year; (ii) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses, as prescribed by the Code) for the one-year period ending on October 31 of the calendar year; and (iii) any ordinary income and capital gains for previous years that was not distributed during those years. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by the Fund in October, November or December with a record date in such a month and paid by the Fund during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. To prevent application of the excise tax, the Fund intends to make its distributions in accordance with the calendar year distribution requirement.
Each Fund shareholder will also receive, if appropriate, various written notices after the close of the Fund's prior taxable year as to the Federal income status of his dividends and distributions which were received from the Fund during the Fund's prior taxable year. Shareholders should consult their tax advisers as to any state and local taxes that may apply to these dividends and distributions. The dollar amount of dividends excluded from Federal income taxation and the dollar amount subject to such income taxation, if any, will vary for each shareholder depending upon the size and duration of each shareholder's investment in the Fund. To the extent that the Fund earns taxable net investment income, the Fund intends to designate as taxable dividends the same percentage of each dividend as its taxable net investment income bears to its total net investment income earned. Therefore, the percentage of each dividend designated as taxable, if any, may vary.
FOREIGN SECURITIES. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine the effective rate of foreign tax in advance since the amount of the EAFE(R) Equity Index Portfolio's assets to be invested in various countries will vary.
If the EAFE(R) Equity Index Portfolio is liable for foreign taxes, and if more than 50% of the value of the Portfolio's total assets at the close of its taxable year consists of stocks or securities of foreign corporations, it may make an election pursuant to which certain foreign taxes paid by it would be treated as having been paid directly by shareholders of the entities, such as the corresponding Fund, which have invested in the Portfolio. Pursuant to such election, the amount of foreign taxes paid will be included in the income of the corresponding Fund's shareholders, and such Fund shareholders (except tax-exempt shareholders) may, subject to certain limitations, claim either a credit or deduction for the taxes. Each such Fund shareholder will be notified after the close of the Portfolio's taxable year whether the foreign taxes paid will "pass through" for that year and, if so, such notification will designate (a) the shareholder's portion of the foreign taxes paid to each such country and (b) the portion which represents income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit in any year will generally be subject to a separate limitation for "passive income," which includes, among other items of income, dividends, interest and certain foreign currency gains. Because capital gains realized by the Portfolio on the sale of foreign securities will be treated as U.S.source income, the available credit of foreign taxes paid with respect to such gains may be restricted by this limitation.
Dividends paid out of the Fund's investment company taxable income will be taxable to a U.S. shareholder as ordinary income. Distributions of net capital gains, if any, designated as capital gain dividends are taxable as long-term capital gains, regardless of how long the shareholder has held the Fund's shares, and are not eligible for the dividends-received deduction. Shareholders receiving distributions in the form of additional shares, rather than cash, generally will have a cost basis in each such share equal to the net asset value of a share of the Fund on the reinvestment date. Shareholders will be notified annually as to the U.S. Federal tax status of distributions.
The Portfolios are not subject to Federal income taxation. Instead, the Fund and other investors investing in a Portfolio must take into account, in computing their Federal income tax liability, their share of the Portfolio's income, gains, losses, deductions, credits and tax preference items, without regard to whether they have received any cash distributions from the Portfolio.
Distributions received by a Fund from the corresponding Portfolio generally will not result in the Fund recognizing any gain or loss for Federal income tax purposes, except that: (i) gain will be recognized to the extent that any cash distributed exceeds the Fund's basis in its interest in the Portfolio prior to the distribution; (ii) income or gain may be realized if the distribution is made in liquidation of the Fund's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio; and (iii) loss may be recognized if the distribution is made in liquidation of the Fund's entire interest in the Portfolio and consists solely of cash and/or unrealized receivables. A Fund's basis in its interest in the corresponding Portfolio generally will equal the amount of cash and the basis of any property which the Fund invests in the Portfolio, increased by the Fund's share of income from the Portfolio, and decreased by the amount of any cash distributions and the basis of any property distributed from the Portfolio.
Any gain or loss realized by a shareholder upon the sale or other disposition of shares of a Class of the Fund, or upon receipt of a distribution in complete liquidation of a Fund, generally will be a capital gain or loss which will be long-term or short-term, generally depending upon the shareholder's holding period for the shares. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced (including shares acquired pursuant to a dividend reinvestment plan) within a period of 61 days beginning 30 days before and ending 30 days after disposition of the shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of a Class' shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gains received by the shareholder with respect to such shares.
Income received by a Portfolio from sources within foreign countries may be subject to withholding and other taxes imposed by such countries.
A Fund may be required to withhold U.S. Federal income tax at the rate of 31% of all taxable distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. Federal income tax liability.
The tax consequences to a foreign shareholder of an investment in a Fund may be different from those described herein. Foreign shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
Each Trust is organized as a Massachusetts business trust and, under current law, neither the Trusts nor any Fund is liable for any income or franchise tax in the Commonwealth of Massachusetts, provided that the Fund continues to qualify as a regulated investment company under Subchapter M of the Code. The investment by each Fund in the corresponding Portfolio does not cause the Fund to be liable for any income or franchise tax in the State of New York.
BT Investment Portfolios and Equity 500 Index Portfolio are each a New York master trust fund. Each Portfolio is not subject to any income or franchise tax in the State of New York or the Commonwealth of Massachusetts.
Fund shareholders may be subject to state and local taxes on their Fund distributions. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
The Statement of Assets and Liabilities and report of Independent Accountants
The following financial statements for the BT Investment Equity
500 Index Fund and Equity 500 Index Portfolio are incorporated herein by reference from its current reports to shareholders filed with the SEC pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder. A copy of each such report will be provided, without charge, to each person receiving this Statement of Additional Information.
BT INVESTMENT EQUITY 500 INDEX FUND
Statement of Assets and Liabilities, December 31, 1994 Statement of Operations for the Year Ended December 31, 1994 Statement of Changes in Net Assets for the Years Ended December 31, 1994 and 1993 Financial Highlights: Selected Ratios and Supplemental Each of the Periods Indicated
Statement of Assets and Liabilities, Statement of Operations, for the Six Months Ended Statement of Changes in Net Assets for the Six Months Ended June 30, 1995 (Unaudited) and for the Year Ended
Financial Highlights: Selected Ratios and Supplemental
Each of the Periods Indicated
Statement of Assets and Liabilities, Statement of Operations for the Year Ended Statement of Changes in Net Assets for the Years Ended December 31, 1994 and 1993
Financial Highlights: Selected Ratios and Supplemental
Each of the Periods Indicated
Statement of Assets and Liabilities, June 30, 1995 Statement of Operations, for the Six Months Ended Statement of Changes in Net Assets for the Six Months Ended June 30, 1995 (Unaudited) and for the Year Ended Financial Highlights: Selected Ratios and Supplemental
Each of the Periods Indicated (Unaudited) Schedule of Portfolio Investments, June 30, 1995
Notes to Financial Statements (Unaudited)
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the U.S. Bond Index Portfolio (one of the Portfolios comprising BT Investment Portfolios) as of January 2, 1996. This financial statement is the responsibility of the Portfolio's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the U.S. Bond Index Portfolio of BT Investment Portfolios as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
** 1 (1) BT Investment Portfolios, a New York master trust, (the "Portfolio Trust") was organized on March 27, 1993 and has been inactive since that date with respect to (the "Portfolio") except for matters relating to the Portfolio's establishment and designation as a subtrust or series of the Portfolio Trust, and the sale of a beneficial interest therein at the purchase price of
$10.00 to BT Advisor Funds --Institutional U.S. Bond Index Fund (the "Fund") (the "Initial Interests"). The Portfolio is one of fifteen series of the Portfolio Trust.
** 2 (2) Organization expenses of the Portfolio are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Portfolio. Any amount received by the Portfolio from the Fund as a result of a redemption by Signature Financial Group, Inc. will be applied so as to reduce the amount of unamortized organization expenses. The amount paid by the Portfolio Trust on any withdrawal by the Fund of an Initial Interest in the Portfolio will be reduced by a portion of any unamortized organization expenses of the Portfolio, determined by the proportion of the amount of the Initial Interest withdrawn to the aggregate amount of the Initial Interests in the Portfolio then-outstanding after taking into account any prior withdrawals of any of the Initial Interests in the Portfolio.
** 3 (3) At 4:00 p.m., New York time, on each business day of the Portfolio, the value of an investor's beneficial interest in the Portfolio is equal to the product of (i) the aggregate net asset value of the Portfolio multiplied by (ii) the percentage representing that investor's share of the aggregate beneficial interests in the Portfolio effective for that day.
** 4 (4) The Portfolio Trust has entered into an Investment Advisory Agreement with Bankers Trust Company and an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Portfolio Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the Equity 500 Equal Weighted Index Portfolio (one of the Portfolios comprising BT Investment Portfolios) as of January 2, 1996. This financial statement is the responsibility of the Portfolio's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the Equity 500 Equal Weighted Index Portfolio of BT Investment Portfolios as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
** 5 (1) BT Investment Portfolios, a New York master trust, (the "Portfolio Trust") was organized on March 27, 1993 and has been inactive since that date with respect to Equity 500 Equal Weighted Index Portfolio (the "Portfolio") except for matters relating to the Portfolio's establishment and designation as a subtrust or series of the Portfolio Trust, and the sale of a beneficial interest therein at the purchase price of Advisor Funds -- Institutional Equity 500 Equal Weighted Index Fund (the "Fund") (the "Initial Interests"). The Portfolio is one of fifteen series of the Portfolio Trust.
** 6 (2) Organization expenses of the Portfolio are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Portfolio. Any amount received by the Portfolio from the Fund as a result of a redemption by Signature Financial Group, Inc. will be applied so as to reduce the amount of unamortized organization expenses. The amount paid by the Portfolio Trust on any withdrawal by the Fund of an Initial Interest in the Portfolio will be reduced by a portion of any unamortized organization expenses of the Portfolio, determined by the proportion of the amount of the Initial Interest withdrawn to the aggregate amount of the Initial Interests in the Portfolio then-outstanding after taking into account any prior withdrawals of any of the Initial Interests in the Portfolio.
** 7 (3) At 4:00 p.m., New York time, on each business day of the Portfolio, the value of an investor's beneficial interest in the Portfolio is equal to the product of (i) the aggregate net asset value of the Portfolio multiplied by (ii) the percentage representing that investor's share of the aggregate beneficial interests in the Portfolio effective for that day.
** 8 (4) The Portfolio Trust has entered into an Investment Advisory Agreement with Bankers Trust Company and an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Portfolio Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the Small Cap Index Portfolio (one of the Portfolios comprising BT Investment Portfolios) as of January 2, 1996. This financial statement is the responsibility of the Portfolio's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the Small Cap Index Portfolio of BT Investment Portfolios as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000 Total assets . . . . . . . . . . . . . . . . . 9,010
Accrued organization expenses . . . . . . . . . . . . 9,000
Net assets . . . . . . . . . . . . . . . . . .$ 10
** 9 (1) BT Investment Portfolios, a New York master trust, (the "Portfolio Trust") was organized on March 27, 1993 and has been inactive since that date with respect to Small Cap Index Portfolio (the "Portfolio") except for matters relating to the Portfolio's establishment and designation as a subtrust or series of the Portfolio Trust, and the sale of a beneficial interest therein at the purchase price of Funds --Institutional Small Cap Index Fund (the "Fund") (the "Initial Interests"). The Portfolio is one of fifteen series of the Portfolio Trust.
** 10 (2) Organization expenses of the Portfolio are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Portfolio. Any amount received by the Portfolio from the Fund as a result of a redemption by Financial Group, Inc. will be applied so as to reduce the amount of unamortized organization expenses. The amount paid by the Portfolio Trust on any withdrawal by the Fund of an Initial Interest in the Portfolio will be reduced by a portion of any unamortized organization expenses of the Portfolio, determined by the proportion of the amount of the Initial Interest withdrawn to the aggregate amount of the Initial Interests in the Portfolio then-outstanding after taking into account any prior withdrawals of any of the Initial Interests in the Portfolio.
** 11 (3) At 4:00 p.m., New York time, on each business day of the Portfolio, the value of an investor's beneficial interest in the Portfolio is equal to the product of (i) the aggregate net asset value of the Portfolio multiplied by (ii) the percentage representing that investor's share of the aggregate beneficial interests in the Portfolio effective for that day.
** 12 (4) The Portfolio Trust has entered into an Investment
Advisory Agreement with Bankers Trust Company and an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Portfolio Trust.
To the Trustees and Shareholders of
We have audited the accompanying statement of assets and liabilities of the EAFE Equity Index Portfolio (one of the Portfolios comprising BT Investment Portfolios) as of January 2, 1996. This financial statement is the responsibility of the Portfolio's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of the EAFE Equity Index Portfolio of BT Investment Portfolios as of January 2, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
STATEMENT OF ASSETS AND LIABILITIES
Cash . . . . . . . . . . . . . . . . . . . . . . . . .$ 10 Deferred organization expenses . . . . . . . . . . . . 9,000
Total assets . . . . . . . . . . . . . . . . .
Accrued organization expenses . . . . . . . . . . . . 9,000 Net assets . . . . . . . . . . . . . . . . . .$ 10
(1) BT Investment Portfolios, a New York master trust, (the "Portfolio Trust") was organized on March 27, 1993 and has been inactive since that date with respect to EAFE(R)Equity Index Portfolio (the "Portfolio") except for matters relating to the Portfolio's establishment and designation as a subtrust or series of the Portfolio Trust, and the sale of a beneficial interest therein at the $10.00 to BT Advisor Funds --Institutional EAFE(R)Equity Index Fund (the "Fund") (the "Initial Interests"). The Portfolio is one of fifteen series of the Portfolio Trust.
(2) Organization expenses of the Portfolio are being deferred and will be amortized on a straight-line basis over a period not to exceed five years from the commencement of investment operations of the Portfolio. Any amount received by the Portfolio from the Fund as a result of a redemption by Signature Financial Group, Inc. will be applied so as to reduce the amount of unamortized organization expenses. The amount paid by the Portfolio Trust on any withdrawal by the Fund of an Initial Interest in the Portfolio will be reduced by a portion of any unamortized organization expenses of the Portfolio, determined by the proportion of the amount of the Initial Interest withdrawn to the aggregate amount of the Initial Interests in the Portfolio then-outstanding after taking into account any prior withdrawals of any of the Initial Interests in the Portfolio.
(3) At 4:00 p.m., New York time, on each business day of the Portfolio, the value of an investor's beneficial interest in the Portfolio is equal to the product of (i) the aggregate net asset value of the Portfolio multiplied by (ii) the percentage representing that investor's share of the aggregate beneficial interests in the Portfolio effective for that day.
(4) The Portfolio Trust has entered into an Investment Advisory Agreement with Bankers Trust Company and an Administration and Services Agreement with Bankers Trust Company under which Bankers Trust Company provides administration, custody and transfer agency services to the Portfolio Trust.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered as medium-grade obligations, i.e. they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such, bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both (good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked short-comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating classification from Aa through B in its corporate bond system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed but debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being paid.
D - Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating will also be used upon the filing of a bankruptcy petition if debt service payments are jeopardized.
The tables on the following pages shows the performance of the S&P 500, the Russell 2000, the Aggregate Bond Index and the EAFE Index for the periods indicated. Stock prices fluctuated widely during the period but were higher at the end than at the beginning. The results shown should not be considered as a representation of the income or capital gain or loss which may be generated by the respective Index in the future. Nor should this be considered as a representation of the past or future performance of the Fund.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX*
LEHMAN BROTHERS AGGREGATE BOND INDEX*
*Source: Lipper Analytical Services, Inc.
RUSSELL 2000 SMALL STOCK INDEX*
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX*
*Source: Morgan Stanley Capital International (MSCI) EAFE Index
STANDARD & POOR'S 500 EQUAL WEIGHTED WILSHIRE INDEX
Signature Broker-Dealer Services, Inc. BT ADVISOR FUNDS- 6 St. James Avenue ADVISOR CLASS SHARES Boston, MA 02116 U.S. BOND INDEX FUND (617) 423-0800 EQUITY 500 EQUAL WEIGHTED INDEX
INVESTMENT ADVISER OF EACH PORTFOLIO BT INVESTMENT EQUITY 500
Bankers Trust Company STATEMENT OF
280 Park Avenue ADDITIONAL INFORMATION New York, NY 10017 JANUARY , 1996
1100 Main Street, Suite 900
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART B
Statement of Assets and Liabilities as of January 2, 1996
BT INVESTMENT PORTFOLIOS - EQUITY 500 EQUAL WEIGHTED PORTFOLIO, BOND INDEX PORTFOLIO, INTERNATIONAL EQUITY INDEX PORTFOLIO AND SMALL CAP INDEX PORTFOLIO: Statement of Assets and Liabilities as of January 2, 1996 Report of Independent Accountants are to be filed by amendment
BT INVESTMENT PORTFOLIOS - LATIN AMERICAN EQUITY PORTFOLIO, GLOBAL HIGH YIELD SECURITIES PORTFOLIO, SMALL CAP PORTFOLIO AND PACIFIC BASIN EQUITY PORTFOLIO Statement of Assets and Liabilities, September 30, 1995 Statement of operations for the period indicated Statement of Changes in Net Assets for each of the periods indicated Financial Highlights: Selected ratios and supplemental data for each of the periods indicated Schedule of Portfolio Investments, September 30, 1995 Notes to Financial Statements Report of
CAPITAL APPRECIATION PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO AND EQUITY 500 INDEX PORTFOLIO Statement of Assets and Liabilities, December 31, 1994 Statement of operations for the period indicated Statement of Changes in Net Assets for each of the periods indicated Financial Highlights: Selected ratios and supplemental data for each of the periods indicated Schedule of Portfolio Investments, December 31, 1994 Notes to Financial Statements Report
CAPITAL APPRECIATION PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO AND EQUITY 500 INDEX PORTFOLIO Statement of Assets and Liabilities, June 30, 1995 (unaudited) Statement of operations for the period indicated (unaudited) Statement of Changes in Net Assets for each of the periods indicated (unaudited) Financial Highlights: Selected ratios and supplemental data for each of the periods indicated (unaudited) Schedule of Portfolio Investments, June 30, 1995 (unaudited) Notes to Financial Statements
(1A) Declaration of Trust of the Trust.1 (1B) Amendment to the Declaration of Trust.2
(2) By-Laws of the Trust.1
(9) (a) See Exhibit 9(b).4 (b) Administration and Services Agreement.2
(11) Consent of independent accountants.3
(13) Investment letter of initial shareholder.3
(15) Plan of Distribution pursuant to Rule 12b-l under the Investment Company Act of 1940, as amended (the
(16) Method of computations of performance information.4
1 Incorporated by reference to the Registrant's registration statement on Form N-1A ("Registration Statement") as filed with the Commission on August 24, 1995. 2 Incorporated by reference to Amendment No. 2 to Registrant's Registration Statement as filed with the Commission on January 3, 1996. 3 Filed herein. 4 To be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
TITLE OF CLASS HOLDERS (AS OF DECEMBER 29, 1995) Latin American Equity Fund 0 Pacific Basin Equity Fund 0 Global High Yield Securities Fund 0 Equity 500 Equal Weighted Index Fund 0 U.S. Bond Index Fund 0 EAFE Equity Index Fund 0 Small Cap Index Fund 0
Under Article XI, Section 2 of the Trust's Declaration of Trust, any past or present Trustee or officer of the Trust (including persons who serve at the Trust's request as directors, officers or trustees of another organization in which the Trust has any interest as a shareholder, creditor or otherwise [hereinafter referred to as a "Covered Person"]) is indemnified to the fullest extent permitted by law against liability and all expenses reasonably incurred by him in connection with any action, suit or proceeding to which he may be a party or otherwise involved by reason of his being or having been a Covered Person. This provision does not authorize indemnification when it is determined, in the manner specified in the Declaration of Trust, that such Covered Person has not acted in good faith in the reasonable belief that his actions were in or not opposed to the best interests of the Trust. Moreover, this provision does not authorize indemnification when it is determined, in the manner specified in the Declaration of Trust, that such Covered Person would otherwise be liable to the Trust or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of his duties. Expenses may be paid by the Trust in advance of the final disposition of any action, suit or proceeding upon receipt of an undertaking by such Covered Person to repay such expenses to the Trust in the event that it is ultimately determined that indemnification of such expenses is not authorized under the Declaration of Trust and either (i) the Covered Person provides security for such undertaking, (ii) the Trust is insured against losses from such advances or (iii) the disinterested Trustees or independent legal counsel determines, in the manner specified in the Declaration of Trust, that there is reason to believe the Covered Person will be found to be entitled to indemnification.
Insofar as indemnification for liability arising under the Securities Act of 1933, as amended (the "1933 Act"), may be permitted to Trustees, officers and controlling persons of the Trust pursuant to the foregoing provisions, or otherwise, the Trust has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Trust of expenses incurred or paid by a Trustee, officer or controlling person of the Trust in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being registered, the Trust will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Signature Broker-Dealer Services, Inc. is the Distributor (the "Signature") for the shares of BT Global Investors. Signature also serves as the principal underwriter or placement agent for other registered investment companies.
(b) Set forth below are the names, principal business addresses and positions of each director and officer of Signature. Unless otherwise noted, the principal business address of these individuals is Signature Broker-Dealer Services, Inc., 6 St. James Avenue, Boston, Massachusetts 02116. Unless otherwise specified, none of the officers and directors of Signature serve as officers and Trustees of the Trust.
PHILIP W. COOLIDGE: Chief Executive Officer, President and Director of Signature and President and Trustee of the Registrant.
LINWOOD C. DOWNS: Treasurer of Signature.
THOMAS M. LENZ: Assistant Secretary of Signature and Secretary of the Registrant.
MOLLY S. MUGLER: Assistant Secretary of Signature and Assistant Secretary of the Registrant.
LINDA T. GIBSON: Assistant Secretary of Signature and Assistant Secretary of the Registrant.
ANDRES E. SALDANA: Assistant Secretary of Signature and Assistant Secretary of the Registrant.
SUSAN JAKUBOSKI: Assistant Treasurer of Signature.
BARBARA M. O'DETTE: Assistant Treasurer of Signature and Assistant Treasurer of the Registrant.
BETH A. REMY: Assistant Treasurer of Signature.
JULIE J. WYETZNER: Product Management Officer of Signature.
ROBERT G. DAVIDOFF: Director of Signature; CMNY Capital, L.P, 135 East 57th Street, New York, NY 10022.
DONALD S. CHADWICK: Director of Signature; Scarborough & Company, 110 East 42nd Street, New York, NY 10017.
LEEDS HACKETT: Director of Signature; National Credit Management Corporation, 10155 York Road, Cockeysville, MD 21030.
LAURENCE E. LEVINE: Director of Signature; First International Capital, Ltd., 130 Sunrise Avenue, Palm Beach, FL 33480.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
BT ADVISOR FUNDS: 6 St. James Avenue, Boston, MA 02116.
BANKERS TRUST COMPANY: 280 Park Avenue, New York, NY 10017.
INVESTORS FIDUCIARY TRUST COMPANY: 127 West 10th Street, Kansas City, MO 64105.
SIGNATURE BROKER-DEALER SERVICES, INC.: 6 St. James Avenue, Boston, MA 02116.
(a) The Registrant undertakes to file a post-effective amendment, including financials, which need not be certified, within four to six months following the commencement of operations of each of its series. The financial statements included in such amendment will be as of and for the time period ended on a date reasonably close or as soon as practicable to the date of the amendment.
(b) The Registrant undertakes to comply with Section 16(c) of the 1940 Act as though such provisions of the Act were applicable to the Registrant except that the request referred to in the third full paragraph thereof may only be made by shareholders who hold in the aggregate at least 10% of the outstanding shares of the Registrant, regardless of the net asset value or values of shares held by such requesting shareholders.
(c) If the information called for by Item 5A of Form N-1A is contained in the latest annual report to shareholders, the Registrant shall furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders upon request and without charge.
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement on Form N-1A (the "Registration Statement") to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Boston and the Commonwealth of Massachusetts on the 11th day of January, 1996.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on January 11, 1996.
/S/JOHN R. ELDER Treasurer (Principal Financial and John R. Elder Principal Accounting Officer)
Thomas M. Lenz as Attorney-in-Fact pursuant to a Power of Attorney filed herein.
Equity 500 Index Portfolio has duly caused this Registration Statement on Form N-1A of BT Advisor Funds to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston and the Commonwealth of Massachusetts on the 11th day of January, 1996.
This Registration Statement on Form N-1A of BT Advisor Funds has been signed below by the following persons in the capacities indicated on January 2, 1996.
/S/PHILIP W. COOLIDGE Trustee and President of Philip W. Coolidge Equity 500 Index Portfolio
CHARLES P. BIGGAR* Trustee of Equity 500 Index
S. LELAND DILL* Trustee of Equity 500 Index
PHILIP SAUNDERS, JR.* Trustee of Equity 500 Index
/S/JOHN R. ELDER Treasurer (Principal Financial and John R. Elder Principal Accounting Officer) of
Thomas M. Lenz as Attorney-in-Fact pursuant to a Power of Attorney previously filed.
International Equity Portfolio has duly caused this Registration Statement on Form N-1A of BT Advisor Funds to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston and the Commonwealth of Massachusetts on the 11th day of January, 1996.
This Registration Statement on Form N-1A of BT Advisor Funds has been signed below by the following persons in the capacities indicated on January 2, 1996.
/S/PHILIP W. COOLIDGE Trustee and President of Philip W. Coolidge International Equity Portfolio
CHARLES P. BIGGAR* Trustee of International Equity
S. LELAND DILL* Trustee of International Equity
PHILIP SAUNDERS, JR.* Trustee of International Equity
/S/JOHN R. ELDER Treasurer (Principal Financial and John R. Elder Principal Accounting Officer) of
Thomas M. Lenz as Attorney-in-Fact pursuant to a Power of Attorney previously filed.
Capital Appreciation Portfolio has duly caused this Registration Statement on Form N-1A of BT Advisor Funds to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston and the Commonwealth of Massachusetts on the 11th of January, 1996.
This Registration Statement on Form N-1A of BT Advisor Funds has been signed below by the following persons in the capacities indicated on January 11, 1996.
/S/PHILIP W. COOLIDGE Trustee and President of Capital Philip W. Coolidge Appreciation Portfolio
CHARLES P. BIGGAR* Trustee of Capital Appreciation
S. LELAND DILL* Trustee of Capital Appreciation
PHILIP SAUNDERS, JR.* Trustee of Capital Appreciation
/S/JOHN R. ELDER Treasurer (Principal Financial and John R. Elder Principal Accounting Officer) of
Thomas M. Lenz as Attorney-in-Fact pursuant to a Power of Attorney previously filed.
BT Investment Portfolios has duly caused this Registration Statement on Form N-1A of BT Advisors Funds to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston and the Commonwealth of Massachusetts on the 11th day of January, 1996.
This Registration Statement on Form N-1A of BT Advisors Funds has been signed below by the following persons in the capacities indicated on January 11, 1996.
/S/PHILIP W. COOLIDGE Trustee and President of BT Philip W. Coolidge Investment Portfolios
CHARLES P. BIGGAR* Trustee of BT Investment
S. LELAND DILL* Trustee of BT Investment
PHILIP SAUNDERS, JR.* Trustee of BT Investment
/S/JOHN R. ELDER Treasurer (Principal Financial and John R. Elder Principal Accounting Officer) of BT
Thomas M. Lenz as Attorney-in-Fact pursuant to a Power of Attorney previously filed.
(1) Amendment to the Declaration of Trust of the Registrant
(11) Consent of independent accountants
(13) Investment letter of initial shareholder | N-1A EL/A | N-1A EL/A | 1996-01-12T00:00:00 | 1996-01-12T16:13:30 |
0000950112-96-000060 | 0000950112-96-000060_0000.txt | <DESCRIPTION>PAINEWEBBER/KIDDER, PEABODY MUNICIPAL MONEY MARKET SERIES-NY SERIES
PaineWebber/Kidder Peabody Municipal Money Market Series - New York Series
For the Year Ended October 31, 1995
Investment advisory and administration.............. 264,448 Reports and notices to shareholders................. 21,630 Amortization of organizational expenses............. 3,286
Net realized and unrealized losses from investment transactions: Net realized losses from investment transactions.... (4,701) Net change in unrealized appreciation/depreciation Net realized and unrealized losses from investment Net increase in net assets resulting from operations.......... $1,501,329
See accompanying notes to financial statements
See accompanying notes to financial statements
PaineWebber/Kidder, Peabody Municipal Money Market Series-New York Series
Organization and Significant Accounting Policies
PaineWebber/Kidder, Peabody Municipal Money Market Series (the "Trust") was organized as a Massachusetts business trust on September 14, 1990, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended ("1940 Act"), as an open-end, non- diversified management investment company. The Trust currently offers three no-load series of shares: the Connecticut Series, the New Jersey Series, and the New York Series (the "Fund"). The financial statements for the Connecticut Series and the New Jersey Series are not included herein. Organizational costs have been deferred and are being amortized on the straight-line method over a period not to exceed 60 months from the date the Fund commenced operations.
Valuation and Accounting for Investments--Investments are valued at amortized cost which approximates market value. Investment transactions are recorded on the trade date. Realized gains and losses from investment transactions are calculated using the identified cost method. Interest income is recorded on an accrual basis. Discounts are accreted and premiums are amortized as adjustments to interest income and identified cost of investments.
Federal Tax Status--The Fund intends to distribute all of its tax-exempt income and any taxable income and to comply with the other requirements of the Internal Revenue Code applicable to regulated investment companies. Accordingly, no provision for federal income taxes is required. In addition, by distributing during each calendar year, substantially all of its net investment income, capital gains and certain other amounts, if any, the Fund intends not to be subject to a federal excise tax.
At October 31, 1995, the Fund had a net capital loss carryforward of $5,141. The loss carryfoward is available as a reduction, to the extent provided in the regulations, of future net realized capital gains, and will expire on October 31, 2002. To the extent such losses are used to offset future capital gains, it its probable that the gains so offset will not be distributed.
Dividends and Distributions to Shareholders--Dividends and distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income and distributions from net realized gains from investment transactions are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Net capital gains, if any, will be distributed at least annually, but the Fund may make more frequent distributions of such gains, if necessary, to maintain its net asset value per share at $1.00 or to avoid income or excise taxes.
The Fund follows an investment policy of investing primarily in municipal obligations of one state. Economic changes affecting the state and certain of its public bodies and municipalities may affect the ability of issuers within the state to pay interest on, or repay principal of, municipal obligations held by the Fund.
PaineWebber/Kidder, Peabody Municipal Money Market Series-New York Series
The Trust's investment adviser and administrator receives compensation from the Fund for its services. Fees paid by the Fund for investment advisory and administration services are accrued daily and paid monthly at the annual rate of 0.50% of the Fund's average daily net assets.
At a special meeting of shareholders that took place on April 13, 1995, shareholders approved the appointment of PaineWebber Incorporated ("PaineWebber") as investment adviser and administrator of the Fund and Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of PaineWebber, as the Fund's sub-adviser and sub- administrator. The Fund pays the same fee for investment advisory and administration services to PaineWebber as previously paid to Kidder Peabody Asset Management, Inc. ("KPAM"), the Fund's predecessor adviser, as described in the Fund's prospectus. PaineWebber (not the Fund) pays Mitchell Hutchins a fee for sub-advisory and sub-administration services at the annual rate of 20% of the fee received by PaineWebber from the Fund. PaineWebber and Mitchell Hutchins continue to manage the Fund in accordance with the Fund's investment objective, policies and restrictions as stated in the prospectus. At October 31, 1995, the Fund owed PaineWebber $17,553 in investment advisory and administration fees.
Investment advisory functions for the Fund were previously transferred from KPAM to Mitchell Hutchins on an interim basis as a result of an asset purchase transaction by and among Kidder, Peabody Group Inc., its parent, General Electric Company, and Paine Webber Group Inc. That period commenced on January 30, 1995 and ended April 13, 1995.
In compliance with applicable state securities laws, PaineWebber, the Fund's investment adviser, will reimburse the Fund, if and to the extent that the aggregate operating expenses in any fiscal year, exclusive of taxes, interest, brokerage fees, distribution fees and extraordinary expenses, exceed limitations imposed by various state regulations. Currently, the most restrictive limitation is 2.5% on the first $30 million of average daily net assets, 2.0% of the next $70 million and 1.5% of any excess over $100 million. For the year ended October 31, 1995, no reimbursements were required pursuant to the above limitation.
Effective January 30, 1995, PaineWebber served as the exclusive distributor of the Fund's shares. For its services, PaineWebber received from the Fund a distribution fee accrued daily and paid monthly at the annual rate of 0.12% of the Fund's average daily net assets. At October 31, 1995, $4,213 was payable to PaineWebber for such services.
PaineWebber/Kidder, Peabody Municipal Money Market Series-New York Series
At October 31, 1995, the amount for dividends payable aggregated $43,045.
There is an unlimited number of $0.001 par value shares of beneficial interest authorized. Transactions in shares of beneficial interest, at $1.00 per share, were as follows:
Net increase (decrease) in shares
On January 27, 1995, the Fund recorded a capital contribution from KPAM in the amount of $44,335 or $0.0008 per share to compensate the Fund for realized losses incurred on the sale of certain securities to unrelated third parties.
The Board of Trustees of the Trust has approved a Plan of Reorganization and Termination ("Reorganization") which was submitted to and approved by the Fund's shareholders, at a special meeting held on November 8, 1995. The Reorganization occurred on November 13, 1995, when all the Fund's assets were acquired and its liabilities assumed by PaineWebber RMA New York Municipal Money Fund ("RMA New York") in a tax-free reorganization. As a result of the Reorganization, the two funds' assets were combined and each Fund shareholder received shares of RMA New York having an aggregate value equal to the value of the shareholder's holdings in the Fund.
** For the period February 1, 1991 to October 31, 1991, the predecessor adviser waived and/or reimbursed the Fund for a portion of its operating expenses. If such fee waivers and/or expense reimbursements had not been made, the annualized ratio of expenses to average net assets and the annualized ratio of net investment income to average net assets would have been 0.83% and 3.43%, respectively.
(1) Total return is calculated assuming a $1,000 investment in Fund shares on the first day of each dividends at net asset value on the payable dates, and a sale at net asset value on the last day of each period reported. Total return information for periods of less than one year have not been annualized.
PaineWebber/Kidder, Peabody Municipal Money Market Series-New York Series
Report of Ernst & Young LLP, Independent Auditors
The Board of Trustees and Shareholders PaineWebber/Kidder Peabody Municipal Money Market Series-New York Series
We have audited the accompanying statement of net assets of the PaineWebber/Kidder, Peabody Municipal Money Market Series-New York Series as of October 31, 1995, and the related statement of operations, statement of changes in net assets, and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The statement of changes in net assets for the year ended October 31, 1994 and the financial highlights for each of the periods in the period then ended were audited by other auditors whose report dated November 30, 1994, expressed an unqualified opinion on that statement and financial highlights.
We have conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at October 31, 1995, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of PaineWebber/Kidder, Peabody Municipal Money Market Fund Series- New York Series at October 31, 1995, the results of its operations, the changes in its net assets, and the financial highlights for the year then ended in conformity with generally accepted accounting principles.
PaineWebber/Kidder, Peabody Municipal Money Market Series-New York Series
We are required by Subchapter M of the Internal Revenue Code of 1986 to advise you within 60 days of the Fund's fiscal year end (October 31, 1995) as to the federal tax status of distributions received by shareholders during such fiscal year. Accordingly, we are advising you that all dividends paid during the fiscal year by the New York Series were federally exempt interest dividends. The Fund had 2% of their dividends subject to the federal alternative minimum tax for individual taxpayers during its fiscal year. Also, all dividends paid by the New York Series were exempt from New York State and New York City personal income tax.
Because the Fund's fiscal year end is not the calendar year, another notification will be sent in respect of calendar year 1995. The second notification, which will reflect any amounts to be used by calendar year taxpayers on their federal income tax returns, will be made in conjunction with Form 1099 DIV and will be mailed in January 1996. Shareholders are advised to consult their own tax advisers with respect to the tax consequences of their investment in the Fund.
PaineWebber/Kidder, Peabody Municipal Money Market Series-New York Series
A special meeting shareholders of PaineWebber/Kidder, Peabody Municipal Money Market Series ("Fund") was held on April 13, 1995. At the meeting David J. Beaubien, William W. Hewitt, Jr., Thomas R. Jordan, Frank P.L. Minard and Carl W. Schafer were elected as directors to serve without limit in time, subject to resignation, retirement or removal. The selection of Deloitte & Touche LLP as the Fund's independent accountants was ratified.
The votes were as follows:
All Series Voting as a Single Series Shares Voted For Shares Withhold Authority
David J. Beaubien 65,392,812 4,541,460 William W. Hewitt, Jr. 65,392,812 4,541,460 Thomas R. Jordan 65,392,812 4,541,460 Frank P.L. Minard 65,392,812 4,541,460 Carl W. Schafer 65,392,812 4,541,460
All Series Voting as a Single Series Voted For Voted Against Withold Authority
of Deloitte & Touche LLP 64,348,845 3,459,852 2,125,575
In addition the following agreements were approved for the New York Series:
1) An interim investment advisory agreement between the Series and Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") containing substantially the same terms, conditions and fees as the previous investment advisory agreement with Kidder Peabody Asset Management, Inc. ("KPAM")
Voted For Voted Against Withhold Authority
New York Series 33,977,145 96,317 296,782
PaineWebber/Kidder, Peabody Municipal Money Market Series-New York Series
2) A new investment advisory and administration agreement between the Fund and PaineWebber Incorporated ("PaineWebber") containing the same fees and substantively similar material terms and conditions as the previous investment advisory agreement with KPAM to commence on the termination of the interim
Voted For Voted Against Withhold Authority
New York Series 33,054,060 102,698 1,213,486
3) A new sub-advisory and sub-administration agreement between PaineWebber and Mitchell Hutchins to commence on the termination of the interim agreement.
Voted For Voted Against Withhold Authority
New York Series 33,967,342 102,698 300,203
Broker non-votes and abstentions are included within the "Shares Withhold Authority" totals.
1285 Avenue of the Americas New York, New York 10019
Mitchell Hutchins Asset Management Inc. 1285 Avenue of the Americas New York, New York 10019 This report is not to be used in connection with the offering of shares of the Funds unless accompanied or preceded by an effective prospectus. | N-30D | N-30D | 1996-01-12T00:00:00 | 1996-01-12T17:11:56 |
0000046189-96-000007 | 0000046189-96-000007_0000.txt | X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1995
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification #) 7 North Hunt Road, Amesbury, Massachusetts 01913 (Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by court. Yes No _____
APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares of Common Stock outstanding as of November 30, 1995:
PART I - FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the notes to consolidated financial statements included in the registrant's Annual Report on Form 10-K for the year ended August 31, 1995 (1995 10-K). In the opinion of Management, all adjustments, consisting of normally recurring adjustments considered necessary for a fair presentation, have been included. Because of the seasonal nature of the registrant's business, operating results for the three months ended November 30, 1995, are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 1996.
Less: Accumulated depreciation 20,644,394 20,304,386 Net utility plant 72,956,154 71,158,346 (at original cost) 570,620 570,620
Cash and cash equivalents 263,563 136,925 Income tax refund receivable - 200,000 Supplemental fuel inventory trust 7,102,168 6,477,155 Material and supplies 889,021 594,817 Prepaid deferred income taxes 1,811,778 1,397,422 Prepayments and other 379,290 350,660 Total current assets 12,581,305 10,856,378
Unamortized debt expense and other 1,180,984 1,028,319 Total deferred charges 3,267,075 3,296,273
See Notes to Consolidated Financial Statements.
Common stock, no par (authorized outstanding 1,614,693 shares) $18,525,669 $ - Common stock, par value $2.50, Additional paid-in capital - 14,311,026 available for sale, net 28,902 28,902 ESOP shares purchased with debt (75,000) (225,000) Total common stock equity 30,220,626 30,709,276 (3,360 shares, 5.50%, $100 par value) 336,000 336,000 Long-term debt less current portion 20,008,607 20,689,366 Current liabilities: Current portion of long-term debt 854,119 978,758 fuel inventory trust 5,696,511 5,131,153 Notes payable, banks 11,400,000 4,890,000 Refundable gas costs 1,024,623 2,490,178 Supplier refund due customers 2,124,708 2,454,739 Total current liabilities 26,103,668 21,511,175 Deferred credits: Accumulated deferred income taxes 9,039,292 9,092,349 Unamortized investment tax credit 1,263,235 1,280,680 Deferred directors' fees 895,487 879,009 Total deferred credits 12,752,814 12,681,401
See Notes to Consolidated Financial Statements.
Operating revenues $ 6,962,014 $6,701,938 Less: Cost of gas 3,273,480 3,222,060 Taxes, other than federal income 212,741 207,206 Federal income taxes (145,445) (182,526) Total operating expenses 3,152,292 3,078,859 Income before interest charges 519,369 398,752 Interest charges: Interest on long-term debt 497,403 518,170 Amortization of debt expense 6,821 6,721 Other interest expense 230,556 157,634 Allowance for funds used during Total interest charges 722,836 672,604 Preferred dividend requirements (4,620) (4,813) Loss attributable to common stock $ (208,087) $ (278,665)
Loss per common share $ (.13) $ (.18) Dividends per common share $ .39 $ .38 See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Net loss $ (203,467) $ (273,852) Adjustments to reconcile net --------- --------- income to net cash: Depreciation and amortization 487,899 458,717 Deferred income taxes (1,193,427) 609,000
Cash provided by (used in) working capital: Increase in accounts receivable (546,221) (61,018) Increase in inventories (919,217) (869,941) Increase (decrease) in income and Decrease in refundable gas costs (1,465,555) (1,100,355) Net cash used in operating --------- --------- Investing activities: Cost of property retirements, net (83,574) (1,951) Net cash used in investing --------- --------- Financing activities: Issuance of common stock 184,137 193,300 Principal retired on long-term debt (655,398) (650,929) Increase in fuel note payable 565,358 495,415 Principal payment on ESOP obligation (150,000) (225,000) Increase in notes payable, banks 6,510,000 4,825,000 Net cash provided by financing --------- --------- Net increase (decrease) in cash and Cash and cash equivalents at beginning of period 136,925 130,939 Cash and cash equivalents at end -------- -------- of period $ 263,563 $ 98,148 Supplemental disclosures: (net of amount capitalized) $1,153,775 $ 1,131,784 Cash paid for income taxes $ 250,000 $ 33,000
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements:
The amount of natural gas sold for purposes of central and space heating, and to a lesser extent, water heating, is directly related to the ambient air temperature. Consequently, less gas is sold during the summer months than is sold during the winter months. In order to match its costs more properly with gas sales revenue each month, the Company charges to certain expenses, primarily depreciation, an amount equal to the percentage of the annual volume of firm gas sales forecasted for the month, applied to the estimated annual expenses.
Accounts Receivable - Customers are shown net of allowance for uncollectible accounts of $726,000 and $595,000 as of November 30, 1995 and August 31, 1995, respectively.
C. Restriction on Retained Earnings
Under the terms of the Indenture securing the First Mortgage Bonds, retained earnings in the amount of $4,357,834 as of November 30, 1995, were unrestricted as to the payment of cash dividends on Common Stock and the purchase, redemption, or retirement of shares of capital stock.
D. Change in Par Value
On September 15, 1995 the Massachusetts Department of Public Utilities gave approval for the Company to change its Common Stock from $2.50 par value to no par value. This change was previously approved by Stockholders of the Company at the 1995 Annual Meeting.
Management's Discussion and Analysis of Financial Condition and Results of Operations
For the Three Months Ended November 30, 1995 and
The Company's gas sales are divided into two categories: firm, whereby the Company must supply gas to customers on demand; and interruptible, whereby the Company may, generally during colder months, discontinue service to high volume industrial customers. Sales of gas to interruptible customers do not materially affect the Company's operating income because, unless interruptible volumes exceed a certain threshold specified by the Massachusetts Department of Public Utilities ("MDPU"), the Company must return all gross profit on such sales directly to the Company's firm customers. Once the threshold is attained, the Company may retain 10% of gross profits. The threshold was not attained in the three month period ended November 30, 1995. Since most of the Company's firm customers utilize gas for space heating purposes, the Company's sales are sensitive to the severity of the weather. The Company measures weather through the use of effective degree days. An effective degree day is calculated by subtracting the average temperature for the day, adjusted for wind and cloud cover, from 65 degrees Fahrenheit. The Company's service territory experienced 907 effective degree days during the three months ended November 30, 1995 as compared to 789 effective degree days for the three months ended November 30, 1994. The twenty-year average for the three months ended November 30 is 972 effective degree days. The colder weather in the current fiscal quarter occurred primarily during the month of November as the billing degree days for November 1995 were 586 compared to 407 for November of 1994. As a result, the volume of firm sales increased 9.2% to 828,342 Mcf for the three months ended November 30, 1995 from 758,216 Mcf for the three months ended November 30, 1994. The Company's interruptible sales increased from 278,144 Mcf to 296,927 Mcf and related interruptible revenues increased from $562,872 to $591,886. The Company's total operating revenues increased 3.9% to $6,962,014 for the three months ended November 30, 1995 from $6,701,938 for the three months ended November 30, 1994. This increase was due to the previously mentioned weather-related increase in firm gas volumes which was partially offset by a 4.7% decrease in the average unit price of gas sold to firm customers. The average unit price was $7.39 per Mcf of firm gas sold for the three months ended November 30, 1995 compared to $7.76 per Mcf of firm gas sold for the three months ended November 30, 1994. The decrease in unit selling prices reflects a return to firm customers of over collected gas costs as well as pipeline supplier refunds.
Gas costs recovered decreased 1.6% to $3,273.480 for the three months ended November 30, 1995 from $3,222,060 for the three months ended November 30, 1994. The reason for the decrease in gas costs recovered is due to a 7.7% decrease in the Company's average cost of gas to $3.24 per firm Mcf for the three months ended November 30, 1995 from $3.51 per firm Mcf for the three months ended November 30, 1994. The reduction in unit costs was partially offset by the aforementioned increase in firm gas volumes sold.
Operations and maintenance expenses remained nearly constant as the Company incurred $2,667,236 for the three months ended November 30, 1995 compared to $2,660,419 for the three months ended November 30, 1994.
Interest charges for the three months ended November 30, 1995 increased by $59,220. The increase was primarily attributable to higher interest rates applicable to higher outstanding amounts of short-term debt.
Loss attributable to common stock decreased 25.3% to $208,087 for the three months ended November 30, 1995 from $278,665 for the three months ended November 30, 1994. Loss per common share decreased 27.8% to $0.13 for the three months ended November 30, 1995 from $0.18 per share for the three months ended November 30, 1994. Since the Company's business is seasonal, losses are generally experienced during the first quarter of the Company's fiscal year. Dividends per common share were $.39 per share for the three months ended November 30, 1995 compared to $.38 per share for the three months ended November 30, 1994. In December, the Company declared a dividend of $.40 per share which was paid to shareholders on January 1, 1996.
The Company continues to invest a significant amount of capital in its distribution system to satisfy current and expected future customer demand. Funding has traditionally been generated from operations, short-term bank borrowings, issuance of long-term debt and the issuance of additional equity, including the issuance of additional shares of common stock through a Dividend Reinvestment Plan. Management anticipates that these and other sources will remain available and will continue to adequately serve the Company's needs.
Effective December 12, 1995, the Company finances most of its gas inventory with a bank through a special purpose credit agreement having a maximum financing commitment of $10,000,000 with a floating interest rate. This credit agreement extends from December 12, 1995 through December 31, 2000. Prior to December 12, 1995, the Company used a variety of arrangements to provide financing for its supplemental fuel inventories. As of November 30, 1995, the Company's obligation was $5,696,511.
For the three months ended November 30, 1995, the Company's construction expenditures totaled $2,199,905. These expenditures were funded principally from short-term bank borrowings. Historically, the first quarter of the Company's fiscal year has been characterized by significant construction expenditures, low gas sendout and low operating revenues. Cash requirements during this period have historically been satisfied through short-term bank borrowings. Planned construction expenditures for the remainder of fiscal 1996 are currently estimated at $4,800,000 and planned construction expenditures for fiscal 1997 are currently estimated at $6,225,000. The Company's planned construction expenditures and long-term debt repayments have been and will continue to be funded through cash generated by operations and short-term bank borrowings, which the Company anticipates will be replaced from time to time with equity and long-term debt financings.
PART II - OTHER INFORMATION
The information called for by this item is unchanged from that filed in the Company's Annual Report on Form 10-K for fiscal 1995.
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
In December 1995, the Company received approval from the MDPU for its new supplemental fuel agreement replacing the one that expired October 31, 1995.
Exhibit 4.5 Revolving Credit Agreement.
Item 6(b) Reports on Form 8-K
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By /S/ Philip H. Reardon President and Chief Executive Officer
By /S/ James H. Hastings | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T13:01:44 |
0000899243-96-000017 | 0000899243-96-000017_0000.txt | Filed Pursuant to Rule 424(b)(2)
(To Prospectus dated January 11, 1996)
[LOGO OF BROWNING FERRIS INDUSTRIES APPEARS HERE]
6.10% Senior Notes due January 15, 2003 Interest payable January 15 and July 15
6.375% Senior Notes due January 15, 2008 Interest payable January 15 and July 15
Interest on the 6.10% Senior Notes due January 15, 2003 and on the 6.375% Senior Notes due January 15, 2008 (collectively, the "Notes") is payable semiannually on January 15 and July 15, commencing July 15, 1996. The Notes are not redeemable prior to maturity. The Notes will be represented by one or more global securities registered in the name of a nominee of The Depository Trust Company, as Depositary. Beneficial interests in the Notes will be shown on, and transfers thereof will be effected only through, records maintained by the Depositary and its participants. Except as described herein, the Notes will not be issued in definitive form. See "Description of the Notes."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(1) Plus accrued interest, if any, from January 17, 1996. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting". (3) Before deducting expenses payable by the Company estimated at $250,000.
The Notes are offered, subject to prior sale, when, as and if accepted by the Underwriters. It is expected that delivery of the Notes will be made on or about January 17, 1996, through the facilities of the Depositary, against payment therefor in same-day funds.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus Supplement or the Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized. This Prospectus Supplement and the Prospectus do not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which they relate or an offer to sell or the solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date.
The following is a summary of certain consolidated financial information regarding the Company for the periods indicated. The selected financial information set forth below for the years ended September 30, 1991 through 1995 is summarized or prepared from the Company's audited consolidated financial statements for such periods. The data presented below should be read in conjunction with the Company's consolidated financial statements and the notes thereto incorporated by reference herein. See "Incorporation of Certain Documents by Reference" in the accompanying Prospectus.
(1) Certain reclassifications have been made in prior period amounts to conform to the current year presentation. (2) $1.25 per share before a special charge of $.10 per share taken in fiscal 1993 to cover the estimated expense of reorganizing the Company's regional structure in the United States. (3) $1.44 per share before a special charge of $1.02 per share taken in fiscal 1991 to establish additional landfill closure and post-closure accruals. (4) Includes extraordinary charge of $5 million, net of tax ($.03 per share) related to the loss on early retirement of debt in fiscal 1994. (5) For the purposes of computing the ratio of earnings to fixed charges, "earnings" has been calculated by adding to the caption "income before income taxes, minority interest and extraordinary item", fixed charges, excluding capitalized interest, and by deducting equity in earnings of affiliates less than 50% owned. "Fixed charges" consists of interest expense whether capitalized or expensed, amortization of debt costs, and one-third of rental expense, which the Company considers representative of the interest factor in the rentals. The interest expense portion of fixed charges includes interest expense and interest costs capitalized related to the Company's proportionate share of 50%-owned subsidiaries and has been reduced by capitalized interest income earned on proceeds primarily from tax-exempt financings of such 50%-owned subsidiaries. (6) Excluding the effects of the fiscal 1993 reorganization charge of $27.0 million, the ratio of earnings to fixed charges for fiscal 1993 was 3.51. (7) Excluding the effects of the fiscal year 1991 special charge of $246.5 million, the ratio of earnings to fixed charges for fiscal year 1991 was 3.63.
The entire net proceeds received by the Company from the sale of the Notes will be applied to repayment of a portion of the Company's 6-1/4% Convertible Subordinated Debentures Due 2012 and 6-3/4% Convertible Subordinated Debentures Due 2005 in the aggregate principal amount of approximately $745 million, called for redemption on February 2, 1996. Such indebtedness bears interest at a current weighted average interest rate of 6.52%. Additional funds required for such redemption will be provided from sales of commercial paper and internally generated funds. Such redemption is expected to result in an extraordinary after-tax charge of approximately $11 million during the quarter ending March 31, 1996.
Pending such uses, the proceeds will be used to repay commercial paper and purchase short-term investments.
The following description of the particular terms of the Notes offered hereby (referred to in the accompanying Prospectus as the "Offered Debt Securities") supplements, and to the extent inconsistent therewith replaces, the description of the general terms and provisions of Debt Securities set forth in the Prospectus, to which description reference is hereby made. The Notes will be issued under the Senior Indenture. Except as otherwise defined herein, capitalized terms used herein have the meanings specified in the accompanying Prospectus.
The 6.10% Senior Notes due January 15, 2003 (the "6.10% Notes") will be limited to $200,000,000 in aggregate principal amount and will mature on January 15, 2003. The 6.375% Senior Notes due January 15, 2008 (the "6.375% Notes") will be limited to $200,000,000 in aggregate principal amount and will mature on January 15, 2008. The Notes will bear interest from January 17, 1996, at the rates per annum stated on the cover page of this Prospectus Supplement, payable semiannually on January 15 and July 15, commencing July 15, 1996, to holders of record at the close of business on first day of the month immediately preceding the month in which such interest payment is due, except as otherwise provided in the Senior Indenture.
The Notes are not redeemable prior to maturity and are not subject to any sinking fund. The Notes will be sold in minimum denominations of $1,000 and integral multiples thereof.
Settlement for the Notes will be made in same-day funds. All payments of principal and interest will be made by the Company in immediately available funds. To the extent any Notes are held by The Depository Trust Company ("DTC"), such Notes will trade in DTC's Same-Day Funds Settlement System until maturity, and therefore DTC will require secondary trading activity in the Notes to be settled in immediately available funds. Secondary trading in long- term notes and debentures of corporate issuers is generally settled in clearing-house or next-day funds. No assurance can be given as to the effect, if any, of settlement in immediately available funds on trading activity in the Notes.
The Notes will be issued in the form of one or more fully registered Global Notes (referred to herein as the "Global Notes" and in the Prospectus as the "Global Securities") which will be deposited with, or on behalf of, the Depositary and registered in the name of the Depositary's nominee. Except as set forth below, the Global Notes may be transferred, in whole and not in part, only to another nominee of the Depositary or to a successor of the Depositary or its nominee.
The Depositary has advised the Company and the Underwriters as follows: The Depositary is a limited- purpose trust company organized under the laws of the State of New York, a "banking corporation" within the meaning of the New York banking law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. The Depositary was created to hold securities of its Participants and to facilitate the clearance and settlement of securities transactions among its Participants in such securities through electronic book- entry changes in accounts of the Participants, thereby eliminating the need for physical movement of securities certificates. The Depositary's Participants include securities brokers and dealers (including the Underwriters), banks (including the Trustee), trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own the Depositary. Access to the Depositary's book-entry system is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly.
Neither the Company, the Trustee, any Paying Agent nor the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Global Notes, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
See "Description of Debt Securities--Provisions Applicable to Both Senior and Subordinated Debt Securities--Global Securities" in the accompanying Prospectus for additional information concerning the arrangements for book-entry registration and transfer of the Notes.
The Company at any time may satisfy its obligations with respect to payments of principal of and interest on the Notes by depositing in trust with the Trustee money or U.S. government obligations or a combination thereof sufficient to make such payments when due. All obligations of the Company with respect to the Notes and the Senior Indenture insofar as they relate to the Notes will be discharged and terminated (except as to the Company's obligations to compensate, reimburse and indemnify the Trustee pursuant to the Senior Indenture) only if (i) such deposit is sufficient to pay when due the principal of and interest on all outstanding Notes, and (ii) the Company delivers to the Trustee an opinion of counsel to the effect that the holders of the Notes will not recognize income, gain or loss for United States federal income tax purposes as a result of such treatment of such holder's principal and interest payments on the Notes (such opinion must be based on a ruling of the Internal Revenue Service or a change in United States federal income tax law occurring after the date hereof, since such a result would not occur under current tax law). In the event of any such defeasance, holders of the Notes would be able to look only to such trust fund for payments of principal of and interest on the Notes until maturity.
See "Description of Debt Securities" in the accompanying Prospectus for additional information concerning the Notes and the Indenture under which they are to be issued.
Subject to the terms and conditions set forth in the Underwriting Agreement, dated the date hereof, the Company has agreed to sell to each of the Underwriters named below, and each of the Underwriters has severally agreed to purchase, the principal amount of Notes set forth opposite its name below:
Under the terms and conditions of the Underwriting Agreement, the Underwriters are obligated to take and pay for all the Notes if any are taken.
The Underwriters propose to offer the Notes directly to the public at the initial public offering prices set forth on the cover page of this Prospectus Supplement and to certain dealers at such price less a concession not in excess of .375% of the principal amount of the 6.10% Notes and .40% of the principal amount of the 6.375% Notes. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of .25% of the principal amount of the 6.10% Notes or the 6.375% Notes to certain other dealers. After the initial public offering, the public offering price and such concessions may be changed by the Underwriters.
The Notes are new issues of securities with no established trading market. The Company has been advised by the Underwriters that the Underwriters intend to make a market in the Notes but are not obligated to do so and may discontinue market making at any time without notice. No assurance can be given as to the liquidity of the trading market for the Notes.
The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended.
In the ordinary course of their respective businesses, the Underwriters and their respective affiliates have engaged and may in the future engage in commercial banking and investment banking transactions with the Company.
[LOGO OF BFI APPEARS HERE]
Browning-Ferris Industries, Inc. (the "Company") may offer and sell from time to time, either jointly or separately, at prices and on terms to be determined at or prior to the time of sale, up to an aggregate initial offering price of not more than $1,142,227,500 (or, if applicable, the equivalent thereof in other currencies) of its (i) unsecured debt securities ("Debt Securities") consisting of debentures, notes and/or other unsecured evidences of indebtedness in one or more series, (ii) shares of preferred stock, without par value ("Preferred Stock"), in one or more series, (iii) shares of common stock, par value $.16 2/3 per share ("Common Stock"), (iv) Warrants ("Warrants") to purchase Debt Securities, Preferred Stock or Common Stock, (v) Stock Purchase Contracts ("Stock Purchase Contracts") to purchase Preferred Stock or Common Stock or (vi) Stock Purchase Units ("Stock Purchase Units"), each representing ownership of a Stock Purchase Contract and Debt Securities or debt obligations of third parties, including U.S. Treasury securities, securing the holder's obligation to purchase the Preferred Stock or Common Stock under the Stock Purchase Contract (the Debt Securities, Preferred Stock, Common Stock, Warrants, Stock Purchase Contracts and Stock Purchase Units are collectively referred to as "Securities").
Specific terms of the Securities ("Offered Securities") in respect of which this Prospectus is being delivered will be set forth in an accompanying Prospectus Supplement ("Prospectus Supplement"), together with the terms of the offering of the Offered Securities and the initial price and net proceeds to the Company from the sale thereof. The Prospectus Supplement will set forth with regard to the particular Offered Securities, without limitation, the following: (i) in the case of Debt Securities, the specific designation, aggregate principal amount, ranking as senior or subordinated debt, authorized denomination, maturity, rate or rates of interest (or method of calculation thereof) and dates for payment thereof, any exchangeability, conversion, redemption, prepayment or sinking fund provisions, and the currency or currencies or currency unit or currency units in which principal, premium, if any, or interest, if any, is payable, (ii) in the case of Preferred Stock, the designation, number of shares, liquidation preference per share, initial public offering price, dividend rate (or method of calculation thereof), dates on which dividends shall be payable and dates from which dividends shall accrue, any redemption or sinking fund provisions, any voting rights, and any conversion or exchange rights, (iii) in the case of Common Stock, the number of shares of Common Stock and the terms of the offering and sale thereof, (iv) in the case of Warrants, the number and terms thereof, the designation and number of Securities issuable upon their exercise, the exercise price, the terms of the offering and sale thereof and, where applicable, the duration and detachability thereof, (v) in the case of Stock Purchase Contracts, the designation and number of shares of Preferred Stock or Common Stock issuable thereunder, the purchase price of the Preferred Stock or Common Stock, the date or dates on which the Preferred Stock or Common Stock is required to be purchased by the holders of the Stock Purchase Contracts, any periodic payments required to be made by the Company to the holders of the Stock Purchase Contract or visa versa, and the terms of the offering and sale thereof, and (vi) in the case of Stock Purchase Units, the specific terms of the Stock Purchase Contracts and any Debt Securities or debt obligations of third parties securing the holder's obligation to purchase the Preferred Stock or Common Stock under the Stock Purchase Contracts, and the terms of the offering and sale thereof.
The Company may sell the Securities directly, through agents designated from time to time or through underwriters or dealers. If any agents of the Company or any underwriters or dealers are involved in the sale of the Securities, the names of such agents, underwriters or dealers and any applicable commissions and discounts will be set forth in the Prospectus Supplement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus may not be used to consummate sales of the Securities unless accompanied by a Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS JANUARY 11, 1996
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT IN CONNECTION WITH THE OFFERING MADE HEREBY AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OTHER PERSON. THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES.
The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company with the Commission may be inspected at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, Seven World Trade Center, New York, New York 10048; and Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports, proxy statements and other information can also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, at the offices of the Chicago Stock Exchange, Inc., 440 S. LaSalle Street, Chicago, Illinois 60605, and at the offices of the Pacific Stock Exchange, Inc., 301 Pine Street, San Francisco, California 94104.
This Prospectus constitutes a part of a Registration Statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement") filed by the Company with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement for further information with respect to the Company and the Securities offered hereby. Any statements contained herein concerning the provisions of any document filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and in each instance reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, heretofore filed with the Commission by the Company pursuant to the Exchange Act, are incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
(b) The Company's Current Report on Form 8-K dated January 24, 1995, as amended, relating to the acquisition by the Company of Attwoods plc, including the consolidated financial statements of Attwoods plc for the year ended July 31, 1994 and the unaudited pro forma combined statement of operations of the Company for the year ended September 30, 1994; and
(c) The Company's Current Report on Form 8-K dated March 2, 1995, including the unaudited pro forma combined statement of operations of the Company for the quarter ended December 31, 1994.
All documents filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus, and prior to the termination of the offering of the Securities, shall be deemed to be incorporated by reference in the Prospectus and to be a the date of filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is or is deemed to be incorporated by reference herein or in the accompanying Prospectus Supplement modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus.
Copies of all documents incorporated by reference (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents) will be provided without charge to each person, including any beneficial owner, who receives a copy of this Prospectus on the written request of such person addressed to the Secretary's Department, Browning-Ferris Industries, Inc., P.O. Box 3151, Houston, Texas 77253, or upon the oral request of such person directed to the Secretary's Department at (713) 870-7027.
The Company is one of the largest publicly-held companies that engages, through its subsidiaries and affiliates, in providing waste services. The Company collects, transports, treats and/or processes, recycles and disposes of commercial, residential and municipal solid wastes and industrial wastes. The Company is also involved in waste-to-energy conversion, medical waste services, portable restroom services and municipal and commercial sweeping operations. The Company (including unconsolidated affiliates) operates in approximately 450 locations in North America and approximately 320 locations outside of North America, and employs approximately 43,000 persons. In addition to operations in the United States, Canada and Puerto Rico, the Company owns interests in subsidiaries or affiliates with operations in Australia, the Dominican Republic, Finland, Germany, Hong Kong, Italy, Israel, Kuwait, the Netherlands, New Zealand, Spain, Switzerland and the United Kingdom.
The term "Company" refers to Browning-Ferris Industries, Inc., a Delaware corporation, and its subsidiaries, affiliates and predecessors unless the context requires otherwise. The Company's executive offices are located at 757 N. Eldridge, Houston, Texas 77079. The Company's mailing address is P.O. Box 3151, Houston, Texas 77253, and its telephone number is (713) 870-8100.
Unless otherwise indicated in a Prospectus Supplement with respect to the proceeds from the sale of the particular Securities to which such Prospectus Supplement relates, the net proceeds to be received by the Company from the sale of the Securities will be added to the Company's general funds and are expected to be applied to reduce certain outstanding debt and for general corporate purposes, including capital expenditures and acquisitions.
The following description of the Debt Securities sets forth certain general terms and provisions of the Debt Securities to which any Prospectus Supplement may relate ("Offered Debt Securities"). The particular terms of the Offered Debt Securities and the extent to which such general provisions may apply will be described in a Prospectus Supplement relating to such Offered Debt Securities.
The Debt Securities will be general unsecured obligations of the Company and will constitute either senior debt securities or subordinated debt securities. In the case of Debt Securities that will be senior debt securities ("Senior Debt Securities" and "Offered Senior Debt Securities"), the Debt Securities will be issued under a Restated Indenture dated as of September 1, 1991 (the "Senior Indenture"), between the Company and Texas Commerce Bank National Association, as Trustee (successor trustee to First City, Texas-Houston, National Association, which was formerly First City National Bank of Houston) (the "Senior Trustee"). In the case of Debt Securities that will be subordinated debt securities ("Subordinated Debt Securities" and "Offered Subordinated Debt Securities"), the Debt Securities will be issued under an Indenture dated as of August 1, 1987, as amended (the "Subordinated Indenture"), between the Company and The Bank of New
York, as Trustee (successor trustee to NationsBank of Texas, National Association, which was successor trustee to First RepublicBank Houston, National Association) (the "Subordinated Trustee"). The Senior Indenture and the Subordinated Indenture are sometimes referred to herein individually as an "Indenture" and collectively as the "Indentures". The Senior Trustee and the Subordinated Trustee are sometimes referred to herein individually as a "Trustee" and collectively as the "Trustees". The statements under this caption relating to the Debt Securities and the Indentures are summaries only and do not purport to be complete. Such summaries make use of terms defined in the Indentures. Wherever such terms are used herein or particular provisions of the Indentures are referred to, such terms or provisions, as the case may be, are incorporated by reference as part of the statements made herein, and such statements are qualified in their entirety by such reference. Certain defined terms in the Indentures are capitalized herein. The references below apply to the section numbers in each of the Indentures, unless otherwise indicated. Both the Senior Indenture and the Subordinated Indenture, and the Securities issued thereunder, are governed by Texas law.
PROVISIONS APPLICABLE TO BOTH SENIOR AND SUBORDINATED DEBT SECURITIES
GENERAL. The Indentures do not limit the aggregate principal amount of the Debt Securities issuable thereunder or of any particular series of the Debt Securities and provide that Debt Securities may be issued thereunder from time to time in one or more series with the same or various maturities at par, at a premium or at a discount. Offered Debt Securities bearing no interest or interest at a rate which at the time of issuance is below market rate ("Original Issue Discount Securities") will be sold at a discount (which may be substantial) from their stated principal amount. Federal income tax consequences and other special considerations applicable to any such Original Issue Discount Securities will be described in the Prospectus Supplement relating thereto. Other than as may be set forth in any Prospectus Supplement, the Indentures and the Debt Securities will not contain any covenants or other provisions that are intended to afford holders of the Debt Securities special protection in the event of a highly leveraged transaction by the Company.
Reference is made to the Prospectus Supplement for the following terms of the Offered Debt Securities: (i) the title and the limit on the aggregate principal amount of Offered Debt Securities; (ii) the percentage of the principal amount at which the Offered Debt Securities will be sold; (iii) the date or dates on which the principal of (and premium, if any, on) the Offered Debt Securities will be payable; (iv) the rate or rates (which may be fixed or variable) per annum, if any, at which the Offered Debt Securities will bear interest or the method of determining such rate or rates; (v) the date or dates from which such interest, if any, shall accrue, the date or dates on which such interest, if any, will be payable and the regular record date for interest payable on any payment date; (vi) the place or places where the principal of (and premium, if any) and interest, if any, on the Offered Debt Securities will be payable; (vii) the terms for redemption or early payment, if any, including any mandatory or optional sinking fund or analogous provision; (viii) the principal amount of any Offered Debt Securities that are Original Issue Discount Securities, which would be payable upon declaration of acceleration of the maturity of the Offered Debt Securities; (ix) any modifications of the Events of Default or covenants of the Company contained in the Indenture pertaining to the Offered Debt Securities; (x) information with respect to book-entry procedures, if any; (xi) as to Subordinated Debt Securities only, whether the offered Subordinated Debt Securities are convertible into Common Stock of the Company and, if so, the initial conversion price; and (xii) any other terms of the Offered Debt Securities not inconsistent with the Indenture under which they are issued. (Section 301)
Unless otherwise indicated in the Prospectus Supplement relating thereto, principal of and any premium and interest on the Offered Debt Securities will be payable, and the Offered Debt Securities will be exchangeable and transfer thereof will be registrable, at the corporate trust office of the Trustee or at the office of each paying agent, if any, identified in the Prospectus Supplement with respect to the Offered Debt Securities; provided that, at the option of the Company, payment of any interest may be made by check mailed to the address of the Person entitled thereto as it appears in the Security Register. The Corporate Trust Office of the Senior Trustee is located at 712 Main Street, Houston, Texas 77002, and the Corporate Trust Office of the Subordinated Trustee is located at 10161 Centurion Parkway, Jacksonville, Florida 32256. (Sections 301, 305 and 1002)
Unless otherwise indicated in the Prospectus Supplement relating thereto, the Offered Debt Securities will be issued in only fully registered form without coupons in denominations of $1,000 or any integral multiple thereof, and no service charge will be made for any transfer or exchange of such Offered Debt Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. (Sections
GLOBAL SECURITIES. The Offered Debt Securities of a series may be issued in whole or in part in the form of one or more global securities ("Global Securities") that will be issued to and registered in the name of the depositary (the "Depositary") identified in the Prospectus Supplement, or its nominee, relating to such series. Global Securities may be issued only in fully-registered form and in either temporary or permanent form. Unless and until a Global Security is exchanged in whole or in part for the individual Debt Securities represented thereby, such Global Security may not be transferred except as a whole by the Depositary to its nominee or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary or nominee of such successor Depositary. (Section 305)
The specific terms of the depositary arrangement with respect to a series of Offered Debt Securities will be described in the Prospectus Supplement relating to such series. The Company anticipates that the following provisions will generally apply to depositary arrangements.
Upon the issuance of a Global Security, the Depositary or its nominee will credit, on its book-entry registration and transfer system, the respective principal amounts of the individual Debt Securities represented by such Global Security to the accounts of persons that have accounts with the Depositary. Such accounts shall be designated by the dealers, underwriters or agents with respect to such Debt Securities or by the Company if such Debt Securities are offered and sold directly by the Company. Ownership of beneficial interests in a Global Security will be limited to persons that have accounts with the Depositary ("Participants") or persons that may hold interests through Participants. Ownership of beneficial interests in such Global Security will be shown on, and the transfer of that ownership will be effected only through, records maintained by the Depositary or its nominee (with respect to interests of Participants) and the records of Participants (with respect to interests of persons other than Participants). The laws of some states require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a Global Security.
So long as the Depositary or its nominee is the registered owner of a Global Security, such registered owner will be considered the sole owner or holder of the Debt Securities represented by such Global Security for all purposes under the Indenture. Except as provided below, owners of beneficial interests in a Global Security will not be entitled to have any of the individual Debt Securities represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of any such Debt Securities in definitive form and will not be considered the owners or holders thereof under the Indenture.
Payments of principal of and premium, if any, and interest, if any, on Debt Securities represented by a Global Security registered in the name of the Depositary or its nominee will be made to the Depositary or its nominee, as the case may be, as the registered owner of the Global Security representing such Debt Securities. None of the Company, the Trustee, any Paying Agent or the Security Registrar for such Debt Securities will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Global Security for such Debt Securities or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
The Company expects the Depositary or its nominee, immediately upon receipt of any payment of principal, premium or interest in respect of a Global Security, will credit Participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Security as shown on the records of the Depositary or its nominee. The Company also expects that payments by Participants to owners of beneficial interests in such Global Security held through such Participants will be governed by standing instructions and customary practices, as is now securities held for the accounts of customers in bearer form or registered in "street name". Such payments will be the sole responsibility of such Participants. The Company has no control over the practices of the Depositary or the Participants and there can be no assurance that these practices will not be changed.
If the Depositary for a series of Debt Securities is at any time unwilling, unable or ineligible to continue as depositary and a successor depositary is not appointed by the Company within 90 days, the Company will issue individual Debt Securities of such series in exchange for the Global Security representing such series of Debt Securities. In addition, the Company may at any time and in its sole discretion, subject to any limitations described in the Prospectus Supplement relating to such Debt Securities, determine not to have any Debt Securities of a series represented by one or more Global Securities and, in such event, will issue individual Debt Securities of such series in exchange for the Global Security representing such series of Debt Securities. Further, if there shall have occurred and be continuing an Event of Default, or an event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default with respect to any series of Debt Securities represented by a Global Security, such Global Security shall be exchangeable for individual Debt Securities of such series. In any such instance, an owner of a beneficial interest in a Global Security will be entitled to a physical delivery of individual Debt Securities of the series represented by such Global Security equal in principal amount to such beneficial interest and to have such Debt Securities registered in its name. Individual Debt Securities of such series so issued will be issued in denominations, unless otherwise specified by the Company, of $1,000 and integral multiples thereof.
CONSOLIDATION, MERGER AND SALE OF ASSETS. Each Indenture provides that the Company, without the consent of the holders of any of the outstanding Debt Securities, may consolidate with or merge into any other corporation or transfer or lease its assets substantially as an entirety to any Person or may acquire or lease the assets of any Person substantially as an entirety or may permit any corporation to merge into the Company provided that (i) the successor is a corporation organized under the laws of any domestic jurisdiction; (ii) the successor corporation, if other than the Company, assumes the Company's obligations under the Indenture and the Debt Securities issued thereunder; (iii) after giving effect to the transaction, no Event of Default and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have occurred and be continuing; and (iv) certain other conditions are met. (Section 801)
MODIFICATION OF THE INDENTURES. Each Indenture provides that the Company and the Trustee may, without the consent of any holders of Debt Securities, enter into supplemental indentures for the purposes, among other things, of adding to the Company's covenants, adding additional Events of Default, establishing the form or terms of Debt Securities, curing ambiguities or inconsistencies in the Indenture or making any other provisions with respect to matters arising under the Indenture if such action shall not adversely affect the interests of the holders of any series of Debt Securities in any material respect or to change or eliminate any of the provisions of the Indenture with respect to a series of Debt Securities if such series is not then outstanding. (Section 901)
Each Indenture also contains provisions permitting the Company, with the consent of the holders of not less than a majority in principal amount of the outstanding Debt Securities of the affected series, to execute supplemental indentures adding any provisions to or changing or eliminating any of the provisions of the Indenture or modifying the rights of the holders of the Debt Securities of such series, except that no such supplemental indenture may, without the consent of the holders of all of the outstanding Debt Securities affected thereby, among other things: (i) change the maturity of the principal of or any installment of principal or interest on any of the Debt Securities; (ii) reduce the principal amount thereof or the rate of interest, if any, thereon or any premium payable on the redemption thereof; (iii) reduce the amount of the principal of Original Issue Discount Securities payable on any date; (iv) change the place of payment where, or the coin or currency in which, any of the Debt Securities or any premium or interest thereon is payable; (v) impair the right to institute suit for the enforcement of any such payment on or after the applicable maturity date; (vi) reduce the percentage in principal amount of the Debt Securities of any outstanding series the consent of the holders of which is required for any such supplemental indenture or for any waiver of compliance with certain provisions of, or of certain defaults under, the Indenture; (vii) as to the Subordinated Indenture only, adversely affect the right to convert the Subordinated Debt Securities (if convertible) or modify the subordination provisions of the Subordinated Indenture in a manner adverse to the holders of Subordinated Debt Securities; or (viii) with certain exceptions, modify the foregoing requirements. (Section
EVENTS OF DEFAULT, NOTICE AND WAIVER. Unless otherwise indicated in the Prospectus Supplement relating to a particular series of Debt Securities, an Event of Default with respect to any series of Debt Securities is defined in each Indenture to be a (i) default for 30 days in the payment of any installment of interest upon any of the Debt Securities of such series when due; (ii) default in the payment of principal of (or premium, if any, on) any of the Debt Securities of such series when due; (iii) default in the making or satisfaction of any sinking fund payment when the same becomes due by the terms of the Debt Securities of such series; (iv) default by the Company in the performance, or breach, of any of its other covenants in the Indenture which shall not have been remedied for a period of 60 days after notice by the Trustee or the holders of at least 25% in principal amount of the Debt Securities of such series; (v) certain events of bankruptcy, insolvency or reorganization of the Company; and (vi) such other events as may be specified for each series. (Section 501)
A default under other indebtedness of the Company or any of its subsidiaries will not be a default under either Indenture, and an Event of Default under one series of Debt Securities will not necessarily be an Event of Default under another series of Debt Securities issued under the same Indenture.
Each Indenture provides that if an Event of Default specified therein with respect to any outstanding series of Debt Securities issued thereunder shall have occurred and be continuing, either the Trustee or the holders of not less than 25% in principal amount of the Debt Securities of such series may declare the principal (or, if the Debt Securities of such series are Original Issue Discount Securities, such portion of the principal amount as may be specified by the terms of such series) of all of the Debt Securities of such series to be immediately due and payable. Such declaration may be rescinded if certain conditions are satisfied. (Section 502)
Each Indenture also provides that the holders of not less than a majority in principal amount of the Debt Securities of any outstanding series may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Debt Securities of such series, provided that the Trustee may take any other proper action not inconsistent with such direction and may decline to act if such direction is contrary to law or to the Indenture or would involve the Trustee in personal liability. (Section 512)
In addition, each Indenture also provides that the holders of not less than a majority in principal amount of the Debt Securities of any outstanding series thereunder may on behalf of the holders of all of the Debt Securities of such series waive any past default with respect to such series and its consequences, except a default (i) in the payment of the principal of (or premium, if any) or interest on any of the Debt Securities of such series or (ii) in respect of a covenant or provision of the Indenture which, under the terms thereof, cannot be modified or amended without the consent of the holders of all of the Debt Securities of such series. (Section 513)
Each Indenture contains provisions entitling the Trustee, subject to the duty of the Trustee during an Event of Default in respect of any series of Debt Securities issued thereunder to act with the required standard of care, to be indemnified by the holders of the Debt Securities of such series before proceeding to exercise any right or power under the Indenture at the request of the holders of the Debt Securities of such series. (Sections 601 and 603)
Each Indenture also provides that the Trustee will, within 90 days after the occurrence of a default in respect of any series of Debt Securities issued thereunder give to the holders of the Debt Securities of such series notice of all uncured and unwaived defaults known to it; provided, however, that, except in the case of a default in the payment of the principal of, (or premium, if any) or interest on, or any sinking fund installment with respect to, any Debt Securities of such series, the Trustee will be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interest of the holders of the Debt Securities of such series; and provided further, that such notice shall not be given until at least 30 days after the occurrence of an Event of Default regarding the performance or breach of any covenant or warranty of the Company under the Indenture other than for the payment of the principal of, (or premium, if any) or interest on, or any sinking fund installment with respect to, any of the Debt Securities of such series. The term default for the foregoing purpose only means any event which is, or after notice or lapse of time, or both, would become, an Event of Default with respect to the Debt Securities of such series. (Section 602)
Each Indenture requires the Company to file annually with the Trustee a certificate, executed by an officer of the Company, indicating whether the Company has fulfilled all of its obligations or is in default under certain covenants under the Indenture. (Section 1004)
PROVISIONS APPLICABLE TO SENIOR DEBT SECURITIES
GENERAL. The Senior Debt Securities will be unsecured obligations of the Company issued under the Senior Indenture and will rank on a parity with all other unsecured and unsubordinated indebtedness of the Company.
LIMITATIONS ON LIENS. The Senior Indenture does not contain any covenant restricting the amount of indebtedness which may be incurred by the Company or any of its Subsidiaries. The Senior Indenture, however, provides, in general, that except as provided in this and in the following paragraph, the Company will not, and will not permit any Restricted Subsidiary to, issue, assume or guarantee any Debt secured by a Lien upon any Principal Property of the Company or any Restricted Subsidiary or upon any shares of stock or Debt of any Restricted Subsidiary (whether such Principal Property, shares of stock or Debt are now owned or hereafter acquired) without in any such case effectively providing concurrently with the issuance, assumption or guaranty of any such Debt that the Senior Debt Securities (together with, if the Company shall so determine, any other indebtedness of or guaranty by the Company or such Restricted Subsidiary then existing or thereafter created which is not subordinate to the Senior Debt Securities) shall be secured equally and ratably with (or, at the option of the Company, prior to) such Debt, so long as such Debt shall be so secured; provided, however, that the foregoing restrictions shall not apply to Debt secured by: (1) Liens on property, shares of stock or indebtedness of any corporation existing at the time such corporation becomes a Restricted Subsidiary; (2) Liens on any property (including shares of stock or Debt) existing at the time of acquisition thereof or securing the payment of all or any part of the purchase price or construction cost thereof or securing any Debt incurred prior to, at the time of or within 180 days after, the acquisition of such property or the completion of any such construction for the purpose of financing all or any part of the purchase price or construction cost thereof; (3) Liens on any property to secure all or any part of the cost of development, operation, construction, alteration, repair or improvement of all or any part of such property, or to secure Debt incurred prior to, at the time of or within 180 days after, the completion of such development, operation, construction, alteration, repair or improvement for the purpose of financing all or any part of such cost; (4) Liens which secure Debt owing by a Restricted Subsidiary to the Company or to another Restricted Subsidiary or by the Company to a Restricted Subsidiary; (5) Liens securing indebtedness of a corporation which becomes a successor of the Company by reason of a consolidation, merger or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety; (6) Liens on property of the Company or a Restricted Subsidiary in favor of governmental authorities to secure partial, progress, advance or other payments or to secure any indebtedness incurred for the purpose of financing all or any part of the purchase price or the cost of construction of the property subject to such Liens, or in favor of any trustee or mortgagee for the benefit of holders of indebtedness of any such entity incurred for any such purpose; (7) Liens incurred in connection with pollution control, sewage or solid waste disposal, industrial revenue or similar financing; (8) Liens existing at January 15, 1985; and (9) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Lien referred to in the foregoing clauses (1) to (8), inclusive, or of any Debt secured thereby; provided that such extension, renewal or replacement Lien shall be limited to all or any part of the same property that secured the Lien extended, renewed or replaced (plus any improvements on such property) and shall secure no larger amount of Debt than that existing at the time of such extension, renewal or replacement. (Section
The Company and any one or more Restricted Subsidiaries may issue, assume or guarantee Debt secured by a Lien which would otherwise be subject to the foregoing restrictions if at the time it does so (the "Incurrence Time") such Debt plus all other Debt of the Company and its Restricted Subsidiaries secured by a Lien which would otherwise be subject to the foregoing restrictions (not including Debt permitted to be secured as described in clauses (1) through (9) in the preceding paragraph), plus the aggregate Attributable Debt (determined as of the Incurrence Time) of Sale and Leaseback Transactions (other than Sale and Leaseback Transactions described in clauses (a) and (b) of the paragraph under the caption "Limitation on Sale and Leaseback Transactions" herein) entered into after January 15, 1985 and in existence at the Incurrence Time (less the aggregate amount of proceeds of such Sale and Leaseback Transactions which shall have been applied as described in clause (d) of the paragraph under the caption "Limitation on Sale and Leaseback Transactions" herein), does not exceed 10% of the Consolidated Net Tangible Assets. (Section 1005)
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Senior Indenture provides, in general, that the Company will not itself, and will not permit any Restricted Subsidiary to, enter into any arrangements with any bank, insurance company or other lender or investor (other than the Company or another Restricted Subsidiary) providing for the leasing as lessee by the Company or any such Restricted Subsidiary of any Principal Property (except a lease for a temporary period not to exceed three years by the end of which it is intended the use of such Principal Property by the lessee will be discontinued), which was or is owned by the Company or a Restricted Subsidiary and which has been or is to be sold or transferred by the Company or a Restricted Subsidiary, more than 180 days after the completion of construction and commencement of full operation thereof by the Company or such Restricted Subsidiary, to such lender or investor or to any person to whom funds have been or are to be advanced by such lender or investor on the security of such Principal Property (herein called a "Sale and Leaseback Transaction") unless: (a) the Company or such Restricted Subsidiary would (at the time of entering into such arrangement) be entitled, as described in clauses (1) through (9) of the first paragraph under the caption "Limitations on Liens" herein, without equally and ratably securing the Senior Debt Securities, to issue, assume or guarantee indebtedness secured by a Lien on such Principal Property, or (b) such Sale and Leaseback Transaction relates to a landfill or other waste disposal site (excluding any plant or similar facility located thereon) owned by the Company or such Restricted Subsidiary or which the Company or such Restricted Subsidiary has the right to use, or (c) the Attributable Debt of the Company and its Restricted Subsidiaries in respect of such Sale and Leaseback Transaction and all other Sale and Leaseback Transactions entered into after January 15, 1985 (other than such Sale and Leaseback Transactions as are referred to in clauses (a), (b) or (d) of this paragraph), plus the aggregate principal amount of Debt secured by Liens on Principal Properties then outstanding (excluding any such Debt secured by Liens described in clauses (1) through (9) of the first paragraph under the caption "Limitations on Liens" herein) which do not equally and ratably secure the Senior Debt Securities, would not exceed 10% of Consolidated Net Tangible Assets or (d) the Company, within 180 days after the sale or transfer, applies or causes a Restricted Subsidiary to apply (subject to certain reductions described in the Senior Indenture) an amount equal to the greater of the net proceeds of such sale or transfer or fair market value of the Principal Property so sold and leased back at the time of entering into such Sale and Leaseback Transaction to the retirement of Senior Debt Securities or other indebtedness of the Company (other than indebtedness subordinated to the Senior Debt Securities) or indebtedness of a Restricted Subsidiary, for money borrowed, having a stated maturity more than 12 months from the date of such application or which is extendible at the option of the obligor thereon to a date more than 12 months from the date of such application. (Section 1006)
DEFINITIONS. Certain terms used in the above described restrictions are given the following definitions in Section 101 of the Senior Indenture:
"Attributable Debt" in respect of a Sale and Leaseback Transaction means, as of any particular time, the present value (discounted at the rate of interest implicit in the terms of the lease involved in such Sale and Leaseback Transaction, as determined in good faith by the Company) of the obligation of the lessee thereunder for net rental payments (excluding, however, any amounts required to be paid by such lessee, whether or not designated as rent or additional rent, on account of maintenance and repairs, services, insurance, taxes, assessments, water rates and similar charges or any amounts required to be paid by such lessee thereunder contingent upon monetary inflation or the amount of sales, maintenance and repairs, insurance, taxes, assessments, water rates or similar charges) during the remaining term of such lease (including any period for which such lease has been extended or may, at the option of the lessor, be extended).
"Consolidated Net Tangible Assets" means the aggregate amount of assets (less applicable reserves and other properly deductible items) after deducting therefrom (a) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles and (b) all current liabilities, all as reflected in the Company's latest audited consolidated balance sheet contained in the Company's most recent annual report to its stockholders prior to the time as of which "Consolidated Net Tangible Assets" shall be determined.
"Debt" means indebtedness for borrowed money.
"Lien" means any mortgage, pledge, security interest, lien or other encumbrance.
"Principal Property" means any waste processing, waste disposal or resource recovery plant or similar facility located within the United States of America (other than its territories and possessions and Puerto Rico) and owned by, or leased to, the Company or any Restricted Subsidiary, except (a) any such plant or facility (i) owned or leased jointly or in common with one or more persons other than the Company and its Subsidiaries, in which the interest of the Company and its Restricted Subsidiaries does not exceed 50%, or (ii) which the Board of Directors determines in good faith is not of material importance to the total business conducted, or assets owned, by the Company and its Subsidiaries as an entirety, or (b) any portion of any such plant or facility which the Board of Directors determines in good faith not to be of material importance to the use or operation thereof.
"Restricted Subsidiary" means any Subsidiary substantially all the property of which is located, or substantially all the business of which is carried on, within the United States of America (excluding its territories and possessions and Puerto Rico).
"Subsidiary" means any corporation of which the Company directly or indirectly owns or controls stock which under ordinary circumstances (not dependent upon the happening of a contingency) has voting power to elect a majority of the board of directors of such corporation.
DEFEASANCE. If so provided in the Prospectus Supplement accompanying the Offered Senior Debt Securities, the Company may discharge its indebtedness and its obligations under the Senior Indenture with respect to such series by depositing funds or obligations issued or guaranteed by the United States of America with the Senior Trustee. The Prospectus Supplement will more fully describe the provisions, if any, relating to such discharge. (Section 403)
REGARDING THE SENIOR TRUSTEE. The Senior Trustee is a lending bank under an unsecured variable interest rate bank credit agreement with the Company. The Company has and may from time to time in the future have other banking relationships with the Senior Trustee in the ordinary course of business. Marc J. Shapiro, a director of the Company, is also the President and Chief Executive Officer of the Senior Trustee and an executive officer of Chemical Banking Corporation, the parent corporation of the Senior Trustee. William D. Ruckelshaus, Chairman of the Board of Directors of the Company, is also an advisory director of the Senior Trustee. Marina v.N. Whitman, a director of the Company, is also a director of Chemical Banking Corporation.
PROVISIONS APPLICABLE TO SUBORDINATED DEBT SECURITIES
GENERAL. The Subordinated Debt Securities will be unsecured obligations of the Company to be issued under the Subordinated Indenture, and will be subordinate in right of payment to certain other indebtedness of the Company as described under "Subordination".
SUBORDINATION. The Subordinated Debt Securities will be subordinate and junior in right of payment, as set forth in the Subordinated Indenture, to the prior payment in full of all Senior Debt of the Company. "Senior Debt" is defined in the Subordinated Indenture as the principal of (and premium, if any) and interest on any indebtedness, whether outstanding at the date of the Subordinated Indenture or thereafter created or incurred, which is for (a) money borrowed by the Company, (b) obligations of the Company evidencing the purchase price for acquisitions by the Company or a subsidiary other than in the ordinary course of business, (c) money borrowed by others and assumed or guaranteed by the Company, (d) capitalized lease obligations of the Company, (e) obligations under performance guarantees, support agreements and other agreements in the nature thereof relating to the obligations of any subsidiary of the Company with respect to waste-to-energy facilities and (f) renewals, extensions, refundings, amendments and modifications of any indebtedness, of the kind described in the foregoing clauses (a), (b), (c), (d) and (e) or of the instruments creating or evidencing such indebtedness, unless, in each case, by the terms of the instrument creating or evidencing such indebtedness or such renewal, extension, refunding, amendment and modification, it is provided that such indebtedness is not senior in right of payment to the Subordinated Debt
In the event of any distribution of assets of the Company upon its dissolution, winding up, liquidation or reorganization, the holders of Senior Debt shall first be paid in full in respect of principal, premium (if any) and interest before any such payments are made on account of the Subordinated Debt Securities. In addition, in the event that (a) the Subordinated Debt Securities or any other debt securities issued under the Subordinated Indenture are declared due and payable because of an Event of Default (other than under the circumstances described in the preceding sentence) or (b) any default by the Company has occurred and is continuing in the payment of principal, premium (if any), sinking funds or interest on any Senior Debt, then no payment shall be made on account of principal, premium (if any), sinking funds or interest on the Subordinated Debt Securities until all such payments due in respect of such Senior Debt have been paid full. (Sections 1301 and 1304)
By reason of such subordination, creditors of the Company who are not holders of Senior Debt may, subject to any subordination provisions that may be applicable to such creditors, recover more ratably than holders of the Subordinated Debt Securities.
As of September 30, 1995, the Company had outstanding approximately $1.8 billion principal amount of indebtedness which would constitute "Senior Debt". The Company also has unused lines of credit for up to a maximum of $1.7 billion at November 30, 1995. The amount of Senior Debt may change in the future, and the Subordinated Indenture contains no limitations on the incurrence of Senior Debt.
CONVERSION. The Subordinated Indenture provides that a series of Subordinated Debt Securities may be convertible into Common Stock. The following provisions will apply to convertible Subordinated Debt Securities unless otherwise provided in the Prospectus Supplement for such series of Subordinated Debt Securities.
The holder of any convertible Subordinated Debt Securities will have the right, exercisable at any time prior to maturity, subject to prior redemption by the Company, to convert any portion of such Subordinated Debt Securities that is $1,000 in principal amount or any integral multiple thereof, into shares of Common Stock at the conversion price or conversion rate set forth in the Prospectus Supplement, subject to adjustment.
In certain events, the conversion price or conversion rate will be subject to adjustment as set forth in the Subordinated Indenture. Such events include the issuance of shares of Common Stock as a dividend or distribution on the Common Stock; subdivisions, combinations and reclassifications of the Common Stock; the fixing of a record date for the issuance to all holders of Common Stock of rights or warrants entitling the holders thereof (for a period expiring within 45 days of the record date) to subscribe for or purchase shares of Common Stock at a price per share less than the then current market price per share of Common Stock (as determined pursuant to the Subordinated Indenture); and the fixing of a record date for the distribution to all holders of Common Stock of evidences of indebtedness or assets (excluding cash dividends paid from surplus) of the Company or subscription rights or warrants (other than those referred to above). No adjustment of the conversion price or conversion rate will be required unless an adjustment would require a cumulative increase or decrease of at least 1% in such price or rate. (Section 1404)
Fractional shares of Common Stock will not be issued upon conversion, but, in lieu thereof, the Company will pay a cash adjustment based on the then current market price for the Common Stock. Upon conversion, no adjustments will be made for accrued interest or dividends, and, accordingly, convertible Subordinated Debt Securities surrendered for conversion between the record date for an interest payment and the interest payment date (except convertible Subordinated Debt Securities called for redemption on a redemption date during such period) must be accompanied by payment of an amount equal to the interest thereon which the registered holder is to receive. (Sections 1403 and 1405)
In the case of any reclassification or change in the outstanding shares of Common Stock, any consolidation or merger of the Company (with certain exceptions) or any conveyance, transfer or lease of the property and assets of the Company substantially as an entirety, the holder of convertible Subordinated Debt Securities, after the consolidation, merger, conveyance, transfer or lease, will have the right to convert such convertible Subordinated Debt Securities into the kind and amount of securities, cash and other property which the holder would have been entitled to receive upon or in connection with such consolidation, merger, conveyance, transfer or lease, if the holder had held the Common Stock issuable upon conversion of such convertible Subordinated Debt Securities immediately prior to such consolidation, merger, conveyance, transfer or lease. (Section 1406)
REGARDING THE SUBORDINATED TRUSTEE. The Company may from time to time in the future have other banking relationships with the Subordinated Trustee in the ordinary course of business.
Pursuant to its Restated Certificate of Incorporation, the Company is authorized to issue (i) 400,000,000 shares of Common Stock, $.16 2/3 par value and (ii) 25,000,000 shares of Preferred Stock, without par value, of which 4,000,000 shares have been designated by the Board of Directors as Series A Participating Preferred Stock which may be issued upon the exercise of Rights (hereinafter defined) associated with the Common Stock as discussed below.
On June 1, 1988, the Board of Directors of the Company declared a dividend distribution of one right (a "Right") on each share of Common Stock outstanding at the close of business on June 13, 1988, and in connection therewith entered into a Rights Agreement, dated as of June 1, 1988 (as amended, the "Rights Agreement") with Texas Commerce Bank National Association (subsequently succeeded by First Chicago Trust Company of New York) as Rights Agent. In addition, the Board authorized the issuance of one Right with respect to each share of Common Stock that becomes outstanding between June 13, 1988 and the earliest of the dates on which separate Right certificates are distributed or the Rights expire or are redeemed. The Rights distribution was not taxable to stockholders.
When exercisable, each Right will entitle the registered holder to purchase one one-hundredth of a share of Series A Participating Preferred Stock at an exercise price of $110.00, subject to adjustment. The Rights will not be exercisable prior to the expiration of the Company's right to redeem the Rights. The Company is entitled to redeem the Rights at $.05 per Right (subject to adjustment) up to and including the tenth business day (twentieth business day if the Board of Directors so determines) after the acquisition by a person of beneficial ownership of shares of the Company's stock having 10% or more of the general voting power of the Company. The Rights will expire on June 13, 1998, unless earlier redeemed.
In general, the Rights Agreement provides that if the Company is acquired in a merger or other business combination transaction on or at any time after the date on which a person obtains ownership of stock having 10% more of the Company's general voting power ("Stock Acquisition Date"), provision must be made prior to the consummation of such transaction to entitle each holder of a Right (except as provided in the Plan) to purchase at the exercise price a number of the acquiring company's common shares having a market value (determined as provided in the Rights Agreement) at the time of such transaction of two times the exercise price of the Right. The Rights Agreement also provides that in the event of (i) the acquisition of the Company on or at any time after the Stock Acquisition Date in a merger or other business combination transaction in which the Company's Common Stock remains outstanding and unchanged, (ii) certain self-dealing transactions by a 10% or greater stockholder, (iii) the acquisition by a person of at least 15% of the general voting power of the Company or (iv) an increase in the ownership interest of a 10% or greater stockholder by more than 1% as a result of the occurrence of any of certain events specified in the Rights Agreement, then, in each such case, each holder of a Right (except as provided in the Rights Agreement) will have the right to receive, upon payment of the exercise price, a number of shares of Series A Participating Preferred Stock having a market value (determined as provided in the Rights Agreement) at the time of such transaction of two times the exercise price of a Right.
Certain provisions in the Company's Restated Certificate of Incorporation and By-laws may have the effect of delaying, deferring or preventing a change in control of the Company. These provisions require that the Company's Board of Directors be divided into three classes that are elected for staggered three- year terms; provide that stockholders may act only at annual or special meetings and may not act by written consent; provide that special meetings of stockholders may be called only by the Board of Directors; authorize the directors of the Company to determine the size of the Board of Directors; require that stockholder nominations for directors be made to the Directors and Corporate Governance Committee of the Company prior to a meeting of stockholders; provide that directors may be removed only for cause and only by a supermajority vote (80% of shares outstanding) of the stockholders (a "Supermajority Vote"), including a majority in interest of the holders ("Minority Holders") of voting stock held by persons other than any person who, together with its affiliates and associates, owns more than 10% of the voting stock; provide for certain minimum price and procedural requirements in connection with certain business combinations, in the absence of which the business combination would require approval by a Supermajority Vote, including a majority in interest of the Minority Holders; require a Supermajority Vote, including a majority in interest of the Minority Holders, for the amendment of any of the foregoing provisions unless approved by a majority of the Board of Directors in certain events; and authorize the Board of Directors to establish one or more series of Preferred Stock, without any further stockholder approval, having rights, preferences, privileges and limitations that could impede or discourage the acquisition of control of the Company.
DESCRIPTION OF COMMON STOCK. At December 14, 1995, 212,660,643 shares of Common Stock were issued and outstanding and approximately 46 million shares were reserved for issuance (i) pursuant to the Company's Dividend Reinvestment Plan and employee benefit plans (including stock option plans), (ii) upon conversion of debentures, (iii) pursuant to outstanding stock purchase contracts and (iv) in connection with the acquisition of businesses and properties in the normal course of business. Subject to the dividend preferences of any outstanding shares of Preferred Stock, all shares of Common Stock are entitled to participate in such dividends as may be declared by the Board of Directors out of assets available for such payment. Holders of Common Stock are entitled to one vote for each share held. All outstanding shares are, and shares issuable hereunder will be, validly issued, fully paid and nonassessable. Holders of Common Stock have no cumulative voting rights or preemptive rights. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in the distribution of assets remaining after payment of debts and expenses and of any preference due to holders of any preferred stock of the Company then outstanding. As described above, one Right will be issued in respect of each share of Common Stock issued before the earliest of the dates on which separate Right certificates are distributed or the Rights expire or are redeemed.
The Common Stock Transfer Agent and Registrar is First Chicago Trust Company of New York, Stock Transfer Department, Mail Suite 4694, Post Office Box 2536, Jersey City, New Jersey 07303-2536.
DESCRIPTION OF PREFERRED STOCK. Under the Company's Restated Certificate of Incorporation, the Board of Directors may provide for the issuance of up to 25,000,000 shares of Preferred Stock in one or more series. The rights, preferences, privileges and restrictions, including liquidation preferences, of the Preferred Stock of each series will be fixed or designated by the Board of Directors pursuant to a certificate of designation without any further vote or action by the Company's stockholders. The issuance of Preferred Stock could have the effect of delaying, deferring or preventing a change in control of the Company. Upon issuance against full payment of the purchase price therefor, shares of Preferred Stock offered hereby will be fully paid and nonassessable.
The specific terms of a particular series of Preferred Stock offered hereby will be described in a Prospectus Supplement relating to such series and will include the following:
(i) The maximum number of shares to constitute the series and the
(ii) The annual dividend rate, if any, on shares of the series, whether such rate is fixed or variable or both, the date or dates from which dividends will begin to accrue or accumulate and whether dividends will be
(iii) Whether the shares of the series will be redeemable and, if so, the price at and the terms and conditions on which the shares of the series may be redeemed, including the time during which shares of the series may be redeemed and any accumulated dividends thereon that the holders of shares of the series shall be entitled to receive upon the redemption thereof;
(iv) The liquidation preference, if any, applicable to shares of the
(v) Whether the shares of the series will be subject to operation of a retirement or sinking fund and, if so, the extent and manner in which any such fund shall be applied to the purchase or redemption of the shares of the series for retirement or for other corporate purposes, and the terms and provisions relating to the operation of such fund;
(vi) The terms and conditions, if any, on which the shares of the series shall be convertible into, or exchangeable for, shares of any other class or classes of capital stock of the Company or any series of any other class or classes, or of any other series of the same class, including the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same;
(vii) The voting rights, if any, on the shares of the series; and
(viii) Any other preferences and relative, participating, optional or other special rights or qualifications, limitations or restrictions thereof.
The Company may issue Warrants, including Warrants to purchase Debt Securities ("Debt Warrants") and Warrants to purchase Common Stock or Preferred Stock ("Stock Warrants"). Warrants may be issued independently of or together with any other Securities and may be attached to or separate from such Securities. Each series of Warrants will be issued under a separate Warrant Agreement (each a "Warrant Agreement") to be entered into between the Company and a Warrant Agent ("Warrant Agent"). The Warrant Agent will act solely as an agent of the Company in connection with the Warrant of such series and will not assume any obligation or relationship of agency for or with holders or beneficial owners of Warrants. The following sets forth certain general terms and provisions of the Warrants offered hereby. Further terms of the Warrants and the applicable Warrant Agreement will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of any Debt Warrants, including the following: (i) the title of such Debt Warrants; (ii) the offering price for such Debt Warrants, if any; (iii) the aggregate number of such Debt Warrants; (iv) the designation and terms of the Debt Securities purchasable upon exercise of such Debt Warrants; (v) if applicable, the designation and terms of the Securities with which such Debt Warrants are issued and the number of such Debt Warrants issued with each such Security; (vi) if applicable, the date from and after which such Debt Warrants and any Securities issued therewith will be separately transferable; (vii) the principal amount of Debt Securities purchasable upon exercise of a Debt Warrant and the price at which such principal amount of Debt Securities may be purchased upon exercise; (viii) the date on which the right to exercise such Debt Warrants shall commence and the date on which such right shall expire; (ix) if applicable, the minimum or maximum amount of such Debt Warrants that may be exercised at any one time; (x) whether the Debt Warrants represented by the Debt Warrant certificates or Debt Securities that may be issued upon exercise of the Debt Warrants will be issued in registered or bearer form; (xi) information with respect to book-entry procedures, if any; (xii) the currency, currencies or currency units in which the offering price, if any, and the exercise price are payable; (xiii) if applicable, a discussion of certain United States federal income tax considerations; (xiv) the antidilution provisions of such Debt Warrants, if any; (xv) the redemption or call provisions, if any, applicable to such Debt Warrants; and (xvi) any additional terms of the Debt Warrants, including terms, procedures and limitations relating to the exchange and exercise of such Debt Warrants.
The applicable Prospectus Supplement will describe the terms of any Stock Warrants, including the following: (i) the title of such Stock Warrants; (ii) the offering price of such Stock Warrants, if any; (iii) the aggregate number of such Stock Warrants; (iv) the designation and terms of the Common Stock or Preferred Stock purchasable upon exercise of such Stock Warrants; (v) if applicable, the designation and terms of the Securities with which such Stock Warrants are issued and the number of such Stock Warrants issued with each such Security; (vi) if applicable, the date from and after which such Stock Warrants and any Securities issued therewith will be separately transferrable; (vii) the number of shares of Common Stock or Preferred Stock purchasable upon exercise of a Stock Warrant and the price at which such shares may be purchased upon exercise; (viii) the date on which the right to exercise such Stock Warrants shall commence and the date on which such right shall expire; (ix) if applicable, the minimum or maximum amount of such Stock Warrants that may be exercised at any one time; (x) the currency, currencies or currency units in which the offering price, if any, and the exercise price are payable; (xi) if applicable, a discussion of certain United States federal income tax considerations; (xii) the antidilution provisions of such Stock Warrants, if any; (xiii) the redemption or call provisions, if any, applicable to such Stock Warrants; and (xiv) any additional terms of such Stock Warrants, including terms, procedures and limitations relating to the exchange and exercise of such Stock Warrants.
DESCRIPTION OF STOCK PURCHASE CONTRACTS
The Company may issue Stock Purchase Contracts, consisting of contracts obligating holders to purchase from the Company, and the Company to sell to the holders, a specified number of shares of Common Stock or Preferred Stock at a future date or dates. The price per share of Preferred Stock or Common Stock may be fixed at the time the Stock Purchase Contracts are issued or may be determined by reference to a specific formula set forth in the Stock Purchase Contracts. The Stock Purchase Contracts may be issued separately or as a part of units ("Stock Purchase Units") consisting of a Stock Purchase Contract and Debt Securities or debt obligations of third parties, including U.S. Treasury securities, securing the holders' obligations to purchase the Preferred Stock or the Common Stock under the Purchase Contracts. The Stock Purchase Contracts may require the Company to make periodic payments to the holders of the Stock Purchase Units or visa versa, and such payments may be unsecured or prefunded on some basis. The Stock Purchase Contracts may require holders to secure their obligations thereunder in a specified manner.
The applicable Prospectus Supplement will describe the terms of any Stock Purchase Contracts or Stock Purchase Units. The description in the Prospectus Supplement will not purport to be complete and will be qualified in its entirety by reference to the Stock Purchase Contracts, and, if applicable, collateral arrangements and depositary arrangements, relating to such Stock Purchase Contracts or Stock Purchase Units.
The Company may sell the Securities being offered hereby in and/or outside the United States (i) through underwriters or a group of underwriters or dealers, (ii) through agents designated from time to time or (iii) directly to purchasers.
If an underwriter or underwriters are utilized in the sale, the Company will enter into an underwriting agreement with such underwriters at the time of sale to them, and the names of the underwriters and the terms and conditions of the transaction (including underwriting discounts and commissions and other items constituting underwriting compensation and discounts and commissions to be allowed or paid to any dealers) will be set forth in the Prospectus Supplement, which will be used by the underwriters to make sales of the Offered Securities in respect of which this Prospectus is delivered to the public. The underwriters may be entitled, under the underwriting agreement, to indemnification by the Company against certain civil liabilities, including liabilities under the Securities Act. Only underwriters named in the Prospectus Supplement are deemed to be underwriting in connection with the Offered Securities in respect of which such Prospectus Supplement and this Prospectus are delivered and any firms not named therein are not parties to the underwriting agreement in respect of such Offered Securities and will have no direct or indirect participation in the underwriting thereof, although they may participate in the distribution of such Securities under circumstances where they may be entitled to a dealer's commission.
If so indicated in the Prospectus Supplement, the Company will authorize underwriters to solicit offers by certain institutions to purchase Offered Securities from the Company at the price set forth in the Prospectus Supplement pursuant to delayed delivery contracts for payment and delivery at a future date. The Prospectus Supplement will set forth the commission payable to the underwriters for solicitation of such contracts.
Offers to purchase Offered Securities may be solicited directly by the Company or by agents designated by the Company from time to time. Unless otherwise indicated in the Prospectus Supplement, any such agent will be acting on a best efforts basis for the period of its appointment. Agents may be entitled under agreements which may be entered into with the Company to indemnification by the Company against certain civil liabilities, including liabilities under the Securities Act.
If an agent or agents are utilized in the sale, such persons may be deemed to be "underwriters", and any discounts, commissions or concessions received by them from the Company or any profit on the resale of Offered Securities by them may be deemed to be underwriting discounts and commissions under the Securities Act. Any such person who may be deemed to be an underwriter and any such compensation received from the Company will be described in the Prospectus Supplement.
The time and place for delivery of the Offered Securities in respect of which this Prospectus is delivered are set forth in the Prospectus Supplement.
The legality of the Securities to be offered hereby will be passed upon for the Company by Fulbright & Jaworski L.L.P., 1301 McKinney Street, Houston, Texas 77010, and for any underwriters or agents of a particular issue of Offered Securities, by Vinson & Elkins L.L.P., 1001 Fannin Street, First City Tower, Houston, Texas 77002 or by other counsel identified in the relevant Prospectus Supplement as passing on the same for any such underwriters and agents. Vinson & Elkins L.L.P. has represented the Company in various legal matters from time to time.
The consolidated financial statements and schedule included in the Annual Report of the Company on Form 10-K for the year ended September 30, 1995 incorporated herein by reference, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are incorporated herein by reference in reliance upon the authority of said firm as experts in giving said report.
The consolidated financial statements of Attwoods plc included in the Company's Current Report on Form 8-K dated January 24, 1995 incorporated herein by reference have been audited by Binder Hamlyn, Chartered Accountants, Registered Auditors, as indicated in their report with respect thereto, and are incorporated herein by reference in reliance upon the authority of said firm as experts in giving said report. | 424B2 | 424B2 | 1996-01-12T00:00:00 | 1996-01-12T15:40:39 |
0000058091-96-000002 | 0000058091-96-000002_0001.txt | 990 SKOKIE BLVD. NORTHBROOK, IL 60062 708 498-4700 FAX 708 498-0066
For further information, please contact: Mr. John O'Mahoney, Vice Chairman
LAWTER TO PROVIDE APPROXIMATELY $11 MILLION AFTER-TAX EMPLOYEE REDUCTION AND OTHER CHARGES TO 1995
Northbrook, Illinois -- January 9, 1996 -- Lawter International, Inc. announced today that it will provide an approximate $11 million after-tax charge to the fourth quarter of 1995. This will be for consolidation of manufacturing facilities, primarily in Europe, reduction of personnel, disposal of certain assets and other year end charges. These actions are intended to stream line operations, reduce costs and position the Company for increased growth and profitability in the future.
Personnel reductions have already become effective at certain locations in the U.S. and abroad, and should ultimately approximate 20% of the total work force.
Sales for the fourth quarter of 1995 were less than sales of the same period of 1994 by approximately 7%. This resulted from a reduction of printing ink consumption that took place during the fourth quarter of 1995 when compared to the fourth quarter of 1994 which was an all-time record. Audited results for sales and earnings for 1995 are expected to be available by February 13, 1996.
In Board action today, Mr. John O'Mahoney, Vice Chairman and Chief Executive Officer, and Mr. John Jilek, President and Chief Operating Officer, were elected directors of the Company.
Lawter directors also voted a regular dividend of 10 cents per share payable March 1, 1996, to shareholders of record at the close of business February 15, 1996. | 8-K | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T11:20:51 |
0000950134-96-000103 | 0000950134-96-000103_0000.txt | [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities For the quarterly period ended November 30, 1995
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ___________
Exact name of registrant as specified in charter
State of incorporation I.R.S. employer I.D.#
9697 East Mineral Avenue, Englewood, Colorado 80112 Address of principal executive office
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Shares outstanding of each of the registrant's classes of Common Stock, as of January 2, 1996.
5,113,021 Common Stock, $.01 par value
26,158,305 Class A Common Stock $.01 par value
JONES INTERCABLE, INC. AND SUBSIDIARIES
I N D E X
UNAUDITED CONSOLIDATED Jones Intercable, Inc. As of November 30 and May 31, 1995
The accompanying notes to unaudited consolidated financial statements are an integral part of these balance sheets.
UNAUDITED CONSOLIDATED Jones Intercable, Inc. As of November 30 and May 31, 1995
The accompanying notes to unaudited consolidated financial statements are an integral part of these balance sheets.
UNAUDITED CONSOLIDATED Jones Intercable, Inc. STATEMENTS OF OPERATIONS and Subsidiaries For the three and six months ended November 30, 1995 and 1994
* Of the total general and administrative expenses, approximately $665,000 and $752,000 for the three months ended November 30, 1995 and 1994, respectively, and approximately $1,183,000 and $1,629,000 for the six months ended November 30, 1995 and 1994, respectively, represent related party expenses.
The accompanying notes to unaudited consolidated financial statements are an integral part of these statements.
UNAUDITED CONSOLIDATED Jones Intercable, Inc. STATEMENTS OF CASH FLOWS and Subsidiaries For the six months ended November 30, 1995 and 1994
The accompanying notes to unaudited consolidated financial statements are an integral part of these statements.
NOTES TO UNAUDITED CONSOLIDATED Jones Intercable, Inc.
(1) This Form 10-Q is being filed by Jones Intercable, Inc. and its subsidiaries (the "Company"), including Jones Cable Holdings, Inc. ("JCH"), a new wholly-owned subsidiary that ultimately will own a majority of the cable television assets of Jones Intercable, Inc. This Form 10-Q is being filed in conformity with the SEC requirements for unaudited financial statements and does not contain all of the necessary footnote disclosures required for a fair presentation of the Balance Sheets, Statements of Operations and Statements of Cash Flows in conformity with generally accepted accounting principles. However, in the opinion of management, this data includes all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company's financial position at November 30, 1995 and May 31, 1995 and its results of operations and cash flows for the three and six months ended November 30, 1995 and 1994. Results of operations for these periods are not necessarily indicative of results to be expected for the full year.
(2) On October 20, 1995, the Company purchased the cable television system serving areas in and around Augusta, Georgia (the "Augusta System") from Cable TV Fund 12-B, Ltd. ("Fund 12-B"), one of the Company's managed limited partnerships. The purchase price was $142,618,000, subject to normal closing adjustments. The purchase price was determined by averaging three separate independent appraisals of the fair market value of the Augusta System. The Company, as general partner of Fund 12-B, received a distribution from Fund 12-B of $13,222,000 upon the closing of this transaction. Such distribution reduced the Company's basis in the assets of the Augusta System. The Augusta System passes approximately 102,000 homes and serves approximately 67,000 basic subscribers. Funding for this transaction was provided by cash on hand.
On November 29, 1995, the Company purchased the cable television system serving Dale City, Lake Ridge, Woodbridge, Fort Bevoir, Triangle, Dumfries, Quantico, Accoquan and portions of Prince William County, all in the state of Virginia (the "Dale City System") from an unaffiliated party. The purchase price was $123,000,000, subject to normal closing adjustments. The purchase was funded by cash on hand and borrowings available under the Company's credit facility. The Company paid Jones Financial Group, Ltd. ("Financial Group"), a subsidiary of Jones International, Ltd., a fee of $1,328,400 for acting as the Company's financial advisor in connection with this transaction. All fees paid to Financial Group by the Company are based upon 90% of the estimated commercial rate charged by unaffiliated brokers. The Dale City System passes approximately 64,100 homes and serves approximately 50,000 basic subscribers.
On January 10, 1996, the Company purchased the cable television systems serving Manassas, Manassas Park, Haymarket and portions of unincorporated Prince William County, all in the State of Virginia (the "Manassas System") from an unaffiliated party. The purchase price of the Manassas System was $71,000,000, subject to normal closing adjustments. The purchase was funded by borrowings available under the Company's credit facility. The Company paid Financial Group a fee of $896,000 upon closing of this transaction for acting as the Company's financial advisor in connection with this transaction. All fees paid to Financial Group by the Company are based upon 90% of the estimated commercial rate charged by unaffiliated brokers. The Manassas System passes approximately 39,000 homes and serves approximately 26,000 basic subscribers.
The pro forma effect of the three above-described acquisitions on the Company's results of operations for the six months ended November 30, 1995 are presented in the following unaudited tabulation:
The pro forma effect of the three above-described acquisitions and the acquisition of the assets of Jones Spacelink, Ltd. in December 1994 on the Company's results of operations for the six months ended November 30, 1994 are presented in the following unaudited tabulation:
(3) On August 11, 1995, the Company entered into a purchase and sale agreement with IDS/Jones Growth Partners 87- A, Ltd., one of the Company's managed limited partnerships, to acquire from such partnership the cable television system serving areas in and around Carmel, Indiana (the "Carmel System"). The purchase price is $44,235,333, which is the average of three separate independent appraisals of the fair market value of the Carmel System. The Carmel System passes approximately 24,400 homes and serves approximately 18,500 basic subscribers. The Company expects to acquire and then transfer the Carmel System, along with certain other properties, to an unaffiliated cable television system operator during the first half of 1996, as discussed below.
On August 11, 1995, the Company entered into a purchase and sale agreement with Jones Cable Income Fund 1-B, Ltd., one of the Company's managed limited partnerships, to acquire from such partnership the cable television system serving areas in and around Orangeburg, South Carolina (the "Orangeburg System"). The purchase price is $18,347,667, which is the average of three separate independent appraisals of the fair market value of the Orangeburg System. The Orangeburg System passes approximately 16,530 homes and services approximately 12,000 basic subscribers. The Company expects to acquire and then to transfer the Orangeburg System, along with certain other properties, to an unaffiliated cable television system operator during the first half of 1996, as discussed below.
On August 11, 1995, the Company entered into a purchase and sale agreement with the Cable TV Fund 12-BCD Venture (the "Venture"), a joint venture of three of the Company's managed limited partnerships, to acquire from the Venture the cable television system serving areas in and around Tampa, Florida (the "Tampa System"). The purchase price is $110,395,667, which is the average of three separate independent appraisals of the fair market value of the Tampa System. The Tampa System passes approximately 125,000 homes and serves approximately 62,500 basic subscribers. The Company expects to acquire and then to transfer the Tampa System, along with certain other properties, to an unaffiliated cable television system during the first half of 1996, as discussed below.
On August 11, 1995, the Company entered into an asset exchange agreement (the "TWEAN Exchange Agreement") with Time Warner Entertainment-Advance/Newhouse Partnership ("TWEAN"), an unaffiliated cable television system operator. Pursuant to the TWEAN Exchange Agreement, the Company will convey to TWEAN the Carmel System, the Orangeburg System and the Tampa System and cash in the amount of $3,500,000 (subject to normal closing adjustments). In return, the Company will receive from TWEAN the cable television systems serving Andrews Air Force Base, Capitol Heights, Cheltenham, District Heights, Fairmount Heights, Forest Heights, Morningside, Seat Pleasant, Upper Marlboro, and portions of Prince George's County, all in Maryland (the "Prince George's County System"), and portions of Fairfax County, Virginia (the "Reston System"). These systems serve approximately 85,000 subscribers.
The closing of the transaction contemplated by the TWEAN Exchange Agreement is subject to customary closing conditions, including obtaining necessary governmental and other third party consents. The parties intend to complete the transaction during the first half of 1996, but there can be no assurance that all conditions will be satisfied or waived by that time. Either party may terminate the TWEAN Exchange Agreement if the transaction is not completed on or before June 30, 1996. The Company will pay Financial Group a $1,668,000 fee upon the completion of the TWEAN Exchange Agreement as compensation to it for acting as the Company's financial advisor. All fees paid to Financial Group by the Company are based upon 90% of the estimated commercial rate charged by unaffiliated brokers.
The closings of the Company's acquisitions of the Carmel System, the Orangeburg System and the Tampa System are not contingent upon the closing of the TWEAN exchange.
(4) On September 5, 1995, the Company entered into an asset purchase agreement with Cable TV Joint Fund 11, a joint venture (the "Venture") among Cable TV Fund 11-A, Ltd., Cable TV Fund 11-B, Ltd., Cable TV Fund 11-C, Ltd. and Cable TV Fund 11-D, Ltd., Colorado limited partnerships managed by the Company, to acquire from the Venture the cable television system serving the City of Manitowoc, Wisconsin (the "Manitowoc System"). The purchase price is $15,735,667, which is the average of three separate independent appraisals of the fair market value of the Manitowoc System. The closing of this transaction is contingent upon the City of Manitowoc's approval of the transfer of the City of Manitowoc cable television franchise and the approval of the transaction by a majority of the limited partners of each of the four partnerships that form the Venture. The Company, as general partner of the partnerships which form the Venture, will receive a distribution of approximately $3,900,000 upon the closing of this transaction. The Manitowoc System passes approximately 15,400 homes and serves approximately 10,500 basic subscribers. The Company expects to acquire and then to trade the Manitowoc System, along with certain other properties, to an unaffiliated cable television system operator during the first half of 1996, as discussed below.
On September 5, 1995, the Company entered into an asset purchase agreement with Jones Spacelink Income Partners 87-1, L.P., a Colorado limited partnership managed by the Company, to acquire from that partnership the cable television systems serving the communities of Lodi, Burbank, Lafayette Township, New London, Bailey Lakes, Savannah Shreve, Jeromesville, West Lafayette, Loudonville, Perrysville, Creston, Gloria Glens, Sterling, Seville, Westfield Center, Chippewa, Lake Area, Rittman, West Salem, Bloomville, Spencer, Polk and Congress, all in the State of Ohio (the "Lodi System"). The purchase price is $25,706,000, which is the average of three separate independent appraisals of the fair market value of the Lodi System. The Lodi System passes approximately 20,600 homes and serves approximately 14,700 basic subscribers. The Company expects to acquire and then to trade the Lodi System, along with certain other properties, to an unaffiliated cable television system operator during the first half of 1996, as discussed below.
On September 5, 1995, the Company entered into an asset purchase agreement with Jones Spacelink Income/Growth Fund 1-A, Ltd., a Colorado limited partnership managed by the Company, to acquire from that partnership the cable television system serving the areas in and around Ripon, Wisconsin (the "Ripon System"). The purchase price is $3,712,667, which is the average of three separate independent appraisals of the fair market value of the Ripon System. The Ripon System passes approximately 2,500 homes and serves approximately 2,450 basic subscribers. The Company expects to acquire and then to trade the Ripon System, along with certain other properties, to an unaffiliated cable television system operator during the first half of 1996, as discussed below.
On September 5, 1995, the Company entered into a second asset purchase agreement with Jones Spacelink Income/Growth Fund 1-A, Ltd. to acquire from that partnership the cable television system serving the areas in and around Lake Geneva, Wisconsin (the "Lake Geneva System"). The purchase price is $6,345,667, which is the average of three separate independent appraisals of the fair market value of the Lake Geneva System. The Lake Geneva System passes approximately 5,400 homes and serves approximately 3,400 basic subscribers. The Company expects to acquire and then to trade the Lake Geneva System, along certain other properties, to an unaffiliated cable television system operator during the first half of 1996, as discussed below.
On September 1, 1995, the Company entered into an asset exchange agreement (the "Time Warner Exchange Agreement") with Time Warner Entertainment Company, L.P. ("Time Warner"), an unaffiliated cable television operator. Pursuant to the Time Warner Exchange Agreement, the Company will convey to Time Warner the cable television system serving Hilo, Hawaii (the "Hilo System") and the cable television system serving Kenosha, Wisconsin (the "Kenosha System") as well as the Manitowoc System, the Lodi System, the Ripon System and the Lake Geneva System. The Hilo System and the Kenosha System serve approximately 17,000 and 27,000 basic subscribers, respectively, and pass approximately 23,000 and 39,000 homes, respectively. In return, the Company will receive from Time Warner the cable television systems serving the communities in and around Savannah, Georgia (the "Savannah System") and cash in the amount of $4,000,000, subject to normal closing adjustments. Taking into account the aggregate purchase price to be paid by the Company for the Lodi System, the Lake Geneva System, the Ripon System and the Manitowoc System and the estimated valuation of the Hilo System and the Kenosha System, less the $4,000,000 cash purchase price to be paid by Time Warner to the Company, the aggregate consideration to be paid for the Savannah System is approximately $119,195,000. The Savannah System passes approximately 100,000 homes and serves approximately 63,000 subscribers.
The closing of the transactions contemplated by the Time Warner Exchange Agreement is subject to customary closing conditions, including obtaining necessary governmental and other third party consents. The parties intend to complete the transactions during the first half of 1996, but there can be no assurance that all conditions will be satisfied or waived by that time. Either party may terminate the Time Warner Exchange Agreement if the transactions are not completed on or before September 30, 1996. The Company will pay Financial Group a $1,286,000 fee upon the completion of the Time Warner Exchange Agreement as compensation to it for acting as the Company's financial advisor. All fees paid to Financial Group by the Company are based upon 90% of the estimated commercial rate charged by unaffiliated brokers.
The closings of the Company's acquisitions of the Manitowoc System, the Lodi System, the Ripon System and the Lake Geneva System are not contingent upon the closing of the Time Warner exchange.
(5) On October 31, 1995, the Company, through JCH, entered into a $500,000,000 reducing revolving credit facility with a group of commercial banks. The new credit facility provides for the transfer of a majority of the Company's cable television properties to JCH, which is the borrower under the credit facility. The entire $500,000,000 commitment is available through March 31, 1999, at which time the commitment will be reduced quarterly with a final maturity of December 31, 2004. As of November 30, 1995, $30,000,000 was outstanding under this agreement. Interest on outstanding obligations ranges from Base Rate to Base Rate plus 1/8% or LIBOR plus 5/8% to LIBOR plus 1 1/8% based on certain financial covenants. In addition, a commitment fee of 3/16% to 3/8% on the unused commitment is also required. The effective interest rate on amounts outstanding at November 30, 1995 was 6.56%.
(6) The Company and its wholly-owned subsidiaries directly own 6,225,796 American Depository Shares ("ADSs") of Bell Cablemedia plc. Prior to August 31, 1995, the ADSs were reflected at historical cost since the securities were considered restricted for accounting purposes. Due to certain events, including the registration of the Company's ADSs, these securities are now classified as unrestricted and, as a result, are reflected at their estimated fair market value in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Since the ADSs are considered available for sale, the unrealized holding gain is reflected as a separate component of shareholders' investment.
(7) Net income (loss) per share of Class A Common Stock and Common Stock is based on the weighted average number of shares outstanding during the periods. Common stock equivalents were not significant to the computation of primary earnings (loss) per share. Conversion of the Convertible Subordinated
Class A Common Stock was assumed for calculation of fully diluted earnings per share and is not presented for the period in which the calculation was anti-dilutive.
(8) For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. No amounts were paid or received relating to income taxes during the six months ended November 30, 1995 and 1994. Approximately $26,764,000 and $18,208,000 of interest expense was paid during the six months ended November 30, 1995 and 1994, respectively. No material non-cash investing or financing transactions were recorded during the first six months of fiscal 1995 and 1994.
(9) On September 12, 1995, the Company filed an application with the Internal Revenue Service ("IRS") to change its fiscal year end from May 31 to December 31. The Company has received approval and will change its fiscal year end effective December 31, 1995.
(10) Certain prior period amounts have been reclassified to conform to the current period presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company intends to grow by implementing a balanced strategy directed at acquiring cable television systems from Company-managed limited partnerships and from third parties. From time to time, the Company may trade cable television properties that it owns for cable television properties owned by unaffiliated parties. The Company will attempt to cluster systems in certain markets as opportunities arise. The Company also intends to maintain and enhance the value of its current cable television systems through capital expenditures. Such expenditures will include, among others, cable television plant extensions and the upgrade and rebuild of certain systems. The Company also intends to implement new services as they are developed and become economically viable. Such acquisitions and capital expenditures are subject to the availability of cash on hand, cash generated from operations, debt and/or equity financing.
In conjunction with the Company's acquisition strategy, the Company purchased the cable television systems serving areas in and around Augusta, Georgia (the "Augusta System") in October 1995, Dale City, Virginia (the "Dale City System") in November 1995 and Manassas, Virginia (the "Manassas System") in January 1996. These transactions are described in detail in the Notes to Unaudited Consolidated Financial Statements.
The $129,396,000 of capital required to purchase the Augusta System, which represents the purchase price of $142,618,000 less the Company's general partner distribution of approximately $13,222,000, was provided by cash on hand. The $123,000,000 of capital required to purchase the Dale City System was provided by cash on hand and $30,000,000 of borrowings available under the Company's credit facility. The $71,000,000 of capital required to purchase the Manassas System was provided by borrowings available under the Company's credit facility.
The above transactions increased the Company's basic subscriber base by approximately 144,000 basic subscribers to approximately 462,000 basic subscribers. In addition, these transactions are part of the Company's strategy to cluster its cable systems. The Augusta System is contiguous to the Company's cable television system serving areas in and around North Augusta, South Carolina (the "North Augusta System"). The Dale City System and Manassas System are near the Company's properties in the Washington/Baltimore area.
In addition, the Company has entered into agreements to acquire the cable television systems serving portions of Prince George's County, Maryland (the "Prince George's County System"), portions of Fairfax County, Virginia (the "Reston System") and Savannah, Georgia (the "Savannah System"). These transactions are also part of the company's strategy to cluster its cable systems. The Prince George's County System and the Reston System are near the Company's properties in the Washington/Baltimore area. The Savannah System is in relatively close proximity to the Company's Augusta System and North Augusta System. The transactions involving the acquisition of the Prince George's County System, the Reston System and the Savannah System are expected to close in the first half of calendar 1996.
To acquire the Prince George's County System and the Reston System, the Company will purchase three cable television properties (the Carmel System, the Orangeburg System and the Tampa System) from certain of its managed limited partnerships and then transfer such properties to an unaffiliated party in exchange for the Prince George's County System and the Reston System. To acquire the Savannah System, the Company will purchase four cable television properties (the Manitowoc System, the Lodi System, the Ripon System and the Lake Geneva System) from certain of its managed limited partnerships and then together with the Company-owned cable television systems serving Kenosha, Wisconsin and Hilo, Hawaii, to an unaffiliated party in exchange for the Savannah System.
The total capital required to acquire the Prince George's County System, the Reston System and the Savannah System is approximately $220,600,000. Such capital will be provided from the Company's credit facility discussed below.
From time to time, the Company made loans to its managed limited partnerships, although it is not required to do so. As of November 30, 1995, the Company had advanced funds to various managed partnerships and other affiliates of the Company totaling approximately $14,760,000, an increase of approximately $4,891,000 over the amount advanced at May 31, 1995. Of the total balance of $14,760,000, an advance to Cable TV Fund 15-A Ltd., ("Fund 15-A"), one of the Company's managed limited partnerships, accounts for approximately $5,490,000, or 37%. The Company advanced funds to Fund 15-A primarily to fund that partnership's capital expenditures. In November 1994, Fund 15-A completed the refinancing of its credit facility and repaid a portion of the then-outstanding advances. The credit facility provides liquidity to Fund 15A, subject to leverage covenants. It is anticipated that Fund 15-A will repay this advance over time with cash generated from operations and borrowings available under the credit facility. In addition, an advance to Cable TV Fund 12-BCD Venture (the "Venture") accounts for approximately $3,668,400, or 25%, of the balance. The Venture is in the process of renegotiating its credit agreements and should repay the advance in the first half of calendar 1996. The remainder of the advances represent funds for capital expansion and improvements of properties owned by 22 partnerships where additional credit sources were not then available to the partnerships, none of these advances are individually significant. These advances reduce the Company's available cash and its liquidity. The Company anticipates the repayment of these advances over time. The Company does not anticipate significant increases in the amount advanced during 1996. These advances bear interest at rates equal to the Company's weighted average cost of borrowing.
The Company purchased property, plant and equipment totaling approximately $30,837,000 during the six months ended November 30, 1995. Such expenditures were principally the result of the following: (a) the upgrade and rebuild of the cable plant in the Alexandria, Virginia and North Augusta, South Carolina systems; and (b) new extension projects, drop materials, converters and various maintenance projects in the Pima County, Arizona; Anne Arundel, Maryland and Charles County, Maryland systems. Estimated capital expenditures, excluding acquisitions, through May 31, 1996 are approximately $30,000,000. Funding for such expenditures is expected to be provided by cash generated from operations and borrowings available under the Company's credit facility, as discussed below.
On October 12, 1995, the Company redeemed the remaining outstanding 7.5% Convertible Subordinated Debentures (the "Debentures") due 2007, at a price equal to 101.5% of the principal amount, plus accrued interest. The total principal amount of the debentures was $43,100,000, of which $23,732,000 were held by the Company and $19,368,000 were held by unaffiliated investors. The Debentures were redeemed with cash on hand.
The Company's cash balance at November 30, 1995, was $4,842,000. The decrease in such balance from May 31, 1995 reflects the cash used for the acquisitions of the Augusta System and the Dale City System.
On October 31, 1995, the Company, through Jones Cable Holdings, Inc. ("JCH") a new wholly-owned subsidiary, entered into a $500,000,000 reducing revolving credit facility with a group of commercial banks. The new credit facility provides for the transfer of a majority of the Company's cable television properties to JCH, which is the borrower under the new credit facility. The entire $500,000,000 commitment is available through March 31, 1999, at which time the commitment will be reduced quarterly with a final maturity of December 31, 2004. As of November 30, 1995, $30,000,000 was outstanding under this agreement. Interest on outstanding obligations ranges from Base Rate to Base Rate plus 1/8% or LIBOR plus
5/8% to LIBOR plus 1 1/8% based on certain leverage covenants. In addition, a commitment fee of 3/16% to 3/8% on the unused commitment is also required. The effective interest rate on amounts outstanding at November 30, 1995 was 6.56%.
On October 6, 1995, Cable TV Fund 11-B, Ltd. ("Fund 11-B"), one of the Company's managed limited partnerships, entered into an agreement to sell the cable television systems serving areas in and around Lancaster, New York to an unaffiliated third party for $84,000,000. Upon closing of this transaction, Fund 11-B will repay its indebtedness, a brokerage fee and a sales tax liability, and Fund 11-B then will distribute the remaining proceeds to its partners. The Company, as general partner of Fund 11-B, expects to receive a distribution of approximately $13,950,000 related to this transaction. In addition, The Jones Group, Ltd., a wholly-owned subsidiary of the Company, will receive a fee of $2,100,000 for acting as the broker in this transaction. The closing of this transaction is contingent upon the approval of the majority of Fund 11-B's limited partnership interests. The closing of this transaction is expected to occur in the first half of calendar 1996.
The Company has an effective registration statement relating to the sale of $600 million of senior debt securities, senior subordinated debt securities, subordinated debt securities and Class A Common Stock. The Company may, from time to time, issue securities not to exceed $600 million pursuant to this registration statement. Proceeds would be used for general corporate purposes, which may include acquisitions of cable television systems from managed partnerships and/or from unaffiliated parties, refinancings of indebtedness, working capital, capital expenditures, and repurchases and redemptions of securities.
The Company has sufficient sources of capital available, consisting of cash generated from operations and available borrowings from its credit facility, to complete the above described acquisitions and meet its operational needs.
The Company, as a result of rate orders issued by the FCC, has filed cost-of-service showings for the following Company-owned cable television systems: Jefferson County, Colorado; Charles County, Maryland; Pima County, Arizona; Alexandria, Virginia; North Augusta, South Carolina; and Augusta, Georgia. For these systems, the Company anticipates no further reductions in revenues or operating income before depreciation and amortization resulting from the FCC's rate regulations, The cost-of-service showings have not yet received final approval from franchising authorities, however, and there can be no assurance that the cost-of-service showings will prevent further rate reductions until such final approvals are received.
Legislation to substantially revise the Communications Act of 1934, as amended, (the "Communications Act") is being reconsidered by Congress after it failed to pass a bill in 1994. Both the House of Representatives and the Senate have passed versions of telecommunications reform bills and House and Senate conferees have tentatively drafted a conference bill (the "Bill"), but it has not yet been adopted by the conferees and is subject to revision. Substantial competition would result under the Bill from the delivery of video and other services by local telephone companies (also known as local exchange carriers or "LECs") and other service providers. The Bill would also permit cable television operators to provide telephone services.
The Bill would establish local exchange competition as a national policy by preempting laws that prohibit competition in the local exchange and by establishing uniform requirements and standards for entry, competitive carrier interconnection and unbundling of LEC monopoly services. This legislation presumes that additional regulatory flexibility for LECs is necessary to allow them to respond to competition. Depending on the degree and form of regulatory flexibility afforded the LECs, the Company's ability to compete to provide telephony services may be adversely affected. The prospects for enactment of the final form of federal legislation cannot be predicted at this time.
The Company derives its revenues from four primary sources: subscriber fees from Company-owned cable television systems, management fees from revenues earned by managed limited partnerships, fees and distributions payable upon the sale of cable television properties owned by managed limited partnerships and revenues from non-cable television subsidiaries. Total revenues for the three months ended November 30, 1995 totaled $50,195,000, an increase of $17,433,000, or 53%, over the total of $32,762,000 for the three months ended November 30, 1994. Total revenues for the six months ended November 30, 1995 increased $28,263,000, or 43%, to $93,453,000 in 1995 from $65,190,000 in 1994. These increases reflect the Company's acquisition of the assets of Jones Spacelink, Ltd. ("Spacelink") on December 20, 1994, the purchase of the Augusta System on October 20, 1995 and were offset, in part, by the sale of the Company's Gaston County, North Carolina cable television system (the "Gaston System") on July 22, 1994. Disregarding the effect of these transactions, total revenues would have increased $2,547,000, or 8%, and $5,396,000, or 8%, respectively, for the three and six months ended November 30, 1995.
The Company's subscriber service fees increased $9,399,000, or 37%, to $34,708,000 for the three months ended November 30, 1995 from $25,309,000 in the same period of 1994. Subscriber service fees for the six months ended November 30, 1995 increased $15,280,000, or 30%, to $66,002,000 from $50,722,000 in 1994. The net effect of the acquisition of Spacelink's assets, the Augusta System purchase and the sale of the Gaston System accounted for $7,378,000, or 78%, and $10,984,000, or 72%, respectively, of the increases in subscriber service fees for the three and six month periods. Disregarding the effect of the acquisition of Spacelink's assets, the purchase of the Augusta System and the sale of the Gaston System, subscriber service fees would have increased $2,021,000 or 8%, and $4,296,000 or 9%, respectively, for the three and six month periods ended November 30, 1995. The remainder of the increases were primarily due to an increase in the number of basic subscribers, an increase in pay per view revenue and basic service rate adjustments in systems owned by the Company.
The Company receives management fees generally equal to 5% of the gross operating revenues of its managed partnerships. Management fees totaled $5,445,000 for the three months ended November 30, 1995 compared to $4,562,000 in the same period in 1994, an increase of approximately 19%. For the six months ended November 30, 1995, management fees totaled $10,854,000 compared to $9,066,000 in 1994, an increase of 20%. The growth of management fee revenue is the result of the acquisition of Spacelink's assets, which included general partner interests in a number of managed limited partnerships, as well as increases in operating revenues of the Company's managed partnerships. Partnership revenues increased as a result of increases in basic subscribers, increases in advertising sales revenue and basic service rate adjustments. Disregarding the effect of the acquisition of Spacelink's assets, management fees increased approximately 10% and 9%, respectively, for the three and six month periods.
In its capacity as the general partner of its managed partnerships, the Company also receives revenues in the form of fees and distributions upon the sale of cable television properties owned by such partnerships. No such revenues were recognized during the three and six months ended November 30, 1995 or 1994. The distribution received as a result of the sale of the Augusta System by Fund 12-B was recorded as a reduction in the basis of the assets of the Augusta System due to the Company's continuing interest in the Augusta System.
The Company also operates certain non-cable subsidiaries. Such subsidiaries include Jones Satellite Programming ("JSP"), a distributor of satellite programming to satellite dish owners; Jones Futurex, Inc. ("Futurex"), a manufacturer of various electronic components; and Jones Satellite Networks, Inc. ("JSN"), a distributor of radio programming to radio stations. Futurex and JSN were acquired as part of the acquisition of Spacelink's assets. Non- cable revenue totaled $10,042,000 for the three months ended November 30, 1995 compared to $2,891,000 in fiscal 1994, an increase of 247%. For the six months ended November 30, 1995, non-cable revenue totaled $16,597,000, compared to $5,402,000 in 1994, an increase of 207%. The acquisition of Futurex and JSN accounted for 98% and 97%, respectively, of the increases for the three and six month periods. The remainder of the increases are due to increases in the revenues of JSP.
Operating, general and administrative expenses consist primarily of costs associated with the administration of Company-owned cable television systems, the administration of managed partnerships and the administration of the non- cable television entities. The Company is reimbursed by its managed partnerships for costs associated with the administration of the partnerships. The principal administrative cost components are salaries paid to corporate and system personnel, programming expenses, professional fees, subscriber billing costs, data processing costs, rent for leased facilities, cable system maintenance expenses and consumer marketing expenses.
Cable operating expenses increased $5,587,000, or 41%, to $19,271,000 for the three months ended November 30, 1995 from $13,684,000 in 1994. For the six months ended November 30, 1995, cable operating expenses increased $9,647,000, or 35%, to $37,497,000 in 1995 from $27,850,000 in 1994. The acquisition of Spacelink's assets and the purchase of the Augusta System, net of the sale of the Gaston System, accounted for 69% and 71%, respectively, of the increases for the three and six month periods. Disregarding the effect of these transactions, cable operating expenses would have increased 13% and 10%, respectively, for the three and six month periods. These increases were due primarily to increases in premium and satellite programming costs.
Cable general and administrative expense decreased $35,000, or 2%, to $2,078,000 for the three months ended November 30, 1995 compared to $2,113,000 for the quarter ended November 30, 1994. For the six month periods, cable general and administrative expense increased $441,000, or 12%, to $4,112,000 from $3,671,000 in 1994. The acquisition of Spacelink's assets and the purchase of the Augusta System primarily accounted for the six month increase.
Non-cable operating, general and administrative expenses increased $6,657,000, or 218%, to $9,710,000 for the three months ended November 30, 1995 from $3,053,000 for the quarter ended November 30, 1994. For the six months ended November 30, 1995, non-cable operating, general and administrative expense increased $10,628,000, or 180%, to $16,518,000 in 1995 from $5,890,000 in 1994. The acquisition of Futurex and JSN primarily accounted for this increase.
Depreciation and amortization expense increased $3,201,000, or 30%, to $13,828,000 for the three months ended November 30, 1995 from $10,627,000 for the quarter ended November 30, 1994. For the six months ended November 30, 1995, depreciation and amortization increased $5,766,000, or 27%, to $27,405,000 in 1995 from $21,639,000 in 1994. These increases are due to the acquisition of Spacelink's, assets, the purchase of the Augusta System and capital additions in fiscal 1995.
For the three month period ended November 30, 1995, operating income increased $2,023,000, or 62%, to $5,308,000 from $3,285,000 for the same three-month period in 1994. For the six months ended November 30, 1995, operating income increased $1,782,000, or 29%, to $7,921,000 from $6,140,000 for the six months ended November 30, 1994.
The cable television industry generally measures the performance of a cable television system in terms of cash flow or operating income before depreciation and amortization. The value of a cable television system is often determined using multiples of cash flow. This measure is not intended to be a substitute or improvement upon the items disclosed on the financial statements, rather it is included because it is an industry standard. For the three months ended November 30, 1995 and 1994, operating income before depreciation and increased $5,224,000, or 38%, to $19,136,000 in 1995 from $13,912,000 in 1994. For the six month periods, operating income before depreciation and amortization increased $7,547,000, or 27%, to $35,326,000 in 1995 from $27,779,000 in 1994. Disregarding the effect of the acquisition of Spacelink's assets, the purchase of the Augusta System and the sale of the Gaston System, operating income before depreciation and amortization would have increased 12% and 10%, respectively, for the three and six month periods.
Interest expense increased $4,004,000, or 44%, to $13,051,000 for the three months ended November 30, 1995 from $9,047,000 for the quarter ended November 30, 1994. For the six month periods, interest expense increased $8,090,000, or 44%, to $26,419,000 in 1995 from $18,329,000 in 1994. These increases are due to interest on the $200 million of Senior Notes sold in March 1995.
The Company reported equity in the income of affiliates totaling $1,169,000 and $246,000, respectively, for the three and six months ended November 30, 1995 compared to equity in losses of affiliates of $370,000 and $917,000, respectively, for the three and six months ended November 30, 1994. These changes are due to income recognized by Jones Global Group, Ltd. ("JGG"), an affiliate of which the Company owns a 38% interest, on the sale of certain Bell Cablemedia ADSs held by JGG.
Interest income increased $1,356,000, or 128%, to $2,412,000 for the three months ended November 30, 1995 from $1,056,000 for the quarter ended November 30, 1994. For the six month periods, interest income increased $5,308,000, or 242%, to $7,505,000 in 1995 from $2,197,000 in 1994. These increases are due to the increase in the Company's cash on hand, prior to the acquisition of the Augusta System and the Dale City System, resulting from the Bell Canada International, Inc. investment in December 1994 and the sale of $200 million of Senior Notes in March 1995.
The Company recognized a gain of $15,496,000 in July 1994 on the sale of its Gaston System. No similar gains were recognized during the six months ended November 30, 1995.
The Company recognized a loss of $692,000 on the redemption of its convertible debentures in the second quarter of fiscal 1996. No similar loss was recognized in the six months ended November 30, 1994.
The Company recorded net loss of $4,591,000 for the three months ended November 30, 1995, a decrease of $624,000, or 12%, compared to $5,215,000 net loss recorded for the three months ended November 30, 1994. This decrease is due to the increases in operating income, interest income and equity in income of affiliates which was offset, in part, by the increase in interest expense. For the six months ended November 30, 1995 the Company recorded net loss of $11,011,000 compared to net income of $5,078,000 for the six months ended November 30, 1994. Such change was due primarily to the gain on the sale of the Gaston System recognized in July 1994.
The Company anticipates the continued recognition of operating income prior to depreciation and amortization charges, but net losses resulting from depreciation, amortization and interest expenses may continue in the future. To the extent the Company recognizes liquidation distributions from its managed partnerships and/or gains on the sale of Company-owned systems in the future, such losses may be reduced or eliminated; however, there is no assurance as to the timing or recognition of these distributions and sales.
PART II - OTHER INFORMATION
In August 1995, Cable TV Fund 12-BCD Venture (the "Venture"), a Colorado joint venture in which Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd. and Cable TV Fund 12-D, Ltd., Colorado limited partnerships, are general partners, entered into a purchase and sale agreement pursuant to which the Venture agreed to sell the Tampa, Florida cable television system (the "Tampa System") to the Company. The Company is the general partner of each of Cable TV Fund 12- B, Ltd., Cable TV Fund 12-C, Ltd. and Cable TV Fund 12-D, Ltd. Closing of the purchase of the Tampa System by the Company is expected to occur in the first half of 1996. Upon closing, the Company anticipates exchanging the Tampa System with an unaffiliated cable television operator in return for systems owned by that operator.
On September 20, 1995, a civil action entitled David Hirsch, on behalf of himself and all others similarly situated, Plaintiff vs. Jones Intercable, Inc., Defendant, was filed in the District Court, County of Arapahoe, State of Colorado (Case No. 95-CV-1800). The plaintiff has brought the action as a class action on behalf of himself and all other limited partners of Cable TV Fund 12-D, Ltd. against the Company seeking to recover damages caused by the Company's alleged breaches of its fiduciary duties to the limited partners of Cable TV Fund 12-D, Ltd. in connection with the sale to the Company of the Tampa System. The complaint also requests unspecified injunctive relief. The Company believes that it has meritorious defenses, and the Company intends to defend this lawsuit vigorously.
On November 17, 1995, a civil action entitled Martin Ury, derivatively on behalf of Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd. and Cable TV Fund 12-D, Ltd., Plaintiff vs. Jones Intercable, Inc., Defendant and Cable TV Fund 12-BCD Venture, Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd. and Cable TV Fund 12-D, Ltd., Nominal Defendants, was filed in the District Court, County of Arapahoe, State of Colorado (Case No. 95-CV-2212). The plaintiff, a limited partner of Cable TV Fund 12-D, Ltd., has brought the action as a derivative action on behalf of the three partnerships that comprise the Venture against the Company seeking to recover damages caused by the Company's alleged breaches of its fiduciary duties to the Venture and to the limited partners of the three partnerships that comprise the Venture in connection with the proposed sale to the Company of the Tampa System and the proposed subsequent exchange of the Tampa System with an unaffiliated cable television operator in return for systems owned by that operator. The Company believes that it has meritorious defenses, and the Company intends to defend this lawsuit vigorously.
Item 6. Exhibits and Reports on Form 10-K.
b) Reports on Form 8-K
Current report on Form 8-K dated September 1, 1995 reporting that the Company had entered into agreements to purchase the Manitowoc System, the Lodi System, the Ripon System and the Lake Geneva System. In addition, the Company reported that it had entered into an agreement to convey the assets of the above systems together with the Hilo System and the Kenosha System to Time Warner Entertainment Company, L.P. in exchange for the Savannah System and $4,000,000 in cash.
Current report on Form 8-K dated September 12, 1995 reporting that the Company filed an Internal Revenue Service Form 1128, "Application to Adopt, Change or Retain a Tax Year" to change its fiscal year end from May 31 to December 31.
Current report on Form 8-K dated September 20, 1995 reporting that on that date a civil action entitled David Hirsch, on behalf of himself and all others similarly situated, Plaintiff vs. Jones Intercable, Inc., Defendant, was filed in the District Court, County of Arapahoe, State of Colorado.
Current report on Form 8-K dated October 20, 1995 reporting that on that date the Company purchased the Augusta System from Fund 12-B.
Current report on Form 8-K dated November 1, 1995 reporting that on that date the Company entered into a letter of intent with an unaffiliated party to set forth the preliminary understanding of the parties as to their intent to enter into an asset purchase agreement whereby the Company would agree to purchase a cable television system servicing subscribers in portions of Anne Arundel County, Maryland.
Current report on Form 8-K dated November 17, 1995 reporting that on that date a civil action entitled Martin Ury, derivatively on behalf of Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd., and Cable TV Fund 12-D, Ltd., Plaintiff vs. Jones Intercable, Inc., Defendant and Cable TV Fund 12-BCD Venture, Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd. and Cable TV Fund 12-D, Ltd., Nominal Defendants, was filed in the District Court, County of Arapahoe, State of Colorado.
Current Report on Form 8-K dated November 29, 1995 reporting that on that date the Company purchased the Dale City System.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T16:18:01 |
0000950156-96-000040 | 0000950156-96-000040_0000.txt | File Nos. 2-87509 and 811-3893
(A member of the Landmark(SM) Family of Funds)
This Prospectus describes Landmark Tax Free Reserves, a mutual fund in the Landmark Family of Funds. The Fund is a type of mutual fund commonly referred to as a "tax-exempt money market fund." Citibank, N.A. is the investment adviser. UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIOS OF SECURITIES, LANDMARK TAX FREE RESERVES SEEKS ITS INVESTMENT OBJECTIVES BY INVESTING ALL OF ITS INVESTABLE ASSETS IN TAX FREE RESERVES PORTFOLIO. TAX FREE RESERVES PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVES AND POLICIES AS LANDMARK TAX FREE RESERVES. SEE "SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE" ON PAGE 6. INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; HOWEVER, THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO. PROSPECTIVE INVESTORS SHOULD ALSO BE AWARE THAT SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. This Prospectus concisely sets forth information about the Fund that a prospective investor should know before investing. A Statement of Additional Information dated January 2, 1996 (and incorporated by reference in this Prospectus) has been filed with the Securities and Exchange Commission. Copies of the Statement of Additional Information may be obtained without charge, and further inquiries about the Fund may be made, by contacting the investor's shareholder servicing agent (see inside back cover for address and phone number).
Condensed Financial Information ........................................ 4 Valuation of Shares .................................................... 8 Net Income and Distributions ........................................... 9 Appendix A -- Permitted Investments and Appendix B -- Ratings of Municipal Obligations .........................16 Appendix C -- Taxable Equivalent Yield Table ...........................19 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
See the body of the Prospectus for more information on the topics discussed in this summary.
THE FUND: This Prospectus describes Landmark Tax Free Reserves, a tax-exempt money market mutual fund.
INVESTMENT OBJECTIVES AND POLICIES: To provide its shareholders with high levels of current income exempt from federal income taxes, preservation of capital and liquidity. Through Tax Free Reserves Portfolio, the Fund invests primarily in short-term, high quality obligations issued by state and municipal governments and by public authorities, the interest on which is exempt from federal income taxes ("Municipal Obligations"). Because the Fund invests through Tax Free Reserves Portfolio, all references in this Prospectus to the Fund include the Portfolio, except as otherwise noted. There can be no assurance that the Fund will achieve its objectives.
INVESTMENT ADVISER AND DISTRIBUTOR: Citibank, N.A. ("Citibank" or the "Adviser"), a wholly-owned subsidiary of Citicorp, is the investment adviser. Citibank and its affiliates manage more than $73 billion in assets worldwide. The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS" or the "Distributor") is the distributor of shares of the Fund. See "Management."
PURCHASES AND REDEMPTIONS: Customers of Shareholder Servicing Agents may purchase and redeem shares of the Fund on any Business Day. See "Purchases" and "Redemptions."
PRICING: Shares of the Fund are purchased and redeemed at net asset value (normally $1.00 per share) without a sales load or redemption fees. While there are no sales loads, shares of the Fund are subject to a distribution fee. See "Purchases," "Redemptions" and "Management -- Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of most other Landmark Funds. See "Exchanges."
DIVIDENDS: Declared daily and distributed monthly. Shares begin accruing dividends on the day they are purchased. See "Net Income and Distributions."
REINVESTMENT: Dividends may be received either in cash or in Fund shares at net asset value, subject to the policies of a shareholder's Shareholder Servicing Agent. See "Net Income and Distributions."
WHO SHOULD INVEST: The Fund is designed for investors seeking liquidity, preservation of capital and current income exempt from federal income taxes, and for whom long-term capital growth is not a consideration. See "Investment Information."
RISK FACTORS: There can be no assurance that the Fund will achieve its investment objectives. In addition, while the Fund intends to maintain a stable net asset value of $1.00 per share, there can be no assurance that the Fund will be able to do so. Investments in high quality, short-term instruments may, in many circumstances, result in a lower yield than would be available from investments with a lower quality or a longer term.
The Fund is a non-diversified mutual fund, which means that it is not subject to any statutory restrictions under the Investment Company Act of 1940 limiting the investment of its assets in one or relatively few issuers. The Fund may therefore invest a relatively high percentage of its assets in the obligations of a limited number of issuers. Also, the Fund may invest 25% or more of its assets in securities of issuers in similar or related industries or issuers located in the same state. As a result, the Fund is more susceptible to any single economic, political or regulatory occurrence.
Certain investment practices also may entail special risks. Prospective investors should read "Risk Considerations" for more information about risk factors.
The following table summarizes estimated shareholder transaction and annual operating expenses for shares of the Fund and for Tax Free Reserves Portfolio.* The Fund invests all of its investable assets in the Portfolio. The Trustees of the Fund believe that the aggregate per share expenses of the Fund and the Portfolio will be less than or approximately equal to the expenses that the Fund would incur if the assets of the Fund were invested directly in the types of securities held by the Portfolio. For more information on costs and expenses, see "Management" -- page 10 and "General Information -- Expenses" -- page 14.
SHAREHOLDER TRANSACTION EXPENSES ..................................... None ANNUAL FUND OPERATING EXPENSES, AFTER FEE WAIVERS AND REIMBURSEMENTS (AS A PERCENTAGE OF AVERAGE NET ASSETS): Investment Management Fee.. .......................................... .20% 12b-1 Fees(1)(2) .. .................................................. .03% Administrative Services Fees(1) .................................... .05% Shareholder Servicing Agent Fees ................................... .25% Other Operating Expenses ........................................... .12% Total Fund Operating Expenses(1) ..................................... .65%
* This table is intended to assist investors in understanding the various costs and expenses that a shareholder of the Fund will bear, either directly or indirectly. The table shows the fees paid by the Fund to various service providers after giving effect to expected voluntary partial fee waivers. (1) Absent fee waivers and reimbursements, 12b-1 fees, administrative services fees and total fund operating expenses would be .20%, .30% and 1.07%, respectively. There can be no assurance that the fee waivers and reimbursements reflected in the table will continue at their present levels. Under the administrative services plan adopted by the Fund, the aggregate of the fee paid to the Administrator, the fees paid to the Shareholder Servicing Agents and the fee paid to the Distributor under the rule 12b-1 distribution plan (not including the .10% portion of the fee that may be charged in anticipation of or reimbursement for print or electronic media advertising, see "Distribution Arrangements" below) may not exceed .60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. Individual components of the aggregate may vary from time to time. For more information on costs and expenses, see "Management" and "General Information -- Expenses." (2) Fees under the 12b-1 distribution plan are asset-based sales charges. Long-term shareholders in the Fund could pay more in sales charges than the economic equivalent of the maximum front-end sales charges permitted by the National Association of Securities Dealers, Inc.
More complete descriptions of the following expenses of the Fund and the Portfolio are set forth on the following pages: (i) investment management fees -- page 10, (ii) distribution fees -- page 12, (iii) administrative services fees -- page 11, and (iv) shareholder servicing agent fees -- page 11.
EXAMPLE: A shareholder of the Fund would pay the following expenses on a $1,000 investment, assuming redemption at the end of each period indicated below:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
The Example assumes that all dividends are reinvested, and expenses are based on the Fund's fiscal year ended August 31, 1995, after waivers and reimbursements. If waivers and reimbursements were not in place, the amounts in the Example would be $11, $34, $59 and $131, respectively. The assumption of a 5% annual return is required by the Securities and Exchange Commission for all mutual funds, and is not a prediction of the Fund's future performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The following table provides condensed financial information about the Fund for the periods indicated. This information should be read in conjunction with the financial statements appearing in the Fund's Annual Report to Shareholders, which are incorporated by reference in the Statement of Additional Information. The financial statements and notes, as well as the table below, covering periods through August 31, 1995 have been audited by Deloitte & Touche LLP, independent certified public accountants, whose report is included in the Fund's Annual Report. Copies of the Annual Report may be obtained without charge from an investor's Shareholder Servicing Agent (see inside of back cover for address and phone number).
INVESTMENT OBJECTIVES: The investment objectives of the Fund are to provide its shareholders with high levels of current income exempt from federal income taxes, preservation of capital and liquidity.
The investment objectives of the Fund may not be changed without approval by the Fund's shareholders. Of course, there can be no assurance that the Fund will achieve its investment objectives.
INVESTMENT POLICIES: The Fund seeks its investment objectives by investing all of its investable assets in Tax Free Reserves Portfolio. The Portfolio seeks its objectives by investing primarily in short-term, high quality fixed rate and variable rate obligations issued by or on behalf of states and municipal governments and their authorities, agencies, instrumentalities and political subdivisions, the interest on which is exempt from federal income taxes (these securities are referred to as "Municipal Obligations"). As a fundamental policy, the Fund invests at least 80% of its assets, under normal circumstances, in the following types of Municipal Obligations and in participation interests in these obligations issued by banks, insurance companies or other financial institutions ("Participation Interests"):
(1) Municipal bonds that at the date of purchase are rated Aa or better by Moody's Investors Service, Inc. ("Moody's") or AA or better by Standard & Poor's Rating Group ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or are unrated but are of comparable quality as determined by the Adviser on the basis of a credit evaluation of the obligor, or of the bank issuing the Participation Interest or guarantee of the bonds, or of any insurance issued in support of the bonds or the Participation Interest;
(2) Municipal notes that at the date of purchase are rated MIG 2/VMIG 2 or better by Moody's, SP-2 or better by S&P or F-2 or better by Fitch, or are unrated but are of comparable quality as determined by the Adviser; and
(3) Municipal commercial paper that at the date of purchase is rated Prime-2 or better by Moody's, A-2 or better by S&P or F-2 or better by Fitch, or is unrated but is of comparable quality as determined by the Adviser.
See Appendix A for an explanation of Municipal Obligations and Appendix B for an explanation of ratings of Municipal Obligations.
Although the Fund attempts to invest all of its assets in Municipal Obligations, the Fund may invest up to 20% of its assets in taxable securities (such as U.S. Government obligations or certificates of deposit of domestic banks). Any taxable securities in which the Fund invests are of comparable quality to the Municipal Obligations in which the Fund invests.
In determining the tax status of interest on Municipal Obligations, the Adviser relies on opinions of bond counsel who may be counsel to the issuer.
$1.00 NET ASSET VALUE. The Fund employs specific investment policies and procedures designed to maintain a constant net asset value of $1.00 per share. There can be no assurance, however, that a constant net asset value will be maintained on a continuing basis. See "Net Income and Distributions."
90-DAY AVERAGE MATURITY. All of the Fund's investments mature in 397 days or less from the date of purchase, have a variable rate of interest adjusted no less frequently than every 397 days, or are purchased pursuant to a repurchase agreement which provides for repurchase by the seller within 397 days from the date of purchase. The average maturity of the Fund's investments (on a dollar-weighted basis) is 90 days or less. All of the Fund's investments are "eligible securities" within the meaning of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), and are determined by the Adviser to present minimal credit risks. Investment in high quality, short-term instruments may, in many circumstances, result in a lower yield than would be available from investment in instruments with a lower quality or a longer term.
PERMITTED INVESTMENTS. Uninvested cash reserves may be held temporarily for the Fund pending investment. The Fund may borrow from banks up to 15% of its total assets for temporary or emergency purposes. For more information regarding permitted investments and investment practices, see Appendix A. The Fund will not necessarily invest or engage in each of the investments and investment practices in Appendix A but reserves the right to do so.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains a list of specific investment restrictions which govern the Fund's investment policies. Certain of these specific restrictions may not be changed without shareholder approval. Except as otherwise indicated, the Fund's investment restrictions and policies may be changed without shareholder approval. If a percentage or rating restriction (other than a restriction as to borrowing) is adhered to at the time an investment is made, a later change in percentage or rating resulting from changes in the Fund's securities will not be a violation of policy.
BROKERAGE TRANSACTIONS. The primary consideration in placing the Fund's security transactions with broker-dealers for execution is to obtain and maintain the availability of execution at the most favorable prices and in the most effective manner possible.
The risks of investing in the Fund vary depending upon the nature of the securities held, and the investment practices employed, on its behalf. Certain of these risks are described below.
NON-DIVERSIFIED STATUS. The Fund is a non-diversified mutual fund. This means that it is not subject to any statutory restrictions under the 1940 Act limiting the investment of its assets in one or relatively few issuers (although certain diversification requirements are imposed by the Internal Revenue Code). Since the Fund may invest a relatively high percentage of its assets in the obligations of a limited number of issuers, the value of shares of the Fund may be more susceptible to any single economic, political or regulatory occurrence than the value of shares of a diversified mutual fund would be. The Fund also may invest 25% or more of its assets in securities the issuers of which are located in the same state or the interest on which is paid from revenues of similar type projects or that are otherwise related in such a way that a single economic, business or political development or change affecting one of the securities would also affect other securities. Investors should consider the greater risk inherent in these policies when compared with a more diversified mutual fund.
"CONCENTRATION" IN PARTICIPATION INTERESTS. The Fund invests more than 25% of its assets in Participation Interests in Municipal Obligations which are secured by bank letters of credit or guarantees. Banks are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of this industry is largely dependent upon the availability and cost of capital funds for the purpose of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of this industry and exposure to credit losses arising from possible financial difficulties of borrowers might affect a bank's ability to meet its obligations under a letter of credit or guarantee. For additional information concerning variable rate instruments and Participation Interests, see Appendix A.
INVESTMENT PRACTICES. Certain of the investment practices employed for the Fund may entail certain risks. See Appendix A.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE: Unlike other mutual funds which directly acquire and manage their own portfolio securities, the Fund seeks its investment objective by investing all of its investable assets in Tax Free Reserves Portfolio, a registered investment company. The Portfolio has the same investment objectives and policies as the Fund. In addition to selling a beneficial interest to the Fund, the Portfolio may sell beneficial interests to other mutual funds, collective investment vehicles, or institutional investors. Such investors will invest in the Portfolio on the same terms and conditions and will pay a proportionate share of the Portfolio's expenses. However, the other investors investing in the Portfolio are not required to sell their shares at the same public offering price as the Fund due to variations in sales commissions and other operating expenses. Therefore, investors in the Fund should be aware that these differences may result in differences in returns experienced by investors in the different funds that invest in the Portfolio. Such differences in returns are also present in other mutual fund structures. Information concerning other holders of interests in the Portfolio is available from the Fund's distributor, LFBDS, at the address and telephone number indicated on the back cover of this Prospectus.
The investment objective of the Fund may not be changed without the approval of the Fund's shareholders. If there is a change in the Fund's investment objective, shareholders should consider whether the Fund remains an appropriate investment in light of their then current financial positions and needs. The investment objective of the Portfolio may be changed without the approval of the investors in the Portfolio, but not without written notice thereof to the investors in the Portfolio (and, if the Fund is then invested in the Portfolio, notice to Fund shareholders) at least 30 days prior to implementing the change. There can, of course, be no assurance that the investment objective of either the Fund or the Portfolio will be achieved. See "Investment Objective, Policies and Restrictions - Investment Restrictions" in the Statement of Additional Information for a description of the fundamental policies of the Fund and the Portfolio that cannot be changed without approval by the holders of a "majority of the outstanding voting securities" (as defined in the 1940 Act) of the Fund or Portfolio. Except as stated otherwise, all investment guidelines, policies and restrictions described herein and in the Statement of Additional Information are non-fundamental.
Certain changes in the Portfolio's investment objectives, policies or restrictions or a failure by the Fund's shareholders to approve a change in the Portfolio's investment objectives or restrictions, may preclude the Fund from investing its investable assets in the Portfolio or require the Fund to withdraw its interest in the Portfolio. Any such withdrawal could result in an "in kind" distribution of securities (as opposed to a cash distribution) from the Portfolio which may or may not be readily marketable. If securities are distributed, the Fund could incur brokerage, tax or other charges in converting the securities to cash. The in kind distribution may result in the Fund having a less diversified portfolio of investments or adversely affect the liquidity of the Fund. Notwithstanding the above, there are other means for meeting shareholder redemption requests, such as borrowing. The absence of substantial experience with this investment structure could have an adverse effect on an investment in the Fund.
Smaller funds investing in the Portfolio may be materially affected by the actions of larger funds investing in the Portfolio. For example, if a large fund withdraws from the Portfolio, the remaining funds may subsequently experience higher pro rata operating expenses, thereby producing lower returns. Additionally, because the Portfolio would become smaller, it may become less diversified, resulting in increased portfolio risk; however, these possibilities exist for traditionally structured funds which have large or institutional investors who may withdraw from a fund. Also, funds with a greater pro rata ownership in the Portfolio could have effective voting control of the operations of the Portfolio. If the Fund is requested to vote on matters pertaining to the Portfolio (other than a vote by the Fund to continue the operation of the Portfolio upon the withdrawal of another investor in the Portfolio), the Fund will hold a meeting of its shareholders and will cast all of its votes proportionately as instructed by such shareholders. The Fund will vote the shares held by Fund shareholders who do not give voting instructions in the same proportion as the shares of Fund shareholders who do give voting instructions. Shareholders of the Fund who do not vote will have no effect on the outcome of such matters.
The Fund may withdraw its investment from the Portfolio at any time, if the Fund's Board of Trustees determines that it is in the best interest of the Fund to do so. Upon any such withdrawal, the Board of Trustees would consider what action might be taken, including the investment of all of the investable assets of the Fund in another pooled investment entity having the same investment objective as the Fund or the retaining of an investment adviser to manage the Fund's assets in accordance with the investment policies described above. In the event the Fund's Trustees were unable to find a substitute investment company in which to invest the Fund's assets or were unable to secure directly the services of an investment adviser, the Trustees would determine the best course of action.
For a description of the management of the Portfolio, see "Management" -- page 10. For descriptions of the expenses of the Portfolio, see "Management" and "General Information -- Expenses" -- page 14. For a description of the investment objectives, policies and restrictions of the Portfolio, see "Investment Information" -- page 5.
Net asset value per share of the Fund is determined each day the New York Stock Exchange is open for trading (a "Business Day"). This determination is made once each day as of 12:00 noon, Eastern time, by adding the market value of all of the Fund's securities and other assets, then subtracting the liabilities charged to the Fund, and then dividing the result by the number of the Fund's outstanding shares. The Fund attempts to stabilize the net asset value of its shares at $1.00 by valuing portfolio securities using the amortized cost method; however, there can be no assurance that the Fund's net asset value will always remain at $1.00 per share. The net asset value per share is effective for orders received and accepted by the Distributor prior to its calculation.
The amortized cost method involves valuing a security at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated value of a security is higher or lower than the price the Fund would receive if the security were sold.
Shares of the Fund are offered continuously and may be purchased on any Business Day without a sales load at the shares' net asset value next determined after an order is transmitted to and accepted by the Distributor. Shares may be purchased either through a securities broker which has a sales agreement with the Distributor or through a bank or other financial institution which has an agency agreement with the Distributor. Shares of the Fund are being offered exclusively to customers of a Shareholder Servicing Agent (i.e., a financial institution, such as a federal or state-chartered bank, trust company, savings and loan association or savings bank, or a securities broker, that has entered into a shareholder servicing agreement concerning the Fund). The Fund and the Distributor reserve the right to reject any purchase order and to suspend the offering of Fund shares for a period of time.
While there is no sales load imposed on shares of the Fund, the Distributor receives fees from the Fund pursuant to a Distribution Plan. See "Management -- Distribution Arrangements."
Each shareholder's account is established and maintained by his or her Shareholder Servicing Agent, which will be the shareholder of record of the Fund. Each Shareholder Servicing Agent may offer services to its customers such as pre-authorized or automatic purchase and redemption programs and "sweep" checking programs, and may establish its own terms, conditions and charges with respect to services it offers to its customers. Charges for these services may include fixed annual fees and account maintenance fees. The effect of any of these fees will be to reduce the net return on the investment of customers of that Shareholder Servicing Agent.
Shareholder Servicing Agents will not transmit purchase orders to the Distributor until they have received the purchase price in federal or other immediately available funds. If Fund shares are purchased by check, there will be a delay (usually not longer than two business days) in transmitting the purchase order until the check is converted into federal funds.
Shares of the Fund may be exchanged for shares of the other Landmark Funds that are made available by a shareholder's Shareholder Servicing Agent, or may be acquired through an exchange of shares of those funds. No initial sales charge is imposed on shares being acquired through an exchange unless the shares being acquired are subject to a sales charge that is greater than the current sales charge of the Fund (in which case an initial sales charge will be imposed at a rate equal to the difference). Contingent deferred sales charges may apply to redemptions of some shares of other Landmark Funds disposed of or acquired through an exchange.
Shareholders must place exchange orders through their Shareholder Servicing Agents, and may do so by telephone if their account applications so permit. For more information on telephone transactions see "Redemptions." All exchanges will be effected based on the relative net asset values per share next determined after the exchange order is received by the Distributor. See "Valuation of Shares." Shares of the Fund may be exchanged only after payment in federal funds for the shares has been made.
This exchange privilege may be modified or terminated at any time, upon at least 60 days' notice when such notice is required by SEC rules, and is available only in those jurisdictions where such exchanges legally may be made. See the Statement of Additional Information for further details. Before making any exchange, shareholders should contact their Shareholder Servicing Agents to obtain more information and prospectuses of the Landmark Funds to be acquired through the exchange.
Fund shares may be redeemed at their net asset value (normally $1.00 per share) next determined after a redemption request in proper form is received by a shareholder's Shareholder Servicing Agent. Shareholders may redeem shares of the Fund only by authorizing their Shareholder Servicing Agents to redeem such shares on their behalf through the Distributor.
REDEMPTIONS BY MAIL. Shareholders may redeem Fund shares by sending written instructions in proper form (as determined by a shareholder's Shareholder Servicing Agent) to their Shareholder Servicing Agents. Shareholders are responsible for ensuring that a request for redemption is in proper form.
REDEMPTIONS BY TELEPHONE. Shareholders may redeem or exchange Fund shares by telephone, if their account applications so permit, by calling their Shareholder Servicing Agents. During periods of drastic economic or market changes or severe weather or other emergencies, shareholders may experience difficulties implementing a telephone exchange or redemption. In such an event, another method of instruction, such as a written request sent via an overnight delivery service, should be considered. The Fund and each Shareholder Servicing Agent will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures may include recording of the telephone instructions and verification of a caller's identity by asking for his or her name, address, telephone number, Social Security number, and account number. If these or other reasonable procedures are not followed, the Fund or the Shareholder Servicing Agent may be liable for any losses to a shareholder due to unauthorized or fraudulent instructions. Otherwise, the shareholder will bear all risk of loss relating to a redemption or exchange by telephone.
PAYMENT OF REDEMPTIONS. The proceeds of a redemption are paid in federal funds normally on the Business Day the redemption is effected, but in any event within seven days. If a shareholder requests redemption of shares which were purchased recently, the Fund may delay payment until it is assured that good payment has been received. In the case of purchases by check, this can take up to ten days. See "Determination of Net Asset Value" in the Statement of Additional Information regarding the Fund's right to pay the redemption price in kind with securities (instead of cash).
Questions about redemption requirements should be referred to the shareholder's Shareholder Servicing Agent. The right of any shareholder to receive payment with respect to any redemption may be suspended or the payment of the redemption price postponed during any period in which the New York Stock Exchange is closed (other than weekends or holidays) or trading on the Exchange is restricted or if an emergency exists.
The Fund's net income is determined each Business Day (and on such other days as is necessary in order to comply with the 1940 Act). This determination is made once during each such day as of 12:00 noon, Eastern time. All the Fund's net income is declared as a dividend to shareholders of record at the time of such determination. Shares begin accruing dividends on the day they are purchased, and accrue dividends up to and including the day prior to redemption. Dividends are distributed monthly on or prior to the last business day of each month. Unless a shareholder elects to receive dividends in cash (subject to the policies of the shareholder's Shareholder Servicing Agent), dividends are distributed in the form of full and fractional additional Fund shares at the rate of one share of the Fund for each one dollar of dividend income.
Since the Fund's net income is declared as a dividend each time the Fund's net income is determined, the net asset value per share of the Fund is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder's investment in the Fund, representing the reinvestment of dividend income, is reflected by an increase in the number of shares of the Fund in the shareholder's account.
Because of the short-term maturities of the portfolio investments of the Fund, the Fund does not expect to realize long-term capital gains or losses. Any net realized short-term capital gains will be declared and distributed to the Fund's shareholders annually after the close of the Fund's fiscal year. Disltributions of short-term capital gains are taxable to shareholders as described in "Tax Matters". Any realized short-term capital losses will be offset against short-term capital gains or, to the extent possible, utilized as capital loss carryover. The Fund may distribute short-term capital gains more frequently than annually, reduce shares to reflect capital losses or make distributions of capital if necessary in order to maintain the Fund's net asset value of $1.00 per share.
It is expected that the Fund will have a positive net income at the time of each determination thereof. If for any reason the Fund's net income is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, the Fund would first offset the negative amount with respect to each shareholder account from the dividends declared during the month with respect to those accounts. If and to the extent that negative net income exceeds declared dividends at the end of the month, the Fund would reduce the number of outstanding Fund shares by treating each shareholder as having contributed to the capital of the Fund that number of full and fractional shares in his or her account which represents his or her share of the amount of such excess. Each shareholder would be deemed to have agreed to such contribution in these circumstances by his or her investment in the Fund.
TRUSTEES AND OFFICERS: The Fund and Tax Free Reserves Portfolio are supervised by their own Boards of Trustees. In each case, a majority of the Trustees are not affiliated with the Adviser. In addition, a majority of the disinterested Trustees of the Fund are different from a majority of the disinterested Trustees of the Portfolio. More information on the Trustees and officers of the Fund and the Portfolio appears under "Management" in the Statement of Additional Information.
INVESTMENT ADVISER: CITIBANK. The Fund draws on the strength and experience of Citibank. Citibank offers a wide range of banking and investment services to customers across the United States and throughout the world, and has been managing money since 1822. Its portfolio managers are responsible for investing in money market, equity and fixed income securities. Citibank and its affiliates manage more than $73 billion in assets worldwide, including the Landmark Funds and Portfolios. Citibank is a wholly-owned subsidiary of Citicorp.
Citibank manages the assets of Tax Free Reserves Portfolio pursuant to an investment advisory agreement (the "Advisory Agreement"). Subject to policies set by the Portfolio's Trustees, Citibank makes investment decisions for the Portfolio.
ADVISORY FEES. For its services under the Advisory Agreement, the Adviser receives investment advisory fees, which are accrued daily and paid monthly, of 0.20% of Tax Free Reserves Portfolio's average daily net assets on an annualized basis for the Portfolio's then-current fiscal year.
For the fiscal year ended August 31, 1995, the investment advisory fees paid to Citibank from Tax Free Reserves Portfolio were $613,607.
BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan and other relationships with the issuers of securities purchased on behalf of the Fund, including outstanding loans to such issuers which may be repaid in whole or in part with the proceeds of securities so purchased. Citibank has informed the Fund that, in making its investment decisions, it does not obtain or use material inside information in the possession of any division or department of Citibank or in the possession of any affiliate of Citibank.
BANK REGULATORY MATTERS. The Glass-Steagall Act prohibits certain financial institutions, such as Citibank, from underwriting securities of open-end investment companies, such as the Fund. Citibank believes that its services under the Advisory Agreement and the activities performed by it or its affiliates as Shareholder Servicing Agents and sub-administrator are not underwriting and are consistent with the Glass-Steagall Act and other relevant federal and state laws. However, there is no controlling precedent regarding the performance of the combination of investment advisory, shareholder servicing and sub-administrative activities by banks. State laws on this issue may differ from applicable federal law and banks and financial institutions may be required to register as dealers pursuant to state securities laws. Changes in either federal or state statutes or regulations, or in their interpretations, could prevent Citibank or its affiliates from continuing to perform these services for the Fund. If Citibank or its affiliates were to be prevented from acting as the Adviser, sub-administrator or a Shareholder Servicing Agent, the Fund would seek alternative means for obtaining these services. The Fund does not expect that shareholders would suffer any adverse financial consequences as a result of any such occurrence.
ADMINISTRATIVE SERVICES PLANS: The Fund and Tax Free Reserves Portfolio have administrative services plans ("Administrative Services Plans") which provide that the Fund or the Portfolio may obtain the services of an administrator, a transfer agent, a custodian, a fund accountant, and, in the case of the Fund, one or more Shareholder Servicing Agents, and may enter into agreements providing for the payment of fees for such services. Under the Fund's Administrative Services Plan, the total of the fees paid to the Fund's Administrator and Shareholder Servicing Agents and the distribution fee paid to the Distributor (other than any fee concerning electronic or other media advertising) may not exceed 0.60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. Within this overall limitation, individual fees may vary. Under the Portfolio's Administrative Services Plan, fees paid to the Portfolio's Administrator may not exceed 0.05% of the Portfolio's average daily net assets on an annualized basis for the Portfolio's then-current fiscal year. See "Administrator," "Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund Accountant."
ADMINISTRATOR: LFBDS provides certain administrative services to the Fund and Tax Free Reserves Portfolio under administrative services agreements. These administrative services include providing general office facilities, supervising the overall administration of the Fund and the Portfolio, and providing persons satisfactory to the Boards of Trustees to serve as Trustees and officers of the Fund and the Portfolio. These Trustees and officers may be directors, officers or employees of LFBDS or its affiliates.
For these services, the Administrator receives fees accrued daily and paid monthly of 0.25% of the average daily net assets of the Fund and 0.05% of the assets of Tax Free Reserves Portfolio, in each case on an annualized basis for the Fund's or the Portfolio's then-current fiscal year. However, the Administrator has voluntarily agreed to waive a portion of the fees payable to it.
LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc. "Landmark" is a service mark of LFBDS.
SUB-ADMINISTRATOR: Pursuant to sub-administrative services agreements, Citibank performs such sub-administrative duties for the Fund and the Portfolio as from time to time are agreed upon by Citibank and LFBDS. Citibank's compensation as sub-administrator is paid by LFBDS.
SHAREHOLDER SERVICING AGENTS: The Fund has entered into separate shareholder servicing agreements with each Shareholder Servicing Agent pursuant to which that Shareholder Servicing Agent provides shareholder services, including answering customer inquiries, assisting in processing purchase, exchange and redemption transactions and furnishing Fund communications to shareholders. For these services, each Shareholder Servicing Agent receives a fee from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund represented by shares owned by investors for whom such Shareholder Servicing Agent maintains a servicing relationship.
Some Shareholder Servicing Agents may impose certain conditions on their customers in addition to or different from those imposed by the Fund, such as requiring a minimum initial investment or charging their customers a direct fee for their services. Each Shareholder Servicing Agent has agreed to transmit to its customers who are shareholders of the Fund appropriate prior written disclosure of any fees that it may charge them directly and to provide written notice at least 30 days prior to imposition of any transaction fees.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust Company acts as transfer agent, dividend disbursing agent and custodian for the Fund. State Street also provides fund accounting services to the Fund and calculates the daily net asset value of the Fund.
DISTRIBUTION ARRANGEMENTS: LFBDS is the Distributor of the Fund's shares and also serves as distributor for each of the other Landmark Funds and as a Shareholder Servicing Agent for certain investors. As Distributor, LFBDS bears the cost of compensating personnel involved in the sale of shares of the Fund and bears all costs of travel, office expenses (including rent and overhead) and equipment. In those states where LFBDS is not a registered broker-dealer, shares of the Fund are sold through Signature Broker-Dealer Services, Inc., as dealer.
Under a plan of distribution for the Fund (the "Plan"), the Fund pays the Distributor a fee at an annual rate not to exceed 0.10% of the average daily net assets of the Fund. The Plan also permits the Fund to pay the Distributor an additional fee (not to exceed 0.10% of the average daily net assets of the Fund) in anticipation of or as reimbursement for print or electronic media advertising expenses incurred in connection with the sale of Fund shares. However, the Distributor has agreed to waive a portion of these fees. The Plan was adopted in accordance with Rule 12b-1 under the 1940 Act.
The Fund and the Distributor provide to the Trustees quarterly a written report of amounts expended pursuant to the Plan and the purposes for which the expenditures were made.
From time to time LFBDS may make payments for distribution and/or shareholder servicing activities out of its past profits or any other sources available to it.
FEDERAL INCOME TAXES: This discussion of taxes is for general information only. Investors should consult their own tax advisers about their particular situations.
The Fund intends to meet requirements of the Internal Revenue Code applicable to regulated investment companies so that it will not be liable for any federal income or excise taxes.
The Fund expects that most of its net income will be attributable to interest on Municipal Obligations and as a result most of the Fund's dividends to shareholders will be excludable from shareholders' gross income. However, the Fund may invest from time to time in taxable securities, and certain Fund dividends may be subject to the federal alternative minimum tax. It is also possible, but not intended, that the Fund may realize short-term or long-term capital gains or losses. Generally, distributions from the Fund's short-term capital gains will be taxed as ordinary income, and distributions of long-term net capital gains will be taxed as such regardless of how long the shares of the Fund have been held. Dividends and distributions are treated in the same manner for federal tax purposes whether they are paid in cash or as additional shares.
Fund dividends of tax-exempt income are taken into account in determining the amount of a shareholder's social security and railroad retirement benefits that may be subject to federal income tax. No deduction may be claimed for interest on indebtedness incurred or carried for the purpose of purchasing or holding Fund shares. Investors who are, or who are related to, "substantial users" of facilities financed by private activity bonds should consult their tax advisers before buying Fund shares.
Early each year, the Fund will notify its shareholders of the amount and federal tax status of distributions paid to shareholders for the preceding year.
The account application asks each new shareholder to certify that the shareholder's Social Security or taxpayer identification number is correct and that the shareholder is not subject to 31% backup withholding for failing to report income to the IRS. The Fund may be required to withhold (and pay over to the IRS for the shareholder's credit) 31% of certain distributions paid to shareholders who fail to provide this information or otherwise violate IRS regulations.
STATE AND LOCAL TAXES: Fund dividends which are excludable from shareholders' gross income for federal income tax purposes may not necessarily be exempt from the income or other tax laws of any state or local taxing authority. Investors should consult their own tax advisers in this regard.
Fund performance may be quoted in advertising, shareholder reports and other communications in terms of yield, effective yield, tax equivalent yield, total rate of return or tax equivalent total rate of return. All performance information is historical and is not intended to indicate future performance. Yields and total rates of return fluctuate in response to market conditions and other factors.
The Fund may provide its period and average annualized "total rates of return" and "tax equivalent total rates of return." The "total rate of return" refers to the change in the value of an investment in the Fund over a stated period and is compounded to include the value of any shares purchased with any dividends or capital gains declared during such period. Period total rates of return may be "annualized." An "annualized" total rate of return assumes that the period total rate of return is generated over a one-year period. The "tax equivalent total rate of return" refers to the total rate of return that a fully taxable money market fund would have to generate in order to produce an after-tax total rate of return equivalent to that of the Fund. The use of a tax equivalent total rate of return allows investors to compare the total rates of return of the Fund, the dividends from which are exempt from federal personal income taxes, with the total rates of return of funds the dividends from which are not so tax exempt.
The Fund may provide annualized "yield," "effective yield" and "tax equivalent yield" quotations. The "yield" of the Fund refers to the income generated by an investment in the Fund over a seven-day period (which period is stated in any such advertisement or communication). This income is then annualized; that is, the amount of income generated by the investment over that period is assumed to be generated each week over a 365-day period and is shown as a percentage of the investment. The "effective yield" is calculated similarly, but when annualized the income earned by the investment during that seven-day period is assumed to be reinvested. The effective yield is slightly higher than the yield because of the compounding effect of this assumed reinvestment. The "tax equivalent yield" refers to the yield that a fully taxable money market fund would have to generate in order to produce an after-tax yield equivalent to that of the Fund. The use of a tax equivalent yield allows investors to compare the yield of the Fund, the dividends from which are exempt from federal personal income tax, with yields of funds the dividends from which are not so tax exempt. The Fund may also provide yield, effective yield and tax equivalent yield quotations for longer periods.
Of course, any fees charged by a shareholder's Shareholder Servicing Agent will reduce that shareholder's net return on his or her investment. See the Statement of Additional Information for more information concerning the calculation of yield and total rate of return quotations for the Fund.
ORGANIZATION: Landmark Tax Free Reserves is a non-diversified, open-end management investment company organized as a Massachusetts business trust on June 21, 1985 and registered under the 1940 Act. The Fund is the successor to the business of The Landmark Funds Tax Free Reserves, Inc., which was incorporated in Maryland in 1983.
Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for the trust's obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the trust itself was unable to meet its obligations.
Tax Free Reserves Portfolio is a trust organized under the laws of the State of New York. The Declaration of Trust of the Portfolio provides that the entities investing in the Portfolio are each liable for all obligations of the Portfolio. However, it is not expected that the liabilities of the Portfolio would ever exceed its assets.
VOTING AND OTHER RIGHTS: Landmark Tax Free Reserves may issue an unlimited number of shares, may create new series of shares and may divide shares in each series into classes. Each share of the Fund gives the shareholder one vote in Trustee elections and other matters submitted to shareholders for vote. All shares of each series of the Fund have equal voting rights except that, in matters affecting only a particular series, only shares of that particular series are entitled to vote.
At any meeting of shareholders of the Fund, a Shareholder Servicing Agent may vote any shares of which it is the holder of record and for which it does not receive voting instructions proportionately in accordance with the instructions it receives for all other shares of which that Shareholder Servicing Agent is the holder of record.
The Fund's activities are supervised by its Board of Trustees. As a Massachusetts business trust, the Fund is not required to hold annual shareholder meetings. Shareholder approval will usually be sought only for changes in the Fund's (or Tax Free Reserves Portfolio's) fundamental investment restrictions and for the election of Trustees under certain circumstances. Trustees may be removed by shareholders under certain circumstances. Each share of the Fund is entitled to participate equally in dividends and other distributions and the proceeds of any liquidation of the Fund.
CERTIFICATES: The Fund's Transfer Agent maintains a share register for shareholders of record, i.e., Shareholder Servicing Agents. Share certificates are not issued.
EXPENSES: For the fiscal year ended August 31, 1995, total operating expenses of the Fund, after allocating to the Fund its share of Tax Free Reserves Portfolio's expenses and after giving effect to fee waivers and reimbursements, were 0.65% of the Fund's average daily net assets for that fiscal year. All fee waivers and reimbursements are voluntary and may be reduced or terminated at anytime.
The Statement of Additional Information dated the date hereof contains more detailed information about the Fund, including information related to (i) investment policies and restrictions, (ii) the Trustees, officers, Adviser and Administrator, (iii) securities transactions, (iv) the Fund's shares, including rights and liabilities of shareholders, (v) the methods used to calculate performance information, (vi) programs for the purchase of shares, and (vii) the determination of net asset value.
No person has been authorized to give any information or make any representations not contained in this Prospectus in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Fund or its distributor. This Prospectus does not constitute an offering by the Fund or its distributor in any jurisdiction in which such offering may not lawfully be made.
MUNICIPAL BONDS. Municipal bonds are debt obligations of states, cities, municipalities and municipal agencies and authorities which generally have a maturity at the time of issue of one year or more and which are issued to raise funds for various public purposes, such as construction of a wide range of public facilities, refunding outstanding obligations or obtaining funds for institutions and facilities. The two principal classifications of municipal bonds are "general obligation" and "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. The principal of and interest on revenue bonds are payable from the income of specific projects or authorities and generally are not supported by the issuer's general power to levy taxes. In some cases, revenues derived from specific taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of private activity bonds ("IDBs") are issued by or on behalf of public authorities to provide funding for various privately operated industrial facilities, such as warehouse, office, plant and store facilities and environmental and pollution control facilities. IDBs are, in most cases, revenue bonds. The payment of the principal and interest on IDBs usually depends solely on the ability of the user of the facilities financed by the bonds or other guarantor to meet its financial obligations and, in certain instances, the pledge of real and personal property as security for payment. Many IDBs may not be readily marketable; however, the IDBs or the participation certificates in IDBs purchased by the Fund will have liquidity because they generally will be supported by demand features to "high quality" banks, insurance companies or other financial institutions.
MUNICIPAL NOTES. There are four major varieties of state and municipal notes: Tax and Revenue Anticipation Notes ("TRANs"); Tax Anticipation Notes ("TANs"); Revenue Anticipation Notes ("RANs"); and Bond Anticipation Notes ("BANs"). TRANs, TANs and RANs are issued by states, municipalities and other tax-exempt issuers to finance short-term cash needs or, occasionally, to finance construction. Many TRANs, TANs and RANs are general obligations of the issuing entity payable from taxes or designated revenues, respectively, expected to be received within the related fiscal period. BANs are issued with the expectation that their principal and interest will be paid out of proceeds from renewal notes or bonds to be issued prior to the maturity of the BANs. BANs are issued most frequently by both general obligation and revenue bond issuers usually to finance such items as land acquisition, facility acquisition and/or construction and capital improvement projects.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS. Variable rate instruments provide for a periodic adjustment in the interest rate paid on the instrument and usually permit the holder to receive payment of principal and accrued interest upon a specified number of day's notice. Variable rate instruments in which the Fund may invest include participation interests in Municipal Obligations owned by a bank, insurance company or other financial institution or affiliated organization ("Participation Interests"). A variable rate instrument or a Participation Interest may be backed by an irrevocable letter of credit or guarantee of, or a right to put to, a bank, or an insurance policy of an insurance company. See "Stand-by Commitments." Purchase of a Participation Interest may involve the risk that the Fund will not be deemed to be the owner of the underlying Municipal Obligation for purposes of the ability to claim tax exemption of interest paid on that Municipal Obligation. If interest rates rise or fall, the rates payable on variable rate instruments will generally be readjusted. As a result variable rate instruments do not offer the same opportunity for capital appreciation or loss as fixed rate instruments.
STAND-BY COMMITMENTS. When the Fund purchases Municipal Obligations it may also acquire stand-by commitments from banks with respect to such Municipal Obligations. The Fund also may acquire stand-by commitments from broker-dealers. Under a stand-by commitment, a bank or broker-dealer agrees to purchase at the Fund's option a specified Municipal Obligation at a specified price. A stand-by commitment is the equivalent of a "put" option with respect to a particular Municipal Obligation. The Fund intends to acquire stand-by commitments solely to facilitate liquidity. Stand-by commitments are subject to certain risks, which include the ability of the issuer of the commitment to pay for the Municipal Obligations at the time the commitment is exercised, the fact that the commitment is not marketable, and that the maturity of the underlying security will generally be different from that of the commitment.
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable securities, the Fund may purchase securities on a "when-issued" or on a "forward delivery" basis, which means that the securities would be delivered to the Fund at a future date beyond customary settlement time. Under normal circumstances, the Fund takes delivery of the securities. In general, the purchaser does not pay for the securities until received and does not start earning interest until the contractual settlement date. While awaiting delivery of the securities, the Fund establishes a segregated account consisting of cash, cash equivalents or high quality debt securities equal to the amount of the Fund's commitments to purchase "when-issued" securities. An increase in the percentage of the Fund's assets committed to the purchase of securities on a "when-issued" basis may increase the volatility of its net asset value.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. Repurchase agreements are transactions in which an institution sells the Fund a security at one price, subject to the Fund's obligation to resell and the selling institution's obligation to repurchase that security at a higher price normally within a seven day period. There may be delays and risks of loss if the seller is unable to meet its obligation to repurchase. Repurchase agreements may involve Municipal Obligations or other securities.
RESTRICTED SECURITIES. The Fund may purchase restricted securities that are not registered for sale to the general public. Provided that a dealer or institutional trading market in such securities exists, these restricted securities are not treated as illiquid securities for purposes of the Fund's investment limitations. Institutional trading in restricted securities is relatively new, and the liquidity of the Fund's investments could be impaired if trading does not develop or declines.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. The Fund may invest up to 10% of its net assets in securities for which there is no readily available market. These illiquid securities may include privately placed restricted securities for which no institutional market exists. The absence of a trading market can make it difficult to ascertain a market value for illiquid investments. Disposing of illiquid investments may involve time-consuming negotiation and legal expenses, and it may be difficult or impossible for the Fund to sell them promptly at an acceptable price.
The ratings of Moody's Investors Service, Inc., Standard & Poor's Ratings Group and Fitch Investors Service, Inc. represent their opinions as to the quality of various debt obligations. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, Municipal Obligations with the same maturity, coupon and rating may have different yields while Municipal Obligations of the same maturity and coupon with different ratings may have the same yield.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST LONG-TERM DEBT RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt edged". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, or fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
Note: Those bonds in the Aa group which Moody's believes possess the strongest investment attributes are designated by the symbol Aa 1.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES:
Moody's ratings for state and municipal short-term obligations are designated Moody's Investment Grade ("MIG"). Such ratings recognize the differences between short-term credit risk and long-term risk. A short-term rating ("VMIG") may also be assigned to variable rate demand obligations. Factors affecting the liquidity of the borrower and short-term cyclical elements are critical in short-term ratings, while other factors of major importance in bond risk, long-term secular trends, for example, may be less important over the short run. Symbols used are as follows:
MIG 1/VMIG 1 -- Notes bearing this designation are of the best quality, with strong protection from established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 -- Notes bearing this designation are of high quality, with margins of protection ample although not so large as in the preceding group.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually senior short-term obligations not having an original maturity in excess of one year.
Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of senior short-term debt obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: (1) leading market positions in well established industries; (2) high rates of return on funds employed; (3) conservative capitalization structures with moderate reliance on debt and ample asset protection; (4) broad margins in earnings coverage of fixed financial charges and high internal cash generation; and (5) well established access to a range of financial markets and assured sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST LONG-TERM DEBT RATINGS:
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree.
Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus or minus sign to show relative standing within the AA rating category.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES:
A Standard & Poor's note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other maturities the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics are given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST COMMERCIAL PAPER RATINGS:
A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days.
A -- Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 -- This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation.
A-2 -- Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated A-1.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S DUAL RATINGS:
Standard & Poor's assigns "dual" ratings to all debt issues that have as part of their structure a put option or demand feature.
The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the put option or demand feature. The long-term debt rating symbols are used for bonds to denote the long-term maturity and the commercial paper rating symbols are used to denote the put option (for example, "AAA/A-1+"). For demand debt, the note rating symbols are used with the commercial paper rating symbols (for example, "SP- 1+/A-1+").
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S TWO HIGHEST BOND RATINGS:
The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality.
AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+".
Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus or minus sign to show relative standing within the AA rating category.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S THREE HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES:
The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+".
F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-2+" and "F-1" ratings.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER RATINGS:
The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+".
F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-1+" and "F-1" ratings.
* As described by the rating agencies. Ratings are generally given to securities at the time of issuance. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so.
(RATES FOR 1995+ UNDER FEDERAL PERSONAL INCOME TAX LAW)
The table below shows the approximate taxable bond yields which are equivalent to tax-exempt bond yields under 1995 federal personal income tax laws. SUCH YIELDS MAY DIFFER UNDER THE LAWS APPLICABLE TO SUBSEQUENT YEARS IF THE EFFECT OF ANY SUCH LAW IS TO CHANGE ANY TAX BRACKET OR THE AMOUNT OF TAXABLE INCOME WHICH IS APPLICABLE TO A TAX BRACKET. Separate calculations, showing the applicable taxable income brackets, are provided for investors who file joint returns and for investors who file individual returns. While it is expected that a substantial portion of the dividends paid to shareholders of the Fund will be exempt from federal personal income taxes, portions of such dividends from time to time may be subject to federal income taxes.
FOR CITIBANK NEW YORK RETAIL BANKING AND BUSINESS AND PROFESSIONAL CUSTOMERS: Citibank, N.A. 450 West 33rd Street, New York, NY 10001 (212) 564-3456 or (800) 846-5300
P.O. Box 5130, New York, NY 10126-5130 Call Your Citigold Executive, or in NY or CT (800) 285-1701, or for all other states (800) 285-1707
FOR CITIBANK PRIVATE BANKING CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 Call Your Citibank Private Banking Account Officer, Registered Representative or (212) 559-5959
FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043
FOR CITIBANK NORTH AMERICAN INVESTOR SERVICES CLIENTS: Citibank, N.A. 111 Wall Street, New York, NY 10043 Call Your Account Manager or (212) 657-9100
FOR CITICORP INVESTMENT SERVICES CUSTOMERS: One Court Square, Long Island City, NY 11120 Call Your Investment Consultant or (800) 846-5200 (212) 736-8170 in New York City
New York Tax Free Reserves
National Tax Free Income Fund New York Tax Free Income Fund
Emerging Asian Markets Equity Fund
C. Oscar Morong, Jr., Chairman
*Affiliated Person of Administrator and Distributor
153 East 53rd Street, New York, NY 10043
The Landmark Funds Broker-Dealer Services, Inc. 6 St. James Avenue, Boston, MA 02116
State Street Bank and Trust Company 225 Franklin Street, Boston, MA 02110
125 Summer Street, Boston, MA 02110
150 Federal Street, Boston, MA 02110
TFR/P/96/RB Printed on Recycled Paper [Symbol]
(A member of the LandmarkSM Family of Funds)
Landmark Tax Free Reserves (the "Fund") is a no-load, non-diversified, open-end management investment company. The address and telephone number of the Fund are 6 St. James Avenue, Boston, Massachusetts 02116, (617) 423-1679. The Fund invests all of its investable assets in Tax Free Reserves Portfolio (the "Portfolio"). The address and telephone number of the Portfolio are 6 St. James Avenue, Boston, Massachusetts 02116, (617) 423-1679.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
Determination of Net Asset Value 17 Description of Shares, Voting Rights Certain Additional Tax Matters 29
This Statement of Additional Information sets forth information which may be of interest to investors but which is not necessarily included in the Fund's Prospectus, dated January 2, 1996, by which shares of the Fund are offered. This Statement of Additional Information should be read in conjunction with the Prospectus, a copy of which may be obtained by an investor without charge by contacting the Fund's Distributor (see back cover for address and phone number).
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
The Fund is a no-load, non-diversified, open-end management investment company which was organized as a business trust under the laws of the Commonwealth of Massachusetts on June 21, 1985 and is the successor to the business of The Landmark Funds Tax Free Reserves, Inc., which was incorporated under the laws of the State of Maryland in 1983. All references in this Statement of Additional Information to the Fund's activities are intended to include those of the Fund and its predecessor, unless the context indicates otherwise. References in this Statement of Additional Information to the Prospectus are to the Prospectus, dated January 2, 1996, of the Fund by which shares of the Fund are offered.
The Fund is a type of mutual fund commonly referred to as a "tax-exempt money market fund." The net asset value of each of the Fund's shares is expected to remain constant at $1.00, although there can be no assurance that this will be so on a continuing basis. (See "Determination of Net Asset Value.")
The Fund seeks its investment objectives by investing all of its investable assets in the Portfolio. The Portfolio is non-diversified open-end management investment company and has the same investment objectives and policies as the Fund.
Citibank, N.A. ("Citibank" or the "Adviser") is the investment adviser to the Portfolio. The Adviser manages the investments of the Portfolio from day to day in accordance with the Portfolio's investment objectives and policies. The selection of investments for the Portfolio, and the way they are managed, depend on the conditions and trends in the economy and the financial marketplaces.
The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS," the "Administrator" or "Portfolio Administrator"), the administrator of the Fund and Portfolio, supervises the overall administration of the Fund and Portfolio. The Boards of Trustees of the Fund and Portfolio provide broad supervision over the affairs of the Fund and Portfolio, respectively. Shares of the Fund are continuously sold by LFBDS, the Fund's distributor (the "Distributor"), only to investors who are customers of a financial institution, such as a federal or state-chartered bank, trust company, savings and loan association or savings bank, or a securities broker, that has entered into a shareholder servicing agreement with the Fund (collectively, "Shareholder Servicing Agents"). Although shares of the Fund are sold without a sales load, LFBDS may receive a fee from the Fund pursuant to a Distribution Plan adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act").
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives of the Fund are to provide its shareholders with high levels of current income exempt from federal income taxes, preservation of capital and liquidity.
The investment objectives of the Fund may not be changed without approval by the Fund's shareholders. Of course, there can be no assurance that the Fund will achieve its investment objectives.
The Fund seeks its investment objectives by investing all of its investable assets in the Portfolio, which has the same investment objectives and policies as the Fund. The Prospectus contains a discussion of the various types of securities in which the Fund and Portfolio may invest and the risks involved in such investments. The following supplements the information contained in the Prospectus concerning the investment objectives, policies and techniques of the Fund and Portfolio. Since the investment characteristics of the Fund will correspond directly to those of the Portfolio, the following is a supplementary discussion with respect to the Portfolio.
The Fund may withdraw its investment from the Portfolio at any time, if the Board of Trustees determines that it is in the best interests of the Fund to do so. Upon any such withdrawal, the Fund's assets would be invested in accordance with the investment policies described below with respect to the Portfolio. The approval of the Fund's shareholders would not be required to change any of the Fund's investment policies. The approval of the Fund and of the other investors in the Portfolio would not be required to change the Portfolio's investment objectives or any of the Portfolio's investment policies discussed below, including those concerning securities transactions. The Portfolio would, however, give written notice to its investors at least 30 days prior to implementing any change in its investment objectives.
The Portfolio seeks its investment objectives by investing primarily in short-term, high quality fixed rate and variable rate obligations issued by or on behalf of states and municipal governments and their authorities, agencies, instrumentalities and political subdivisions, the interest on which is exempt from federal income taxes, including participation interests in such obligations issued by banks, insurance companies or other financial institutions. (These securities, whether or not the interest thereon is subject to the federal alternative minimum tax, are referred to herein as "Municipal Obligations"). In determining the tax status of interest on Municipal Obligations, the Adviser relies on opinions of bond counsel who may be counsel to the issuer. Although the Portfolio will attempt to invest 100% of its assets in Municipal Obligations, the Portfolio reserves the right to invest up to 20% of its total assets in securities, the interest income on which is subject to federal, state and local income tax or the federal alternative minimum tax. The Portfolio invests more than 25% of its assets in participation certificates issued by banks in industrial development bonds and other Municipal Obligations. In view of this "concentration" in these bank participation certificates, an investment in Fund shares should be made with an understanding of the characteristics of the banking industry and the risks which such an investment may entail. (See "Variable Rate Instruments and Participation Interests" below.) The Portfolio may hold uninvested cash reserves pending investment. The Portfolio's investments may include "when-issued" or "forward delivery" Municipal Obligations, stand-by commitments and taxable repurchase agreements.
For a general discussion of Municipal Obligations and an explanation of the ratings of Municipal Obligations by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rating Group ("Standard & Poor's") and Fitch Investors Service, Inc. ("Fitch"), see Appendix B to the Prospectus. For a comparison of yields on such Municipal Obligations and taxable securities, see Appendix C to the Prospectus.
All investments by the Portfolio mature or are deemed to mature within 397 days from the date of acquisition and the average maturity of the Portfolio's securities (on a dollar-weighted basis) is 90 days or less. The maturities of variable rate instruments held by the Portfolio are deemed to be the longer of the notice period, or the period remaining until the next interest rate adjustment, although the stated maturities may be in excess of 397 days. (See "Variable Rate Instruments and Participation Interests" below.) All investments by the Portfolio are "eligible securities," that is, rated in one of the two highest rating categories for short-term obligations by at least two nationally recognized statistical rating organizations (each a "NRSRO") assigning a rating to the security or issuer or, if only one NRSRO assigns a rating, that NRSRO, or, in the case of an investment which is not rated, of comparable quality as determined by or on behalf of the Portfolio's Board of Trustees on the basis of its credit evaluation of the obligor or of the bank issuing a participation interest, letter of credit or guarantee, or insurance issued in support of the Municipal Obligations or participation interests. (See "Variable Rate Instruments and Participation Interests" below.) Such instruments may produce a lower yield than would be available from less highly rated instruments. The Portfolio's Board of Trustees has determined that Municipal Obligations which are backed by the full faith and credit of the U.S. Government are considered to have a rating equivalent to Moody's Aaa. (See "Ratings of Municipal Obligations" in Appendix B to the Prospectus.)
As a fundamental policy, the Portfolio invests at least 80% of its assets, under normal circumstances, in:
(1) Municipal bonds with remaining maturities of one year or less that are rated within the Aaa or Aa categories at the date of purchase by Moody's or within the AAA or AA categories by Standard & Poor's or Fitch or, if not rated by these rating agencies, are of comparable quality as determined by the Adviser on the basis of the credit evaluation of the obligor on the bonds or of the bank issuing a participation interest or guarantee or of any insurance issued in support of the bonds or the participation interests.
(2) Municipal notes with remaining maturities of one year or less that at the date of purchase are rated MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by Standard & Poor's or F-1+,F-1 or F-2 by Fitch or, if not rated by these rating agencies, are of comparable quality as determined by the Adviser. The principal kinds of municipal notes are tax and revenue anticipation notes, tax anticipation notes, bond anticipation notes and revenue anticipation notes. Notes sold in anticipation of collection of taxes, a bond sale or receipt of other revenues are usually general obligations of the issuing municipality or agency.
(3) Municipal commercial paper that is rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch or, if not rated by these rating agencies, is of comparable quality as determined by the Adviser. Issues of municipal commercial paper typically represent very short-term, unsecured, negotiable promissory notes. These obligations are often issued to meet seasonal working capital needs of municipalities or to provide interim construction financing and are paid from general revenues of municipalities or are refinanced with long-term debt. In most cases municipal commercial paper is backed by letters of credit, lending agreements, note repurchase agreements or other credit facility agreements offered by banks or other institutions which may be called upon in the event of default by the issuer of the commercial paper.
Subsequent to its purchase by the Portfolio, a rated Municipal Obligation may cease to be rated or its rating may be reduced below the minimum required for purchase by the Portfolio. Neither event requires sale of such Municipal Obligation by the Portfolio (other than variable rate instruments which must be sold if they are not "high quality"), but the Adviser considers such event in determining whether the Portfolio should continue to hold the Municipal Obligation. To the extent that the ratings given to the Municipal Obligations or other securities held by the Portfolio are altered due to changes in any of the Moody's, Standard & Poor's or Fitch ratings systems (see Appendix B to the Prospectus for an explanation of these rating systems), the Adviser adopts such changed ratings as standards for its future investments in accordance with the investment policies contained in the Prospectus. Certain Municipal Obligations issued by instrumentalities of the U.S. Government are not backed by the full faith and credit of the U.S. Treasury but only by the creditworthiness of the instrumentality. The Portfolio's Board of Trustees has determined that any Municipal Obligation that depends directly, or indirectly through a government insurance program or other guarantee, on the full faith and credit of the U.S. Government is considered to have a rating in the highest category. Where necessary to ensure that the Municipal Obligations are "eligible securities" (i.e., within the two highest ratings assigned by Moody's, Standard & Poor's or Fitch), or where the obligations are not freely transferable, the Portfolio will require that the obligation to pay the principal and accrued interest be backed by an unconditional irrevocable bank letter of credit, a guarantee, insurance policy or other comparable undertaking of an approved financial institution.
The Portfolio may invest 25% or more of its assets in securities that are related in such a way that an economic, business or political development or change affecting one of the securities would also affect the other securities including, for example, securities the interest upon which is paid from revenues of similar type projects, or securities the issuers of which are located in the same state.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS
Variable rate instruments that the Portfolio may purchase are tax-exempt Municipal Obligations (including municipal notes and municipal commercial paper) that provide for a periodic adjustment in the interest rate paid on the instrument and permit the holder to receive payment upon a specified number of days' notice of the unpaid principal balance plus accrued interest either from the issuer or by drawing on a bank letter of credit, a guarantee or an insurance policy issued with respect to such instrument or by tendering or "putting" such instrument to a third party.
The variable rate instruments in which the Portfolio's assets may be invested are payable upon a specified period of notice which may range from one day up to one year. The terms of the instruments provide that interest rates are adjustable at intervals ranging from daily to up to one year and the adjustments are based upon the prime rate of a bank or other appropriate interest rate adjustment index as provided in the respective instruments. The Portfolio will decide which variable rate instruments it will purchase in accordance with procedures prescribed by its Board of Trustees to minimize credit risks. An unrated variable rate instrument may be determined to meet the Portfolio's high quality criteria if it is backed by a letter of credit or guarantee or a right to tender or put the instrument to a third party or is insured by an insurer that meets the high quality criteria for the Portfolio discussed above or on the basis of a credit evaluation of the underlying obligor. If the credit of the obligor is of "high quality," no credit support from a bank or other financial institution will be necessary. Each unrated variable rate instrument will be evaluated on a quarterly basis to determine that it continues to meet the Portfolio's high quality criteria. If an instrument is ever deemed to be of less than high quality, the Portfolio either will sell it in the market or exercise the liquidity feature described below.
Variable rate instruments in which the Portfolio may invest include participation interests in variable rate, tax-exempt Municipal Obligations owned by a bank, insurance company or other financial institution or affiliated organizations. Although the rate of the underlying Municipal Obligations may be fixed, the terms of the participation interest may result in the Portfolio receiving a variable rate on its investment. A participation interest gives the Portfolio an undivided interest in the Municipal Obligation in the proportion that the Portfolio's participation bears to the total principal amount of the Municipal Obligation and provides the liquidity feature. Each participation may be backed by an irrevocable letter of credit or guarantee of, or a right to put to, a bank (which may be the bank issuing the participation interest, a bank issuing a confirming letter of credit to that of the issuing bank, or a bank serving as agent of the issuing bank with respect to the possible repurchase of the participation interest) or insurance policy of an insurance company that has been determined by or on behalf of the Board of Trustees of the Portfolio to meet the prescribed quality standards of the Portfolio. The Portfolio has the right to sell the participation interest back to the institution or draw on the letter of credit or insurance after a specified period of notice, for all or any part of the full principal amount of the Portfolio's participation in the security, plus accrued interest. The Portfolio intends to exercise the liquidity feature only (1) upon a default under the terms of the bond documents, (2) as needed to provide liquidity to the Portfolio in order to facilitate withdrawals from the Portfolio, or (3) to maintain a high quality investment portfolio. In some cases, this liquidity feature may not be exercisable in the event of a default on the underlying Municipal Obligations; in these cases, the underlying Municipal Obligations must meet the Portfolio's high credit standards at the time of purchase of the participation interest. Issuers of participation interests will retain a service and letter of credit fee and a fee for providing the liquidity feature, in an amount equal to the excess of the interest paid on the instruments over the negotiated yield at which the participations were purchased on behalf of the Portfolio. The total fees generally range from 5% to 15% of the applicable prime rate or other interest rate index. With respect to insurance, the Portfolio will attempt to have the issuer of the participation interest bear the cost of the insurance, although the Portfolio retains the option to purchase insurance if necessary, in which case the cost of insurance will be an expense of the Portfolio subject to the expense limitation of 2 1/2% of the first $30 million of the Portfolio's average net assets, 2% of the next $70 million and 1 1/2% of the Portfolio's average net assets in excess of $100 million. The Adviser has been instructed by the Portfolio's Board of Trustees to monitor continually the pricing, quality and liquidity of the variable rate instruments held by the Portfolio, including the participation interests, on the basis of published financial information and reports of the rating agencies and other bank analytical services to which the Portfolio may subscribe. Although participation interests may be sold, the Portfolio intends to hold them until maturity, except under the circumstances stated above.
In view of the "concentration" of the Portfolio in bank participation interests in Municipal Obligations secured by bank letters of credit or guarantees, an investment in the Portfolio should be made with an understanding of the characteristics of the banking industry and the risks which such an investment may entail. Banks are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of this industry is largely dependent upon the availability and cost of capital funds for the purpose of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of this industry and exposure to credit losses arising from possible financial difficulties of borrowers might affect a bank's ability to meet its obligations under a letter of credit.
Periods of high inflation and periods of economic slowdown, together with the fiscal measures adopted to attempt to deal with them, have brought wide fluctuations in interest rates. When interest rates rise, the value of fixed income securities generally falls; and vice versa. While this is true for variable rate instruments generally, the variable rate nature of the underlying instruments should minimize these changes in value. Accordingly, as interest rates decrease or increase, the potential for capital appreciation and the risk of potential capital depreciation is less than would be the case with a portfolio of fixed income securities. Because the adjustment of interest rates on the variable rate instruments is made in relation to movements of various interest rate adjustment indices, the variable rate instruments are not comparable to long-term fixed rate securities. Accordingly, interest rates on the variable rate instruments may be higher or lower than current market rates for fixed rate obligations of comparable quality with similar maturities.
Because of the variable rate nature of the instruments, when prevailing interest rates decline the Portfolio's yield will decline and its shareholders will forgo the opportunity for capital appreciation. On the other hand, during periods when prevailing interest rates increase, the Portfolio's yield will increase and its shareholders will have reduced risk of capital depreciation.
For purposes of determining whether a variable rate instrument held by the Portfolio matures within 397 days from the date of its acquisition, the maturity of the instrument will be deemed to be the longer of (1) the period required before the Portfolio is entitled to receive payment of the principal amount of the instrument after notice or (2) the period remaining until the instrument's next interest rate adjustment. The maturity of a variable rate instrument will be determined in the same manner for purposes of computing the Portfolio's dollar-weighted average portfolio maturity.
New issues of certain Municipal Obligations frequently are offered on a "when-issued" or "forward delivery" basis. The payment obligation and the interest rate that will be received on the Municipal Obligations are each fixed at the time the buyer enters into the commitment although settlement, i.e., delivery of and payment for the Municipal Obligations, takes place beyond customary settlement time (but normally within 45 days after the date of the Portfolio's commitment to purchase). Although the Portfolio will only make commitments to purchase "when-issued" or "forward delivery" Municipal Obligations with the intention of actually acquiring them, the Portfolio may sell these securities before the settlement date if deemed advisable by the Adviser.
Municipal Obligations purchased on a "when-issued" or "forward delivery" basis and the securities held in the Portfolio's portfolio are subject to changes in value based upon the public's perception of the credit-worthiness of the issuer and changes, real or anticipated, in the level of interest rates. The value of these Municipal Obligations and securities generally change in the same way, that is, both experience appreciation when interest rates decline and depreciation when interest rates rise. Purchasing Municipal Obligations on a "when-issued" or "forward delivery" basis can involve a risk that the yields available in the market on the settlement date may actually be higher or lower than those obtained in the transaction itself. A separate account of the Portfolio consisting of cash or liquid debt securities equal to the amount of the "when-issued" or "forward delivery" commitments will be established at the Portfolio's custodian bank. For the purpose of determining the adequacy of the securities in the account, the deposited securities will be valued at market value. If the market value of such securities declines, additional cash or highly liquid securities will be placed in the account daily so that the value of the account will equal the amount of the Portfolio's commitments. On the settlement date of the "when-issued" or "forward delivery" securities, the Portfolio's obligations will be met from then-available cash flow, sale of securities held in the separate account, sale of other securities or, although not normally expected, from sale of the "when-issued" or "forward delivery" securities themselves (which may have a value greater or lesser than the Portfolio's payment obligations). Sale of securities to meet such obligations may result in the realization of capital gains or losses, which are not exempt from federal income tax.
When the Portfolio purchases Municipal Obligations it may also acquire stand-by commitments from banks with respect to such Municipal Obligations. The Portfolio also may acquire stand-by commitments from broker-dealers. Under the stand-by commitment, a bank or broker-dealer agrees to purchase at the Portfolio's option a specified Municipal Obligation at a specified price. A stand-by commitment is the equivalent of a "put" option acquired by the Portfolio with respect to a particular Municipal Obligation held in the Portfolio's portfolio.
The amount payable to the Portfolio upon the exercise of a stand-by commitment normally would be (1) the acquisition cost of the Municipal Obligation (excluding any accrued interest paid on the acquisition), less any amortized market premium or plus any amortized market or original issue discount during the period the Portfolio owned the security, plus (2) all interest accrued on the security since the last interest payment date during the period the security was owned by the Portfolio. Absent unusual circumstances relating to a change in market value, the Portfolio would value the underlying Municipal Obligation at amortized cost. Accordingly, the amount payable by a bank or dealer during the time a stand-by commitment is exercisable would be substantially the same as the market value of the underlying Municipal Obligation. The Portfolio values stand-by commitments at zero for purposes of computing the value of its net assets.
The stand-by commitments that the Portfolio may enter into are subject to certain risks, which include the ability of the issuer of the commitment to pay for the securities at the time the commitment is exercised and the fact that the commitment is not marketable by the Portfolio and the maturity of the underlying security will generally be different from that of the commitment.
Although the Portfolio attempts to invest 100% of its net assets in tax-exempt Municipal Obligations, the Portfolio may invest up to 20% of the value of the Portfolio's net assets in securities of the kind described below, the interest income on which is subject to federal income tax. Circumstances in which the Portfolio may invest in taxable securities include the following: (a) pending investment in the type of securities described above; (b) to maintain liquidity for the purpose of meeting anticipated withdrawals; and (c) when, in the opinion of the Fund's investment adviser, it is advisable to do so because of adverse market conditions affecting the market for Municipal Obligations. The kinds of taxable securities in which the Portfolio's assets may be invested are limited to the following short-term, fixed-income securities (maturing in 397 days or less from the time of purchase): (1) obligations of the U.S. Government or its agencies, instrumentalities or authorities; (2) commercial paper rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch; (3) certificates of deposit of U.S. banks with assets of $1 billion or more; and (4) repurchase agreements with respect to any Municipal Obligations or other securities which the Portfolio is permitted to own. The Portfolio's assets may also be invested in Municipal Obligations which are subject to an alternative minimum tax.
The Portfolio may invest assets in instruments subject to repurchase agreements only with member banks of the Federal Reserve System or "primary dealers" (as designated by the Federal Reserve Bank of New York) in U.S. Government securities. Under the terms of a typical repurchase agreement, the Portfolio would acquire an underlying debt instrument for a relatively short period (usually not more than one week) subject to an obligation of the seller to repurchase and the Portfolio to resell the instrument at a fixed price and time, thereby determining the yield during the Portfolio's holding period. This results in a fixed rate of return insulated from market fluctuations during such period. A repurchase agreement is subject to the risk that the seller may fail to repurchase the security. Repurchase agreements may be deemed to be loans under the 1940 Act. All repurchase agreements entered into by the Portfolio shall be fully collateralized at all times during the period of the agreement in that the value of the underlying security shall be at least equal to the amount of the loan, including the accrued interest thereon, and the Portfolio or its custodian or sub-custodian shall have possession of the collateral, which the Portfolio's Board of Trustees believes will give it a valid, perfected security interest in the collateral. Whether a repurchase agreement is the purchase and sale of a security or a collateralized loan has not been definitively established. This might become an issue in the event of the bankruptcy of the other party to the transaction. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the Portfolio but only constitute collateral for the seller's obligation to pay the repurchase price. Therefore, the Portfolio may suffer time delays and incur costs in connection with the disposition of the collateral. The Portfolio's Board of Trustees believes that the collateral underlying repurchase agreements may be more susceptible to claims of the seller's creditors than would be the case with securities owned by the Portfolio. Repurchase agreements will give rise to income which will not qualify as tax-exempt income when distributed by the Portfolio. The Portfolio will not invest in a repurchase agreement maturing in more than seven days if any such investment together with illiquid securities held by the Portfolio exceed 10% of the Portfolio's total net assets. Repurchase agreements are also subject to the same risks described herein with respect to stand-by commitments.
The Fund and Portfolio have each adopted the following policies which may not be changed without approval by a "majority of the outstanding shares" of the Fund or the Portfolio, respectively, which as used in this Statement of Additional Information means the vote of the lesser of (i) 67% or more of the shares of the Fund or the Portfolio, respectively, present at a meeting, if the holders of more than 50% of the outstanding "voting securities" of the Fund or the Portfolio, respectively, are present or represented by proxy, or (ii) more than 50% of the outstanding "voting securities" of the Fund or the Portfolio, respectively. The term "voting securities" as used in this paragraph has the same meaning as in the 1940 Act. Whenever the Fund is requested to vote on a change in the investment restrictions of the Portfolio, the Fund will hold a meeting of its shareholders and will cast its vote as instructed by the shareholders. The Fund will vote the shares held by its shareholders who do not give voting instructions in the same proportion as the shares of the Fund's shareholders who do give voting instructions. Shareholders of the Fund who do not vote will have no effect on the outcome of these matters.
(1) Make investments other than as described under "Investment Policies" above or any other form of federal tax-exempt investment which meets the Fund's high quality criteria, as determined by the Board of Trustees and which is consistent with the Fund's investment objectives and policies (provided, however, that the Fund may invest all of its assets in a diversified, open-end management investment company with substantially the same investment objectives, policies and restrictions as the Fund).
(2) Borrow money. This restriction shall not apply to borrowings from banks for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests that might otherwise require the untimely disposition of securities, in an amount up to 15% of the value of the Fund's total assets (including the amount borrowed) valued at market less liabilities (not including the amount borrowed) at the time the borrowing was made. While borrowings exceed 5% of the value of the Fund's total assets, the Fund will not make any investments. Interest paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber its assets, except in an amount up to 15% of the value of its total assets and only to secure borrowings for temporary or emergency purposes.
(4) Sell securities short or purchase securities on margin, or engage in the purchase and sale of put, call, straddle or spread options or in writing such options, except to the extent that securities subject to a demand obligation and stand-by commitments may be purchased as set forth under "Investment Policies" above.
(5) Underwrite the securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in disposing of a portfolio security (provided, however, that the Fund may invest all of its assets in a diversified, open-end management investment company with substantially the same investment objectives, policies and restrictions as the Fund).
(6) Purchase or sell real estate, real estate investment trust securities, commodities or commodity contracts, or oil and gas interests, but this shall not prevent the Fund from investing in Municipal Obligations secured by real estate or interests in real estate.
(7) Make loans to others, except through the purchase of Fund investments, including repurchase agreements, as described under "Investment Policies" above.
(8) Invest more than 5% of the value of its total assets in the securities of issuers where the entity providing the revenues from which the issue is to be paid has a record, including predecessors, of fewer than three years of continuous operation, except obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (provided, however, that the Fund may invest all of its assets in a diversified, open-end management investment company with substantially the same investment objectives, policies and restrictions as the Fund).
(9) Invest more than 25% of its assets in the securities of "issuers" in any single industry, provided that there shall be no limitation on the purchase of Municipal Obligations or on obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. In addition, the Fund reserves the freedom of action to invest more than 25% of its assets in instruments (including without limitation participation interests) issued by U.S. branches of domestic banks.
(10) Invest in securities of other investment companies, except the Fund may purchase unit investment trust securities where such unit trusts meet the investment objectives and policies of the Fund and then only up to 5% of the Fund's net assets, except as they may be acquired as part of a merger, consolidation or acquisition of assets (provided, however, that the Fund may invest all of its assets in a diversified, open-end management investment company with substantially the same investment objectives, policies and restrictions as the Fund).
The Fund has adopted the following non-fundamental policy, which may be changed without approval by a majority of the outstanding shares of the Fund. The Fund will not invest in a repurchase agreement maturing in more than seven days or other illiquid securities if as a result thereof the Fund's total illiquid assets (including repurchase agreements maturing in more than seven days) would exceed 10% of the Fund's net assets.
(1) borrow money, except that as a temporary measure for extraordinary or emergency purposes borrow from banks in an amount not to exceed 1/3 of the value of the net assets of the Portfolio, including the amount borrowed (moreover, the Portfolio may not purchase any securities at any time at which borrowings exceed 5% of its total assets (taken at market value)); (it is intended that the Portfolio would borrow money only from banks and only to accommodate requests for the withdrawal of all or a portion of a beneficial interest in the Portfolio while effecting an orderly liquidation of securities); for additional related restrictions, see clause (i) under the caption "State and
(2) purchase any security or evidence of interest therein on margin, except that the Portfolio may obtain such short term credit as may be necessary for the clearance of purchases and sales of securities;
(3) underwrite securities issued by other persons, except insofar as the Portfolio may technically be deemed an underwriter under the Securities Act of 1933 in selling a security;
(4) make loans to other persons except (a) through the lending of securities held by the Portfolio, but not in excess of 33 1/3% of the Portfolio's net assets, (b) through the use of fixed time deposits or repurchase agreements or the purchase of short term obligations, or (c) by purchasing all or a portion of an issue of debt securities of types commonly distributed privately to financial institutions; for purposes of this paragraph (4) the purchase of short term commercial paper or a portion of an issue of debt securities which are part of an issue to the public shall not be considered the making of a loan; for additional related restrictions, see clause (x) under the caption "State and Federal Restrictions" below;
(5) purchase or sell real estate (including limited partnership interests but excluding securities secured by real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts in the ordinary course of business (the Portfolio reserves the freedom of action to hold and to sell real estate acquired as a result of the ownership of securities by the Fund or the Portfolio);
(6) concentrate its investments in any particular industry, but if it is deemed appropriate for the achievement of its investment objective, up to 25% of the assets of the Portfolio (taken at market value at the time of each investment) may be invested in any one industry, except that the Portfolio will invest at least 25% of its assets and may invest up to 100% of its assets in
(7) issue any senior security (as that term is defined in the 1940 Act) if such issuance is specifically prohibited by the 1940 Act or the rules and regulations promulgated thereunder, except as appropriate to evidence a debt incurred without violating the investment restriction in paragraph (1) above.
For purposes of the investment restriction in paragraph (6) above, "bank obligations" shall include bank participation interests in Municipal Obligations.
In order to comply with certain state and federal statutes and regulatory policies, neither the Fund nor the Portfolio will as a matter of operating policy:
(i) borrow money for any purpose in excess of 10% of the total assets of the Fund or Portfolio (taken at cost),
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of the net assets of the Fund or Portfolio (taken at market value),
(iii) sell any security which it does not own unless by virtue of its ownership of other securities it has at the time of sale a right to obtain securities, without payment of further consideration, equivalent in kind and amount to the securities sold; and provided, that if such right is conditional the sale is made upon the same conditions,
(iv) invest for the purpose of exercising control or management,
(v) purchase securities issued by any registered investment company, except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, and except when such purchase, though not made in the open market, is part of a plan of merger or consolidation; provided, however, that neither the Fund nor the Portfolio will purchase the securities of any registered investment company if such purchase at the time thereof would cause more than 10% of the total assets of the Fund or the Portfolio (taken at the greater of cost or market value) to be invested in the securities of such issuers or would cause more than 3% of the outstanding voting securities of any such issuer to be held by the Portfolio; and provided, further, that neither the Fund nor the Portfolio shall purchase securities issued by any open-end investment company,
(vi) taken together with any investments described in clause (x) below, invest more than 10% of the net assets of the Fund or the Portfolio, in securities that are not readily marketable, including debt securities for which there is no established market and fixed time deposits and repurchase agreements maturing in more than seven days,
(vii) purchase securities of any issuer if such purchase at the time thereof would cause it to hold more than 10% of any class of securities of such issuer, for which purposes all indebtedness of an issuer shall be deemed a
(viii) purchase or retain any securities issued by an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Fund or the Portfolio, or is an officer or director of the Adviser, if after the purchase of the securities of such issuer by the Fund or the Portfolio one or more of such persons owns beneficially more than 1/2 of 1% of the shares or securities, or both, all taken at market value, of such issuer, and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, all taken at
(ix) write, purchase or sell any put or call option or any combination
(x) taken together with any investments described in clause (vi) above, invest in securities which are subject to legal or contractual restrictions on resale (other than fixed time deposits and repurchase agreements maturing in not more than seven days) if, as a result thereof, more than 10% of the net assets of the Fund or the Portfolio (taken at market value) would be so invested (including fixed time deposits and repurchase agreements maturing in more than
(xi) make short sales of securities or maintain a short position, unless at all times when a short position is open it owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short, and unless not more than 10% of the net assets, of the Fund or the Portfolio (taken at market value) is held as collateral for such sales at any one time (neither the Fund nor the Portfolio presently intends to make such sales).
These policies are not fundamental and may be changed by the Fund without approval by the Fund's shareholders, or by the Portfolio without approval by the Fund or its other investors, in each case in response to changes in the various state and federal requirements.
DESIGNATION OF ISSUER OF SECURITIES
For purposes of the investment restrictions described above, the issuer of a tax-exempt security is deemed to be the entity (public or private) ultimately responsible for the payment of principal of and interest on the security. When the assets and revenues of an agency, authority, instrumentality or other political subdivision are separate from those of the government creating the issuing entity and a security is backed only by the assets and revenues of the entity, the entity would be deemed to be the sole issuer of the security. Similarly, in the case of a private activity bond, if that bond is backed only by the assets and revenues of the non-governmental user, then such non-governmental user would be deemed to be the sole issuer. If, however, in either case, the creating government or some other entity, such as an insurance company or other corporate obligor, guarantees a security or a bank issues a letter of credit, such a guarantee or letter of credit may, in accordance with applicable Securities and Exchange Commission ("SEC") rules, be considered a separate security and could be treated as an issue of such government, other entity or bank.
If a percentage restriction or a rating restriction (other than a restriction as to borrowing) on investment or utilization of assets set forth above or referred to in the Prospectus is adhered to at the time an investment is made or assets are so utilized, a later change in percentage resulting from changes in the value of the securities held by the Fund or the Portfolio or a later change in the rating of a security held by the Fund or the Portfolio will not be considered a violation of policy.
Any current yield quotation of the Fund which is used in such a manner as to be subject to the provisions of Rule 482(d) under the Securities Act of 1933, as amended, consists of an annualized historical yield, carried at least to the nearest hundredth of one percent, based on a specific seven calendar day period and is calculated by dividing the net change in the value of an account having a balance of one share at the beginning of the period by the value of the account at the beginning of the period and multiplying the quotient by 365/7. For this purpose the net change in account value would reflect the value of additional shares purchased with dividends declared on the original share and dividends declared on both the original share and any such additional shares, but would not reflect any realized gains or losses from the sale of securities or any unrealized appreciation or depreciation on portfolio securities. In addition, any effective yield quotation of the Fund so used shall be calculated by compounding the current yield quotation for such period by multiplying such quotation by 7/365, adding 1 to the product, raising the sum to a power equal to 365/7, and subtracting 1 from the result.
Any tax equivalent yield quotation of the Fund is calculated as follows: If the entire current yield quotation for such period is tax-exempt, the tax equivalent yield will be the current yield quotation divided by 1 minus a stated income tax rate or rates. If a portion of the current yield quotation is not tax-exempt, the tax equivalent yield will be the sum of (a) that portion of the yield which is tax-exempt divided by 1 minus a stated income tax rate or rates and (b) the portion of the yield which is not tax-exempt.
A total rate of return quotation for the Fund is calculated for any period by (a) dividing (i) the sum of the net asset value per share on the last day of the period and the net asset value per share on the last day of the period of shares purchasable with dividends and capital gains distributions declared during such period with respect to a share held at the beginning of such period and with respect to shares purchased with such dividends and capital gains distributions, by (ii) the public offering price on the first day of such period, and (b) subtracting 1 from the result. Any annualized total rate of return quotation is calculated by (x) adding 1 to the period total rate of return quotation calculated above, (y) raising such sum to a power which is equal to 365 divided by the number of days in such period, and (z) subtracting 1 from the result.
Any tax equivalent total rate of return quotation of the Fund is calculated as follows: If the entire current total rate of return quotation for such period is tax-exempt, the tax equivalent total rate of return will be the current total rate of return quotation divided by 1 minus a stated income tax rate or rates. If a portion of the current total rate of return quotation is not tax-exempt, the tax equivalent total rate of return will be the sum of (a) that portion of the total rate of return which is tax-exempt divided by 1 minus a stated income tax rate or rates and (b) the portion of the total rate of return which is not tax-exempt.
Set forth below is total rate of return information, assuming that dividends and capital gains distributions, if any, were reinvested, for the Fund for the periods indicated, at the beginning of which periods no sales charges were applicable to purchases of shares of the Fund (unless otherwise indicated).
The annualized yield of the Fund for the seven-day period ended August 31, 1995 was 3.14%, the effective compound annualized yield of the Fund for such period was 3.19% and the annualized tax equivalent yield of the Fund for such period was 5.20% (assuming a federal tax bracket of 39.60%).
4. DETERMINATION OF NET ASSET VALUE
The net asset value of each of the shares of the Fund is determined on each day on which the New York Stock Exchange is open for trading. This determination is made once during each such day as of 12:00 noon, Eastern time, by dividing the value of the Fund's net assets (i.e., the value of its investment in the Portfolio and other assets less its liabilities, including expenses payable or accrued) by the number of shares of the Fund outstanding at the time the determination is made. As of the date of this Statement of Additional Information, the New York Stock Exchange is open for trading every weekday except for the following holidays (or the days on which they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. It is anticipated that the net asset value of each share of the Fund will remain constant at $1.00 and, although no assurance can be given that they will be able to do so on a continuing basis, as described below, the Fund and Portfolio employ specific investment policies and procedures to accomplish this result.
The value of the Portfolio's net assets (i.e., the value of its securities and other assets less its liabilities, including expenses payable or accrued) is determined at the same time and on the same days as the net asset value per share of the Fund is determined. The net asset value of the Fund's investment in the Portfolio is equal to the Fund's pro rata share of the total investment of the Fund and of other investors in the Portfolio less the Fund's pro rata share of the Portfolio's liabilities.
The securities held by the Portfolio are valued at their amortized cost. Amortized cost valuation involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. If fluctuating interest rates cause the market value of the securities held by the Portfolio to deviate more than 1/2 of 1% from their value determined on the basis of amortized cost, the Portfolio's Board of Trustees will consider whether any action should be initiated, as described in the following paragraph. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated value of an instrument is higher or lower than the price the Portfolio would receive if the instrument were sold.
Pursuant to the rules of the SEC, the Fund's and Portfolio's Boards of Trustees have established procedures to stabilize the value of the Fund's and Portfolio's net assets within 1/2 of 1% of the value determined on the basis of amortized cost. These procedures include a review of the extent of any such deviation of net asset value, based on available market rates. Should that deviation exceed 1/2 of 1% for the Fund or Portfolio, the Fund's or Portfolio's Board of Trustees will consider whether any action should be initiated to eliminate or reduce material dilution or other unfair results to investors in the Fund or Portfolio. Such action may include withdrawal in kind, selling securities prior to maturity and utilizing a net asset value as determined by using available market quotations. The Fund and Portfolio maintain a dollar-weighted average maturity of 90 days or less, do not purchase any instrument with a remaining maturity greater than 397 days or subject to a repurchase agreement having a duration of greater than 397 days, and limit their investments, including repurchase agreements, to those U.S. dollar-denominated instruments that are determined by the Adviser to present minimal credit risks and comply with certain reporting and recordkeeping procedures. The Fund and Portfolio also have established procedures to ensure that securities purchased by the Fund and Portfolio meet the high quality criteria described in "Investment Policies."
Subject to compliance with applicable regulations, the Fund and Portfolio have each reserved the right to pay the redemption price of shares of the Fund or beneficial interests in the Portfolio, either totally or partially, by a distribution in kind of readily marketable securities (instead of cash). The securities so distributed would be valued at the same amount as that assigned to them in calculating the net asset value for the shares or beneficial interests being sold. If a holder of shares or beneficial interests received a distribution in kind, such holder could incur brokerage or other charges in converting the securities to cash.
The Fund or the Portfolio may suspend the right of redemption or postpone the date of payment for shares of the Fund or beneficial interests in the Portfolio for more than seven days during any period when (a) trading in the markets the Fund or Portfolio normally utilizes is restricted, or an emergency, as defined by the rules and regulations of the SEC, exists making disposal of the Fund's or Portfolio's investments or determination of its net asset value not reasonably practicable; (b) the NYSE is closed (other than customary weekend and holiday closings); or (c) the SEC has by order permitted such suspension.
The Trustees and officers of the Fund and Portfolio, their ages and their principal occupations during the past five years are set forth below. Their titles may have varied during that period. Asterisks indicate that those Trustees and officers are "interested persons" (as defined in the 1940 Act) of the Fund or the Portfolio. Unless otherwise indicated below, the address of each Trustee and officer is 6 St. James Avenue, Boston, Massachusetts.
H. B. ALVORD; 73 -- Treasurer - Tax Collector, County of Los Angeles (retired, March, 1984); Trustee, The 59 Wall Street Trust and The 59 Wall Street Fund, Inc. (Registered Investment Companies). His address is P.O. Box 1812, Pebble Beach, California.
PHILIP W. COOLIDGE; 44* -- President of the Fund and Portfolio; Chief Executive Officer and President, Signature Financial Group, Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
C. OSCAR MORONG, JR.; 60 -- Chairman of the Board of Trustees of the Fund; Managing Director, Morong Capital Management (since February, 1993); Senior Vice President and Investment Manager, CREF Investments, Teachers Insurance & Annuity Association (retired January, 1993). His address is 1385 Outlook Drive West, Mountainside, New Jersey.
E. KIRBY WARREN; 61 -- Professor of Management, Graduate School of Business, Columbia University (since 1987). His address is Columbia University, Graduate School of Business, 725 Uris Hall, New York, New York.
ELLIOTT J. BERV; 52 -- Chairman and Director, Catalyst, Inc. (Management Consultants) (since August, 1992); President, Chief Operating Officer and Director, Deven International, Inc. (International Consultants) (June, 1991 to July, 1992); President and Director, Elliott J. Berv & Associates (Management Consultants) (since May, 1984). His address is 15 Stornoway Drive, Cumberland Foreside, Maine.
PHILIP W. COOLIDGE; 44* -- President of the Fund and Portfolio; Chairman, Chief Executive Officer, Signature Financial Group, Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
MARK T. FINN; 52 -- President and Director, Delta Financial, Inc. (since June, 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd. (Commodity Trading Advisory Firm) (since April, 1990); Director, Vantage Consulting Group, Inc. (since October, 1988). His address is 3500 Pacific Avenue, P.O. Box 539, Virginia Beach, Virginia.
WALTER E. ROBB, III; 69 -- President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since 1989); Trustee of certain registered investment companies in the MFS Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
OFFICERS OF THE FUND AND PORTFOLIO
PHILIP W. COOLIDGE; 44* -- President of the Fund and Portfolio; Chairman, Chief Executive Officer and President, Signature Financial Group, Inc., and the Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
DAVID G. DANIELSON; 30* -- Assistant Treasurer of the Fund and Portfolio; Assistant Manager, Signature Financial Group, Inc. since May 1991; Graduate Student, Northeastern University from April 1990 to March 1991.
JOHN R. ELDER; 47* -- Treasurer of the Fund and Portfolio; Vice President, Signature Financial Group, Inc. (since April 1995); Treasurer, Phoenix Family of Mutual Funds (Phoenix Home Life Mutual Insurance Company) (from 1983 to March 1995).
LINDA T. GIBSON; 30* -- Assistant Secretary of the Fund and Portfolio; Legal Counsel, Signature Financial Group, Inc. (since June 1991); law student, Boston University School of Law (from September 1989 to May 1992); Product Manager, Signature Financial Group, Inc. (January 1989 to September 1989).
JAMES S. LELKO; 30* -- Assistant Treasurer of the Fund and Portfolio; Assistant Manager, Signature Financial Group, Inc. since January 1993; Senior Tax Compliance Accountant, Putnam Companies since prior to December 1992.
THOMAS M. LENZ; 37* -- Secretary of the Fund and Portfolio; Vice President and Associate General Counsel, Signature Financial Group, Inc. (since November 1989); Attorney, Ropes & Gray (September 1984 to November 1989).
MOLLY S. MUGLER; 44* -- Assistant Secretary of the Fund and Portfolio; Legal Counsel and Assistant Secretary, Signature Financial Group, Inc. (since December, 1988); Assistant Secretary, The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
BARBARA M. O'DETTE; 36* -- Assistant Treasurer of the Fund and Portfolio; Assistant Treasurer, Signature Financial Group, Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
ANDRES E. SALDANA; 33* -- Assistant Secretary of the Fund and Portfolio; Legal Counsel and Assistant Secretary, Signature Financial Group, Inc. since November 1992; Attorney, Ropes & Gray from September 1990 to November 1992.
DANIEL E. SHEA; 33* -- Assistant Treasurer of the Fund and Portfolio; Assistant Manager of Fund Administration, Signature Financial Group, Inc. since November 1993; Supervisor and Senior Technical Advisor, Putnam Investments since prior to 1990.
The Trustees and officers of the Fund and Portfolio also hold comparable positions with certain other funds for which LFBDS or an affiliate serves as the distributor or administrator.
As of December 15, 1995, all Trustees and officers as a group owned less than 1% of the Fund's outstanding shares. As of the same date, more than 95% of the outstanding shares of the Fund were held of record by Citibank, N.A. or an affiliate, as a Shareholder Servicing Agent of the Fund, for the accounts of their respective clients.
The Declaration of Trust of each of the Fund and Portfolio provides that the Fund or Portfolio, as the case may be, will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Fund or Portfolio, as the case may be, unless, as to liability to the Fund or Portfolio or its respective investors, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices, or unless with respect to any other matter it is finally adjudicated that they did not act in good faith in the reasonable belief that their actions were in the best interests of the Fund or the Portfolio, as the case may be. In the case of settlement, such indemnification will not be provided unless it has been determined by a court or other body approving the settlement or other disposition, or by a reasonable determination, based upon a review of readily available facts, by vote of a majority of disinterested Trustees of the Fund or the Portfolio, or in a written opinion of independent counsel, that such officers or Trustees have not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Citibank manages the assets of the Portfolio pursuant to an investment advisory agreement (the "Advisory Agreement"). Subject to such policies as the Board of Trustees the Portfolio may determine, the Adviser manages the securities of the Portfolio and makes investment decisions for the Portfolio. The Adviser furnishes at its own expense all services, facilities and personnel necessary in connection with managing the Portfolio's investments and effecting securities transactions for the Portfolio. The Advisory Agreement will continue in effect as long as its continuance is specifically approved at least annually by the Board of Trustees of the Portfolio or by a vote of a majority of the outstanding voting securities of the Portfolio, and, in either case, by a majority of the Trustees of the Portfolio who are not parties to the Advisory Agreement or interested persons of any such party, at a meeting called for the purpose of voting on the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render services to others. The Advisory Agreement is terminable without penalty on not more than 60 days' nor less than 30 days' written notice by the Portfolio when authorized either by a vote of a majority of the outstanding voting securities of the Portfolio or by a vote of a majority of the Board of Trustees of the Portfolio, or by the Adviser on not more than 60 days' nor less than 30 days' written notice, and will automatically terminate in the event of its assignment. The Advisory Agreement provides that neither the Adviser nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions for the Portfolio, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties under the Advisory Agreement.
The Prospectus contains a description of the fees payable to the Adviser for services under the Advisory Agreement.
For the fiscal years ended August 31, 1993, 1994 and 1995, the fees payable to Citibank under the Advisory Agreement were $467,850 (of which $46,152 was voluntarily waived), $493,866 (of which $25,348 was voluntarily waived) and $613,607 (none of which was waived).
Pursuant to Administrative Services Agreements (the "Administrative Services Agreements"), LFBDS provides the Fund and Portfolio respectively, with general office facilities and supervises the overall administration of the Fund and Portfolio, including, among other responsibilities, the negotiation of contracts and fees with, and the monitoring of performance and billings of, the independent contractors and agents of the Portfolio; the preparation and filing of all documents required for compliance by the Portfolio with applicable laws and regulations; and arranging for the maintenance of books and records of the Portfolio. LFBDS provides persons satisfactory to the Board of Trustees of the Fund and Portfolio to serve as Trustees and officers of the Fund and Portfolio, respectively. Such Trustees and officers may be directors, officers or employees of LFBDS or its affiliates.
The Prospectus contains a description of the fees payable to LFBDS under the Administrative Services Agreements.
For the fiscal years ended August 31, 1993, 1994 and 1995, the fees payable to LFBDS under the Administrative Services Agreement and a prior administrative services agreement with the Fund were $116,806, $246,637 and $306,293 (of which $35,740, $154,725 and $226,642 were voluntarily waived). For the fiscal years ended August 31, 1993, 1994 and 1995, the fees payable to LFBDS under the Administrative Services Agreement with the Portfolio were $116,962 and $123,466 (of which $11,538 and $6,337 were voluntarily waived) and $153,402 (none of which was waived).
The Administrative Services Agreement with the Fund acknowledges that the names "Landmark" and "Landmark Funds" are the property of the Administrator and provides that if LFBDS ceases to serve as the Administrator of the Fund, the Fund will change its name so as to delete the word "Landmark" or the words "Landmark Funds." The Administrative Services Agreement with the Fund also provides that LFBDS may render administrative services to others and may permit other investment companies in addition to the Fund to use the word "Landmark" or the words "Landmark Funds" in their names.
The Administrative Services Agreement with the Fund continues in effect if such continuance is specifically approved at least annually by the Fund's Board of Trustees or by a vote of a majority of the outstanding voting securities of the Fund and, in either case, by a majority of the Trustees of the Fund who are not interested persons of the Fund or the Administrator. The Administrative Services Agreement with the Fund terminates automatically if it is assigned and may be terminated by the Fund without penalty by vote of a majority of the Fund's outstanding voting securities or by either party on not more than 60 days' nor less than 30 days' written notice. The Administrative Services Agreement with the Fund also provides that neither the Administrator nor its personnel shall be liable for any error of judgment or mistake of law or for any act or omission in the administration or management of the Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its or their duties or by reason of reckless disregard of its or their obligations and duties under the Administrative Services Agreement.
The Administrator has agreed to reimburse the Fund for its operating expenses (exclusive of interest, taxes, brokerage, and extraordinary expenses) which in any year exceed the limits prescribed by any state in which the Fund's shares are qualified for sale. The expenses incurred by the Fund for distribution purposes pursuant to the Fund's Distribution Plan are included within such operating expenses only to the extent required by any state in which the Fund's shares are qualified for sale. The Fund may elect not to qualify its shares for sale in every state. The Fund believes that currently the most restrictive expense ratio limitation imposed by any state is 2 1/2% of the first $30 million of the Fund's average net assets, 2% of the next $70 million and 1 1/2% of the average net assets in excess of $100 million. For the purpose of this obligation to reimburse expenses, the Fund's annual expenses are estimated and accrued daily, and any appropriate estimated payments will be made by the Administrator. Subject to the obligations of the Administrator to reimburse the Fund for its excess expenses as described above, the Fund has, under its Administrative Services Agreement, confirmed its obligation for payment of all other expenses.
The Administrative Services Agreement with the Portfolio provides that LFBDS may render administrative services to others. The Administrative Services Agreement with the Portfolio terminates automatically if it is assigned and may be terminated without penalty by a vote of a majority of the outstanding voting securities in the Portfolio or by either party on not more than 60 days' nor less than 30 days' written notice. The Administrative Services Agreement with the Portfolio also provides that neither LFBDS, as the Portfolio Administrator, nor its personnel shall be liable for any error of judgment or mistake of law or for any act or omission in the administration or management of the Portfolio, except for willful misfeasance, bad faith or gross negligence in the performance of its or their duties or by reason of reckless disregard of its or their obligations and duties under the Administrative Services Agreement.
LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc.
Pursuant to Sub-Administrative Services Agreements (the "Sub-Administrative Agreements"), Citibank performs such sub-administrative duties for the Fund and Portfolio as are from time to time agreed upon by Citibank and LFBDS. Citibank's sub-administrative duties may include providing equipment and clerical personnel necessary for maintaining the organization of the Fund and Portfolio, participation in the preparation of documents required for compliance by the Fund and Portfolio with applicable laws and regulations, preparation of certain documents in connection with meetings of Trustees and shareholders of the Fund and Portfolio, and other functions which would otherwise be performed by the Administrator or the Portfolio Administrator as set forth above. For performing such sub-administrative services, the Sub-Administrative Agreements provide that Citibank will receive such compensation as is from time to time agreed upon by LFBDS and Citibank, not to exceed the amount paid to the Administrator and the Portfolio Administrator for their services under the Administrative Services Agreements. All such compensation is paid by LFBDS.
The Fund has adopted a Distribution Plan (the "Distribution Plan") in accordance with Rule 12b-1 under the 1940 Act after having concluded that there is a reasonable likelihood that the Distribution Plan will benefit the Fund and its shareholders. The Distribution Plan provides that the Fund shall pay a distribution fee to the Distributor at an annual rate not to exceed 0.10% of the Fund's average daily net assets for distribution of the Fund's shares (exclusive of any advertising expenses incurred by the Distributor in connection with the sale of shares of the Fund). The Distributor may use all or any portion of such fee to pay for Fund expenses of printing prospectuses and reports used for sales purposes, expenses of the preparation and printing of sales literature and other distribution-related expenses.
The Fund is also permitted to pay the Distributor an additional fee not to exceed 0.10% per annum of the Fund's average daily net assets in anticipation of, or as reimbursement for, print or electronic media advertising expenses incurred in connection with the sale of shares of the Fund. No payments under the Distribution Plans are made to Shareholder Servicing Agents although Shareholder Servicing Agents receive payments under the Administrative Services Plan referred to below.
The Distribution Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Fund's Trustees and a majority of the Fund's Trustees who are not "interested persons" of the Fund and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreement related to the Distribution Plan ("Qualified Trustees"). The Distribution Plan requires that the Fund and the Distributor shall provide to the Board of Trustees, and the Board of Trustees shall review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Distribution Plan. The Distribution Plan further provides that the selection and nomination of the Qualified Trustees is committed to the discretion of the disinterested Trustees (as defined in the 1940 Act) then in office. The Distribution Plans may be terminated with respect to the Fund at any time by a vote of a majority of the Fund's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Fund. The Distribution Plans may not be amended to increase materially the amount of the Fund's permitted expenses thereunder without the approval of a majority of the outstanding voting securities of the Fund and may not be materially amended in any case without a vote of the majority of both the Trustees and the Qualified Trustees. The Distributor will preserve copies of any plan, agreement or report made pursuant to each Distribution Plan for a period of not less than six years from the date of the Plan, and for the first two years the Distributor will preserve such copies in an easily accessible place.
As contemplated by the Distribution Plan, LFBDS acts as the agent of the Fund in connection with the offering of shares of the Fund pursuant to a Distribution Agreement (the "Distribution Agreement"). After the prospectus and periodic reports have been prepared, set in type and mailed to existing shareholders, the Distributor pays for the printing and distribution of copies of the prospectuses and periodic reports which are used in connection with the offering of shares of the Fund to prospective investors. The Prospectus contains a description of fees payable to the Distributor under the Distribution Agreement. For the Fund's fiscal years ended August 31, 1993, 1994 and 1995, the fees payable to the Distributor under the Distribution Agreement were $233,612 and $123,319 (of which $227,869 and $120,470 were voluntarily waived) and $153,147 (all of which was voluntarily waived). As of August 31, 1995, no portion of such fees was applicable to print or electronic media advertising.
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
The Fund has adopted an Administrative Services Plan (the "Administrative Plan") which provides that the Fund may obtain the services of an administrator, a transfer agent, a custodian and one or more Shareholder Servicing Agents, and may enter into agreements providing for the payment of fees for such services. Under the Administrative Plan, the aggregate of the fee paid to the Administrator from the Fund, the fees paid to the Shareholder Servicing Agents from the Fund and the distribution fee paid from the Fund to the Distributor under the Distribution Plan may not exceed 0.60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. The Administrative Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Fund's Trustees and a majority of the Fund's Trustees who are not "interested persons" of the Fund and who have no direct or indirect financial interest in the operation of the Administrative Plan or in any agreement related to such Plan ("Qualified Trustees"). The Administrative Plan requires that the Fund provide to the Fund's Board of Trustees and the Fund's Board of Trustees review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Administrative Plan. The Administrative Plan may be terminated at any time with respect to the Fund by a vote of a majority of the Fund's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Fund. The Administrative Plan may not be amended to increase materially the amount of permitted expenses thereunder without the approval of a majority of the outstanding voting securities of the Fund and may not be materially amended in any case without a vote of the majority of both the Fund's Trustees and the Qualified Trustees.
The Fund has entered into a shareholder servicing agreement (a "Servicing Agreement") with each Shareholder Servicing Agent and a Transfer Agency and Service Agreement and a Custodian Agreement with State Street Bank and Trust Company ("State Street") pursuant to which State Street acts as transfer agent and custodian for the Fund. For additional information, including a description of fees paid to the Shareholder Servicing Agents under the Servicing Agreements, see "Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund Accountant" in the Prospectus. For the fiscal year ended August 31, 1995, the aggregate fees payable by the Fund to Shareholder Servicing Agents under the Administrative Services Plans were $1,225,173 (of which $459,440 was voluntarily waived).
The Portfolio has also adopted an Administrative Services Plan (the "Portfolio Administrative Plan") which provides that the Portfolio may obtain the services of an administrator, a transfer agent and a custodian, and may enter into agreements providing for the payment of fees for such services. Under the Portfolio Administrative Plan, the administrative services fee payable to the Portfolio Administrator from the Portfolio may not exceed 0.05% of the Portfolio's average daily net assets on an annualized basis for its then-current fiscal year.
The Portfolio Administrative Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Portfolio's Trustees and a majority of the Portfolio's Trustees who are not "interested persons" of the Portfolio and who have no direct or indirect financial interest in the operation of the Portfolio Administrative Plan or in any agreement related to such Plan ("Qualified Trustees"). The Portfolio Administrative Plan requires that the Portfolio provide to the Board of Trustees and the Board of Trustees review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Portfolio Administrative Plan. The Portfolio Administrative Plan may be terminated at any time by a vote of a majority of the Portfolio's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Portfolio. The Portfolio Administrative Plan may not be amended to increase materially the amount of permitted expenses thereunder without the approval of a majority of the outstanding voting securities of the Portfolio and may not be materially amended in any case without a vote of the majority of both the Portfolio's Trustees and the Portfolio's Qualified Trustees.
The Portfolio has entered into a Transfer Agency and Service Agreement and a Custodian Agreement with State Street pursuant to which State Street acts as transfer agent and custodian and performs fund accounting services for the Portfolio.
The Portfolio's purchases and sales of portfolio securities usually are principal transactions. Portfolio securities are normally purchased directly from the issuer or from an underwriter or market maker for the securities. There usually are no brokerage commissions paid for such purchases. The Portfolio does not anticipate paying brokerage commissions. Any transaction for which the Portfolio pays a brokerage commission will be effected at the best price and execution available. Purchases from underwriters of portfolio securities include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market makers include the spread between the bid and asked price.
Allocation of transactions, including their frequency, to various dealers is determined by the Adviser in its best judgment and in a manner deemed to be in the best interest of investors in the Portfolio rather than by any formula. The primary consideration is prompt execution of orders in an effective manner at the most favorable price.
Investment decisions for the Portfolio will be made independently from those for any other account, series or investment company that is or may in the future become managed by the Adviser or its affiliates. If, however, the Portfolio and other investment companies, series or accounts managed by the Adviser are contemporaneously engaged in the purchase or sale of the same security, the transactions may be averaged as to price and allocated equitably to each account. In some cases, this policy might adversely affect the price paid or received by the Portfolio or the size of the position obtainable for the Portfolio. In addition, when purchases or sales of the same security for the Portfolio and for other investment companies or series managed by the Adviser occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantages available to large denomination purchases or sales.
No portfolio transactions are executed with the Adviser, or with any affiliate of the Adviser, acting either as principal or as broker.
7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund's Declaration of Trust permits the Fund's Board of Trustees to issue an unlimited number of full and fractional Shares of Beneficial Interest (without par value) and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in that series. Each share of the series represents an equal proportionate interest in the series with each other share. Upon liquidation or dissolution of the Fund, the Fund's shareholders are entitled to share pro rata in the Fund's net assets available for distribution to its shareholders. The Fund reserves the right to create and issue additional series of shares, in which case the shares of each series would participate pro rata in the earnings, dividends and distribution of net assets of the particular series upon the liquidation or dissolution of the series. Shares of each series would be entitled to vote separately to approve advisory agreements or changes in investment policy, but shares of all series could vote together in the election or selection of Trustees and accountants for the Fund.
Shareholders are entitled to one vote for each share held on matters on which they are entitled to vote. Shareholders in the Fund do not have cumulative voting rights, and shareholders owning more than 50% of the outstanding shares of the Fund may elect all of the Trustees of the Fund if they choose to do so and in such event the other shareholders in the Fund would not be able to elect any Trustee. The Fund is not required to and has no current intention to hold annual meetings of shareholders but the Fund will hold special meetings of shareholders when in the judgment of a Fund's Trustees it is necessary or desirable to submit matters for a shareholder vote. Shareholders have under certain circumstances (e.g., upon application and submission of certain specified documents to the Trustees by a specified number of shareholders) the right to communicate with other shareholders in connection with requesting a meeting of shareholders for the purpose of removing one or more Trustees. Shareholders also have the right to remove one or more Trustees without a meeting by a declaration in writing by a specified number of shareholders. No material amendment may be made to the Fund's Declaration of Trust without the affirmative vote of the holders of a majority of its outstanding shares.
The Fund's Declaration of Trust provides that, at any meeting of shareholders of the Fund or of any series of the Fund, a Shareholder Servicing Agent may vote any shares of which it is the holder of record and for which it does not receive voting instructions proportionately in accordance with the instructions it receives for all other shares of which it is the holder of record. Shares have no preference, pre-emptive or conversion or similar rights. Shares, when issued, are fully paid and non-assessable, except as set forth below.
The Fund may enter into a merger or consolidation, or sell all or substantially all of its assets, if approved by the vote of the holders of two-thirds of its outstanding shares voting as a single class, except that if the Trustees of the Fund recommend such sale of assets, merger or consolidation, the approval by a vote of the holders of a majority of the Fund's outstanding voting securities would be sufficient. The Fund may be terminated (i) by a vote of a majority of the outstanding voting securities of the Fund or (ii) by the Trustees by written notice to the shareholders of the Fund. If not so terminated, the Fund will continue indefinitely.
Share certificates will not be used.
The Fund is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Fund and provides for indemnification and reimbursement of expenses out of Fund property for any shareholder held personally liable for the obligations of the Fund. The Declaration of Trust also provides that the Fund shall maintain appropriate insurance (e.g., fidelity bonding and errors and omissions insurance) for the protection of the Fund, its shareholders, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Fund itself was unable to meet its obligations.
The Fund's Declaration of Trust further provides that obligations of the Fund are not binding upon the Fund's Trustees individually but only upon the property of the Fund and that the Fund's Trustees will not be liable for any action or failure to act, but nothing in the Declarations of Trust protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office.
The Portfolio is organized as a trust under the laws of the State of New York. The Portfolio's Declaration of Trust provides that investors in the Portfolio (e.g., other investment companies (including the Fund), insurance company separate accounts and common and commingled trust funds) are each liable for all obligations of the Portfolio. However, the risk of the Fund incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance existed and the Portfolio itself was unable to meet its obligations. It is not expected that the liabilities of the Portfolio would ever exceed its assets.
Each investor in the Portfolio, including the Fund, may add to or reduce its investment in the Portfolio on each business day. At 12:00 noon, Eastern time, on each such business day, the value of each investor's interest in the Portfolio is determined by multiplying the net asset value of the Portfolio by the percentage representing that investor's share of the aggregate beneficial interests in the Portfolio effective for that day. Any additions or withdrawals, which are to be effected on that day, are then effected. The investor's percentage of the aggregate beneficial interests in the Portfolio is then recomputed as the percentage equal to the fraction (i) the numerator of which is the value of such investor's investment in the Portfolio as of 12:00 noon, Eastern time, on such day plus or minus, as the case may be, the amount of any additions to or withdrawals from the investor's investment in the Portfolio effected on such day, and (ii) the denominator of which is the aggregate net asset value of the Portfolio as of 12:00 noon, Eastern time, on such day plus or minus, as the case may be, the amount of the net additions to or withdrawals from the aggregate investments in the Portfolio by all investors in the Portfolio. The percentage so determined is then applied to determine the value of the investor's interest in the Portfolio as of 12:00 noon, Eastern time, on the following business day of the Portfolio.
8. CERTAIN ADDITIONAL TAX MATTERS
The Fund has elected to be treated and intends to qualify each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), by meeting all applicable requirements of Subchapter M, including requirements as to the nature of the Fund's gross income, the amount of Fund distributions (as a percentage of both the Fund's overall income and its tax-exempt income), and the composition and holding period of the Fund's portfolio assets. Provided all such requirements are met and all of the Fund's net investment income and realized capital gains are distributed to shareholders in accordance with the timing requirements imposed by the Code, no federal income or excise taxes will be required to be paid by the Fund. If the Fund should fail to qualify as a regulated investment company for any year, the Fund would incur a regular corporate federal income tax upon its taxable income and Fund distributions would generally be taxable as ordinary dividend income to shareholders. The Portfolio believes that it also will not be required to pay any federal income or excise taxes.
The portion of the Fund's distributions of net investment income that is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as an item of tax preference for shareholders under the federal alternative minimum tax, and all exempt-interest dividends may increase a corporate shareholder's alternative minimum tax. Unless the Fund provides shareholders with actual monthly percentage breakdowns, the percentage of income designated as tax-exempt will be applied uniformly to all distribution by the Fund of net investment income made during each fiscal year of the Fund and may differ from the percentage of distributions consisting of tax-exempt interest in any particular month. Shareholders are required to report exempt-interest dividends received from the Fund on their federal income tax returns.
Because the Fund expects to earn primarily interest income, it is expected that no Fund distributions will qualify for the dividends-received deduction for corporations.
9. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the independent certified public accountants for the Fund and for the Portfolio, providing audit services and assistance and consultation with respect to the preparation of filings with the SEC.
The audited financial statements of the Fund (Statement of Assets and Liabilities at August 31, 1995, Statement of Operations for the year ended August 31, 1995, Statement of Changes in Net Assets for the years ended August 31, 1995 and 1994, Financial Highlights for each of the years in the five-year period ended August 31, 1995, Notes to Financial Statements and Independent Auditor's Report) and of the Portfolio (Portfolio of Investments at August 31, 1995, Statement of Assets and Liabilities at August 31, 1995, Statement of Operations for the year ended August 31, 1995, Statement of Changes in Net Assets for the years ended August 31, 1995 and 1994, Financial Highlights for each of the years in the four-year period ended August 31, 1995 and the period from February 5, 1991 (commencement of operations) to August 31, 1991, Notes to Financial Statements and Independent Auditor's Report), each of which is included in the Annual Report to Shareholders of the Fund, are incorporated by reference into this Statement of Additional Information and have been so incorporated in reliance upon the report of Deloitte & Touche LLP, independent certified public accountants, as experts in accounting and auditing.
A copy of the Annual Report accompanies this Statement of Additional Information.
FOR CITIBANK NEW YORK RETAIL BANKING AND BUSINESS AND PROFESSIONAL CUSTOMERS: Citibank, N.A. 450 West 33rd Street, New York, NY 10001 (212) 564-3456 or (800) 846-5300
P.O. Box 5130, New York, NY 10126-5130 Call Your Citigold Executive or, in NY or CT (800) 285-1701, or for all other states (800) 285-1707
FOR CITIBANK PRIVATE BANKING CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 Call Your Citibank Private Banking Account Officer, Registered Representative or (212) 559-5959
FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043
FOR CITIBANK NORTH AMERICAN INVESTOR SERVICES CLIENTS: Citibank, N.A. 111 Wall Street, New York, NY 10043 Call Your Account Manager or (212) 657-9100
FOR CITICORP INVESTMENT SERVICES CUSTOMERS: One Court Square, Long Island City, NY 11120 Call Your Investment Consultant or (800) 846-5200 (212) 736-8170 in New York City
C. Oscar Morong, Jr., Chairman
*Affiliated Person of Administrator and Distributor
153 East 53rd Street, New York, NY 10043
The Landmark Funds Broker-Dealer Services, Inc. 6 St. James Avenue, Boston, MA 02116
TRANSFER AGENT AND CUSTODIAN State Street Bank and Trust Company 225 Franklin
125 Summer Street, Boston, MA 02110
150 Federal Street, Boston, MA 02110 | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T10:15:53 |
0000893877-96-000005 | 0000893877-96-000005_0006.txt | <DESCRIPTION>STATEMENT OF ELIGIBILITY OF TRUSTEE
UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) _____
THE FIRST NATIONAL BANK OF CHICAGO (Exact name of trustee as specified in its charter)
A National Banking Association 36-0899825
One First National Plaza, Chicago, Illinois 60670-0126 (Address of principal executive offices) (Zip Code)
The First National Bank of Chicago One First National Plaza, Suite 0286 Attn: Lynn A. Goldstein, Law Department (312) 732-6919 (Name, address and telephone number of agent for service)
(Exact name of obligor as specified in its charter)
(State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number)
(Address of principal executive offices) (Zip Code)
Item 1. General Information. Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which it is subject.
Comptroller of Currency, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C., The Board of Governors of the Federal Reserve System, Washington D.C.
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations With the Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation.
No such affiliation exists with the trustee.
Item 16. List of exhibits. List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the articles of association of the trustee now in
2. A copy of the certificates of authority of the trustee to
3. A copy of the authorization of the trustee to exercise
4. A copy of the existing by-laws of the trustee.*
6. The consent of the trustee required by Section 321(b) of the Act.
7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority.
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, The First National Bank of Chicago, a national banking association organized and existing under the laws of the United States of America, has duly caused this Statement of Eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Chicago and State of Illinois, on the 3rd day of January, 1996.
The First National Bank of Chicago,
By /s/ R. D. Manella
* Exhibit 1,2,3 and 4 are herein incorporated by reference to Exhibits bearing identical numbers in Item 12 of the Form T-1 of The First National Bank of Chicago, filed as Exhibit 26 to the Registration Statement on Form S-3 of The CIT Group Holdings, Inc., filed with the Securities and Exchange Commission on February 16, 1993 (Registration No. 33-58418).
THE CONSENT OF THE TRUSTEE REQUIRED BY SECTION 321(b) OF THE ACT
In connection with the qualification of an indenture between Pacific Telecom, Inc. and The First National Bank of Chicago, the undersigned, in accordance with Section 321(b) of the Trust Indenture Act of 1939, as amended, hereby consents that the reports of examinations of the undersigned, made by Federal or State authorities authorized to make such examinations, may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor.
The First National Bank of Chicago
By: /s/ R. D. Manella
Legal Title of Bank: The First National Bank of Chicago Page RC-1 Address: One First National Plaza, Suite 0460 City, State Zip: Chicago, IL 60670-0460
Call Date: 09/30/95 ST-BK: 17-1630 FFIEC 031
Consolidated Report of Condition for Insured Commercial and State-Chartered Savings Banks for September 30, 1995
All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding of the last business day of the quarter.
Legal Title of Bank: The First National Bank of Chicago Page RC-2 Address: One First National Plaza, Suite 0460 City, State Zip: Chicago, IL 60670-0460
Call Date: 09/30/95 ST-BK: 17-1630 FFIEC 031
To be reported only with the March Report of Condition. 1. Indicate in the box at the right the number of the statement below that best describes the most comprehensive level of auditing work performed for the bank by independent external auditors as of any date Number during 1993................................. RCFD 6724 N/A M.1.
1 = Independent audit of the bank 4 = Directors' examination of the bank conducted in accordance with performed by other external generally accepted auditing auditors (may be required by state standards by a certified public chartering authority) accounting firm which submits a 5 = Review of the bank's financial report on the bank statements by external auditors 2 = Independent audit of the bank's 6 = Compilation of the bank's parent holding company conducted financial statements by external in accordance with generally auditors accepted auditing standards by a 7 = Other audit procedures (excluding certified public accounting firm tax preparation work) which submits a report on the 8 = No external audit work not on the bank separately) 3 = Directors' examination of the bank standards by a certified public accounting firm (may be required
(1) Includes total demand deposits and noninterest-bearing time and savings deposits. | S-3 | EX-25 | 1996-01-12T00:00:00 | 1996-01-12T17:21:24 |
0000950132-96-000005 | 0000950132-96-000005_0001.txt | Donald J. MacLeod David T. Lamar Contact: (412) 234-5601 (412) 234-4633 Corporate Affairs MEDIA: One Mellon Bank Center
MELLON REPORTS RECORD FOURTH QUARTER AND FULL YEAR 1995 RESULTS
. Mellon Reports Record Earnings in 1995 of $4.50 Per Common Share, Up 13 Percent from 1994, Excluding Certain Items.
. Return on Common Equity is 17.8 Percent and Return on Assets is 1.72 Percent for 1995.
. Mellon Reports Record Earnings of $1.18 Per Common Share for Fourth Quarter 1995, Up 12 Percent from Fourth Quarter 1994, Excluding Certain Items.
. Return on Common Equity Reaches 18.1 Percent and Return on Assets is 1.68 Percent for the 1995 Fourth Quarter.
PITTSBURGH, Jan. 10, 1996--Mellon Bank Corporation (NYSE:MEL) today reported record 1995 earnings of $4.50 per common share, up 13 percent from 1994. For the full year 1994, the Corporation reported earnings of $4.00 per common share, excluding certain items. "1995 was the best year in Mellon's history, setting record earnings," said Frank V. Cahouet, Mellon chairman, president and chief executive officer. "This was captured in our stock price for 1995 which appreciated 76 percent and recently set an all-time high. We saw excellent growth in a number of our key businesses and are poised to continue that growth as we proceed into 1996." For the full year 1995, Mellon reported net income applicable to common stock of $652 million, compared with $593 million for the full year 1994, excluding a $130 million one-time securities lending charge, $89 million in Dreyfus merger-related charges, and $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock. Mellon reported 1994 net income applicable to common stock of $358 million, or $2.42 per common share, including the securities lending charge, Dreyfus merger-related charges and preferred stock dividends.
For the fourth quarter of 1995, Mellon reported net income applicable to common stock of $164 million, or $1.18 per common share, compared with $157 million, or $1.05 per common share, in the fourth quarter of 1994, excluding the securities lending charge and preferred stock redemption. Including those items, fourth quarter 1994 net income applicable to common stock was $11 million, or $.07 per common share. Compared with the fourth quarter of 1994, Mellon's fourth quarter 1995 results reflected higher fee revenue offset in part by higher credit quality expense and lower net interest revenue. Net interest revenue was $382 million in the fourth quarter of 1995, down from $401 million in the fourth quarter of 1994, reflecting higher funding costs and the credit card securitization transaction that occurred in late November. Fee revenue was $444 million in the fourth quarter of 1995, compared with $405 million in the fourth quarter of 1994. The increase in fee revenue primarily resulted from higher mortgage servicing revenue as a result of acquisitions and credit card revenues. The increase in credit card revenue is primarily related to the credit card securitization transaction. Operating expense for the fourth quarter of 1995 was $526 million, compared with $741 million in the prior-year period. Excluding the fourth quarter 1994 pretax securities lending charge of $223 million, fourth quarter 1995 operating expense increased one percent, compared with the prior-year period. The provision for credit losses was $35 million in the fourth quarter of 1995, up from $15 million in the prior-year period. Net credit losses were $138 million in the fourth quarter of 1995, compared with $20 million in the fourth quarter of 1994. The increase resulted primarily from $106 million of credit losses on $193 million of CornerStone/SM/ credit card loans that were transferred to an accelerated resolution portfolio at their estimated net realizable value. Nonperforming assets totaled $236 million at Dec. 31, 1995, down $25 million, or 10 percent, from $261 million at Sept. 30, 1995. Nonperforming assets decreased by $3 million, from $239 million at Dec. 31, 1994. The Corporation's nonperforming assets ratio at Dec. 31, 1995, was .85 percent, compared with .93 percent at Sept. 30, 1995, and .89 percent at Dec. 31, 1994. Annualized return on common shareholders' equity and return on assets were 18.1 percent and 1.68 percent, respectively, in the fourth quarter of 1995. Annualized return on common shareholders' equity and return on assets, excluding the securities lending charge and preferred stock redemption, were 16.5 percent and 1.74 percent, respectively, in the fourth quarter of 1994. Annualized return on common shareholders' equity and return on assets, including the securities lending charge and the preferred stock redemption, were 1.1 percent and .42 percent, respectively, in the fourth quarter of 1994. Compared with 1994, the Corporation's 1995 results reflected increases in net interest and fee revenue as well as lower operating expense, partially offset by higher credit quality expense. Net interest revenue for the year increased to $1.548 billion, up $40 million from $1.508 billion in 1994, principally reflecting a higher average level of loans. Fee revenue increased to $1.670 billion, compared with $1.652 billion in 1994. Higher mortgage servicing fees, credit card fees and foreign currency and securities trading fees were partially offset by lower trust and investment management fees, the loss of revenue from the seasonal tax refund anticipation loan program, which was discontinued in 1995, as well as the effect of divestitures. Operating expense, before the net revenue from acquired property, was well managed at $2.047 billion in 1995, down from $2.075 billion for 1994, before the securities lending charge and merger expense. The provision for credit losses was $105 million in 1995, up $35 million from $70 million in 1994. Net credit losses in 1995 were $249 million, up significantly from $67 million in 1994, reflecting higher net credit losses on credit card loans including the $106 million credit card loss on certain CornerStone/sm/ accounts recorded in the fourth quarter of 1995.
Return on common shareholders' equity and return on assets were 17.8 percent and 1.72 percent, respectively, in 1995. 1994 return on common shareholders' equity and return on assets were 16.0 percent and 1.71 percent, respectively, excluding the securities lending charge, Dreyfus merger-related charges and preferred stock redemption. Including the securities lending charge, Dreyfus merger-related charges and preferred stock redemption, 1994 return on common shareholders' equity and return on assets were 9.8 percent and 1.14 percent, respectively. With balance sheet assets of approximately $41 billion and assets under management or administration of more than $900 billion, Mellon Bank Corporation is a major financial services company headquartered in Pittsburgh; its primary subsidiary is Mellon Bank, N.A. Mellon provides a full range of banking and investment products and services to individuals and small, midsize and large businesses and institutions. Its principal mutual fund business is The Dreyfus Corporation.
NOTE: Detailed supplemental information follows.
The decrease in net interest revenue and the net interest margin in the fourth quarter of 1995, compared with the fourth quarter of 1994, primarily resulted from the migration of retail customers from lower cost deposit products to higher cost products and the effect of a credit card securitization which offset loan growth. The $950 million credit card securitization transaction occurred in late November and reduced average credit card loans by $423 million for the quarter. Adjusted for the effect of the credit card securitization, net interest revenue in the fourth quarter of 1995 would have been $394 million and the net interest margin for the fourth quarter of 1995 would have been 4.49%. In accordance with generally accepted accounting principles, the foregone net interest revenue from the securitized credit card receivables is substantially offset by higher servicing fee revenue and lower net credit losses.
Average loans increased in the fourth quarter of 1995, compared with the prior- year period by $1.3 billion, or 5%, primarily as a result of an $800 million increase in mortgage warehouse loans, a $500 million increase in retail loans and a $500 million increase in domestic wholesale loans, which more than offset a $300 million decrease in jumbo residential mortgage loans, due in part to loan sales.
The improvement in net interest revenue in the full year of 1995 principally resulted from loan growth. The decrease in the net interest margin in the full year of 1995 principally resulted from the same factors responsible for the fourth quarter decline.
Credit Quality Expense and Net Credit Losses
(a) Excludes net credit losses on segregated assets.
Credit quality expense increased in the fourth quarter and full year of 1995, compared with the prior-year periods, primarily as a result of a higher provision for credit losses, which was made in response to credit losses from the CornerStone/sm/ credit card portfolio.
The $118 million increase in net credit losses compared with the fourth quarter of 1994 resulted from a $123 million increase in net credit card losses from the CornerStone/sm/ portfolio. In December 1995, the Corporation segregated $193 million of CornerStone/sm/ credit card loans into an accelerated resolution portfolio. CornerStone/sm/ outstandings were $845 million at that time, compared with $880 million at June 30, 1995 and $810 million at March 31, 1995. In connection with this $193 million transfer, the Corporation evaluated the carrying value of these loans, which have a history of delinquency, and recorded a credit loss of $106 million to reflect an estimated net realizable value of $87 million. Interest receipts, fees and loan loss recoveries on loans in this portfolio are applied to reduce the carrying value of this portfolio, which totaled $82 million at December 31, 1995. No revenue will be recorded on this portfolio until the net realizable value is recovered.
Total net credit losses in the fourth quarter of 1995 on the CornerStone/sm/ credit card portfolio were $128 million, including the $106 million of credit losses on the loans transferred to the accelerated resolution portfolio and $22 million of credit losses recorded prior to the formation of the accelerated resolution portfolio. Excluding these credit losses, the ratio of annualized net credit losses to average loans was 15 basis points. The Corporation expects a significant reduction in net credit card credit losses in 1996 as a result of the actions taken on the delinquent portion of the CornerStone/sm/ portfolio as well as the securitization of $950 million of credit card loans.
Net credit losses increased $182 million in the full year of 1995 compared with the full year of 1994, reflecting the higher level of credit card losses during the year. Partially offsetting these credit losses were strong credit recoveries on commercial real estate and other commercial loans in 1995.
The $5 million increase in trust and investment management fees in the fourth quarter of 1995, compared with the prior-year period, primarily resulted from a $10 million increase in mutual fund management revenue and a $5 million increase in private asset management fees. Partially offsetting these increases was a $10 million decrease in mutual fund administration and custody fees. The higher revenue from the management of mutual funds resulted from a higher average level of mutual fund assets managed and lower fee waivers at Dreyfus. Mutual fund management revenues grew to $82 million in the fourth quarter from $80 million in the third quarter, $76 million in the second quarter and $71 million in the first quarter, paralleling the growth in these assets. Average proprietary funds managed at Dreyfus in the fourth quarter of 1995 were $78 billion, compared with $77 billion in the third quarter, $72 billion in the second quarter and $68 billion in the first quarter. These increases primarily resulted from higher average institutional money market funds, as well as an market values of assets managed, reflecting the improvement in the fixed income and equity markets in 1995. At December 31, 1995, total mutual fund assets managed at Dreyfus were $77 billion, an increase of $11 billion from December 31, 1994.
The increase in mortgage servicing fees in the fourth quarter of 1995, compared with the prior-year period, resulted from the acquisition of mortgage servicing rights. The third quarter 1995 acquisition of Metmor, a residential and commercial mortgage banking company, generated $14 million in fee revenue in the fourth quarter. The Corporation's total mortgage servicing portfolio was $53 billion at December 31, 1995, compared with $37 billion at December 31, 1994.
Credit card revenue increased in the fourth quarter of 1995, compared with the fourth quarter of 1994, primarily as a result of servicing revenue related to the credit card portfolio that was securitized in late November 1995. The amount of credit card interest revenue and fee revenue in excess of interest paid to securitization certificate holders and credit losses is recognized monthly in credit card fee revenue. The decrease in foreign currency and securities trading fee revenue in the fourth quarter of 1995 was attributable to lower trading account fee revenue.
The increase in fee revenue for the full year of 1995, compared with the prior- year period, resulted from higher mortgage servicing revenue, credit card fees and foreign currency and securities trading revenue, partially offset by lower trust and investment management fees.
(a) Operating expense before the net revenue from acquired property, the securities lending charge and merger expense as a percentage of revenue, computed on a taxable equivalent basis, excluding gains (losses) on the sale of securities.
Operating expense before the net revenue from acquired property, the securities lending charge and merger expense increased $8 million, or 1%, in the fourth quarter of 1995, compared with the prior-year period. This increase primarily resulted from increases in the amortization of purchased mortgage servicing rights, staff expense and equipment expense. These increases were partially offset by lower FDIC deposit insurance assessment expense and professional, legal and other purchased services expense.
The increase in the amortization of mortgage servicing rights reflects the $16 billion, or 44%, increase in the Corporation's mortgage servicing portfolio from December 31, 1994. The increase in staff expense reflects higher incentive accruals. The increase in equipment expense primarily reflects the internalization of certain data processing operations at The Boston Company as well as various equipment upgrades. This increase is partially offset by a reduction in expense for purchased data processing services. Partially offsetting these increases were a decrease in the FDIC deposit insurance assessment resulting from a reduction in the assessment rate from $.23 to $.04 for every $100 of deposits and a decrease in professional, legal and other purchased services resulting from lower consulting and legal expense.
The $28 million decrease in operating expense before the net revenue from acquired property, the securities lending charge and merger expense in the full year of 1995, compared with the full year of 1994, resulted from a lower FDIC assessment charge, lower marketing expense related to the CornerStone/sm/ credit cards and a reduction in professional, legal and other purchased services. Partially offsetting these decreases were increases in the amortization of mortgage servicing rights and purchased credit card relationships and higher equipment expense. The efficiency ratio improved two percentage points in 1995.
In the fourth quarter of 1994, the Corporation recorded a one-time charge of $223 million, or $130 million after-tax, as a result of actions taken to reduce the interest rate sensitivity of certain securities lending clients' portfolios. Merger expense of $104 million, or $79 million after-tax, was recorded in the third quarter of 1994 to reflect expense associated with the Dreyfus merger.
Except for the merger with Dreyfus, which was accounted for as a pooling of interests, the Corporation historically has accounted for business combinations under the purchase method of accounting, resulting in the recording of goodwill and other identified intangibles which are amortized into operating expense in future years. Net income applicable to common stock, return on tangible equity and return on tangible assets, excluding the after-tax impact of the amortization of these intangibles, are shown in the table below:
(a) Results for the fourth quarter of 1994 exclude the $130 million securities lending charge, as well as the additional $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock. Results for the full year 1994 also exclude $89 million of Dreyfus merger-related charges.
The Corporation's effective tax rate for the full year of 1995 was 36.65%. It is currently anticipated that the effective tax rate will decline to approximately 36.5% in 1996.
The $25 million reduction in nonperforming assets from September 30, 1995, resulted from a $16 million decrease in nonperforming loans and a $9 million decrease in acquired property. The decrease in nonperforming loans resulted from returns to accrual status, repayments and credit losses. The reduction in total acquired property primarily resulted from transfers to nonperforming loans. Total nonperforming assets decreased $3 million compared with December 31, 1994 as an increase in nonperforming loans was more than offset by a decrease in acquired property.
(a) Excludes reserve for segregated assets.
The $103 million decrease in the reserve for credit losses from September 30, 1995, primarily resulted from the $106 million of credit losses taken on the CornerStone/sm/ credit card loans that were transferred to an accelerated resolution portfolio. These loans were transferred at their estimated net realizable value. The excess of the carrying value over the estimated realizable value was recorded as a credit loss.
(a) Common shareholders' equity less goodwill and other intangibles divided by total assets less goodwill and other intangibles. (b) Estimated.
The decrease in the Corporation's common and total shareholders' equity at December 31, 1995, compared with September 30, 1995 and December 31, 1994, primarily resulted from repurchases of common stock offset in part by earnings retention. In addition, asset growth resulted in a decrease in the Corporation's capital ratios compared with December 31, 1994.
In the second quarter of 1995, the Corporation repurchased 3.75 million shares of common stock as well as warrants for an additional 4.5 million shares of stock issued in 1993 as part of the purchase price of The Boston Company. In the fourth quarter of 1995, the board of directors of the Corporation authorized the repurchase of up to 8 million additional shares of the Corporation's common stock. At December 31, 1995, the Corporation has repurchased 3.5 million shares under this authorization and expects to complete this repurchase by March 31, 1996. In addition, during 1995 the Corporation repurchased 5.5 million shares of its common stock to be used to meet its current and near-term common stock requirements for its stock-based benefit plans and its dividend reinvestment plan. As of December 31, 1995, the Corporation had reissued 2.8 million of these repurchased shares. During 1995, the Corporation spent $632 million, prior to any reissuances, to purchase 12.8 million shares of common stock, or 9% of common shares outstanding at the beginning of the year, as well as warrants to purchase 4.5 million shares of common stock.
Mellon Bank Corporation (and its subsidiaries)
(a) Percentages are annualized where applicable. All amounts are based on unrounded numbers. (b) Results for the fourth quarter of 1994 exclude the $130 million securities lending charge, as well as the additional $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock. Results for the full year of 1994 exclude $79 million of merger expenses and $10 million of losses on the disposition of securities available for sale previously owned by Dreyfus, the $130 million securities lending charge, as well as the $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock. (c) Computed on a daily average basis. (d) After adding back Series D preferred stock dividends. (e) At December 31, 1995, common stock and stock equivalents totaled 139.2 million shares. (f) Based on unrounded numbers. | 8-K | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T14:26:51 |
0000830524-96-000002 | 0000830524-96-000002_0000.txt | <DESCRIPTION>1ST QUARTER NOVEMBER 30, 1995
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 30, 1995 Commission File Number 1-9852
(Exact Name of Registrant as Specified in Its Charter)
(State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.)
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Common Shares Outstanding as of December 31, 1995 3,572,155
To the Board of Directors
We have reviewed the consolidated balance sheet of Chase Corporation and Subsidiary as of November 30, 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for the periods of three months ended November 30, 1995 and 1994, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.
A review of interim financial information consists principally of obtaining an understanding of the system for the preparation of interim financial information, applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objectives of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Chase Corporation and Subsidiary as of August 31, 1995, and the related statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated November 9, 1995, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of August 31, 1995, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
CHASE CORPORATION SECURITIES AND EXCHANGE COMMISSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note A - Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and all adjustments (consisting of nonrecurring accruals) have been made which are, in the opinion of Management, necessary to a fair statement of the results for the interim periods reported. The financial statements of Chase Corporation include the activities of its divisions and its foreign sales subsidiary.
Certain divisions used estimated gross profit rates to determine the cost of goods sold. No significant adjustments have resulted from reconciling with the interim physical inventories as a result of using this method.
Note C - Income per Share of Common Stock
Income per share is based on the average number of shares and share equivalents outstanding during the period. The average number of shares and share equivalents outstanding used in determining primary per share results was 3,743,745 for the period of three months ended November 30, 1995. Common share equivalents arise from the issuance of certain stock options.
Note D - Review by Independent Public Accountant
The financial information included in this form has been reviewed by an independent public accountant in accordance with established professional standards and procedures such review, no adjustments or additional disclosures were recommended.
Letter from the independent public accountant is included as a part of this report.
CHASE CORPORATION SECURITIES AND EXCHANGE COMMISSION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
Net revenues increased 5% to $8,359,000, an increase of $433,000 when compared to the first quarter of 1994. This increase is primarily the result of the steady growth of sales of conformal coatings by the HumiSeal division and of shielding tapes produced by the Webster facility of the Chase & Sons division. These increases were somewhat offset by the reduction of product sales related to the commercial construction market. When compared to 1993, the increase of $1,005,000 also related to the improvement of revenues of both HumiSeal and our Webster operation.
The cost of products sold increased in the most recent quarter over the same quarter last year and to a large extent this is volume related. These costs were also affected by increased material costs and changes in product mix. As a percent of sales, the increase was 2.5%. The Company's products are largely mature and some are highly competitive which result in low margins. Competitive pressure prevents us from being able to recover all our material price increases from our customers.
Selling and administrative expenses during the current year were about the same while as a percent of sales decreased by 1%.
Interest expense increased during the comparable periods as a result of increased borrowing related to recent acquisitions and the stock repurchase in July 1995.
The increased interest expense and changes in product mix when compared to last year were the primary reasons for the reduction of income before taxes and net income.
During the first quarter of both 1995 and 1994, the effective tax rate was somewhat lower than the applicable tax rate primarily as a result of export sales through our Chase Export Corporation subsidiary.
Liquidity and Sources of Capital
The ratio of current assets to current liabilities was 2.1 at the end of the first quarter of 1995, compared to 1.8 at the prior year end. The improved ratio is largely the result of a reduction to payables that were associated with increased sales during the last quarter of fiscal 1995.
While Long-Term Debt increased $163,000 from the prior year end, total liabilities decreased $1,247,000 primarily as a result of positive cash flow from operations.
The Company had $1,440,000 in unused available credit at November 30, 1995 under its credit arrangement with its bank and plans to utilize this means to help finance its interim needs during the year. Current financial resources and anticipated funds from operations are expected to be adequate to meet requirements for funds in the year ahead.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Subsection Description of Exhibit Status Number
Pursuant to reg. S-K item 601 no exhibits are required.
(b) Reports on Form 8-K
No 8-K reports were filed during the three months ended November 30, 1995.
No financial statements were filed during the three months ended November 30, 1995.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Peter R. Chase, President & CEO | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T11:07:56 |
0000950152-96-000077 | 0000950152-96-000077_0001.txt | SECTION 805 OF THE BUSINESS CORPORATION LAW
Pursuant to the provisions of Section 805 of the Business Corporation Law, the undersigned, William M. Jordan, President, and Ronald F. Shuff, Secretary, of THE DURIRON COMPANY, INC., a New York corporation (the "Corporation"), do hereby certify as follows:
FIRST: The name of the corporation is The Duriron Company, Inc. The name under which the corporation was formed was Duriron Castings Company.
SECOND: The Certificate of Incorporation of the Corporation was filed by the Department of State on May 1, 1912.
THIRD: The amendments to the Certificate of Incorporation affected by this Certificate are as follows:
Article THIRD of the Certificate of Incorporation is hereby amended by deleting the first sentence of Article THIRD and by replacing such deleted sentence with the following sentence:
"THIRD: The aggregate number of shares which the Corporation shall have authority to issue is 61,000,000 of which 1,000,000 shares, of the par value of $1.00 each, shall be Preferred Stock and 60,000,000 shares, of the par value of $1.25 each, shall be Common Stock."
FOURTH: No change in the number of outstanding shares of Common Stock or Preferred Stock of the Corporation resulted from the above amendment. However, as the result of such amendment, the total number of authorized shares of the Corporation is increased from 31,000,000 to 61,000,000 with the number of shares of Preferred Stock, of the par value of $1.00 each, being unchanged from 1,000,000 shares and the number of shares of Common Stock, of the par value of $1.25 each, being increased from 30,000,000 to 60,000,000 shares.
FIFTH, the foregoing amendment to the Certificate of Incorporation was authorized by the unanimous vote of the Directors present at a meeting of the Board of Directors duly convened and held on September 9, 1995, and such amendment was thereafter approved by an affirmative vote of a majority of all the outstanding shares of the Common Stock at a Special Meeting of Shareholders of the Corporation held on November 30, 1995.
IN WITNESS WHEREOF, we hereunto sign our respective names and affirm that the statements made herein are true under penalties of perjury, this 3rd day of January, 1996. | S-8 POS | EX-4.2 | 1996-01-12T00:00:00 | 1996-01-12T11:23:00 |
0000950168-96-000039 | 0000950168-96-000039_0001.txt | FIRST INVESTORS SERIES FUND II, INC.
This AGREEMENT entered into the 17th day of March, 1994, by and between FIRST INVESTORS SERIES FUND II, Inc., a Maryland Corporation, with an office located at 95 Wall Street, New York, New York 10005 (the "Fund"), on behalf of each of its separate designated Series (singularly and collectively, "Series"), and FIRST INVESTORS CORPORATION, a New York corporation with its principal office located at 95 Wall Street, New York, New York 10005 (the "Underwriter").
In consideration of the mutual covenants and agreements of the parties hereto, the parties mutually covenant and agree with each other as follows:
1. Appointment. The Fund hereby appoints the Underwriter as agent of the Fund to effect the sale and public distribution of shares of each Series and each class of common stock of the Fund as now exists or is hereafter established ("Shares"). This appointment is made by the Fund and accepted by the Underwriter upon the understanding that (a) upon the request of the Underwriter, the Fund will prepare, execute and file such applications for registration and qualification of the Shares as are required by federal and state law in such amounts as the Underwriter reasonably may determine, (b) the distribution of the Shares to the public be effected by the Underwriter or through various securities dealers, and (c) the distribution of the Shares shall be done in such manner that the Fund shall be under no responsibility or liability to any person whatsoever on account of the acts and statements of any such person or their agents or employees. The Underwriter shall have the sole right to select the security dealers to whom the Shares will be offered by it and, subject to express provisions of this Agreement, the Articles of Incorporation, By-Laws and the Fund's then current Registration Statement, to determine the terms and prices in any contract for the sale of Shares to any dealer made by it as such agent for the Fund.
2. Underwriter as Exclusive Agent. The Underwriter shall be the exclusive agent for the Fund for the sale of the Shares and the Fund agrees that it will not sell any Shares to any person except to fill orders for the Shares received through the Underwriter, provided, however, that the foregoing exclusive right shall not apply to: (a) Shares issued or sold in connection with the merger or consolidation of any other investment company with the Fund or the acquisition by purchase or otherwise of all or substantially all the outstanding shares of any such company by the Fund, (b) Shares which may be offered by each Series to its shareholders for reinvestment of cash distributed from capital gains or net investment income of such Series, or such gains or income paid in the form of Shares, or (c) Shares which may be issued to shareholders of other investment companies who exercise the exchange and/or cross-investment privileges set forth in the Fund's then current Registration Statement.
3. Sales to Dealers. The Underwriter shall have the right to sell the Shares to dealers, as needed (making reasonable allowance for clerical errors and errors of transmission), but not more than the Shares needed to fill unconditional orders for Shares placed with the Underwriter by dealers. In every case the Fund shall receive the net asset value for the Shares sold, determined as provided in Paragraph 4 hereof. The Underwriter shall notify the Fund at the close of each business day of the number of Shares sold during each day.
4. Determination of Net Asset Value. The net asset value of each Series or class of Shares shall be determined by the Fund or the Fund's custodian, or such officer or officers or other persons as the Board of Directors of the Fund may designate. The determinations shall be made once a day on each day that the New York Stock Exchange is open for a full business day and in accordance with the method set forth in the Fund's then current Registration Statement.
5. Public Offering Price. The public offering price of each Series or class of Shares shall be the net asset value per Share (as determined by the Fund) of the outstanding Shares of such Series or class, plus any applicable sales charge as described in the Fund's then current Registration Statement. The Fund shall furnish (or arrange for another person to furnish) the Underwriter with quotations of public offering prices on each business day.
6. Repurchase and Redemption of Shares.
(a) The Fund appoints and designates the Underwriter as agent of the Fund, and the Underwriter accepts such appointment as such agent, to redeem or repurchase for retirement the Shares in accordance with the provisions of the Articles of Incorporation and By-Laws of the Fund.
(b) In connection with such redemptions or repurchases the Fund authorizes and designates the Underwriter to take any action, to make any adjustments in net asset value (including the deduction of a contingent deferred sales charge, if applicable, as provided in Paragraph 8 hereof) and to make any arrangements for the payment of the redemption or repurchase price authorized or permitted to be taken or made as set forth in the By-Laws and the Fund's then current Registration Statement.
(c) The authority of the Underwriter under this Paragraph 6 may, with the consent of the Fund, be re-delegated in whole or in part to another person or firm.
(d) To the extent permitted by law and applicable regulations, the authority granted in this Paragraph 6 may be suspended by the Fund at any time or from time to time until further notice to the Underwriter.
7. Allocation of Expenses. The Underwriter (or one of its non-investment company affiliates) shall bear the cost of preparing and disseminating sales material or literature, as well as the costs of preparing and disseminating prospectuses, proxy material and shareholder reports used in connection with the sale of the Shares except, as discussed below, to the extent that such materials are being sent to existing shareholders or such Series has agreed to bear the cost of such expenses under a Plan (as defined in Paragraph 8 hereof). Each Series shall bear all fees and expenses incident to the registration and qualification of the Shares, all expenses related to communications with its existing shareholders, including the costs of preparing, printing and mailing prospectuses, statements of additional information, proxy materials and other materials sent to such shareholders.
8. Compensation. As compensation for providing services under this Agreement, the Underwriter shall retain the sales charge, if any (including a contingent deferred sales shares, if applicable), on purchases or, if applicable, on redemptions of Shares as set forth in the Fund's then current Registration Statement. With regard to purchases, the Underwriter is authorized to collect the gross proceeds derived from the sale of the Shares, remit the net asset value thereof to the Fund upon receipt of the proceeds and retain the sales charge, if any. With regard to redemptions, the Underwriter is authorized to retain the contingent deferred sales charge, if any, imposed on the redemption of Shares as may be authorized by the Board of Directors and set forth in the Fund's then current Registration Statement. The Underwriter may reallow any or all of such sales charges to such dealers as it may from time to time determine. Whether a sales charge shall be retained by the Underwriter shall be determined in accordance with the Fund's then current Registration Statement and applicable law. The Underwriter may also receive from each Series a distribution and/or service fee at the rate and under the terms and conditions of any plan or plans of distribution (collectively and singularly, "Plan") as have been or may be adopted by the Fund, subject to any further limitations on such fee as the Board of Directors may impose.
9. Effectiveness of Agreement. This Agreement shall become effective upon the date hereabove written, provided that, with respect to any Series or class of Shares created after the date of this Agreement, this Agreement shall not take effect unless such action has first been approved by vote of a majority of the Board of Directors and by vote of a majority of those directors of the Fund who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or in any agreements related thereto (all such directors collectively being referred to herein as the "Independent Directors"), cast in person at a meeting called for the purpose of voting on such action.
10. Termination of Agreement. This Agreement shall continue in effect with respect to a Series for a period of more than one year from its effective date only as long as such continuance is approved, at least annually, by the Board of Directors of the Fund, including a majority of the Independent at a meeting called for the purpose of voting on such approval. With respect to any Series, this Agreement may be terminated at any time, without the payment of any penalty, by vote of the Board of Directors, by vote of a majority of the Independent Directors or by vote of a majority of the outstanding voting securities of such Series on 30 days' written notice by the Underwriter to the Series or upon 30 days' written notice by the Series to the Underwriter. Termination of this Agreement with respect to any given Series shall in no way affect the continued validity of this Agreement or the performance thereunder with respect to any other Series. This Agreement shall automatically terminate in the event of its assignment by the Underwriter, as the term "assignment" is defined by the Investment Company Act of 1940, as amended ("1940 Act"), unless the Securities Exchange Commission ("SEC") has issued an order exempting the Fund and the Underwriter from the provisions of the 1940 Act which would otherwise have effected the termination of this Agreement.
11. Amendments. No amendment to this Agreement shall be executed or become effective with respect to any Series unless its terms have been approved: (a) by a majority of the Directors of the Fund, or (b) by the vote of a majority of the outstanding voting securities of such Series and, in either case, by a vote of a majority of the Independent Directors.
12. Limitation of Liability. The Underwriter agrees to use its best efforts in effecting the sale and public distribution of the Shares through dealers and in performing its duties in redeeming and repurchasing the Shares, but nothing contained in this Agreement shall make the Underwriter or any of its officers, directors or shareholders liable for any loss sustained by the Fund or any of its officers, directors or shareholders, or by any other person on account of any act done or omitted to be done by the Underwriter under this Agreement, provided that nothing contained herein shall protect the Underwriter against any liability to the Fund or to any of its shareholders to which the Underwriter would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence in the performance of its duties as Underwriter or by reason of its reckless disregard of its obligations or duties as Underwriter under this Agreement. Nothing in this Agreement shall protect the Underwriter from any liabilities which it may have under the Securities Act of 1933, as amended ("1933 Act"), or the 1940 Act.
13. Definitions. The terms "assignment," "interested person," and "majority of the outstanding voting securities" shall have the meanings given to them by Section 2(a) of the 1940 Act, subject to such exemptions as may be granted by the SEC by any rule, regulation or order. Additionally, with respect to each Series, the term "Registration Statement" shall mean the registration statement most recently filed with the SEC by the Fund, on behalf of such Series, and effective under the 1940 Act and 1933 Act, as such Registration Statement is amended from time to time, and the terms "Prospectus" and "Statement of Additional Information" shall mean, respectively, the form of prospectus(es) and statement(s) of additional information with respect to such Series filed by the Fund as part of the Registration Statement.
14. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws principles thereof, and in accordance with the 1940 Act. To the extent that the applicable laws of the State of New York conflict with the applicable provisions of the 1940 Act, the latter shall control.
15. Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors.
16. Miscellaneous. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written.
FIRST INVESTORS SERIES FUND II, INC.
By: /s/Glenn O. Head (signature appears here)
/s/Concetta Durso (signature appears here)
By: /s/ Michael S. Miller (signature appears here) ATTEST:
/s/Carol R. Lerner (signature appears here) | 485BPOS | EX-99.B6 | 1996-01-12T00:00:00 | 1996-01-12T09:22:27 |
0000898430-96-000105 | 0000898430-96-000105_0000.txt | FILED PURSUANT TO RULE 424(b)(3)
(TO PROSPECTUS DATED JANUARY 9, 1996)
Tele-Communications, Inc. Series A TCI Group Common Stock
On January 5, 1996, Neely Productions Limited (the "Selling Stockholder") sold 186,657 shares of the Tele-Communications, Inc. Series A TCI Group Common Stock, par value $1.00 per share (the "Series A TCI Group Common Stock"). All 186,657 shares of Series A TCI Group Common Stock were sold by the Selling Stockholder through Merrill Lynch, Pierce, Fenner & Smith acting as agent ("Merrill") at $21.50 per share. Merrill received $9332.85 in commissions in connection with such sale.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement is January 10, 1996.
FILED PURSUANT TO RULE 424(b)(3)
Tele-Communications, Inc. Series A TCI Group Common Stock ($1.00 par value)
This Prospectus relates to 380,594 shares (the "Shares") of the Tele- Communications, Inc. Series A TCI Group Common Stock, par value $1.00 per share (the "TCI Group Series A Common Stock"), of Tele-Communications, Inc., a Delaware corporation (the "Company" or "TCI") to be offered and sold from time to time by the holders thereof (the "Selling Stockholders"). See "Selling Stockholders."
On August 3, 1995, the Company's Restated Certificate of Incorporation was amended to, among other things, (i) redesignate the Company's Class A Common Stock, par value $1.00 per share ("Class A Common Stock"), as TCI Group Series A Common Stock and the Company's Class B Common Stock, par value $1.00 per share, as Tele-Communications, Inc. Series B TCI Group Common Stock, par value $1.00 per share (the "TCI Group Series B Common Stock" and, together with the TCI Group Series A Common Stock, the "TCI Group Common Stock"), and (ii) authorize two additional series of the Company's common stock, designated as the Tele- Communications, Inc. Series A Liberty Media Group Common Stock, par value $1.00 per share (the "LMG Series A Common Stock"), and the Tele-Communications, Inc. Series B Liberty Media Group Common Stock, par value $1.00 per share (the "LMG Series B Common Stock" and, together with the LMG Series A Common Stock, the "Liberty Media Group Common Stock"). Thereafter, the Company distributed (the "Distribution") to holders of TCI Group Common Stock one-fourth of a share of the corresponding series of Liberty Media Group Common Stock in respect of each share of TCI Group Common Stock held of record as of August 4, 1995, the record date for the Distribution. As a result of the Distribution, the Selling Stockholders acquired shares of LMG Series A Common Stock (the "LMG Shares").
Both series of TCI Group Common Stock are identical in all respects, except (i) each share of TCI Group Series B Common Stock has ten votes and each share of TCI Group Series A Common Stock has one vote and (ii) each share of TCI Group Series B Common Stock is convertible, at the option of the holder, into one share of TCI Group Series A Common Stock. Similarly, both series of Liberty Media Group Common Stock are identical in all respects, except (i) each share of LMG Series B Common Stock has ten votes and each share of LMG Series A Common Stock has one vote and (ii) each share of LMG Series B Common Stock is convertible, at the option of the holder, into one share of LMG Series A Common Stock. The shares of TCI Group Series A Common Stock and LMG Series A Common Stock are not convertible into shares of TCI Group Series B Common Stock and LMG Series B Common Stock, respectively.
Shares of the TCI Group Series A Common Stock, the TCI Group Series B Common Stock, the LMG Series A Common Stock, and the LMG Series B Common Stock are traded on the Nasdaq National Market under the symbols "TCOMA", "TCOMB", "LBTYA" and "LBTYB", respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January 9, 1996.
The Shares may be offered for sale and sold by the Selling Stockholders from time to time in varying amounts, including in block transactions, on the Nasdaq National Market at then prevailing prices or in private transactions at prices and on terms to be determined at the time of sale. The Shares may be sold by the Selling Stockholders directly, through an underwritten offering, through agents designated from time to time or to or through broker-dealers designated from time to time. To the extent required, the number and series of Shares to be sold, the name of the Selling Stockholders, the purchase price, the public offering price, if applicable, the name of any such agent or broker- dealer, and any applicable commissions, discounts or other items constituting compensation to such underwriters, agents or broker-dealers with respect to a particular offering will be set forth in a supplement or supplements to this Prospectus (each, a "Prospectus Supplement"). The aggregate proceeds to the Selling Stockholders from the sale of the Shares so offered will be the purchase price of the Shares sold less (i) the aggregate commissions, discounts and other compensation, if any, paid by the Selling Stockholders to underwriters, agents or broker-dealers and (ii) certain other expenses of the offering and sale of the Shares that will be the responsibility of the Selling Stockholders. See "Selling Stockholders". The Selling Stockholders may also sell all or a portion of the Shares pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), to the extent that such sales may be made in compliance with such Rule. See "Plan of Distribution". The Company will not receive any proceeds from the sale of the Shares. Except as disclosed under the caption "Selling Stockholders," the Company knows of no selling arrangement between any underwriter, agent or broker-dealer and the Selling Stockholders.
The Selling Stockholders and any broker-dealers or agents that participate with the Selling Stockholders in the distribution of any of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any discount or commission received by them and any profit on the resale of the Shares purchased by them may be deemed to be underwriting discounts or commissions under the Securities Act.
The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act, with respect to the Shares. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information pertaining to the Shares and the Company, reference is made to the Registration Statement. Statements contained herein or in any document incorporated herein by reference concerning the provisions of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document. Each such statement is qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Commission. Reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; Suite 1400, 500 West Madison Street, Chicago, Illinois 60661; and at Suite 1300, 7 World Trade Center, New York, New York 10048; and copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company hereby incorporates in this Prospectus by reference the following documents filed with the Commission (File No. 0-20421): (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1994, as amended by Form 10-K/A (Amendment No. 1), (ii) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995, (as amended by Form 10-Q/A (Amendment No. 1)), (iii) the Company's Current Reports on Form 8-K, dated January 23, 1995, February 3, 1995 (as amended by Form 8-K/A), February 13, 1995, February 15, 1995, April 6, 1995, April 20, 1995 (as amended by Form 8-K/A), May 4, 1995 (as amended by Form 8- K/A), July 26, 1995, August 10, 1995 and December 18, 1995, and (iv) the financial statements and notes thereto of TeleCable Corporation as of December 31, 1993 and 1992 and for each of the two years in the period ended December 31, 1993, included in the Company's Current Report on Form 8-K, dated August 26, 1994.
All documents filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the termination of the offering of the Shares described in this Prospectus shall be deemed to be incorporated herein by reference and to be a part hereof from the respective dates of the filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a Prospectus is delivered, on the written or oral request of any such person, a copy of any or all of the documents incorporated by reference herein, other than certain exhibits to such documents (unless such exhibits are specifically incorporated by reference into the documents that this Prospectus incorporates). Such requests should be addressed to Stephen M. Brett, Esq., Executive Vice President and General Counsel, Tele-Communications, Inc., Terrace Tower II, 5619 DTC Parkway, Englewood, Colorado 80111-3000; telephone (303) 267-5500.
The Company, through its subsidiaries and affiliates, is principally engaged in the construction, acquisition, ownership and operation of cable television systems and the provision of satellite-delivered video entertainment, information and home shopping programming services to various video distribution media, principally cable television systems. The Company believes that, measured by the number of basic subscribers, it is the largest provider of cable television services in the United States. The Company also (i) has investments in cable and telecommunications operations and television programming in certain international markets and (ii) is involved, as an investor and developer, in new television and telecommunications ventures and technologies. The Company is a Delaware corporation and its principal executive offices are located at Terrace Tower II, 5619 DTC Parkway, Englewood, Colorado 80111-3000; telephone (303) 267- 5500.
The Selling Stockholders are JAKL, Inc., a District of Columbia corporation wholly owned by James Lehrer, Neely Productions Limited, a New York corporation wholly owned by Robert MacNeil ("Neely"), and the William Morris Agency, Inc., a New York corporation. All of the Shares being offered hereby were initially acquired as shares of Class A Common Stock (prior to the redesignation of such shares into shares of Series A TCI Group Common Stock) by the Selling Stockholders on January 4, 1995 in connection with the acquisition (the "Acquisition") by a wholly owned subsidiary of the Company of a 66 2/3% general partnership interest in MacNeil Lehrer Productions ("MLP"), a general partnership principally engaged in the development and production of the "MacNeil Lehrer News Hour." In the Acquisition, JAKL, Inc. and Neely Productions Limited, the general partners of MLP, each received 211,657 shares of Class A Common Stock in consideration for the sale of a portion of their partnership interest in MLP and the William Morris Agency, Inc. received 22,280 shares of Class A Common Stock in consideration for its services rendered to MLP in connection with the Acquisition.
The Shares held by the Selling Stockholders constitute restricted securities and cannot be transferred unless they are registered under the Securities Act or an exemption from registration is available. The Selling Stockholders were, however, given the right to require the Company, subject to certain limitations, to register the Shares for resale under the Securities Act and to include the Shares in certain types of registration statements proposed to be filed by the Company. In response to a request by the Selling Stockholders, the Company has filed the Registration Statement of which this Prospectus forms a part in order to permit the resale of the Shares from time to time by the Selling Stockholders and has agreed to prepare and file such amendments and supplements to the Registration Statement as may be necessary to keep the Registration Statement effective until the earlier of such time as all of the Shares offered hereby have been sold or the second anniversary of June 27, 1995. Such registration rights are also applicable to certain of the LMG Shares acquired by the Selling Stockholders in the Distribution. The Company has filed with the Commission a registration statement on Form S-3 under the Securities Act with respect to such LMG Shares. As of the date of this Prospectus, such registration statement has not become effective. The Selling Stockholders may also sell all or a portion of the Shares being offered hereby pursuant to Rule 144 promulgated under the Securities Act ("Rule 144") to the extent that such sales may be made in compliance with Rule 144.
The following table sets forth the name of each Selling Stockholder, the number of Shares and LMG Shares beneficially owned as of December 15, 1995 by each Selling Stockholder (in each case, less than 1% of the class outstanding) and the number of Shares which may be offered by each Selling Stockholder pursuant to this Prospectus. Any or all of the Shares listed below may be offered for sale by the Selling Stockholders from time to time and therefore no estimate can be given as to the number of Shares that will be held by the Selling Stockholders upon termination of this offering (except that in each case, such number will represent less than 1% of the class outstanding). Except as discussed above, neither the Company nor any of its affiliates has had within the past three years any material relationship with any of the Selling Stockholders, except that JAKL, Inc. and Neely Productions Limited are general partners with a subsidiary of the Company in MLP.
The Shares may be offered for sale and sold by the Selling Stockholders in one or more transactions, including block transactions, at a fixed price or prices (which may be changed), at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at prices determined on a negotiated or competitive bid basis. The Shares may be sold by the Selling Stockholders directly, through an underwritten offering, through agents designated from time to time or to or through broker-dealers designated from time to time.
If any Shares are sold in an underwritten offering, such Shares may be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Unless otherwise indicated in the applicable Prospectus Supplement, the obligations of any underwriters to purchase Shares will be subject to certain conditions precedent, and the underwriters will be obligated to purchase all of the Shares specified in such Prospectus Supplement if any are purchased.
Shares may be sold through a broker-dealer acting as agent or broker for the Selling Stockholders, or to a broker-dealer acting as principal. In the latter case, the broker-dealer may then resell such Shares to the public at varying prices to be determined by such broker-dealer at the time of resale.
Neely has advised the Company that it has entered into an agreement with Merrill Lynch, Pierce, Fenner & Smith ("Merrill") pursuant to which Merrill will sell certain of the Shares as agent for Neely. The number of Shares sold, the price, the fees payable to Merrill and certain other information regarding any sales made in accordance with such agreement, will be disclosed in a supplement to this Prospectus.
Except as described in the preceding paragraph, as of the date of this Prospectus, the Company has not been advised by the Selling Stockholders of any arrangements with an underwriter, agent or broker-dealer for the sale of the Shares.
The Selling Stockholders may also sell all or a portion of the Shares pursuant to Rule 144 promulgated under the Securities Act, to the extent that such sales may be made in compliance with such Rule.
The Selling Stockholders and any agents or broker-dealers that participate with the Selling Stockholders in the distribution of any of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any discount or commission received by them and any profit on the resale of the Shares purchased by them may be deemed to be underwriting discounts or commissions under the Securities Act.
The Company has agreed to indemnify the Selling Stockholders against certain liabilities that may arise in connection with any offer and sale of the Shares, including liabilities under the Securities Act, and to contribute to payments that the Selling Stockholders may be required to make in respect thereof.
To the extent required, the number of Shares to be sold, the purchase price, the public offering price, if applicable, the name of any underwriter, agent or broker-dealer, and any applicable commissions, discounts or other items constituting compensation to such underwriters, agents or broker-dealers with respect to a particular offering will be set forth in an accompanying Prospectus Supplement.
The following description of certain terms of the common stock of TCI does not purport to be complete and is qualified in its entirety by reference to the Restated Certificate of Incorporation, as amended, of TCI (the "TCI Charter") which has been incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part.
The TCI Charter provides, among other things, that TCI is authorized to issue 2,725,000,000 shares of common stock, par value $1.00 per share (the "TCI Common Stock"), of which 1,750,000,000 shares are designated Tele- Communications, Inc. Series A TCI Group Common Stock, 150,000,000 shares are designated Tele-Communications, Inc. Series B TCI Group Common Stock, 750,000,000 shares are designated Tele-Communications, Inc. Series A Liberty Media Group Common Stock, and 75,000,000 shares are designated Tele- Communications, Inc. Series B Liberty Media Group Common Stock.
As of November 1, 1995, 571,576,645 shares of TCI Group Series A Common Stock, 84,801,554 shares of TCI Group Series B Common Stock, 142,892,796 shares of LMG Series A Common Stock and 21,200,336 shares of LMG Series B Common Stock (in each case net of shares held in treasury) have been issued and are outstanding.
As used herein, the following terms have the meanings specified below:
"Committed Acquisition Shares" means (a) the shares of LMG Series A Common Stock that TCI had, prior to the record date for the Distribution, agreed to issue, but as of such record date had not issued, and (b) the shares of LMG Series A Common Stock that are issuable upon conversion, exercise or exchange of Convertible Securities that TCI had, prior to the record date for the Distribution, agreed to issue, but as of such record date had not issued, in each case including obligations of TCI to issue shares of TCI's Class A Common Stock, par value $1.00 per share (which has been redesignated TCI Group Series A Common Stock), which as a result of the Distribution, constitute obligations to issue, among other securities, LMG Series A Common Stock or Convertible Securities which are convertible into or exercisable or exchangeable for LMG Series A Common Stock; provided, however that Committed Acquisition Shares will not include any shares of Liberty Media Group Common Stock issuable upon conversion, exercise or exchange of Pre-Distribution Convertible Securities. The type and amount of Committed Acquisition Shares issuable will be appropriately adjusted to reflect subdivisions and combinations of the LMG Series A Common Stock and dividends or distributions of shares of LMG Series A Common Stock or LMG Series B Common Stock to holders of LMG Series A Common Stock and other reclassifications of the LMG Series A Common Stock, in each case occurring (or the record date for which occurs) after the Distribution.
"Convertible Securities" means any securities of TCI (other than any series of TCI Common Stock) that are convertible into, exchangeable for or evidence the right to purchase any shares of any series of TCI Common Stock, whether upon conversion, exercise, exchange, pursuant to antidilution provisions of such securities or otherwise.
"DGCL" means the General Corporation Law of the State of Delaware.
The "Distribution" means the distribution paid by TCI on August 10, 1995 of one-fourth of one share of LMG Series A Common Stock on each outstanding share of TCI Group Series A Common Stock and one-fourth of one share of LMG Series B Common Stock on each outstanding share of TCI Series B Group Common Stock to holders of record on August 4, 1995.
The "Inter-Group Interest" means any equity value of TCI attributable to the Liberty Media Group that is not represented by outstanding shares of Liberty Media Group Common Stock. The Inter-Group Interest is represented by the Number of Shares Issuable with Respect to the Inter-Group Interest.
The "Inter-Group Interest Fraction" means a fraction the numerator of which is the Number of Shares Issuable with Respect to the Inter-Group Interest and the denominator of which is the sum of such Number of Shares Issuable with Respect to the Inter-Group Interest and the aggregate number of shares of Liberty Media Group Common Stock outstanding.
The "Liberty Media Group" means:
(a) the interest of TCI or any of its subsidiaries in Liberty Media Corporation or any of its subsidiaries (including any successor thereto by merger, consolidation or sale of all or substantially all of its assets, whether or not in connection with a Related Business Transaction (as defined below under "--Conversion and Redemption--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock")) and their
(b) all assets and liabilities of TCI or any of its subsidiaries to the extent attributed to any of the properties or assets referred to in clause (a) of this sentence, whether or not such assets or liabilities are assets and liabilities of Liberty Media Corporation or any of its subsidiaries (or a successor as described in clause (a) of this sentence),
(c) all assets and properties contributed or otherwise transferred to the Liberty Media Group from the TCI Group, and
(d) the interest of TCI or any of its subsidiaries in the businesses, assets and liabilities acquired by TCI or any of its subsidiaries for the Liberty Media Group, as determined by the Board of Directors of TCI (the
provided that (i) from and after any dividend or other distribution with respect to any shares of Liberty Media Group Common Stock (other than a dividend or other distribution payable in shares of Liberty Media Group Common Stock, with respect to which adjustment will be made as described in clause (a) of the definition of "Number of Shares Issuable with Respect to the Inter-Group Interest," or in other securities of TCI attributed to the Liberty Media Group for which provision will be made as described in the penultimate sentence of this definition), the Liberty Media Group will no longer include an amount of assets or properties equal to the aggregate amount of such kind of assets or properties so paid in respect of shares of Liberty Media Group Common Stock multiplied by a fraction the numerator of which is equal to the Inter-Group Interest Fraction in effect immediately prior to the record date for such dividend or other distribution and the denominator of which is equal to the Outstanding Interest Fraction in effect immediately prior to the record date for such dividend or other distribution and (ii) from and after any transfer of assets or properties from the Liberty Media Group to the TCI Group, the Liberty Media Group will no longer include the assets or properties so transferred. If TCI pays a dividend or makes any other distribution with respect to shares of Liberty Media Group Common Stock payable in securities of TCI attributed to the Liberty Media Group other than Liberty Media Group Common Stock, the TCI Group will be deemed to hold an amount of such other securities equal to the amount so distributed multiplied by the fraction specified in clause (i) of this definition (determined as of a time immediately prior to the record date for such dividend or other distribution), and to the extent interest or dividends are paid or other distributions are made on such other securities so distributed to the holders of Liberty Media Group Common Stock, the Liberty Media Group will no longer include a corresponding ratable amount of the kind of assets paid as such interest or dividends or other distributions in respect of such securities so deemed to be held by the TCI Group. TCI may also, to the extent any such other securities constitute Convertible Securities which are at the time convertible, exercisable or exchangeable, cause such Convertible Securities deemed to be held by the TCI Group to be deemed to be converted, exercised or exchanged (and to the extent the terms of such Convertible Securities require payment or delivery of consideration in order to effect such conversion, exercise or exchange, the Liberty Media Group will in such case include an amount of the kind of properties or assets required to be paid or delivered as such consideration for the amount of the Convertible Securities deemed converted, exercised or exchanged as if such Convertible Securities were outstanding), in which case such Convertible Securities will no longer be deemed to be held by the TCI Group or attributed to the Liberty Media Group.
"Market Value" of any class or series of capital stock of TCI on any day means the average of the high and low reported sale prices regular way of a share of such class or series on such day (if such day is a trading day, and if such day is not a trading day, on the trading day immediately preceding such day) or in case no such reported sale takes place on such trading day the average of the reported closing bid and asked prices regular way of a share of such class or series on such trading day, in either case on the Nasdaq National Market, or if the shares of such class or series are not quoted on such Nasdaq National Market on such trading day, the average of the closing bid and asked prices of a share of such class or series in the over-the-counter market on such trading day as furnished by any New York Stock Exchange member firm selected from time to time by TCI, or if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such trading day, the market value of a share of such class or series as determined by the TCI Board of Directors; provided that for purposes of determining the ratios described under "--Conversion and Redemption--Conversion at the Option of TCI" and "--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock" and "--Liquidation," (a) the "Market Value" of any share of any series of TCI Common Stock on any day prior to the "ex" date or any similar date for any dividend or distribution paid or to be paid with respect to such series of TCI Common Stock will be reduced by the fair market value of the per share amount of such dividend or distribution as determined by the TCI Board of Directors and (b) the "Market Value" of any share of any series of TCI Common Stock on any day prior to (i) the effective date of any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of outstanding shares of such series of TCI Common Stock or (ii) the "ex" date or any similar date for any dividend or distribution with respect to any such series of TCI Common Stock in shares of such series of TCI Common Stock will be appropriately adjusted to reflect such subdivision, combination, dividend or distribution.
The "Number of Shares Issuable with Respect to the Inter-Group Interest" is currently zero and will from time to time be
(a) adjusted as appropriate to reflect subdivisions (by stock split or otherwise) and combinations (by reverse stock split or otherwise) of the LMG Series A Common Stock and dividends or distributions of shares of LMG Series A Common Stock or LMG Series B Common Stock to holders of LMG Series A Common Stock and other reclassifications of LMG Series A Common Stock,
(b) decreased (but not to less than zero) by (i) the aggregate number of shares of LMG Series A Common Stock issued or sold by TCI after the Distribution other than Committed Acquisition Shares, the proceeds of which are attributed to the TCI Group, (ii) the aggregate number of shares of LMG Series A Common Stock issued or delivered upon conversion, exercise or exchange of Convertible Securities (other than Pre-Distribution Convertible Securities and Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares), the proceeds of which are attributed to the TCI Group, (iii) the aggregate number of shares of LMG Series A Common Stock issued or delivered by TCI as a dividend or distribution to holders of TCI Group Series A Common Stock and TCI Group Series B Common Stock, (iv) the aggregate number of shares of LMG Series A Common Stock issued or delivered upon the conversion, exercise or exchange of any Convertible Securities (other than
Pre-Distribution Convertible Securities and Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares) issued or delivered by TCI after the Distribution as a dividend or distribution or by reclassification or exchange to holders of TCI Group Series A Common Stock and TCI Group Series B Common Stock and (v) the aggregate number of shares of LMG Series A Common Stock (rounded, if necessary, to the nearest whole number), equal to the aggregate fair value (as determined by the TCI Board of Directors) of assets or properties attributed to the Liberty Media Group that are transferred from the Liberty Media Group to the TCI Group in consideration of a reduction in the Number of Shares Issuable with Respect to the Inter-Group Interest, divided by the Market Value of one share of LMG Series A Common Stock as of the date of
(c) increased by (i) the aggregate number of any shares of LMG Series A Common Stock and LMG Series B Common Stock which are retired or otherwise cease to be outstanding following their purchase with funds attributed to the TCI Group, (ii) a number (rounded, if necessary, to the nearest whole number), equal to the fair value (as determined by the TCI Board of Directors) of assets or properties, theretofore attributed to the TCI Group that are contributed to the Liberty Media Group in consideration of an increase in the Number of Shares Issuable with Respect to the Inter-Group Interest, divided by the Market Value of one share of LMG Series A Common Stock as of the date of such contribution and (iii) the aggregate number of shares of LMG Series A Common Stock and LMG Series B Common Stock into or for which Convertible Securities are deemed to be converted, exercised or exchanged pursuant to the last sentence of the definition of "TCI Group."
TCI will not issue or sell shares of LMG Series B Common Stock in respect of a reduction in the Number of Shares Issuable with Respect to the Inter-Group Interest. Whenever a change in the Number of Shares Issuable with Respect to the Inter-Group Interest occurs, TCI will prepare and file a statement of such change with the Secretary of TCI.
The "Outstanding Interest Fraction" means a fraction the numerator of which is the aggregate number of shares of Liberty Media Group Common Stock outstanding and the denominator of which is the sum of such aggregate number of shares of Liberty Media Group Common Stock outstanding and the Number of Shares Issuable with Respect to the Inter-Group Interest.
"Pre-Distribution Convertible Securities" means Convertible Securities that were outstanding on the record date for the Distribution and were, prior to such date, convertible into or exercisable or exchangeable for shares of TCI's Class A Common Stock, par value $1.00 per share (which has been redesignated TCI Group Series A Common Stock).
The "TCI Group" means as of any date of determination thereof:
(a) the interest of TCI or any of its subsidiaries in all of the businesses in which TCI or any of its subsidiaries (or any of their predecessors or successors) is or has been engaged, directly or indirectly, and the respective assets and liabilities of TCI or any of its subsidiaries, other than any businesses, assets or liabilities of the
(b) a proportionate interest in the businesses, assets and liabilities of the Liberty Media Group equal to the Inter-Group Interest Fraction as of
(c) from and after any dividend or other distribution with respect to shares of Liberty Media Group Common Stock (other than a dividend or other distribution payable in shares of Liberty Media Group Common Stock, with respect to which adjustment will be made as described in clause (a) of the definition of "Number of Shares Issuable with Respect to the Inter-Group Interest," or in other securities of TCI attributed to the Liberty Media Group, for which provision will be made as described in the penultimate sentence of this definition), an amount of assets or properties theretofore included in the Liberty Media Group equal to the aggregate amount of such kind of assets or properties so paid in respect of such dividend or other
to shares of Liberty Media Group Common Stock multiplied by a fraction the numerator of which is equal to the Inter-Group Interest Fraction in effect immediately prior to the record date for such dividend or other distribution and the denominator of which is equal to the Outstanding Interest Fraction in effect immediately prior to the record date for such dividend or other distribution; and
(d) any assets or properties transferred from the Liberty Media Group
provided that, from and after any contribution or transfer of any assets or properties from the TCI Group to the Liberty Media Group, the TCI Group will no longer include such assets or properties so contributed or transferred (other than pursuant to its interest in the businesses, assets and liabilities of the Liberty Media Group described in clause (b) above). If TCI pays a dividend or makes any other distribution with respect to shares of Liberty Media Group Common Stock payable in other securities of TCI attributed to the Liberty Media Group, the TCI Group will be deemed to hold an amount of such other securities equal to the amount so distributed multiplied by the fraction specified in clause (c) of this definition (determined as of a time immediately prior to the record date for such dividend or other distribution), and to the extent interest or dividends are paid or other distributions are made on such other securities so distributed to holders of Liberty Media Group Common Stock, the TCI Group will include a corresponding ratable amount of the kind of assets paid as such interest or dividends or other distributions in respect of such securities so deemed to be held by the TCI Group. TCI may also, to the extent any such other securities constitute Convertible Securities which are at the time convertible, exercisable or exchangeable, cause such Convertible Securities deemed to be held by the TCI Group to be deemed to be converted, exercised or exchanged (and to the extent the terms of such Convertible Securities require payment or delivery of consideration in order to effect such conversion, exercise or exchange, the TCI Group will in such case no longer include an amount of the kind of properties or assets required to be paid or delivered as such consideration for the amount of the Convertible Securities deemed converted, exercised or exchanged as if such Convertible Securities were outstanding), in which case such Convertible Securities will no longer be deemed to be held by the TCI Group or attributed to the Liberty Media Group.
Holders of TCI Group Series A Common Stock are entitled to one vote for each share of such stock held, holders of TCI Group Series B Common Stock are entitled to ten votes for each share of such stock held, holders of LMG Series A Common Stock are entitled to one vote for each share of such stock held and holders of LMG Series B Common Stock are entitled to ten votes for each share of such stock held, on all matters presented to such stockholders. Except as may otherwise be required by the laws of the State of Delaware or, with respect to any class of TCI's preferred stock or any series of such a class, in the TCI Charter (including any resolution or resolutions providing for the establishment of such class or series pursuant to authority vested in the TCI Board of Directors by the TCI Charter), the holders of TCI Group Common Stock and the holders of Liberty Media Group Common Stock and the holders of each class or series of TCI's preferred stock, if any, entitled to vote thereon will vote as one class for all purposes. See "--Other Matters."
Neither the holders of TCI Group Series A Common Stock or TCI Group Series B Common Stock, nor the holders of LMG Series A Common Stock or LMG Series B Common Stock, have any rights to vote as a separate class or series on any matter coming before the stockholders of TCI, except with respect to certain limited class and series voting rights provided under the DGCL. Under the DGCL, the approval of the holders of a majority of the outstanding shares of any class of capital stock of a corporation, voting separately as a class, is required to approve any amendment to the charter that would alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely, provided that, if any amendment would alter or change the powers, preferences or special rights of one or more series of the class so as to affect them adversely, but would not so affect the entire class, then only the shares of the series so affected by the amendment would be entitled to vote thereon separately as a class.
Subject to the prior payment of dividends on outstanding shares of TCI's preferred stock, dividends may be paid as determined by the TCI Board of Directors (i) on the TCI Group Common Stock out of the lesser of (x) the TCI Group Available Dividend Amount and (y) funds of TCI legally available therefor under the DGCL and (ii) on the Liberty Media Group Common Stock out of the lesser of (x) the Liberty Media Group Available Dividend Amount and (y) funds of TCI legally available therefor under the DGCL. Under the DGCL the amount of the funds of TCI legally available for the payment of dividends on any series of TCI Common Stock is determined on the basis of the entire corporation and not just the Liberty Media Group or the TCI Group. Consequently, the amount of legally available funds will be reduced by the amount of any net losses of the Liberty Media Group or the TCI Group and any dividends or distributions on, or repurchases of, the TCI Group Common Stock or the Liberty Media Group Common Stock and dividends on, or certain repurchases of, TCI's preferred stock. Certain loan agreements to which certain subsidiaries of TCI are parties or are subject contain restricted payment provisions that limit the amount of dividends, other than stock dividends, that those companies may pay. Future loan agreements may also contain similar restrictions and limits.
The "TCI Group Available Dividend Amount," as of any date, means either (a) the excess of (i) an amount equal to the total assets of the TCI Group less the total liabilities (not including preferred stock) of the TCI Group as of such date over (ii) the aggregate par value of, or any greater amount determined to be capital in respect of, all outstanding shares of TCI Group Common Stock and each class or series of TCI's preferred stock attributed to the TCI Group or (b) in case there is no such excess, an amount equal to TCI Earnings (Loss) Attributable to the TCI Group (if positive) for the fiscal year in which such date occurs and/or the preceding fiscal year. "TCI Earnings (Loss) Attributable to the TCI Group," for any period, means the net earnings or loss of the TCI Group for such period determined on a basis consistent with the determination of the net earnings or loss of the TCI Group for such period as presented in the combined financial statements of the TCI Group for such period, including income and expenses of TCI attributed to the operations of the TCI Group on a substantially consistent basis, including without limitation, corporate administrative costs, net interest and income taxes. The TCI Group Available Dividend Amount is intended to be similar to the amount that would be legally available for the payment of dividends on the TCI Group Common Stock under the DGCL if the TCI Group were a separate Delaware corporation. There can be no assurance that there will be a TCI Group Available Dividend Amount.
The "Liberty Media Group Available Dividend Amount," as of any date, means the product of the Outstanding Interest Fraction and either (a) the excess of (i) an amount equal to the total assets of the Liberty Media Group less the total liabilities (not including preferred stock) of the Liberty Media Group as of such date over (ii) the aggregate par value of, or any greater amount determined to be capital in respect of, all outstanding shares of Liberty Media Group Common Stock and each class or series of TCI's preferred stock attributed to the Liberty Media Group or (b) in case there is no such excess, an amount equal to TCI Earnings (Loss) Attributable to the Liberty Media Group (if positive) for the fiscal year in which such date occurs and/or the preceding fiscal year. "TCI Earnings (Loss) Attributable to the Liberty Media Group," for any period, means the net earnings or loss of the Liberty Media Group for such period determined on a basis consistent with the determination of the net earnings or loss of the Liberty Media Group for such period as presented in the combined financial statements of the Liberty Media Group for such period, including income and expenses of TCI attributed to the operations of the Liberty Media Group on a substantially consistent basis, including, without limitation, corporate administrative costs, net interest and income taxes. The Liberty Media Group Available Dividend Amount is intended to be similar to the amount that would be legally available for the payment of dividends on the Liberty Media Group Common Stock under the DGCL if the Liberty Media Group were a separate Delaware corporation. There can be no assurance that there will be a Liberty Media Group Available Dividend Amount.
Except for dividends declared or paid as described below under "--Share Distributions" and "--Conversion and Redemption--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock," any dividends paid on the TCI Group Series A Common Stock or the TCI Group Series
B Common Stock will be paid only on both series, in equal amounts per share, and any dividends paid on the LMG Series A Common Stock or the LMG Series B Common Stock will be paid only on both series, in equal amounts per share.
The TCI Board of Directors, subject to the provisions described herein under "--Dividends" and below under "--Share Distributions," has the authority and discretion to declare and pay dividends on the TCI Group Common Stock or the Liberty Media Group Common Stock in equal or unequal amounts, notwithstanding the relationship between the TCI Group Available Dividend Amount and the Liberty Media Group Available Dividend Amount, the respective amounts of prior dividends declared on, or liquidation rights of, the TCI Group Common Stock or the Liberty Media Group Common Stock or any other factor.
At the time of any dividend or other distribution on the outstanding shares of Liberty Media Group Common Stock (including any dividend of Net Proceeds from the Disposition of all or substantially all of the properties and assets of the Liberty Media Group as described below under "--Conversion and Redemption- Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock"), the TCI Group will (if at such time there is an Inter-Group Interest) be credited, and the Liberty Media Group will be charged (in addition to the charge for the dividend or other distribution paid or distributed in respect of outstanding shares of Liberty Media Group Common Stock), with an amount equal to the product of (i) the aggregate amount of such dividend or distribution paid or distributed in respect of outstanding shares of Liberty Media Group Common Stock times (ii) a fraction the numerator of which is the Inter-Group Interest Fraction and the denominator of which is the Outstanding Interest Fraction.
DISTRIBUTIONS ON TCI GROUP COMMON STOCK. If at any time after the Distribution a distribution paid in TCI Group Common Stock, Liberty Media Group Common Stock, any other securities of TCI or any other person (a "share distribution") is to be made with respect to the TCI Group Common Stock, such share distribution will be declared and paid only as follows:
(i) a share distribution consisting of shares of TCI Group Series A Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of TCI Group Series A Common Stock) to holders of TCI Group Series A Common Stock and TCI Group Series B Common Stock, on an equal per share basis; or consisting of shares of TCI Group Series B Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of TCI Group Series B Common Stock) to holders of TCI Group Series A Common Stock and TCI Group Series B Common Stock, on an equal per share basis; or consisting of shares of TCI Group Series A Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of TCI Group Series A Common Stock) to holders of TCI Group Series A Common Stock and, on an equal per share basis, shares of TCI Group Series B Common Stock (or like Convertible Securities convertible into or exercisable or exchangeable for shares of TCI Group Series B Common Stock) to holders of TCI Group Series B Common Stock;
(ii) a share distribution consisting of shares of LMG Series A Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of LMG Series A Common Stock) to holders of TCI Group Series A Common Stock and TCI Group Series B Common Stock, on an equal per share basis; provided that the sum of (a) the aggregate number of shares of LMG Series A Common Stock to be so issued (or the number of such shares which would be issuable upon conversion, exercise or exchange of any Convertible Securities to be so issued) and (b) the number of shares of such series that are subject to issuance upon conversion, exercise or exchange of any Convertible Securities
then outstanding that are attributed to the TCI Group (other than Pre-Distribution Convertible Securities and other than Convertible Securities convertible into or exercisable or exchangeable for Committed Acquisition Shares) is less than or equal to the Number of Shares Issuable with Respect to the Inter-
(iii) a share distribution consisting of any class or series of securities of TCI or any other person other than TCI Group Common Stock or Liberty Media Group Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of TCI Group Common Stock or Liberty Media Group Common Stock), either on the basis of a distribution of identical securities, on an equal per share basis, to holders of TCI Group Series A Common Stock and TCI Group Series B Common Stock or on the basis of a distribution of one class or series of securities to holders of TCI Group Series A Common Stock and another class or series of securities to holders of TCI Group Series B Common Stock, provided that the securities so distributed (and, if the distribution consists of Convertible Securities, the securities into which such Convertible Securities are convertible or for which they are exercisable or exchangeable) do not differ in any respect other than their relative voting rights and related differences in designation, conversion, redemption and share distribution provisions, with holders of shares of TCI Group Series B Common Stock receiving the class or series having the higher relative voting rights (without regard to whether such rights differ to a greater or lesser extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the TCI Group Series A Common Stock and the TCI Group Series B Common Stock), provided that if the securities so distributed constitute capital stock of a subsidiary of TCI, such rights will not differ to a greater extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the TCI Group Series A Common Stock and the TCI Group Series B Common Stock, and provided in each case that such distribution is otherwise made on an equal per share basis.
TCI will not reclassify, subdivide or combine the TCI Group Series A Common Stock without reclassifying, subdividing or combining the TCI Group Series B Common Stock, on an equal per share basis, and TCI will not reclassify, subdivide or combine the TCI Group Series B Common Stock without reclassifying, subdividing or combining the TCI Group Series A Common Stock, on an equal per share basis.
DISTRIBUTIONS ON LIBERTY MEDIA GROUP COMMON STOCK. If at any time a share distribution is to be made with respect to the Liberty Media Group Common Stock, such share distribution will be declared and paid only as follows (or as described under "--Conversion and Redemption" with respect to the redemptions and other distributions referred to therein):
(i) a share distribution consisting of shares of LMG Series A Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of LMG Series A Common Stock) to holders of LMG Series A Common Stock and LMG Series B Common Stock, on an equal per share basis; or consisting of shares of LMG Series B Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of LMG Series B Common Stock) to holders of LMG Series A Common Stock and LMG Series B Common Stock, on an equal per share basis; or consisting of shares of LMG Series A Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of LMG Series A Common Stock) to holders of LMG Series A Common Stock and, on an equal per share basis, shares of LMG Series B Common Stock (or like Convertible Securities convertible into or
exchangeable for shares of LMG Series B Common Stock) to holders of LMG Series B Common Stock; and
(ii) a share distribution consisting of any class or series of securities of TCI or any other person other than as described in the immediately preceding clause (i) and other than TCI Group Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of TCI Group Series A Common Stock or TCI Group Series B Common Stock), either on the basis of a distribution of identical securities, on an equal per share basis, to holders of LMG Series A Common Stock and LMG Series B Common Stock or on the basis of a distribution of one class or series of securities to holders of LMG Series A Common Stock and another class or series of securities to holders of LMG Series B Common Stock, provided that the securities so distributed (and, if the distribution consists of Convertible Securities, the securities into which such Convertible Securities are convertible or for which they are exercisable or exchangeable) do not differ in any respect other than their relative voting rights and related differences in designation, conversion, redemption and share distribution provisions, with holders of shares of LMG Series B Common Stock receiving the class or series having the higher relative voting rights (without regard to whether such rights differ to a greater or lesser extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the LMG Series A Common Stock and the LMG Series B Common Stock), provided that if the securities so distributed constitute capital stock of a subsidiary of TCI, such rights will not differ to a greater extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the LMG Series A Common Stock and the LMG Series B Common Stock, and provided in each case that such distribution is otherwise made on an equal per share basis.
TCI will not reclassify, subdivide or combine the LMG Series A Common Stock without reclassifying, subdividing or combining the LMG Series B Common Stock, on an equal per share basis, and TCI will not reclassify, subdivide or combine the LMG Series B Common Stock without reclassifying, subdividing or combining the LMG Series A Common Stock, on an equal per share basis.
CONVERSION OF TCI GROUP SERIES B COMMON STOCK AND LMG SERIES B COMMON STOCK AT THE OPTION OF THE HOLDER. Each share of TCI Group Series B Common Stock is convertible, at the option of the holder thereof, into one share of TCI Group Series A Common Stock. Each share of LMG Series B Common Stock is convertible, at the option of the holder thereof, into one share of LMG Series A Common Stock. Shares of TCI Group Series A Common Stock are not convertible into shares of TCI Group Series B Common Stock, and shares of LMG Series A Common Stock are not convertible into shares of LMG Series B Common Stock.
CONVERSION OF LIBERTY MEDIA GROUP COMMON STOCK AT THE OPTION OF TCI. The TCI Board of Directors may at any time declare that (i) all of the outstanding shares of LMG Series A Common Stock will be converted into a number (or fraction) of fully paid and nonassessable shares of TCI Group Series A Common Stock equal to the Optional Conversion Ratio, and (ii) all of the outstanding shares of LMG Series B Common Stock will be converted into a number (or fraction) of fully paid and nonassessable shares of TCI Group Series B Common Stock equal to the Optional Conversion Ratio.
For these purposes, the "Optional Conversion Ratio" means the quotient (calculated to the nearest five decimal places) obtained by dividing (x) the Liberty Media Group Common Stock Per Share Value by (y) the average Market Value of one share of TCI Group Series A Common Stock over the 20-trading day period ending on the trading day preceding the Appraisal Date.
The "Liberty Media Group Private Market Value" means an amount equal to the private market value of the Liberty Media Group as of the last day of the calendar month preceding the month in which the last of the two appraisers referred to in the immediately following sentence are selected (the last day of such calendar month is hereinafter referred to as the "Appraisal Date"). In the event that TCI determines to establish the Liberty Media Group Private Market Value, two investment banking firms of recognized national standing will be designated to determine the private market value of the Liberty Media Group, one designated by TCI (the "First Appraiser") and one designated by a committee of the TCI Board of Directors all of whose members are independent directors as determined under Nasdaq National Market rules (the "Second Appraiser"). The date upon which the last of such appraisers is selected is hereinafter referred to as the "Selection Date." Not later than 20 days after the Selection Date, the First Appraiser and the Second Appraiser will each determine its initial view as to the private market value of the Liberty Media Group as of the Appraisal Date and will consult with one another with respect thereto. Not later than the 30th day after the Selection Date, the First Appraiser and the Second Appraiser will each have determined its final view as to such private market value. If the higher of the respective final views of the First Appraiser and the Second Appraiser as to such private market value (the "Higher Appraised Amount") is not more than 120% of the lower of such respective final views (the "Lower Appraised Amount"), the Liberty Media Group Private Market Value (subject to any adjustment described in the second succeeding paragraph) will be the average of those two amounts. If the Higher Appraised Amount is more than 120% of the Lower Appraised Amount, the First Appraiser and the Second Appraiser will agree upon and jointly designate a third investment banking firm of recognized national standing (the "Mutually Designated Appraiser") to determine such private market value. The Mutually Designated Appraiser will not be provided with any of the work of the First Appraiser and Second Appraiser. The Mutually Designated Appraiser will, no later than the 20th day after the date the Mutually Designated Appraiser is designated, determine such private market value (the "Mutually Appraised Amount"), and the Liberty Media Group Private Market Value (subject to any adjustment described in the second succeeding paragraph) will be (i) if the Mutually Appraised Amount is between the Lower Appraised Amount and the Higher Appraised Amount, (a) the average of (1) the Mutually Appraised Amount and (2) the Lower Appraised Amount or the Higher Appraised Amount, whichever is closer to the Mutually Appraised Amount, or (b) the Mutually Appraised Amount, if neither the Lower Appraised Amount nor the Higher Appraised Amount is closer to the Mutually Appraised Amount, or (ii) if the Mutually Appraised Amount is greater than the Higher Appraised Amount or less than the Lower Appraised Amount, the average of the Higher Appraised Amount and the Lower Appraised Amount. For these purposes, if any such investment banking firm expresses its final view of the private market value of the Liberty Media Group as a range of values, such investment banking firm's final view of such private market value will be deemed to be the midpoint of such range of values.
Each of the investment banking firms referred to in the immediately preceding paragraph will be instructed to determine the private market value of the Liberty Media Group as of the Appraisal Date based upon the amount a willing purchaser would pay to a willing seller, in an arm's length transaction, if it were acquiring the Liberty Media Group, as if the Liberty Media Group were a publicly traded non-controlled corporation and the purchaser was acquiring all of the capital stock of such corporation and without consideration of any potential regulatory constraints limiting the potential purchasers of the Liberty Media Group other than that which would have existed if the Liberty Media Group were a publicly traded non-controlled entity.
Following the determination of the Liberty Media Group Private Market Value, the investment banking firms whose final views of the private market value of the Liberty Media Group were used in the calculation of the Liberty Media Group Private Market Value will determine the Adjusted Outstanding Shares of Liberty Media Group Common Stock together with any further appropriate adjustments to the Liberty Media Group Private Market Value resulting from such determination. The "Adjusted Outstanding Shares of Liberty Media Group Common Stock" means a number, as determined by such investment banking firms as of the Appraisal Date, equal to the sum of the number of shares of Liberty Media Group Common Stock outstanding, the Number of Shares Issuable with Respect to the Inter-Group Interest, the number of Committed Acquisition Shares issuable, the number of shares of Liberty Media Group Common Stock issuable upon the conversion, exercise or exchange of all Pre-Distribution Convertible Securities and the number of shares of Liberty Media Group Common Stock issuable upon the conversion, exercise or exchange of those Convertible Securities (other than Pre-Distribution Convertible Securities and other than Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares) the holders of which would derive an economic benefit from conversion, exercise or exchange of such Convertible Securities which exceeds the economic benefit of not converting, exercising or exchanging such Convertible Securities. The "Liberty Media Group Common Stock Per Share Value" means the quotient obtained by dividing the Liberty Media Group Private Market Value by the Adjusted Outstanding Shares of Liberty Media Group Common Stock, provided that if such investment banking firms do not agree on the determinations provided for in this paragraph, the Liberty Media Group Common Stock Per Share Value will be the average of the quotients so obtained on the basis of the respective determinations of such firms.
If TCI determines to convert shares of LMG Series A Common Stock into TCI Group Series A Common Stock and shares of LMG Series B Common Stock into TCI Group Series B Common Stock at the Optional Conversion Ratio, such conversion will occur on a conversion date on or prior to the 120th day following the Appraisal Date. If TCI determines not to undertake such conversion, TCI may at any time thereafter undertake to reestablish the Liberty Media Group Common Stock Per Share Value as of a subsequent date.
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF LIBERTY MEDIA GROUP COMMON STOCK. Upon the sale, transfer, assignment or other disposition, whether by merger, consolidation, sale or contribution of assets or stock or otherwise (a "Disposition"), in one transaction or a series of related transactions by TCI and its subsidiaries of all or substantially all of the properties and assets of the Liberty Media Group to one or more persons, entities or groups (other than (a) in connection with the Disposition by TCI of all of TCI's properties and assets in one transaction or a series of related transactions in connection with the liquidation, dissolution or winding up of TCI, (b) a dividend, other distribution or redemption in accordance with any provision described under "-- Dividends," "--Share Distributions," "--Redemption in Exchange for Stock of Subsidiary" or "--Liquidation Rights," (c) to any person, entity or group which TCI, directly or indirectly, after giving effect to the Disposition, controls or (d) in connection with a Related Business Transaction), TCI will on or prior to the 85th trading day following the consummation of such Disposition, either:
(i) subject to the limitations described above under "--Dividends," declare and pay a dividend in cash and/or securities or other property (other than a dividend or distribution of TCI Common Stock) to the holders of the outstanding shares of Liberty Media Group Common Stock equally on a share for share basis (subject to the provisions described in the last sentence of the paragraph herein which defines the term "Net Proceeds"), in an aggregate amount equal to the product of the Outstanding Interest Fraction as of the record date for determining the holders entitled to receive such dividend and the Net Proceeds of such Disposition;
(ii) provided that there are funds of TCI legally available therefor and the Liberty Media Group Available Dividend Amount would have been sufficient to pay a dividend in lieu thereof as described in clause (i) of this paragraph:
(a) if such Disposition involves all (not merely substantially all) of the properties and assets of the Liberty Media Group, redeem all outstanding shares of LMG Series A Common Stock and LMG Series B Common Stock in exchange for cash and/or securities or other property (other than TCI Common Stock) in an aggregate amount equal to the product of the Adjusted Outstanding Interest Fraction as of the date of such redemption and the Net Proceeds of such Disposition, such aggregate amount to be allocated (subject to the provisions described in the last sentence of the paragraph herein which defines the term "Net Proceeds") to shares of LMG Series A Common Stock and LMG Series B Common Stock in the ratio of the number of shares of each such series outstanding (so that the amount of consideration paid for
share of LMG Series A Common Stock and each share of LMG Series B Common Stock is the same); or
(b) if such Disposition involves substantially all (but not all) of the properties and assets of the Liberty Media Group, apply an aggregate amount of cash and/or securities or other property (other than TCI Common Stock) equal to the product of the Outstanding Interest Fraction as of the date shares are selected for redemption and the Net Proceeds of such Disposition to the redemption of outstanding shares of LMG Series A Common Stock and LMG Series B Common Stock, such aggregate amount to be allocated (subject to the provisions described in the last sentence of the paragraph herein which defines the term "Net Proceeds") to shares of LMG Series A Common Stock and LMG Series B Common Stock in the ratio of the number of shares of each such series outstanding, and the number of shares of each such series to be redeemed to equal the lesser of (x) the whole number nearest the number determined by dividing the aggregate amount so allocated to the redemption of such series by the average Market Value of one share of LMG Series A Common Stock during the ten- trading day period beginning on the 16th trading day following the consummation of such Disposition and (y) the number of shares of such series outstanding (so that the amount of consideration paid for the redemption of each share of LMG Series A Common Stock and each share of LMG Series B Common Stock is the same);
(iii) convert (a) each outstanding share of LMG Series A Common Stock into a number (or fraction) of fully paid and nonassessable shares of TCI Group Series A Common Stock and (b) each outstanding share of LMG Series B Common Stock into a number (or fraction) of fully paid and nonassessable shares of TCI Group Series B Common Stock, in each case equal to 110% of the average daily ratio (calculated to the nearest five decimal places) of the Market Value of one share of LMG Series A Common Stock to the Market Value of one share of TCI Group Series A Common Stock during the ten-trading day period referred to in clause (ii)(b) of this paragraph.
For these purposes, "substantially all of the properties and assets of the Liberty Media Group" as of any date means a portion of such properties and assets that represents at least 80% of the then-current market value (as determined by the TCI Board of Directors) of the properties and assets of the Liberty Media Group as of such date.
A "Related Business Transaction" means any Disposition of all or substantially all of the properties and assets of the Liberty Media Group in which TCI receives as proceeds of such Disposition primarily equity securities (including, without limitation, capital stock, convertible securities, partnership or limited partnership interests and other types of equity securities, without regard to the voting power or contractual or other management or governance rights related to such equity securities) of the purchaser or acquirer of such assets and properties of the Liberty Media Group, any entity which succeeds (by merger, formation of a joint venture enterprise or otherwise) to such assets and properties of the Liberty Media Group or a third party issuer, which purchaser, acquirer or other issuer is engaged or proposes to engage primarily in one or more businesses similar or complementary to the businesses conducted by the Liberty Media Group prior to such Disposition, as determined in good faith by the TCI Board of Directors.
The "Adjusted Outstanding Interest Fraction" means a fraction the numerator of which is the number of outstanding shares of Liberty Media Group Common Stock and the denominator of which is the sum of (a) such number of outstanding shares, (b) the Number of Shares Issuable with Respect to the Inter-Group Interest, (c) the number of shares of Liberty Media Group Common Stock issuable upon conversion, exercise or exchange of Pre-Distribution Convertible Securities and (d) the number of Committed Acquisition Shares issuable.
The "Net Proceeds" with respect to any Disposition of any of the properties and assets of the Liberty Media Group means an amount, if any, equal to the gross proceeds of such Disposition after any payment of, or reasonable provision for, (a) any taxes payable by TCI in respect of such Disposition or in respect of any resulting dividend or redemption (or which would have been payable but for the utilization of tax benefits attributable to the TCI Group), (b) any transaction costs, including, without limitation, any legal, investment banking and accounting fees and expenses and (c) any liabilities and other obligations (contingent or otherwise) of, or attributed to, the Liberty Media Group, including, without limitation, any indemnity or guarantee obligations incurred in connection with the Disposition or any liabilities for future purchase price adjustments and any preferential amounts plus any accumulated and unpaid dividends and other obligations (without duplication of amounts allocated for the satisfaction of TCI's obligations with respect to Pre-Distribution Convertible Securities and Committed Acquisition Shares issuable which are included in the determination of the Adjusted Outstanding Interest Fraction) in respect of TCI's preferred stock attributed to the Liberty Media Group. TCI may elect to pay the dividend or redemption price referred to in clause (i) or (ii) above either in the same form as the proceeds of the Disposition were received or in any other combination of cash or securities or other property (other than TCI Common Stock) that the TCI Board of Directors determines will have an aggregate market value on a fully distributed basis, of not less than the amount of the Net Proceeds. If the dividend or redemption price is paid in the form of securities of an issuer other than TCI, the TCI Board of Directors may determine either to (i) pay the dividend or redemption price in the form of separate classes or series of securities, with one class or series of such securities to holders of LMG Series A Common Stock and another class or series of securities to holders of LMG Series B Common Stock, provided that such securities (and, if such securities are convertible into or exercisable or exchangeable for shares of another class or series of securities, the securities so issuable upon such conversion, exercise or exchange) do not differ in any respect other than their relative voting rights and related differences in designation, conversion, redemption and share distribution provisions with holders of shares of LMG Series B Common Stock receiving the class or series having the higher relative voting rights (without regard to whether such rights differ to a greater or lesser extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the LMG Series A Common Stock and the LMG Series B Common Stock), provided that if such securities constitute capital stock of a subsidiary of TCI, such rights will not differ to a greater extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the LMG Series A Common Stock and LMG Series B Common Stock, and otherwise such securities will be distributed on an equal per share basis, or (ii) pay the dividend or redemption price in the form of a single class of securities without distinction between the shares received by the holders of LMG Series A Common Stock and LMG Series B Common Stock.
At the time of any dividend made as a result of a Disposition referred to above, the TCI Group will be credited, and the Liberty Media Group will be charged (in addition to the charge for the dividend paid in respect of outstanding shares of Liberty Media Group Common Stock), with an amount equal to the product of (i) the aggregate amount paid in respect of such dividend times (ii) a fraction the numerator of which is the Inter-Group Interest Fraction and the denominator of which is the Outstanding Interest Fraction.
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY. At any time at which all of the assets and liabilities attributed to the Liberty Media Group are held directly or indirectly by any one or more corporations all of the capital stock of which is owned by TCI (the "Liberty Media Group Subsidiaries"), the TCI Board of Directors may, subject to there being funds of TCI legally available therefor, redeem on a pro rata basis, all of the outstanding shares of Liberty Media Group Common Stock in exchange for an aggregate number of outstanding fully paid and nonassessable shares of common stock of each Liberty Media Group Subsidiary equal to the product of the Adjusted Outstanding Interest Fraction and the number of all of the outstanding shares of common stock of such Liberty Media Group Subsidiary.
In effecting such a redemption, the TCI Board of Directors may determine either to (i) redeem shares of LMG Series A Common Stock and LMG Series B Common Stock in exchange for shares of separate classes or series of common stock of each Liberty Media Group Subsidiary with relative voting rights and related differences in designation, conversion, redemption and share distribution greater than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the LMG Series A Common Stock and LMG Series B Common Stock, with holders of shares of LMG Series B Common Stock receiving the class or series having the higher relative voting rights, or (ii) redeem shares of LMG Series A Common Stock and LMG Series B Common Stock in exchange for shares of a single class of common stock of each Liberty Media Group Subsidiary without distinction between the shares distributed to the holders of the two series of Liberty Media Group Common Stock. If TCI determines to undertake a redemption as described in clause (i) of the preceding sentence, the outstanding shares of common stock of each Liberty Media Group Subsidiary not distributed to holders of Liberty Media Group Common Stock would consist solely of the class or series having the lower relative voting rights.
CERTAIN PROVISIONS RESPECTING CONVERTIBLE SECURITIES. Unless the provisions of any class or series of Pre-Distribution Convertible Securities or Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares provide specifically to the contrary, after any conversion date or redemption date on which all outstanding shares of Liberty Media Group Common Stock were converted or redeemed, any share of Liberty Media Group Common Stock that is issued on conversion, exercise or exchange of any Pre-Distribution Convertible Securities or any Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares will, immediately upon issuance pursuant to such conversion, exercise or exchange and without any notice or any other action on the part of TCI or the TCI Board of Directors or the holder of such share of Liberty Media Group Common Stock, be converted into or redeemed in exchange for, as applicable, the kind and amount of shares of capital stock, cash and/or other securities or property that a holder of such Pre-Distribution Convertible Securities or any Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares would have been entitled to receive pursuant to the terms of such securities had such terms provided that the conversion, exercise or exchange privilege in effect immediately prior to any such conversion or redemption of all outstanding shares of Liberty Media Group Common Stock would be adjusted so that the holder of any such Pre-Distribution Convertible Securities or any Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares thereafter surrendered for conversion, exercise or exchange would be entitled to receive the kind and amount of shares of capital stock, cash and/or other securities or property such holder would have received as a result of such action had such securities been converted, exercised or exchanged immediately prior thereto. With respect to any Convertible Securities which are created, established or otherwise first authorized for issuance subsequent to the record date for the Distribution (other than Pre-Distribution Convertible Securities and Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares), the terms and provisions of which do not provide for adjustments specifying the kind and amount of capital stock, cash and/or securities or other property that such holder would be entitled to receive upon the conversion, exercise or exchange of such Convertible Securities following any conversion date or redemption date on which all outstanding shares of Liberty Media Group Common Stock were converted or redeemed, then upon such conversion, exercise or exchange of such Convertible Securities, any share of Liberty Media Group Common Stock that is issued on conversion, exercise or exchange of any such Convertible Securities will, immediately upon issuance pursuant to such conversion, exercise or exchange and without any notice or any other action on the part of TCI or the TCI Board of Directors or the holder of such share of Liberty Media Group Common Stock, be redeemed in exchange for, to the extent assets of TCI are legally available therefor, the amount of $.01 per share in cash.
GENERAL CONVERSION AND REDEMPTION PROVISIONS. Not later than the 10th trading day following the consummation of a Disposition referred to above under "--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock," TCI will announce publicly by press release (i) the Net Proceeds of such Disposition, (ii) the number of outstanding shares of LMG Series A Common Stock and LMG Series B Common Stock, (iii) the number of shares of LMG Series A Common Stock and LMG Series B Common Stock into or for which Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Distribution Convertible Securities or Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares) and the number of Committed Acquisition Shares issuable, (iv) the Outstanding Interest Fraction as of a recent date preceding the date of such notice and (v) the Adjusted Outstanding Interest Fraction as of a recent date preceding the date of such notice. Not earlier than the 26th trading day and not later than the 30th trading day following the consummation of such Disposition, TCI will announce publicly by press release which of the actions described in clauses (i), (ii) or (iii) of the first paragraph under "--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock" it has irrevocably determined to take.
TCI also will cause to be given to each holder of outstanding shares of LMG Series A Common Stock and LMG Series B Common Stock and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities) a notice setting forth (i) if TCI has determined to pay a dividend described in clause (i) of the first paragraph under "--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock" (a "Dividend Election"), (x) the record date for determining holders entitled to receive such dividend, which will not be earlier than the 40th trading day, nor later than the 50th trading day, following the consummation of such Disposition and (y) the anticipated payment date of such dividend (which will not be more than 85 trading days following the consummation of such Disposition), (ii) if TCI has determined to redeem shares of Liberty Media Group Common Stock following a Disposition of all (and not merely substantially all) of the properties and assets of the Liberty Media Group as described in clause (ii)(a) of the first paragraph under "--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock" (a "Full Redemption Election"), (x) the redemption date (which will not be more than 85 trading days following the consummation of such Disposition) and (y) a statement that all shares of Liberty Media Group Common Stock outstanding on the redemption date will be redeemed, (iii) if TCI has determined to redeem shares of Liberty Media Group Common Stock following a Disposition of substantially all (but not all) of the properties and assets of the Liberty Media Group as described in clause (ii)(b) of the first paragraph under "--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock" (a "Partial Redemption Election"), (x) a date not earlier than the 40th trading day and not later than the 50th trading day following the consummation of such Disposition on which shares of Liberty Media Group Common Stock then outstanding will be selected for redemption and (y) the anticipated redemption date (which will not be more than 85 trading days following the consummation of such Disposition) and (iv) in the event of any conversion as described above under "--Conversion at the Option of TCI" or as described in clause (iii) of the first paragraph under "--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock" (a "Conversion Election"), (x) a statement that all outstanding shares of Liberty Media Group Common Stock will be converted and (y) the conversion date (which will not be more than 85 trading days following the consummation of the Disposition in the event of conversion pursuant to the provisions described under "--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common Stock" and which will not be more than 120 days after the Appraisal Date in the event of conversion pursuant to the provisions described under "-- Conversion at the Option of TCI"). Each notice of a Dividend Election, a Full Redemption Election or a Partial Redemption Election also will state, as applicable, (i) the kind of shares of capital stock, cash and/or other securities or property to be distributed in respect of shares of Liberty Media Group Common Stock (in the case of a Dividend Election) or paid as the redemption price with respect to shares of Liberty Media Group Common Stock outstanding on the redemption date (in the case of a Full Redemption Election) or selected for redemption (in the case of a Partial Redemption Election); (ii) the Net Proceeds of such Disposition; (iii) in the case of a Dividend Election and a Partial Redemption Election, the Outstanding Interest Fraction as of a recent date preceding the date of such notice, and in the case of a Full Redemption Election, the Adjusted Outstanding Interest Fraction as of a recent date preceding the date of such notice; (iv) the number of outstanding shares of LMG Series A Common Stock and LMG Series B Common Stock and the number of shares of LMG Series A Common Stock and LMG Series B Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange price thereof (and, in the case of a Full Redemption Election, stating which, if any, of such Convertible Securities constitute Pre-Distribution Convertible Securities or Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares and the number of Committed Acquisition Shares issuable); (v) in the case of a Full Redemption Election, the place or places where certificates for shares of Liberty Media Group Common Stock properly endorsed or assigned for transfer (unless TCI waives such requirement), are to be surrendered for delivery of certificates for shares of such capital stock, cash and/or other securities or property; (vi) in the case of notice to holders of Convertible Securities, a statement to the effect that holders of such Convertible Securities will be entitled to receive such dividend (in the case of a Dividend Election) or participate in such redemption (in the case of a Full Redemption Election) or in the selection of shares for redemption (in the case of a Partial Redemption Election) only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the record date for determining holders entitled to receive such dividend, the redemption date, or the date fixed for the selection of shares to be redeemed, respectively, and a statement as to what, if anything, such holder will be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, the provisions described under "--Certain Provisions Respecting Convertible Securities" if such holder converts, exercises or exchanges such Convertible Securities following such redemption date or date for selection of shares to be redeemed, as applicable, and (vii) in the case of a Partial Redemption Election, a statement that TCI will not be required to register a transfer of any shares of Liberty Media Group Common Stock for a period of 15 trading days next preceding the date fixed for selection of shares to be redeemed. In the case of a Partial Redemption Election, TCI also will cause to be given to each holder of shares of Liberty Media Group Common Stock selected for redemption, a notice setting forth (i) the number of shares of LMG Series A Common Stock and LMG Series B Common Stock held by such holder to be redeemed, (ii) a statement that such shares of LMG Series A Common Stock and LMG Series B Common Stock will be redeemed, (iii) the redemption date (which will not be more than 85 trading days following the consummation of such Disposition), (iv) the kind and per share amount of shares of capital stock, cash and/or other securities or property to be received by such holder with respect to each share of such Liberty Media Group Common Stock to be redeemed, including details as to the calculation thereof, and (v) the place or places where certificates for shares of such Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless TCI waives such requirement), are to be surrendered for delivery of certificates for shares of such capital stock, cash and/or other securities or property. The outstanding shares of Liberty Media Group Common Stock to be redeemed will be redeemed by TCI pro rata among the holders of Liberty Media Group Common Stock or by such other method as may be determined by the TCI Board of Directors to be equitable.
In the case of a Conversion Election, TCI's notice also will state (i) the per share number of shares of TCI Group Series A Common Stock or TCI Group Series B Common Stock, as applicable, to be received with respect to each share of LMG Series A Common Stock or LMG Series B Common Stock, including details as to the calculation thereof, (ii) the place or places where certificates for shares of Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless TCI waives such requirement), are to be surrendered, (iii) the number of outstanding shares of LMG Series A Common Stock and LMG Series B Common Stock, the number of Committed Acquisition Shares issuable and the number of shares of LMG Series A Common Stock and LMG Series B Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof and (iv) in the case of a notice to holders of Convertible Securities, a statement to the effect that holders of such Convertible Securities will be entitled to participate in such conversion only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the conversion date and a statement as to what, if anything, such holders will be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, the provision described under "--Certain Provisions Respecting Convertible Securities" if such holders convert, exercise or exchange such Convertible Securities following such conversion date.
Notice of a Dividend Election will be given not later than the 30th trading day following the consummation of the Disposition; notice of a Full Redemption Election will be given not less than 35 trading days nor more than 45 trading days prior to the redemption date; notice of a Partial Redemption Election will be given not later than the 30th trading day following the consummation of the Disposition and the notice to holders of shares selected for redemption will be given promptly following such selection, but not earlier than the 40th trading day and not later than the 50th trading day following the consummation of the Disposition; and notice of a Conversion Election will be given not less than 35 trading days nor more than 45 trading days prior to the conversion date. All such notices will be sent by first-class mail, postage prepaid, to a holder at such holder's address as the same appears on the transfer books of TCI.
If TCI determines to redeem shares of LMG Series A Common Stock and LMG Series B Common Stock as described above under "--Redemption in Exchange for Stock of Subsidiary," TCI will promptly cause to be given to each holder of LMG Series A Common Stock and LMG Series B Common Stock and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for such notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (i) a statement that all outstanding shares of Liberty Media Group Common Stock will be redeemed in exchange for shares of common stock of the Liberty Media Group Subsidiaries, (ii) the redemption date, (iii) the Adjusted Outstanding Interest Fraction as of a recent date preceding the date of such notice, (iv) the place or places where certificates for shares of Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless TCI waives such requirement), are to be surrendered for delivery of certificates for shares of common stock of the Liberty Media Group Subsidiaries, (v) the number of outstanding shares of LMG Series A Common Stock and LMG Series B Common Stock and the number of shares of LMG Series A Common Stock and LMG Series B Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Distribution Convertible Securities or Convertible Securities which are convertible into or exercisable or exchangeable for Committed Acquisition Shares) and the number of Committed Acquisition Shares issuable, and (vi) in the case of a notice to holders of Convertible Securities, a statement to the effect that holders of such Convertible Securities will be entitled to receive shares of common stock of the Liberty Media Group Subsidiaries upon redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the redemption date referred to in clause (ii) of this sentence and a statement as to what, if anything, such holders will be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, the provisions described under "--Certain Provisions Respecting Convertible Securities" if such holders convert, exercise or exchange such Convertible Securities following the redemption date. Such notice will be sent by first-class mail, postage prepaid, not less than 35 trading days nor more than 45 trading days prior to the redemption date, at such holder's address as the same appears on the transfer books of TCI.
Neither the failure to mail any notice to any particular holder of Liberty Media Group Common Stock or of Convertible Securities nor any defect therein will affect the sufficiency thereof with respect to any other holder of outstanding shares of Liberty Media Group Common Stock or of Convertible Securities, or the validity of any conversion or redemption.
TCI will not be required to issue or deliver fractional shares of any class of capital stock or any fractional securities to any holder of Liberty Media Group Common Stock upon any conversion, redemption, dividend or other distribution described above. In connection with the determination of the number of shares of any class of capital stock that is issuable or the amount of securities that is deliverable to any holder of record upon any such conversion, redemption, dividend or other distribution (including any fractions of shares or securities), TCI may aggregate the number of shares of Liberty Media Group Common Stock held at the relevant time by such holder of record. If the number of shares of any class of capital stock or the amount of securities remaining to be issued or delivered to any holder of Liberty Media Group Common Stock is a fraction, TCI will, if such fraction is not issued or delivered to such holder, pay a cash adjustment in respect of such fraction in an amount equal to the fair market value of such fraction on the fifth trading day prior to the date such payment is to be made (without interest). For purposes of the preceding sentence, "fair market value" of any fraction will be (i) in the case of any fraction of a share of capital stock of TCI, the product of such fraction and the Market Value of one share of such capital stock and (ii) in the case of any other fractional security, such value as is determined by the TCI Board of Directors.
No adjustments in respect of dividends will be made upon the conversion or redemption of any shares of Liberty Media Group Common Stock; provided, however, that if the conversion date or the redemption date with respect to the Liberty Media Group Common Stock is subsequent to the record date for the payment of a dividend or other distribution thereon or with respect thereto, the holders of shares of Liberty Media Group Common Stock at the close of business on such record date will be entitled to receive the dividend or other distribution payable on or with respect to such shares on the date set for payment of such dividend or other distribution, notwithstanding the conversion or redemption of such shares or TCI's default in payment of the dividend or distribution due on such date.
Before any holder of shares of Liberty Media Group Common Stock will be entitled to receive certificates representing shares of any kind of capital stock or cash and/or securities or other property to be received by such holder with respect to any conversion or redemption of shares of Liberty Media Group Common Stock, such holder is required to surrender at such place as TCI will specify certificates for such shares, properly endorsed or assigned for transfer (unless TCI waives such requirement). TCI will as soon as practicable after such surrender of certificates representing shares of Liberty Media Group Common Stock deliver to the person for whose account such shares were so surrendered, or to the nominee or nominees of such person, certificates representing the number of whole shares of the kind of capital stock or cash and/or securities or other property to which such person is entitled, together with any payment for fractional securities referred to above. If less than all of the shares of Liberty Media Group Common Stock represented by any one certificate are to be redeemed, TCI will issue and deliver a new certificate for the shares of Liberty Media Group Common Stock not redeemed. TCI will not be required to register a transfer of (i) any shares of Liberty Media Group Common Stock for a period of 15 trading days next preceding any selection of shares of Liberty Media Group Common Stock to be redeemed or (ii) any shares of Liberty Media Group Common Stock selected or called for redemption. Shares selected for redemption may not thereafter be converted pursuant to the provisions described under "--Conversion at the Option of the Holder."
From and after any applicable conversion date or redemption date, all rights of a holder of shares of Liberty Media Group Common Stock that were converted or redeemed will cease except for the right, upon surrender of the certificates representing shares of Liberty Media Group Common Stock, to receive certificates representing shares of the kind and amount of capital stock or cash and/or securities or other property for which such shares were converted or redeemed, together with any payment for fractional securities and such holder will have no other or further rights in respect of the shares of Liberty Media Group Common Stock so converted or redeemed, including, but not limited to, any rights with respect to any cash, securities or other property which are reserved or otherwise designated by TCI as being held for the satisfaction of TCI's obligations to pay or deliver any cash, securities or other property upon the conversion, exercise or exchange of any Convertible Securities outstanding as of the date of such conversion or redemption or any Committed Acquisition Shares which may then be issuable. No holder of a certificate that, immediately prior to the applicable conversion date or redemption date for the Liberty Media Group Common Stock, represented shares of Liberty Media Group Common Stock will be entitled to receive any dividend or other distribution with respect to shares of any kind of capital stock into or in exchange for which the Liberty Media Group Common Stock was converted or redeemed until surrender of such holder's certificate for a certificate or certificates representing shares of such kind of capital stock. Upon such surrender, there will be paid to the holder the amount of any dividends or other distributions (without interest) which theretofore became payable with respect to a record date after the conversion date or redemption date, as the case may be, but that were not paid by reason of the foregoing, with respect to the number of whole shares of the kind of capital stock represented by the certificate or certificates issued upon such surrender. From and after a conversion date or redemption date, as the case may be, for any shares of Liberty Media Group Common Stock, TCI will, however, be entitled to treat the certificates for shares of Liberty Media Group Common Stock that have not yet been surrendered for conversion or redemption as evidencing the ownership of the number of whole shares of the kind or kinds of capital stock for which the shares of Liberty Media Group Common Stock represented by such certificates have been converted or redeemed, notwithstanding the failure to surrender such certificates.
TCI will pay any and all documentary, stamp or similar issue or transfer taxes that may be payable in respect of the issue or delivery of any shares of capital stock and/or other securities on conversion or redemption of shares of Liberty Media Group Common Stock. TCI will not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of any shares of capital stock in a name other than that in which the shares of Liberty Media Group Common Stock so converted or redeemed were registered and no such issue or delivery will be made unless and until the person requesting such issue has paid to TCI the amount of any such tax, or has established to the satisfaction of TCI that such tax has been paid.
In the event of a liquidation, dissolution or winding up of TCI, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of TCI and subject to the prior payment in full of the preferential amounts to which any class or series of TCI's preferred stock is entitled, (i) the holders of the shares of TCI Group Common Stock will share equally, on a share for share basis, in a percentage of the funds of TCI remaining for distribution to its common stockholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of X/Z for the 20-trading day period ending on the trading day prior to the date of the public announcement of such liquidation, dissolution or winding up, and (ii) the holders of the shares of Liberty Media Group Common Stock will share equally, on a share for share basis, in a percentage of the funds of TCI remaining for distribution to its common stockholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for such 20-trading day period, where X is the aggregate Market Capitalization of the TCI Group Series A Common Stock and the TCI Group Series B Common Stock, Y is the aggregate Market Capitalization of the LMG Series A Common Stock and the LMG Series B Common Stock, and Z is the aggregate Market Capitalization of the TCI Group Series A Common Stock, the TCI Group Series B Common Stock, the LMG Series A Common Stock and the LMG Series B Common Stock. Neither a consolidation, merger nor sale of assets will be construed to be a "liquidation," "dissolution" or "winding up" of TCI. The "Market Capitalization" of any class or series of capital stock of TCI on any trading day means the product of (i) the Market Value of one share of such class or series on such trading day and (ii) the number of shares of such class or series outstanding on such trading day.
No holder of Liberty Media Group Common Stock will have any special right to receive specific assets of the Liberty Media Group in the case of any dissolution, liquidation or winding up of TCI.
DETERMINATIONS BY THE TCI BOARD OF DIRECTORS
The TCI Charter provides that any determinations made by the TCI Board of Directors under any provision described under "--TCI Group Common Stock and Liberty Media Group Common Stock" above will be final and binding on all stockholders of TCI, except as may otherwise be required by law. Such a determination would not be binding if it were established that the determination was made in breach of a fiduciary duty of the TCI Board of Directors. TCI will prepare a statement of any such determination by the TCI Board of Directors respecting the fair market value of any properties, assets or securities and will file such statement with the Secretary of TCI.
Holders of the TCI Group Common Stock and Liberty Media Group Common Stock do not have any preemptive rights to subscribe for any additional shares of capital stock or other obligations convertible into or exercisable for shares of capital stock that may hereafter be issued by TCI.
The DGCL, the TCI Charter and TCI's Bylaws contain provisions which may serve to discourage or make more difficult a change in control of TCI without the support of the TCI Board of Directors or without meeting various other conditions. The principal provisions of the DGCL and the aforementioned corporate governance documents are outlined below.
DGCL Section 203, in general, prohibits a "business combination" between a corporation and an "interested stockholder" within three years of the date such stockholder became an "interested stockholder," unless (i) prior to such date the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, exclusive of shares owned by directors who are also officers and by certain employee stock plans or (iii) on or after such date, the business combination is approved by the board of directors and authorized by the affirmative vote at a stockholders' meeting of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. The term "business combination" is defined to include, among other transactions between the interested stockholder and the corporation or any direct or indirect majority-owned subsidiary thereof, a merger or consolidation; a sale, pledge, transfer or other disposition (including as part of a dissolution) of assets having an aggregate market value equal to 10% or more of either the aggregate market value of all assets of the corporation on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation; certain transactions that would increase the interested stockholder's proportionate share ownership of the stock of any class or series of the corporation or such subsidiary; and any receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation or any such subsidiary. In general, and subject to certain exceptions, an "interested stockholder" is any person who is the owner of 15% or more of the outstanding voting stock (or, in the case of a corporation with classes of voting stock with disparate voting power, 15% or more of the voting power of the outstanding voting stock) of the corporation, and the affiliates and associates of such person. The term "owner" is broadly defined to include any person that individually or with or through his or its affiliates or associates, among other things, beneficially owns such stock, or has the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement or understanding or upon the exercise of warrants or options or otherwise or has the right to vote such stock pursuant to any agreement or understanding, or has an agreement or understanding with the beneficial owner of such stock for the purpose of acquiring, holding, voting or disposing of such stock. The restrictions of DGCL Section 203 do not apply to corporations that have elected, in the manner provided therein, not to be subject to such section or, with certain exceptions, which do not have a class of voting stock that is listed on a national securities exchange or authorized for quotation on an interdealer quotation system of a registered national securities association or held of record by more than 2,000 stockholders. The TCI Charter does not contain any provision "opting out" of the application of DGCL Section 203 and TCI has not taken any of the actions necessary for it to "opt out" of such provision. As a result, the provisions of Section 203 will remain applicable to transactions between TCI and any of its "interested stockholders."
The TCI Charter also contains certain provisions which could make a change in control of TCI more difficult. For example, the TCI Charter requires, subject to the rights, if any, of any class or series of TCI's preferred stock, the affirmative vote of 66 2/3% of the total voting power of the outstanding shares of Voting Securities, voting together as a single class, to approve (i) a merger or consolidation of TCI with, or into, another corporation, other than a merger or consolidation which does not require the consent of stockholders under the DGCL or a merger or consolidation which has been approved by 75% of the members of the TCI Board of Directors (in which case, in accordance with the DGCL, the affirmative vote of a majority of the total voting power of the outstanding Voting Securities would, with certain exceptions, be required for approval), (ii) the sale, lease or exchange of all or substantially all of the property and assets of TCI or (iii) the dissolution of TCI. "Voting Securities" is currently defined as the TCI Group Common Stock, the Liberty Media Group Common Stock and any class or series of TCI's preferred stock entitled to vote generally with the holders of TCI Common Stock on matters submitted to stockholders for a vote. The TCI Charter also provides for a TCI Board of Directors of not less than three members, divided into three classes of approximately equal size, with each class to be elected for a three-year term at each annual meeting of stockholders. The exact number of directors, currently nine, is fixed by the TCI Board of Directors. The holders of TCI Group Common Stock, Liberty Media Group Common Stock, TCI's Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, par value $.01 per share, and certain series of TCI's Series Preferred Stock, par value $.01 per share ("Series Preferred Stock"), voting together as a single class, vote in elections for directors. (TCI's Convertible Redeemable Participating Preferred Stock, Series F has voting rights, but outstanding shares are not entitled to vote because they are held by subsidiaries of TCI.) Stockholders of TCI do not have cumulative voting rights.
The TCI Charter authorizes the issuance of 50,000,000 shares of Series Preferred Stock of which 48,429,425 shares remain available for designation as of January 2, 1996. Under the TCI Charter, the TCI Board of Directors is authorized, without further action by the stockholders of TCI, to establish the preferences, limitations and relative rights of the Series Preferred Stock. In addition, 1,900,000,000 shares of the TCI Group Common Stock and 825,000,000 shares of Liberty Media Group Common Stock are currently authorized by the TCI Charter, of which 1,175,326,387 and 643,826,638, respectively, remain available for issuance as of November 1, 1995. The issue and sale of shares of TCI Group Common Stock, Liberty Media Group Common Stock and/or Series Preferred Stock could occur in connection with an attempt to acquire control of TCI, and the terms of such shares of Series Preferred Stock could be designed in part to impede the acquisition of such control.
The TCI Charter requires the affirmative vote of 66 2/3% of the total voting power of the outstanding shares of Voting Securities, voting together as a single class, to approve any amendment, alteration or repeal of any provision of the TCI Charter or the addition or insertion of other provisions therein.
The TCI Charter and TCI's Bylaws provide that a special meeting of stockholders will be held at any time, subject to the rights of the holders of any class or series of TCI's preferred stock, upon the call of the Secretary of TCI upon (i) the written request of the holders of not less than 66 2/3% of the total voting power of the outstanding shares of Voting Securities or (ii) at the request of not less than 75% of the members of the TCI Board of Directors. Subject to the rights of any class or series of TCI's preferred stock, TCI's Bylaws require that written notice of the intent to make a nomination at a meeting of stockholders must be received by the Secretary of TCI, at TCI's principal executive offices, not later than (a) with respect to an election of directors to be held at an annual meeting of stockholders, 90 days in advance of such meeting, and (b) with respect to an election of directors to be held at a special meeting of stockholders, the close of business on the seventh day following the day on which notice of such meeting is first given to stockholders. The notice must contain: (1) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (2) a representation that the stockholder is a holder of record of TCI's Voting Securities entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (3) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (4) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each proposed nominee been nominated, or intended to be nominated, by the TCI Board of Directors; and (5) the consent of each nominee to serve as a director of TCI if so elected. Any actions to remove directors is required to be for "cause" (as defined in the TCI Charter) and be approved by the holders of 66 2/3% of the total voting power of the outstanding shares entitled to vote in the election of directors.
Certain legal matters with respect to the Shares will be passed upon for the Company by Stephen M. Brett, Esq., Executive Vice President and General Counsel of the Company.
The consolidated balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, and all related schedules, which appear in Tele-Communications, Inc.'s Annual Report on Form 10- K for the year ended December 31, 1994, as amended, have been incorporated by reference herein in reliance upon the reports, dated March 27, 1995, of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The reports of KPMG Peat Marwick LLP covering the December 31, refer to the adoption of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994.
The consolidated balance sheets of TeleWest Communications plc and subsidiaries as of 31 December 1994 and 1993, and the related consolidated statements of operations and cash flows for each of the years in the three year period ended 31 December 1994, which appear in the 31 December 1994 Annual Report on Form 10-K of Tele-Communications, Inc., as amended, have been incorporated by reference herein in reliance upon the report of KPMG, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.
The combined balance sheets of Cablevision (a combination of certain cable television assets of Cablevision S.A., Televisora Belgrano S.A., Construred S.A. and Univent's S.A.) as of December 31, 1994 and 1993, and the related combined statements of operations and deficit and cash flows for each of the years in the three-year period ended December 31, 1994, which appear in the Current Report on Form 8-K of Tele-Communications, Inc., dated April 20, 1995, as amended, have been incorporated by reference herein in reliance upon the report of KPMG Finsterbusch Pickenhayn Sibille, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.
The consolidated balance sheets of QVC, Inc. and subsidiaries as of January 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended January 31, 1994, which appear in the Current Report on Form 8-K of Tele-Communications, Inc. dated February 3, 1995, as amended, have been incorporated by reference herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the January 31, 1994 consolidated financial statements refers to a change in the method of accounting for income taxes.
The financial statements of TeleCable Corporation as of December 31, 1993 and 1992 and for each of the two years in the period ended December 31, 1993, incorporated in this Prospectus by reference to the Company's Current Report on Form 8-K dated August 26, 1994, have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR OF ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
Common Stock ($1.00 par value) | 424B3 | 424B3 | 1996-01-12T00:00:00 | 1996-01-12T16:48:05 |
0000201533-96-000007 | 0000201533-96-000007_0000.txt | <DESCRIPTION>PRICING SUPPLEMENT NO 184 DATED JAN 11, 1996
PRICING SUPPLEMENT NO. 184 DATED Filed Pursuant to January 11, 1996 TO PROSPECTUS DATED Rule 424(b)(5) March 29, 1994 AS AMENDED BY PROSPECTUS File No. 33-51877
General Term Notes (servicemark of J.W. Korth & Company), Series A Due 9 Months to 25 Years from date of issue
Except as set forth herein, the General Term Notes (servicemark of J.W. Korth & Company) offered hereby (the "Notes") have such terms as are described in the accompanying Prospectus dated October 14, 1995.
Original Issue Date (Settlement Date) January 17, 1996 Stated Maturity Date: January 15, 2003 Issue Price to Public: 100.00% of Principal Amount Interest Rate: 7.500% Per Annum Interest Payment Dates: July 15 and January 15 and semi- Survivor's Option: [ X ] Yes [ ] No Optional Redemption: [ X ] Yes [ ] No Initial Redemption Date: January 15, 1998 Redemption Price: Initially 101.00% of Principal Amount and 100.00% after the first anniversary of the Initial Redemption Date.
Agent Principal Amount of Notes Prudential Securities Incorporated $ 722,000.00 EVEREN Securities, Inc. $ 0.00 First of Michigan Corporation $ 1,000.00 Roney & Co. $ 54,000.00 J.W. Korth & Company $2,891,000.00
Agent's Discount or Commission: $ 7.00 $ 25,676.00 Selling Concession: $ 19.00 $ 69,692.00 Proceeds to the Company: $ 974.00 $3,572,632.00 | 424B5 | 424B5 | 1996-01-12T00:00:00 | 1996-01-12T15:01:12 |
0000950134-96-000097 | 0000950134-96-000097_0000.txt | MONEY MARKET MUTUAL FUND -
AS SUPPLEMENTED ON AUGUST 1, 1995 AND JANUARY 2, 1996
MONEY MARKET MUTUAL FUND -- CLASS A SHARES
SUPPLEMENT DATED JANUARY 2, 1996 TO PROSPECTUS DATED MAY 1, 1995
THIS SUPPLEMENT APPLIES ONLY TO INVESTORS RESIDENT IN OHIO WHO PURCHASE SHARES OF THE MONEY MARKET MUTUAL FUND -- CLASS A SHARES:
The prospectus for the Fund does not comply with Ohio Administrative Code 1301:6-3-09(E)(12), which relates to the limitation on the Fund's investment in restricted securities, thereby distinguishing the Fund from an open-end investment company that meets all of the requirements of paragraphs (E) or (F)(3) of Section 1301:6-3-09 of the Ohio Administrative Code. In accord with Ohio Administrative Code Section 1301:6-3-09(G) and as long as the Fund's shares are registered for sale to investors resident in Ohio, the Fund will be permitted to invest more than fifteen percent (15%), but will not invest more than forty-five percent (45%), of its total assets in the "securities of issuers . . . which are restricted as to disposition" in so far as the Ohio Administrative Code requires this limitation.
SUPPLEMENT DATED AUGUST 1, 1995 TO PROSPECTUS DATED MAY 1, 1995 FOR MANAGED SWEEP ACCOUNT CUSTOMERS AND MONEY MARKET ACCESS ACCOUNT(TM) CUSTOMERS.
The following information is provided to potential investors seeking to invest in the Class A Shares of the Money Market Mutual Fund or the shares of the California Tax-Free Money Market Mutual Fund (collectively, the "Funds") through a Managed Sweep Account or a Money Market Access Account (each, an "Account") established with Wells Fargo Bank, N.A. ("Wells Fargo Bank") and supplements the Prospectus dated May 1, 1995 of the Funds.
INVESTMENTS THROUGH A MANAGED SWEEP ACCOUNT OR A MONEY MARKET ACCESS ACCOUNT
Customers of Wells Fargo Bank may invest in Class A Shares of the Money Market Mutual Fund or in shares of the California Tax-Free Money Market Mutual Fund through a Money Market Access Account established with the Bank. Customers of Wells Fargo Bank who currently hold shares of the California Tax-Free Money Market Mutual Fund through a Managed Sweep Account may also open additional Managed Sweep Accounts that sweep into the California Tax-Free Money Market Mutual Fund. Investments through an Account are governed by the terms and conditions of the Account, which are set forth in a separate Disclosure Statement provided by Wells Fargo Bank to each Account holder. In light of the automated sweep and custodial account structure of investments through an Account, certain of the features described in this Prospectus are not available to investors purchasing shares through an Account. Specifically, shares of a Fund purchased through an Account may be redeemed only through the Account, and the dividend and distribution options and exchange privileges described in this Prospectus are not available with respect to shares purchased through an Account. Potential Account holders should refer to the Disclosure Statement for more information regarding the Account, including information about fees and expenses.
MONEY MARKET MUTUAL FUND - CLASS A SHARES
CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND
Stagecoach Funds, Inc. (the "Company") is a professionally managed, open-end series investment company. This Prospectus contains information about two of the funds in the Stagecoach Family of Funds -- the MONEY MARKET MUTUAL FUND and the CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND (each a "Fund" and, collectively, the "Funds" or "Money Market Funds").
The MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. This Prospectus describes the Class A Shares of the Money Market Mutual Fund. Pursuant to the approval of the Company's Board of Directors, the previously existing single class of shares of the Fund has been redesignated the Class A Shares and a new class of shares, the Class S Shares, has been created. Currently, the Class S Shares are available only to qualified business investors who purchase Fund shares through certain non-interest bearing transaction accounts at Wells Fargo Bank.
The CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND seeks to obtain a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital and liquidity, by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A CONSTANT $1.00 NET ASSET VALUE PER SHARE.
The Funds are advised by Wells Fargo Bank, N.A. ("Wells Fargo Bank") which also serves as the Funds' transfer and dividend disbursing agent and custodian. In addition, Wells Fargo Bank is a Shareholder Servicing Agent (as defined below) and a Selling Agent (as defined below) under a Selling Agreement with the Funds' distributor. Stephens Inc. ("Stephens") is the Funds' sponsor and administrator and serves as the distributor of the Funds' shares.
This Prospectus sets forth concisely information about the Funds that a prospective investor should know before investing. It should be read and retained for future reference.
Statements of Additional Information ("SAIs"), dated May 1, 1995, for the Funds have been filed with the Securities and Exchange Commission ("SEC") and are incorporated by reference. The SAI for each Fund is available free of charge by writing to Stagecoach Funds, Inc., c/o Stagecoach Shareholder Services, Wells Fargo Bank, N.A., P.O. Box 7066, San Francisco, CA 94120-7066 or by calling the Company at 800-222-8222. Information concerning Class S Shares is also available by calling the Company at this number.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUNDS, FOR WHICH IT IS COMPENSATED. STEPHENS, WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY IS A CRIMINAL OFFENSE.
PROSPECTUS DATED MAY 1, 1995 AS SUPPLEMENTED ON AUGUST 1, 1995 AND JANUARY 2, 1996
The Funds provide you with a convenient way to invest in a portfolio of securities selected and supervised by professional management. The following provides you with summary information about each of the Funds. For more information, please refer specifically to the identified Prospectus sections and generally to the Prospectus and SAI.
Q. WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
A. The MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. In pursuing this objective, the Fund invests in securities with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"). These securities include obligations of the U.S. Government, its agencies and instrumentalities, high-quality debt obligations such as corporate debt, certain obligations of U.S. banks and certain repurchase agreements.
The CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND seeks to obtain a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital and liquidity, by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations. The Fund, in pursuing its objective, invests in securities with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the 1940 Act. Under normal market conditions, substantially all of the Fund's assets will be invested in California municipal obligations that are exempt from federal income taxes and California personal income taxes. Certain risks may arise from the Fund's concentration in investments in California municipal obligations.
Each Fund seeks to maintain a net asset value of $1.00 per share; however, there is no assurance that this will be achieved. See "How the Funds Work" and "Prospectus Appendix -- Additional Investment Policies."
Q. WHO MANAGES MY INVESTMENTS?
A. Wells Fargo Bank, as the Funds' investment adviser, manages your investments. Wells Fargo Bank also provides the Funds with transfer agency, dividend disbursing agency, and custodial services. In addition, Wells Fargo Bank is a Shareholder Servicing Agent (as defined below) and a Selling Agent (as defined below). See "The Funds and Management" and "Management and Servicing Fees."
Q. HOW DO I INVEST?
A. You may invest by purchasing shares of the Funds at their net asset value. You may open an account by investing at least $2,500, and you may add to your account by making additional investments of at least $100, although certain exceptions to these minimums may be available. Shares may be purchased on any day the Funds are open by wire, by mail, or by an automatic investment feature called the AutoSaver Plan. California Tax-Free Money Market Mutual Fund shares may not be suitable investments for tax-exempt institutions or tax-exempt retirement plans, since such investors would not benefit from the exempt status of such Funds' dividends. See "Investing in the Funds." In addition, California Tax-Free Money Market Mutual Fund shares are not available in all states. For more details, contact Stephens (the Funds' sponsor and
distributor), a Shareholder Servicing Agent (such as Wells Fargo Bank) or a Selling Agent.
Q. HOW WILL I RECEIVE DIVIDENDS AND ANY CAPITAL GAINS?
A. Dividends from net investment income are declared daily and automatically reinvested monthly in additional shares of the Funds at net asset value unless you elect to receive dividends in cash. Any capital gains will be distributed at least annually in the same manner. See "Dividends" and "Additional Shareholder Services."
Q. HOW MAY I REDEEM SHARES?
A. You may redeem your shares, without charge by either Fund, on any day the Funds are open by letter, by an automatic feature called the Systematic Withdrawal Plan, or by telephone (if you have so authorized). See "How To Redeem Shares." For more details, contact Stephens, a Shareholder Servicing Agent or a Selling Agent (such as Wells Fargo Bank).
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH THIS TYPE OF INVESTMENT?
A. An investment in either Fund is not insured against loss of principal. Although the Funds seek to maintain a stable net asset value of $1.00 per share, there is no assurance that they will be able to do so. Also, the Funds' shares are not insured or guaranteed. Since the California Tax-Free Money Market Mutual Fund will invest primarily in securities issued by California, its agencies and municipalities, events in California are more likely to affect this Fund's investments. Also, the California Tax-Free Money Market Mutual Fund is nondiversified, which means that its assets may be invested among fewer issuers and therefore the value of its assets may be subject to greater impact by events affecting one of its investments. You should be prepared to accept some risk with the money you invest in these Funds. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives.
This expense summary is a standard format required for all mutual funds to help you understand the various costs and expenses you will bear directly or indirectly as a shareholder of the Funds. As shown below, you are not charged sales charges, redemption fees, or exchange fees. You should consider this expense information together with the important information in this Prospectus, including the Funds' investment objectives and policies.
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
(1) After any waivers or reimbursements. * The Company reserves the right to impose a charge for wiring redemption proceeds. ** The Funds understand that a Shareholder Servicing Agent also may impose certain conditions on its customers, subject to the terms of this Prospectus, in addition to or different from those imposed by the Funds, such as requiring a minimum initial investment or payment of a separate fee for additional services.
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell Fund shares. There are no Shareholder Transaction Expenses for these Funds. However, the Company reserves the right to impose a charge for wiring redemption proceeds.
ANNUAL FUND OPERATING EXPENSES for the Funds are based on amounts incurred during the most recent fiscal year, restated to reflect voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees if certain Fund expenses exceed limits set by state securities laws or regulations. In addition, Wells Fargo Bank and Stephens at their sole discretion may waive or reimburse all or a portion of their respective fees charged to, or expenses paid by, a Fund. Any waivers or reimbursements would reduce a Fund's total expenses. There can be no assurance that waivers or reimbursements will continue. Absent waivers and reimbursements, the percentages shown above under "Rule 12b-1 Fees," "Total Other Expenses," and "Total Fund Operating Expenses" would be 0.05%, 0.44% and 0.89%, respectively, for the Class A Shares of the Money Market Mutual Fund; and 0.05%, 0.53% and 1.08%, respectively, for the California Tax-Free Money Market Mutual Fund. Long-term shareholders in the Funds could pay more in sales charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers ("NASD"). For more complete descriptions of the various costs and expenses you can expect to incur as an investor in each Fund, please see the Prospectus section captioned "Management and Servicing Fees."
EXAMPLE OF EXPENSES is a hypothetical example which illustrates the expenses associated with a $1,000 investment over the periods shown, based on the expenses in the table above and an assumed annual rate of return of 5%. This rate of return should not be considered an indication of actual or expected performance of a Fund. In addition, the example should not be considered a representation of past or future expenses and actual expenses may be greater or lesser than those shown.
The following information has been derived from the Financial Highlights in the Funds' 1994 annual financial statements. The financial statements are incorporated by reference into the SAI for each Fund and have been audited by KPMG Peat Marwick, LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Funds' 1994 annual financial statements and the notes thereto. The SAI for each Fund has been incorporated by reference into this Prospectus.
FOR A CLASS A SHARE OUTSTANDING
CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND
THE MONEY MARKET MUTUAL FUND
The Money Market Mutual Fund seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. The Fund invests its assets only in U.S. dollar-denominated, high-quality money market instruments, and may engage in certain other investment activities as described in this Prospectus. Permitted investments include U.S. Government short-term obligations, obligations of domestic and foreign banks, commercial paper, and repurchase agreements. In pursuing its objective, the Fund invests in instruments with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2A-7 under the 1940 Act. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. A more complete description of these investments and investment activities is contained in the "Prospectus Appendix -- Additional Investment Policies" and in the SAI.
THE CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND
The California Tax-Free Money Market Mutual Fund seeks to obtain a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital and liquidity, by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations. This investment objective is fundamental and cannot be changed without shareholder approval. There can be no assurance that the Fund, which is a nondiversified portfolio, will achieve its investment objective. Wells Fargo Bank, as investment adviser to the Fund, will pursue the Fund's objective by investing (under normal market conditions) substantially all of the Fund's assets in the following types of municipal obligations that pay interest which is exempt from both federal income tax and California personal income tax: bonds, notes, and commercial paper issued by or on behalf of the State of California, its cities, municipalities, political subdivisions and other public authorities with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2A-7 under the 1940 Act. These municipal obligations and the taxable investments described below may bear interest at rates that are not fixed ("floating-and variable-rate instruments").
The California Tax-Free Money Market Mutual Fund, which is nondiversified, may temporarily invest some of its assets in certain high-quality, taxable money market instruments or may engage in certain other investment activities as described in this Prospectus. The Fund may elect to invest temporarily up to 20% of its net assets in certain permitted taxable investments, which include cash reserves, U.S. Government obligations, obligations of domestic and foreign banks, foreign securities, rated commercial paper, taxable municipal obligations, repurchase agreements, and loans of portfolio securities. Such temporary investments would most likely be made when there is an unexpected or abnormal level of investor purchases or redemptions of Fund shares or because of unusual market conditions. The income from these temporary investments and investment activities may be subject to federal income taxes and California personal income taxes. However, as stated above, Wells Fargo Bank seeks to invest substantially all of the Fund's assets in securities exempt from such taxes. Additional description of tax-free municipal obligations, taxable money instruments, and other investment activities is contained in the "Prospectus Appendix -- Additional Investment Policies" and in the SAI.
As a matter of fundamental policy, at least 80% of the California Tax-Free Money Market Mutual Fund's net assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from federal income taxes and not subject to the federal alternative minimum tax (or in other open-end tax-free money market funds with a similar fundamental policy). At least 65% of the Fund's total assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from California personal income taxes. However, as a matter of general operating policy, the Fund seeks to have substantially all of its assets invested in such municipal obligations. The Fund's investment adviser may rely either on an opinion of counsel to the issuer of the municipal obligations or on Internal Revenue Service ("IRS") rulings regarding the tax treatment of these obligations. In addition, the Fund may invest 25% or more of its assets in California municipal obligations that are related in such a way that an economic, business or political development or change affecting one such obligation would also affect the other obligations; for example, the California Tax-Free Money Market Mutual Fund may own different municipal obligations which pay interest based on the revenues of similar types of projects.
The Funds, under the 1940 Act, must comply with certain investment criteria designed to provide liquidity, reduce risk, and allow the Funds to maintain a stable net asset value of $1.00 per share. Of course, the Funds cannot guarantee a $1.00 share price. The Funds' dollar-weighted average portfolio maturity must not exceed 90 days. Any security that the Funds purchase must have a remaining maturity of not more than thirteen months. In addition, any security that the Funds purchase must present minimal credit risks and be of high quality (i.e., be rated in the top two rating categories by the required number of nationally recognized statistical rating organizations or, if unrated, determined to be of comparable quality to such rated securities). These determinations are made by Wells Fargo Bank, as the Funds' Investment Adviser, under guidelines adopted by the Company's Board of Directors.
The Funds will seek to reduce risk by investing its assets in securities of various issuers. The Money Market Mutual Fund, but not the California Tax-Free Money Market Mutual Fund, will be considered to be diversified for purposes of the 1940 Act. In addition, the Funds, since their inception, have emphasized safety of principal and high credit quality. In particular, the internal investment policies of the Funds' investment adviser, Wells Fargo Bank, have always prohibited the purchase for the Funds of many types of floating rate derivative securities that are considered potentially volatile. The following types of derivative securities are not permitted investments for the Funds:
- capped floaters (on which interest is not paid when market rates move
- leveraged floaters (whose interest rate reset provisions are based on a formula that magnifies changes in interest rates);
- range floaters (which do not pay any interest if market interest rates move outside of a specified range);
- dual index floaters (whose interest rate reset provisions are tied to more than one index so that a change in the relationship between these indices may result in the value of the instrument falling below face
- inverse floaters (which reset in the opposite direction of their index).
Additionally, the Funds may not invest in securities whose interest rate reset provisions are tied to an index that materially lags short-term interest rates, such as "COFI floaters." The Funds may only invest in floating rate securities that bear interest at a rate that resets quarterly or more frequently, and which resets based on changes in standard money market rate indices such as U.S. Treasury bills, London Interbank Offered Rate, the prime rate, published commercial paper rates or federal funds rates.
Since the California Tax-Free Money Market Mutual Fund will invest primarily in securities issued by California and its agencies and municipalities, events in California will be more likely to affect the Fund's investments. While the California Tax-Free Money Market Mutual Fund will seek to reduce risk by investing its assets in securities of various issuers, the Fund will be considered to be nondiversified for purposes of the 1940 Act. However, the California Tax-Free Money Market Mutual Fund will comply with Internal Revenue Code of 1986 ("Code") diversification requirements, as described in the "Prospectus Appendix -- Additional Investment Policies" section below.
California is experiencing recurring budget deficits caused by lower than anticipated tax-revenues and increased expenditures for certain programs. These budget deficits have depleted the state's available cash resources, and the state has recently had to use a series of external borrowings to meet its cash needs. In addition, since 1992 some of the credit rating agencies have assigned their third highest rating to certain of the state's debt obligations. On July 15, 1994, three of the ratings agencies rating California's long-term debt lowered their ratings of the state's general obligation bonds. Moody's Investors Service lowered its rating from "Aa" to "A1," Standard & Poor's Ratings Group lowered its rating from "A+" to "A" and termed its outlook as "stable," and Fitch Investors Service lowered its rating from "AA" to "A." Since the California Tax-Free Money Market Mutual Fund may invest only in securities rated in the top two rating categories, any further rating downgrade of the state's debt obligations may impact the availability of securities that meet the Fund's investment policies and restrictions. The Fund's investment adviser continues to monitor and evaluate the Fund's investments in light of the events in California and the California Tax-Free Money Market Mutual Fund's investment objective and investment policies. The rating agencies also continue to monitor events in the state and the state and local governments' responses to budget shortfalls. See "Special Considerations Affecting California Municipal Obligations" in the SAI for the California Tax-Free Money Market Mutual Fund.
The performance of the California Tax-Free Money Market Mutual Fund and Class A Shares of the Money Market Mutual Fund may be advertised in terms of current yield or effective yield. In addition, the California Tax-Free Money Market Mutual Fund's performance may be advertised in terms of tax-equivalent yield or effective tax-equivalent yield. These performance figures are based on historical results and are not intended to indicate future performance.
Yield refers to the income generated by an investment in a Fund over a seven-day period, expressed as an annual percentage rate. Effective yields are calculated similarly, but assume that the income earned from a Fund is reinvested in the Fund. Because of the effects of compounding, effective yields are slightly higher than yields. The tax-equivalent yield and the effective yield of the California Tax-Free Money Market Mutual Fund assume that a stated income tax rate has been applied to determine the tax-equivalent figures. The application of the stated income tax rate results in a higher yield figure.
Additional information about the performance of each Fund is contained in the Annual Report for each Fund. The Annual Reports may be obtained free of charge by calling the Company at 800-222-8222.
The Funds are two of the funds in the Stagecoach Family of Funds. The Company was organized as a Maryland corporation on September 9, 1991, and currently offers shares of ten other series: the Asset Allocation Fund, California Tax-Free Bond Fund, California Tax-Free Income Fund, Corporate Stock Fund, Diversified Income Fund, Ginnie Mae Fund, Growth and Income Fund, Short-Intermediate U.S. Government Income Fund, U.S. Government Allocation Fund and the Variable Rate Government Fund. The Money Market Mutual Fund also offers a second class of shares -- Class S Shares. Class S Shares are subject to different levels of fees and expenses than Class A Shares and the performance of such shares may vary accordingly. Class S Shares are currently available only to qualified investors who invest through certain non-interest bearing transaction accounts with Wells Fargo Bank. Please contact Wells Fargo Bank at 800-222-8222 if you desire additional information about Class S Shares.
The Board of Directors of the Company supervises the Funds' activities and monitors their contractual arrangements with various service providers. Although the Company is not required to hold annual shareholder meetings, special meetings may be required for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing the Funds' investment objectives or fundamental investment policies. All shares of the Company have equal voting rights and will be voted in the aggregate, rather than by series or Class, unless otherwise required by law (such as when the voting matter affects only one series or Class). As a shareholder of the Funds, you are entitled to one vote for each share you own and fractional votes for fractional shares owned. A more detailed description of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the Funds' SAI.
Wells Fargo Bank is the Funds' investment adviser, transfer and dividend disbursing agent and custodian. In addition, Wells Fargo Bank is a Shareholder Servicing Agent of the Funds, and a Selling Agent under a Selling Agreement with the Funds' distributor. Wells Fargo Bank, one of the largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets under management. Wells Fargo Bank also serves as the investment adviser to the other separately managed series of the Company, and serves as investment adviser or sub-adviser to six other registered, open-end, management investment companies which consist of several separately managed investment portfolios. Wells Fargo Bank, a wholly owned subsidiary of Wells Fargo & Company, is located at 420 Montgomery Street, San Francisco, California 94163.
Stephens is the Funds' sponsor and administrator, and distributes the Funds' shares. Stephens is a full service broker/dealer and investment advisory firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit-sharing plans, individual investors, foundations, insurance companies and university endowments.
You can buy shares in either Fund in one of the several ways described below. You will find an Account Application accompanying this Prospectus, which you must complete and sign to open an account. Additional documentation may be required from corporations, associations, and certain fiduciaries. Do not mail cash. If you have any questions or need extra forms, you may call 1-800-222-8222.
After an application has been processed and an account has been established, subsequent purchases of different funds of the Company under the same umbrella account do not require the completion of additional applications. A separate application must be processed for each different umbrella account number (even if the registration is the same). Call the number on your confirmation statement to obtain information about what is required to change registration.
The price of a share of each Fund is its "net asset value," or NAV. The NAV of each share of the California Tax-Free Money Market Mutual Fund is computed by adding the value of the Fund's portfolio investments plus cash and other assets, deducting liabilities and then dividing the result by the number of shares outstanding. The NAV of a share of each Class of the Money Market Mutual Fund is the value of total net assets attributable to each Class divided by the number of outstanding shares of that Class. The value of the net assets per Class is determined daily by adjusting the net assets per Class at the beginning of the day by the value of each Class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each Class by attributing to each Class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each Class as appropriate. As noted above, the Funds seek to maintain a constant $1.00 NAV share price, although there is no assurance that they will be able to do so.
Shares of the Funds may be purchased on any day the Funds are open (a "Business Day"). The Funds are open on any day that either the New York Stock Exchange or Wells Fargo Bank is open. Currently the holidays observed by both the New York Stock Exchange and Wells Fargo Bank are New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday").
Wells Fargo Bank calculates each Fund's NAV as of both 9:00 a.m. (Pacific time) and 1:00 p.m. (Pacific time) each Business Day. The only transaction orders that are processed at 1:00 p.m. are those that are received at that time through Shareholder Servicing Agents in connection with automated investment programs. All transaction orders are processed at the NAV next determined after the order is received.
The Funds' portfolio investments are valued on the basis of amortized cost. This valuation method is based on the receipt of a steady rate of payment from the date of purchase until maturity rather than actual changes in market value. The Company's Board of Directors believes that this valuation method accurately reflects fair value.
You may buy shares of the Funds on any Business Day by any of the methods described below. After a properly completed Account Application is received and your wire order or check is received, or an account with a bank, which is designated in the Account Application and which is approved by the Transfer Agent (an "Approved Account") is debited, your purchase order will be made effective and full and fractional shares will be purchased at the next determined NAV, which is expected to remain a constant $1.00 per share. If shares are purchased by a check which does not clear, the Company reserves the right to cancel the purchase and hold the investor responsible for any losses or fees incurred. In addition, the Funds may hold payment on any redemption until reasonably satisfied that your investments made by check have been collected (which may take up to 15 days). The Company reserves the right to reject any purchase order or suspend sales at any time.
Generally, the minimum initial investment amount is $2,500. However, the minimum initial investment amount is $100 for investments made through the AutoSaver Plan purchase method (described below) and $250 for investments in Class A Shares of the Money Market Mutual Fund made through any tax-sheltered retirement account for which Wells Fargo Bank serves as custodian or trustee under a prototype trust approved by the IRS (a "Plan Account"). Where shares of the California Tax-Free Money Market Mutual Fund or Class A Shares of the Money Market Mutual Fund are purchased in exchange for shares of another fund in the Stagecoach Family of Funds, the minimum initial investment amount applicable to the shares being exchanged carries over. This means, for example, that you can invest $1,000 in either the California Tax-Free Money Market Mutual Fund or Class A Shares of the Money Market Mutual Fund even though each such Fund ordinarily requires a $2,500 minimum balance, in an exchange from a fund that has a $1,000 minimum balance. In addition, the minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. In addition, the minimum initial purchase amount does not apply to investors who purchase shares of the Funds as customers of a financial institution which has established a cash sweep arrangement with respect to one of the Funds. All subsequent investments must be at least $100. If you have questions regarding purchases of shares, please contact the Company at 800-222-8222 or contact a Shareholder Servicing Agent or Selling Agent (defined below).
California Tax-Free Money Market Mutual Fund shares may not be suitable investments for tax-exempt institutions or tax-sheltered retirement plans, since such investors would not benefit from the exempt status of the Fund's dividends. See "Federal Income Taxes - Special Tax Considerations" in the SAI. In addition, California Tax-Free Money Market Mutual Fund shares are not available in all states.
1. Complete an Account Application.
2. Instruct the wiring bank to transmit the specified amount in federal funds ($2,500 or more) to:
Wire Purchase Account Number: 4068-000587 Attention: Stagecoach Funds (Name of Fund) (designate Class A, if Account Name(s): Name(s) in which to be registered Account Number: (if investing into an existing account)
3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened:
4. Share purchases are effected at the NAV next determined after the Account Application is received and accepted.
1. Complete an Account Application. Indicate the services to be used.
2. Mail the Account Application and a check for $2,500 or more, payable to "Stagecoach Funds (Name of Fund) (designate Class A, if applicable)," to the address set forth in "Initial Purchases by Wire."
3. Share purchases will be effected at the NAV next determined after the Account Application is received and accepted.
The Company's AutoSaver Plan provides you with a convenient way to establish and automatically add to a Fund account on a monthly basis. To participate in the AutoSaver Plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from a designated Approved Bank account. Wells Fargo Bank is an Approved Bank. The Transfer Agent withdraws and uses this amount to purchase shares of the specified Fund on your behalf on or about the fifth Business Day of each month. There are no separate fees charged to you by the Funds for participating in the AutoSaver Plan.
You may change your investment amount, suspend purchases or terminate your election at any time by notifying the Transfer Agent at least five Business Days prior to any scheduled transaction.
You may be entitled to invest in the Money Market Mutual Fund through a Plan Account or other tax-deferred retirement plan. Contact a Shareholder Servicing Agent (such as Wells Fargo Bank) or a Selling Agent for materials describing Plan Accounts available through it, and the benefits, provisions, and fees of such Plan Accounts. The minimum initial investment amount for Class A Shares of the Money Market Mutual Fund acquired through a Plan Account is $250.
Pursuant to the Code, individuals who are not active participants (and who do not have a spouse who is an active participant) in certain types of retirement plans ("qualified retirement plans") may deduct contributions to an Individual Retirement Account ("IRA"), up to specified limits. Investment earnings in the IRA will be tax-deferred until withdrawn, at which time the individual may be in a lower tax bracket.
The maximum annual deductible contribution to an IRA for individuals under age 70 1/2 is 100% of includible compensation up to a maximum of (i) $2,000 for single individuals; (ii) $4,000 for a married couple when both spouses earn income; and (iii) $2,250 when one spouse earns, or elects for IRA purposes to be treated as earning, no income (together the "IRA contribution limits").
The IRA deduction is also available for single individual taxpayers and married couples who are active participants in qualified retirement plans but who have adjusted gross incomes which do not exceed certain specified limits. If their adjusted gross income exceeds these limits, the amount of the deductible contribution may be phased down and eventually eliminated.
Any individual who works may make nondeductible contributions to an IRA in addition to any deductible contributions. Total aggregate deductible and nondeductible contributions are limited to the IRA contribution limits discussed above. Nondeductible contributions in excess of the applicable IRA contribution limit are "nondeductible excess contributions." In addition, contributions made to an IRA for the year in which an individual attains the age of 70 1/2, or any year thereafter, are also nondeductible excess contributions. Nondeductible excess contributions are subject to a 6% excise tax penalty which is charged each year that the nondeductible excess contribution remains in the IRA.
An employer also may contribute to an individual's IRA by establishing a Simplified Employee Pension Plan through a Shareholder Servicing Agent or a Selling Agent, known as a SEP-IRA. Participating employers may make an annual contribution in an amount up to the lesser of 15% of earned income or $30,000, subject to certain provisions of the Code. Investment earnings will be tax-deferred until withdrawn.
The foregoing discussion regarding IRAs is based on the Code and regulations in effect as of the date of this Prospectus and summarizes only some of the important federal tax considerations generally affecting IRA contributions made by individuals or their employers. It is not intended as a substitute for careful tax planning. Investors should consult their tax advisors with respect to their specific tax situations as well as with respect to state and local taxes. Further federal tax information is contained under the heading "Taxes" in this Prospectus and in the SAI.
A Shareholder Servicing Agent or Selling Agent also may offer other types of tax-deferred or tax-advantaged plans, including a Keogh retirement plan for self-employed professional persons, sole proprietors and partnerships.
Application materials for opening a tax-deferred retirement plan can be obtained from a Shareholder Servicing Agent or a Selling Agent. Return your completed tax-deferred retirement plan application to your Shareholder Servicing Agent or a Selling Agent for approval and processing. If your tax-deferred retirement plan application is incomplete or improperly filled out, there may be a delay before a Fund account is opened. You should ask your Shareholder Servicing Agent or Selling Agent about the investment options available to your tax-deferred retirement plan, since some of the funds in the Stagecoach Family of Funds may be unavailable as options. Moreover, certain features described herein, such as the AutoSaver Plan and the Systematic Withdrawal Plan, may not be available to individuals or entities who invest through a tax-deferred retirement plan.
You may make additional purchases of $100 or more by instructing the Funds' Transfer Agent to debit a designated Approved Bank account, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Stagecoach Funds (name of Fund) (designate Class A, if applicable)" to the address set forth in "Initial Purchases by Wire". Write your Fund account number on the check and include the detachable stub from your Statement of Account or a letter providing your Fund account number.
You may place a purchase order for shares of the Funds through a broker/dealer or financial institution which has entered into a Selling Agreement with Stephens, as the Funds' Distributor ("Selling Agent"), by 9:00 a.m. (Pacific time) on any Business Day, including placing an order for which payment is to be made from your free cash credit balance in a securities account maintained with a Selling Agent. These purchase orders generally will be executed on the same day the order is placed if notice is provided to the Transfer Agent by 9:00 a.m. and federal funds are received by the Transfer Agent before the close of business. If your purchase order is received by a Selling Agent after 9:00 a.m. on any Business Day or federal funds are not received by the Transfer Agent before the close of business, then your purchase order generally will be executed on the next Business Day following the day your order is placed. The Selling Agent is responsible for the prompt transmission of your purchase order to the Funds. A Selling Agent which is a financial institution may be required to register as a dealer pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein.
PURCHASES THROUGH SHAREHOLDER SERVICING AGENTS
Purchase orders for shares of the Funds may be transmitted to the Transfer Agent through any entity that has entered into a Shareholder Servicing Agreement with the Funds ("Shareholder Servicing Agent"), such as Wells Fargo Bank. See "Management and Servicing Fees -- Shareholder Servicing Agent."
The Shareholder Servicing Agent may transmit a purchase order to the Transfer Agent, on your behalf, including a purchase order for which payment is to be transferred from an account with an Approved Bank or wired from a financial institution. If your order is transmitted by the Shareholder Servicing Agent to the Transfer Agent before 9:00 a.m. (Pacific time) and federal funds are received by the Transfer Agent before the close of business, the purchase order generally will be executed on the same day. If your Shareholder
Servicing Agent transmits your purchase order to the Transfer Agent after 9:00 a.m. or federal funds are not received by the Transfer Agent before the close of business, then your order will be executed on the next Business Day, except that automated investment program purchase orders transmitted through Shareholder Servicing Agents are executed at 1:00 p.m. on each Business Day. The Shareholder Servicing Agent is responsible for the prompt transmission of your purchase order to the Transfer Agent.
The Funds, or a Shareholder Servicing Agent on their behalf, will typically send you a monthly statement of your account after every month in which there has been a transaction that affects your share balance or your Fund account registration. The Funds do not issue share certificates. A statement with tax information will be mailed to you by January 31 of each year, and also will be filed with the IRS. At least twice a year, you will receive financial statements.
The Funds intend to declare dividends on a daily basis payable to shareholders of record as of 9:00 a.m. (Pacific time). If your purchase order is received before 9:00 a.m. on any Business Day, you will begin earning dividends on the day your purchase order is effective and continue to earn dividends through the day prior to the date you redeem such shares. If your purchase order for shares is processed at 1:00 p.m. on any Business Day, you will begin earning dividends on the following Business Day and continue to earn dividends through the day on which you redeem your shares. Dividends for a Saturday, Sunday or Holiday are credited on the preceding Business Day. If you redeem shares before a dividend payment date, any dividends credited to you will be paid on the following dividend payment date unless you have redeemed all of the shares in your account, in which case you will receive your accrued dividends together with your redemption proceeds. The Funds will distribute any capital gains at least annually.
Dividends declared in a month will be paid early in the following month. You have three options for receiving dividends and any capital gain distributions. They are discussed under "Additional Shareholder Services -- Dividend and Distribution Options."
You may redeem all or a portion of your shares in a Fund on any Business Day without any charge by the Funds. Your shares will be redeemed at the next NAV calculated after the Funds have received your redemption request in proper form. Redemption proceeds may be more or less than the amount invested and, therefore, a redemption of shares in either Fund may result in a gain or loss for federal and state income tax purposes. The Funds ordinarily will remit your redemption proceeds within seven days after your redemption order is received in proper form, unless the SEC permits a longer period under extraordinary circumstances. Such extraordinary circumstances could include a period during which an emergency exists as a result of which (a) disposal by the Funds of securities owned by them is not reasonably practicable or (b) it is not reasonably practicable for the Funds fairly to determine the value of their net assets, or a period during which the SEC by order permits deferral of redemptions for the protection of security holders of the Funds. In addition, the Funds may hold payment on your redemption until reasonably satisfied that ments made by check have been collected (which can take up to 15 days from the purchase date). To ensure acceptance of your redemption request, please follow the procedures described below. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions.
Due to the high cost of maintaining Fund accounts with small balances, the Funds reserve the right to close your account and send you the proceeds if the balance falls below the applicable minimum balance because of a redemption (including a redemption of shares of a Fund after an investor has made only the applicable minimum initial investment). You will be given 30 days' notice to make an additional investment to increase your account balance to an amount equal to or greater than the applicable minimum balance. For a discussion of applicable minimum balance requirements, see "Investing in the Funds -- How to Buy Shares."
Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you specifically decline the privileges. Telephone redemption privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Company and the Transfer Agent may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine.
1. Write a letter of instruction. Indicate the dollar amount or number of Fund shares you want to redeem. Refer to your Fund account number and give your social security or taxpayer identification number (where applicable).
2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign.
3. Signature guarantees are not required for redemption requests unless redemption proceeds of $5,000 or more are to be paid to someone other than you at your address of record or your designated Approved Bank account, or other unusual circumstances exist which cause the Transfer Agent to determine that a signature guarantee is necessary or prudent to protect against unauthorized redemption requests. If required, a signature must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is an FDIC member, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation may be requested from corporations, administrators, executors, personal representatives, trustees or custodians.
4. Mail your letter to the Transfer Agent at the mailing address set forth under "Investing in the Funds -- Initial Purchases by Wire."
Unless other instructions are given in proper form, a check for your redemption proceeds will be sent to your address of record. The Transfer Agent may benefit from the use of your redemption proceeds until the check it issues to you for such redemption proceeds has cleared.
EXPEDITED REDEMPTIONS BY MAIL OR TELEPHONE
You may request an expedited redemption of shares of a Fund by letter, in which case your receipt of redemption proceeds, but not the Fund's receipt of your redemption request, would be expedited. You also may request an expedited redemption of shares of a Fund by telephone on any Business Day, in which case both your receipt of redemption proceeds and the Fund's receipt of your redemption request would be expedited. You may request expedited redemption by telephone only if the total value of the shares redeemed is equal to $100 or more.
You may request expedited redemption by telephone by calling the Transfer Agent at the telephone number listed on your transaction confirmation or by calling 800-222-8222.
You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Investing in the Funds -- Initial Purchases by Wire."
Upon request, proceeds of expedited redemptions of $5,000 or more will be wired or credited to an Approved Bank account designated in your Account Application or wired to the Selling Agent designated in your Account Application. The Company reserves the right to impose a charge for wiring redemption proceeds. When proceeds of your expedited redemption are to be paid to someone else, to an address other than that of record, or to an account with an Approved Bank or Selling Agent that you have not predesignated in your Account Application, your expedited redemption request must be made by letter and the signature(s) on the letter may be required to be guaranteed, regardless of the amount of the redemption. If your expedited redemption request is received by the Transfer Agent by 9:00 a.m. (Pacific time) on a Business Day, your redemption proceeds will be transmitted to your designated account with an Approved Bank or Selling Agent on the next Business Day (assuming your investment check has cleared as described above), absent extraordinary circumstances. Such extraordinary circumstances could include those described above as potentially delaying redemptions, and also could include situations involving an unusually heavy volume of wire transfer orders on a national or regional basis or communication or transmittal delays that could cause a brief delay in the wiring or crediting of funds. A check for proceeds of less than $5,000 will be mailed to your address of record, or, at your election, credited to an Approved Bank account designated in your Account Application.
During periods of drastic economic or market activity or changes, you may experience problems implementing an expedited redemption by telephone. In the event you are unable to reach the Transfer Agent by telephone, you should consider using overnight mail to implement an expedited redemption. The Funds reserve the right to modify or terminate the expedited telephone redemption privilege at any time.
The Company's Systematic Withdrawal Plan provides you with a convenient way to have shares of a Fund redeemed from your account and the proceeds distributed to you on a monthly basis. You may participate in this plan only if you have a
$10,000 or more as of the date of your election to participate, your dividend and capital gain distributions are being reinvested automatically and you are not a participant in the AutoSaver Plan at any time while participating in the Systematic Withdrawal Plan. You specify an amount ($100 or more) to be distributed by check to your address of record or deposited in your Approved Bank account designated in the Account Application. The Transfer Agent redeems sufficient shares and mails or deposits your redemption proceeds as instructed on or about the fifth Business Day prior to the end of each month. There are no separate fees charged to you by the Funds for participating in the Systematic Withdrawal Plan.
You may change your withdrawal amount, suspend withdrawals or terminate your election at any time by notifying the Transfer Agent at least ten Business Days prior to any scheduled transaction. Your participation in the Systematic Withdrawal Plan will be terminated automatically if your Fund account is closed or, in some cases, if your Approved Bank account is closed.
You may request a redemption of shares of a Fund through your Selling Agent. Redemption orders transmitted by a Selling Agent to the Transfer Agent before 9:00 a.m. (Pacific time) on any Business Day will be executed on that day. Redemption orders transmitted by a Selling Agent to the Transfer Agent after 9:00 a.m. on any Business Day will be executed on the next Business Day. The Selling Agent is responsible for the prompt transmission of your redemption order to the Funds.
Unless you have made other arrangements with a Selling Agent, and the Transfer Agent has been informed of such arrangements, proceeds of a redemption order made by you through a Selling Agent will be credited to an account with an Approved Bank that you have designated in the Account Application. If no such account is designated, a check for the proceeds will be mailed to your address of record or, if such address is no longer valid, the proceeds will be credited to your account with the Selling Agent. You may request a check from the Selling Agent or may elect to retain the redemption proceeds in such account. The Selling Agent may charge you a service fee. In addition, it may benefit from the use of your redemption proceeds until the check it issues to you has cleared or until such proceeds have been disbursed or reinvested on your behalf.
REDEMPTIONS THROUGH SHAREHOLDER SERVICING AGENTS
You may request a redemption of shares of a Fund through your Shareholder Servicing Agent. Any redemption request made by telephone through your Shareholder Servicing Agent must redeem shares with a total value equal to $100 or more. Redemption orders transmitted by a Shareholder Servicing Agent to the Transfer Agent before 9:00 a.m. (Pacific time) will be executed on that day. Redemption orders transmitted by a Shareholder Servicing Agent to the Transfer Agent after 9:00 a.m. will be executed on the next Business Day, except that automated investment program redemption orders transmitted through Shareholder Servicing Agents are executed at 1:00 p.m. on each Business Day. The Shareholder Servicing Agent is responsible for the prompt transmission of your redemption order to the Funds.
Unless you have made other arrangements with your Shareholder Servicing Agent, and the Transfer Agent has been informed of such arrangements, proceeds made by you through your Shareholder Servicing Agent will be credited to an account with the Approved Bank that you have designated in the Account Application. If no such account is designated, a check for the proceeds will be mailed to your address of record or, if such address is no longer valid, the proceeds will be credited to your account with your Shareholder Servicing Agent or to another account designated in your agreement with your Shareholder Servicing Agent.
The Company offers you a number of optional services. As noted above, you can take advantage of the AutoSaver Plan, the Systematic Withdrawal Plan, and Expedited Redemptions by Letter and Telephone. In addition, the Funds offer you three dividend and distribution payment options and an exchange privilege, which are described below.
When you fill out your Account Application, you can choose from three dividend and distribution options:
A. The Automatic Reinvestment Option provides for the reinvestment of your dividends and capital gain distributions in additional shares of the same Class of the Fund which paid such dividends or capital gain distributions. Dividends and distributions declared in a month will be reinvested at NAV early in the following month. You are assigned this option automatically if you make no choice on your Account Application.
B. The Automatic Clearing House Option permits you to have dividends and capital gain distributions deposited in your Approved Bank account designated in the Account Application. In the event your Approved Bank account is closed, your distribution will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf.
C. The Check Payment Option lets you receive a check for all dividends and capital gain distributions, which will be mailed either to your designated address or a designated Approved Bank early in the month following declaration. If the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, your distributions will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf.
The Company forwards moneys to the dividend disbursing agent so that it may issue you dividend checks under the Check Payment Option. The dividend disbursing agent may benefit from the temporary use of such moneys until these checks clear.
Wells Fargo Bank advises a variety of other funds, each with its own investment objective and policies. The exchange privilege is a convenient way for you to buy shares in the other funds of the Stagecoach Family of Funds that are registered in your state of residence in order to respond to changes in your investment and savings goals or in market conditions. Before you make an exchange from a Fund into another fund of the Stagecoach Family of Funds, please observe the following:
- You may exchange shares of the California Tax-Free Money Market Mutual Fund and Class A Shares of the Money Market Mutual Fund for shares of one of the Company's single-class funds, for Class A or Class B Shares of one of the Company's multi-class funds or for Retail Shares of another fund. You may also exchange shares of the California Tax-Free Money Market Mutual Fund for Class A Shares of the Money Market Mutual Fund and vice versa.
- Obtain and carefully read the prospectus of the fund into which you want to exchange.
- If you exchange into another fund with a sales charge, you must pay the difference between that fund's sales charge and any sales charge you already have paid in connection with the shares you are exchanging.
- Each exchange, in effect, represents the redemption of shares of one fund and the purchase of shares of another, which may produce a gain or loss for tax purposes. A confirmation of each exchange transaction will be sent to you.
- The dollar amount of shares you exchange must meet the minimum initial and/or subsequent investment amounts of the other fund.
- The Company reserves the right to limit the number of times shares may be exchanged between funds, to reject any telephone exchange order, or otherwise to modify or discontinue exchange privileges at any time. Under SEC rules, subject to limited exceptions, the Company must notify you 60 days before it modifies or discontinues the exchange privilege.
The procedures applicable to Fund share redemptions also apply to Fund share exchanges. In particular, because the only transaction orders that are processed at 1:00 p.m. are those that are received at that time through Shareholder Servicing Agents in connection with automated investment programs, exchange orders received through other means after 9:00 a.m. will be processed on the next day that is a Business Day for both funds involved in the exchange. In addition, a signature guarantee may be required for exchanges between shareholder accounts registered in identical names if the amount being exchanged is more than $25,000.
To exchange shares, write the Transfer Agent at the mailing address under "Investing in the Funds - Initial Purchases by Wire" or call the Transfer Agent at the telephone number listed on your transaction confirmation, or contact your Shareholder Servicing Agent or Selling Agent. The procedures applicable to telephone redemptions, including the discussion regarding the responsibility for the authenticity of telephone instructions, are also applicable to telephone exchange requests. See "How to Redeem Shares - Expedited Redemptions by Letter and Telephone."
Subject to the overall supervision of the Company's Board of Directors, Wells Fargo Bank, as the Funds' investment adviser, provides investment guidance and policy direction in connection with the management of the Funds' assets. Wells Fargo Bank also furnishes the Board of Directors with periodic reports on the Funds' investment strategies and performance. For these services, Wells Fargo Bank is entitled to a monthly investment advisory fee at the annual rate of 0.40% of the average daily net assets of the Money Market Mutual Fund and 0.50% of the average daily net assets of the California Tax-Free Money Market Mutual Fund. From time to time, Wells Fargo Bank may waive such fees in whole or in part. Any such waiver will reduce expenses of the Funds and, accordingly, have a favorable impact on the Funds' yields. From time to time, each of the Funds, consistent with its investment objectives, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For the year ended December 31, 1994, Wells Fargo Bank was paid 0.40% of the average daily net assets of the Money Market Mutual Fund and 0.49% of the average daily net assets of the California Tax-Free Money Market Mutual Fund for its services as investment adviser.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Wells Fargo Bank also serves as the Funds' custodian and transfer and dividend disbursing agent. Wells Fargo Bank performs the custodial services at its address above. Under its Custody Agreement with Wells Fargo Bank, each Fund may, at times, borrow money from Wells Fargo Bank as needed to satisfy temporary liquidity needs. Wells Fargo Bank charges interest on such overdrafts at a rate determined pursuant to each Fund's Custody Agreement. The transfer and dividend disbursing agency activities are performed at 525 Market Street, San Francisco, California 94105.
The Funds have entered into Shareholder Servicing Agreements with Wells Fargo Bank, and may enter into similar agreements with other entities. Under such agreements, Shareholder Servicing Agents (including Wells Fargo Bank) will, as agent for their customers, among other things: answer customer inquiries regarding account status and history and the manner in which purchases, exchanges and redemptions of Fund shares may be effected; assist shareholders in designating and changing dividend options, account designations and addresses; provide necessary personnel and facilities to establish and maintain shareholder accounts and records; assist in processing purchase, redemption and exchange transactions; arrange for the wiring of money; transfer money in connection with customer orders to purchase or redeem shares; verify shareholder signatures in connection with redemption and exchange orders and transfers and changes in accounts with Approved Banks; furnish (either separately or on an integrated basis with other reports sent to a shareholder by the Shareholder Servicing Agent) monthly and year-end statements and confirmations of purchases, redemptions and exchanges; furnish, on behalf of each of the Funds, proxy statements, annual reports, updated prospectuses and other communications to shareholders; receive, tabulate and send to the Fund proxies executed by shareholders; and provide such other related services as the Funds or a shareholder may reasonably request. For these services, a Shareholder Servicing Agent receives a fee, which may be paid periodically, determined by a formula based upon the number of accounts serviced by the Shareholder Servicing Agent during the period for which payment is being made, the level of activity in such accounts during such period, and the expenses incurred by the Shareholder Servicing Agent. In no event will such fees, as calculated on an annualized basis for each Fund's then-current fiscal year, exceed the lesser of (1) 0.30% of the average daily net assets of the California Tax-Free Money Market Mutual Fund or 0.30% of the average daily net assets attributable to the Class A shares of the Money Market Mutual Fund, as represented by shares owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the Rules of Fair Practice of the NASD ("NASD Rules"). In no event will the portion of such fees that constitutes a "service fee," as that term is used by the NASD, exceed 0.25% of the average net asset value of a Fund or Class of a Fund, as the case may be.
A Shareholder Servicing Agent may impose certain conditions on its customers, subject to the terms of this Prospectus, in addition to or different from those imposed by the Funds, such as requiring a minimum initial investment or payment of a separate fee for additional services. Each Shareholder Servicing Agent will be required to agree to disclose any fees it may directly charge its customers who are shareholders of a Fund and to notify them in writing at least 30 days before it imposes any transaction fees.
Subject to the overall supervision of the Company's Board of Directors, Stephens provides the Funds with administrative services, including general supervision of each Fund's operation, coordination of the other services provided to each Fund, compilation of information for reports to the SEC and the state securities commissions, preparation of proxy statements and shareholder reports, and general supervision of data compilation in connection with preparing periodic reports to the Company's Directors and officers. Stephens also furnishes office space and certain facilities to conduct each Fund's business, and compensates the Company's Directors, officers and employees who are affiliated with Stephens. For these services, Stephens is entitled to a monthly fee at the annual rate of 0.03% of each Fund's average daily net assets. From time to time, Stephens may waive its fees from a Fund in whole or in part. Any such waivers will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield.
Stephens, as the principal underwriter of the Funds within the meaning of the 1940 Act, has entered into a Distribution Agreement with the Company pursuant to which Stephens is responsible for distributing Fund shares. The Company also has adopted a Distribution Plan on behalf of the California Tax-Free Money Market Mutual Fund and the Class A Shares of the Money Market Mutual Fund under the SEC's Rule 12b-1 ("Plans"). Under the Plan for the California Tax-Free Money Market Mutual Fund, the Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective shareholders of the Fund by paying on an annual basis up to 0.05% of the Funds' average daily net assets. Under the Plan for the Class A Shares of the Money Market Mutual Fund, the Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective Class A shareholders of the Fund by paying on an annual basis up to 0.05% of the average daily net assets attributable to the
Class A Shares of the Fund. The Plans provide only for the reimbursement of actual expenses. The Distribution Agreement provides that Stephens shall act as agent for the Funds for the sale of their shares and may enter into Selling Agreements with Selling Agents that wish to make available shares of the Funds to their respective customers. The Funds may participate in joint distribution activities with any of the other funds of the Company, in which event, expenses reimbursed out of the assets of the Funds may be attributable, in part, to the distribution-related activities of another fund of the Company. Generally, the expenses attributable to joint distribution activities will be allocated among each Fund and the other funds of the Company in proportion to their relative net asset sizes, although the Company's Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Funds may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise.
In addition, the Plans contemplate that, to the extent any fees payable pursuant to a Shareholder Servicing Agreement (discussed above) are deemed to be for distribution-related services, such payments are approved and payable pursuant to the Plans. Financial institutions acting as Selling Agents, Shareholder Servicing Agents, or in certain other capacities may be required to register as dealers pursuant to applicable state securities laws which may differ from federal law and any interpretations expressed herein.
From time to time, Wells Fargo Bank and Stephens may waive their respective fees in whole or in part and reimburse expenses payable to others. Any such waivers or reimbursements will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield. Except for the expenses borne by Wells Fargo Bank and Stephens, the Company bears all costs of its operations, including advisory, shareholder servicing, transfer agency, custody and administration fees, payments pursuant to any Plans, interest, fees and expenses of independent auditors and legal counsel, and any extraordinary expenses. Expenses attributable to each Fund or Class are charged against the assets of the Fund or Class. General expenses of the Company are allocated among all of the funds of the Company, including the Funds, in a manner proportionate to the net assets of each fund, on a transactional basis, or on such other basis as the Company's Board of Directors deems equitable.
By complying with the applicable provisions of the Code, the Money Market Mutual Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders. Dividends from net investment income (including net short-term capital gains, if any) declared and paid by the Money Market Mutual Fund will be taxable as ordinary income to Fund shareholders. Whether you take dividend payments in cash or have them automatically reinvested in additional shares in the Money Market Mutual Fund, they will be taxable as ordinary income. Generally, dividends and distributions are taxable to shareholders at the time they are paid. However, dividends and distributions declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends or distributions are actually paid no later than January 31 of the following year. The Money Market Mutual Fund intends to pay out substantially all of its net investment income and net realized capital gains (if any) for each year. The Money Market Mutual Fund does not expect its dividends to qualify for the dividends-received deduction allowed to corporate shareholders.
By complying with the applicable provisions of the Code, the California Tax-Free Money Market Mutual Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders, and the Fund's shareholders will not be subject to federal income taxes on any Fund dividends attributable to interest from tax-exempt securities. However, dividends attributable to interest from taxable securities and capital gains (if any) will be taxable to shareholders. In addition, by complying with the applicable provisions of the California Revenue and Taxation Code, the Fund dividends also will be exempt from California personal income tax to the extent such dividends are attributable to instruments that pay interest which would be exempt from California personal income taxes were such instruments held directly by an individual.
The federal alternative minimum tax ("AMT") rules attempt to ensure that at least a minimum amount of tax is paid by corporate and high-income noncorporate taxpayers who obtain significant benefit from certain tax deductions and exemptions. These deductions and exemptions have been designated "tax preference items" which must be added back to taxable income for the purposes of calculating AMT. Among the "tax preference items" and "adjustments" which must be considered when calculating the AMT is tax-exempt interest from private activity bonds issued after August 7, 1986. To the extent that the California Tax-Free Money Market Mutual Fund invests in private activity bonds, shareholders who pay the alternative minimum tax will be required to report that portion of Fund dividends attributable to income from the bonds as a tax preference item in determining their federal AMT. Shareholders will be notified of the tax status of distributions made by the Funds. Persons who may be "substantial users" (or "related persons" of substantial users) of facilities financed by private activity bonds should consult their tax advisors before purchasing shares in the California Tax-Free Money Market Mutual Fund. There are other adjustments that may also affect adjusted current earnings for the purposes of corporate AMT. Shareholders with questions or concerns about AMT should also consult their tax advisors.
The Funds, or your Shareholder Servicing Agent on their behalf, will inform you of the amount and nature of such Fund dividends and capital gains. You you receive to assist in your personal record keeping. The Company is required to withhold, subject to certain exemptions, at a rate of 31% on dividends paid or credited to individual shareholders of the Funds, if a shareholder has not complied with IRS regulations or if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% back-up withholding for previous underreporting to the IRS.
Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes -- Foreign Shareholders" in the SAI.
Further federal tax considerations are discussed in the SAIs. All investors should consult their individual tax advisors with respect to their particular tax situations as well as the state and local tax status of investments in shares of the Funds.
The Money Market Mutual Fund may invest in the following:
California Tax-Free Money Market Mutual Fund
The California Tax-Free Money Market Mutual Fund may invest in the following municipal obligations with remaining maturities not exceeding thirteen months:
Pending the investment of proceeds from the sale of Fund shares or proceeds from sales of portfolio securities or in anticipation of redemptions or to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of market conditions, the California Tax-Free Money Market Mutual Fund may elect to invest temporarily up to 20% of the current value of its total assets in cash reserves or the following taxable high-quality money market instruments:
Moreover, the California Tax-Free Money Market Mutual Fund may invest temporarily more than 20% of its total assets in such securities and in high-quality, short-term municipal obligations the interest on which is not exempt from federal income taxes to maintain a temporary defensive posture or in an effort to improve after-tax yield to the California Tax-Free Money Market Mutual Fund's shareholders when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of unusual market conditions.
Municipal bonds generally have a maturity at the time of issuance of up to 40 years. Medium-term municipal notes are generally issued in anticipation of the receipt of tax funds, of the proceeds of bond placements, or of other revenues. The ability of an issuer to make payments on notes is therefore especially dependent on such tax receipts, proceeds from bond sales or other revenues, as the case may be. Municipal commercial paper is a debt obligation with a stated maturity of 270 days or less that is issued to finance seasonal working capital needs or as short-term financing in anticipation of longer-term debt. From time to time, the California Tax-Free Money Market Mutual Fund may invest 25% or more of the current value of its total assets in certain "private activity bonds," such as pollution control bonds; provided, however, that such investments will be made only to the extent they are consistent with the Fund's fundamental policy of investing, under normal circumstances, at least 80% of its net assets in municipal obligations that are exempt from federal income taxes and not subject to the federal alternative minimum tax.
For a further discussion of factors affecting purchases of municipal obligations by the California Tax-Free Money Market Mutual Fund, see "Special Considerations Affecting California Municipal Obligations" in the SAI.
U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or
U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or the timing of receipt of payments due to their structure or contract terms.
The California Tax-Free Money Market Mutual Fund also may invest in shares of other open-end investment companies that invest exclusively in high-quality short-term securities, provided however, that any such company has a fundamental policy of investing, under normal circumstances, at least 80% of its net assets in obligations that are exempt from federal income taxes and not subject to the federal alternative minimum tax. Such investment companies can be expected to charge management fees and other operating expenses that would be in addition to those charged to the Fund; however, the Fund's investment adviser has undertaken to waive its advisory fees with respect to that portion of the Fund's assets so invested. In no event may the Fund, together with any company or companies controlled by it, own more than 3% of the total outstanding voting stock of any such investment company, nor may the Fund, together with any such company or companies, invest more than 5% of its assets in any one such investment company or invest more than 10% of its assets in securities of all such investment companies combined.
Certain of the debt instruments that the Funds may purchase bear interest at rates that are not fixed, but vary for example, with changes in specified market rates or indices or at specified intervals. Certain of these instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The Funds may, in accordance with SEC rules, account for these instruments as maturing at the next interest rate readjustment date or the date at which the Funds may tender the instrument back to the issuer, whichever is later. The floating- and variable-rate instruments that the Funds may purchase include certificates of participation in such obligations. With regard to the California Tax-Free Money Market Mutual Fund, Wells Fargo Bank, as investment adviser, may rely upon either an opinion of counsel or an IRS ruling regarding the tax-exempt status of these certificates. The Funds may invest in floating- and variable-rate obligations even if they carry stated maturities in excess of thirteen months, upon compliance with certain conditions of the SEC, in which case such obligations will be treated in accordance with these conditions as having maturities not exceeding thirteen months.
Wells Fargo Bank, as investment adviser to the Funds, will monitor on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of a demand instrument to make payment when due may occur between the time a Fund elects to demand payment and the time payment is due, thereby affecting such Fund's ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists.
The Funds may enter into repurchase agreements wherein the seller of a security to a Fund agrees to repurchase that security from such Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Funds may enter into repurchase agreements only with respect to U.S. Government obligations and other obligations that could otherwise be purchased by the participating Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. While the maturities of the underlying securities in a repurchase agreement transaction may be greater than 13 months, the term of any repurchase agreement on behalf of the Fund will always be less than 13 months. If the seller defaults and the value of the underlying securities has declined, the participating Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the participating Fund's disposition of the security may be delayed or limited. The Funds will enter into repurchase agreements only with registered broker/dealers and commercial banks that meet guidelines established by the Board of Directors of the Funds and that are not affiliated with Wells Fargo Bank. The Funds may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank.
Certain of the debt obligations, certificates of participation, commercial paper and other short-term obligations which the Funds are permitted to purchase may be backed by an unconditional and irrevocable letter of credit of a bank, savings and loan association or insurance company which assumes the obligation for payment of principal and interest in the event of default by the issuer. Letter of credit-backed investments must, in the opinion of Wells Fargo Bank, be of investment quality comparable to other permitted investments of the Fund.
Each Fund may invest up to 25% of its assets in high-quality, short-term debt obligations of foreign branches of U.S. banks or U.S. branches of foreign banks that are denominated in and pay interest in U.S. dollars. Investments in foreign obligations involve certain considerations that are not typically associated with investing in domestic obligations. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not subject to the same uniform accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic developments that could adversely affect investments in, the liquidity of, and the ability to enforce contractual obligations with respect to, securities of issuers located in those countries.
Each Fund's investment objective, as set forth in the "How the Funds Work -- Investment Objectives and Policies" section, is fundamental; that is, it may not be changed without approval by the vote of the holders of a majority of such Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. In addition, any fundamental investment policy may not be changed without such shareholder approval. If the Company's Board of Directors determines, however, that a Fund's investment objective can best be achieved by a substantive change in a nonfundamental investment policy or strategy, the Company's Board may make such change without shareholder approval and will disclose any such material changes in the then-current prospectus.
As matters of fundamental policy, the Funds may: (i) borrow from banks up to 10% of the current value of each of their net assets only for temporary purposes in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of each of their net assets (but investments may not be purchased by a Fund while any such outstanding borrowing in excess of 5% of its net assets exists); (ii) not make loans of portfolio securities or other assets, except that loans for purposes of this restriction will not include the purchase of fixed time deposits, repurchase agreements, commercial paper and other short-term obligations, and other types of debt instruments commonly sold in a public or private offering; and (iii) not invest more than 25% of their assets (i.e. , concentrate) in any particular industry, excluding, (a) investments in municipal securities by the California Tax-Free Money Market Mutual Fund (for the purpose of this restriction, private activity bonds shall not be deemed municipal securities if the payments of principal and interest on such bonds is the ultimate responsibility of nongovernmental users), (b) U.S. Government obligations, and (c) obligations of domestic banks (for purposes of this restriction, domestic bank obligations do not include obligations of foreign branches of U.S. banks and obligations of U.S. branches of foreign banks).
As a matter of nonfundamental policy: (i) the Money Market Mutual Fund may not purchase securities of any issuer (except for U.S. Government obligations, for certain temporary purposes and for certain guarantees and unconditional puts) if as a result more than 5% of the value of the Money Market Mutual Fund's total assets would be invested in the securities of such issuer or the Money Market Mutual Fund would own more than 10% of the outstanding voting securities of such issuer; (ii) the Money Market Mutual Fund may not invest more than 10% of the current value of its net assets in securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days; and (iii) the California Tax-Free Money Market Mutual Fund may not invest more than 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, illiquid securities and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days. With respect to item (i), it may be possible that the Company would own more than 10% of the outstanding voting securities of an issuer.
For purposes of complying with the Code, the California Tax-Free Money Market Mutual Fund will diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the California Tax-Free Money Market Mutual
Fund's assets is represented by cash, U.S. Government obligations and other securities limited in respect of any one issuer to an amount not greater than 5% of the California Tax-Free Money Market Mutual Fund's assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government obligations and the securities of other regulated investment companies), or of two or more issuers which the taxpayer controls and which are determined to be engaged in the same or similar trades or businesses or related trades or businesses.
In addition, at least 65% of the California Tax-Free Money Market Mutual Fund's total assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from California personal income taxes. However, as a matter of general operating policy, the California Tax-Free Money Market Mutual Fund seeks to have substantially all of its assets invested in such municipal obligations.
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INVESTMENT ADVISER, TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN
For more information about the Funds, simply call 1-800-222-8222, or write: | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T14:21:44 |
0000090896-96-000002 | 0000090896-96-000002_0000.txt | Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the Quarter Ended November 30, 1995
(Exact name of registrant as specified in its charter)
(State of Incorporation) (IRS Employer Identification No.)
P. O. Box 743, 2520 By-Pass Road Elkhart, IN 46515
(Address of principal executive offices) (Zip)
(Registrant's telephone number) (Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Securities registered pursuant to Section 12 (b) of the Act:
Title of Class January 12, 1996
of November 30, 1995 and May 31, 1995 2 - 3
Consolidated Statements of Earnings and 4 Retained Earnings for the three and six-month periods ended November 30,
Consolidated Statements of Cash 5 Flows for the six-month periods ended November 30, 1995 and 1994
Notes to the Consolidated Financial 6
Report of Independent Accountants 7
Item 2. Management's Discussion and Analysis 8 - 9 of Financial Condition and Results
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Skyline Corporation and Subsidiary Companies
November 30, 1995 May 31, 1995
Cash and temporary cash investments $ 6,495 $ 10,754
Treasury Bills, at cost plus accrued interest, which approximates market 52,208 29,157
Accounts receivable, trade, less allowance for doubtful accounts of $40 41,161 45,374
Work in process 4,748 4,468
Other current assets 8,748 7,246
TOTAL CURRENT ASSETS 120,171 107,336
Investment in U.S. Treasury Notes 59,912 59,917
Property, Plant and Equipment, at Cost: Buildings and improvements 57,546 57,502 Machinery and equipment 22,267 24,391
Less accumulated depreciation 40,451 41,915
Total Property, Plant and Equipment 44,582 45,256
The accompanying notes are a part of the consolidated financial statements.
Skyline Corporation and Subsidiary Companies
(Dollars in thousands except per share data)
November 30, 1995 May 31, 1995 Current Liabilities:
Accounts payable, trade $ 13,268 $ 9,962
Accrued salaries and wages 5,816 5,662
Accrued profit sharing 1,297 2,408
Accrued marketing programs 16,594 8,192
Other accrued liabilities 8,524 6,142
TOTAL CURRENT LIABILITIES 45,808 33,246
Other Deferred Liabilities 2,555 2,486 Commitments and Contingencies - -
Common stock, $.0277 par value, 15,000,000 shares authorized; issued 11,217,144 shares 312 312 Additional paid-in capital 4,928 4,928
Treasury stock, at cost, 572,800 shares at November 30, 1995 and 96,500 shares at May 31, 1995 (9,902) (1,695)
TOTAL SHAREHOLDERS' EQUITY 179,269 179,732
The accompanying notes are a part of the consolidated financial statements.
Skyline Corporation and Subsidiary Companies Consolidated Statements of Earnings and Retained Earnings For the three and six-month periods ended November 30, 1995 and 1994
(Dollars in thousands except per share data)
Sales $ 172,469 $ 164,475 $ 336,324 $ 319,803
Cost of sales 141,853 138,798 276,699 269,664
Gross profit 30,616 25,677 59,625 50,139
expenses 22,612 20,453 45,409 39,687
Operating earnings 8,004 5,224 14,216 10,452
Interest income 1,576 1,523 3,126 3,011
Earnings before income taxes 9,580 6,747 17,342 13,463
Federal 3,135 2,190 5,685 4,370 State 719 510 1,299 1,020
Net earnings 5,726 4,047 10,358 8,073
beginning of period 179,485 168,883 176,187 166,196
Less, cash dividends paid 1,280 1,339 2,614 2,678
end of period $ 183,931 $ 171,591 $ 183,931 $ 171,591
Net earnings per share $ .54 $ .36 $ .96 $ .72
Cash dividends per share $ .12 $ .12 $ .24 $ .24
shares outstanding 10,655,689 11,157,244 10,828,196 11,157,244
The accompanying notes are a part of the consolidated financial statements.
Skyline Corporation and Subsidiary Companies Consolidated Statements of Cash Flows For the six-month periods ended November 30, 1995 and 1994
Cash Flows From Operating Activities: Net earnings $ 10,358 $ 8,073
Adjustments to reconcile net earnings to net cash provided by operating activities: Interest income earned on U.S. Treasury Bills and Notes (3,006) (2,867) Amortization of discount or premium on U.S. Treasury Notes 5 (5) Working capital items: Other current assets (1,502) (1,328) Accounts payable, trade 3,306 (31) Income taxes payable (571) (1,923) Other deferred liabilities 69 87
Net cash provided by operating activities 27,569 5,820
Cash Flows From Investing Activities: Proceeds from sale or maturity of U.S. Treasury Bills 84,492 18,879 Purchase of U.S. Treasury Bills (106,336) (18,556) Interest received from U.S. Treasury Notes 1,799 2,604 Proceeds from sale of property, plant Purchase of property, plant and equipment (1,517) (9,067)
Net cash used in investing activities (21,007) (6,102)
Cash Flows From Financing Activities: Cash dividends paid (2,614) (2,678) Purchase of treasury stock (8,207) -
Net cash used in financing activities (10,821) (2,678)
Net decrease in cash (4,259) (2,960) Cash at beginning of year 10,754 9,232
Cash at end of quarter $ 6,495 $ 6,272
The accompanying notes are a part of the consolidated financial statements.
Skyline Corporation and Subsidiary Companies Notes to the Consolidated Financial Statements For the three and six-month periods ended November 30, 1995 and 1994
The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of November 30, 1995 and the consolidated results of operations and changes in cash for the three and six-month periods ended November 30, 1995 and 1994.
The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation's latest annual report on Form 10-K.
The financial data included herein has been subjected to a limited review by Price Waterhouse LLP, the registrant's independent accountants, whose report is included on page 7 of this filing.
Inventories are stated at cost, determined under the first-in, first-out method, which is not in excess of market. Physical inventory counts are taken at the end of each reporting quarter.
The Corporation and its subsidiaries were contingently liable at November 30, 1995 under agreements to purchase repossessed units on floor plan financing made by financial institutions to its customers. Losses, if any, would be the difference between repossession cost and the resale value of the units. There have been no material losses in past years under these agreements, and none are anticipated in the future.
The Corporation is a party to various pending legal proceedings in the normal course of business. Management believes that any losses resulting from such proceedings would not have a material adverse effect on the Corporation's results of operations or financial position.
To The Board of Directors and
We have reviewed the accompanying consolidated balance sheet as of November 30, 1995 and the related consolidated statements of earnings and retained earnings for the three-month and six-month periods ended November 30, 1995 and 1994 and the consolidated statements of cash flows for the six-month periods ended November 30, 1995 and 1994 of Skyline Corporation and Subsidiary Companies. This financial information is the responsibility of the company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial information for it to be in conformity with generally accepted accounting principles.
Skyline Corporation and Subsidiary Companies Management's Discussion and Analysis of Financial Condition and Results
At November 30, 1995 cash and investments in U.S. Treasury Bills totaled $58,703,000, an increase of $18,792,000 from $39,911,000 at May 31, 1995. Current assets exclusive of cash and investments in U.S. Treasury Bills totaled $61,468,000 at November 30, 1995, a decrease of $5,957,000 from the balance at May 31, 1995 of $67,425,000. Reductions in trade accounts receivable ($4,213,000) and finished goods inventories ($2,936,000) contributed to this decrease. Current liabilities increased $12,562,000 from May 31, 1995 to $45,808,000 at November 30, 1995. This increase in current liabilities can mainly be attributed to increased trade accounts payable due to increased production ($3,306,000) and increased marketing program accruals ($8,402,000). Working capital at November 30, 1995 amounted to $74,363,000 compared to $74,090,000 at May 31, 1995. Capital expenditures totaled $1,517,000 in 1995 compared to $9,067,000 in the first half of the prior year. Capital expenditures during the current fiscal year were made primarily to increase manufacturing capacity, adopt new manufacturing processes and increase manufacturing efficiencies. Cash was also used to purchase $8,207,000 of Company stock in fiscal 1996. The cash provided by operating activities in fiscal 1996 is expected to be adequate to fund any capital expenditures and treasury stock purchases which may be deemed necessary during the year. Historically, the Corporation's financing needs have been met through funds generated internally.
Results of Operations for the Quarter and Six-months Ended November 30,
Sales in the quarter ended November 30, 1995 amounted to $172,469,000, a 4.9 percent increase from $164,475,000 in the comparable quarter of the prior year. Manufactured housing sales increased 13.6 percent to $150,079,000 in 1995 compared to $132,113,000 in 1994. Manufactured housing unit sales increased to 5,657 compared to 5,323 in 1994. Recreational vehicle sales decreased 30.8 percent to $22,390,000 in the second quarter of fiscal 1996 compared to $32,362,000 in fiscal 1995. Recreational vehicle unit sales decreased to 1,776 compared to 2,544 in fiscal 1995.
Sales during the first half of fiscal 1996 amounted to $336,324,000 a 5.2 percent increase from $319,803,000 in the comparable period of the prior year. Manufactured housing sales increased 14.1 percent to $291,377,000 in 1995 compared to $255,408,000 in 1994. Manufactured housing unit sales increased to 11,027 compared to 10,398 in 1994. Recreational vehicle sales decreased 30.2 percent to $44,947,000 in the first half of fiscal 1996 compared to $64,395,000 in fiscal 1995. Recreational vehicle unit sales decreased to 3,637 compared to 5,307 in 1994. Sales for the second quarter and the first half of fiscal 1996 reflect continuing strong demand for manufactured housing in most sections of the country and an overall industry slowdown in the RV marketplace.
Cost of sales in the second quarter decreased to 82.2 percent of sales compared with 84.4 percent in 1994, while the cost of sales for the first half of the year was very comparable to the quarter (82.3 percent in fiscal 1996 vs 84.3 percent in fiscal 1995). The decrease in costs is due to efficiencies gained by increased sales volume, higher product selling prices in the manufactured housing segment, and continued cost containment efforts.
Selling and administrative expenses for the second quarter of fiscal 1996 increased as a percentage of sales to 13.1 percent from 12.4 percent last year. Selling and administrative expenses for the first half of the fiscal year also increased as a percentage of sales to 13.5 percent from 12.4 percent. Both increases were due primarily to the costs of increased marketing efforts.
Interest income amounted to $1,576,000 in the second quarter of fiscal 1996 compared to $1,523,000 one year earlier. Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government securities. The increase in interest income was due to slightly higher investment levels and yields during the period.
The provision for federal income tax approximates the statutory rate and for state income taxes reflects current state rates effective for the period based upon activities within the taxable entities.
Information with respect to this Item for the period covered by this Form 10-Q has been previously reported in Item 3, entitled "Legal Proceedings" of the Form 10-K for the fiscal year ended May 31, 1995, heretofore filed by the registrant with the Commission.
Item 6. Exhibits and Reports on Form 8-K No reports on Form 8K were filed during the second quarter of fiscal 1996.
The Exhibit filed as part of this report is listed below.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: January 12, 1996 /S/ Joseph B. Fanchi
DATE: January 12, 1996 /S/ James R. Weigand | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T10:44:39 |
0000708950-96-000002 | 0000708950-96-000002_0000.txt | NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON February 16, 1996
Notice is hereby given that a Special Meeting (the "Meeting") of Shareholders of the Calvert Responsibly Invested ("CRI") Equity Portfolio (the "Equity Portfolio") of Acacia Capital Corporation (the "Company") will be held at the offices of the Company, 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814 on February 16, 1996 at 10:00 a.m., Eastern Time, for the following purposes: 1. To consider and act upon an amendment to the Company's Articles of Incorporation to, in effect, combine the Equity Portfolio into the company's existing CRI Capital Accumulation Fund (the "Capital Accumulation Fund") by a reclassification of Equity Portfolio shares. A vote in favor of the proposed amendment is a vote in favor of the elimination of the Equity Portfolio; and
2. To transact any other business which may properly come before the Meeting or any adjournments thereof.
The Directors of the Company have fixed the close of business on December 18, 1995 as the record date for the determination of shareholders of the Equity Portfolio entitled to notice of and to vote at the Meeting and any adjournment thereof.
IT IS IMPORTANT THAT VOTING INSTRUCTIONS BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE ENCLOSED VOTING INSTRUCTION FORM IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT THEIR SHARES MAY BE REPRESENTED AND VOTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED VOTING INSTRUCTION FORM WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Directors
INSTRUCTIONS FOR EXECUTING VOTING INSTRUCTION FORM
The following general rules for signing voting instruction forms may be of assistance to you and may help to avoid the time and expense involved in validating your vote if you fail to sign your voting instruction form properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it appears in the registration on the voting instruction form.
2. JOINT ACCOUNTS: Either party may sign, but the name of the party signing should conform exactly to a name shown in the registration on the voting instruction form.
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the voting instruction form should be indicated unless it is reflected in the form of registration. For example:
(1) ABC Corp. ABC Corp. (2) ABC Corp. John Doe, Treasurer (3) ABC Corp. c/o John Doe, Treasurer John Doe, Treasurer Sharing Plan John Doe, Trustee (1) ABC Trust Jane B. Doe, Trustee (2) Jane B. Doe, Trustee Jane B. Doe (1) John B. Smith, Cust. John B. Smith f/b/o John B. Smith, Jr. UGMA (2) John B. Smith, Jr. John B. Smith, Jr., Executor
PROSPECTUS/PROXY STATEMENT DATED December 30, 1995
This Prospectus/Proxy Statement is being furnished to shareholders of the Calvert Responsibly Invested ("CRI") Equity Portfolio (the "Equity Portfolio") of Acacia Capital Corporation (the "Company"), in connection with a proposed amendment to the Company's Articles of Incorporation that would, in effect, combine the Equity Portfolio into the Company's existing CRI Capital Accumulation Portfolio (the "Capital Accumulation Portfolio") (the "Proposed Merger"). The Proposed Merger would be accomplished by a reclassification of shares and tax-free transfer of all assets and liabilities of the Equity Portfolio in exchange for shares of the Capital Accumulation Portfolio. As a result of the Proposed Merger, shareholders of the Equity Portfolio would exchange their shares and become shareholders of the Capital Accumulation Portfolio and the Equity Portfolio would be eliminated. Each Portfolio will pay its respective expenses attributable to the Proposed Merger.
The Company is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Company currently consists of 7 portfolios, each with a different investment objective. The Capital Accumulation Portfolio seeks to provide long-term capital appreciation by investing primarily in a non-diversified portfolio of the equity securities of small-to mid-sized companies that are undervalued but demonstrate a potential for growth. The Portfolio relies on its proprietary research to identify stocks that may have been overlooked by analysts, investors and the media, and which generally have a market value between $100 million and $5 billion, but which may be larger or smaller as deemed appropriate.
This Prospectus/Proxy Statement, which should be retained for future reference, sets forth concisely the information about the Capital Accumulation Portfolio that shareholders of the Equity Portfolio should know before voting on the Proposed Merger. Certain relevant documents listed below, which have been filed with the Securities and Exchange Commission (the "SEC"), are incorporated in whole or in part by reference. A Statement of Additional Information dated May 1, 1995, relating to this Prospectus/Proxy Statement and the Proposed Merger, incorporating by reference the financial statements of the Capital Accumulation Portfolio and the Equity Portfolio (each a "Portfolio" and together, the "Portfolios"), dated December 31, 1994 has been filed with the SEC and is incorporated by reference in its entirety into this Prospectus/Proxy Statement. A copy of such Statement of Additional Information is available upon request and without charge by writing to the Company at 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814 or by calling toll-free 1-800-368-2748.
The Prospectus of the CRI portfolios of the Company, including the Portfolios, dated May 1, 1995, the Company's Annual Report for such CRI portfolios for the fiscal year ended December 31, 1994 and the Company's CRI Capital Accumulation Portfolio's unaudited balance sheet dated June 30, 1995 and unaudited income statement for the six months ended June 30, 1995 are incorporated herein by reference in their entirety, insofar as they relate to the Capital Accumulation Portfolio and the Equity Portfolio only, and not to any other portfolios described therein.
Included as Exhibit A to this Prospectus/Proxy Statement is a copy of the Plan of Reclassification (the "Plan") and included as Exhibit B to this Prospectus/Proxy Statement is the form of amendment to the Company's Articles of Incorporation to be filed with the State of Maryland if shareholders of the Equity Portfolio approve the Plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS OR OBLIGATIONS OF OR ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED OR OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS. WHEN INVESTORS SELL SHARES OF THE FUND, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY PAID.
INVESTMENT OBJECTIVES AND POLICIES OF THE THE EQUITY PORTFOLIO............... MANAGEMENT OF THE FUNDS................. INVESTMENT ADVISERS, SUB-ADVISERS AND ADMINISTRATOR PORTFOLIO MANAGEMENT........ DISTRIBUTION OF SHARES...... PURCHASE AND REDEMPTION PROCEDURES......... DIVIDENDS AND DISTRIBUTIONS............
INFORMATION ABOUT THE PROPOSED MERGER......... DESCRIPTION OF THE MERGER............... REASONS FOR THE PROPOSED MERGER......... PRO-FORMA CAPITALIZATION...............
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES......................
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS....... FORM OF ORGANIZATION....................... CAPITALIZATION....................... SHAREHOLDER MEETINGS AND VOTING RIGHTS..... LIQUIDATION OR DISSOLUTION............ RIGHTS OF INSPECTION..................
This Prospectus/Proxy Statement solicits the accompanying voting instructions ("Proxy") on behalf of the Board of Directors of the Company for use at the Special Meeting of Shareholders of the Equity Portfolio to be held February 16, 1996 at 10:00 a.m., Eastern Time, and any adjournments thereof (the "Meeting"). The Equity Portfolio will bear all expenses in connection with the solicitation of Proxies. Employees of Calvert Asset Management Company, Inc. ("CAMCO"), the Portfolio's investment adviser, and Providian Life and Health Insurance Company ("Providian"), will solicit Proxies. The solicitation will be by mail and may also be by telephone, telegram or personal interview.
Outstanding Shares and Voting Requirements
The Board of Directors of the Company has fixed the close of business on December 18, 1995 as the record date (the "Record Date") for determination of shareholders entitled to notice of and to vote at the Meeting and any adjournments thereof. All outstanding shares of the Equity Portfolio are owned of record by Providian Separate Account V, which is registered with the Securities and Exchange Commission (the "SEC"), (the "Separate Account") to fund variable annuity contracts (the "contracts") issued by Providian.
Approval of the Proposed Merger requires the affirmative vote of the holders of at least a majority (as defined in the 1940 Act) of the interest in the Equity Portfolio shares entitled to vote.
Providian holds through its Separate Account, all of the Equity Portfolio shares entitled to vote. Providian will attend the Meeting and vote the Equity Portfolio shares held by its Separate Account in accordance with instructions received from contract owners having values allocated to the Equity Portfolio, as provided in the contracts. Providian will vote Equity Portfolio shares for which no instructions are received in the same proportion as to which instructions are received with respect to the Separate Account.
Each contract participant (other than participants under contracts issued in connection with non-qualified and unfunded deferred compensation plans or contracts issued in connection with a deferred compensation plan) has the right to give instructions as to how shares of the Equity Portfolio attributable to the participant's account should be voted, notwithstanding that the contract owner may be the participant's employer. Contract owners will instruct the Separate Accounts in accordance with such instructions. Fractional shares also will be voted in accordance with instructions received. A contract owner or participant who has given voting instructions may revoke such voting instructions only through the Separate Account prior to the Meeting date. There are no appraisal rights.
The number of Equity Portfolio shares deemed attributable to a participant's account prior to the annuity date and during the lifetime of the annuitant will be determined on the basis of the value of accumulation units credited to the participant's account as of the Record Date. On or after the annuity date or after the death of the participant, the number of Equity Portfolio shares deemed attributable to the participant's account will be based on the liability for future variable annuity payments to the payee under the contract as of the Record Date. Such liability for future payments will be calculated on the basis of the mortality assumptions and the assumed investment rate used in determining the number of annuity units credited to the participant's account and the applicable annuity unit value on the Record Date.
As of the close of business on the Record Date, there were outstanding 234,843.126 shares of common stock of the Equity Portfolio. Each share is entitled to one vote. To the Company's knowledge no person owns annuity contracts or interests therein entitling that person to give voting instructions regarding five percent or more of the total outstanding shares of the Equity Portfolio.
Directors and officers of the Company as a group own annuity contracts or interests therein entitling them to give voting instructions regarding less than one percent of the total outstanding shares of the Equity Portfolio.
The cost of this proxy solicitation, including the printing and mailing of the proxy materials, will be borne by the Equity Portfolio. A proxy may be revoked at anythime before or during the meeting by oral or written notice to William M. Tartikoff, Esq., Secretary of the Company, 4550 Montgomery Ave., Suite 1000N, Bethesda, MD 20814. This Prospectus/Proxy Statement was first mailed to contract owners on or about December 30, 1995. If you have any questions about the proposed merger, please call 1-800-866-6007.
The Equity Portfolio and the Capital Accumulation Portfolio are each a series of the Company, an open-end management investment company organized as a Maryland corporation on December 22, 1982. The Company currently consists of seven separate investment portfolios, each of which is, in effect, a separate mutual fund issuing its own separate class of common stock. By investing in a portfolio, an investor becomes entitled to a pro-rata share of all dividends and distributions arising from the net income and capital gains on the investments of that portfolio. Each portfolio is governed by the Company's Articles of Incorporation, its Bylaws and applicable Maryland law.
The Board of Directors of the Company has approved a Plan of Reclassification (the "Plan") providing for the Company to amend its Articles of Incorporation, subject to the approval of the shareholders of the Equity Portfolio, to reclassify the issued and unissued shares of the class of the Company's common stock currently designated as CRI Equity Portfolio into the class of the Company's common stock currently designated as CRI Capital Accumulation Portfolio. In effect, shareholders of the Equity Portfolio would exchange their shares for shares of the Capital Accumulation Portfolio and the Equity Portfolio would be eliminated.
The Plan contemplates a Proposed Merger in which shares of the Equity Portfolio will be reclassified and the Equity Portfolio will transfer all of its assets and liabilities to the Capital Accumulation Portfolio in exchange for shares of the Capital Accumulation Portfolio. The number of shares of the Capital Accumulation Portfolio to be issued to the Equity Portfolio will be determined on the basis of the relative net asset values of the Equity Portfolio and the Capital Accumulation Portfolio calculated as of the close of business on the business day immediately preceding the effective date of the Proposed Merger, currently scheduled for February 26, 1996. The Equity Portfolio will then distribute the Capital Accumulation Portfolio shares it receives to Equity Portfolio shareholders in exchange for their Equity Portfolio shares, on a pro-rata basis.
The Directors of the Company, including the Directors who are not "interested persons," as such term is defined in the 1940 Act (the "Independent Directors"), have concluded that the Proposed Merger would be in the best interests of shareholders of the Equity Portfolio and that the interests of the shareholders of the Equity Portfolio and the Capital Accumulation Portfolio will not be economically diluted as a result of the transactions contemplated by the Reorganization. Accordingly, the Directors have submitted the Plan for the approval of the Equity Portfolio's shareholders. THE DIRECTORS OF THE COMPANY RECOMMEND APPROVAL BY SHAREHOLDERS OF THE EQUITY PORTFOLIO OF THE PLAN EFFECTING THE PROPOSED MERGER.
If the shareholders of the Equity Portfolio do not vote to approve the Proposed Merger, the Directors of the Company will consider other possible courses of action in the best interests of shareholders.
The completion of the Proposed Merger is contingent upon the receipt by the Company of an opinion of outside tax counsel to the effect that the Proposed Merger will qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). As such, the Proposed Merger will not result in the recognition, for federal income tax purposes, of any gain or loss to the Equity Portfolio or its shareholders, the aggregate tax basis of the shares of the Capital Accumulation Portfolio received by shareholders of the Equity Portfolio will be the same as the tax basis of those shareholders' Equity Portfolio shares and the aggregate tax basis of the assets of the Equity Portfolio in the hands of the Capital Accumulation Portfolio will be the same as the tax basis of such assets in the hands of the Equity Portfolio prior to the Proposed Merger. In addition, the Proposed Merger will not result in the recognition of any gain or loss to contract owners.
INVESTMENT OBJECTIVES AND POLICIES OF THE CAPITAL ACCUMULATION PORTFOLIO AND THE EQUITY PORTFOLIO
The Capital Accumulation Portfolio. The Capital Accumulation Portfolio seeks to provide long-term capital appreciation by investing primarily in a nondiversified portfolio of the equity securities of small- to mid-sized companies that are undervalued but demonstrate a potential for growth. The Portfolio relies on its proprietary research to identify stocks that may have been overlooked by analysts, investors, and the media, and which generally have a market value between $100 million and $5 billion, but which may be larger or smaller as deemed appropriate. Investments may also include, but are not limited to, preferred stocks, foreign securities, convertible securities, bonds, notes and other debt securities. The Portfolio may use certain futures and options, invest in repurchase agreements, and lend its portfolio securities. The Portfolio takes reasonable risks in seeking to achieve its investment objective. There is, of course, no assurance that the Portfolio will be successful in meeting its objective since there is risk involved in the ownership of all equity securities. The Portfolio's investment objective is not fundamental and may be changed without shareholder approval. The Portfolio will notify shareholders at least thirty days in advance of a change in the investment objective of the Portfolio so that shareholders may determine whether the Portfolio's goals continue to meet their own.
The Equity Portfolio. The Equity Portfolio seeks growth of capital through investment in the equity securities of issuers within industries perceived to offer opportunities for potential capital appreciation and which satisfy the Portfolio's investment and social criteria. The Portfolio is neither speculative nor conservative in its investment policies and takes reasonable risks in seeking to achieve its investment objective of growth of capital. The Portfolio normally invests at least 80% of the value of its net assets in equity securities. Such securities include common stocks, convertible securities and preferred stocks. The Portfolio does not currently hold or intend to invest more than 5% of its assets in non-investment grade debt securities. For liquidity purposes or pending the investment of the proceeds of the sale of its shares, the Equity Portfolio may invest up to 20% of the value of its assets in money market instruments, including: obligations of the U.S. Government, its agencies and instrumentalities; certificates of deposit of banks having total assets of at least $1 billion; and commercial paper or other corporate notes of investment grade quality. Such securities may be purchased subject to repurchase agreements with recognized securities dealers and banks. If the Equity Portfolio assumed a temporary defensive posture, there is no limitation on the percentage of its assets which may be invested in money market instruments. The Portfolio may invest in foreign securities, including emerging markets, to a limited extent. See "Comparison of Investment Objectives and Policies" below.
The overall management of the Company and the Portfolios is the responsibility of, and is supervised by, the Board of Directors of the Company.
INVESTMENT ADVISERS, SUB-ADVISERS AND ADMINISTRATOR
Calvert Asset Management Company, Inc. ("CAMCO"), 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814, is the investment adviser to both Portfolios. CAMCO is a wholly-owned subsidiary of Calvert Group, Ltd., of the same address, which is in turn an indirect wholly-owned subsidiary of Acacia Mutual Life Insurance Company, 51 Louisiana Avenue, N.W., Washington, D.C. 20001. As of August 31, 1995, CAMCO had assets under management and administration in excess of $4.8 billion. Pursuant to its investment advisory agreement with the Company, CAMCO manages the investment and reinvestment of the assets of each Portfolio and is responsible for the overall management of the business affairs of each Portfolio, subject to the direction and authority of the Company's Board of Directors. CAMCO also serves as investment adviser to seven other registered investment companies in the Calvert Group of Funds: First Variable Rate Fund for Government Income, Calvert Cash Reserves (doing business as Money Management Plus), Calvert Social Investment Fund, Calvert Tax-Free Reserves, The Calvert Fund, Calvert Municipal Fund, Inc., and Calvert World Values Fund, Inc. CAMCO has retained certain investment subadvisers ("Subadvisers") for the Portfolios.
The Capital Accumulation Portfolio has a pool of six investment subadvisers ready to manage the Portfolio's assets. The Subadvisers along with their investment style and ownership characteristics, are listed below, the asterisks indicating those comprising the current portfolio management team who have managed the Portfolio since December 8, 1994:
Johnston Small-Cap Growt Hispanic American
Sturdivant Large-Cap Value African Americans
CAMCO selects which Subadvisers will manage the Capital Accumulation Portfolio's assets at any given time and the allocation of assets among the managers. CAMCO retains a consultant, Progress Investment Management Company ("Progress"), to aid it in making these determinations. Progress is a California state-certified minority business enterprise, registered as an investment adviser with the SEC, that evaluates and monitors emerging minority/women-owned investment management firms. Each firm has selected a performance index against which the performance fee adjustment, if any, will be calculated, as explained below.
Apodaca-Johnston Capital Management, Inc. Apodaca-Johnston Capital Management, Inc., 580 California Street, Suite 200, San Francisco, California 94104, is a small-cap growth manager that seeks to discover compelling investment ideas by focusing on those entrepreneurial companies that identify and capitalize on positive trends. It looks for companies that are experiencing a powerful acceleration in earnings, exhibit a strong, high quality balance sheet or decidedly improving financial statements and demonstrate strong price strength. Its performance index is the Russell 2000.
Mr. Scott is President and Chief Investment Officer of Apodaca-Johnston. In 1985 Mr. Johnston founded Sterling Financial Group, an independent SEC-registered investment advisory firm, which was merged into Apodaca-Johnston Capital Management.
Brown Capital Management, Inc. Brown Capital Management, Inc., 809 Cathedral Street, Baltimore, Maryland 21201, uses a bottom-up approach that incorporates growth-adjusted price earnings. Stocks purchased are generally undervalued and have momentum, have EPS growth rates greater than the market, are more profitable than the market, and have relatively low price-earnings ratios. Its performance index is a blend: 60% Russell 1000 Growth and 40% Russell 2000.
Mr. Eddie Brown is founder and President of Brown Capital Management. He has over 22 years of investment experience, having served as Vice President and Portfolio Manager for 10 years at T. Rowe Price Associates immediately prior to starting his own firm.
Fortaleza Asset Management, Inc., 200 West Adams, Suite 1900, Chicago, Illinois 60606, is a small-cap growth manager that bases its investment principles on: (1) a proprietary stock valuation system that incorporates technical and market sentiment indicators to determine optimal buy points; (2) an emphasis on the preservation of capital through the implementation of a strict selling discipline to lock in capital gains and reduce losses; and (3) a discipline that does not force equity commitment in overvalued markets. The investment approach is based on a bottom-up stock selection process (selecting the individual companies first, rather than the industry sector). Its performance index is the Russell 2000.
Ms. Margarita Perez is the founder, President and Portfolio Manager of Fortaleza, and has over 13 years of investment experience. Prior to forming Fortaleza, Ms. Perez was Vice president and Portfolio Manager for Monetta Financial Services, Inc., where she was directly involved in the management of equity accounts totalling in excess of $100 million.
New Amsterdam Partners, L.P. is a mid-cap value investment manager located at 475 Park Avenue , New York, New York 10016. New Amsterdam Partners is a quantitative investment firm, evaluating investment opportunities by comparing expected investment returns. The firm believes that the disciplined use of their valuation techniques, in conjunction with fundamental analysis of companies, is the key to understanding and maximizing investment returns.
Michelle Clayman, General Partner of New Amsterdam, was a founding partner of the company, which was started in 1986. Prior to co-founding New Amsterdam, Ms. Clayman was a Vice President of Salomon Brothers in charge of STOCKFACTS, an on-line computer system that combines analytical tools for equity analysis and databases and was designed and developed by Ms. Clayman.
Seneca, Inc., 100 Campus Drive, Second Floor West, Flovham Park, Basking Ridge, New Jersey 07932, is a value-oriented, medium-to-large capitalization equity manager with a twelve-year performance record. The firm is majority-owned by six women employees and a female director. The company employs a traditional low price/earnings value approach enhanced by portfolio risk controls and selection of only those securities experiencing upward revisions in analysts' earnings estimates.
Susan Saltus and Sandi Sweeney direct the investment effort, drawing on more than 28 years of investment experience. Ms. Saltus, CFA, is Chief Investment Officer and has 16 years' investment experience. Ms. Sweeney is a Portfolio Manager and has 12 years investment experience.
Sturdivant & Co., Inc. Sturdivant & Co., Inc., 223 Gibbsboro Road, Clementon, New Jersey 08021, seeks to identify undervalued companies or companies undergoing significant changes that will enhance shareholder value. The company utilizes a conservative, disciplined and consistently-applied decision making process designed to achieve lower risk than the market.
Ralph Sturdivant is Chairman and CEO who, prior to founding the firm, was a Vice President at Prudential-Bache Securities and an Account Executive with Merrill Lynch.
Albert Sturdivant is President and CIO, and was a principal and manager of the capital markets division of Grigsby, Brandford & Company prior to co-founding Sturdivant & Co.
The Subadviser to the Equity Portfolio is Loomis, Sayles and Company ("Loomis Sayles") 2001 Pennsylvania Avenue, N.W., Washington, D.c. 20006, which replaced United States Trust Company as of February 1, 1994 upon shareholder approval. The individual portfolio manager responsible for the Equity Portfolio is Philip J. Schettewi, Managing Partner, Vice President, and Chief Portfolio Strategist of Loomis, Sayles. Mr. Schettewi is a Chartered Financial Analyst and has 12 years' experience in the investment business.
For its services, CAMCO, as the Portfolios' investment adviser, is entitled to receive a fee based on a percentage of the average daily net assets of each of the Portfolios. CAMCO is currently entitled to receive a base fee of 0.70% of average daily net assets of the Equity Portfolio and 0.80% of the average daily net assets of the Capital Accumulation Portfolio.
CAMCO will pay the Subadvisers of the Portfolios a base fee of 0.25% of average net assets. In addition, under the circumstances described below, for each Portfolio, the investment advisers to the Capital Accumulation Portfolios and the investment subadvisers to the Portfolios may earn (or have their fees reduced by) performance fee adjustments based on the extent to which performance of the Portfolios exceeds or trails the index against which they are measured. In the case of the Equity Portfolio, payment consistent with the performance fee adjustment began June 1, 1995. In the case of the Capital Accumulation Portfolio, the performance fee adjustment will begin on January 1, 1997. The specific adjustments are as follows:
The Equity Portfolio Subadviser's Performance Fee Adjustment
The performance fee adjustment for the Equity Portfolio is collected from or disbursed by the Portfolio directly to the investment adviser, which acts as a conduit to the investment subadviser, but which does not retain any of in the performance fee adjustment.
The Capital Accumulation Portfolio: CAMCO's Performance Fee Adjustment
CAMCO's performance fee adjustment will be paid directly from the Portfolio to CAMCO.
The Capital Accumulation Portfolio: Each Subadviser's Performance Fee Adjustment
Payment of an upward performance fee adjustment to a Subadviser will be paid from the Capital Accumulation Portfolio to CAMCO and not out of CAMCO's own fee, and CAMCO will pass on the appropriate amount to the particular Subadviser; fees adjusted downward from the base fee as a result of under performance will be retained by the Portfolio. Payment of an upward performance adjustment will be conditioned on: (1) the performance of the Portfolio as a whole having exceeded the S&P 400 Mid-Cap Index; and (2) payment of the performance adjustment not causing the Portfolio's performance to fall below the S&P 400 Mid-Cap Index.
Calvert Administrative Services Company ("CASC"), an affiliate of CAM, has been retained by the Capital Accumulation Portfolio to provide certain administrative services necessary to the conduct of its affairs, including the preparation of regulatory filings and shareholder reports, the daily determination of net asset value per share and dividends, and the maintenance of portfolio and general accounting records. For providing such services, CASC is entitled to receive a fee from the Portfolio of 0.10% of net assets per year.
See "Investment Adviser, Sub-Advisers and Administrator" above.
Annual Fund operating expenses of the Equity Portfolio and the Capital Accumulation Portfolio are shown below. Expenses are unaudited and are based on year-to-date actual expenses through November 30, 1995, expressed as a percentage of average net assets.
Management fees for the Equity Portfolio reflects the negative performance fee adjustment due to the Equity Portfolio's below average performance. Management fees for Capital Accumulation Portfolio do not include the 0.10% annual administrative service fee which was voluntarily waived. If this fee had been charged, the Management fees would have been 0.90% and the total fund operating expenses would have been 1.28%, for both the Capital Accumulation Portfolio and the Pro Forma Combined. Management fees include sub-advisor fees.
Although the fees in the Capital Accumulation Portfolio are higher than those in the Equity Portfolio, the Fund's Board of Directors believes that the proposed merger is in the best interests of the shareholders of both the Equity Portfolio and the Capital Accumulation Portfolio, particularly in terms of the comparative performance records of each of the Portfolios; relative compatibility of their investment objectives and policies; the relative size of the portfolios in terms of assets; and the investment experience, expertise and resources of the Advisor and Subadvisors.
With regard to the Portfolios, the Company's shares are sold to Providian for allocation to the Separate Account to fund the benefits under certain variable annuity and variable life insurance policies (the "Variable Accounts"). Shares of the Portfolios may also be sold to other insurance companies for the same purpose. In this Prospectus/Proxy Statement, Providian and the other applicable companies may be referred to as the "Insurance Companies," and the variable annuity and variable life insurance policies may be referred to as the "Policies."
Shares of the Portfolios may only be sold to the Insurance Companies for their Separate Accounts, and not to individual investors. As such, the "shareholders" referred to in this prospectus are the Insurance Companies. Nevertheless, as a policyholder you have an opportunity to choose among the various Portfolios in order to fund the benefits under any Policies you purchase, subject to any limitations described in the Insurance Companies' prospectuses.
Shares are purchased by the Variable Accounts at the net asset value of a Portfolio next determined after the Insurance Company receives the premium payment. The Company continuously offers its shares in the Portfolios at a price equal to the net asset value per share. Initial and subsequent payments allocated to a Portfolio are subject to the limits applicable in the Policies issued by the Insurance Companies.
It is conceivable that in the future it may be disadvantageous for both annuity Variable Accounts and life insurance Variable Accounts, or for Variable Accounts of different Insurance Companies, to invest simultaneously in a Portfolio, although currently neither the Insurance Companies nor the Company foresees any such disadvantages to either variable annuity or variable life insurance policyholders of any Insurance Company. The Company's Directors intend to monitor events in order to identify any material conflict between such policyholders and to determine what action, if any, should be taken in response to the problem.
Information concerning the purchase of shares is described above.
The Insurance Companies redeem shares of the Portfolios to make benefit and surrender payments under the terms of their Policies. Redemptions are processed on any day on which the Company is open for business (each day the New York Stock Exchange is open), and are made at a Portfolio's net asset value next determined after the appropriate Insurance Company receives a surrender request in acceptable form.
Payment for redeemed shares will be made promptly, and in no event later than seven days. However, the right of redemption may be suspended or the date of payment postponed in accordance with the Rules under the 1940 Act. The amount received on redemption of the shares of a Portfolio may be more or less than the amount paid for the shares, depending on the fluctuations in the market value of the assets owned by the Portfolio. The Company redeems all full and fractional shares of the Portfolios for cash.
The net asset value of the shares of each Portfolio is determined once daily as of the close of business of the New York Stock Exchange, on days when the Exchange is open for business, or for any other day when there is a sufficient degree of trading in the investments of a Portfolio to affect materially its asset value per share (except on days when no orders to purchase or redeem shares of the Portfolio have been received). The net asset value is determined by adding the values of all securities and other assets of a Portfolio, subtracting liabilities and expenses, and dividing by the number of outstanding shares of the Portfolio.
Except for money market instruments maturing in 60 days or less, securities held by the Portfolios are valued at their market value if market quotations are readily available. Otherwise, securities are valued at fair value as determined in good faith by the Board of Directors, although the actual calculations may be made by persons acting pursuant to the direction of the Board of Directors of the Company. All money market instruments with a remaining maturity of 60 days or less held by a Portfolio, are valued on an amortized cost basis.
It is the Company's intention to distribute substantially all of the net investment income, if any, of the Portfolios. Net investment income consists of all payments of dividends or interest received by a Portfolio less estimated expenses, including the investment advisory fee. All net realized capital gains, if any, are declared and distributed periodically, at least annually. All dividends and distributions are reinvested in additional shares of the Portfolio at net asset value.
The following tables provide information about the Capital Accumulation Portfolio's financial history. They express the information in terms of a single share outstanding throughout each period. The tables have been audited by those independent accountants whose reports are included in the Fund's Annual Report to Shareholders, for each of the respective periods presented. The tables should be read in conjunction with the financial statements and their related notes. The current Annual Report to Shareholders is incorporated by reference into the Statement of Additional Information.
The Equity Portfolio and the Capital Accumulation Portfolio have distinct investment objectives that they pursue through their separate investment policies, as stated above. There can be no assurance that the objectives of either the Equity Portfolio or the Capital Accumulation Portfolio will be achieved. The differences in objectives and policies between the Equity Portfolio and the Capital Accumulation Portfolio can be expected to affect the return of each. As described below under "Comparison of Investment Objectives and Policies", the Capital Accumulation Portfolio may be viewed as more aggressive and concomitantly more volatile than the Equity Portfolio for five principal reasons.
First, the Capital Accumulation Portfolio is "non-diversified" which means that, as opposed to the "diversified" Equity Portfolio, a higher percentage of its assets may be invested in a more limited number of issues, with the result that its shares are more susceptible to any single economic, political or regulatory event than the shares of the Equity Portfolio.
Second, The Capital Accumulation Portfolio invests in small-cap issuers. The securities of small-cap issuers tend to be less actively traded than the securities of larger issuers, may trade in a more limited volume, and may change in value more abruptly than securities of larger companies. Information concerning these securities may not be readily available so that the companies may be less actively followed by stock analysts. Small-cap issuers do not usually participate in market rallies to the same extent as more widely-known securities, and they tend to have a relatively higher percentage of insider ownership. There is no limit on the percentage of assets that may be invested in small-cap issuers.
Third, the Capital Accumulation Portfolio may borrow up to one-third of its total assets while the Equity Portfolio may only borrow up to 10% of its total assets. This allows the Capital Accumulation Portfolio to use potentially more leverage than the Equity Portfolio, although in any event, the Capital Accumulation Portfolio will only borrow from banks and then only for temporary or emergency purposes.
Fourth, the Capital Accumulation Portfolio may invest up to 3% (while the Equity Portfolio may invest up to 1%) of its total assets in investments that offer a below market return but that further the Portfolio's social criteria.
Finally, the Capital Accumulation Portfolio may invest up to 15% of its net assets in illiquid securities while the Equity Portfolio may invest up to 10% of its net assets in such securities.
INFORMATION ABOUT THE PROPOSED MERGER
DESCRIPTION ABOUT THE PROPOSED MERGER
The Plan provides that after the Effective Time on the Closing Date the Equity Portfolio will transfer all of its assets and liabilities to the Capital Accumulation Portfolio if all of the conditions of the Plan are fulfilled and are not waived and the Closing Date is not extended. In exchange for the Equity Portfolio assets and liabilities, the Capital Accumulation Portfolio will issue to the Equity Portfolio a number of Capital Accumulation Portfolio shares having a value equal to the aggregate net assets of the Equity Portfolio acquired. The Closing Date is currently scheduled for February 26, 1996 and may be changed as determined by officers of the Company. As part of the Plan, the Company's shareholders are being asked to approve a proposed amendment to the Company's Articles of Incorporation to reclassify the issued and unissued shares of the class of the Company's common stock currently designated as the Equity Portfolio into the class of common stock currently designated as the Capital Accumulation Portfolio. Copies of the Plan and the proposed amendment to the Company's Articles of Incorporation are attached as Exhibits A and B, respectively, to this Prospectus/Proxy Statement.
The number of shares of the Capital Accumulation Portfolio to be issued in the Proposed Merger will be determined on the basis of the relative net asset values of the Equity Portfolio and the Capital Accumulation Portfolio calculated as of the Valuation Date. The net asset value of each Portfolio will be determined by dividing the value of that Portfolio's portfolio securities, cash and other assets (including accrued but uncollected interest and dividends), less all liabilities (including accrued expenses but excluding capital and surplus) by the number of shares of that Portfolio outstanding.
Capital Accumulation Portfolio shares will be distributed to Equity Portfolio shareholders in exchange for their Equity Portfolio shares, on a pro rata basis. The number of such full and fractional Capital Accumulation shares issued to each Equity Portfolio shareholder will be determined by multiplying the number of Equity Portfolio shares to be exchanged by a fraction, the numerator of which is the net asset value per share of the Equity Portfolio and the denominator of which is the net asset value per share of the Capital Accumulation Portfolio. Thus, the Equity Portfolio shares of each Equity Portfolio shareholder will be exchanged for the number of full and fractional shares of the Capital Accumulation Portfolio which, when multiplied by the net asset value per share of the Capital Accumulation Portfolio, will have a value equal to the aggregate net asset value of that shareholder's shares in the Equity Portfolio at the Effective Time on the Closing Date. The aggregate value of the Capital Accumulation Portfolio shares attributable to shareholders previously holding Equity Portfolio shares will be the same immediately after the Proposed Merger as the aggregate value of the Equity Portfolio shares attributable to such shareholders immediately before the Proposed Merger.
The Proposed Merger as provided in the Plan is subject to approval of the shareholders of the Equity Portfolio. Approval requires the affirmative vote of at least a majority of the Equity Portfolio shares entitled to vote. The Plan is also conditioned on: (i) acceptance of the amendment to the Company's Articles of Incorporation by the Maryland Department of Assessments and Taxation and the amendment's having become effective; (ii) receipt of any necessary regulatory approvals from the SEC; (iii) receipt of an opinion of outside counsel that the Proposed Merger qualifies as a tax-free reorganization under the Code; and (iv) receipt of any necessary regulatory approvals by relevant state insurance authorities.
REASONS FOR THE PROPOSED MERGER
The Directors of the Company have considered and approved the Proposed Merger, as recommended by CAM, including entry by the Company on behalf of each Portfolio into the Plan, as in the best interests of the shareholders.
In making their recommendation to the Directors, the representatives of CAM reviewed with the Directors various factors about the Company and its Portfolios and the Proposed Merger. There are certain similarities between the Capital Accumulation Portfolio and the Equity Portfolio. Specifically, the Capital Accumulation Portfolio and the Equity Portfolio have certain similar investment objectives and policies, and relatively comparable risk profiles. See, "Comparison of Investment Objectives and Policies" below. In terms of total net assets the Equity Portfolio at August 31, 1995 had net assets of only approximately $2.8 million. The Capital Accumulation Portfolio's net assets at such date were approximately $7.6 million. The Equity Portfolio has not, since its inception in 1992 achieved asset levels on a continuing basis that would permit it to operate economically and generate a competitive return. Given the relative similarities between the Portfolios and the fact that the Portfolios are offered through common distribution channels and are both managed by CAM, CAM believes that the Equity Portfolio will not be able to achieve significant increases in asset levels in the foreseeable future.
The Directors of the Company met on August 2, 1995 and considered the recommendation of CAM, and, in addition, considered among other things in general, (i) the terms and conditions of the Proposed Merger; (ii) whether the Proposed Merger would result in the economic dilution of shareholder interests; (iii) the comparative performance records of each of the Portfolios; compatibility of their investment objectives and policies; the investment experience, expertise and resources of CAM and the Subadvisers; and the personnel and financial resources of CAM and the Subadvisers; (iv) the fact that the Capital Accumulation Portfolio will assume certain identified liabilities of the Equity Portfolio; and (v) the expected federal income tax consequences of the Proposed Merger.
The Directors also considered the benefits to be derived by shareholders of the Equity Portfolio from the transfer of its assets to the Capital Accumulation Portfolio. In this regard, the Directors considered the economies of scale that could be realized by the participation by shareholders of the Equity Portfolio in the combined portfolio.
During their consideration of the Proposed Merger, the Directors met with members of the legal staff at CAM, as well as counsel to the Independent Directors, regarding the legal issues involved. The Directors also concluded at a meeting on August 2, 1995 that the Proposed Merger would be in the best interests of shareholders of the Capital Accumulation Portfolio and that the interests of the shareholders of the Capital Accumulation Portfolio will not be diluted as a result of the transactions contemplated by the Proposed Merger.
THE DIRECTORS OF THE COMPANY RECOMMEND THAT THE SHAREHOLDERS OF THE EQUITY PORTFOLIO APPROVE THE PROPOSED MERGER.
The following tables show the capitalization of the Capital Accumulation Portfolio and the Equity Portfolio as of August 31, 1995 individually and on a pro forma basis as of that date, giving effect to the proposed acquisition of assets and liabilities of the Equity Portfolio at the then net asset value:
CAPITALIZATION OF THE EQUITY PORTFOLIO AND THE CAPITAL ACCUMULATION PORTFOLIO
Net Assets............ $2,754,925 $7,612,117 $10,367,042 Shares Outstanding.... 154,804 328,606 447,532
The table above should be read in conjunction with the Funds' Annual Report for the fiscal year ended December 31, 1994 and the unaudited statement of assets and liabilities and statement of operations for June 30, 1995 and the periods then ended, and the unaudited proforma statement of assets and liabilities and statement of operations for December 31, 1994 and August 31, 1995, and the periods then ended, each of which is hereby incorporated herein by reference.
On the Record Date, there were 234,843.126 and 368,096.669 shares of the Equity Portfolio and the Capital Accumulation Portfolio, respectively, outstanding.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES OF INVESTMENT OBJECTIVES
The following discussion is based upon the descriptions of the respective investment objectives, policies and restrictions set forth in the Company's CRI Prospectus and Statement of Additional Information for the CRI portfolios. The Company's CRI Prospectus also offers additional portfolios managed by CAM. These additional portfolios are not involved in the Proposed Merger, their investment objectives, policies and restrictions are not discussed in this Prospectus/Proxy Statement and their shares are not offered hereby.
Although the Capital Accumulation Portfolio invests primarily in equity securities, it may invest in debt securities. These debt securities may consist of investment-grade and noninvestment-grade obligations.
Both the Capital Accumulation and Equity Portfolios may, in pursuit of their investment objectives, purchase put and call options and engage in the writing of covered call options and secured put options on securities of issuers that meet their social criteria, and employ a variety of other investment techniques, including the purchase and sale of market index futures contracts, financial futures contracts and options on such futures. Both Portfolios may engage in futures contracts and related options only to protect against market declines. Neither Portfolio engages in such transactions for speculation or leverage. It is an operating policy of the Company that neither Portfolio may invest in options and futures contracts if as a result more than 5% of its assets would be so invested.
Each Portfolio may engage in repurchase agreements and reverse repurchase agreements. No more than 10% of either Portfolio's assets may be invested in repurchase agreements not terminable within seven days.
The Equity Portfolio may borrow no more than 10% of the value of its assets from banks (and pledge its assets to secure such borrowing) for temporary or emergency purposes, but not for leverage, while the Capital Accumulation Portfolio may borrow up to one-third of the value of its assets. Each Portfolio may also make loans of the securities it holds.
Each Portfolio may lend its securities to New York Stock Exchange member firms and to commercial banks with assets of $1 billion or more. The Equity Portfolio may only make loans if the value of the securities loaned does not exceed 10% of the Portfolio's assets and the Capital Accumulation Portfolio may lend no more than 5% of its securities.
Each Portfolio may invest up to 25% of its assets in the securities of foreign issuers. The Portfolios may write exchange-traded call options on their securities. Call options may be written on portfolio securities, securities indices, or foreign currencies. With respect to securities and foreign currencies, each Portfolio may write call and put options on an exchange or over-the-counter. Neither Portfolio may write options on more than 50% of its total assets. Management presently intends to cease writing options if and as long as 25% of such total assets are subject to outstanding options contracts or if required under regulations of state securities administrators.
Each Portfolio may write call and put options in order to obtain a return on its investments from the premiums received and will retain the premiums whether or not the options are exercised.
The Portfolios may invest up to an aggregate of 5% of their total assets in exchange-traded or over-the-counter call and put options on securities and securities indices and foreign currencies. Purchases of such options may be made for the purpose of hedging against changes in the market value of the underlying securities or foreign currencies. The Portfolios may sell a call option or a put option which they have previously purchased prior to the purchase (in the case of a call) or the sale (in the case of a put) of the underlying security or foreign currency.
Each Portfolio may invest up to 5% of its net assets in warrants and stock rights, but no more than 2% of its net assets in warrants and stock rights not listed on the New York Stock Exchange.
A Portfolio may enter into financial futures contracts and related options as a hedge against anticipated changes in the market value of its portfolio securities or securities which it intends to purchase or in the exchange rate of foreign currencies.
A Portfolio may purchase and sell financial futures contracts which are traded on a recognized exchange or board of trade and may purchase exchange or board-traded put and call options in financial futures contracts. Each Portfolio may engage in transactions in financial futures contracts and related options only for hedging purposes and not for speculation. In addition, a Portfolio will not purchase or sell any financial futures contract or related option if, immediately thereafter, the sum of the cash or U.S. Treasury bills committed with respect to a Portfolio's existing futures and related options positions and the premiums paid for related options would exceed 5% of the market value of its total assets.
The value of a Portfolio's assets as measured in Untied States dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the Portfolios may incur costs in connection with conversions between various currencies. The Portfolios conduct their foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through forward contracts to purchase or sell foreign currencies.
The Portfolios may also hedge their foreign currency exchange rate risk by engaging in currency financial futures and options transactions.
When CAM or a Subadviser believes that the currency of a particular foreign country may suffer a substantial decline against the United States dollar, it may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of a Portfolio's portfolio securities denominated in such foreign currency.
The Equity Portfolio may invest up to less than 1% and the Capital Accumulation Portfolio up to 3% of its assets in investments in securities that offer a rate of return below the then prevailing market rate and that present attractive opportunities for furthering the Portfolios' social criteria.
The Equity Portfolio may not purchase illiquid securities if more than 10%, and the Capital Accumulation Portfolio may not purchase illiquid securities if more than 15%, of the value of its net assets would be invested in such securities.
The Capital Accumulation Portfolio and the Equity Portfolio are subject to different investment screens.
1. The Capital Accumulation Portfolio avoids investing in companies that, in CAM's opinion, have significant or historical patterns of violating environmental regulations, or otherwise have an egregious environmental record. Additionally, the Portfolio avoids investing in nuclear power plant operators and owners, or manufacturers of key components in the nuclear power process.
2. The Capital Accumulation Portfolio will not invest in companies that are significantly engaged in weapons production.
3. The Capital Accumulation Portfolio will not invest in companies that, in CAM's opinion, have significant or historical patterns of discrimination against employees on the basis of race, gender, religion, age, disability or sexual orientation, or that have major labor-management disputes.
4. The Capital Accumulation Portfolio will not invest in companies that are significantly involved in the manufacture of tobacco or alcohol products. The Capital Accumulation Portfolio will not invest in companies that make products or offer services that, under proper use, in the Advisor's opinion, are considered harmful.
The Equity Portfolio seeks to invest in producers or service providers that:
1. deliver safe products and services in ways that sustain our natural environment.
2. Are managed with particpation throughout the organization in defining and achieving objectives.
3. Negotiate fairly with their workers, provide an enviornment supportive of their wellness, do not discriminate on the basis of race, gender, religion, age, disability, ethnic origin, or sexual orientation, do not consistently violate regulations of the Equal Employment Opportunity Commission, and provide opportunities for women, disadvantaged minorities, and others for whome equal opportunities have often been denied.
4. Foster awareness of a commitment to human goals, such as creativity, productivity ,self-respect and responsiblility, within the organization and the world, and continually recreate a context within which these goals can be realized.
The Equity Portfolio will not invest in an issuer primarily engaged in:
1. The production of nuclear energy or the manufacture of equipment to produce nuclear energy.
2. Business activities in support of repressive regimes.
3. The manufacture of weapons systems.
In addition, the Portfolio will not, as a matter of operating policy which may be changed without the approval of a majority of the outstanding shares, invest in an issuer primarily engaged in the manufacture of alcoholic beverages or tobacco products, or the operation of gambling casinos.
The characteristics of each investment policy and the associated risks are described in the Company's CRI Prospectus and Statement of Additional Information. Both Portfolios have other investment policies and restrictions which are also set forth in the Company's CRI Prospectus and Statement of Additional Information, which are hereby incorporated herein by reference and available upon request.
The current sub-advisers, Apodaca-Johnston, Brown Capital Management and Fortaleza Asset Management, assumed the investment management of the Capital Accumulation Portfolio effective December 8, 1994. Prior to then, it had been managed by Ariel Capital Management. For the 12 months ended December 31, 1994, which reflects management by Ariel Capital Management until December 8, and the new investment managers after that, the Portfolio returned -9.92%. Annual performance was behind that of the Lipper Growth Funds Average, which returned -2.15% for the year.
For the six months ended June 30, 1995, the Portfolio's return was 24.12%, well ahead of the 17.47% return for the Lipper Growth Funds Average. Each of the Portfolio's investment managers contributed positive returns that were ahead of their individual benchmarks. Concentrations in the better performing sectors, including technology, health care and specialty retailers boosted performance. Within the technology sector, the Portfolio's investments in semi-conductor/silicon-related issues experienced enormous growth.
The line graph below is comparing a hypothetical $10,000 investment of the Capital Accumulation Portfolio to the S&P 400, Russell 2000, and S&P 500:
Comparison of change in value of a hypothetical $10,000 investment.
==================================== (not able to show graph)
7/91 8/92 6/93 8/94 8/95
......Calvert Responsibly Invested Capital Accumualtion
Life of Portfolio (7/91) 4.88% 10.37%
Performance information is for the Capital Accumulation Portfolio only and does not reflect chganges and expenses of the variable annuity. Past performance does not indicate future results. The current Adviser and Sub-Advisers have managed the Portfolio since December 8, 1994.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
The Company was incorporated in Maryland on September 27, 1982, and is an open-end management investment company registered under the 1940 Act. The Company has seven CRI portfolios, including the Portfolios, designed to provide opportunities for investing in enterprises that make a significant contribution to society through their products and services and through the way they do business.
The total number of shares of stock of all classes which the Company is currently authorized to issue is 100 million shares. The par value of each share is $1.00. The Capital Accumulation Portfolio currently has 4,000,000 authorized shares and the Equity Portfolio currently has 2,000,000 authorized shares. Fractional shares may be issued. Each Portfolio's shares have equal voting rights and represent equal proportionate interests in the assets belonging to the Portfolio. Shareholders of each Portfolio are entitled to receive dividends and other amounts as determined by the Directors of the Company. Shareholders of each Portfolio vote separately as to matters that affect only their particular Portfolio such as approval or amendments of investment advisory agreements or proposed reclassifications, that affect only their particular portfolio.
SHAREHOLDER MEETINGS AND VOTING RIGHTS
The Company is not required to hold annual meetings of shareholders. The Company does not permit cumulative voting. A majority of shares entitled to vote on a matter constitutes a quorum for consideration of such matter. In either case, a majority of the shares voting is sufficient to act on a matter (unless otherwise specifically required by the applicable governing documents or other law, including the 1940 Act).
In the event of the liquidation of a Portfolio the shareholders are entitled to receive, when, and as declared by the Directors, the excess of the assets belonging to such portfolio over the liabilities belonging to the Portfolio. The assets so distributable to shareholders of a Portfolio will be distributed among the shareholders in proportion to the number of shares of the Portfolio held by them and recorded on the books of the Company.
Shareholders of the respective Funds have the same right to inspect in Maryland the governing documents, records of meetings of shareholders, shareholder lists, share transfer records, accounts and books of the Company as are permitted shareholders of a corporation under the Maryland corporation law. The purpose of inspection must be for interests of shareholders relative to the affairs of the Portfolios.
The foregoing is only a summary of certain characteristics of the operations of the Company's Articles of Incorporation, its By-Laws and Maryland law and is not a complete description of those documents or the law. Shareholders should refer to the provisions of such respective Articles of Incorporation, By-Laws, and Maryland law directly for more complete information.
Information concerning the operation and management of the Company and the Portfolios is incorporated herein by reference from the Prospectus dated May 1, 1995, a copy of which is enclosed, and the Statement of Additional Information dated as of the same date. A copy of such Statement of Additional Information is available upon request and without charge by writing to the Company, at the address listed on the cover page of this Prospectus/Proxy Statement or by calling toll-free 1-800-368-2748.
The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended and the 1940 Act, and in accordance therewith files reports and other information including proxy material, and charter documents with the SEC. These items can be inspected and copies obtained at the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Statement of Additional Information relating to this Prospectus/Proxy Statement includes the following financial statements: (i) financial statements for the fiscal year ended December 31, 1994, included in the Company's Annual Report for that period; (ii) unaudited financial statements for the six-months ended June 30, 1995, and (iii) unaudited pro-forma financial statements combining the Equity Portfolios and the Capital Accumulation Portfolio's statement of net assets and statement of operations for December 31, 1994 and August 31, 1995. The financial statements included in the Company's Annual and Semi-Annual Reports are incorporated by reference into the Statement of Additional Information. The financial statements for the year ended December 31, 1994 included in the Company's Annual Report have been audited by Coopers & Lybrand LLP, independent accountants, and have been included in the Statement of Additional Information in reliance upon the report of Coopers & Lybrand LLP given upon the authority of such firm as experts in accounting and auditing.
Certain legal matters concerning the issuance of shares of the Company will be passed upon by William M. Tartikoff, Esq., General Counsel of The Calvert Group, Ltd. Sullivan & Worcester, Washington, D.C., has advised the Company on certain federal income tax matters.
The Directors of the Company do not intend to present any other business at the Meeting. If, however, any other matters are properly brought before the Meeting, the persons named in the accompanying form of proxy will vote thereon in accordance with their judgment.
THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE INDEPENDENT DIRECTORS, RECOMMENDS APPROVAL OF THE PROPOSED MERGER AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PROPOSED MERGER.
The Company is a Maryland corporation whose shares of common stock are currently classified into seven classes or series ("Portfolios"), including the Calvert Responsibly Invested ("CRI") Equity Portfolio (the "Equity Portfolio") and the CRI Capital Accumulation Portfolio (the "Capital Accumulation Portfolio").
The Company is registered under the Investment Company Act of 1940, as amended ("1940 Act") as an open-end management investment company, and its shares of common stock are registered under the Securities Act of 1933, as amended (the "1933 Act").
The Company offers shares of certain Portfolios to Providian Life and Health Insurance Company ("Providian") and its Separate Accounts and other insurance companies and their separate accounts.
Providian issues, or intends to issue, variable annuity contracts ("contracts") through its Separate Account or Accounts. The Company understands that Providian votes the shares of the Equity Portfolio held by its Separate Account that are attributable to contracts in accordance with instructions received from holders of interests in the contracts (hereinafter, "shareholders"). The Company further understands that Providian votes shares of the Equity Portfolio as to which no instructions have been received in the same proportion as the shares of the relevant Separate Account as to which instructions have been received.
The Directors of the Company have determined that it is advisable to amend the Articles of Incorporation of the Company to reclassify the issued and unissued shares of common stock currently designated as the Equity Portfolio into the class of common stock currently designated as the Capital Accumulation Portfolio (the "Reclassification") and have directed that the proposed amendment be submitted for consideration at a special meeting of shareholders.
The Directors of the Company have determined - independently for the Equity Portfolio and for the Capital Accumulation Portfolio - that the Reclassification, including the consideration, is reasonable and fair, does not involve overreaching on the part of any person concerned, and will not dilute the interests of shareholders. In addition, the Directors have determined that the investment objectives of the Equity Portfolio and the Capital Accumulation Portfolio are compatible so that the Reclassification will be compatible with the investment objectives and policies recited in the registration statement and reports relating to each. Furthermore, the Directors have determined that the Reclassification would be in the best interests of shareholders and is consistent with the general purposes of the 1940 Act, the protection of investors, and the purposes fairly intended by the policy and provisions of the 1940 Act.
It is intended that the Reclassification shall qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
1. Meeting Date. In accordance with Section 2-604 of the Maryland General Corporation Law (the "Maryland Law") and the Company's Articles of Incorporation, the Reclassification shall be submitted to the shareholders of the Equity Portfolio for their approval at a special meeting (the "Meeting") to be held on or about February 16, 1996 at 10:00 a.m., Eastern Time, at the offices of the Company, 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814.
2. Record Date. The close of business on December 18, 1995, shall be the record date (the "Record Date") for the Meeting and only shareholders of record of the Equity Portfolio on such date shall be entitled to notice of and be permitted to give voting instructions at the Meeting.
3. Required Vote. The Reclassification shall not become effective without the affirmative vote of the holders of a majority (as defined in the 1940 Act) of the interests of the total number of Equity Portfolio shares outstanding and entitled to vote thereon.
4. Form N-14 Registration Statement/Proxy Materials. The appropriate officers of the Company shall take all actions necessary or appropriate to solicit the approval of the shareholders of the Equity Portfolio, including the preparation and execution of a registration statement on Form N-14 of the Securities and Exchange Commission (the "SEC"), and any amendments thereto, containing a notice of meeting, proxy statement, and voting instruction forms (collectively, the "proxy materials"), and the filing of such proxy materials with the SEC.
5. Mailing of Proxy Materials. The appropriate officers of the Company shall cause the proxy materials to be mailed on or about December 30, 1995, as appropriate, to each shareholder of the Equity Portfolio of record on the Record Date.
B. Amendment of Articles of Incorporation.
In accordance with Maryland Law, the Company shall effect the Reclassification by amending its Articles of Incorporation.
1. Form of Amendment. The amendment to the Company's Articles of Incorporation (the "Amendment") shall be in the form of Articles Supplementary with such modifications as the officers executing the same deem necessary or appropriate, consistent with the purposes of this Plan.
2. Date of Filing. The appropriate officers of the Company shall execute, acknowledge, verify and file the Amendment with the Maryland State Department of Assessments and Taxation (the "Maryland State Department") on or about Feburary 19, 1996, following shareholder approval, for effectiveness at 12:01 a.m. or Feburary 26, 1996.
In connection with the Reclassification of shares, the Equity Portfolio shall transfer all of its assets and liabilities to the Capital Accumulation Portfolio, in exchange for which the Capital Accumulation Portfolio shall issue to the Equity Portfolio a number of the Capital Accumulation Portfolio shares having a value equal to the aggregate net assets of the Equity Portfolio acquired.
1. Time of Transfer. The above-described transfer shall occur on February 26, 1996 (the "Closing Date"), or such other time and date as determined by the appropriate officers of the Company.
2. Issuance of Capital Accumulation Portfolio Shares to the Equity Portfolio. The number of shares of the Capital Accumulation Portfolio to be issued to the Equity Portfolio shall be determined on the basis of the relative net asset values of the Capital Accumulation Portfolio and the Equity Portfolio calculated as of the close of business on the business day immediately preceding the Closing Date. The net asset value of each Portfolio shall be determined by dividing the value of that Portfolio's securities, cash, and other assets (including accrued but uncollected interest and dividends), less all liabilities (including accrued expenses but excluding capital and surplus) by the number of shares of that Portfolio outstanding.
3. Distribution of Capital Accumulation Portfolio Shares to Equity Portfolio Shareholders. Upon effectiveness of the Amendment, the Equity Portfolio shall distribute the Capital Accumulation Portfolio shares it receives to the Equity Portfolio shareholders in exchange for their Equity Portfolio shares, on a pro rata basis. The number of such full and fractional Capital Accumulation Portfolio shares issued to each Equity Portfolio shareholder shall be determined by multiplying the number of Equity Portfolio shares to be exchanged by a fraction, the numerator of which is the net asset value per share of the Equity Portfolio and the denominator of which is the net asset value per share of the Equity Portfolio. Thus, the Equity Portfolio shares of each Equity Portfolio shareholder shall be exchanged for the number of full and fractional shares of the Capital Accumulation Portfolio which, when multiplied by the net asset value per share of the Capital Accumulation Portfolio, will have a value equal to the aggregate net asset value of that shareholder's shares in the Equity Portfolio on the Closing Date.
D. Costs of Effecting the Reclassification.
The Equity Portfolio and the Capital Accumulation Portfolio shall each pay its portion of the expenses attributable to the Reclassification.
1. Termination of Agreements. The appropriate officers of the Company shall cause all agreements with the Equity Portfolio or the Company to be terminated as they relate to the Equity Portfolio.
2. General Authority. The appropriate officers of the Company shall, in the name and on behalf of the Company or either of the Portfolios, do and perform such further acts and things, modify any dates or deadlines, and execute and deliver or file such other instruments, certificates, and documents as they shall determine to be necessary, appropriate, or desirable to carry out the foregoing, any such determination to be conclusively evidenced by the doing or performing of any such act or thing or the execution and delivery or filing of any such instrument, certificate, or document.
The Reclassification shall not become effective unless each of the following has occurred:
A. The Amendment shall have been approved by the affirmative vote of the holders of a majority (as defined in the 1940 Act) in interests of the total number of Equity Portfolio shares outstanding and entitled to vote
B. The Articles Supplementary shall have been accepted for filing by the Maryland Department of Assessments and Taxation and become effective;
C. The Company shall have received any necessary regulatory approvals of the proposed Reclassification by the SEC;
D. The Company shall have received an opinion of counsel reasonably satisfactory to it that the Reclassification shall qualify as a tax-free reorganization under Section 368 of the Code; and
E. The Insurance Companies shall have received any necessary regulatory approvals of the proposed Reclassification by relevant state insurance authorities.
At the Closing Date, the Capital Accumulation Portfolio shall succeed, without any transfer other than that contemplated in Section II.C above, to all the assets belonging to the Equity Portfolio (or allocated to the Equity Portfolio by the Board of Directors of the Company pursuant to Article Ninth of the Company's Restated Articles of Incorporation) and shall be subject to all the liabilities of the Equity Portfolio in the same manneras if the liabilities had been incurred by, or allocated to, the Capital Accumulation Portfolio in the first instance.
Upon effectiveness of the Amendment, all of the Shares of the Equity Portfolio shall be reclassified as Capital Accumulation Portfolio shares, and the Equity Portfolio shall cease to be a separate class of stock of the Company.
FIRST: The name of the Corporation is Acacia Capital Corporation.
SECOND: The Corporation desires to restate its charter as currently in effect.
THIRD: The provisions set forth in the Articles of Restatement are all the provisions of the charter currently in effect.
FOURTH: These Articles of Restatement have been approved by a majority of the entire Board of Directors.
FIFTH: The charter is not amended by the Articles of Restatement.
SIXTH: The nature of the business or purposes to be conducted or promoted are as follows:
(A) To conduct and carry on the business of an investment trust or investment company of the general management type.
(B) To invest and reinvest the property and assets of the corporation in securities of different types and classes, including, without in any way limiting the generality thereof, stocks, bonds, notes, debentures, and certificates of interest or participation, and in other personal property without limitation or restriction except for the specific restrictions hereinafter set forth.
(C) To act as financial or fiscal agent for any person, firm, or corporation and as such to manage, control, and deal with, in any and every way whatsoever, the property, holdings, investments, and business interests thereof.
(D) To endorse, guarantee, or undertake the performance of any obligation, contract, or engagement of any other corporation, or other party, if the Corporation is interested in such obligation, contract or engagement.
(E) To purchase, retire, redeem, hold, sell, reissue, transfer, and otherwise deal in, shares of its own capital stock; and to apply to such purchase, retirement, or acquisition any funds or property of the Corporation, whether capital or surplus or otherwise, as may be permitted by law.
(F) To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Maryland.
(G) To do and all of the acts herein set forth or implied and such other acts as are incidental or conducive to the attainment of the objectives and purposes of the Corporation; and to do any and all such acts either as principal or in the capacity of agent, broker, factor, contractor, or otherwise.
SEVENTH: The current address of the principal office of the Corporation is 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814.
EIGHTH: The Corporation's current resident agent is William M. Tartikoff, Calvert Group, 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814.
NINTH: The total number of shares of stock of all classes which the Corporation is authorized to issue is One Hundred Million (100,000,000) shares of stock. The par value of each share shall be One Cent ($0.01). The shares shall be allocated as follows for each series:
No. of Shares per Series
CRI Balanced Growth Portfolio 75,000,000 CRI Money Market Portfolio 9,000,000 CRI Global Equity Portfolio 4,000,000 CRI Capital Accumulation Portfolio 6,000,000 CRI Strategic Growth Portfolio 5,000,000
The Board of Directors is hereby expressly granted the authority to issue any remaining unissued shares and to establish additional series. The Board of Directors is also expressly granted the authority to increase or decrease the number of shares of any series, subject to the provisions that the aggregate number of shares, and the number of shares allocated to all series cannot exceed the total authorized number of shares, and that the number of shares allocated to any series may not be decreased below the number of shares issued and outstanding for such series.
TENTH: The powers, preferences and rights of each series and the qualifications, limitations and restrictions on each such series shall be as follows:
(A) (1) The assets of the Corporation received as consideration for the issue of stock of each series, together with all income, earnings and profits on such assets, and proceeds derived from the sale, exchange or liquidation of such assets, and any assets derived from the reinvestment of such income, earnings and profits, and proceeds in whatever form received, shall for all purposes, subject only to the rights of creditors, be irrevocably allocated to the series for which such assets were received by the Corporation, and be so entered upon the books of account and referred to in these Articles as "the assigned assets" of such series.
(2) Each series will be managed in accordance with the investment policy for such series.
(3) The assigned assets of each series shall be charged with the specific liabilities (including accrued expenses and reserves as conclusively determined from time to time by the Board of Directors) of such series and the general liabilities of the Corporation in proportion to the net asset values of the respective series. Any liability applicable to more than one series, but not to all series, shall be allocated to each series to which it is applicable in proportion to the net asset values of such series. The allocation of any liability to a series by the Board of Directors shall be conclusive.
(B) Each share of stock of a series shall have the same rights, privileges and preferences with respect to the assigned assets of such series as each of the other shares of stock of that series. Each share of stock of a series shall be entitled to participate equally in such dividends as may be declared from time to time by the Board of Directors. Each fractional share of stock of a series shall have proportionately the same rights, privileges and preferences with respect to the assigned assets of such series as a whole share, and shall participate proportionately in dividends as declared.
(C) (1) "Shareholder" as used in these Articles shall mean a shareholder of record as defined in the By-Laws.
(2) Each shareholder of the Corporation shall have one vote for each share held by the shareholder, and shall have a fractional vote for each fraction of a share held by the shareholder.
(3) Whenever the vote of shareholders is required or permitted to be taken in connection with any matter affecting the Corporation or any series, such vote shall be taken, and effective action shall be determined in accordance with the General Laws of the State of Maryland or the Investment Company Act of 1940, whichever is more strict.
ELEVENTH: The number of directors of the Corporation shall be five (5), which number may be increased or decreased pursuant to the By-Laws of the Corporation but shall not be less than three (3). The names of the Directors are Clifton S. Sorrell, Jr., Frank H. Blatz, Jr., Charles E. Diehl, Arthur J. Pugh, and South Trimble III.
TWELFTH: The following provisions are hereby adopted for the purpose of defining, limiting and regulating the powers of the Corporation and of the Directors and shareholders.
(A) No holder of shares of stock shall be entitled as a matter of right to subscribe for or purchase or receive any part of any treasury shares held by the Corporation, or of any new or additional issues of shares of stock or securities convertible into shares of stock of the Corporation, whether now or hereafter authorized, or whether issued for money, for a consideration other than money, or by way of dividends.
(B) Upon the request of any shareholder, the Corporation shall repurchase shares owned by such shareholder on the terms and conditions specified in the By-Laws.
(C) With respect to the issuance and sale of shares of the Corporation's stock, or securities convertible into shares of stock, the Corporation shall receive not less than the net asset value per share determined in accordance with the By-Laws.
(D) Assets of this Corporation may be held or deposited with a bank or trust company or other organization as custodian and, except as provided below, the Corporation may employ any agency or unincorporated, to render management services of any nature with respect to the conduct of the business of the Corporation, and to manage and direct the business and activities of the Corporation to such extent as the Board of Directors may determine from time to time, whether or not such employment involves delegation of functions usually or customarily performed by the Board of Directors or officers of the Corporation. However, this Corporation shall contract with a professional investment manager which is registered under the Investment Advisers Act of 1940 to provide investment advice to the Corporation and to manage the investments of the Corporation's assets.
(E) The Corporation reserves the right from time to time to make any amendment of its Articles, now or hereafter authorized by law, including any amendment which alters the contract rights of any outstanding stock.
(F) The original By-Laws of the Corporation have been adopted by the Directors. The Board of Directors shall have the power to make, alter or repeal any By-Law, except those By-Laws which by statute or By-Law provision must be submitted to shareholders for a vote.
(G) The use of the Corporation of the name "Acacia" and all trademarks now or hereafter associated with Acacia Mutual Life Insurance Company are subject to and conditioned upon the continuing consent of Acacia Mutual Life Insurance Company, a Washington, D.C. Corporation, which consent may be withdrawn at any time.
(H) The Corporation shall have the power and authority to indemnify its directors, officers and employees to the fullest extent permitted by law.
THIRTEENTH:The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned hereby execute these Articles of Restatement and acknowledge the same to be their act and further acknowledge that, to the best of their knowledge, the matters and facts set forth herein are true in all materials respects, under the penalties of perjury.
Dated this 3 rd day of November, 1995. | 497J | 497J | 1996-01-12T00:00:00 | 1996-01-12T12:36:51 |
0000820626-96-000002 | 0000820626-96-000002_0001.txt | OF RESTATED CERTIFICATE OF INCORPORATION
IMC GLOBAL INC. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware ("DGCL"), DOES HEREBY CERTIFY THAT:
FIRST: That at a meeting of the Board of Directors of the Corporation resolutions were duly adopted setting forth a proposed amendment to the Restated Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and directing consideration thereof at a meeting of the stockholders of said Corporation. The resolution setting forth the proposed amendment to the Restated Certificate of Incorporation is as follows:
RESOLVED, that the first paragraph of ARTICLE FOURTH of the Restated Certificate of Incorporation of the Company be amended to read in its entirety as follows:
"The aggregate number of shares which the Corporation shall have authority to issue is 112,000,000 divided into 12,000,000 shares of Series Preferred Stock, $1.00 par value per share (hereafter called "Series Preferred Stock"), and 100,000,000 shares of Common Stock, $1.00 par value per share (hereafter called "Common Stock"). All of such shares shall be issued as fully-paid and non-assessable shares, and the holders thereof shall not be liable for any further payments in respect thereto."
SECOND: That pursuant to a resolution of its Board of Directors, the annual meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the DGCL, at which meeting the necessary number of the outstanding shares of common stock of the Corporation entitled to vote on such amendment by the DGCL and the Restated Certificate of Incorporation were voted in favor of such amendment.
THIRD: That such amendment was duly adopted in accordance with the provisions of Section 242 of the DGCL.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Marschall I. Smith, Senior Vice President, Secretary and General Counsel of the Corporation, as of this 23rd day of October, 1995. | 8-A12B/A | EX-3.(I) | 1996-01-12T00:00:00 | 1996-01-12T12:30:58 |
0000898430-96-000095 | 0000898430-96-000095_0001.txt | [LETTERHEAD OF ADVANCED MICRO DEVICES, INC.]
AMD REPORTS 1995 YEAR-END RESULTS
SUNNYVALE, CA ... January 10, 1996 ... Advanced Micro Devices (AMD) today reported 1995 year-end sales of $2,429,724,000, an increase of 14 percent compared to the $2,134,659,000 reported for fiscal 1994. Net income applicable to common stockholders was $300,511,000, compared to $294,916,000 for 1994. Earnings per share were $2.81 on a fully diluted basis, compared to $2.92 per share fully diluted reported for 1994.
Sales for the fourth quarter of 1995 were $539,029,000, up nine percent compared to $545,168,000 reported for the fourth quarter of 1994. Third quarter sales were $590,385,000. Net income applicable to common stockholders was $55,572,000 or $0.52 per share, up 46 percent compared to $38,171,000 or $0.39 per share fully diluted earned in the fourth quarter of 1994. The fourth quarter 1994 net income reflected a one-time charge for a litigation settlement. Third quarter 1995 net income was $56,163,000 or $0.52 per share. Net income in the fourth quarter of 1995 benefited from a lower tax rate.
The company again reported strong demand for its flash products. "Sales of our flash devices grew over 20 percent on a sequential basis and nearly tripled year-over-year," said W.J. Sanders III, chairman and chief executive officer of AMD. "Late in the quarter we began sampling our new 3 volt-only flash memory products, which we believe will gain wide acceptance for battery powered applications in 1996."
Overall sales in the fourth quarter were only nominally higher over the third quarter due to lower than expected unit shipments of Am486(R) microprocessors. "With the exception of Microsoft(R) Windows(R)-compatible microprocessors, our product sales increased by eight percent sequentially and more than 36 percent for the year," Sanders said.
In December, AMD broadly sampled customers with the first member of its K86(TM) Superscalar Family of Microsoft Windows-compatible microprocessors, code named SSA/5-75. This microprocessor is a plug-in replacement for a Pentium 75. Also during the quarter, AMD commenced shipments of its AM5x86(TM)-P75 microprocessor. This device exceeds the performance of a Pentium 75 while maintaining socket compatibility with 486 motherboards. Both products are manufactured on AMD's 0.35 micron logic process technology.
Focusing on personal and networked computing and communications markets, Advanced Micro Devices, Inc., produces microprocessors and related peripherals, flash memories, programmable logic devices, and circuits for telecommunications and networking applications. Founded in 1969, AMD has sales and manufacturing facilities worldwide.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements in this release looking forward in time involve risks and uncertainties, including product demand and market acceptance risks, the effect of changing economic conditions, the impact of competitive products and pricing, risks in technology development, risks in product development and commercialization, the effect of the company's accounting policy, and other risk factors detailed in the company's Securities and Exchange Commission filings.
Am5x86 and K86 are trademarks of Advanced Micro Devices. Am486 is a registered trademark of Advanced Micro Devices. Microsoft and Windows are registered trademarks of Microsoft Corporation.
All other product names used in this press release are for identification purposes only and may be trademarks of their respective companies.
(Thousands except per share amounts) | 8-K | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T15:37:02 |
0000950109-96-000209 | 0000950109-96-000209_0000.txt | This Prospectus sets forth concisely information about the above-referenced Portfolio that an investor needs to know before investing. Please read this Prospectus carefully, and keep it on file for future reference.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end investment management company, certain classes of which offer financial institutions a convenient means of investing their own funds, or funds for which they act in a fiduciary, agency or custodial capacity, in one or more professionally managed diversified and non-diversified portfolios of securities. A portfolio may offer separate classes of shares that differ from each other primarily in the allocation of certain distribution expenses and minimum investment amounts. This Prospectus offers Class A shares of the Trust's Tax Free Portfolio (the "Portfolio"), a money market portfolio.
AN INVESTMENT IN THE PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC- CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
1 The Manager has waived, on a voluntary basis, a portion of its fee, and the Management/Advisory Fees shown reflect this voluntary waiver. The Manager reserves the right to terminate its waiver at any time in its sole discretion. Absent such waiver, Management/Advisory Fees for the Portfolio would be .40%. 2 The 12b-1 fees shown reflect the Portfolio's current 12b-1 budget for reimbursement of expenses. The maximum 12b-1 fees payable by the Class A shares of the Portfolio are .30%. 3 Absent the Manager's voluntary fee waiver, Total Operating Expenses for Class A shares of the Portfolio would be .51%.
An investor in Class A shares of the Portfolio would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period: 1 YR. 3 YRS. 5 YRS. 10 YRS. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table and example is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Portfolio's Class A shares. A person that purchases shares through an account with a financial institution may be charged separate fees by that institution. The Portfolio also offers Class D shares, which are subject to the same expenses except that Class D shares bear different distribution costs and transfer agent costs. Additional information regarding these differences may be found under "The Manager and Shareholder Servicing Agent," "Distribution" and "The Adviser."
Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted under Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
The following financial highlights, for a share outstanding throughout each period, have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon was unqualified. This information should be read in conjunction with the Trust's financial statements and notes thereto, which are included in the Trust's Statement of Additional Information and which appear, along with the report of Arthur Andersen LLP, in the Trust's 1995 Annual Report to Shareholders. Additional performance information is set forth in the 1995 Annual Report to Shareholders, which is available upon request and without charge by calling 1-800-342-5734.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT THE PERIOD
+ Return is for the period indicated and has not been annualized. 1 In August 1990, the Trustees changed the fiscal year end of the Trust from January 31 to August 31.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company that offers units of beneficial interest ("shares") in separate diversified and non-diversified investment portfolios. This Prospectus offers Class A shares of the Trust's Tax Free Portfolio (the "Portfolio"). Shares in the Portfolio may also be purchased through the Portfolio's Class D shares. Additional information pertaining to the Trust may be obtained by writing to SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-342-5734.
The Portfolio's investment objective is to preserve principal value and maintain a high degree of liquidity while providing current income exempt from federal income taxes. There can be no assurance this investment objective will be met. The Portfolio invests in U.S. dollar denominated municipal securities of issuers located in all fifty states, the District of Columbia, Puerto Rico and other U.S. territories and possessions (collectively, "Municipal Securities"). At least 80% of the Portfolio's net assets will be invested in securities the interest on which is exempt from federal income taxes, based on opinions from bond counsel for the issuers. This investment policy is a fundamental policy of the Portfolio. Under normal conditions, the Portfolio will invest at least 80% of its net assets in securities the interest on which is not a preference item for purposes of the alternative minimum tax. The Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating or, if not rated, are of comparable quality as determined by Weiss, Peck & Greer, L.L.C., the Portfolio's investment adviser (the "Adviser"): (i) municipal bonds rated AA or better by Standard and Poor's Corporation ("S&P") or Aa or better by Moody's Investors Service, Inc. ("Moody's"); (ii) municipal notes rated at least SP-1 by S&P or MIG-1 or VMIG-1 by Moody's; and (iii) tax-exempt commercial paper rated at least A-1 by S&P or Prime-1 by Moody's. The Adviser will not invest more than 25% of Portfolio assets in municipal securities (a) whose issuers are located in the same state or (b) the interest on which is derived from revenues of similar type projects. This restriction does not apply to municipal securities in any of the following categories: public housing authorities; general obligations of states and localities; state and local housing finance authorities or municipal utilities systems. There could be economic, business, or political developments which might affect all municipal securities of a similar type. To the extent that a significant portion of the Portfolio's assets are invested in municipal securities payable from revenues on similar projects, the Portfolio will be subject to the peculiar risks presented by such projects to a greater extent than it would be if the Portfolio's assets were not so invested. Moreover, in
seeking to attain its investment objective the Portfolio may invest all or any part of its assets in municipal securities that are industrial development bonds.
In purchasing obligations, the Portfolio complies with the requirements of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), as that Rule may be amended from time to time. These requirements currently provide that the Portfolio must limit its investments to securities with remaining maturities of 397 days or less, and must maintain a dollar-weighted average maturity of 90 days or less. In addition, the Portfolio may only invest in securities (other than U.S. Government Securities) rated in one of the two highest categories for short-term securities by at least two nationally recognized statistical rating organizations ("NRSROs") (or by one NRSRO if only one NRSRO has rated the security), or, if unrated, determined by the Adviser (in accordance with procedures adopted by the Trust's Board of Trustees) to be of equivalent quality to rated securities in which the Portfolio may invest. Securities rated in the highest rating category (e.g., A- 1 by S&P) by at least two NRSROs (or, if unrated, determined by the Adviser to be of comparable quality) are "first tier" securities. Securities rated in the second highest rating category (e.g., A-2 by S&P) by at least one NRSRO (or, if unrated, determined by the Adviser to be of comparable quality) are considered to be "second tier" securities. Although the Portfolio is governed by Rule 2a-7, its investment policies are more restrictive than those imposed by that Rule. The Portfolio may invest in variable and floating rate obligations, may purchase securities on a "when-issued" basis, and reserves the right to engage in transactions involving standby commitments. The Portfolio may invest up to 20% of its net assets in taxable money market instruments (including repurchase agreements) and securities the interest on which is a preference item for purposes of the alternative minimum tax. However, the Portfolio generally intends to be fully invested in federally tax-exempt securities. The Portfolio will not invest more than 10% of its net assets in illiquid securities. Taxable money market instruments in which the Portfolio may invest consist of U.S. Treasury obligations; obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities, whether or not backed by the full faith and credit of the U.S. Government; obligations of U.S. commercial banks or savings and loan institutions (not including foreign branches of U.S. banks or U.S. branches of foreign banks) that are members of the Federal Reserve System, the Bank Insurance Fund and Savings Association Insurance Fund of the Federal Deposit Insurance Corporation and which have total assets
of $1 billion or more as shown on their last published financial statements at the time of investment; and repurchase agreements involving any of the foregoing obligations. Municipal notes rated SP-1 by S&P have strong capacity to pay principal and interest and notes rated MIG-1 or VMIG-1 by Moody's are considered to be of the best quality. Bonds rated AA by S&P have a very strong capacity to pay interest and repay principal; bonds rated Aa by Moody's are judged to be of high quality by all standards. The highest S&P commercial paper rating category, A-1, indicates that the degree of safety regarding timely payment is strong and commercial paper issuers rated Prime-1 by Moody's have a superior ability for repayment. For a description of the permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
The investment objective and investment limitations are fundamental policies of the Portfolio. Fundamental policies cannot be changed with respect to the Trust or the Portfolio without the consent of the holders of a majority of the Trust's or the Portfolio's outstanding shares. It is a fundamental policy of the Portfolio to use its best efforts to maintain a constant net asset value of $1.00 per share.
1. Purchase securities of any issuer (except securities issued or guaranteed by the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the total assets of the Portfolio (based on current market value at the time of investment) would be invested in the securities of such issuer; provided, however, that the Portfolio may invest up to 25% of its total assets without regard to this restriction as permitted by Rule 2a-7.
2. Purchase any securities which would cause more than 25% of the total assets of the Portfolio, based on current value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities.
3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio.
The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
SEI Financial Management Corporation (the "Manager" and the "Transfer Agent"), a wholly-owned subsidiary of SEI Corporation ("SEI"), provides the Trust with overall management services, regulatory reporting, all necessary office space, equipment, personnel and facilities, and serves as institutional transfer agent, dividend disbursing agent, and shareholder servicing agent. For these services, the Manager is entitled to a fee which is calculated daily and paid monthly at an annual rate of .36% of the average daily net assets of the Portfolio. The Manager has voluntarily agreed to waive a portion of its fee in order to limit the total operating expenses of the Class A shares of the Portfolio to not more than .45% of the Portfolio's average daily net assets attributable to Class A shares, on an annualized basis. The Manager reserves the right, in its sole discretion, to terminate this voluntary fee waiver at any time. For the fiscal year ended August 31, 1995, the Portfolio paid management fees, after waivers, of .30% of its average daily net assets.
Weiss, Peck & Greer, L.L.C. (the "Adviser" or "WPG") acts as the Portfolio's investment adviser under an investment advisory agreement with the Trust (the "Advisory Agreement"). Under the Advisory Agreement, the Adviser invests the assets of the Portfolio, and continuously reviews, supervises and administers the Portfolio's investment program. The Adviser is independent of the Manager and SEI and discharges its responsibilities subject to the supervision of, and policies set by, the Trustees of the Trust. The Adviser is a limited liability company founded as a limited partnership in 1970, and engages in investment management, venture capital management and management buyouts. WPG has been active since its founding in managing portfolios of tax exempt securities. As of September 30, 1995, total assets under management were approximately $12.5 billion. The principal business address of the Adviser is One New York Plaza, New York, NY 10004. For its services, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .05% of the combined average daily net assets of the money market portfolios of the Trust that are advised by the Adviser up to $500 million, .04% of such assets from $500 million to $1 billion, and .03% of such assets in excess of $1 billion. Such fees are allocated daily among these portfolios based on their relative net assets. For the fiscal year ended August 31, 1995, the Portfolio paid advisory fees, after waivers, of .04% of its relative daily net assets.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as each Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the Trust. Each Class of the Trust has adopted a distribution plan (the "Class A Plan" and "Class D Plan") pursuant to Rule 12b-1 under the 1940 Act. The Class A Plan provides for reimbursement for expenses incurred by the Distributor in an amount not to exceed .30% of the average daily net assets of the Portfolio, on an annualized basis, provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement ("Qualified Trustees"). Pursuant to state law, the Distributor has voluntarily agreed to limit the distribution-related expenses of the Class A shares of each Portfolio to .25%. Currently, the budget (shown here as a percentage of daily net assets) for each Portfolio is set at an annual rate of .07%. Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, federal and state securities law registration and the cost of complying with such laws in the distribution of the Trust's shares, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific Portfolio are allocated among each of the Portfolios of the Trust on the basis of their average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget. It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers. The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation. The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the sales charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolios. Such promotional incentives will be offered uniformly to all shares of the Portfolios, and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolios sold by such dealer.
Financial institutions may acquire shares of the Portfolio for their own account, or as a record owner on behalf of fiduciary, agency or custody accounts, by placing orders with the Transfer Agent. Institutions that use certain SEI proprietary systems may place orders electronically through those systems. State securities laws may require banks and financial institutions purchasing shares for their customers to register as dealers pursuant to state laws. Financial institutions which purchase shares for the accounts of their customers may impose separate charges on these customers for account services. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness on the same day. Shares of the Portfolio are offered only to residents of states in which the shares are eligible for purchase. Shares of the Portfolio may be purchased or redeemed on days on which the New York Stock Exchange is open for business ("Business Days"). However, money market fund shares cannot be purchased by Federal Reserve wire on federal holidays restricting wire transfers. Shareholders who desire to purchase shares for cash must place their orders with the Transfer Agent prior to 2:00 p.m., Eastern time on any Business Day for the order to be accepted on that Business Day. Cash investments must be transmitted or delivered in federal funds to the wire agent by the close of business on the same day the order is placed. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust or shareholders to accept such purchase order. The Trust will send shareholders a statement of shares owned after each transaction. The purchase price of shares is the net asset value next determined after a purchase order is received and accepted by the Trust, which is expected to remain constant at $1.00. The net asset value per share of the Portfolio is determined by dividing the total value of its investments and other assets, less any liabilities, by the total outstanding shares of the Portfolio. The Portfolio's investments will be valued by the amortized cost method described in the Statement of Additional Information. Net asset value per share is determined daily as of 2:00 p.m., Eastern time on each Business Day. Shareholders who desire to redeem shares of the Portfolio must place their redemption orders with the Transfer Agent prior to 12:30 p.m., Eastern time on any Business Day. Otherwise, the redemption order will be effective on the next Business Day. The redemption price is the net asset value per share of the Portfolio next determined after receipt by the Transfer Agent, and effectiveness, of the redemption order. For redemption orders received before 12:30 p.m., Eastern time on any Business Day,
payment will be made the same day by transfer of federal funds. Otherwise, the redemption order will be effective on the next Business Day. Purchase and redemption orders may be placed by telephone. Neither the Trust nor its Transfer Agent will be responsible for any loss, liability, cost or expense for acting upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and its Transfer Agent will each employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions. If market conditions are extraordinarily active, or other extraordinary circumstances exist, shareholders may experience difficulties placing redemption orders by telephone, and may wish to consider placing orders by other means.
From time to time the Portfolio advertises its "current yield", "tax equivalent yield" and "effective yield". These figures are based on historical earnings and are not intended to indicate future performance. The "current yield" of the Portfolio refers to the income generated by an investment over a seven-day period which is then "annualized." That is, the amount of income generated by the investment during the week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" (also called "effective compound yield") is calculated similarly but, when annualized, the income earned by an investment is assumed to be reinvested. The "effective yield" will be slightly higher than the "current yield" because of the compounding effect of this assumed reinvestment. The "tax equivalent yield" is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of the Portfolio's yield, assuming certain tax brackets for a shareholder. The Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and business publications and periodicals; (ii) broad groups of comparable mutual funds; (iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) other investment alternatives. The Portfolio may also quote financial and business publications and periodicals as they relate to fund management, investment philosophy and investment techniques. The performance on Class A shares will normally be higher than that on the Class D shares of the Portfolio because of the additional distribution and transfer agent expenses charged to Class D shares.
The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal income tax treatment of the Portfolio or its shareholders, and state and local tax consequences of an investment in the Portfolio may differ from the federal income tax consequences described below. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
Tax Status of The Portfolio is treated as a separate entity for federal the Portfolio income tax purposes and is not combined with the Trust's other portfolios. The Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal income tax on net investment company taxable income and net capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
Tax Status of The Portfolio intends to distribute substantially all of its Distributions net investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Portfolio's total assets consists of obligations the interest on which is excludable from gross income, the Portfolio may pay "exempt-interest dividends" to its shareholders. Exempt-interest dividends are excludable from a shareholder's gross income for federal income tax purposes but may have certain collateral federal tax consequences including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information. Any dividends paid out of income realized by the Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends- received deduction for corporate shareholders. Distributions to shareholders of net capital gains of the Portfolio will be taxable to shareholders as long-term capital gain, whether received in cash or additional shares, and regardless of how long a shareholder has held the shares. Dividends declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio at any time during the following January. The Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies.
Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of the Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolio may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares. The Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolio during the year to which the dividends relate. Each sale, exchange or redemption of the Portfolio's shares is a taxable transaction for the shareholder.
The Trust The Trust was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. In addition to the Portfolio, the Trust consists of the following portfolios: Institutional Tax Free Portfolio, California Tax Exempt Portfolio, Intermediate- Term Municipal Portfolio, Pennsylvania Municipal Portfolio, Kansas Tax Free Income Portfolio, Bainbridge Tax Exempt Portfolio, California Intermediate-Term Municipal Portfolio, New York Intermediate-Term Municipal Portfolio, and Pennsylvania Tax Free Portfolio. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation materials and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential services to the Trust.
Voting Rights Each share held entitles the shareholder of record to one vote. The shareholders of each portfolio or class will vote separately on matters relating solely to that Portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the
outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Manager. SEI Inquiries Financial Management Corporation, 680 E. Swedesford Road, Wayne, Pennsylvania, 19087.
Dividends The net investment income (exclusive of capital gains) of the Portfolio is determined and declared on each Business Day as a dividend for shareholders of record as of the close of business on that day. Dividends are paid by the Portfolio in federal funds or in additional shares at the discretion of the shareholder on the first Business Day of each month. Currently, capital gains, if any, are distributed at the end of the calendar year. Shareholders automatically receive all income dividends and capital gain distributions in additional shares, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution. The dividends on Class A shares of the Portfolio are normally higher than those on Class D shares because of the additional distribution and transfer agent expenses charged to Class D shares.
Counsel and Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Independent Arthur Andersen LLP serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as Custodian of the Trust's assets and acts as wire agent of certain cash of the Trust. The Custodian holds cash, securities and other assets of the Trust as required by the 1940 Act.
The following is a description of certain of the permitted investments for the Portfolio, and the associated risk factors:
Commercial Commercial Paper is a term used to describe unsecured short- Paper term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligations issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility, tolls from a toll bridge, for example. Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which the Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed- upon date. The Custodian will hold the security as collateral for the repurchase agreement. The Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss on the sale of the collateral. The Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
Standby Securities subject to standby commitments or puts permit the Commitments and holder thereof to sell the securities at a fixed price prior Puts to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Portfolio owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Portfolio will limit standby commitment or put transactions to institutions believed to present minimal credit risk.
Variable and Certain of the obligations purchased by the Portfolio may Floating Rate carry variable or floating rates of interest and may involve Instruments a conditional or unconditional demand feature. Such obligations may include variable amount master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or at some other interval, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice period exceeding seven days may be considered illiquid if there is no secondary market for such security.
When-Issued and When-issued or delayed delivery transactions involve the Delayed purchase of an instrument with payment and delivery taking Delivery place in the future. Delivery of and payment for these Securities securities may occur a month or more after the date of the purchase commitment. The Portfolio will maintain with the custodian a separate account with liquid, high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date, and no interest accrues to the Portfolio before settlement. These securities are subject to market fluctuation due to changes in market interest rates, and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Portfolio generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, the Portfolio may dispose of a when-issued security or forward commitment prior to settlement if the Adviser deems it appropriate to do so.
This Prospectus sets forth concisely information about the above-referenced Portfolio that an investor needs to know before investing. Please read this Prospectus carefully, and keep it on file for future reference.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company, certain classes of which offer financial institutions a convenient means of investing their own funds, or funds for which they act in a fiduciary, agency or custodial capacity, in one or more professionally managed diversified and non-diversified portfolios of securities. A portfolio may offer separate classes of shares that differ from each other primarily in the allocation of certain distribution expenses and minimum investment amounts. This Prospectus offers Class A, Class B and Class C shares of the Institutional Tax Free Portfolio (the "Portfolio"), a money market portfolio.
AN INVESTMENT IN THE PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC- CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
1 The Manager has waived, on a voluntary basis, a portion of its fee, and the Management/Advisory Fees shown reflect this voluntary waiver. The Manager reserves the right to terminate its waiver at any time in its sole discretion. Absent such waiver, Management/Advisory Fees for the Portfolio would be .40%. 2 The 12b-1 fees shown reflect the Portfolio's current 12b-1 budget for reimbursement of expenses. The maximum 12b-1 fees payable by the Class A shares of the Portfolio are .30%, by Class B Shares are .60% and by Class C Shares are .80%. 3 Absent the Manager's voluntary fee waiver, Total Operating Expenses for Class A shares of the Portfolio would be .51%, Class B shares would be .81%, and Class C shares would be 1.01%.
An investor in Class A, Class B and Class C shares of the Portfolio would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period:
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table and example is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Portfolio's Class A, Class B and Class C shares. A person that purchases shares through an account with a financial institution may be charged separate fees by that institution. Additional information may be found under "The Manager and Shareholder Servicing Agent," "Distribution" and "The Adviser."
Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted under Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
The following financial highlights, for a share outstanding throughout each period, have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon was unqualified. This information should be read in conjunction with the Trust's financial statements and notes thereto, which are included in the Trust's Statement of Additional Information and which appear, along with the report of Arthur Andersen LLP, in the Trust's 1995 Annual Report to Shareholders. Additional performance information is set forth in the 1995 Annual Report to Shareholders which is available upon request and without charge by calling 1-800-342-5734. As of September 30, 1995, Class C shares of the Portfolio had not yet commenced operations.
FOR CLASS A AND CLASS B SHARES OUTSTANDING THROUGHOUT THE PERIOD
+ Return is for the period indicated and has not been annualized. 1 In August 1990, the Trustees changed the fiscal year end of the Trust from January 31 to August 31. 2 The Institutional Tax-Free Portfolio--Class B commenced operations on October 15, 1990.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company that offers units of beneficial interest ("shares") in separate diversified and non-diversified investment portfolios. This Prospectus offers Class A, Class B and Class C shares of the Trust's Institutional Tax Free Portfolio (the "Portfolio"). Additional information pertaining to the Trust may be obtained by writing to SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-342-5734.
The Portfolio's investment objective is to preserve principal value and maintain a high degree of liquidity while providing current income exempt from federal income taxes. There can be no assurance this investment objective will be met. The Portfolio invests in U.S. dollar denominated municipal securities of issuers located in all fifty states, the District of Columbia, Puerto Rico and other U.S. territories and possessions (collectively, "Municipal Securities"). It is a fundamental policy of the Portfolio to invest at least 80% of its net assets in securities the interest on which is exempt from federal income taxes, based on opinions from bond counsel for the issuers, and the Portfolio will invest, under normal conditions, at least 80% of its net assets in securities the interest on which is not a preference item for purposes of the alternative minimum tax. The Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating or, if not rated, are of comparable quality as determined by Weiss, Peck & Greer, L.L.C., the Portfolio's investment adviser (the "Adviser"): (i) municipal bonds rated AA or better by Standard and Poor's Corporation ("S&P") or Aa or better by Moody's Investors Service, Inc. ("Moody's"); (ii) municipal notes rated at least SP-1 by S&P or MIG-1 or VMIG-1 by Moody's; and (iii) tax-exempt commercial paper rated at least A-1 by S&P or Prime-1 by Moody's. The Adviser will not invest more than 25% of Portfolio assets in municipal securities (a) whose issuers are located in the same state or (b) the interest on which is derived from revenues of similar type projects. This restriction does not apply to municipal securities in any of the following categories: public housing authorities; general obligations of states and localities; state and local housing finance authorities or municipal utilities systems. There could be economic, business, or political developments which might affect all municipal securities of a similar type. To the extent that a significant portion of the Portfolio's assets are invested in municipal securities payable from revenues on similar projects, the Portfolio will be subject to the peculiar risks presented by such projects to a greater extent than it would be if the Portfolio's assets were not so invested. Moreover, in
seeking to attain its investment objective the Portfolio may invest all or any part of its assets in municipal securities that are industrial development bonds.
In purchasing obligations, the Portfolio complies with the requirements of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), as that Rule may be amended from time to time. These requirements currently provide that the Portfolio must limit its investments to securities with remaining maturities of 397 days or less, and must maintain a dollar-weighted average maturity of 90 days or less. In addition, the Portfolio may only invest in securities (other than U.S. Government Securities) rated in one of the two highest categories for short-term securities by at least two nationally recognized statistical rating organizations ("NRSROs") (or by one NRSRO if only one NRSRO has rated the security), or, if unrated, determined by the Adviser (in accordance with procedures adopted by the Trust's Board of Trustees) to be of equivalent quality to rated securities in which the Portfolio may invest. Securities rated in the highest rating category (e.g., A- 1 by S&P) by at least two NRSROs (or, if unrated, determined by the Adviser to be of comparable quality) are "first tier" securities. Securities rated in the second highest rating category (e.g., A-2 by S&P) by at least one NRSRO (or, if unrated, determined by the Adviser to be of comparable quality) are considered to be "second tier" securities. Although the Portfolio is governed by Rule 2a-7, its investment policies are more restrictive than those imposed by that Rule. The Portfolio may purchase securities on a "when-issued" basis, and reserves the right to engage in transactions involving standby commitments. The Portfolio may invest up to 20% of its net assets in taxable money market instruments (including repurchase agreements) and securities the interest on which is a preference item for purposes of the alternative minimum tax. However, the Portfolio generally intends to be fully invested in federally tax-exempt securities. The Portfolio will not invest more than 10% of its total assets in securities which are considered to be illiquid. Taxable money market instruments in which the Portfolio may invest consist of U.S. Treasury obligations; obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities, whether or not backed by the full faith and credit of the U.S. Government; obligations of U.S. commercial banks or savings and loan institutions (not including foreign branches of U.S. banks or U.S. branches of foreign banks) that are members of the Federal Reserve System, the Bank Insurance Fund and Savings Association Insurance Fund of the Federal Deposit Insurance Corporation and that have total assets of $1 billion or more as shown on their last published financial statements at the time of investment; and repurchase agreements involving any of the foregoing obligations.
Municipal notes rated SP-1 by S&P have strong capacity to pay principal and interest and notes rated MIG-1 or VMIG-1 by Moody's are considered to be of the best quality. Bonds rated AA by S&P have a very strong capacity to pay interest and repay principal; bonds rated Aa by Moody's are judged to be of high quality by all standards. The highest S&P commercial paper rating category, A-1, indicates that the degree of safety regarding timely payment is strong and commercial paper issuers rated Prime-1 by Moody's have a superior ability for repayment. For a description of the permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
The investment objective and investment limitations are fundamental policies of the Portfolio. Fundamental policies cannot be changed with respect to the Trust or the Portfolio without the consent of the holders of a majority of the Trust's or the Portfolio's outstanding shares. It is a fundamental policy of the Portfolio to use its best efforts to maintain a constant net asset value of $1.00 per share.
1. Purchase securities of any issuer (except securities issued or guaranteed by the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the total assets of the Portfolio (based on current market value at the time of investment) would be invested in the securities of such issuer; provided, however, that the Portfolio may invest up to 25% of its total assets without regard to this restriction as permitted by Rule 2a-7.
2. Purchase any securities which would cause more than 25% of the total assets of the Portfolio, based on current value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities.
3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio.
The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
SEI Financial Management Corporation (the "Manager" and the "Transfer Agent"), a wholly-owned subsidiary of SEI Corporation ("SEI"), provides the Trust with overall management services, regulatory reporting, all necessary office space, equipment, personnel and facilities, and serves as institutional transfer agent, dividend disbursing agent, and shareholder servicing agent. For these services, the Manager is entitled to a fee which is calculated daily and paid monthly at an annual rate of .36% of the average daily net assets of the Portfolio. The Manager has voluntarily agreed to waive a portion of its fee in order to limit the total operating expenses to not more than .33% of the average daily net assets of the Class A shares of the Portfolio, not more than .63% of the average daily net assets of Class B shares of the Portfolio and not more than .83% of the average daily net assets of Class C shares of the Portfolio, on an annualized basis. The Manager reserves the right, in its sole discretion, to terminate this voluntary fee waiver at any time. For the fiscal year ended August 31, 1995, the Portfolio paid management fees, after waivers, of .18% of its average daily net assets.
Weiss, Peck & Greer, L.L.C. (the "Adviser" or "WPG") serves as the Portfolio's investment adviser under an investment advisory agreement with the Trust (the "Advisory Agreement"). Under the Advisory Agreement, the Adviser invests the assets of the Portfolio, and continuously reviews, supervises and administers the Portfolio's investment program. The Adviser is independent of the Manager and SEI and discharges its responsibilities subject to the supervision of, and policies set by, the Trustees of the Trust. The Adviser is a limited liability company founded as a limited partnership in 1970, and engages in investment management, venture capital management and management buyouts. WPG has been active since its founding in managing portfolios of tax exempt securities. As of September 30, 1995, total assets under management were approximately $12.5 billion. The principal business address of the Adviser is One New York Plaza, New York, NY 10004. For its services, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .05% of the combined average daily net assets of the money market portfolios of the Trust that are advised by the Adviser up to $500 million, .04% of such assets from $500 million to $1 billion and .03% of such assets in excess of $1 billion. Such fees are allocated daily among these portfolios based on their relative net assets. For the fiscal year ended August 31, 1995 the Portfolio paid advisory fees, after waivers, of .04% of its relative net assets.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as each Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the Trust. Each Class of the Trust has adopted a distribution plan (the "Class A Plan," "Class B Plan," "Class C Plan" and "Class D Plan," and, collectively, the "Plans") pursuant to Rule 12b-1 under the 1940 Act. Each Plan provides for reimbursement for expenses incurred by the Distributor, in an amount not to exceed .30% of the average daily net assets of each Portfolio on an annualized basis, and provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement ("Qualified Trustees"). Pursuant to state law, the Distributor has voluntarily agreed to limit the distribution-related expenses of the Class A shares to .25%. Currently, the budget (shown here as a percentage of daily net assets) for the Portfolio is set at an annual rate of .07%. Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific portfolio of the Trust are allocated among each of the Portfolios of the Trust based on the basis of their relative average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget. The Class B and C Plans, in addition to providing for the reimbursement payments described above, provides for payments to the Distributor at an annual rate of .30% and .50%, respectively, of the Portfolio's average daily net assets attributable to such Class shares. This additional payment may be used to compensate financial institutions that provide distribution-related services to their customers. These payments are characterized as "compensation," and are not directly tied to expenses incurred by the Distributor, the payments the Distributor receives during any year may therefore be higher or lower than its actual expenses. These additional payments compensate the Distributor for its services in connection with distribution assistance or the provision of shareholder services, and some or all of it may be used to pay financial institutions and intermediaries such as banks, savings and loan associations, insurance companies, and investment counselors, broker-dealers (including the Distributor's affiliates and subsidiaries) for services or reimbursement of expenses incurred in connection with distribution assistance or the provision of shareholder services. If the Distributor's expenses are less than its fees under the Class B or C Plan, the Trust will still pay the full fee and the Distributor will realize a profit, but the Trust will not be obligated to pay in excess of the full fee, even if the Distributor's actual expenses ar higher.
It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers. The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation. The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the sales charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolios. Such promotional incentives will be offered uniformly to all shares of the Portfolios, and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolios sold by such dealer.
Financial institutions may acquire shares of the Portfolio for their own account, or as a record owner on behalf of fiduciary, agency or custody accounts, by placing orders with the Transfer Agent. Institutions that use certain SEI proprietary systems may place orders electronically through those systems. State securities laws may require banks and financial institutions purchasing shares for their customers to register as dealers pursuant to state laws. Financial institutions which purchase shares for the accounts of their customers may impose separate charges on these customers for account services. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness on the same day. Shares of the Portfolio are offered only to residents of states in which the shares are eligible for purchase. Shares of the Portfolio may be purchased or redeemed on days on which the New York Stock Exchange is open for business ("Business Days"). However, money market fund shares cannot be purchased by Federal Reserve wire on federal holidays restricting wire transfers. Shareholders who desire to purchase shares for cash must place their orders with the Transfer Agent prior to 2:00 p.m., Eastern time on any Business Day for the order to be accepted on that Business Day. Cash investments must be transmitted or delivered in federal funds to the wire agent by the close of business on the same day the order is placed. The Trust reserves the right to reject a purchase order when the Transfer Agent determines that it is not in the best interest of the Trust or shareholders to accept such purchase order.
The Trust will send shareholders a statement of shares owned after each transaction. The purchase price of shares is the net asset value next determined after a purchase order is received and accepted by the Trust, which is expected to remain constant at $1.00. The net asset value per share of the Portfolio is determined by dividing the total value of its investments and other assets, less any liabilities, by the total outstanding shares of the Portfolio. The Portfolio's investments will be valued by the amortized cost method described in the Statement of Additional Information. Net asset value per share is determined daily as of 2:00 p.m., Eastern time on each Business Day. Shareholders who desire to redeem shares of the Portfolio must place their redemption orders with the Transfer Agent prior to 12:30 p.m., Eastern time on any Business Day. Otherwise, the redemption order will be effective on the next Business Day. The redemption price is the net asset value per share of the Portfolio next determined after receipt by the Transfer Agent, and effectiveness, of the redemption order. For redemption orders received before 12:30 p.m., Eastern time on any Business Day, payment will be made the same day by transfer of federal funds. Otherwise, the redemption will be effective on the next Business Day. If a shareholder's aggregate balance is less than $45 million as a result of redemption or transfer, for a period of seven consecutive days, the Trust reserves the right to redeem that shareholder's shares in the Portfolio for their current net asset value. Before the Trust redeems such shares, the shareholder will be given notice that the value of its shares is less than the minimum amount and will be allowed sixty days to make an additional investment in an amount that will increase the value of the account to at least $50 million. Purchase and redemption orders may be placed by telephone. Neither the Trust nor its Transfer Agent will be responsible for any loss, liability, cost or expense for acting upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and its Transfer Agent will each employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions. If market conditions are extraordinarily active, or other extraordinary circumstances exist, shareholders may experience difficulties placing redemption orders by telephone, and may wish to consider placing orders by other means.
From time to time the Portfolio advertises its "current yield", "tax equivalent yield" and "effective yield". These figures are based on historical earnings and are not intended to indicate future performance. The "current yield" of the Portfolio refers to the income generated by an investment over a seven-day period which is then "annualized." That is, the amount of income generated by the investment during the week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" (also called "effective compound yield") is calculated similarly but, when annualized, the income earned by an investment is assumed to be reinvested. The "effective yield" will be slightly higher than the "current yield" because of the compounding effect of this assumed reinvestment. The "tax equivalent yield" is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of the Portfolio's yield, assuming certain tax brackets for a shareholder. The Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and business publications and periodicals; (ii) broad groups of comparable mutual funds; (iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) other investment alternatives. The Portfolio may also quote financial and business publications and periodicals as they relate to fund management, investment philosophy and investment techniques. The performance on Class A shares will normally be higher than that on Class B and Class C shares because of the additional distribution expenses charged to Class B and Class C shares.
The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal income tax treatment of the Portfolio or its shareholders, and state and local tax consequences of an investment in the Portfolio may differ from the federal income tax consequences described below. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
Tax Status of The Portfolio is treated as a separate entity for federal the Portfolio income tax purposes and is not combined with the Trust's other portfolios. The Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal income tax on net investment company taxable income and net capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
Tax Status of The Portfolio intends to distribute substantially all of its Distributions net investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Portfolio's total assets consists of obligations the
interest on which is excludable from gross income, the Portfolio may pay "exempt-interest dividends" to its shareholders. Exempt-interest dividends are excludable from a shareholder's gross income for federal income tax purposes but may have certain collateral federal tax consequences including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information. Any dividends paid out of income realized by the Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends- received deduction for corporate shareholders. Distributions to shareholders of net capital gains of the Portfolio will be taxable to shareholders as long-term capital gain, whether received in cash or additional shares, and regardless of how long a shareholder has held the shares. Dividends declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio at any time during the following January. The Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies. Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of the Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolio may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares. The Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolio during the year to which the dividends relate. Each sale, exchange, or redemption of any Portfolio's shares is a taxable transaction to the shareholder.
The Trust The Trust was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. In addition to the Portfolio, the Trust consists of the following portfolios: Tax Free Portfolio, California Tax Exempt Portfolio, Intermediate-Term Municipal Portfolio, Pennsylvania Municipal Portfolio, Kansas Tax Free Income Portfolio, Bainbridge Tax Exempt Portfolio, California
Municipal Portfolio, New York Intermediate-Term Municipal Portfolio, and Pennsylvania Tax Free Portfolio. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto. The Trust pay its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation materials and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential services to the Trust.
Voting Rights Each share held entitles the shareholder of record to one vote. The shareholders of each portfolio or class will vote separately on matters relating solely to that Portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Manager. SEI Inquiries Financial Management Corporation, 680 E. Swedesford Road, Wayne, Pennsylvania, 19087.
Dividends The net investment income (exclusive of capital gains) of the Portfolio is determined and declared on each Business Day as a dividend for shareholders of record as of the close of business on that day. Dividends are paid by the Portfolio in federal funds or in additional shares at the discretion of the shareholder on the first Business Day of each month. Currently, capital gains, if any, are distributed at the end of the calendar year. Shareholders automatically receive all income dividends and capital gain distributions in additional shares, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution.
The dividends on Class A shares of the Portfolio are normally higher than those on Class B and Class C shares because of the additional distribution expenses charged to Class B and Class C shares.
Counsel and Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Independent Arthur Andersen LLP serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as Custodian of the Trust's assets and acts as wire agent of certain cash of the Trust. The Custodian holds cash, securities and other assets of the Trust as required by the 1940 Act.
The following is a description of certain of the permitted investments for the Portfolio, and the associated risk factors:
Commercial Commercial Paper is a term used to describe unsecured short- Paper term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligations issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility, tolls from a toll bridge, for example. Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which the Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed- upon date. The Custodian will hold the security as collateral for the repurchase agreement. The Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss on the sale of the collateral. The Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
Standby Securities subject to standby commitments or puts permit the Commitments and holder thereof to sell the securities at a fixed price prior Puts to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Portfolio owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Portfolio will limit standby commitment or put transactions to institutions believed to present minimal credit risk.
Variable and Certain of the obligations purchased by the Portfolio may Floating Rate carry variable or floating rates of interest and may involve Instruments a conditional or unconditional demand feature. Such obligations may include variable amount master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or at some other interval, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice period exceeding seven days may be considered illiquid if there is no secondary market for such security.
When-Issued and When-issued or delayed delivery transactions involve the Delayed purchase of an instrument with payment and delivery taking Delivery place in the future. Delivery of and payment for these Securities securities may occur a month or more after the date of the purchase commitment. The Portfolio will maintain with the custodian a separate account with liquid, high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date, and no interest accrues to the Portfolio before settlement. These securities are subject to market fluctuation due to changes in market interest rates, and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Portfolio generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, the Portfolio may dispose of a when-issued security or forward commitment prior to settlement if the Adviser deems it appropriate to do so.
This Prospectus sets forth concisely information about the above-referenced Portfolios that an investor needs to know before investing. Please read this Prospectus carefully, and keep it on file for future reference.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end investment management company, certain classes of which offer financial institutions a convenient means of investing their own funds, or funds for which they act in a fiduciary, agency or custodial capacity, in one or more professionally managed diversified and non-diversified portfolios of securities. A portfolio may offer separate classes of shares that differ from each other primarily in the allocation of certain distribution expenses and minimum investment amounts. This Prospectus offers Class A and Class B shares of the Trust's California Tax Exempt Portfolio, a money market portfolio (the "Portfolio").
AN INVESTMENT IN THE PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE CALIFORNIA MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC- CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
1 The Manager has waived, on a voluntary basis, a portion of its fees for the Portfolio. The Management/Advisory fees shown reflect these voluntary waivers. The Manager reserves the right to terminate its waiver at any time in its sole discretion. Absent such fee waivers, Management/Advisory fees for the Portfolio would be .27%. 2 The 12b-1 fees shown reflect the current 12b-1 budget for reimbursement of expenses. The maximum 12b-1 fees payable by Class A shares of the Portfolio are .30% and .60% by Class B shares of the Portfolio. 3 Absent the voluntary fee waivers described above, Total Operating Expenses for Class A and B shares of the Portfolio would be .37% and .67%, respectively.
An investor in a Portfolio would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period:
The example should not be considered a representation of past or future expenses. Actual expenses may be greater or less than those shown. The purpose of the expense table and example is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors to a Portfolio. A person who purchases shares through a financial institution may be charged separate fees by that institution. The information in the foregoing table and example relates only to Class A and Class B shares. The Portfolio also offers Class C shares which are subject to the same expenses, except there are different distribution and transfer agent costs. Additional information may be found under "The Manager and Shareholder Servicing Agent," "Distribution" and "The Adviser." Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
The following financial highlights, for a share outstanding throughout each period, have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon was unqualified. This information should be read in conjunction with the Trust's financial statements and notes thereto, which are included in the Trust's Statement of Additional Information and which appear, along with the report of Arthur Andersen LLP, in the Trust's 1995 Annual Report to Shareholders. Additional performance information is set forth in the 1995 Annual Report to Shareholders which is available upon request and without charge by calling 1-800-342-5734.
FOR A CLASS A AND CLASS B SHARE OUTSTANDING THROUGHOUT THE PERIOD**
** The Trust has not previously offered shares of the California Intermediate- Term Municipal Portfolio. + Return is for the period indicated and has not been annualized. /1/ The California Tax Exempt Portfolio--Class A commenced operations on May 14, 1990. /2/ TheCalifornia Tax Exempt Portfolio--Class B closed on July 12, 1995. /3/ The California Tax Exempt Portfolio--Class B commenced operations on January 5, 1994.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company that offers units of beneficial interest ("shares") in separate diversified and non-diversified investment portfolios. This Prospectus offers Class A and Class B shares of the Trust's California Tax Exempt Portfolio (the "Portfolio"). Shares in the Portfolio may also be purchased through the Portfolio's Class C shares. Each class provides for variation in distribution or transfer agent costs, voting rights, and dividends. Additional information pertaining to the Trust may be obtained by writing to SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-342-5734.
The Portfolio's investment objective is to preserve principal value and maintain a high degree of liquidity while providing current income exempt from federal and, to the extent possible, California state personal income taxes. There can be no assurance that the Portfolio will be able to achieve its investment objective. It is a fundamental policy of the Portfolio to invest, under normal conditions, at least 80% of its net assets in municipal securities that produce interest that, in the opinion of bond counsel, is exempt from federal income tax (collectively, "Municipal Securities"), and the Portfolio will invest, under normal conditions, at least 80% of its net assets in securities the interest on which is not a preference item for purposes of the alternative minimum tax. Under normal conditions, at least 65% of the Portfolio's assets will be invested in municipal obligations the interest on which is exempt from California state personal income tax. These constitute municipal obligations of the state of California and its political subdivisions or municipal authorities and municipal obligations issued by territories or possessions of the United States. The Portfolio may invest, under normal conditions, up to 20% of its net assets in (1) Municipal Securities the interest on which is a preference item for purposes of the alternative minimum tax (although the Portfolio has no present intention of investing in such securities) and (2) taxable investments. In addition, for temporary defensive purposes when its investment adviser determines that market conditions warrant, the Portfolio may invest up to 100% of its assets in municipal obligations of states other than California or taxable money market instruments (including repurchase agreements, U.S. Treasury securities and instruments of certain U.S. commercial banks or savings and loan institutions). The Adviser will not invest more than 25% of Portfolio assets in municipal securities the interest on which is derived from revenues of similar type projects. This restriction does not apply to municipal securities in any of the following categories: public housing authorities; general obligations of states and localities; state and local housing finance authorities or municipal utilities systems.
There could be economic, business, or political developments which might affect all municipal securities of a similar type. To the extent that a significant portion of the Portfolio's assets are invested in municipal securities payable from revenues on similar projects, the Portfolio will be subject to the peculiar risks presented by such projects to a greater extent than it would be if the Portfolio's assets were not so invested. Moreover, in seeking to attain its investment objective the Portfolio may invest all or any part of its assets in municipal securities that are industrial development bonds.
In purchasing obligations, the Portfolio complies with the requirements of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), as that Rule may be amended from time to time. These requirements currently provide that the Portfolio must limit its investments to securities with remaining maturities of 397 days or less, and must maintain a dollar-weighted average maturity of 90 days or less. In addition, the Portfolio may only invest in securities (other than U.S. Government Securities) rated in one of the two highest categories for short-term securities by at least two nationally recognized statistical rating organizations ("NRSROs") (or by one NRSRO if only one NRSRO has rated the security), or, if unrated, determined by the Adviser (in accordance with procedures adopted by the Trust's Board of Trustees) to be of equivalent quality to rated securities in which the Portfolio may invest. Securities rated in the highest rating category (e.g., A- 1 by Standard & Poor's Corporation ("S&P")) by at least two NRSROs (or, if unrated, determined by the Adviser to be of comparable quality) are "first tier" securities. Securities rated in the second highest rating category (e.g., A-2 by S&P) by at least one NRSRO (or, if unrated, determined by the Adviser to be of comparable quality) are considered to be "second tier" securities. Although the Portfolio is governed by Rule 2a-7, its investment policies are more restrictive than those imposed by that Rule. The Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating or, if not rated, are of comparable quality as determined by the Adviser: (i) municipal bonds rated AA or better by S&P or Aa or better by Moody's; (ii) municipal notes rated at least SP-2 by S&P or MIG-2 or VMIG-2 by Moody's; and (iii) tax- exempt commercial paper rated at least A-2 by S&P or Prime-2 by Moody's. For a description of the Portfolio's permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
California Risk Certain risks are inherent in the Portfolio's investments in Factors California municipal securities. These risks result from (1) amendments to the California Constitution and other statutes that limit the taxing and spending authority of California government entities, (2) the general financial condition of the State of California, and (3) a variety of California laws and regulations that may affect, directly or indirectly, California municipal securities. The ability of issuers of municipal securities to pay interest on, or repay principal of, municipal securities may be impaired as a result. A more complete description of these risks is contained in the Statement of Additional Information. The Portfolio's concentration in investments in California municipal securities involves greater risks than if their investments were more diversified. These risks arise from provisions in the California Constitution and other statutes that limit the taxing and spending authority of California governmental entities, as well as from the general financial condition of the State of California. The investment objective and investment limitations are fundamental policies of the Portfolio. Fundamental policies cannot be changed with respect to the Trust or a Portfolio without the consent of the holders of a majority of the Trust's or the Portfolio's outstanding shares. It is a fundamental policy of the Portfolio to use its best efforts to maintain a constant net asset value of $1.00 per share.
1. Purchase securities of any issuer (except securities issued or guaranteed by the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the total assets of the Portfolio (based on current value at the time of investment) would be invested in the securities of such issuer. This restriction applies to 75% of the Portfolio's assets. 2. Purchase any securities which would cause more than 25% of the total assets of the Portfolio, based on fair market value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the United States Government or its agencies and instrumentalities or to investments in tax-exempt securities issued by governments or political subdivisions of governments. 3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio.
The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
SEI Financial Management Corporation (the "Manager" and the "Transfer Agent"), a wholly-owned subsidiary of SEI Corporation ("SEI"), provides the Trust with overall management services, regulatory reporting, all necessary office space, equipment, personnel and facilities, and serves as institutional transfer agent, dividend disbursing agent, and shareholder servicing agent. For these services, the Manager is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .23% of the average daily net assets of the Portfolio. The Manager has voluntarily agreed to waive a portion of its fees in order to limit the total operating expenses of Class A and Class B shares of the Portfolio to not more than .28% and .58% as a percentage of the Portfolio's average daily net assets attributable to Class A and Class B shares, on an annualized basis, respectively. The Manager reserves the right, in its sole discretion, to terminate these voluntary fee waivers at any time. For the fiscal year ended August 31, 1995, the Portfolio paid management fees, after waivers, of .14% of its average daily net assets.
Weiss, Peck & Greer, L.L.C. (the "Adviser" or "WPG") serves as the Portfolio's investment adviser under an advisory agreement (the "Advisory Agreement") with the Trust. Under the Advisory Agreement, the Adviser invests the assets of the Portfolio, and continuously reviews, supervises and administers the investment programs of the Portfolio. The Adviser is independent of the Manager and SEI and discharges its responsibilities subject to the supervision of, and policies set by, the Trustees of the Trust. The Adviser is a limited liability company founded as a limited partnership in 1970, and engages in investment management, venture capital management and management buyouts. WPG has been active since its founding in managing portfolios of tax exempt securities. As of September 30, 1995, total assets under management were approximately $12.5 billion. The principal business address of the Adviser is One New York Plaza, New York, NY 10004. Janet Fiorenza acts as the portfolio manager for the Portfolio. Ms. Fiorenza, a Principal of WPG, has been associated with WPG's Tax Exempt Fixed Income group since 1988 and its predecessor since 1980. For its services to the Portfolio, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .05% of the combined average daily net assets of the money market portfolios of the Trust advised by the Adviser up to $500
million, .04% of such assets from $500 million to 1 billion, and .03% of such assets in excess of $1 billion. Such fees are allocated daily among these portfolios on the basis of their relative net assets. For the fiscal year ended August 31, 1995, the Portfolio paid advisory fees, after waivers, of .04% of its relative net assets.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as the Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the Trust. Each Class of the Trust has adopted a distribution plan (the "Class A Plan," "Class B Plan" and "Class C Plan," and, collectively, the "Plans") pursuant to Rule 12b-1 under the 1940 Act. Each Plan provides for reimbursement for expenses incurred by the Distributor, in an amount not to exceed .30% of the average daily net assets of the Portfolio on an annualized basis, and provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement ("Qualified Trustees"). Currently, the budget (shown here as a percentage of daily net assets) for each Portfolio is set at an annual rate of .06%. Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific portfolio of the Trust are allocated among each of the portfolios of the Trust based on the basis of their relative average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget. The Class B Plan, in addition to providing for the reimbursement payments described above, provides for payments to the Distributor at an annual rate of .30% of the Portfolio's average daily net assets attributable to such Class B shares. This additional payment may be used to compensate financial institutions that provide distribution- related services to their customers. These payments are characterized as "compensation," and are not directly tied to expenses incurred by the Distributor; the payments the Distributor receives during any year may therefore be higher or lower than its actual expenses. These additional payments compensate the Distributor for its services in connection with distribution assistance or the provision of shareholder services, and some or all of it may be used to pay financial institutions and intermediaries such as banks, savings and loan associations, insurance companies, and investment counselors, broker-dealers (including the Distributor's affiliates and subsidiaries) for services or reimbursement of expenses incurred in connection with distribution assistance or the provision of shareholder services. If the Distributor's expenses are less than its fees under the Class B Plan, the Trust will still pay
the full fee and the Distributor will realize a profit, but the Trust will not be obligated to pay in excess of the full fee, even if the Distributor's actual expenses are higher. It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers. The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation. The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the sales charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolio. Such promotional incentives will be offered uniformly to all shares of the Portfolio, and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolio sold by such dealer.
Financial institutions may acquire shares of the Portfolio for their own account, or as a record owner on behalf of fiduciary, agency or custody accounts, by placing orders with the Transfer Agent. Institutions that use certain SEI proprietary systems may place orders electronically through those systems. State securities laws may require banks and financial institutions purchasing shares for their customers to register as dealers pursuant to state laws. Financial institutions which purchase shares for the accounts of their customers may impose separate charges on these customers for account services. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness on the same day. Shares of the Portfolio are offered only to residents of states in which the shares are eligible for purchase. Shares of the Portfolio may be purchased or redeemed on days on which the New York Stock Exchange is open for business ("Business Days"). However, money market fund shares cannot be purchased by Federal Reserve wire on federal holidays restricting wire transfers. Shareholders who desire to purchase shares for cash must place their orders with the Distributor prior to the calculation of net asset value on any Business Day for the order to be accepted on that Business Day. Cash investments must be transmitted or delivered in federal funds to the wire agent by the close of business on the same day the order is placed. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust or shareholders to accept such purchase order.
The Trust will send shareholders a statement of shares owned after each transaction. The purchase price of shares is the net asset value next determined after a purchase order is received and accepted by the Trust. The purchase price of shares is expected to remain constant at $1.00. The net asset value per share of the Portfolio is determined by dividing the total value of its investments and other assets, less any liability, by the total outstanding shares of the Portfolio. The Portfolio's investments will be valued by the amortized cost method described in the Statement of Additional Information. Net asset value per share is determined on each Business Day as of 2:00 p.m., Eastern time. The market value of each portfolio security is obtained by the Manager from an independent pricing service. Securities having maturities of 60 days or less at the time of purchase will be valued using the amortized cost method (described in the Statement of Additional Information), which approximates the securities' market value. The pricing service may use a matrix system to determine valuations of equity and fixed income securities. This system considers such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. The pricing service may also provide market quotations. The procedures of the pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Trustees. Portfolio securities for which market quotations are available are valued at the most recently quoted bid price on each Business Day. Shareholders who desire to redeem shares of the Portfolio must place their redemption orders with the Transfer Agent prior to the calculation of net asset value on any Business Day in order to be effective on that day. Otherwise, the redemption orders will be effective on the next Business Day. Payment for redemption orders received before the calculation of net asset value will be made the same day by transfer of federal funds. The redemption price is the net asset value per share of the Portfolio next determined after receipt by the Transfer Agent of an effective redemption order. Purchase and redemption orders may be placed by telephone. Neither the Trust nor its transfer agent will be responsible for any loss, liability, cost or expense for acting upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and its transfer agent will each employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions. If market conditions are extraordinarily active, or other extraordinary circumstances exist, shareholders may experience difficulties placing redemption orders by telephone, and may wish to consider placing orders by other means.
From time to time the Portfolio may advertise its "current yield" and "effective yield". The Portfolio may also advertise a "tax equivalent yield". These figures are based on historical earnings and are not intended to indicate future performance.
The "current yield" of the Portfolio refers to the income generated by an investment in the Portfolio over a seven-day period which is then "annualized". That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" (also called "effective compound yield") is calculated similarly but, when annualized, the income earned by an investment in the Portfolio is assumed to be reinvested. The "effective yield" will be slightly higher than the "current yield" because of the compounding effect of this assumed reinvestment. A "tax equivalent yield" is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of the Portfolio's yield, assuming certain tax brackets for a shareholder. The Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and business publications and periodicals; (ii) broad groups of comparable mutual funds; (iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) other investment alternatives. The performance on Class A shares on the Portfolio will normally be higher than that on Class B or Class C shares because of the additional distribution expenses charged to Class B and Class C shares.
The following summary of federal and state income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state or local income tax treatment of the Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
Tax Status of The Portfolio is treated as a separate entity for federal each Portfolio income tax purposes and is not combined with the Trust's other portfolios. The Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal income tax on net investment company taxable income and net capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
Tax Status of The Portfolio intends to distribute substantially all of its Distributions net investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Portfolio's total assets consists of obligations the
interest on which is excludable from gross income, the Portfolio may pay "exempt-interest dividends" to its shareholders. Exempt-interest dividends are excludable from a shareholder's gross income for federal income tax purposes but may have certain collateral federal tax consequences including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information. Any dividends paid out of income realized by the Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends- received deduction for corporate shareholders. Distributions to shareholders of net capital gains of the Portfolio will be taxable to shareholders as long-term capital gain, whether received in cash or additional shares, and regardless of how long a shareholder has held the shares. Dividends declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio at any time during the following January. The Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies. Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of the Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolio may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares. The Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolio during the year to which the dividends relate. Each sale, exchange or redemption of the Portfolio's shares is a taxable transaction to the shareholder. The following is a general, abbreviated summary of certain of the provisions of the California Revenue and Taxation Code presently in effect as they directly govern the taxation of shareholders subject to California personal income tax. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive.
California The Portfolio intends to qualify to pay dividends to Taxes shareholders that are exempt from California personal income tax ("California exempt-interest dividends"). The Portfolio will qualify to pay California exempt-interest dividends if (1) at the close of each quarter of the
Portfolio's taxable year, at least 50 percent of the value of the Portfolio's total assets consists of obligations the interest on which would be exempt from California personal income tax if the obligations were held by an individual ("California Tax Exempt Obligations") and (2) the Portfolio continues to qualify as a regulated investment company. The Portfolio will notify its shareholders of the amount of exempt-interest dividends each year. If the Portfolio qualifies to pay California exempt- interest dividends, dividends distributed to shareholders will be considered California exempt-interest dividends if they meet certain requirements. See the Statement of Additional Information. Corporations subject to California franchise tax that invest in the Portfolio may not be entitled to exclude California exempt-interest dividends from income. Distributions that do not qualify for treatment as California exempt-interest dividends (including those distributions to shareholders taxable as long-term capital gains for federal income tax purposes) will be taxable to shareholders at ordinary income tax rates for California personal income tax purposes to the extent of the Portfolio's earnings and profits. Interest on indebtedness incurred or continued by a shareholder in connection with the purchase of shares of the Portfolio will not be deductible for California personal income tax purposes if the Portfolio distributes California exempt-interest dividends.
The Trust The Trust was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. In addition to the Portfolios, the Trust consists of the following portfolios: Tax Free Portfolio, Institutional Tax Free Portfolio, Intermediate-Term Municipal Portfolio, Pennsylvania Municipal Portfolio, Kansas Tax Free Income Portfolio. Bainbridge Tax Exempt Portfolio, New York Intermediate-Term Municipal Portfolio, and Pennsylvania Tax Free Portfolio. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation materials and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential services to the Trust.
Voting Rights Each share held entitles the shareholder of record to one vote. The shareholders of each portfolio or class will vote separately on matters relating solely to that portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Manager. SEI Inquiries Financial Management Corporation, 680 E. Swedesford Road, Wayne, Pennsylvania, 19087.
Dividends The net investment income (exclusive of capital gains) of the Portfolio is distributed in the form of dividends. The Portfolio declares dividends daily, and shareholders of record at the close of each Business Day will be entitled to receive that day's dividend. Dividends are paid on the first Business Day of each month. If any net capital gains are realized by the Portfolio, they will be distributed annually. Shareholders automatically receive all income dividends and capital gain distributions in additional shares, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution. The dividends on Class A shares of the Portfolio are normally higher than those on Class B or Class C shares because of the additional distribution expenses charged to Class B and Class C shares.
Counsel and Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Independent Arthur Andersen LLP serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as Custodian of the Trust's assets and acts as wire agent of certain cash of the Trust. The Custodian holds cash, securities and other assets of the Trust as required by the 1940 Act.
The following is a description of certain of the permitted investments for the Portfolios, and the associated risk factors:
Commercial Commercial Paper is a term used to describe unsecured short- Paper term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligations issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility, tolls from a toll bridge, for example. Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which a Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed- upon date. The Custodian will hold the security as collateral for the repurchase agreement. The Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss on the sale of the collateral. The Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
Standby Securities subject to standby commitments or puts permit the Commitments and holder thereof to sell the securities at a fixed price prior Puts to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Portfolio owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Portfolio will limit standby commitment or put transactions to institutions believed to present minimal credit risk.
Variable and Certain of the obligations purchased by the Portfolio may Floating Rate carry variable or floating rates of interest and may involve Instruments a conditional or unconditional demand feature. Such obligations may include variable amount master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or at some other interval, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice period exceeding seven days may be considered illiquid if there is no secondary market for such security.
When-Issued and When-issued or delayed delivery transactions involve the Delayed purchase of an instrument with payment and delivery taking Delivery place in the future. Delivery of and payment for these Securities securities may occur a month or more after the date of the purchase commitment. The Portfolio will maintain with the custodian a separate account with liquid, high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date, and no interest accrues to the Portfolio before settlement. These securities are subject to market fluctuation due to changes in market interest rates, and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although a Portfolio generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, a Portfolio may dispose of a when-issued security or forward commitment prior to settlement if the Adviser deems it appropriate to do so.
This Prospectus sets forth concisely information about the above-referenced Portfolios that an investor needs to know before investing. Please read this Prospectus carefully, and keep it on file for future reference.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company, certain classes of which offer financial institutions a convenient means of investing their own funds, or funds for which they act in a fiduciary, agency or custodial capacity, in one or more professionally managed diversified and non-diversified portfolios of securities. A portfolio may offer separate classes of shares that differ from each other primarily in the allocation of certain distribution expenses and minimum investment amounts. This Prospectus offers Class A shares of the Trust's Pennsylvania Municipal Portfolio (the "Fixed Income Portfolio") and Class A, Class B and Class C shares of the Trust's Pennsylvania Tax Free Portfolio (the "Money Market Portfolio") (each, a "Portfolio" and together, the "Portfolios").
AN INVESTMENT IN THE PORTFOLIOS IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE PENNSYLVANIA TAX FREE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC- CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, INCLUDING BESSEMER TRUST COMPANY, N.A. OR ANY OF ITS AFFILIATES OR CORRESPONDENTS. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
1 The Manager has waived, on a voluntary basis, a portion of its fee, and agreed to reimburse expenses; the management/advisory fees shown reflect this voluntary waiver. The Manager reserves the right to terminate its waiver and reimbursements at any time in its sole discretion. Absent such waiver, management/advisory fees for the Money Market Portfolio would be .40% and for the Fixed Income Portfolio would be .55%. 2 The 12b-1 fees shown reflect each Portfolio's current 12b-1 budget for reimbursement of expenses. The maximum 12b-1 fees payable are .30% by Class A shares of the Fixed Income Portfolio and .30% by Class A shares of the Money Market Portfolio. 3 Absent the Manager's voluntary fee waiver and reimbursements, total operating expenses for Class A, Class B and Class C shares of the Money Market Portfolio would be .51%, .76%, and 1.01%, respectively, and for Class A shares of the Fixed Income Portfolio would be .67%.
An investor in Class A shares of the Portfolios would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period:
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table and example is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Portfolios' Class A shares. A person that purchases shares through an account with a financial institution may be charged separate fees by that institution. The Money Market Portfolio also offers Class B and Class C shares, which are subject to the same expenses, except that the Class B and Class C shares bear different distribution and transfer agent costs. Additional information may be found under "The Manager and Shareholder Servicing Agent," "Distribution" and "The Adviser." Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted under Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
The following financial highlights, for a share outstanding throughout each period, have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon was unqualified. This information should be read in conjunction with the Trust's financial statements and notes thereto, which are included in the Trust's Statement of Additional Information and which appear, along with the report of Arthur Andersen LLP, in the Trust's 1995 Annual Report to Shareholders. Additional performance information is set forth in the 1995 Annual Report to Shareholders which is available upon request and without charge by calling 1-800-342-5734.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT THE PERIOD
+ Return is for period indicated and has not been annualized. 1 The Pennsylvania Municipal Portfolio commenced operations on August 14, 1989. 2 In August 1990, the Trustees changed the fiscal year end of the Trust from January 31 to August 31. 3 The Pennsylvania Tax Free Portfolio commenced operations on January 21, 1994.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company that offers units of beneficial interest ("shares") in separate diversified and non-diversified investment portfolios. This Prospectus offers Class A shares of the Trust's Pennsylvania Municipal Portfolio (the "Fixed Income Portfolio") and Class A, Class B and Class C shares of the Trust's Pennsylvania Tax Free Portfolio (the "Money Market Portfolio"). The Fixed Income Portfolio is a diversified portfolio, and the Money Market Portfolio is non-diversified. Additional information pertaining to the Trust may be obtained by writing to SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-342-5734.
PENNSYLVANIA The Fixed Income Portfolio's investment objective is to MUNICIPAL provide current income exempt from both federal and PORTFOLIO Pennsylvania state income taxes while preserving capital by investing primarily in municipal securities within the guidelines presented below. The Fixed Income Portfolio has a fundamental policy, under normal conditions, to be fully invested in obligations which produce interest that is exempt from both federal and Pennsylvania state income tax (state tax-free obligations). Under normal circumstances, the Portfolio will invest at least 90% (and intends to invest 100%) of its net assets in securities the interest on which is not a preference item for purposes of the alternative minimum tax. In addition, for temporary defensive purposes when, in the opinion of its investment adviser, such securities are not readily available or of sufficient quality, the Portfolio can invest up to 100% of its assets in securities which pay interest which is exempt only from federal income taxes or in taxable securities as described below. The Fixed Income Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating or, if not rated, are of comparable quality as determined by Morgan Grenfell Capital Management, this Portfolio's investment adviser ("Morgan Grenfell"): (i) municipal bonds rated BBB or better by Standard & Poor's Corporation ("S&P") or Baa or better by Moody's Investors Service, Inc. ("Moody's"); (ii) municipal notes rated at least SP-1 by S&P or MIG-1 or VMIG-1 by Moody's; and (iii) tax-exempt commercial paper rated at least A-1 by S&P or Prime-1 by Moody's. Bonds rated BBB by S&P or Baa by Moody's have speculative characteristics. Municipal obligations owned by the Fixed Income Portfolio which become less than the prescribed investment quality shall be sold at a time when, in the judgment of Morgan Grenfell, it does not substantially impact the market value of the Portfolio. The Fixed Income Portfolio will maintain a dollar- weighted average portfolio maturity of seven years or less. Each security purchased will have an average maturity of no longer than fifteen years.
PENNSYLVANIA The Money Market Portfolio's investment objective is a high TAX FREE level of current income, free from federal income tax and, PORTFOLIO to the extent possible, Pennsylvania personal income taxes, consistent with preservation of capital. The Money Market Portfolio will also attempt to maintain a constant net asset value of $1.00 per share. It is a fundamental policy of the Money Market Portfolio to invest, under normal conditions, at least 80% of its net assets in municipal securities the interest on which, in the opinion of bond counsel for the issuer, is exempt from federal income tax (collectively, "Municipal Securities"). This Portfolio will, under normal conditions, invest at least 80% of its net assets in securities the interest on which is not a preference item for purposes of the alternative minimum tax and invest at least 65% of its total assets in municipal obligations the interest on which is exempt from Pennsylvania personal income tax ("Pennsylvania Securities"). Pennsylvania Securities constitute municipal obligations of the Commonwealth of Pennsylvania and its political subdivisions or municipal authorities and municipal obligations issued by territories or possessions of the United States, such as Puerto Rico. This Portfolio may invest, under normal conditions, up to 20% of its net assets in (1) Municipal Securities the interest on which is a preference item for purposes of the alternative minimum tax (although the Portfolio has no present intention of investing in such securities), and (2) taxable securities, including shares of other mutual funds to the extent permitted by regulations of the SEC. In addition, for temporary defensive purposes when its investment adviser determines that market conditions warrant, the Money Market Portfolio may invest up to 100% of its assets in municipal obligations of states other than Pennsylvania or taxable money market instruments (including repurchase agreements, U.S. Treasury securities and obligations of certain U.S. commercial banks or savings and loan institutions). The Money Market Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating or, if not rated, are of comparable quality as determined by Weiss, Peck & Greer L.L.C., this Portfolio's investment adviser: (i) municipal bonds rated AA or better by S&P or Aa or better by Moody's; (ii) municipal notes rated at least SP-2 by S&P or MIG-2 or VMIG-2 by Moody's; (iii) tax-exempt commercial paper rated at least A-2 by S&P or Prime-2 by Moody's.
Neither Portfolio will invest more than 25% of its assets in municipal securities the interest on which is derived from revenues of similar type projects. This restriction does not apply to municipal securities in any of the following categories: public housing authorities; general obligations of states and localities; state and local housing finance authorities; or municipal utilities systems. There could be economic, business, or political developments which might affect all municipal securities of a similar type. To the extent that a significant portion of a Portfolio's assets are invested in municipal securities payable from revenues on similar projects, the Portfolio will be subject to the peculiar risks presented by such
greater extent than it would be if the Portfolio's assets were not so invested. Moreover, in seeking to attain its investment objective a Portfolio may invest all or any part of its assets in municipal securities that are industrial development bonds. Municipal notes rated SP-1 by S&P have strong capacity to pay principal and interest; municipal notes rated SP-2 by S&P have satisfactory capacity to pay principal and interest. Notes rated MIG-1 or VMIG-1 by Moody's are considered to be of the best quality and notes rated MIG-2 or VMIG-2 by Moody's are considered to be of high quality. Bonds rated AA by S&P have a very strong capacity to pay interest and repay principal; bonds rated Aa by Moody's are judged to be of high quality by all standards. Bonds rated BBB by S&P have an adequate capacity to pay interest and repay principal; bonds rated Baa by Moody's are considered to be medium-grade obligations (i.e., neither highly protected nor poorly secured). Bonds rated BBB by S&P or Baa by Moody's have speculative characteristics. The highest S&P commercial paper rating category, A-1, indicates that the degree of safety regarding timely payment is strong; commercial paper issuers rated Prime-1 by Moody's have a superior ability for repayment. Capacity for timely payment on commercial paper with the S&P designation of A-2 is satisfactory; commercial paper issuers rated Prime-2 by Moody's have a strong ability for repayment of senior short- term debt obligations.
There can be no assurance that either Portfolio will be able to achieve its investment objective or that the Money Market Portfolio will be able to maintain a constant $1.00 net asset value per share.
In purchasing obligations, the Money Market Portfolio complies with the requirements of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), as that Rule may be amended from time to time. These requirements currently provide that the Money Market Portfolio must limit its investments to securities with remaining maturities of 397 days or less, and must maintain a dollar-weighted average maturity of 90 days or less. In addition, the Money Market Portfolio may only invest in securities (other than U.S. Government Securities) rated in one of the two highest categories for short-term securities by at least two nationally recognized statistical rating organizations ("NRSROs") (or by one NRSRO if only one NRSRO has rated the security), or, if unrated, determined by the Adviser (in accordance with procedures adopted by the Trust's Board of Trustees) to be of equivalent quality to rated securities in which the Money Market Portfolio may invest. Securities rated in the highest rating category (e.g., A- 1 by S&P) by at least two NRSROs (or, if unrated, determined by the Adviser to be of comparable quality) are "first tier" securities. Securities rated in the second highest rating category (e.g., A-2 by S&P) by
at least one NRSRO (or, if unrated, determined by the Adviser to be of comparable quality) are considered to be "second tier" securities. Although the Money Market Portfolio is governed by Rule 2a-7, its investment policies are more restrictive than those imposed by that Rule. Each Portfolio may invest in variable and floating rate obligations, may purchase securities on a "when-issued" basis, and reserves the right to engage in transactions involving standby commitments. The Fixed Income Portfolio may also purchase other types of tax exempt instruments as long as they are of a quality equivalent to the long-term bond or commercial paper ratings stated above. Although permitted to do so, the Fixed Income Portfolio has no present intention to invest in repurchase agreements. Each Portfolio will not invest more than 10% of its net assets in illiquid securities. The taxable instruments in which each Portfolio may invest consist of U.S. Treasury obligations; obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities, whether or not backed by the full faith and credit of the U.S. Government; obligations of U.S. commercial banks or savings and loan institutions (not including foreign branches of U.S. banks or U.S. branches of foreign banks) which are members of the Federal Reserve System, the Bank Insurance Fund and Savings Association Insurance Fund of the Federal Deposit Insurance Corporation and which have total assets of $1 billion or more as shown on their last published financial statements at the time of investment; and repurchase agreements involving any of the foregoing obligations. For a description of the permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
Fixed Income The market value of the Fixed Income Portfolio's investments Securities will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. Changes by recognized rating agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of these fixed income securities will not necessarily affect cash income derived from these securities, but will affect this Portfolio's net asset value.
Pennsylvania Under normal conditions the Fixed Income Portfolio will be Risk Factors fully invested, and the Money Market Portfolio will invest primarily, in obligations which produce interest income exempt from federal income tax and Pennsylvania state income tax. Accordingly, each Portfolio will have considerable investments in Pennsylvania municipal obligations. As a
Portfolio will be more susceptible to factors which adversely affect issuers of Pennsylvania obligations than a mutual fund which does not have as great a concentration in Pennsylvania municipal obligations. An investment in either Portfolio will be affected by the many factors that affect the financial condition of the Commonwealth of Pennsylvania. For example, financial difficulties of the Commonwealth, its counties, municipalities and school districts that hinder efforts to borrow and lower credit ratings are factors which may affect the Portfolio. See "Special Considerations Relating to Pennsylvania Municipal Securities" in the Statement of Additional Information.
Non- Investment in the Money Market Portfolio, a non-diversified Diversification mutual fund, may entail greater risk than would investment in a diversified investment company because the concentration in securities of relatively few issuers could result in greater fluctuation in the total market value of this Portfolio's holdings. Any economic, political, or regulatory developments affecting the value of the securities this Portfolio holds could have a greater impact on the total value of the Portfolio's holdings than would be the case if the portfolio securities were diversified among more issuers. The Money Market Portfolio intends to comply with the diversification requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In accordance with these requirements, the Portfolio will not invest more than 5% of its total assets in any one issuer; this limitation applies to 50% of the Portfolio's total assets.
The investment objectives and investment limitations are fundamental policies of the Portfolios. Fundamental policies cannot be changed with respect to the Trust or a Portfolio without the consent of the holders of a majority of the Trust's or that Portfolio's outstanding shares. It is a fundamental policy of the Money Market Portfolio to use its best efforts to maintain a constant net asset value of $1.00 per share.
1. Purchase securities of any issuer (except securities issued or guaranteed by the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the total assets of the Portfolio would be invested in the securities of such issuer. This limitation does not apply to the Money Market Portfolio. 2. Purchase any securities which would cause more than 25% of the total assets of the Portfolio, based on current value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities or
investments in tax-exempt securities issued by governments or political subdivisions of governments. 3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio.
The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
SEI Financial Management Corporation (the "Manager" and the "Transfer Agent"), a wholly-owned subsidiary of SEI Corporation ("SEI"), provides the Trust with overall management services, regulatory reporting, all necessary office space, equipment, personnel and facilities, and serves as institutional transfer agent, dividend disbursing agent, and shareholder servicing agent. For these services, the Manager is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .35% of the average daily net assets of the Fixed Income Portfolio and .36% of the average daily net assets of the Money Market Portfolio. The Manager has voluntarily waived a portion of its fees in order to limit the total operating expenses of Class A shares of the Fixed Income Portfolio to not more than .48% of that Portfolio's average daily net assets on an annualized basis and to limit the total operating expenses of Class A shares of the Money Market Portfolio to not more than .35% of that Portfolio's average daily net assets on an annualized basis. The Manager reserves the right, in its sole discretion, to terminate these voluntary fee waivers at any time. For the fiscal year ended August 31, 1995, the Fixed Income and Money Market Portfolios paid management fees, after waivers, of .12% and .20%, respectively, of their average daily net assets.
Under advisory agreements with the Trust (the "Advisory Agreements"), Morgan Grenfell Capital Management Incorporated and Weiss, Peck & Greer, L.L.C. (the "Advisers" and each of these, an "Adviser") act as the investment advisers for the Fixed Income and Money Market Portfolios, respectively. Under the Advisory Agreements, the Advisers invest the assets of the Portfolios, and continuously review, supervise and administer the Portfolios' investment programs. Each Adviser is independent of the Manager and SEI and discharges its responsibilities subject to the supervision of, and policies set by, the Trustees of the Trust.
Morgan Grenfell Morgan Grenfell Capital Management Incorporated ("Morgan Capital Grenfell") acts as investment adviser for the Fixed Income Management Portfolio. Morgan Grenfell is a wholly-owned U.S.-based Incorporated subsidiary of Morgan Grenfell Asset Management and was organized in 1985. As of September 30, 1995, total assets under management by Morgan Grenfell were approximately $7 billion. The principal place of business address of Morgan Grenfell is 885 Third Avenue, 32nd Floor, New York, New York 10022. David W. Baldt, Director and Executive Vice President of Morgan Grenfell, has served as the portfolio manager of the Fixed Income Portfolio since July, 1995, and has been with Morgan Grenfell since 1989. For its services, Morgan Grenfell is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .20% of the average daily net assets. For the fiscal year ended August 31, 1995, the Portfolio paid Morgan Grenfell an advisory fee, after waivers, of .20% of its average daily net assets.
Weiss, Peck & Weiss, Peck & Greer, L.L.C. ("WPG") acts as investment Greer, L.L.C. adviser for the Money Market Portfolio. WPG is a limited liability company founded as a limited partnership in 1970, and engages in investment management, venture capital management and management buyouts. WPG has been active since its founding in managing portfolios of tax exempt securities. As of September 30, 1995, total assets under management were approximately $12.5 billion. The principal business address of WPG is One New York Plaza, New York, NY 10004. Janet Fiorenza acts as the portfolio manager for the Portfolio. Ms. Fiorenza, a Principal of WPG, has been associated with WPG's Tax Exempt Fixed Income group since 1988 and its predecessor since 1980. For its services, WPG is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .05% of the average daily net assets of the money market portfolios of the Trust that are advised by WPGA up to $500 million; .04% of such assets from $500 million to $1 billion; and .03% of such assets over $1 billion. Such fees are allocated daily among these money market portfolios on the basis of their relative net assets. For the fiscal year ended August 31, 1995, the Portfolio paid WPG an advisory fee, after waivers, of .04% of its average daily net assets.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as each Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the Trust. Each Class of the Trust has adopted a distribution plan (the "Class A Plan," "Class B Plan," "Class C Plan," and, collectively, the "Plans") pursuant to Rule 12b-1 under the 1940 Act. Each Plan provides for reimbursement for expenses incurred by the Distributor, in an amount not to exceed .30% of the average daily net assets of each Portfolio on an
annualized basis, and provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement ("Qualified Trustees"). Currently, the budget (shown here as a percentage of daily net assets) for each Portfolio is set at an annual rate of .08% for the Pennsylvania Municipal Portfolio and .07% for the Pennsylvania Tax-Free Portfolio. Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific portfolio of the Trust are allocated among each of the portfolios of the Trust based on the basis of their relative average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget. The Class B and C Plans for the Pennsylvania Tax Free Portfolio, in addition to providing for the reimbursement payments described above, provides for payments to the Distributor at an annual rate of .30% and 50%, respectively of the Portfolio's average daily net assets attributable to Class B and C shares. This additional payment may be used to compensate financial institutions that provide distribution- related services to their customers. These payments are characterized as "compensation," and are not directly tied to expenses incurred by the Distributor; the payments the Distributor receives during any year may therefore be higher or lower than its actual expenses. These additional payments compensate the Distributor for its services in connection with distribution assistance or the provision of shareholder services, and some or all of it may be used to pay financial institutions and intermediaries such as banks, savings and loan associations, insurance companies, and investment counselors, broker-dealers (including the Distributor's affiliates and subsidiaries) for services or reimbursement of expenses incurred in connection with distribution assistance or the provision of shareholder services. If the Distributor's expenses are less than its fees under the Class B or C Plans, the Trust will still pay the full fee and the Distributor will realize a profit, but the Trust will not be obligated to pay in excess of the full fee, even if the Distributor's actual expenses are higher. Currently, the Distributor is taking this additional compensation payment under the Class B Plan at a rate of .25% of the Portfolio's average daily net assets, on an annualized basis, attributable to such Class shares. It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers. The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation.
The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the sales charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolios. Such promotional incentives will be offered uniformly to all shares of the Portfolios, and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolios sold by such dealer.
Financial institutions may acquire shares of each Portfolio for their own account, or as a record owner on behalf of fiduciary, agency or custody accounts, by placing orders with the Transfer Agent. Institutions that use certain SEI proprietary systems may place orders electronically through those systems. State securities laws may require banks and financial institutions purchasing shares for their customers to register as dealers pursuant to state laws. Financial institutions which purchase shares for the accounts of their customers may impose separate charges on these customers for account services. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness on the same day. Shares of either Portfolio are offered only to residents of states in which the shares are eligible for purchase. Shares of each Portfolio may be purchased or redeemed on days on which the New York Stock Exchange is open for business ("Business Days"). However, money market fund shares cannot be purchased by Federal Reserve wire on federal holidays restricting wire transfers. Shareholders who desire to purchase shares for cash must place their orders with the Transfer Agent prior to a specified time on any Business Day for the order to be accepted on that Business Day; the specified time is 2:00 p.m., Eastern time for the Money Market Portfolio and the close of trading on the New York Stock Exchange (presently 4:00 p.m., Eastern time) for the Fixed Income Portfolio. Cash investments must be transmitted or delivered in federal funds to the wire agent by the close of business on the same day the order is placed for the Money Market Portfolio and on the next Business Day following the day the order is placed for the Fixed Income Portfolio. Purchases will be made in full or fractional shares of the Fixed Income Portfolio calculated to three decimal places. The Trust will send shareholders a statement of shares owned after each transaction. The purchase price of shares is the net asset value next determined after a purchase order is received and accepted by the Trust. The purchase price of shares of the Money Market Portfolio is expected to remain constant at $1.00.
The net asset value per share of each Portfolio is determined by dividing the total value of its investments and other assets, less any liability, by the total outstanding shares of the Portfolio. The Money Market Portfolio's investments will be valued by the amortized cost method described in the Statement of Additional Information. Net asset value per share is determined on each Business Day as of 2:00 p.m., Eastern time for the Money Market Portfolio and as of the close of trading on the New York Stock Exchange (presently 4:00 p.m., Eastern time) for the Fixed Income Portfolio. Although the methodology and procedures for determining net asset value per share are identical for all classes of a Portfolio, the net asset value per share of one class of the Fixed Income Portfolio may differ from that of another class because of the different distribution fees charged to each class. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust or shareholders to accept such purchase order. The market value of each portfolio security is obtained by the Manager from an independent pricing service. Securities having maturities of 60 days or less at the time of purchase will be valued using the amortized cost method (described in the Statement of Additional Information), which approximates the securities' market value. The pricing service may use a matrix system to determine valuations of equity and fixed income securities. This system considers such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. The pricing service may also provide market quotations. The procedures of the pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Trustees. Portfolio securities for which market quotations are available are valued at the most recently quoted bid price on each Business Day. Shareholders who desire to redeem shares of a Portfolio must place their redemption orders with the Transfer Agent prior to the calculation of net asset value on any Business Day in order to be effective on that day. Otherwise, the redemption orders will be effective on the next Business Day. Payment for redemption orders from the Fixed Income Portfolio will be made as promptly as possible and, in any event, within five Business Days after the redemption order is received. Payment for redemption orders from the Money Market Portfolio received before the calculation of net asset value will be made the same day by transfer of federal funds. The redemption price is the net asset value per share of the Portfolio next determined after receipt by the Transfer Agent of an effective redemption order. Financial institutions which redeem shares for the accounts of their customers may impose their own procedures and cut-off times for receipt of redemption requests directed through the financial institution. Purchase and redemption orders may be placed by telephone. Neither the Trust nor its transfer agent will be responsible for any loss, liability, cost or expense for acting upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and its transfer agent will each employ reasonable procedures to
instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions. If market conditions are extraordinarily active, or other extraordinary circumstances exist, shareholders may experience difficulties placing redemption orders by telephone, and may wish to consider placing orders by other means.
From time to time, the Money Market Portfolio may advertise its "current yield" and "effective yield," and the Fixed Income Portfolio may advertise its yield and total return. Each Portfolio may also advertise a "tax equivalent yield." These figures are based on historical earnings and are not intended to indicate future performance. The "current yield" of the Money Market Portfolio refers to the income generated by an investment over a seven-day period which is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment is assumed to be reinvested. The effective yield will be slightly higher than the "current yield" because of the compounding effect of this assumed reinvestment. The yield of the Fixed Income Portfolio refers to the annualized income generated by a hypothetical investment, in the Portfolio over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period generated each period over one year and is shown as a percentage of the investment. The total return of the Fixed Income Portfolio refers to the average compounded rate of return to a hypothetical investment for designated time periods (including, but not limited to, the period from which the Portfolio commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gain distributions. The "tax equivalent yield" is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of a Portfolio's yield, assuming certain tax brackets for a shareholder of the Money Market Portfolio. A Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and business publications and periodicals; (ii) broad groups of comparable mutual funds; (iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) other investment alternatives. The Fixed Income Portfolio may quote Morningstar, Inc., a service that ranks mutual funds on the basis of risk-adjusted performance. The Fund may quote Ibbotson Associates of Chicago, Illinois, which provides historical returns of the capital markets in
the U.S. The Fixed Income Portfolio may use long-term performance of these capital markets to demonstrate general long-term risk versus reward scenarios and could include the value of a hypothetical investment in any of the capital markets. The Fixed Income Portfolio may also quote financial and business publications and periodicals as they relate to fund management, investment philosophy, and investment techniques. The Fixed Income Portfolio may quote various measures of volatility and benchmark correlation in advertising and may compare these measures to those of other funds. Measures of volatility attempt to compare historical share price fluctuations or total returns to a benchmark while measures of benchmark correlation indicate how valid a comparative benchmark might be. Measures of volatility and correlation are calculated using averages of historical data and cannot be calculated precisely. The performance on Class A shares will normally be higher than that on Class B or Class C shares because of the additional distribution and transfer agent expenses charged to Class B or Class C shares.
The following summary of federal and state income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state or local income tax treatment of the Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
Tax Status of Each Portfolio is treated as a separate entity for federal each Portfolio income tax purposes and is not combined with the Trust's other portfolios. Each Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal income tax on net investment company taxable income and net capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
Tax Status of Each Portfolio intends to distribute substantially all of Distributions its net investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of a Portfolio's total assets consists of obligations the interest on which is excludable from gross income, the Portfolio may pay "exempt-interest dividends" to its shareholders. Exempt- interest dividends are excludable from a shareholder's gross income for federal income tax purposes but may have certain collateral federal tax consequences including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social
Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information. Any dividends paid out of income realized by a Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends-received deduction for corporate shareholders. Distributions to shareholders of net capital gains of a Portfolio will be taxable to shareholders as long-term capital gain, whether received in cash or additional shares, and regardless of how long a shareholder has held the shares. Dividends declared by a Portfolio in October, November or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio at any time during the following January. Each Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies. Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of a Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolios may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares. Each Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolio during the year to which the dividends relate. Each sale, exchange or redemption of any Portfolio's shares is a taxable transaction to the shareholders. The following is a general, abbreviated summary of certain of the provisions of the Pennsylvania tax code presently in effect as they directly govern the taxation of shareholders subject to Pennsylvania personal income tax. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive.
State Taxes Distributions paid by a Portfolio to shareholders will not be subject to the Pennsylvania personal income tax or to the Philadelphia School District investment net income tax to the extent that the distributions are attributable to interest received by the Portfolio from its investments in (i) obligations issued by the Commonwealth of Pennsylvania, any public authority, commission, board of agency created by the Commonwealth of Pennsylvania or any public authority created by such political subdivision, and (ii) obligations of the United States, the interest and gains from which are statutorily free from state taxation in the Commonwealth or the United States. Distributions by a Portfolio to a Pennsylvania resident that are attributable to most other sources will not be exempt from the Pennsylvania personal income tax or (for residents of Philadelphia) the
District investment net income tax. Distributions paid by a Portfolio which are excludable as exempt income for federal tax purposes are not subject to the Pennsylvania corporate net income tax. Shares of the Portfolio are exempt from Pennsylvania county personal property taxes and (as to residents of Pittsburgh) from personal property taxes imposed by the City of Pittsburgh and the School District of Pittsburgh to the extent that the Portfolio's investments consist of obligations which are themselves exempt from taxation in Pennsylvania. Each Portfolio intends to invest primarily in obligations that produce interest exempt from federal and Pennsylvania taxes. If a Portfolio invests in obligations that pay interest that is not exempt for Pennsylvania purposes but is exempt for federal purposes, a portion of the Portfolio's distributions will be subject to Pennsylvania personal income tax.
The Trust The Trust was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. In addition to the Portfolios, the Trust consists of the following portfolios: Tax Free Portfolio, Institutional Tax Free Portfolio, California Tax Exempt Portfolio, Intermediate-Term Municipal Portfolio, Kansas Tax Free Income Portfolio, Bainbridge Tax Exempt Portfolio, California Intermediate-Term Municipal Portfolio and New York Intermediate-Term Municipal Portfolio. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation materials and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential services to the Trust.
Voting Rights Each share held entitles the shareholder of record to one vote. The shareholders of each portfolio or class will vote separately on matters relating solely to that portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the
outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Manager, SEI Inquiries Financial Management Corporation, 680 E. Swedesford Road, Wayne, Pennsylvania, 19087.
Dividends The net investment income (exclusive of capital gains) of each Portfolio is distributed in the form of dividends. The Money Market Portfolio declares dividends daily, and shareholders of record at the close of each Business Day will be entitled to receive that day's dividend. The Money Market Portfolio pays dividends on the first Business Day of each month. The Fixed Income Portfolio declares dividends daily, and shareholders of record on the last record date of each period will be entitled to receive the periodic dividend distribution, which is generally paid on the 10th Business Day of the following month. If any net capital gains are realized by either Portfolio, they will be distributed annually. Shareholders automatically receive all income dividends and capital gain distributions in additional shares, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution.
Counsel and Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Independent Arthur Andersen LLP serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as Custodian of the Trust's assets and acts as wire agent of certain cash of the Trust. The Custodian holds cash, securities and other assets of the Trust as required by the 1940 Act.
The following is a description of certain of the permitted investments for the Portfolios, and the associated risk factors:
Bankers' Bankers' acceptances are bills of exchange or time drafts Acceptances drawn on and accepted by a commercial bank. Bankers' acceptances are used by corporations to finance the shipment and storage of goods. Maturities are generally six months or less.
Certificates of Certificates of deposit are interest bearing instruments Deposit with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds, and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
Commercial Commercial Paper is a term used to describe unsecured short- Paper term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligations issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility, tolls from a toll bridge, for example. Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which a Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed- upon date. The Custodian will hold the security as collateral for the repurchase agreement. A Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss on the sale of the collateral. A Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
Standby Securities subject to standby commitments or puts permit the Commitments and holder thereof to sell the securities at a fixed price prior Puts to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price.
commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Portfolio owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Portfolio will limit standby commitment or put transactions to institutions believed to present minimal credit risk.
Variable and Certain of the obligations purchased by a Portfolio may Floating Rate carry variable or floating rates of interest and may involve Instruments a conditional or unconditional demand feature. Such obligations may include variable amount master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or at some other interval, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice period exceeding seven days may be considered illiquid if there is no secondary market for such security.
When-Issued and When-issued or delayed delivery transactions involve the Delayed purchase of an instrument with payment and delivery taking Delivery place in the future. Delivery of and payment for these Securities securities may occur a month or more after the date of the purchase commitment. The Portfolio will maintain with the custodian a separate account with liquid, high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date, and no interest accrues to the Portfolio before settlement. These securities are subject to market fluctuation due to changes in market interest rates, and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although a Portfolio generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, a Portfolio may dispose of a when-issued security or forward commitment prior to settlement if the Adviser deems it appropriate to do so.
Supplement dated December 31, 1995 to Prospectus dated December 31, 1995
This Supplement to the Prospectus provides new and additional information beyond that contained in the Prospectus and should be read in conjunction with the Prospectus.
Annual Operating Expenses (as a percentage of average net assets) Management/Advisory Fees (after fee waivers)/1/ .45% Total Operating Expenses (after fee waivers)/3/ .60%
1 SFM has waived, on a voluntary basis, a portion of its fees and the Management/Adivsory fees shown reflect these voluntary waivers. SFM reserves the right to terminate this waiver at any time in its sole discretion. Absent such waiver, the Management/Advisory fes for the Portfolio would be .57%. 2 The 12b-1 fees shown affect the Portfolio's current 12b-1 budget for reimbursement of expenses. The maximum 12b-1 fees payable by Class A shares of the Portfolio are .30%. 3 Absent the voluntary fee waivers described above, Total Operating Expenses for Class A shares of the Portfolio would be .72%.
On December 4, 1995, the Board of Trustees of the SEI Tax Exempt Trust (the "Trust") approved a series of changes relating to the investment advisory arrangements for the Intermediate-Term Municipal Portfolio (the "Portfolio"). At the meeting, the Board voted to terminate the investment advisory agreement between the Trust, on behalf of the Portfolio, and Weiss, Peck & Greer Advisers, Inc., such termination to take effect on January 1, 1996. The Board approved a new investment advisory agreement between the Trust, on behalf of the Portfolio, and Standish Ayer & Wood, Inc. ("Standish"), effective as of January 1, 1996. At the same meeting, the Board approved an alternative advisory arrangement for the Portfolio, which arrangement will take effect upon shareholder approval and supplant the advisory agreement with Standish. Under this proposed alternate arrangement, SEI Financial Management ("SFM") will act as the investment adviser to the Portfolio and Standish would serve as investment sub-adviser to the Portfolio.
At a shareholder meeting expected to be held on April 16, 1996, shareholders of the Portfolio accordingly will be asked to approve: (a) an advisory agreement between the Trust, on behalf of the Portfolio, and SFM; (b) a sub-advisory agreement between SFM and Standish, pursuant to which Standish will act as the Portfolio's sub-adviser and will be compensated by SFM from its advisory fee, such agreement to take effect only upon the approval of SFM as investment adviser; and (c) an advisory agreement between the Trust and Standish to take effect on January 1, 1996 and to continue after the date of the shareholders meeting only if the advisory and sub-advisory agreements referenced in (a) and (b) are not approved by shareholders.
Prior to shareholder approval, Standish will serve as interim investment adviser, and will be compensated at the rate of .18% of the Portfolio's average daily net assets up to $125 million and .15% of the Portfolio's average daily net assets over $125 million. The rate of compensation paid to Weiss, Peck & Greer Advisers, Inc., the Portfolio's former investment adviser, was .18% of the Portfolio's average daily net assets up to $150 million and .16% of the Portfolio's average daily net assets over $150 million.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
This Prospectus sets forth concisely information about the above-referenced Portfolio that an investor needs to know before investing. Please read this Prospectus carefully, and keep it on file for future reference.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end investment management company, certain classes of which offer financial institutions a convenient means of investing their own funds, or funds for which they act in a fiduciary, agency or custodial capacity, in professionally managed diversified and non- diversified portfolios of securities. A portfolio may offer separate classes of shares that differ from each other primarily in the allocation of certain distribution expenses and minimum investment amounts. This Prospectus offers Class A shares of the Trust's Intermediate-Term Municipal Portfolio (the "Portfolio"), a fixed income portfolio.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC- CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE TRUST'S SHARES ARE NOT FEDERALLY IN- SURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE- SERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT IN- VESTED.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
1 SFM has waived, on a voluntary basis, a portion of its fees, and the Management/Advisory fees shown reflect these voluntary waivers. SFM reserves the right to terminate this waiver at any time in its sole discretion. Absent such waiver, the Management/Advisory fees for the Portfolio would be .75%. 2 The 12b-1 fees shown effect the Portfolio's current 12b-1 budget for reimbursement of expenses. The maximum 12b-1 fees payable by Class A shares of the Portfolio are .30%. 3 Absent the voluntary fee waivers described above, Total Operating Expenses for Class A shares of the Portfolio would be .90%.
An investor in Class A shares of the Portfolio would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period:
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the table and this example is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Portfolio's Class A shares. A person who purchases shares through a financial institution may be charged separate fees by that institution. The Portfolio also offers Class D shares, which are subject to the same expenses except that Class D shares bear different distribution and transfer agent costs and are subject to a sales load. Additional information may be found under "The Manager and Shareholder Servicing Agent", "Distribution" and "The Adviser".
Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
The following financial highlights, for a share outstanding throughout each period, have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon was unqualified. This information should be read in conjunction with the Trust's financial statements and notes thereto, which are included in the Trust's Statement of Additional Information and which appear, along with the report of Arthur Andersen LLP, in the Trust's 1995 Annual Report to Shareholders. Additional performance information is set forth in the 1995 Annual Report to Shareholders which is available upon request and without charge by calling 1-800-342-5734.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
+ Return is for period indicated and has not been annualized. 1 The Intermediate-Term Municipal Portfolio commenced operations on September 5, 1989. 2 In August 1990, the Trustees changed the fiscal year end of the Trust from January 31 to August 31.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company that offers units of beneficial interest ("shares") in separate diversified and non-diversified investment portfolios. The Trust offers units of beneficial interest ("shares") in separate investment portfolios. This prospectus offers Class A shares of the Trust's Intermediate-Term Municipal Portfolio (the "Portfolio"). Shares in the Portfolio may also be purchased through the Portfolio's Class D shares. The investment adviser and investment sub-adviser to the Portfolio are referred to collectively as the "advisers." Additional information pertaining to the Trust may be obtained by writing to SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734.
The Portfolio's investment objective is to seek the highest level of income exempt from federal income taxes that can be obtained, consistent with the preservation of capital, from a diversified portfolio of investment grade municipal securities. However, the Portfolio's income might not be as high as it would be if the Portfolio had minimum investment rating requirements lower than those discussed below. There can be no assurance that the Portfolio will be able to achieve its investment objective. The Portfolio invests at least 80% of its net assets in municipal securities the interest of which is exempt from federal income taxes (collectively "Municipal Securities"), based on opinions from bond counsel for the issuers. This investment policy is a fundamental policy of the Portfolio. The issuers of these securities can be located in all fifty states, the District of Columbia, Puerto Rico, and other U.S. territories and possessions. Under normal conditions, the Portfolio will invest at least 80% of its net assets in securities the interest on which is not a preference item for purposes of the alternative minimum tax. Although the advisers have no present intention of doing so, the up to 20% of all assets in the Portfolio can be invested in taxable debt securities for defensive purposes or when sufficient tax exempt securities considered appropriate by the advisers are not available for purchase. The market value of the Portfolio's fixed income investments will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Changes by recognized rating agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of portfolio securities will not necessarily affect cash income derived from these securities, but will affect the Portfolio's net asset value. The Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating, or, if not rated, are of comparable quality as determined by the advisers: (i) municipal bonds rated A or
better by Standard and Poor's Corporation ("S&P") or by Moody's Investors Service, Inc. ("Moody's"), and the Portfolio may invest up to 10% of its total assets in municipal bonds rated BBB by S&P or Baa by Moody's; (ii) municipal notes rated at least SP-1 by S&P or MIG-1 or VMIG-1 by Moody's; and (iii) tax-exempt commercial paper rated at least A-1 by S&P or Prime-1 by Moody's. Bonds rated BBB by S&P or Baa by Moody's have speculative characteristics. Municipal obligations owned by the Portfolio which become less than the prescribed investment quality shall be sold at a time when, in the judgment of the advisers, it does not substantially impact the market value of the Portfolio. Not more than 25% of Portfolio assets will be invested in (a) municipal securities whose issuers are located in the same state, (b) municipal securities the interest on which is derived from revenues of similar type projects, or (c) municipal securities subject to the alternative minimum tax. This restriction does not apply to municipal securities in any of the following categories: public housing authorities; general obligations of states and localities; state and local housing finance authorities, or municipal utilities systems. There could be economic, business, or political developments which might affect all municipal securities of a similar type. To the extent that a significant portion of the Portfolio's assets are invested in municipal securities payable from revenues on similar projects, the Portfolio will be subject to the peculiar risks presented by such projects to a greater extent than it would be if the Portfolio's assets were not so invested. The Portfolio will maintain a dollar-weighted average portfolio maturity of three to ten years. However, when the advisers determine that market conditions so warrant, the Portfolio can maintain an average weighted maturity of less than three years.
The Portfolio may invest in variable and floating rate obligations, may purchase securities on a "when-issued" basis, and reserves the right to engage in transactions involving standby commitments. The Portfolio may also purchase other types of tax-exempt instruments as long as they are of a quality equivalent to the long-term bond or commercial paper ratings stated above. Although permitted to do so, the Portfolio has no present intention to invest in repurchase agreements or purchase securities subject to the alternative minimum tax. The Portfolio will not invest more than 15% of its net assets in illiquid securities. The taxable securities in which the Portfolio may invest consist of U.S. Treasury obligations; obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities whether or not backed by the full faith and credit of the U.S. Government; instruments of U.S. commercial banks or savings and loan institutions (not including foreign branches of U.S. banks or U.S. branches of foreign banks) which are members of the Federal Reserve System or the Federal Deposit Insurance Corporation and
which have total assets of $1 billion or more as shown on their last published financial statements at the time of investment; and repurchase agreements involving any of such obligations. Municipal notes rated SP-1 by S&P have strong capacity to pay principal and interest; notes rated MIG-1 or VMIG-1 by Moody's are considered to be of the best quality. Bonds rated BBB by S&P have an adequate capacity to pay interest and repay principal; bonds rated Baa by Moody's are considered to be medium-grade obligations (i.e., neither highly protected nor poorly secured). The highest S&P commercial paper rating category, A-1, indicates that the degree of safety regarding timely payment is strong and commercial paper issuers rated Prime-1 by Moody's have a superior ability for repayment. For a description of the permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
The investment objective and investment limitations are fundamental policies of the Portfolio. Fundamental policies cannot be changed with respect to the Trust or the Portfolio without the consent of the holders of a majority of the Trust's or the Portfolio's outstanding shares.
1. Purchase securities of any issuer (except securities issued or guaranteed by the United States Government, its agencies or instrumentalities and any security guaranteed thereby) if, as a result, more than 5% of the total assets of the Portfolio (based on fair market value at time of investment) would be invested in the securities of such issuer; provided, however, that the Portfolio may invest up to 25% of its total assets without regard to this restriction.
2. Purchase any securities which would cause more than 25% of the total assets of the Portfolio, based on current value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities or to investments in tax-exempt securities issued by governments or political subdivisions of governments.
3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio. The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
SEI Financial Management Corporation ("SFM" and the "Transfer Agent"), a wholly-owned subsidiary of SEI Corporation ("SEI"), provides the Trust with overall management services, regulatory reporting, all necessary office space, equipment, personnel and facilities, and serves as institutional transfer agent, dividend disbursing agent, and shareholder servicing agent. For these services, SFM is entitled to a fee which is calculated daily and paid monthly at an annual rate of .24% of the average daily net assets of the Portfolio. In addition, SFM has voluntarily agreed to waive a portion of its fees proportionately in order to limit total operating expenses of the Class A shares of the Portfolio to not more than .55% of the Portfolio's average daily net assets attributable to Class A shares, on an annualized basis. SFM reserves the right, in its sole discretion, to terminate its waiver at any time. For the fiscal year ended August 31, 1995, the Portfolio paid management fees, after waivers, of .27% of its average daily net assets.
SFM serves as investment adviser (the "Adviser") to the Portfolio. Within the Portfolio one or more investment sub- advisers (each, a "Sub-Adviser," and together, the "Sub- Advisers") who specialize in the distinct investment style or styles that the Portfolio is designed to capture may be utilized to select that Portfolio's investments. The Adviser has general oversight responsibility for the investment advisory services provided to the Portfolio, including formulating the Portfolio's investment policies and analyzing economic trends affecting the Portfolio. In addition, SFM is responsible for (i) managing the allocation of assets among the Portfolio's Sub-Advisers, if applicable, (ii) directing and evaluating the investment services provided by a Sub-Adviser, including their adherence to the Portfolio's respective investment objective and policies and the Portfolio's investment performance, and (iii) managing the cash portion of the Portfolio's assets. In accordance with the Portfolio's investment objective and policies, and under the supervision of the Adviser and the Trust's Board of Trustees, a Sub-Adviser is responsible for the day-to-day investment management of all or a discrete portion of the assets of a Portfolio. The Adviser and the Sub-Adviser are authorized to make investment decisions for the Portfolio and place orders on behalf of the Portfolios to effect the investment decisions made. SFM monitors the compliance of the Sub-Adviser of the Portfolio with regulatory and tax regulations, such as portfolio concentration and diversification. For the most part compliance with these requirements by a Sub-Adviser with respect to its portion of the Portfolio will assure compliance by that Portfolio as a whole. In addition, SFM monitors positions taken by each of the Portfolio's Sub- Advisers and will notify the Sub-Advisers of
any developing situations to help ensure that investments do not run afoul of the short-short test or the wash sale rules. To the extent that having multiple Sub-Advisers responsible for investing separate portions of the Portfolio's assets creates the need for coordination among such Sub-Advisers, there is an increased risk that the Portfolio will not comply with these regulatory and tax requirements. It is possible that different Sub-Advisers of the Portfolio could take opposite actions within a short period of time with respect to a particular security. For example, one Sub-Adviser could buy a security for the Portfolio and shortly thereafter another Sub-Adviser could sell the same security from the portion of the Portfolio allocated to it. If in these circumstances the securities could be transferred from one Sub-Adviser's portion of the Portfolio to another, the Portfolio could avoid transaction costs and could avoid creating possible wash sales and short-short gains under the Internal Revenue Code of 1986, as amended (the "Code"). Such transfers are not practicable but the Sub-Advisers do not believe that there will be material adverse effects on the Portfolio as a result. First, it does not appear likely that there will be substantial overlap in the securities acquired for the Portfolio by the various Sub-Advisers. Moreover, the Sub-Advisers would probably only rarely engage in the types of offsetting transactions described above, especially within a short time period. Therefore, it is a matter of speculation whether offsetting transactions would result in any significant increases in transaction costs or have significant tax consequences. With respect to the latter, SFM has established procedures with respect to the short- short test which are designed to prevent realization of short-short gains in excess of Code limits. It is true that wash sales could occur in spite of the efforts of SFM, but the Board of Trustees believes that the benefit of using multiple advisers outweighs the consequences of any wash sales. SFM is currently seeking an exemptive order from the Securities and Exchange Commission (the "SEC") that would permit SFM, with the approval of the Trust's Board of Trustees, to retain sub-advisers for the Portfolio without submitting the sub-advisory agreement to a vote of the Portfolio's shareholders. If granted, the exemptive relief will permit the non-disclosure of amounts payable by SFM under such sub-advisory agreements. The Trust will notify shareholders in the event of any change in the identity of the Sub-Adviser for the Portfolio. Until or unless this exemptive order is granted, if one of the Sub-Advisers is terminated or departs from ways. First, the Portfolio may propose that a Sub-Adviser be appointed to manage that portion of the Portfolio's assets managed by the departing adviser. In this case, the Portfolio would be required to submit to the vote of the Portfolio's shareholders the approval of an investment advisory contract with the new Sub-Adviser. In the alternative, the Portfolio may decide to allocate the departing sub-adviser's assets among the remaining advisers. This allocation would not require new investment advisory contracts with the remaining Sub- Advisers, and consequently no shareholder approval would be necessary.
SEI Financial SEI Financial Management Corporation ("SFM") serves as Management investment adviser to the Portfolio. SFM is a wholly-owned Corporation subsidiary of SEI Corporation ("SEI"), a financial services company located in Wayne, PA. The principal business address of SFM is 680 East Swedesford Road, Wayne, PA 19087-1658. SEI was founded in 1968 and is a leading provider of investment solutions to banks, institutional investors, investment advisers and insurance companies. Affiliates of SFM have provided consulting advice to institutional investors for more than 20 years, including advice regarding the selection and evaluation of investment advisers. SFM currently serves as manager or administrator to more than 26 investment companies, including more than 220 portfolios, which investment companies have more than $51 billion in assets as of September 30, 1995. For these advisory services, SFM is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .33% of the Portfolio's average daily net assets.
Standish, Ayer & Standish Ayer & Wood, Inc. ("SAW") serves as Sub-Adviser Wood, Inc. for the Portfolio. SAW's principal offices are located at One Financial Center, Boston, MA 02111. SAW was founded in 1933 and is a Subchapter S Corporation organized under the laws of the Commonwealth of Massachusetts and is completely owned by its 23 directors, all of whom are actively engaged in the management of the corporation. SAW has been providing investment management services to institutions and managing municipal securities since 1934. SAW manages assets for pensions, funds, corporate and public, insurance companies; banks; and individuals. Total assets under management as of September 30, 1995 were $29 billion. Raymond J. Kubiak, CFA serves as portfolio manager to the Portfolio. Mr. Kubiak has 15 years experience in public finance and is a Vice President and Director of the Sub- Adviser. He has been with SAW since March, 1988. SFM pays SAW a fee which is calculated and paid monthly, based on an annual rate of .18% for assets of up to $125 million and .15% for assets over $125 million.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as each Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the Trust. Each Class of the Trust has adopted a distribution plan (the "Class A Plan" and "Class D Plan") pursuant to Rule 12b-1 under the 1940 Act. The Class A Plan provides for reimbursement for expenses incurred by the Distributor, in an amount not to exceed .30% of the average daily net assets of the Portfolio, on an annualized basis, provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement
("Qualified Trustees"). Currently, the budget (shown here as a percentage of daily net assets) for the Portfolio is set at an annual rate of .08%. Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, federal and state securities law registration and the cost of complying with such laws in the distribution of the Trust's shares, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific Portfolio are allocated among each of the Portfolios of the Trust on the basis of their average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget. It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers. The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation. The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the sales charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolios. Such promotional incentives will be offered uniformly to all shares of the Portfolios, and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolios sold by such dealer.
Financial institutions may acquire shares of the Portfolio for their own account, or as a record owner on behalf of fiduciary, agency or custody accounts, by placing orders with the Transfer Agent. Institutions that use certain SEI proprietary systems may place orders electronically through those systems. State securities laws may require banks and financial institutions purchasing shares for their customers to register as dealers pursuant to state laws. Financial institutions which purchase shares for the accounts of their customers may impose separate charges on these customers for account services. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness on the same day. Shares of the Portfolio are offered only to residents of states in which the shares are eligible for purchase. Shares of the Portfolio may be purchased or redeemed on days on which the New York Stock Exchange is open for business ("Business Days").
Shareholders who desire to purchase shares for cash must place their orders with the Distributor prior to the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on any Business Day for the order to be accepted on that Business Day. Cash investments must be transmitted or delivered in federal funds to the wire agent on the next Business Day following the date the order is placed. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust and/or shareholders to accept such purchase order. Purchases will be made in full and fractional shares of the Portfolio calculated to three decimal places. The Trust will send shareholders a statement of shares owned after each transaction. The purchase price of shares is the net asset value next determined after a purchase order is received and accepted by the Trust plus, in the case of Class D Shares of the Portfolio, the applicable sales load. The net asset value per share of the Portfolio is determined by dividing the total value of its investments and other assets, less any liability, by the total outstanding shares of the Portfolio. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on each Business Day. Although the methodology and procedures for determining net asset value per share are identical for all classes of the Portfolio, the net asset value of one class may differ from that of another class because of the different distribution fees charged to each class and the incremental transfer agent fees charged to Class D Shares. The market value of each security is obtained by the Manager from an independent pricing service. Securities having maturities of 60 days or less at the time of purchase will be valued using the amortized cost method (described in the Statement of Additional Information), which approximates the securities' market value. The pricing service may use a matrix system to determine valuations of fixed income securities. This system considers such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. The pricing service may also provide market quotations. The procedures of the pricing service and its valuation are reviewed by the officers of the Trust under the general supervision of the Trustees. Portfolio securities for which market quotations are available are valued at the most recently quoted bid price on each Business Day. Shareholders who desire to redeem shares of the Portfolio must place their redemption orders with the Transfer Agent prior to the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on any Business Day. The redemption price is the net asset value per share of the Portfolio next determined after receipt by the Transfer Agent of the redemption order. Payment on redemption will be made as promptly as possible and, in any event, within five Business Days after the redemption order is received. Purchase and redemption orders may be placed by telephone. Neither the Trust nor the Transfer Agent will be responsible for any loss, liability, cost or expense for
upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and the Transfer Agent will each employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions. If market conditions are extraordinarily active, or other extraordinary circumstances exist, shareholders may experience difficulties placing redemption orders by telephone, and may wish to consider placing orders by other means.
From time to time, the Portfolio may advertise yield, tax equivalent yield and total return. These figures will be based on historical earnings and are not intended to indicate future performance. The yield of the Portfolio refers to the annualized income generated by a hypothetical investment in the Portfolio over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period generated each period over one year and is shown as a percentage of the investment. A tax equivalent yield is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of the Portfolio's yield, assuming certain tax brackets for a shareholder. The total return of the Portfolio refers to the average compounded rate of return to a hypothetical investment for designated time periods (including, but not limited to, the period from which the Portfolio commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gain distributions. The Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and business publications and periodicals; (ii) broad groups of comparable mutual funds; (iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) other investment alternatives. The Portfolio may quote Morningstar, Inc., a service that ranks mutual funds on the basis of risk-adjusted performance. The Portfolio may quote Ibbotson Associates of Chicago, Illinois, which provides historical returns of the capital markets in the U.S. The Portfolio may use long-term performance of these capital markets to demonstrate general long-term risk versus reward scenarios and could include the value of a hypothetical investment in any of the capital markets. The Portfolio may also quote financial and business publications and periodicals as they relate to fund management, investment philosophy, and investment techniques. The Portfolio may quote various measures of volatility and benchmark correlation in advertising and may compare these measures to those of other funds. Measures of volatility attempt to compare historical share price fluctuations or total returns to a benchmark while
measures of benchmark correlation indicate how valid a comparative benchmark might be. Measures of volatility and correlation are calculated using averages of historical data and cannot be calculated precisely. The performance on Class A shares will normally be higher than that on the Class D Shares of the Portfolio because of the imposition of a sales charge and additional distribution and transfer agent expenses charged to Class D Shares.
The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state and local tax consequences of an investment in the Portfolio may differ from the federal income tax consequences described below or local income tax treatment of the Portfolio or its shareholders and, accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
Tax Status of The Portfolio is treated as a separate entity for federal the Portfolio income tax purposes and is not combined with the Trust's other portfolios. The Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal income tax on net investment company taxable income) and net capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
Tax Status of The Portfolio intends to distribute substantially all of Distributions its net investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Portfolio's total assets consists of obligations the interest on which is excludable from gross income, the Portfolio may pay "exempt-interest dividends" to its shareholders. Exempt-interest dividends are excludable from a shareholder's gross income for federal income tax purposes but may have certain collateral federal tax consequences including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information. Any dividends paid out of income realized by the Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends-received deduction for corporate shareholders. Distributions to shareholders of net capital gains of the Portfolio will be taxable to shareholders as long-term
whether received in cash or additional shares, and regardless of how long a shareholder has held the shares. Dividends declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio at any time during the following January. The Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies. Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of the Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolio may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares. The Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax- exempt based on income received by the Portfolio during the year to which the dividends relate. Each sale, exchange, or redemption of any Portfolio's shares is a taxable transaction to the shareholder.
The Trust The Trust was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. In addition to the Portfolio, the Trust consists of the following portfolios: Tax Free Portfolio, Institutional Tax Free Portfolio, California Tax Exempt Portfolio, Pennsylvania Municipal Portfolio, Kansas Tax Free Income Portfolio, Bainbridge Tax Exempt Portfolio, California Intermediate-Term Municipal Portfolio, New York Intermediate-Term Municipal Portfolio, and Pennsylvania Tax Free Portfolio. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation materials and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential management services to the Trust.
Voting Rights Each share held entitles the shareholder of record to one vote. The shareholders of each portfolio or class will vote separately on matters relating solely to that portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Manager, Inquiries SEI Financial Management Corporation, 680 E. Swedesford Road, Wayne, Pennsylvania, 19087.
Dividends Substantially all of the net investment income (exclusive of capital gains) of the Portfolio is declared daily and paid monthly as a dividend. Shareholders of record on the last record date of each period will be entitled to receive the dividend distribution, which is generally paid on the 10th Business Day of the following month. If any net capital gains are realized, they will be distributed by the Portfolio annually. Shareholders automatically receive all income dividends and capital gain distributions in additional shares at the net asset value next determined following the record date, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution. The dividends on Class A shares of the Portfolio are normally higher than those on Class D shares because of the additional distribution and transfer agent expenses charged to Class D shares.
Counsel and Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Independent Arthur Andersen LLP serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as Custodian of the Trust's assets and acts as wire agent of certain cash of the Trust. The Custodian holds cash, securities and other assets of the Trust as required by the 1940 Act.
The following is a description of certain of the permitted investments for the Portfolio, and the associated risk factors:
Commercial Paper Commercial Paper is a term used to describe unsecured short-term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligations issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility, tolls from a toll bridge, for example. Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which the Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed-upon date. The Custodian will hold the security as collateral for the repurchase agreement. The Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss on the sale of the collateral. The Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
KANSAS TAX FREE INCOME PORTFOLIO
This Prospectus sets forth concisely information about above-referenced Portfolio that an investor needs to know before investing. Please read this Prospectus carefully, and keep it on file for future reference.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company, certain classes of which offer financial institutions a convenient means of investing their own funds, or funds for which they act in a fiduciary, agency or custodial capacity, in professionally managed diversified and non- diversified portfolios of securities. A portfolio may offer separate classes of shares that differ from each other primarily in the allocation of certain distribution expenses and minimum investment amounts. This Prospectus offers Class A and Class B shares of the Trust's Kansas Tax Free Income Portfolio (the "Portfolio"), a fixed income portfolio.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC- CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE TRUST'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
1 The Adviser has waived, on a voluntary basis, a portion of its fee, and the Management/Advisory fee shown reflect these voluntary waivers. The Adviser reserves the right to terminate its waiver at any time in its sole discretion. Absent such waiver, the Management/Advisory fee would be .45% for both Class A and Class B shares of the Portfolio. 2 Absent the Adviser's voluntary fee waiver. Total Operating Expenses would be .51% and .81%, respectively, for Class A and Class B shares of the Portfolio.
An investor would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period:
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table and example is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Portfolio's Class A and Class B shares. A person who purchases shares through a financial institution may be charged separate fees by that institution. Additional information may be found under "The Manager and Shareholder Servicing Agent", "Distribution" and "The Adviser".
Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
The following financial highlights, for a share outstanding throughout each period, have been audited by Arthur Andersen, L.L.P., independent public accountants, whose report thereon was unqualified. This information should be read in conjunction with the Trust's financial statements and notes thereto, which are included in the Trust's Statement of Additional Information and which appear, along with the report of Arthur Andersen, L.L.P., in the Trust's 1995 Annual Report to Shareholders. Additional performance information is set forth in the 1995 Annual Report to Shareholders, which is available upon request and without charge by calling 1-800-342-5734.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT THE PERIOD**
** The Trust has not previously offered Class B shares of the Portfolio. + Return is for period indicated and has not been annualized. 1 The Kansas Tax Free Income Portfolio commenced operations on December 10, 1990.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company that offers units of beneficial interest ("shares") in separate diversified and non-diversified investment portfolios. This prospectus offers Class A and Class B shares of the Trust's Kansas Tax Free Income Portfolio (the "Portfolio"). Additional information pertaining to the Trust may be obtained by writing to SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734.
The Portfolio's investment objective is to preserve capital while producing current income for the investor that is exempt from both federal and Kansas state income taxes. There can be no assurance that this investment objective will be met.
Under normal conditions the Portfolio will invest at least 80% of its net assets in municipal obligations which produce interest that is, in the opinion of bond counsel, exempt from federal income tax (collectively "Municipal Securities"). This investment policy is a fundamental policy of the Portfolio. At least 65% of the Portfolio's total assets will be invested in Municipal Securities which are exempt from Kansas state income taxes. The remainder of the Portfolio may be invested in Municipal Securities of other states. Under normal conditions, the Portfolio will also invest at least 80% of its net assets in securities the income from which is not subject to the alternative minimum tax. Although it has no present intention of doing so, the Portfolio may invest up to 20% of its assets in taxable securities for defensive purposes or when sufficient tax exempt securities considered appropriate by INTRUST, N.A., the Portfolio's investment adviser (the "Adviser") are not available for purchase.
The market value of the Portfolio's fixed income investments will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Changes by recognized rating agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of portfolio securities will not necessarily affect cash income derived from these securities, but will affect the Portfolio's net asset value.
The Portfolio will maintain a dollar-weighted average portfolio maturity of seven years to twelve years. However, when the Adviser determines that the market conditions so warrant, the Portfolio can maintain an average weighted maturity of less than seven years.
The Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating, or, if not rated, are of comparable quality as determined by the Adviser: (i) municipal bonds rated A or better by Standard and Poor's Corporation ("S&P") or Moody's Investors Service,
and a maximum of 10% of the Portfolio's total assets in municipal bonds rated BBB by S&P or Baa by Moody's; (ii) municipal notes rated at least SP-2 by S&P or MIG-2 or V- MIG-2 by Moody's; and (iii) tax-exempt commercial paper rated at least A-1 by S&P or Prime-1 by Moody's. Municipal notes rated SP-2 by S&P have satisfactory capacity to pay principal and interest; notes rated MIG-2 or VMIG-2 by Moody's are considered to be of high quality. Bonds rated BBB by S&P have an adequate capacity to pay interest and repay principal; bonds rated Baa by Moody's are considered to be medium-grade obligations (i.e., neither highly protected nor poorly secured) and have speculative characteristics. Capacity for timely payment on commercial paper with the S&P designation of A-2 is satisfactory and commercial paper issuers rated Prime-2 by Moody's have a strong ability for repayment of senior short-term debt obligations.
For a description of the permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
The Portfolio may invest in variable and floating rate obligations, may purchase securities on a "when-issued" basis, and reserves the right to engage in standby commitments. The Portfolio may also purchase other types of tax exempt instruments as long as they are of a quality equivalent to the long-term bond or commercial paper ratings stated above. Although permitted to do so, the Portfolio has no present intention to invest in repurchase agreements. The Portfolio will not invest more than 10% of its total assets in securities which are considered to be illiquid.
The taxable instruments in which the Portfolio may invest consist of U.S. Treasury obligations; obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities whether or not backed by the full faith and credit of the U.S. Government; certificates of deposit, bankers acceptances and time deposits of U.S. commercial banks or savings and loan institutions (not including foreign branches of U.S. banks or U.S. branches of foreign banks) which are members of the Federal Reserve System, the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation and which have total assets of $1 billion or more as shown on their last published financial statements at the time of investment; and repurchase agreements involving any of the foregoing obligations.
Kansas Risk Under normal conditions, the Portfolio will be primarily Factors invested in municipal obligations which produce income which is exempt from federal and Kansas state income taxes. Accordingly, the Portfolio will have considerable investments in Kansas municipal obligations, and will be more susceptible to factors which adversely affect issuers of Kansas obligations than a mutual fund which does not have as great a concentration in the municipal obligations of one particular state.
The Portfolio will be affected by factors that affect the financial condition of the State of Kansas; for example, financial difficulties of Kansas, its counties, municipalities and school districts. See "Additional Considerations Relating to Kansas Municipal Securities" in the Statement of Additional Information.
The investment objective and investment limitations are fundamental policies of the Portfolio. Fundamental policies cannot be changed with respect to the Trust or the Portfolio without the consent of the holders of a majority of the Trust's or the Portfolio's outstanding shares.
1. Purchase securities of any issuer (except the securities issued or guaranteed by the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the total assets of the Portfolio would be invested in the securities of such issuer. This restriction applies to 75% of the Portfolio's assets.
2. Purchase any securities which would cause more than 25% of the total assets of the Portfolio based on current value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities or to investments in tax-exempt securities issued by governments or political subdivisions of governments.
3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio.
The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
SEI Financial Management Corporation (the "Manager" and the "Transfer Agent"), a wholly-owned subsidiary of SEI Corporation ("SEI"), provides the Trust with overall management services, regulatory reporting, all necessary office space, equipment, personnel and facilities, and serves as institutional transfer agent, dividend disbursing agent, and shareholder servicing agent.
For these services, the Manager is entitled to a fee which is calculated daily and paid monthly at an annual rate of .15% of the average daily net assets of the Portfolio. For the fiscal year ended August 31, 1995, the Portfolio paid management fees, after waivers, of .15% of its average daily net assets.
INTRUST Bank, N.A. in Wichita, formerly First National Bank in Wichita (the "Adviser"), serves as the Portfolio's investment adviser under an advisory agreement with the Trust (the "Advisory Agreement"). Under the Advisory Agreement, the Adviser invests the assets of the Portfolio, and continuously reviews, supervises and administers the Portfolio's investment program. The Adviser is independent of the Manager and SEI and discharges its responsibilities subject to the supervision of, and policies set by, the Trustees of the Trust.
The Adviser is a majority-owned subsidiary of INTRUST Financial Corporation (formerly First Bancorp of Kansas), a bank holding company. The Adviser is a national banking association which provides a full range of banking and trust services to clients. As of September 30, 1995 total assets under management were approximately $1.17 billion. The principal place of business address of the Adviser is 105 North Main Street, Box One, Wichita, Kansas 67201.
Michael Colgan, Vice President and Trust Investment Officer for the Adviser since 1985, has managed the portfolio of the Kansas Tax Free Income Portfolio since December 1991.
The Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .30% of the average daily net assets of the Portfolio. The Adviser may waive its fee, in its discretion, for competitive purposes. In addition, the Adviser has voluntarily agreed to waive a portion of its fee to limit the total operating expenses to not more than .21% of the average daily net assets for Class A and no more than .51% of the average daily net assets for Class B on an annualized basis. The Adviser reserves the right, in its sole discretion, to terminate this voluntary fee waiver at any time. For the fiscal year ended August 31, 1995, the Portfolio paid advisory fees, after waivers, of .00% of its relative net assets.
The Glass-Steagall Act restricts the securities activities of national banks such as INTRUST Bank, N.A. but the Comptroller of the Currency permits national banks to provide investment advisory and other services to mutual funds. Should the Comptroller's position be challenged successfully in court or reversed by legislation, the Trust might have to make other investment advisory arrangements.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as each Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the Trust. Each Class of the
distribution plan (the "Class A Plan" and "Class B Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act").
Each Plan provides for reimbursement for expenses incurred by the Distributor, in an amount not to exceed .30% of the average daily net assets of each Portfolio on an annualized basis, and provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement ("Qualified Trustees"). Currently, the budget (shown here as a percentage of daily net assets) for the Portfolio is set at an annual rate of .00%.
Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific portfolio of the Trust are allocated among each of the portfolios of the Trust based on the basis of their relative average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget.
The Class B Plan, in addition to providing for the reimbursement payments described above, provides for payments to the Distributor at an annual rate of .30% of the Portfolio's average daily net assets attributable to Class D shares. This additional payment may be used to compensate financial institutions that provide distribution-related services to their customers. These payments are characterized as "compensation," and are not directly tied to expenses incurred by the Distributor; the payments the Distributor receives during any year may therefore be higher or lower than its actual expenses. These additional payments compensate the Distributor for its services in connection with distribution assistance or the provision of shareholder services, and some or all of it may be used to pay financial institutions and intermediaries such as banks, savings and loan associations, insurance companies, and investment counselors, broker-dealers (including the Distributor's affiliates and subsidiaries) for services or reimbursement of expenses incurred in connection with distribution assistance or the provision of shareholder services. If the Distributor's expenses are less than its fees under the Class D Plan, the Trust will still pay the full fee and the Distributor will realize a profit, but the Trust will not be obligated to pay in excess of the full fee, even if the Distributor's actual expenses are higher.
It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers.
The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation.
The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the
charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolios. Such promotional incentives will be offered uniformly to all shares of the Portfolios, and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolios sold by such dealer.
Financial institutions may acquire shares of the Portfolio for their own account, or as a record owner on behalf of fiduciary, agency or custody accounts, by placing orders with the Transfer Agent. Institutions that use certain SEI proprietary systems may place orders electronically through those systems. State securities laws may require banks and financial institutions purchasing shares for their customers to register as dealers pursuant to state laws. Financial institutions which purchase shares for the accounts of their customers may impose separate charges on these customers for account services. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness on the same day. Shares of the Portfolio are offered only to residents of states in which the shares are eligible for purchase.
Shares of the Portfolio may be purchased or redeemed on days on which the New York Stock Exchange is open for business ("Business Day"). However, money market fund shares cannot be purchased by Federal Reserve wire on federal holidays restricting wire transfers.
Shareholders who desire to purchase shares for cash must place their orders with the Transfer Agent prior to the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on any Business Day for the order to be accepted on that Business Day. Cash investments must be transmitted or delivered in federal funds to the wire agent on the next Business Day following the date the order is placed. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust and/or shareholders to accept such purchase order.
Purchases will be made in full and fractional shares of the Portfolio calculated to three decimal places. The Trust will send shareholders a statement of shares owned after each transaction. The purchase price of shares is the net asset value next determined after a purchase order is received and accepted by the Trust. The net asset value per share of the Portfolio is determined by dividing the total value of its investments and other assets, less any liability, by the total outstanding shares of the Portfolio. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on each Business Day.
The market value of each security is obtained by the Manager from an independent pricing service. Securities having maturities of 60 days or less at the time of purchase will be valued using the amortized cost method (described in the Statement of Additional Information), which approximates the securities' market value. The pricing service may use a matrix system to determine valuations of fixed income securities. This system considers such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. The pricing service may also provide market quotations. The procedures of the pricing service and its valuation are reviewed by the officers of the Trust under the general supervision of the Trustees. Portfolio securities for which market quotations are available are valued at the most recently quoted bid price on each Business Day.
Shareholders who desire to redeem shares of the Portfolio must place their redemption orders with the Transfer Agent prior to the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on any Business Day. The redemption price is the net asset value per share of the Portfolio next determined after receipt by the Transfer Agent of the redemption order. Payment on redemption will be made as promptly as possible and, in any event, within five Business Days after the redemption order is received.
Purchase and redemption orders may be placed by telephone. Neither the Trust nor the Transfer Agent will be responsible for any loss, liability, cost or expense for acting upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and the Transfer Agent will each employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions.
If market conditions are extraordinarily active, or other extraordinary circumstances exist, shareholders may experience difficulties placing redemption orders by telephone, and may wish to consider placing orders by other means.
From time to time, the Portfolio may advertise yield, total return and tax equivalent yield. These figures will be based on historical earnings and are not intended to indicate future performance.
The yield of the Portfolio refers to the annualized income generated by an investment in the Portfolio over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period generated each period over one year and is shown as a percentage of the investment. The tax equivalent yield is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of the Portfolio's yield, assuming certain tax brackets for a shareholder.
The total return of the Portfolio refers to the average compounded rate of return to a hypothetical investment for designated time periods (including, but not limited to, the period from which the Portfolio commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gain distributions.
The Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and business publications and periodicals; (ii) broad groups of comparable mutual funds; (iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) other investment alternatives. The Portfolio may quote Morningstar, Inc., a service that ranks mutual funds on the basis of risk-adjusted performance. The Portfolio may quote Ibbotson Associates of Chicago, Illinois, which provides historical returns of the capital markets in the U.S. The Portfolio may use long-term performance of these capital markets to demonstrate general long-term risk versus reward scenarios and could include the value of a hypothetical investment in any of the capital markets. The Portfolio may also quote financial and business publications and periodicals as they relate to fund management, investment philosophy, and investment techniques.
The Portfolio may quote various measures of volatility and benchmark correlation in advertising and may compare these measures to those of other funds. Measures of volatility attempt to compare historical share price fluctuations or total returns to a benchmark while measures of benchmark correlation indicate how valid a comparative benchmark might be. Measures of volatility and correlation are calculated using averages of historical data and cannot be calculated precisely.
The performance on Class A shares will normally be higher than that on Class B shares because of the additional distribution expenses charged to Class B shares.
The following summary of federal and state income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state or local income tax treatment of the Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
Tax Status of The Portfolio is treated as a separate entity for federal the Portfolio income tax purposes and is not combined with the Trust's other portfolios. The Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal income tax on net investment company taxable income and net
capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
Tax Status of The Portfolio intends to distribute substantially all of its Distributions net investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Portfolio's total assets consists of obligations the interest on which is excludable from gross income, the Portfolio may pay "exempt-interest dividends" to its shareholders. Exempt-interest dividends are excludable from a shareholder's gross income for federal income tax purposes but may have certain collateral federal tax consequences including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information.
Any dividends paid out of income realized by the Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends- received deduction for corporate shareholders. Distributions to shareholders of net capital gains of the Portfolio will be taxable to shareholders as long-term capital gain, whether received in cash or additional shares, and regardless of how long a shareholder has held the shares.
Dividends declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio at any time during the following January. The Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies.
Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of the Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolio may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares. The Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolio during the year to which the dividends relate.
Each sale, exchange or redemption of any Portfolio's shares is a taxable transaction to the shareholder.
State Taxes The following is a general, abbreviated summary of certain of the provisions of the Kansas tax code presently in effect as they directly govern the taxation of shareholders subject to Kansas personal income tax. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive.
Under Kansas law, interest on all obligations issued by the State of Kansas or its political subdivisions after December 31, 1987 is excluded from Kansas adjusted gross income in determining Kansas tax liability, and interest from obligations issued prior to January 1, 1988, is exempt from Kansas income tax only if there is statutory authority exempting the interest from the particular obligations in question. For Kansas income tax purposes, interest on the above-described obligations is exempt for both the Portfolio and its shareholders who are Kansas residents.
The Trust The Trust was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. In addition to the Portfolio, the Trust consists of the following portfolios: Intermediate-Term Municipal Portfolio, Tax Free Portfolio, Institutional Tax Free Portfolio, California Tax Exempt Portfolio, Pennsylvania Municipal Portfolio, Bainbridge Tax Exempt Portfolio, California Intermediate-Term Municipal Portfolio, New York Intermediate-Term Municipal Portfolio, and Pennsylvania Tax Free Portfolio. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto.
The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation materials and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential management services to the Trust.
Voting Rights Each share held entitles the shareholder of record to one vote. The shareholders of each portfolio or class will vote separately on matters relating solely to that portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Manager, SEI Inquiries Financial Management Corporation, 680 E. Swedesford Road, Wayne, Pennsylvania, 19087.
Dividends Substantially all of the net investment income (exclusive of capital gains) of the Portfolio is periodically declared and paid as a dividend. Shareholders of record on the last record date of each period will be entitled to receive the periodic dividend distribution, which is generally paid on the 10th Business Day of the following month. If any net capital gains are realized, they will be distributed by the Portfolio annually.
Shareholders automatically receive all income dividends and capital gain distributions in additional shares at the net asset value next determined following the record date, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution.
The dividends on Class A shares are normally higher than on Class B shares of the Portfolio because of the additional distribution expenses charged to Class B shares.
Counsel and Morgan, Lewis & Bockius, LLP serves as counsel to the Trust. Independent Arthur Andersen, L.L.P. serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as Custodian of the Trust's assets and acts as wire agent of certain cash of the Trust. The Custodian holds cash, securities and other assets of the Trust as required by the 1940 Act.
The following is a description of certain of the permitted investments for the Portfolio, and the associated risk factors:
Commercial Commercial Paper is a term used to describe unsecured short- Paper term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligations issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities.
General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility, tolls from a toll bridge, for example. Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment.
Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which the Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed- upon date. The Custodian will hold the security as collateral for the repurchase agreement. The Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss on the sale of the collateral. The Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
Standby Securities subject to standby commitments or puts permit the Commitments and holder thereof to sell the securities at a fixed price prior Puts to maturity. Securities subject to a standby commitment or
put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Portfolio owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Portfolio will limit standby commitment or put transactions to institutions believed to present minimal credit risk.
Variable and Certain of the obligations purchased by the Portfolio may Floating Rate carry variable or floating rates of interest and may involve Instruments a conditional or unconditional demand feature. Such obligations may include variable amount master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or at some other interval, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice period exceeding seven days may be considered illiquid if there is no secondary market for such security.
When-Issued and When-issued or delayed delivery transactions involve the Delayed purchase of an instrument with payment and delivery taking Delivery place in the future. Delivery of and payment for these Securities securities may occur a month or more after the date of the purchase commitment. The Portfolio will maintain with the custodian a separate account with liquid, high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date, and no interest accrues to the Portfolio before settlement. These securities are subject to market fluctuation due to changes in market interest rates, and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Portfolio generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, the Portfolio may dispose of a when-issued security or forward commitment prior to settlement if the Adviser deems it appropriate to do so.
NEW YORK INTERMEDIATE-TERM MUNICIPAL PORTFOLIO
This Prospectus sets forth concisely information about the above-referenced Portfolio that an investor needs to know before investing. Please read this Prospectus carefully before investing, and keep it on file for future reference.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end investment management company, certain classes of which offer financial institutions a convenient means of investing their own funds, or funds for which they act in a fiduciary, agency or custodial capacity, in professionally managed diversified and non- diversified portfolios of securities. A portfolio may offer separate classes of shares that differ from each other primarily in the allocation of certain distribution expenses and minimum investment amounts. This Prospectus offers Class A shares of the Trust's New York Intermediate-Term Municipal Portfolio (the "Portfolio"), a fixed income portfolio.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE TRUST'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
1 The Manager and Adviser have waived, on a voluntary basis, a portion of their fees, and the Management/Advisory fees shown reflect these voluntary waivers. The Manager and Adviser reserve the right to terminate their waivers at any time in their sole discretion. Absent such waiver, the Management/Advisory fees for the Portfolio would be .57%. 2 The 12b-1 fees shown effect the Portfolio's current 12b-1 budget for reimbursement of expenses. The maximum 12b-1 fees payable by Class A shares of the Portfolio are .30%. 3 Absent the voluntary fee waivers described above, Total Operating Expenses for Class A shares of the Portfolio would be 1.00%.
An investor in Class A shares of the Portfolio would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period:
"Other Expenses" is based on estimated amounts for the current fiscal year. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the table and this example is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Portfolio's Class A shares. A person who purchases shares through a financial institution may be charged separate fees by that institution. Additional information may be found under "The Manager and Shareholder Servicing Agent", "Distribution" and "The Adviser". Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company that offers units of beneficial interest ("shares") in separate diversified and non-diversified investment portfolios. This prospectus offers Class A shares of the Trust's New York Intermediate-Term Municipal Portfolio (the "Portfolio"). Additional information pertaining to the Trust may be obtained by writing to SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734.
The investment objective of the Portfolio is a high level of current income, exempt from both federal and New York state personal income taxes, consistent with the preservation of principal. There can be no assurance that the Portfolio will be able to achieve its investment objective.
It is a fundamental policy of the Portfolio to invest, under normal conditions, at least 80% of its net assets in municipal securities that produce interest that, in the opinion of bond counsel to the issuers, is exempt from federal income tax (collectively, "Municipal Securities") and is not a preference item for purposes of the alternative minimum tax. Under normal conditions, at least 65% of the Portfolio's assets will be invested in municipal obligations the interest on which is exempt from New York state personal income tax. These include municipal obligations issued by the State of New York and its political subdivisions or any agency or instrumentality of either of the foregoing, and municipal obligations issued by territories or possessions of the United States. The Portfolio may invest, under normal conditions, up to 20% of its net assets in (1) Municipal Securities the interest on which is a preference item for purposes of the alternative minimum tax (although the Portfolio has no present intention of investing in such securities) and (2) taxable investments. In addition, for temporary defensive purposes when its investment adviser determines that market conditions warrant, the Portfolio may invest up to 100% of its assets in municipal obligations of states other than New York or taxable money market instruments (including repurchase agreements, U.S. Treasury securities and instruments of certain U.S. commercial banks or savings and loan institutions).
The Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating or, if not rated, are of comparable quality as determined by the Adviser: (i) municipal bonds rated BBB or better by Standard and Poor's Corporation ("S&P") or Baa or better by Moody's Investors Service, Inc. ("Moody's"); (ii) municipal notes and certificates of participation which are rated at least SP-2 by S&P or MIG-2 or VMIG-2 by Moody's; and (iii) tax-exempt commercial paper rated at least A-2 by S&P or Prime-2 by Moody's.
The Portfolio currently contemplates that it will not invest more than 25% of its total assets (at market value at the time of purchase) in municipal securities, the interest on which is paid from revenues of projects with similar characteristics. This restriction does not apply to municipal securities in any of the following categories: public housing authorities; general obligations of states and localities; state and local housing finance authorities or municipal utilities systems.
In seeking to attain its investment objective the Portfolio may invest all or any part of its assets in municipal securities that are industrial development bonds.
Normally, the Portfolio will maintain a dollar-weighted average portfolio maturity of five to ten years; however, under certain circumstances this average weighted maturity may fall below five years. There are no restrictions on the maturity of any single instrument in which this Portfolio may invest. The Portfolio's annual portfolio turnover rate is expected to be less than 100% under normal circumstances. See also "Risk Factors."
The Portfolio may invest in variable and floating rate obligations, may purchase securities on a "when-issued" basis, and reserves the right to engage in transactions involving standby commitments. The Portfolio may also purchase other types of tax-exempt instruments as long as they are of a quality equivalent to the long-term bond or commercial paper ratings stated above. The Portfolio will not invest more than 15% of its net assets in illiquid securities.
The taxable money market instruments in which the Portfolio may invest consist of U.S. Treasury obligations; obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities, whether or not backed by the full faith and credit of the U.S. Government; obligations of U.S. commercial banks or savings and loan institutions (not including foreign branches of U.S. banks or U.S. branches of foreign banks) which are members of the Federal Reserve System, the Bank Insurance Fund and Savings Association Insurance Fund of the Federal Deposit Insurance Corporation and which have total assets of $1 billion or more as shown on their last published financial statements at the time of investment; and repurchase agreements involving any of the foregoing obligations. Municipal notes rated SP-2 by S&P have satisfactory capacity to pay principal and interest; notes rated MIG-2 or VMIG-2 by Moody's are considered to be of high quality. Bonds rated BBB by S&P have an adequate capacity to pay interest and repay principal; bonds rated Baa by Moody's are considered to be medium-grade obligations (i.e., neither highly protected nor poorly secured). Capacity for timely payment on commercial paper with the S&P designation of A-2 is satisfactory and commercial paper issuers rated Prime-2 by Moody's have a strong ability for repayment of senior short- term debt obligations.
For a description of the permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
Fixed Income The market value of the Portfolio's fixed income investments Securities will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. Changes by recognized rating agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of these fixed income securities will not necessarily affect cash income derived from these securities, but will affect the Portfolio's net asset value. The Portfolio may invest in securities rated in the fourth highest category by S&P or Moody's; such securities, while still investment grade, are considered to have speculative characteristics.
New York Risk Certain risks are inherent in the Portfolio's investments in Factors New York municipal securities. These risks result from (1) amendments to the New York Constitution and other statutes that limit the taxing and spending authority of New York government entities, (2) the general financial condition of the State of New York, and (3) a variety of New York laws and regulations that may affect, directly or indirectly, New York municipal securities. The ability of issuers of municipal securities to pay interest on, or repay principal of, municipal securities may be impaired as a result.
The Portfolio's concentration in investments in New York municipal securities involves greater risks than if their investments were more diversified. Because the Portfolio invests primarily in New York municipal securities, investors should consider that the Portfolio's yield and share price are sensitive to political and economic developments within the State of New York, and to the financial condition of the State, its public authorities, and political subdivisions, particularly the City of New York. Both the State and the City are experiencing significant financial difficulties related to poor economic performance and recurring deficits. The State's credit standing has been, and could be further, reduced, and its ability to provide assistance to its public authorities and political subdivisions has been, and could be, further impaired. These may have the effect of impairing the ability of the issuers of New York municipal securities to pay interest on, or repay the principal of, such securities. A more complete description of these risks is contained in the Statement of Additional Information.
Non- In addition to the risks, described above, arising from Diversification concentration, investment in the Portfolio, a non- diversified mutual fund, may entail greater risk than would investment in a diversified investment company because the concentration in securities of relatively few issuers could result in greater fluctuation in the total market value of the Portfolio's holdings. Any economic, political, or regulatory developments affecting the value of the securities the Portfolio holds could have a greater impact on the total value of the Portfolio's holdings than would be the case if the portfolio securities were diversified among more issuers. The Portfolio intends to comply with the diversification requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In accordance with these requirements, the Portfolio will not invest more than 5% of its total assets in any one issuer; this limitation applies to 50% of the Portfolio's total assets.
The investment objective and investment limitations are fundamental policies of the Portfolio. Fundamental policies cannot be changed with respect to the Trust or the Portfolio without the consent of the holders of a majority of the Trust's or the Portfolio's outstanding shares.
1. Purchase any securities which would cause more than 25% of the total assets of the Portfolio, based on current value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities or to investments in tax-exempt securities issued by governments or political subdivisions of governments.
2. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings in excess of 5% of the Portfolio's total assets, will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio.
The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
SEI Financial Management Corporation (the "Manager" and the "Transfer Agent"), a wholly-owned subsidiary of SEI Corporation ("SEI"), provides the Trust with overall
management services, regulatory reporting, all necessary office space, equipment, personnel and facilities, and serves as institutional transfer agent, dividend disbursing agent, and shareholder servicing agent.
For these services, the Manager is entitled to a fee which is calculated daily and paid monthly at an annual rate of .39% of the average daily net assets of the Portfolio. In addition, the Manager and Adviser have voluntarily agreed to waive a portion of their fees proportionately in order to limit total operating expenses of the Class A shares of the Portfolio to not more than .55% of the Portfolio's average daily net assets attributable to Class A shares, on an annualized basis. Each of the Manager and the Adviser reserves the right, in its sole discretion, to terminate its waiver at any time. As of August 31, 1995, the Portfolio had not commenced operations.
Weiss, Peck & Greer, L.L.C. (the "Adviser" or "WPG") serves as the Portfolio's investment adviser under an advisory agreement with the Trust (the "Advisory Agreement"). Under the Advisory Agreement, the Adviser invests the assets of the Portfolio, and continuously reviews, supervises and administers the Portfolio's investment program. The Adviser is independent of the Manager and SEI and discharges its responsibilities subject to the supervision of, and policies set by, the Trustees of the Trust.
The Adviser is a limited liability company founded as a limited partnership in 1970, and engages in investment management, venture capital management and management buyouts. WPG has been active since its founding in managing portfolios of tax exempt securities. At September 30, 1995, total assets under management were approximately $12.5 billion. The principal business address of the Adviser is One New York Plaza, New York, NY 10004.
S. Blake Miller, CFA, and Nancy J. Neiman act as the portfolio managers for the Portfolio. Mr. Miller, an Associate Principal of WPG, has been associated with WPG's Tax Exempt Fixed Income group since 1988 and its predecessor since 1986. Ms. Neiman, an Associate Principal of WPG, has been associated with WPG's Tax Exempt Fixed Income group since 1988 and its predecessor since 1985.
For its services to the New York Intermediate-Term Municipal Portfolio, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .18% of the combined average daily net assets of the non- money market portfolios of the Trust advised by the Adviser up to $150 million, and .16% of such assets in excess of $150 million. Such fees are allocated daily among these portfolios on the basis of their relative net assets. The Adviser has voluntarily agreed to waive a portion of its fee, as described under "The Manager and Shareholder Servicing Agent." As of August 31, 1995, the Portfolio had not commenced operations.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as each Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the trust. Each Class of the Trust has adopted a distribution plan (the "Class A Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act").
The Class A Plan provides for reimbursement for expenses incurred by the Distributor, in an amount not to exceed .30% of the average daily net assets of the Portfolio, on an annualized basis, provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement ("Qualified Trustees"). Currently, the budget (shown here as a percentage of daily net assets) for each Portfolio is set at an annual rate of .08%.
Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, federal and state securities law registration and the cost of complying with such laws in the distribution of the Trust's shares, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific Portfolio are allocated among each of the Portfolios of the Trust on the basis of their average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget.
It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers.
The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation.
The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the sales charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolios. Such promotional incentives will be offered uniformly to all shares of the Portfolios, and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolios sold by such dealer.
Financial institutions may acquire shares of the Portfolio for their own account, or as a record owner on behalf of fiduciary, agency or custody accounts, by placing orders with the Transfer Agent. Institutions that use certain SEI proprietary systems may place orders electronically through those systems. State securities laws may require banks and financial institutions purchasing shares for their customers to register as dealers pursuant to state laws. Financial institutions which purchase shares for the accounts of their customers may impose separate charges on these customers for account services. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness on the same day. Shares of the Portfolio are offered only to residents of states in which the shares are eligible for purchase.
Shares of the Portfolio may be purchased or redeemed on days on which the New York Stock Exchange is open for business ("Business Days").
Shareholders who desire to purchase shares for cash must place their orders with the Transfer Agent prior to the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on any Business Day for the order to be accepted on that Business Day. Cash investments must be transmitted or delivered in federal funds to the wire agent on the next Business Day following the date the order is placed. The Trust reserves the right to reject a purchase order when the Transfer Agent determines that it is not in the best interest of the Trust and/or shareholders to accept such purchase order.
Purchases will be made in full and fractional shares of the Portfolio calculated to three decimal places. The Trust will send shareholders a statement of shares owned after each transaction. The purchase price of shares is the net asset value next determined after a purchase order is received and accepted by the Trust. The net asset value per share of the Portfolio is determined by dividing the total value of its investments and other assets, less any liability, by the total outstanding shares of the Portfolio. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on each Business Day.
The market value of each security is obtained by the Manager from an independent pricing service. Securities having maturities of 60 days or less at the time of purchase will be valued using the amortized cost method (described in the Statement of Additional Information), which approximates the securities' market value. The pricing service may use a matrix system to determine valuations of fixed income securities. This system considers such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. The pricing service may also provide market quotations. The procedures of the pricing service and its valuation are reviewed by the officers of the Trust under the general supervision of the Trustees. Portfolio
for which market quotations are available are valued at the most recent quoted bid price on each Business Day.
Shareholders who desire to redeem shares of the Portfolio must place their redemption orders with the Transfer Agent prior to the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on any Business Day. The redemption price is the net asset value per share of the Portfolio next determined after receipt by the Transfer Agent of the redemption order. Payment on redemption will be made as promptly as possible and, in any event, within five Business Days after the redemption order is received.
Purchase and redemption orders may be placed by telephone. Neither the Trust nor the Transfer Agent will be responsible for any loss, liability, cost or expense for acting upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and the Transfer Agent will each employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions.
If market conditions are extraordinarily active, or other extraordinary circumstances exist, shareholders may experience difficulties placing redemption orders by telephone, and may wish to consider placing orders by other means.
From time to time, the Portfolio may advertise yield, total return and tax equivalent yield. These figures will be based on historical earnings and are not intended to indicate future performance.
The yield of the Portfolio refers to the annualized income generated by a hypothetical investment in the Portfolio over a specified 30-day period. The yield is calculated by assuming that the same amount of income generated by the investment during that period is generated in each 30-day period over one year and is shown as a percentage of the investment.
The total return of the Portfolio refers to the average compounded rate of return to a hypothetical investment for designated time periods (including, but not limited to, the period from which the Portfolio commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gain distributions. The total return of the Portfolio may also be quoted as a dollar amount or on an aggregate basis, an actual basis.
The tax equivalent yield is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of the Portfolio's yield, assuming certain tax brackets for a shareholder.
The Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and
business publications and periodicals; (ii) broad groups of comparable mutual funds; (iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) other investment alternatives. The Portfolio may quote Morningstar, Inc., a service that ranks mutual funds on the basis of risk-adjusted performance. The Portfolio may quote Ibbotson Associates of Chicago, Illinois, which provides historical returns of the capital markets in the U.S. The Portfolio may use long-term performance of these capital markets to demonstrate general long-term risk versus reward scenarios and could include the value of a hypothetical investment in any of the capital markets. The Portfolio may also quote financial and business publications and periodicals as they relate to fund management, investment philosophy, and investment techniques.
The Portfolio may quote various measures of volatility and benchmark correlation in advertising and may compare these measures to those of other funds. Measures of volatility attempt to compare historical share price fluctuations or total returns to a benchmark while measures of benchmark correlation indicate how valid a comparative benchmark might be. Measures of volatility and correlation are calculated using averages of historical data and cannot be calculated precisely.
The following summary of federal and state income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state or local income tax treatment of the Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
Tax Status of The Portfolio is treated as a separate entity for federal the Portfolio income tax purposes and is not combined with the Trust's other portfolios. The Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal income tax on net investment company taxable income) and net capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
Tax Status of The Portfolio intends to distribute substantially all of its Distributions net investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Portfolio's total assets consists of obligations the interest on which is excludable from gross income, the Portfolio may pay exempt-interest dividends to its shareholders. Exempt-interest dividends are excludable from
shareholder's gross income for federal income tax purposes but may have certain collateral federal tax consequences including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information.
Any dividends paid out of income realized by the Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends- received deduction for corporate shareholders. Distributions to shareholders of net capital gains of the Portfolio will be taxable to shareholders as long-term capital gain, whether received in cash or additional shares, and regardless of how long a shareholder has held the shares.
Dividends declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio at any time during the following January. The Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies.
Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of the Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolio may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares.
The Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolio during the year to which the dividends relate. Each sale, exchange, or redemption of any Portfolio's shares is a taxable transaction to the shareholder.
State and Local The following is a general, abbreviated summary of certain Taxes of the provisions of the New York tax code presently in effect as they directly govern the taxation of shareholders subject to New York personal income tax. These provisions are subject to change by legislative or administrative action, and any such change may be retro active.
Exempt-interest dividends paid by the Portfolio that are derived from interest on Municipal Securities issued by New York State and the political subdivisions or any agency or instrumentality thereof or any territory or possession of the United States will be exempt from New York State and New York City personal income taxes, but not corporate franchise taxes. Other dividends and distributions from other Municipal Securities, U.S. Government obligations, taxable income and capital gains will not be exempt from New York State and New York City taxes.
Shareholders should consult their tax advisers concerning the state and local tax consequences of investment in the Portfolio, which may differ from the federal income tax consequences described above.
The Trust The Trust was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. In addition to the Portfolio, the Trust consists of the following portfolios: Tax Free Portfolio, Institutional Tax Free Portfolio, California Tax Exempt Portfolio, Pennsylvania Municipal Portfolio, Kansas Tax Free Income Portfolio, Massachusetts Intermediate-Term Municipal Portfolio, Bainbridge Tax Exempt Portfolio, California Municipal Portfolio, and Pennsylvania Tax Free Portfolio. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto.
The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential management services to the Trust.
Voting Rights Each share held entitles the shareholder of record to one vote. The shareholders of each portfolio or class will vote separately on matters relating solely to that portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Manager, SEI Inquiries Financial Management Corporation, 680 E. Swedesford Road, Wayne, Pennsylvania, 19087.
Dividends Substantially all of the net investment income (exclusive of capital gains) of the Portfolio is periodically declared and paid as a dividend. Shareholders of record on the last record date of each period will be entitled to receive the periodic dividend distribution, which is generally paid on the 10th Business day of the following month. If any net capital gains are realized, they will be distributed by the Portfolio annually.
Shareholders automatically receive all income dividends and capital gain distributions in additional shares, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution.
Counsel and Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Independent Arthur Andersen LLP serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as Custodian of the Trust's assets and acts as wire agent of certain cash of the Trust. The Custodian holds cash, securities and other assets of the Trust as required by the Investment Company Act of 1940, as amended (the "1940 Act").
The following is a description of certain of the permitted investments for the Portfolio, and the associated risk factors:
Commercial Paper Commercial Paper is a term used to describe unsecured short- term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligations issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities.
General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility, tolls from
a toll bridge, for example. Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment.
Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which the Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed- upon date. The Custodian will hold the security as collateral for the repurchase agreement. The Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss on the sale of the collateral. The Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
Standby Securities subject to standby commitments or puts permit the Commitments and holder thereof to sell the securities at a fixed price prior Puts to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Portfolio owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Portfolio will limit standby commitment or put transactions to institutions believed to present minimal credit risk.
Variable and Certain of the obligations purchased by the Portfolio may Floating Rate carry variable or floating rates of interest and may involve Instruments a conditional or unconditional demand feature. Such obligations may include variable amount master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or at some other interval, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice period exceeding seven days may be considered illiquid if there is no secondary market for such security.
When-Issued and When-issued or delayed delivery transactions involve the Delayed purchase of an instrument with payment and delivery taking Delivery place in the future. Delivery of and payment for these Securities securities may occur a month or more after the date of the purchase commitment. The Portfolio will maintain with the custodian a separate account with liquid, high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date, and no interest accrues to the Portfolio before settlement. These securities are subject to market fluctuation due to changes in market interest rates, and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Portfolio generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, the Portfolio may dispose of a when-issued security or forward commitment prior to settlement if the Adviser deems it appropriate to do so.
Please read this Prospectus carefully before investing, and keep it on file for future reference. It concisely sets forth information that can help you decide if the Portfolio's investment goals match your own.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-437-6016. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end investment management company, certain classes of which offer shareholders a convenient means of investing their funds in one or more professionally managed diversified and non-diversified portfolios of securities. The Tax Free Portfolio offers two classes of shares, Class A and Class D shares. Class D shares differ from Class A shares primarily in the allocation of certain distribution expenses and transfer agent fees. Class D shares are available through SEI Financial Services Company (the Trust's distributor), and through participating broker- dealers, financial institutions and other organizations. This Prospectus offers Class D shares of the Trust's Tax Free Portfolio (the "Portfolio"), a money market portfolio.
AN INVESTMENT IN THE PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
HOW TO READ THIS PROSPECTUS ____________________________________________________
This Prospectus gives you information that you should know about the Portfolio before investing. Brief descriptions are also provided throughout the Prospectus to better explain certain key points. To find these helpful guides, look for this symbol. [SYMBOL APPEARS HERE]
The following summary provides basic information about the Class D shares of the Portfolio. This summary is qualified in its entirety by reference to the more detailed information provided elsewhere in this Prospectus and in the Statement of Additional Information.
INVESTMENT The Tax Free Portfolio seeks to preserve principal value and OBJECTIVE AND maintain a high degree of liquidity while providing current POLICIES income exempt from federal income taxes. See "Investment Ob- jective and Policies" and "Description of Permitted Investments and Risk Factors."
UNDERSTANDING The Portfolio invests in U.S. dollar denominated municipal RISK securities, the interest on which is exempt from federal income taxes. The investment policies of the Portfolio entail certain risks and considerations of which an investor should be aware. There can be no assurance that the Portfolio will achieve its investment objective. See "Investment Objective and Policies" and "Description of Permitted Investments and Risk Factors."
MANAGEMENT Weiss, Peck & Greer, L.L.C. (the "Adviser") serves as the PROFILE investment adviser of the Portfolio. SEI Financial Management Corporation serves as the manager and shareholder servicing agent of the Trust (the "Manager"). DST Systems, Inc. ("DST") serves as transfer agent (the "Transfer Agent") and dividend disbursing agent for the Class D shares of the Trust. SEI Financial Services Company acts as distributor ("Distributor") of the Trust's shares. See "The Manager and Shareholder Servicing Agent," "The Adviser" and "Distribution."
Believing that no single investment adviser can deliver outstanding per- formance in every investment category, only those advisers who have distin- guished themselves within their areas of specialization are selected to ad- vise our mutual funds.
YOUR ACCOUNT You may open an account with just $1,000 and make additional AND DOING investments with as little as $100. Redemptions of the BUSINESS WITH Portfolio's shares are made at net asset value per share. See US "Your Account and Doing Business With Us."
DIVIDENDS Substantially all of the net investment income (exclusive of capital gains) of the Portfolio is distributed in the form of dividends that will be declared daily and paid monthly on the first Business Day of each month. Any realized net capital gain is distributed at least annually. Distributions are paid in additional shares unless the shareholder elects to take the payment in cash. See "General Information--Dividends."
INFORMATION/ For more information about Class D Shares, call 1-800-437-6016.
The purpose of the following table is to help you understand the various cost and expenses that you, as a shareholder, will bear directly or indirectly in connection with an investment in Class D shares.
1 A charge, currently $10.00, is imposed on wires of redemption proceeds. 2 The Manager has waived, on a voluntary basis, a portion of its fees, and the Management/Advisory fees shown reflect this voluntary waiver. The Manager reserves the right to terminate its waiver at any time in its sole discretion. Absent such waiver, the Management/Advisory fee for the Class D shares of the Portfolio would be .40%. 3 The 12b-1 fees shown reflect the Portfolio's current 12b-1 budget for reimbursement of expenses and the Distributor's voluntary waiver of a portion of its compensatory fee. The Distributor reserves the right to terminate its waiver at any time in its sole discretion. The maximum 12b-1 fees payable by Class D shares of the Portfolio are .55%. 4 Absent the voluntary fee waivers described above, Total Operating Expenses for Class D shares of the Portfolio would be .86%.
You would pay the following expenses on a $1,000 investment in the Class D shares assuming (1) 5% annual return and (2) redemption at the end of each time period:
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSE AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution. The information set forth in the foregoing table and example relates only to the Class D shares (a class of shares of the Portfolio). The Portfolio also offers Class A shares, which are subject to the same expenses as the Portfolio's Class D shares except that Class A shares bear different distribution and transfer agent costs. Additional information may be found under "The Manager and Shareholder Servicing Agent", "Distribution", and "The Adviser".
Long-term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
The following financial highlights, for a share outstanding throughout each period, have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon was unqualified. This information should be read in conjunction with the Trust's financial statements and notes thereto, which are included in the Trust's Statement of Additional Information and which appear, along with the report of Arthur Andersen LLP, in the Trust's 1995 Annual Report to Shareholders. Additional performance information is set forth in the 1995 Annual Report to Shareholders which is available upon request and without charge by calling 1-800-342-5734.
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD
+ Return is for the period indicated and has not been annualized. /1/ The Tax Free Portfolio--Class D commenced operations on November 1, 1994.
Any entity, such as a bank, broker-dealer, other financial institution, as- sociation or organization which has entered into an arrangement with the Dis- tributor to sell Class D shares to its customers.
YOUR ACCOUNT AND DOING BUSINESS
Class D shares of the Portfolio are sold on a continuous basis and may be purchased directly from the Trust's Distributor, SEI Financial Services Company. Shares may also be purchased through financial institutions, broker- dealers, or other organizations which have established a dealer agreement or other arrangement with SEI Financial Services Company ("Intermediaries"). For more information about the following topics, see "Additional Information About Doing Business with Us."
HOW TO BUY, Class D shares of the Portfolio may be purchased through SELL AND Intermediaries which provide various levels of shareholder EXCHANGE services to their customers. Contact your Intermediary for SHARES THROUGH information about the services available to you and for INTERMEDIARIES specific instructions on how to buy, sell and exchange shares. To allow for processing and transmittal of orders to the Transfer Agent on the same day, Intermediaries may impose earlier cut-off times for receipt of purchase orders. Certain Intermediaries may charge customer account fees. Information concerning shareholder services and any charges will be provided to the customer by the Intermediary. Certain of these Intermediaries may be required to register as broker-dealers under state law.
The shares you purchase through an Intermediary may be held "of record" by that Intermediary. If you want to transfer the registration of shares beneficially owned by you, but held "of record" by an Intermediary, you should call the Intermediary to request this change.
HOW TO BUY Application forms may be obtained by calling 1-800-437-6016. SHARES FROM Class D shares of the Portfolio are offered only to residents THE DISTRIBUTOR of states in which the shares are eligible for purchase.
Opening an You may buy Class D shares by mailing a completed application Account and a check (or other negotiable bank instrument or money By Check order) payable to "Class D Shares (Portfolio Name)". If you send a check that does not clear, the purchase will be canceled and you could be liable for any losses or fees incurred.
By Fed Wire You may buy shares by Fed Wire by calling 1-800-437-6016.
Automatic You may systematically buy Class D shares through deductions Investment from your checking or savings accounts, provided these Plan ("AIP") accounts are maintained through banks which are part of the Automated Clearing House ("ACH") system. You may purchase shares on a fixed schedule (semi-monthly or monthly) with amounts as low as $25, or as high as $100,000. Upon notice, the amount you commit to the AIP may be changed or canceled at any time. The AIP is subject to account minimum initial purchase amounts and minimum balance maintenance requirements.
When making an exchange, you authorize the sale of your shares of one or more Portfolios in order to purchase the shares of another Portfolio. In other words, you are executing a sell order and then a buy order. This sale of your shares is a taxable event which could result in a taxable gain or loss.
When Can You Once payment for your shares has been received and accepted Exchange (i.e., an account has been established), you may exchange Shares? some or all of your shares for Class D shares of the Trust or of SEI Liquid Asset Trust, SEI Daily Income Trust, SEI International Trust and SEI Institutional Managed Trust ("SEI Funds"). Exchanges are made at net asset value plus any applicable sales charge.
When Do Sales SEI Funds' portfolios that are not money market portfolios Charges Apply currently impose a sales charge on Class D shares. If you to an exchange into one of these "non-money market" portfolios, you Exchange? will have to pay a sales charge on any portion of your exchanged Class D shares for which you have not previously paid a sales charge.
If you previously paid a sales charge on your Class D shares, no additional sales charge will be assessed when you exchange those Class D shares for other Class D shares.
If you buy Class D shares of a "non-money market" fund and you receive a sales charge waiver, you will be deemed to have paid the sales charge for purposes of this exchange privilege. In calculating any sales charge payable on your exchange, the Trust will assume that the first shares you exchange are those on which you have already paid a sales charge. Sales charge waivers may also be available under certain circumstances described in the SEI Funds' prospectuses.
The Trust reserves the right to change the terms and conditions of the exchange privilege discussed herein, or to terminate the exchange privilege, upon 60 days' notice. The Trust also reserves the right to deny an exchange request made within 60 days of the purchase of a "non-money market" portfolio.
Requesting an To request an exchange, you must provide proper instructions Exchange of in writing to the Transfer Agent. Telephone exchanges will Shares also be accepted if you previously elected this option on your account application.
In the case of shares held "of record" by an Intermediary but beneficially owned by you, you should contact the Intermediary who will contact the Transfer Agent and effect the exchange on your behalf.
A signature guarantee verifies the authenticity of your signature and may be obtained from any of the following: banks, brokers, dealers, certain credit unions, securities exchange or association, clearing agency or savings association. A notary public cannot provide a signature guarantee.
HOW TO SELL To sell your shares, a written request for redemption in good SHARES THROUGH order must be received by the Transfer Agent. Valid written THE redemption requests will be effective on receipt. All DISTRIBUTOR shareholders of record must sign the redemption request. The Transfer Agent may require that the signatures on written By Mail requests be guaranteed.
For information about the proper form of redemption requests, call 1-800-437-6016. You may also have the proceeds mailed to an address of record or mailed (or sent by ACH) to a commercial bank account previously designated on the Account Application or specified by written instruction to the Transfer Agent. There is no charge for having redemption requests mailed to a designated bank account.
By Telephone You may sell your shares by telephone if you previously elected that option on the Account Application. You may have the proceeds mailed to the address of record, wired or sent by ACH to a commercial bank account previously designated on the Account Application. Under most circumstances, payments will be transmitted on the next Business Day following receipt of a valid telephone request for redemption. Wire redemption requests may be made by calling 1-800-437-6016. A wire redemption charge (presently $10.00) will be deducted from the amount of the redemption.
Systematic You may establish a systematic withdrawal plan for an account Withdrawal with a $10,000 minimum balance. Under the plan, redemptions Plan ("SWP") can be automatically processed from accounts (monthly, quarterly, semi-annually or annually) by check or by ACH with a minimum redemption amount of $50.
Check-Writing Check-Writing Service is offered free of charge to Class D shareholders in the Portfolio. You may redeem shares by writing checks on your account for $500 or more. Once you have signed and returned a signature card, you will receive a supply of checks. A check may be made payable to any person, and your account will continue to earn dividends until the check clears.
Because of the difficulty of determining in advance the exact value of your account, you may not use a check to close your account. The checks are free, but your account will be charged a fee for stopping payment of a check upon your request or if the check cannot be honored because of insufficient funds or other valid reasons.
Each Portfolio's investment objective is a statement of what it seeks to achieve. It is important to make sure that the investment objective matches your own financial needs and circumstances. The investment policies section spells out the types of securities in which each Portfolio invests.
INVESTMENT OBJECTIVE AND POLICIES ______________________________________________
The investment objective of the Tax Free Portfolio is to preserve principal value and maintain a high degree of liquidity while providing current income exempt from federal income taxes. There can be no assurance that the Portfolio will achieve its investment objective.
The Portfolio invests in U.S. dollar denominated municipal securities of issuers located in all fifty states, the District of Columbia, Puerto Rico and other U.S. territories and possessions (collectively, "Municipal Securities"). At least 80% of the Portfolio's net assets will be invested in securities the interest on which is exempt from federal income taxes, based on opinions from bond counsel for the issuers. This investment policy is a fundamental policy of the Portfolio. Under normal conditions, the Portfolio will invest at least 80% of its net assets in securities the interest on which is not a preference item for purposes of the alternative minimum tax.
The Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating or, if not rated, are of comparable quality is determined by Weiss, Peck & Greer, L.L.C., the Portfolio's investment adviser (the "Adviser"): (i) municipal bonds rated AA or better by Standard and Poor's Corporation ("S&P") or Aa or better by Moody's Investors Service, Inc. ("Moody's"); (ii) municipal notes rated at least SP-1 by S&P or MIG-1 or VMIG-1 by Moody's; and (iii) tax-exempt commercial paper rated at least A-1 by S&P or Prime-1 by Moody's.
The Adviser will not invest more than 25% of Portfolio assets in municipal securities (a) whose issuers are located in the same state or (b) the interest on which is derived from revenues of similar type projects. This restriction does not apply to municipal securities in any of the following categories; public housing authorities; general obligations of states and localities; state and local housing finance authorities or municipal utilities systems.
There could be economic, business, or political developments which might affect all municipal securities of a similar type. To the extent that a significant portion of the Portfolio's assets are invested in municipal securities payable from revenues on similar projects, the Portfolio will be subject to the peculiar risks presented by such projects to a greater extent than it would be if the Portfolio's assets were not so invested. Moreover, in seeking to attain its investment objective the Portfolio may invest all or any part of its assets in municipal securities that are industrial development bonds.
In purchasing obligations, the Portfolio complies with the requirements of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), as that Rule may be amended from time to time. These requirements currently provide that the Portfolio must limit its investments to securities with remaining maturities of 397 days or less, and must maintain a dollar-weighted average maturity of 90 days or less. In addition, the Portfolio may only invest in securities (other than U.S. Government Securities) rated in one of the two highest categories for short-term securities by at least two nationally recognized statistical rating organizations ("NRSROs") (or by one NRSRO if only one NRSRO has rated the security), or, if unrated, determined by the Adviser (in accordance with procedures adopted by the Trust's Board of Trustees) to be of equivalent quality to rated securities in which the Portfolio may invest.
Securities rated in the highest rating category (e.g., A- 1 by S&P) by at least two NRSROs (or, if unrated, determined by the Adviser to be of comparable quality) are "first tier" securities. Securities rated in the second highest rating category (e.g., A-2 by S&P) by at least one NRSRO (or, if unrated, determined by the Adviser to be of comparable quality) are considered to be "second tier" securities.
Although the Portfolio is governed by Rule 2a-7, its investment policies are more restrictive than those imposed by that Rule.
The Portfolio may invest in variable and floating rate obligations, may purchase securities on a "when-issued" basis, and reserves the right to engage in transactions involving standby commitments. The Portfolio will not invest more than 10% of its net assets in illiquid securities.
The Adviser has discretion to invest up to 20% of the Portfolio's assets in taxable money market instruments (including repurchase agreements) and securities the interest on which is a preference item for purposes of the alternative minimum tax. However, the Portfolio generally intends to be fully invested in federally tax-exempt securities.
The taxable money market instruments in which the Portfolio may invest consist of: U.S. Treasury obligations; obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities, whether or not backed by the full faith and credit of the
U.S. Government; obligations of U.S. commercial banks or savings and loan institutions (not including foreign branches of U.S. banks or U.S. branches of foreign banks) which are members of the Federal Reserve System, the Bank Insurance Fund and Savings Association Insurance Fund of the Federal Deposit Insurance Corporation and which have total assets of $1 billion or more as shown on their last published financial statements at the time of investment; and repurchase agreements involving any of the foregoing obligations.
Municipal notes rated SP-1 by S&P have strong capacity to pay principal and interest and notes rated MIG-1 or VMIG-1 by Moody's are considered to be of the best quality. Bonds rated AA by S&P have a very strong capacity to pay interest and repay principal; bonds rated Aa by Moody's are judged to be of high quality by all standards. The highest S&P commercial paper rating category, A-1, indicates that the degree of safety regarding timely payment is strong; commercial paper issuers rated Prime-1 by Moody's have a superior ability for repayment.
For a description of the Portfolio's permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
The investment objective and investment limitations are fundamental policies of the Portfolio. Fundamental policies cannot be changed with respect to the Trust or the Portfolio without the consent of the holders of a majority of the Trust's or the Portfolio's outstanding shares. It is a fundamental policy of the Portfolio to use its best efforts to maintain a constant net asset value of $1.00 per share.
1. Purchase securities of any issuer (except securities issued or guaranteed by the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the total assets of the Portfolio (based on current value at the time of investment) would be invested in the securities of such issuer, provided, however, that the Portfolio may invest up to 25% of its total assets without regard to this restriction as permitted by Rule 2a-7.
2. Purchase any securities which would cause more than 25% of the total assets of the Portfolio, based on current value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities.
3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio.
The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
A Portfolio's investment ad-viser manages the investment activities and is responsible for the perfor-mance of the Portfolio. The adviser conducts investment re-search, executes investment strategies based on an assessment of economic and market condi-tions, and de-termines which securities to buy, hold or sell.
SEI Financial Management Corporation (the "Manager"), a wholly-owned subsidiary of SEI Corporation ("SEI") provides the Trust with overall management services, regulatory reporting, all necessary office space, equipment, personnel and facilities, and serves as the Trust's institutional transfer agent, dividend disbursing agent, and shareholder servicing agent.
For these services, the Manager is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .36% of the average daily net assets of the Portfolio. The Manager has voluntarily waived a portion of its fees in order to limit the total operating expenses of the Class D shares of the Portfolio to not more than .80% of the Portfolio's average daily net assets attributable to Class D shares, on an annualized basis. The Manager reserves the right, in its sole discretion, to terminate this voluntary fee waiver at any time.
For the fiscal year ended August 31, 1995, the Portfolio paid management fees, after waivers, of .30% of its average daily net assets.
The Trust and DST Systems, Inc., 210 W. 10th Street, Kansas City, Missouri, 64105 ("DST"), have entered into a separate transfer agent agreement, with respect to the Class D shares of the Portfolio. Under this agreement, DST acts as the transfer agent and dividend disbursing agent (the "Transfer Agent") for the Class D shares of the Trust.
Weiss, Peck & Greer, L.L.C. (the "Adviser" or "WPG") acts as the Portfolio's investment adviser under an advisory agreement with the Trust (the "Advisory Agreement"). Under the Advisory Agreement, the Adviser invests the assets of the Portfolio, and continuously reviews, supervises and administers the Portfolio's investment program. The Adviser is independent of the Manager and SEI and discharges its responsibilities subject to the supervision of, and policies set by, the Trustees of the Trust.
The Adviser is a limited liability company founded as a limited partnership in 1970, and engages in investment management, venture capital management and management buyouts. WPG has been active since its founding in managing portfolios of tax exempt securities. As of September 30, 1995, total assets under management were approximately $12.5 billion. The principal business address of the Adviser is One New York Plaza, New York, NY 10004.
For its services, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .05% of the combined average daily net assets of the money market portfolios of the Trust that are advised by the Adviser up to $500 million, .04% of such assets from $500 million to $1 billion, and .03% of such assets in excess of $1 billion. Such fees are allocated daily among these portfolios based on their relative net assets. For the fiscal year ended August 31, 1995 the Portfolio paid advisory fees, after waivers, of .04% of its relative net assets.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as each Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the Trust. Each class of the Trust has adopted a distribution plan (the "Class A Plan" and "Class D Plan,"), pursuant to Rule 12b-1 under the 1940 Act.
The Class D Plan provides for reimbursement for expenses incurred by the Distributor, in an amount not to exceed .30% of the average daily net assets of each Portfolio on an annualized basis, and provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement ("Qualified Trustees"). Currently, the budget (shown here as a percentage of daily net assets) for the Portfolio is set at an annual rate of .07%.
Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific portfolio of the Trust are allocated among each of the portfolios of the Trust based on the basis of their relative average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget.
The Class D Plan, in addition to providing for the reimbursement payments described above, provides for payments to the Distributor at an annual rate of .25% of the Portfolio's average daily net assets attributable to Class D shares. This additional payment may be used to compensate financial institutions that provide distribution-related services to their customers. These payments are characterized as "compensation," and are not directly tied to expenses incurred by the Distributor; the payments the Distributor receives during any year may therefore be higher or lower than its actual expenses. These additional payments compensate the Distributor for its services in connection with distribution assistance or provision of shareholder services, and some or all of it may be used to pay financial institutions and intermediaries such as banks, savings and loan associations, insurance companies, and investment
Distributor's affiliates and subsidiaries) for services or reimbursement of expenses incurred in connection with distribution assistance or provision of shareholder services. If the Distributor's expenses are less than its fees under the Class D Plan, the Trust will still pay the full fee and the Distributor will realize a profit, but the Trust will not be obligated to pay in excess of the full fee, even if the Distributor's actual expenses are higher. Currently, the Distributor is taking this additional compensation payment under the Class D Plan at a rate of .20% of the Portfolio's average daily net assets, on an annualized basis, attributable to Class D shares.
It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers.
The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation.
The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the sales charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolio. Such promotional incentives will be offered uniformly to all shares of the Portfolio and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolio sold by such dealer.
From time to time the Portfolio may advertise its "current yields," "effective yield," and "tax equivalent yield." These figures are based on historical earnings and are not intended to indicate future performance.
The "current yield" of the Portfolio refers to the income generated by an investment in the Portfolio over a seven-day period which is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" (also called "effective compound yield") is calculated similarly but, when annualized, the income earned by an investment is assumed to be reinvested. The "effective yield" will be slightly higher than the "current yield" because of the compounding effect of this assumed reinvestment.
A "tax equivalent yield" is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of the Portfolio's yield, assuming certain tax brackets for a shareholder.
The Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and business publications and periodicals; (ii) broad groups of
(iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) other investment alternatives. The Portfolio may also quote financial and business publications and periodicals as they relate to fund management, investment philosophy and investment techniques.
The performance on Class D shares will normally be lower than that on Class A shares of the Portfolio because of the additional distribution and transfer agent expenses charged to Class D shares.
The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal income tax treatment of the Portfolio or its shareholders, and state and local tax consequences of an investment in the Portfolio may differ from the federal income tax consequences described below. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
You must pay taxes on your Portfolio's earnings, whether you take your payments in cash or additional shares.
Tax Status of The Portfolio is treated as a separate entity for federal each Portfolio: income tax purposes and is not combined with the Trust's other portfolios. The Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code"), so as to be relieved of federal income tax on net investment company taxable income and net capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
The Portfolio distributes income dividends and capital gains. Income dividends represent the earnings from the Portfolio's investments; capital gains distributions occur when investments in the Portfolio are sold for more than the original purchase price.
Tax Status of The Portfolio distributes substantially all of its net Distributions: investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Portfolio's total assets consists of obligations the interest on which is excludable from gross income, the Portfolio may pay "exempt- interest dividends" to its shareholders. Exempt-interest dividends are excludable from a shareholder's gross income for federal income tax purposes but may have certain collateral
alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information.
Any dividends paid out of income realized by the Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends- received deduction for corporate shareholders. Distributions of net capital gains of the Portfolio will be taxable to shareholders as long-term capital gains whether received in cash or additional shares, and regardless of how long a shareholder has held the shares.
Dividends declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio at any time during the following January. The Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies.
Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of the Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolio may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares. The Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolio during the year to which the dividends relate.
Each sale, exchange, or redemption of the Portfolio's shares is a taxable transaction to the shareholder.
APPEARS SELL REQUESTS ARE IN HERE] "GOOD ORDER" WHEN:
. The account number and portfolio name are shown . The amount of the transaction is specified in dollars or shares . Signatures of all owners appear exactly as they are registered on the . Any required signature guarantees (if applicable) are included . Other supporting legal documents (as necessary) are present
Business Days You may buy, sell or exchange shares on days on which the New York Stock Exchange is open for business (a "Business Day"). However, shares of the Portfolio cannot be purchased by Federal Reserve wire on federal holidays restricting wire transfers. All purchase, exchange and redemption requests received in "good order" will be effective as of the Business Day received by the Transfer Agent as long as the Transfer Agent receives the order and, in the case of a purchase request, payment before 2:00 p.m., Eastern time. Otherwise the purchase will be effective when payment is received. Broker-dealers may have separate arrangements with the Trust regarding the sale of Class D shares.
If an exchange request is for shares of a portfolio whose net asset value is calculated as of a time earlier than 2:00 p.m., Eastern time, the exchange request will not be effective until the next Business Day. Anyone who wishes to make an exchange must have received a current prospectus of the portfolio into which the exchange is being made before the exchange will be effected.
Minimum The minimum initial investment in the Portfolio's Class D Investments shares is $1,000; however, the minimum investment may be waived at the Distributor's discretion. All subsequent purchases must be at least $100 ($25 for payroll deductions authorized pursuant to pre-approved payroll deduction plans). The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust or its shareholders to accept such order.
Maintaining a Due to the relatively high cost of handling small investments, Minimum Account the Portfolio reserves the right to redeem, at net asset Balance value, the shares of any shareholder if, because of redemptions of shares by or on behalf of the shareholder, the account of such shareholder in the Portfolio has a value of less than $1,000, the minimum initial purchase amount. Accordingly, an investor purchasing shares of the Portfolio in only the minimum investment amount may be subject to such involuntary redemption if he or she thereafter redeems any of these shares. Before the Portfolio exercises its right to redeem such shares and to send the proceeds to the shareholder, the shareholder will be given notice that the value of the shares in his or her account is less than the minimum amount and will be allowed 60 days to make an additional investment in the Portfolio in an amount that will
increase the value of the account to at least $1,000. See "Purchase and Redemption of Shares" in the Statement of Additional Information for examples of when the right of redemption may be suspended.
At various times, the Portfolio may receive a request to redeem shares for which it has not yet received good payment. In such circumstances, redemption proceeds will be forwarded upon collection of payment for the shares; collection of payment may take 10 or more days. The Portfolio intends to pay cash for all shares redeemed, but under abnormal conditions that make payment in cash unwise, payment may be made wholly or partly in portfolio securities with a market value equal to the redemption price. In such cases, an investor may incur brokerage costs in converting such securities to cash.
Net Asset Value An order to buy shares will be executed at a per share price equal to the net asset value next determined after the receipt of the purchase order by the Transfer Agent (the "offering price"). The purchase price of shares is expected to remain constant at $1.00. No certificates representing shares will be issued. An order to sell shares will be executed at the net asset value per share next determined after receipt and effectiveness of a request for redemption in good order. Net asset value per share is determined daily as of 2:00 p.m., Eastern time on any Business Day. Payment to shareholders for shares redeemed will be made within 7 days after receipt by the Transfer Agent of the redemption order.
How the Net The net asset value per share of the Portfolio is determined Asset Value is by dividing the total market value of its investments and Determined other assets, less any liabilities, by the total number of outstanding shares of the Portfolio. The Portfolio's investments will be valued by the amortized cost method described in the Statement of Additional Information. Although the methodology and procedures for determining net asset value per share are identical for each class of the Portfolio, the net asset value per share of one class may differ from that of another class because of the different distribution fees and incremental transfer agent fees charged to Class D shares.
Signature The Transfer Agent may require that the signatures on the Guarantees written request be guaranteed. You should be able to obtain a signature guarantee from a bank, broker, dealer, certain credit unions, securities exchange or association, clearing agency or savings association. Notaries public cannot guarantee signatures. The signature guarantee requirement will be waived if all of the following conditions apply: (1) the redemption is for not more than $5,000 worth of shares, (2) the redemption check is payable to the shareholder(s) of record, and (3) the redemption check is mailed to the shareholder(s) at his or her address of record. The Trust and the Transfer Agent reserve the right to amend these requirements without notice.
Telephone/Wire Redemption orders may be placed by telephone. Neither the Instructions Trust nor the Transfer Agent will be responsible for any loss, liability, cost or expense for acting upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and the
Transfer Agent will each employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions. If market conditions are extraordinarily active, or other extraordinary circumstances exist, and you experience difficulties placing redemption orders by telephone, you may wish to consider placing your order by other means.
Systematic Please note that if withdrawals exceed income dividends, Withdrawal Plan your invested principal in the account will be depleted. ("SWP") Thus, depending upon the frequency and amounts of the withdrawal payments and/or any fluctuations in the net asset value per share, your original investment could be exhausted entirely. To participate in the SWP, you must have your dividends automatically reinvested. You may change or cancel the SWP at any time, upon written notice to the Transfer Agent.
How to Close An account may be closed by providing written notice to the your Account Transfer Agent. You may also close your account by telephone if you have previously elected telephone options on your account application.
The Trust SEI Tax Exempt Trust (the"Trust") was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. Shareholders may purchase shares in the Portfolio through two separate classes: Class A and Class D, which provide for variation in distribution and transfer agent costs, voting rights, and dividends. This Prospectus offers Class D shares of the Trust's Tax Free Portfolio. In addition to the Portfolio, the Trust consists of the following portfolios: Institutional Tax Free Portfolio, California Tax Exempt Portfolio, Intermediate- Term Municipal Portfolio, Pennsylvania Municipal Portfolio, Kansas Tax Free Income Portfolio, Massachusetts Intermediate-Term Municipal Portfolio, Bainbridge Tax Exempt Portfolio, New York Intermediate-Term Municipal Portfolio and Pennsylvania Tax Free Portfolio. Additional information pertaining to the Trust may be obtained by writing to SEI Financial Management Corporation, 680 East Swedesford Road, Wayne, Pennsylvania 19087 or by calling 1-800-437-6016. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto.
The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential management services to the Trust.
Voting Rights Each share held entities the shareholder of record to one vote. The shareholders of each portfolio or class of the Trust will vote separately on matters relating solely to that portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but shareholders' approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Transfer Inquiries Agent, DST Systems, Inc., P.O. Box 419240, Kansas City, Missouri, 64141-6240.
Dividends The net investment income (exclusive of capital gains) of the Portfolio is determined and declared on each Business Day as a dividend for shareholders of record as of the close of business on that day. Dividends are paid by the Portfolio in cash or in additional shares at the discretion of the shareholder on the first Business Day of each month. Currently, capital gains, if any, are distributed at the end of the calendar year.
The dividends on Class D shares of the Portfolio will normally be lower than those on Class A shares because of the additional distribution and transfer agent expenses charged to Class D shares.
Shareholders automatically receive all income dividends and capital gain distributions in additional shares, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution.
Counsel and Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Independent Arthur Andersen LLP serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as custodian of the Trust's assets and acts as wire agent of certain cash of the Trust. The Custodian holds cash, securities and other assets of the Trust as required by the 1940 Act.
The following is a description of certain of the permitted investments for the Portfolio, and the associated risk factors:
Commercial Commercial Paper is a term used to describe unsecured short- Paper term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligation issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities.
General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility, tolls from a toll bridge, for example. Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment.
Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which the Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed- upon date within a number of days from the date of purchase. The Custodian will hold the security as collateral for the repurchase agreement. The Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss in the sale of the collateral. The Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
Standby Securities subject to standby commitments or puts permit the Commitments and holder thereof to sell the securities at a fixed price prior Puts to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Portfolio owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Portfolio will limit standby commitment or put transactions to institutions believed to present minimal credit risk.
Variable and Certain of the obligations purchased by the Portfolio may Floating Rate carry variable or floating rates of interest and may involve Instruments a conditional or unconditional demand feature. Such obligations may include variable amount master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or at some other interval and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice period exceeding seven days may be considered illiquid if there is no secondary market for such security.
When-issued and When-issued or delayed delivery transactions involve the Delayed purchase of an instrument with payment and delivery taking Delivery place in the future. Delivery of and payment for these Securities securities may occur a month or more after the date of the purchase commitment. The Portfolio will maintain with the custodian a separate account with liquid, high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date, and no interest accrues to the Portfolio before settlement. These securities are subject to market fluctuation due to changes in market interest rates, and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Portfolio generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, the Portfolio may dispose of a when-issued security or forward commitment prior to settlement if the Adviser deems it appropriate to do so.
Supplement dated December 31, 1995 to Prospectus dated December 31, 1995
This Supplement to the Prospectus provides new and additional information beyond that contained in the Prospectus and should be read in conjunction with the Prospectus.
Shareholder Transaction Expenses (as a percentage of offering price)
Maximum Sales Load Imposed on Purchases 3.50% Maximum Sales Load Imposed on Reinvested Dividends none
Annual Operating Expenses (as a percentage of average net assets) Management/Advisory Fees (after fee waivers)/2/ .45% Total Operating Expenses (after fee waivers)/4/ 1.00%
1 A charge, currently $10.00, is imposed on wires of redemption proceeds of the Portfolio's Class D shares. 2 SFM has waived, on a voluntary basis, a portion of its fees, and the Management/Advisory fees shown reflect these voluntary waivers. SFM reserves the right to terminate this waiver at any time in its sole discretion. Absent such waiver, the Management/Advisory fees for the Portfolio would be .57%. 3 The 12b-1 fees shown affect the Portfolio's current 12b-1 budget for reimbursement of expenses. The maximum 12b-1 fees payable by Class A shares of the Portfolio are .60%. 4 Absent the voluntary fee waivers described above, Total Operating Expenses for Class A shares of the Portfolio would be 1.12%.
On December 4, 1995, the Board of Trustees of the SEI Tax Exempt Trust (the "Trust") approved a series of changes relating to the investment advisory arrangements for the Intermediate-Term Municipal Portfolio (the "Portfolio"). At the meeting, the Board voted to terminate the investment advisory agreement between the Trust, on behalf of the Portfolio, and Weiss, Peck & Greer Advisers, Inc., such termination to take effect on January 1, 1996. The Board approved a new investment advisory agreement between the Trust, on behalf of the Portfolio, and Standish Ayer & Wood, Inc. ("Standish"), effective as of January 1, 1996. At the same meeting, the Board approved an alternative advisory arrangement for the Portfolio, which arrangement will take effect upon shareholder approval and supplant the advisory agreement with Standish. Under this proposed alternate arrangement, SEI Financial Management ("SFM") will act as the investment adviser to the Portfolio and Standish would serve as investment sub-adviser to the Portfolio.
At a shareholder meeting expected to be held on April 16, 1996, shareholders of the Portfolio accordingly will be asked to approve: (a) an advisory agreement between the Trust, on behalf of the Portfolio, and SFM; (b) a sub-advisory agreement between SFM and Standish, pursuant to which Standish will act as the Portfolio's sub-adviser and will be compensated by SFM from its advisory fee, such agreement to take effect only upon the approval of SFM as investment adviser; and (c) an advisory agreement between the Trust and Standish to take effect on January 1, 1996 and to continue after the date of the shareholders meeting only if the advisory and sub-advisory agreements referenced in (a) and (b) are not approved by shareholders.
Prior to shareholder approval, Standish will serve as interim investment adviser, and will be compensated at the rate of .18% of the Portfolio's average daily net assets up to $125 million and .15% of the Portfolio's average daily net assets over $125 million. The rate of compensation paid to Weiss, Peck & Greer Advisers, Inc., the Portfolio's former investment adviser, was .18% of the Portfolio's average daily net assets up to $150 million and .16% of the Portfolio's average daily net assets over $150 million.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
Please read this Prospectus carefully before investing, and keep it on file for future reference. It concisely sets forth information that can help you decide if the Portfolio's investment goals match your own.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-437-6016. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end investment management compa- ny, certain classes of which offer shareholders a convenient means of investing their funds in one or more professionally managed diversified and non-diversi- fied portfolios of securities. The Intermediate-Term Municipal Portfolio, an investment portfolio of the Trust, offers two classes of shares, Class A shares and Class D shares. Class D shares differ from Class A shares primarily in the imposition of sales charges and the allocation of certain distribution expenses and transfer agent fees. Class D shares are available through SEI Financial Services Company (the Trust's distributor) and through participating broker- dealers, financial institutions and other organizations. This Prospectus offers the Class D shares of the Trust's Intermediate-Term Municipal Portfolio (the "Portfolio") listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC- CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE TRUST'S SHARES ARE NOT FEDERALLY IN- SURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE- SERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT IN- VESTED.
HOW TO READ THIS PROSPECTUS ____________________________________________________
This Prospectus gives you information that you should know about the Portfolio before investing. Brief descriptions are also provided throughout the Prospectus to better explain certain key points. To find these helpful guides, look for this symbol.
The following summary provides basic information about the Class D shares of the Portfolio. This summary is qualified in its entirety by reference to the more detailed information provided elsewhere in this Prospectus and in the Statement of Additional Information.
INVESTMENT The Intermediate-Term Municipal Portfolio seeks the highest OBJECTIVE AND level of income exempt from federal income taxes that can be POLICIES obtained, consistent with preservation of capital, from a diversified portfolio of investment grade municipal securities. See "Investment Objective and Policies," "General Investment Policies" and "Description of Permitted Investments and Risk Factors."
UNDERSTANDING Shares of the Portfolio, like shares of any mutual fund, will RISK fluctuate in value and when you sell your shares, they may be worth more or less than what you paid for them. The Portfolio invests at least 80% of its assets in municipal securities the interest on which is exempt from federal income taxes, and that is not a preference item for purposes of the alternative minimum tax. The investment policies of the Portfolio entail certain risks and considerations of which an investor should be aware. The value of fixed income funds and the fixed income securities in which they invest tend to vary inversely with interest rates and may be affected by other market and economic factors as well. In addition, there can be no assurance that the Portfolio will achieve its investment objective. See "Investment Objective and Policies" and "Description of Permitted Investments and Risk Factors."
MANAGEMENT SEI Financial Management Corporation ("SFM") serves as the PROFILE investment adviser of the Portfolio. Standish, Ayer & Wood, Inc. serves as investment sub-adviser to the Portfolio. The investment adviser and investment sub-adviser to the Portfolio are referred to collectively as the "advisers." SFM serves as the manager and shareholder servicing agent of the Trust. DST Systems, Inc. ("DST") serves as transfer agent (the "Transfer Agent") and dividend disbursing agent for the Class D shares of the Trust. SEI Financial Services Company acts as distributor ("Distributor") of the Trust's shares. See "The Manager and Shareholder Servicing Agent," "The Adviser" and "Distribution."
Believing that no single investment adviser can deliver outstanding performance in every investment category, only those advisers who have distinguished themselves within their areas of specialization are selected to advise our mutual funds. ................................................................................
YOUR ACCOUNT You may open an account with just $1,000 and make additional AND DOING investments with as little as $100. Class D shares of the BUSINESS WITH Portfolio are offered at net asset value per share plus a US maximum sales charge at the time of purchase of 3.50%. Shareholders who purchase higher amounts may qualify for a reduced sales charge. Redemptions of the Portfolio's shares are made at net asset value per share. See "Your Account and Doing Business with Us."
DIVIDENDS The net investment income (exclusive of capital gains) of the Portfolio is declared periodically and is paid as a dividend on the tenth Business Day of each month. Any realized net capital gain is distributed at least annually. Distributions are paid in additional shares unless the shareholder elects to take the payment in cash. See "General Information-- Dividends."
INFORMATION/ For more information about Class D shares, call 1-800-437- SERVICE 6016.
The purpose of the following table is to help you understand the various costs and expenses that you, as a shareholder, will bear directly or indirectly in connection with an investment in the Class D shares.
SHAREHOLDER TRANSACTION EXPENSES (as a percentage of offering price)
1 A charge, currently $10.00, is imposed on wires of redemption proceeds of the Portfolio's Class D shares. 2 SFM has waived, on a voluntary basis, a portion of its fees, and the Management/Advisory fees shown reflect these voluntary waivers. SFM reserves the right to terminate its waiver at any time in its sole discretion. Absent such waivers, the Management/Advisory Fees for the Portfolio would be .75%. 3 The 12b-1 fees shown reflect the Portfolio's current 12b-1 budget for reimbursement of expenses and the Distributor's voluntary waiver of a portion of its compensatory fee. The Distributor reserves the right to terminate its waiver at any time in its sole discretion. The maximum 12b-1 fees payable by Class D shares of the Portfolio are .60%. 4 Absent the voluntary fee waivers described above, Total Operating Expenses for Class D shares of the Portfolio would be 1.30%.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
A person who purchases shares through a financial institution may be charged separate fees by that institution. The information set forth in the foregoing table and example relates only to the Portfolio's Class D shares (a class of shares of the Portfolio). The Portfolio also offers Class A shares which are subject to the same expenses, except there are no sales charges and different distribution and transfer agent costs. Additional information may be found under "The Manager and Shareholder Servicing Agent," "Distribution" and "The Adviser."
The rules of the Securities and Exchange Commission require that the maximum sales charge be reflected in the above table. However, certain investors may qualify for reduced sales charges. See "Your Account and Doing Business with Us."
Long-term shareholders may pay more than the economic equivalent of the maximum front end sales charge permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
The following financial highlights, for a share outstanding throughout each period, have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon was unqualified. This information should be read in conjunction with the Trust's financial statements and notes thereto, which are included in the Trust's Statement of Additional Information and which appear, along with the report of Arthur Anderson LLP, in the Trust's 1995 Annual Report to Shareholders. Additional performance information is set forth in the 1995 Annual Report to Shareholders, which is available upon request and without charge by calling 1-800-437-6016.
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD
** Total Return does not reflect the sales charge. 1 The Intermediate-Term Municipal Portfolio--Class D commenced operations on September 28, 1993.
Any entity, such as a bank, broker-dealer, other financial institution, association or organization which has entered into an arrangement with the Distributor to sell Class D shares to its customers.
YOUR ACCOUNT AND DOING BUSINESS WITH US ________________________________________ Class D shares of the Portfolio are sold on a continuous basis and may be purchased directly from the Trust's Distributor, SEI Financial Services Company. Shares may also be purchased through financial institutions, broker- dealers, or other organizations which have established a dealer agreement or other arrangement with SEI Financial Services Company ("Intermediaries"). For more information about the following topics, see "Additional Information About Doing Business with Us." HOW TO BUY, Class D shares of the Portfolio may be purchased through SELL AND Intermediaries which provide various levels of shareholder EXCHANGE services to their customers. Contact your Intermediary for SHARES THROUGH information about the services available to you and for INTERMEDIARIES specific instructions on how to buy, sell and exchange shares. To allow for processing and transmittal of orders to the Transfer Agent on the same day, Intermediaries may impose earlier cut-off times for receipt of purchase orders. Certain Intermediaries may charge customer account fees. Information concerning shareholder services and any charges will be provided to the customer by the Intermediary. Certain of these Intermediaries may be required to register as broker-dealers under state law. The shares you purchase through an Intermediary may be held "of record" by that Intermediary. If you want to transfer the registration of shares beneficially owned by you, but held "of record" by an Intermediary, you should call the Intermediary to request this change.
HOW TO BUY Application forms can be obtained by calling 1-800-437-6016. SHARES FROM Class D shares of the Portfolio are offered only to residents THE of states in which the shares are eligible for purchase.
Opening an You may buy Class D shares by mailing a completed application Account and a check (or other negotiable bank instrument or money By Check order) payable to "Class D Shares (Portfolio Name)." If you send a check that does not clear, the purchase will be canceled and you could be liable for any losses or fees incurred. By Fed Wire You may buy shares by Fed Wire by calling 1-800- 437-6016. Automatic You may systematically buy Class D shares through deductions Investment from your checking or savings accounts, provided these Plan ("AIP") accounts are maintained through banks which are part of the Automated Clearing House ("ACH") system. You may purchase shares on a fixed schedule (semi-monthly or monthly) with amounts as low as $25, or as high as $100,000. Upon notice, the amount you commit to the AIP may be changed or canceled at any time. The AIP is subject to account minimum initial purchase amounts and minimum maintained balance requirements.
OTHER Your purchase is subject to a sales charge which varies INFORMATION depending on the size of your purchase. The following table ABOUT BUYING shows the regular sales charges on Class D shares of the SHARES Portfolio to a "single purchaser," together with the reallowance paid to dealers and the agency commission paid Sales Charges to brokers (collectively the "commission"):
The commissions shown in the table above apply to sales through Intermediaries. Under certain circumstances, commissions up to the amount of the entire sales charge may be re-allowed to certain Intermediaries, who might then be deemed to be "underwriters" under the Securities Act of 1933, as amended. Commission rates may vary among the Trust's portfolios.
Right of A Right of Accumulation allows you, under certain Accumulation circumstances, to combine your current purchase with the current market value of previously purchased shares of the Portfolio and Class D shares of other portfolios ("Eligible Portfolios") in order to obtain a reduced sales charge. Letter of A Letter of Intent allows you, under certain circumstances, Intent to aggregate anticipated purchases over a 13-month period to obtain a reduced sales charge. Sales Charge Certain shareholders may qualify for a sales charge waiver. Waiver To determine whether or not you qualify for a sales charge waiver see "Additional Information About Doing Business with Us." Shareholders who qualify for a sales charge waiver must notify the Transfer Agent before purchasing shares.
When making an exchange, you authorize the sale of your shares of one or more Portfolios in order to purchase the shares of another Portfolio. In other words, you are executing a sell order and then a buy order. This sale of your shares is a taxable event which could result in a taxable gain or loss. ................................................................................
EXCHANGING Once good payment for your shares has been received and SHARES accepted (i.e., an account has been established), you may When Can You exchange some or all of your shares for Class D shares of the Exchange Trust or of SEI Liquid Asset Trust, SEI Daily Income Trust, Shares? SEI International Trust, and SEI Institutional Managed Trust ("SEI Funds"). Exchanges are made at net asset value plus any applicable sales charge. When Do Sales SEI Funds' portfolios that are not money market Charges Apply portfolios currently impose a sales charge on Class D to an shares. If you exchange into one of these "non-money Exchange? market" portfolios, you will have to pay a sales charge on any portion of your exchanged Class D shares for which you have not previously paid a sales charge. If you previously paid a sales charge on your Class D shares, no additional sales chargewill be assessed when you exchange those Class D shares for other Class D shares. If you buy Class D shares of a "non-money market" fund and you receive a sales charge waiver, you will be deemed to have paid the sales charge for purposes of this exchange privilege. In calculating any sales charge payable on your exchange, the Trust will assume that the first shares you exchange are those on which you have already paid a sales charge. Sales charge waivers may also be available under certain circumstances described in the SEI Funds' prospectuses. The Trust reserves the right to change the terms and conditions of the exchange privilege discussed herein, or to terminate the exchange privilege, upon 60 days' notice. The Trust also reserves the right to deny an exchange request made within 60 days of the purchase of a non-money market portfolio. Requesting an To request an exchange, you must provide proper instructions Exchange of in writing to the Transfer Agent. Telephone exchanges will Shares also be accepted if you previously elected this option on your account application. In the case of shares held "of record" by an Intermediary but beneficially owned by you, you should contact the Intermediary who will contact the Transfer Agent and effect the exchange on your behalf.
A signature guarantee verifies the authenticity of your signature and may be obtained from any of the following: banks, brokers, dealers, certain credit unions, securities exchange or association, clearing agency or savings association. A notary public cannot provide a signature guarantee. ................................................................................
HOW TO SELL To sell your shares, a written request for redemption in good SHARES THROUGH order must be received by the Transfer Agent. Valid written THE redemption requests will be effective on receipt. All DISTRIBUTOR shareholders of record must sign the redemption request. For information about the proper form of redemption By Mail requests, call 1-800-437-6016. You may also have the proceeds mailed to an address of record or mailed (or sent by ACH) to a commercial bank account previously designated on the Account Application or specified by written instruction to the Transfer Agent. There is no charge for having redemption requests mailed to a designated bank account. By Telephone You may sell your shares by telephone if you previously elected that option on the Account Application. You may have the proceeds mailed to the address of record, or wired or sent by ACH to a commercial bank account previously designated on the Account Application. Under most circumstances, payments will be transmitted on the next Business Day following receipt of a valid telephone request for redemption. Wire redemption requests may be made by calling 1-800-437-6016, a wire redemption charge (presently $10.00) will be deducted from the amount of the redemption. Systematic You may establish a systematic withdrawal plan for an account Withdrawal with a $10,000 minimum balance. Under the plan, redemptions Plan ("SWP") can be automatically processed from accounts (monthly, quarterly, semi-annually or annually) by check or by ACH with a minimum redemption amount of $50.
The Portfolio's investment objective is a statement of what it seeks to achieve. It is important to make sure that the investment objective matches your own financial needs and circumstances. The investment policies section spells out the types of securities in which the Portfolio invests.
The investment objective of the Intermediate-Term Municipal Portfolio (the "Portfolio") is to seek the highest level of income exempt from federal income taxes that can be obtained, consistent with the preservation of capital, from a diversified portfolio of investment grade municipal securities. However, the Portfolio's income might not be as high as it would be if the Portfolio had minimum investment rating requirements lower than those discussed below. There can be no assurance that the Portfolio will achieve its investment objective.
The Portfolio invests at least 80% of its assets in municipal securities the interest on which is exempt from federal income taxes (collectively "Municipal Securities"), based on opinions from bond counsel for the issuers. This investment policy is a fundamental policy of the Portfolio. The issuers of these securities can be located in all fifty states, the District of Columbia, Puerto Rico, and other U.S. territories and possessions. Under normal conditions, the Portfolio will invest at least 80% of its net assets in securities the interest on which is not a preference item for purposes of the alternative minimum tax. Although the advisers have no present intention of doing so, up to 20% of all assets in the Portfolio can be invested in taxable debt securities for defensive purposes or when sufficient tax exempt securities considered appropriate by the advisers are not available for purchase.
The market value of the Portfolio's fixed income investments will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Changes by recognized rating agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of portfolio securities will not necessarily affect cash income derived from these securities, but will affect the Portfolio's net asset value.
The Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating, or, if not rated, are of comparable quality as determined by the advisers: (i) municipal bonds rated A or better by Standard and Poor's Corporation ("S&P") or by Moody's Investors Service, Inc. ("Moody's"), and the Portfolio may invest up to 10% of its total assets in municipal bonds rated BBB by S&P or Baa by Moody's; (ii) municipal notes rated at least SP-1 by S&P or MIG-1 or VMIG-1 by Moody's; and (iii) tax-exempt commercial paper rated at least A-1 by S&P or Prime-1 by Moody's. Bonds rated BBB by S&P or Baa by Moody's have
characteristics. Municipal obligations owned by the Portfolio which become less than the prescribed investment quality shall be sold at a time when, in the judgment of the advisers, it does not substantially impact the market value of the Portfolio.
Not more than 25% of Portfolio assets will be invested in (a) municipal securities whose issuers are located in the same state, (b) municipal securities the interest on which is derived from revenues of similar type projects, or (c) municipal securities subject to the alternative minimum tax. This restriction does not apply to municipal securities in any of the following categories: public housing authorities; general obligations of states and localities; state and local housing finance authorities, or municipal utilities systems.
There could be economic, business, or political developments which might affect all municipal securities of a similar type. To the extent that a significant portion of the Portfolio's assets are invested in municipal securities payable from revenues on similar projects, the Portfolio will be subject to the peculiar risks presented by such projects to a greater extent than it would be if the Portfolio's assets were not so invested.
The Portfolio will maintain a dollar-weighted average portfolio maturity of three to ten years. However, when the advisers determine that market conditions so warrant, the Portfolio can maintain an average weighted maturity of less than three years.
The Portfolio may invest in variable and floating rate obligations, may purchase securities on a "when-issued" basis, and reserves the right to engage in transactions involving standby commitments. The Portfolio may also purchase other types of tax-exempt instruments as long as they are of a quality equivalent to the long-term bond or commercial paper ratings stated above. Although permitted to do so, the Portfolio has no present intention to invest in repurchase agreements or purchase securities subject to the alternative minimum tax. The Portfolio will not invest more than 15% of its net assets in illiquid securities.
The taxable securities in which the Portfolio may invest consist of U.S. Treasury obligations; obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities whether or not backed by the full faith and credit of the U.S. Government; obligations of U.S. commercial banks or savings and loan institutions (not including foreign branches of U.S. banks or U.S. branches of foreign banks) which are members of the Federal Reserve System or the Federal Deposit Insurance Corporation and which have total assets of $1 billion or more as shown on their last published financial statements at the time of investment, and repurchase agreements involving any of such obligations.
Municipal notes rated SP-1 by S&P have strong capacity to pay principal and interest; notes rated MIG-1 or VMIG-1 by Moody's are considered to be of the best quality. Bonds rated BBB by S&P have an adequate capacity to pay interest and repay principal; bonds rated Baa by Moody's are considered to be medium-grade obligations (i.e., neither highly protected nor poorly secured). The highest S&P commercial paper rating category, A-1, indicates that the degree of safety regarding timely payment is strong and commercial paper issuers rated Prime-1 by Moody's have a superior ability for repayment. For a description of the permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
The investment objective and investment limitations are fundamental policies of the Portfolio. Fundamental policies cannot be changed with respect to the Trust or the Portfolio without the consent of the holders of a majority of the Trust's or the Portfolio's outstanding shares. The Portfolio may not: 1. Purchase securities of any issuer (except securities issued or guaranteed by the United States Government, its agencies or instrumentalities and any security guaranteed thereby) if, as a result, more than 5% of the total assets of the Portfolio (based on fair market value at the time of investment) would be invested in the securities of such issuer; provided, however, that the Portfolio may invest up to 25% of its total assets without regard to this restriction. 2. Purchase any securities which would cause more than 25% of the total assets of the Portfolio, based on current value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities or to investments in tax-exempt securities issued by governments or political subdivisions of governments. 3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio. The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
A Portfolio's investment adviser manages the investment activities and is responsible for the performance of the Portfolio. The adviser conducts investment research, executes investment strategies based on an assessment of economic and market conditions, and determines which securities to buy, hold or sell. ................................................................................
SEI Financial Management Corporation ("SFM"), a wholly-owned subsidiary of SEI Corporation ("SEI"), provides the Trust with overall management services, regulatory reporting, all necessary office space, equipment, personnel, and facilities, and serves as shareholder servicing agent. For these services, SFM is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .24% of the average daily net assets of the Portfolio. SFM has voluntarily agreed to waive a portion of its fees proportionately in order to limit the total operating expenses of the Class D shares of the Portfolio to not more than .95% of the Portfolio's average daily net assets attributable to the Class D shares on an annualized basis. SFM reserves the right, in its sole discretion, to terminate this voluntary fee waiver at any time. For the fiscal year ended August 31, 1995, the Portfolio paid management fees, after waivers, of .27% of its average daily net assets. The Trust and DST Systems, Inc., 210 W. 10th Street, Kansas City, Missouri 64105 ("DST"), have entered into a separate transfer agent agreement with respect to the Class D shares of the Portfolio. Under this agreement, DST acts as the transfer agent and dividend disbursing agent for the Class D shares of the Trust.
SFM serves as investment adviser (the "Adviser") to the Portfolio. Within the Portfolio one or more investment sub- advisers (each, a "Sub-Adviser," and together, the "Sub- Advisers") who specialize in the distinct investment style or styles that the Portfolio is designed to capture may be utilized to select that Portfolio's investments. The Adviser has general oversight responsibility for the investment advisory services provided to the Portfolio, including formulating the Portfolio's investment policies and analyzing economic trends affecting the Portfolio. In addition, SFM is responsible for (i) managing the allocation of assets among the Portfolio's Sub-Advisers, if applicable, (ii) directing and evaluating the investment services provided by a Sub-Adviser, including their adherence to the Portfolio's respective investment objective and policies and the Portfolio's investment performance, and (iii) managing the cash portion of the Portfolio's assets. In accordance with the Portfolio's investment objective and policies, and under the supervision of the Adviser and the Trust's Board of Trustees, a Sub-Adviser is responsible for the day-to-day investment
of all or a discrete portion of the assets of a Portfolio. The Adviser and the Sub-Adviser are authorized to make investment decisions for the Portfolio and place orders on behalf of the Portfolios to effect the investment decisions made.
SFM monitors the compliance of the Sub-Adviser of the Portfolio with regulatory and tax regulations, such as portfolio concentration and diversification. For the most part compliance with these requirements by a Sub-Adviser with respect to its portion of the Portfolio will assure compliance by that Portfolio as a whole. In addition, SFM monitors positions taken by each of the Portfolio's Sub- Advisers and will notify the Sub-Advisers of any developing situations to help ensure that investments do not run afoul of the short-short test or the wash sale rules. To the extent that having multiple Sub-Advisers responsible for investing separate portions of the Portfolio's assets creates the need for coordination among such Sub-Advisers, there is an increased risk that the Portfolio will not comply with these regulatory and tax requirements.
It is possible that different Sub-Advisers of the Portfolio could take opposite actions within a short period of time with respect to a particular security. For example, one Sub-Adviser could buy a security for the Portfolio and shortly thereafter another Sub-Adviser could sell the same security from the portion of the Portfolio allocated to it. If in these circumstances the securities could be transferred from one Sub-Adviser's portion of the Portfolio to another, the Portfolio could avoid transaction costs and could avoid creating possible wash sales and short-short gains under the Internal Revenue Code of 1986, as amended (the "Code"). Such transfers are not practicable but the Sub-Advisers do not believe that there will be material adverse effects on the Portfolio as a result. First, it does not appear likely that there will be substantial overlap in the securities acquired for the Portfolio by the various Sub-Advisers. Moreover, the Sub-Advisers would probably only rarely engage in the types of offsetting transactions described above, especially within a short time period. Therefore, it is a matter of speculation whether offsetting transactions would result in any significant increases in transaction costs or have significant tax consequences. With respect to the latter, SFM has established procedures with respect to the short-short test which are designed to prevent realization of short-short gains in excess of Code limits. It is true that wash sales could occur in spite of the efforts of SFM, but the Board of Trustees believes that the benefit of using multiple advisers outweighs the consequences of any wash sales.
SFM is currently seeking an exemptive order from the Securities and Exchange Commission (the "SEC") that would permit SFM, with the approval of the Trust's Board of Trustees, to retain sub-advisers for the Portfolio without submitting the sub-advisory agreement to a vote of the Portfolio's shareholders. If granted, the exemptive relief will permit the non-disclosure of amounts payable by SFM under such sub-advisory agreements. The Trust will notify shareholders in the event of any change in the identity of the Sub-Adviser for the Portfolio. Until or unless this exemptive order is granted, if one of the Sub-Advisers is terminated or departs from a Portfolio, the Portfolio will
termination or departure in one of two ways. First, the Portfolio may propose that a Sub-Adviser be appointed to manage that portion of the Portfolio's assets managed by the departing adviser. In this case, the Portfolio would be required to submit to the vote of the Portfolio's shareholders the approval of an investment advisory contract with the new Sub-Adviser. In the alternative, the Portfolio may decide to allocate the departing sub-adviser's assets among the remaining advisers. This allocation would not require new investment advisory contracts with the remaining Sub-Advisers, and consequently no shareholder approval would be necessary.
SEI Financial SEI Financial Management Corporation ("SFM") serves as Management investment adviser to the Portfolio. SFM is a wholly-owned Corporation subsidiary of SEI Corporation ("SEI"), a financial services company located in Wayne, PA. The principal business address of SFM is 680 East Swedesford Road, Wayne, PA 19087-1658. SEI was founded in 1968 and is a leading provider of investment solutions to banks, institutional investors, investment advisers and insurance companies. Affiliates of SFM have provided consulting advice to institutional investors for more than 20 years, including advice regarding the selection and evaluation of investment advisers. SFM currently serves as manager or administrator to more than 26 investment companies, including more than 220 portfolios, which investment companies have more than $51 billion in assets as of September 30, 1995.
For these advisory services, SFM is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .33% of the Portfolio's average daily net assets.
Standish, Ayer Standish Ayer & Wood, Inc. ("SAW") serves as Sub-Adviser for & Wood, Inc. the Portfolio. SAW's principal offices are located at One Financial Center, Boston, MA 02111. SAW was founded in 1933 and is a Subchapter S Corporation organized under the laws of the Commonwealth of Massachusetts and is completely owned by its 23 directors, all of whom are actively engaged in the management of the corporation. SAW has been providing investment management services to institutions and managing municipal securities since 1934. SAW manages assets for pensions, funds, corporate and public, insurance companies; banks; and individuals. Total assets under management as of September 30, 1995 were $29 billion.
Raymond J. Kubiak, CFA serves as portfolio manager to the Portfolio. Mr. Kubiak has 15 years experience in public finance and is a Vice President and Director of the Sub- Adviser. He has been with SAW since March, 1988.
SFM pays SAW a fee which is calculated and paid monthly, based on an annual note of .18% for assets of up to $125 million and .15% for assets over $125 million.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as each Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the Trust. Each Class of the Trust has adopted a distribution plan (the "Class A" and "Class D Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act"). The Class D Plan provides for reimbursement for expenses incurred by the Distributor, in an amount not to exceed .30% of the average daily net assets of each Portfolio on an annualized basis, and provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement ("Qualified Trustees"). Currently, the budget (shown here as a percentage of daily net assets) for the Portfolio is set at an annual rate of .08%. Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific portfolio of the Trust are allocated among each of the portfolios of the Trust based on the basis of their relative average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget. The Class D Plan, in addition to providing for the reimbursement payments described above, provides for payments to the Distributor at an annual rate of .30% of the Portfolio's average daily net assets attributable to Class D shares. This additional payment may be used to compensate financial institutions that provide distribution-related services to their customers. These payments are characterized as "compensation," and are not directly tied to expenses incurred by the Distributor, the payments the Distributor receives during any year may therefore be higher or lower than its actual expenses. These additional payments compensate the Distributor for its services in connection with distribution assistance or the provision of shareholder services, and some or all of it may be used to pay financial institutions and intermediaries such as banks, savings and loan associations, insurance companies, and investment counselors, broker-dealers (including the Distributor's affiliates and subsidiaries) for services or reimbursement of expenses incurred in connection with distribution assistance or the provision of shareholder services. If the Distributor's expenses are less than its fees under the Class D Plan, the Trust will still pay the full fee and the Distributor will realize a profit, but the Trust will not be obligated to pay in excess of the full fee, even if the Distributor's actual expenses are higher. Currently, the Distributor is taking this additional compensation payment under the Class D Plan at a rate of .25% of the Portfolio's average daily net assets, on an annualized basis, attributable to Class D shares.
It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers. The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation. The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the sales charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolio. Such promotional incentives will be offered uniformly to all shares of the Portfolio, and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolio sold by such dealer.
From time to time, the Portfolio may advertise yield and total return. These figures will be based on historical earnings and are not intended to indicate future performance. From time to time, the Portfolio may also advertise yield and tax equivalent yield. The yield of these Portfolios refers to the annualized income generated by a hypothetical investment, net of any sales charge imposed in the case of Class D shares, in the Portfolio over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period generated each period over one year and is shown as a percentage of the investment. A tax equivalent yield is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of the Portfolio's yield, assuming certain tax brackets for a shareholder. The total return of the Portfolio refers to the average compounded rate of return to a hypothetical investment for designated time periods (including, but not limited to, the period from which the Portfolio commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gain distributions. The Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and business publications and periodicals; (ii) broad groups of comparable mutual funds; (iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) to other investment alternatives. The Portfolio may quote Morningstar, Inc., a service that ranks mutual funds on the basis of risk-adjusted performance. The Portfolio may quote Ibbotson Associates of Chicago, Illinois, which provides historical returns of the capital markets in the U.S. The Portfolio may use long-term performance of these capital
long-term risk versus reward scenarios and could include the value of a hypothetical investment in any of the capital markets. The Portfolio may also quote financial and business publications and periodicals as they relate to fund management, investment philosophy, and investment techniques.
The Portfolio may quote various measures of volatility and benchmark correlation in advertising and may compare these measures to those of other funds. Measures of volatility attempt to compare historical share price fluctuations or total returns to a benchmark while measures of benchmark correlation indicate how valid a comparative benchmark might be. Measures of volatility and correlation are calculated using averages of historical data and cannot be calculated precisely.
The performance on the Class D shares will normally be lower than the performance on the Class A shares of the Portfolio because of the imposition of the sales charge and additional distribution and transfer agent expenses charged to the Class D shares.
You must pay taxes on your Portfolio's earnings, whether you take your payments in cash or additional shares.
The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. No attempt has been made to present a detailed explanation of the federal income tax treatment of the Portfolio or its shareholders and, state and local tax consequences of an investment in the Portfolio may differ from the federal income tax consequences described below. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
Tax Status of The Portfolio is treated as a separate entity for federal the Portfolio: income tax purposes and is not combined with the Trust's other Portfolios. The Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal income tax on net investment company taxable income and net capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
Tax Status of The Portfolio intends to distribute substantially all of its Distributions: net investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Portfolio's total assets consists of obligations the interest on which is excludable from gross income, the Portfolio may pay "exempt- interest dividends" to its shareholders. Those dividends constitute the portion of the aggregate dividends designated by the Portfolio equal to the excess of the excludable
The Portfolio distributes income dividends and capital gains. Income dividends represent the earnings from the Portfolio's investments; capital gains distributions occur when investments in the Portfolio are sold for more than the original purchase price.
certain amounts disallowed as deductions. In determining net exempt-interest income, expenses of each Portfolio are allocated to gross tax-exempt interest income in the proportion that the gross amount of such interest income bears to the Portfolio's total gross income, excluding net capital gains. Exempt-interest dividends are excludable from a shareholder's gross income for federal income tax purposes but may have certain collateral federal tax consequences including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information.
Current federal tax law limits the types and volume of bonds qualifying for the federal income tax exemption of interest, which may have an effect on the ability of the Portfolio to purchase sufficient amounts of tax-exempt securities to satisfy the Code's requirements for the payment of "exempt-interest" dividends.
Any dividends paid out of income realized by the Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends-received deduction for corporate shareholders. Distributions to shareholders of net capital gains of the Portfolio also will not qualify for that deduction and will be taxable to shareholders as long-term capital gain, whether received in cash or additional shares, and regardless of how long a shareholder has held the shares.
Dividends declared by the Portfolio in October, November, or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio during the following January. The Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies.
Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of the Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolio may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares. The Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolio during the year to which the dividends relate.
Each sale, exchange, or redemption of the Portfolio's shares is a taxable transaction to the shareholder.
APPEARS SELL REQUESTS ARE IN HERE] "GOOD ORDER" WHEN:
. The account number and portfolio name are shown . The amount of the transaction is specified in dollars or shares . Signatures of all owners appear exactly as they are registered on the account . Any required signature guarantees (if applicable) are included . Other supporting legal documents (as necessary) are present
Business Days You may buy, sell, or exchange shares on days on which the New York Stock Exchange is open for business (a "Business Day"). However, shares cannot be purchased by Federal Reserve wire on federal holidays restricting wire transfers. All purchase, exchange, and redemption requests received in "good order" will be effective as of the Business Day received by the Transfer Agent as long as the Transfer Agent receives the order and, in the case of a purchase request, payment before the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time). Otherwise the purchase will be effective when payment is received. Broker-dealers may have separate arrangements with the Trust regarding the sale of Class D shares.
If an exchange request is for shares of a portfolio whose net asset value is calculated as of a time earlier than the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time), the exchange request will not be effective until the next Business Day. Anyone who wishes to make an exchange must have received a current prospectus of the portfolio into which the exchange is being made before the exchange will be effected.
Minimum The minimum initial investment in the Portfolio's Class D Investments shares is $1,000; however, the minimum investment may be waived at the Distributor's discretion. All subsequent purchases must be at least $100 ($25 for payroll deductions authorized pursuant to pre-approved payroll deduction plans). The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust or its shareholders to accept such order.
Maintaining a Due to the relatively high cost of handling small Minimum investments, the Portfolio reserves the right to redeem, at Account net asset value, the shares of any shareholder if, because of Balance redemptions of shares by or on behalf of the shareholder, the account of such shareholder in the Portfolio has a value of less than $1,000, the minimum initial purchase amount. Accordingly, an investor purchasing shares of the Portfolio in only the minimum investment amount may be subject to such involuntary redemption if he or she thereafter redeems any of these shares. Before the Portfolio exercises its right to redeem such shares and to send the proceeds to the shareholder, the shareholder will be given notice that the value of the shares in his or her account is less than the minimum amount and will be allowed 60 days to make an additional investment in the Portfolio in an amount that will
increase the value of the account to at least $1,000. See "Purchase and Redemption of Shares" in the Statement of Additional Information for examples of when the right of redemption may be suspended.
At various times, the Portfolio may receive a request to redeem shares for which it has not yet received good payment. In such circumstances, redemption proceeds will be forwarded upon collection of payment for the shares; collection of payment may take 10 or more days. The Portfolio intends to pay cash for all shares redeemed, but under abnormal conditions that make payment in cash unwise, payment may be made wholly or partly in portfolio securities with a market value equal to the redemption price. In such cases, an investor may incur brokerage costs in converting such securities to cash.
Net Asset Value An order to buy shares will be executed at a per share price equal to the net asset value next determined after the receipt of the purchase order by the Transfer Agent plus any applicable sales charge (the "offering price"). No certificates representing shares will be issued. An order to sell shares will be executed at the net asset value per share next determined after receipt and effectiveness of a request for redemption in good order. Net asset value per share is determined as of the close of trading on the New York Stock Exchange (presently 4:00 p.m. Eastern time) on each Business Day. Payment to shareholders for shares redeemed will be made within 7 days after receipt by the Transfer Agent of the redemption order.
How the Net The net asset value per share of the Portfolio is determined Asset Value is by dividing the total market value of its investments and Determined other assets, less any liabilities, by the total number of outstanding shares of the Portfolio. The Portfolio may use a pricing service to obtain the most recently quoted bid price of each equity or fixed income security held by the Portfolio. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Net asset value per share is determined daily as of 4:00 p.m. Eastern time on each Business Day. Purchases will be made in full and fractional shares of the Portfolio calculated to three decimal places. Although the methodology and procedures for determining net asset value per share are identical for both classes of the Portfolio, the net asset value per share of one class may differ from that of another class because of the different distribution fees charged to each class and the incremental transfer agent fees charged to Class D shares.
Rights of In calculating the sales charge rates applicable to current Accumulation purchases of the Portfolio's shares, a "single purchaser" (defined below) is entitled to combine current purchases with the current market value of previously purchased shares of the Portfolio and Class D shares of other portfolios ("Eligible Portfolios") which are sold subject to a comparable sales charge.
The term "single purchaser" refers to (i) an individual, (ii) an individual and spouse purchasing shares of the Portfolio for their own account or for trust or custodial accounts of their minor children, or (iii) a fiduciary purchasing for any one trust, estate, or fiduciary account, including employee benefit plans created under Sections 401 or 457 of the Code,
including related plans of the same employer. Furthermore, under this provision, purchases by a single purchaser shall include purchases by an individual for his or her own account in combination with (i) purchases of that individual and spouse for their joint accounts or for trust and custodial accounts for their minor children and (ii) purchases of that individual's spouse for his or her own account. To be entitled to a reduced sales charge based upon shares already owned, the investor must ask the Transfer Agent for such reduction at the time of purchase and provide the account number(s) of the investor, the investor and spouse, and their children (under age 21). The Portfolio may amend or terminate this right of accumulation at any time as to subsequent purchases.
Letter of By submitting a Letter of Intent (the "Letter") to the Intent Transfer Agent, a single purchaser may purchase shares of the Portfolio and the other Eligible Portfolios during a 13- month period at the reduced sales charge rates applying to the aggregate amount of the intended purchases stated in the Letter. The Letter may apply to purchases made up to 90 days before the date of the Letter. It is the shareholder's responsibility to notify the Transfer Agent at the time the Letter is submitted that there are prior purchases that may apply.
Five percent (5%) of the total amount intended to be purchased will be held in escrow by the Transfer Agent until such purchase is completed within the 13-month period. The 13-month period begins on the date of the earliest purchase. If the intended investment is not completed, the Manager will surrender an appropriate number of the escrowed shares for redemption in order to realize the difference between the sales charge on the shares purchased at the reduced rate and the sales charge otherwise applicable to the total shares purchased. Such purchasers may include the value of all their shares of the Portfolio and of any of the other Eligible Portfolios in the Trust towards the completion of such Letter.
Reinstatement A shareholder who has redeemed shares of any portfolio of Privilege the Trust has a one-time right to reinvest the redemption proceeds in shares of another portfolio of the Trust at their net asset value as of the time of reinvestment. Such a reinvestment must be made within 30 days of the redemption and is limited to the amount of the redemption proceeds. Although redemptions and repurchases of shares are taxable events, a reinvestment within such 30-day period in the same portfolio is considered a "wash sale" and results in the inability to recognize currently all or a portion of a loss realized on the original redemption for federal income tax purposes. The investor must notify the Transfer Agent at the time the trade is placed that the transaction is a reinvestment.
Sales Charge No sales charge is imposed on shares of the Portfolio: (i) Waivers issued in plans of reorganization, such as mergers, asset acquisitions, and exchange offers, to which the Trust is a party; (ii) sold to dealers or brokers that have a sales agreement with the Distributor ("participating broker- dealers") for their own account or for retirement plans for employees or sold to present employees of dealers or brokers that certify to the Distributor at the time of purchase that such purchase is for their own account; (iii) sold to present employees of SEI or one of its affiliates, or of any entity which is a current
service provider to the Trust; (iv) sold to tax-exempt organizations enumerated in Section 501(c) of the Code or qualified employee benefit plans created under Sections 401, 403(b)(7), or 457 of the Code (but not IRAs or SEPs); (v) sold to fee-based clients of banks, financial planners, and investment advisers; (vi) sold to clients of trust companies and bank trust departments; (vii) sold to trustees and officers of the Trust; (viii) purchased with proceeds from the recent redemption of another class of shares of a portfolio of the Trust, SEI Institutional Managed Trust, SEI International Trust, SEI Liquid Asset Trust, or SEI Daily Income Trust; (ix) purchased with the proceeds from the recent redemption of shares of a mutual fund with similar investment objectives and policies (other than Class D shares) for which a front-end sales charge was paid (this offer will be extended, to cover shares on which a deferred sales charge was paid, if permitted under regulatory authorities' interpretation of applicable law); or (x) sold to participants or members of certain affinity groups, such as trade associations or membership organizations, which have entered into arrangements with the Distributor.
Members of affinity groups such as trade associations or membership organizations which have entered into arrangements relating to waivers of sales charges with the Distributor should call 1-800-437-6016 for more information.
The Distributor has also entered into arrangements with certain affinity groups and broker dealers wherein their members or clients are entitled to percentage-based discounts from the otherwise applicable sales charge for purchase of Class D shares. Currently, the only percentage- based discount equals 50%. Please call 1-800-437-6016 for more information.
An investor relying upon any of the categories of waivers of the sales charge must qualify such waiver in advance of the purchase with the Transfer Agent or the financial institution or intermediary through which shares are purchased by the investor.
The waiver of the sales charge under circumstances (viii) and (ix) above applies only if the following conditions are met: the purchase must be made within 60 days of the redemption; the Transfer Agent must be notified in writing by the investor, or his or her agent, at the time a purchase is made; and a copy of the investor's account statement showing such redemption must accompany such notice. The waiver policy with respect to the purchase of shares through the use of proceeds from a recent redemption as described in clauses (viii) and (ix) above will not be continued indefinitely and may be discontinued at any time without notice. Investors should call 1-800-437-6016 to confirm availability prior to initiating the procedures described in clauses (viii) and (ix) above.
Signature The Transfer Agent may require that the signatures on the Guarantees written request be guaranteed. You should be able to obtain a signature guarantee from a bank, broker, dealer, certain credit unions, securities exchange or association, clearing agency, or savings association. Notaries public cannot guarantee signatures. The signature guarantee requirement will be waived if all of the following conditions apply: (1) the redemption is for not more than $5,000 worth of shares, (2) the redemption check is payable to the shareholder(s) of
record, and (3) the redemption check is mailed to the shareholder(s) at his or her address of record. The Trust and the Transfer Agent reserve the right to amend these requirements without notice.
Telephone/Wire Redemption orders may be placed by telephone. Neither the Instructions Trust nor the Transfer Agent will be responsible for any loss, liability, cost, or expense for acting upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and the Transfer Agent will each employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions. If market conditions are extraordinarily active, or other extraordinary circumstances exist, and you experience difficulties placing redemption orders by telephone, you may wish to consider placing your order by other means.
Systematic Please note that if withdrawals exceed income dividends, Withdrawal Plan your invested principal in the account will be depleted. ("SWP") Thus, depending upon the frequency and amounts of the withdrawal payments and/or any fluctuations in the net asset value per share, your original investment could be exhausted entirely. To participate in the SWP, you must have your dividends automatically reinvested. You may change or cancel the SWP at any time, upon written notice to the Transfer Agent.
How to Close An account may be closed by providing written notice to the your Account Transfer Agent. You may also close your account by telephone if you have previously elected telephone options on your account application.
The Trust SEI Tax Exempt Trust (the "Trust") was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. Shareholders may purchase shares in the Portfolio through two separate classes: Class A and Class D, which provide for variation in distribution and transfer agent costs, voting rights, dividends, and the imposition of a sales load on the Class D Shares. This Prospectus relates to the Class D Shares of the Trust's Intermediate-Term Municipal Portfolio. In addition to the Portfolio, the Trust consists of the following portfolios: Tax Free Portfolio, Institutional Tax Free Portfolio, California Tax Exempt Portfolio, Pennsylvania Municipal Portfolio, Kansas Tax Free Income Portfolio, California Intermediate-Term Municipal Portfolio, Bainbridge Tax Exempt Portfolio, New York Intermediate-Term Municipal Portfolio, and Pennsylvania Tax Free Portfolio. Additional information pertaining to the Trust may be obtained by writing to SEI Financial Management Corporation, 680 East Swedesford Road, Wayne, Pennsylvania 19087 or by calling 1-800-437-6016. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto.
The Trust pays its expenses, including fees of its service providers, audit, and legal expenses, expenses of preparing prospectuses, proxy solicitation material and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation, and other extraordinary expenses, brokerage costs, interest charges, taxes, and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential management services to the Trust.
Voting Rights Each share held entitles the shareholder of record to one vote. The shareholders of each portfolio or class will vote separately on matters relating solely to that portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Transfer Inquiries Agent, DST Systems, Inc., P.O. Box 419240, Kansas City, Missouri, 64141-6240.
Dividends The net investment income (exclusive of capital gains) of the Portfolio is determined and declared daily as a dividend for shareholders of record as of the close of business on that day. Dividends are paid by the Portfolio in cash or in additional shares at the discretion of the shareholder on the tenth Business Day of each month. If any net capital gains are realized, they will be distributed by the Portfolio annually.
Shareholders automatically receive all income dividends and capital gain distributions in additional shares at the net asset value next determined following the record date, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution.
The dividends on Class D Shares will normally be lower than on Class A shares of the Portfolio because of the additional distribution and transfer agent expenses charged to Class D Shares.
Counsel and Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Independent Arthur Andersen, L.L.P. serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as Custodian of the Trust's assets and acts as wire agent of certain cash of
the Trust. The Custodian holds cash, securities, and other assets of the Trust as required by the Investment Company Act of 1940, as amended (the "1940 Act").
The following is a description of certain of the permitted investments for the Portfolio, and the associated risk factors.
Commercial Commercial Paper is a term used to describe unsecured short- Paper term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligations issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds, issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities.
General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility (tolls from a toll bridge, for example). Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment.
Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which the Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed- upon date. The Custodian will hold the security as collateral for the repurchase agreement. The Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss on the sale of the collateral. The Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
Standby Securities subject to standby commitments or puts permit the Commitmentsand holder thereof to sell the securities at a fixed price prior Puts to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Portfolio owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put. This premium will have the effect of reducing the yield otherwise payable on the underlying security. The Portfolio will limit standby commitment or put transactions to institutions believed to present minimal credit risk.
Variable and Certain of the obligations purchased by the Portfolio may Floating Rate carry variable or floating rates of interest and may involve Instruments a conditional or unconditional demand feature. Such obligations may include variable amount master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly, or at some other interval, and may have a floor or ceiling on interest rate charges. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice period exceeding seven days may be considered illiquid if there is no secondary market for such security.
When-Issued When-issued or delayed delivery transactions involve the and Delayed purchase of an instrument with payment and delivery taking Delivery place in the future. Delivery of and payment for these Securities securities may occur a month or more after the date of the purchase commitment. The Portfolio will maintain with the custodian a separate account with liquid, high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date, and no interest accrues to the Portfolio before settlement. These securities are subject to market fluctuation due to changes in market interest rates, and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although the Portfolio generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, the Portfolio may dispose of a when-issued security or forward commitment prior to settlement if the advisers deem it appropriate to do so.
This Prospectus sets forth concisely information about the above-referenced Portfolios that an investor needs to know before investing. Please read this Prospectus carefully, and keep it on file for future reference.
A Statement of Additional Information dated December 31, 1995 has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087 or by calling 1-800-342-5734. The Statement of Additional Information is incorporated into this Prospectus by reference.
SEI Tax Exempt Trust (the "Trust") is an open-end investment management company, certain classes of which offer financial institutions a convenient means of investing their own funds, or funds for which they act in a fiduciary, agency or custodial capacity, in one or more professionally managed diversified and non-diversified portfolios of securities. A portfolio may offer separate classes of shares that differ from each other primarily in the allocation of certain distribution expenses and minimum investment amounts. This Prospectus offers Class C shares of the Trust's California Tax Exempt Portfolio, a money market portfolio (the "Portfolio").
AN INVESTMENT IN THE PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE CALIFORNIA MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC- CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
1 The Manager has waived, on a voluntary basis, a portion of its fees for the Portfolio. The Management/Advisory fees shown reflect these voluntary waivers. The Manager reserves the right to terminate its waiver at any time in its sole discretion. Absent such fee waivers, Management/Advisory fees for the Portfolio would be .27%. 2 The 12b-1 fees shown reflect the current 12b-1 budget for reimbursement of expenses. The maximum 12b-1 fees payable by Class C of the Portfolio are .80%. 3 Absent the voluntary fee waivers described above, Total Operating Expenses for Class C shares of the Portfolio would be .87%.
An investor in a Portfolio would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period:
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table and example is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors to a Portfolio. A person who purchases shares through a financial institution may be charged separate fees by that institution. The information in the foregoing table and example relates only to Class C shares of the Portfolio. The Portfolio also offers Class A and Class B shares which are subject to the same expenses, except there are different distribution and transfer agent costs. Additional information may be found under "The Manager and Shareholder Servicing Agent," "Distribution" and "The Adviser."
Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD").
The following financial highlights, for a share outstanding throughout each period, have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon was unqualified. This information should be read in conjunction with the Trust's financial statements and notes thereto, which are included in the Trust's Statement of Additional Information and which appear, along with the report of Arthur Andersen LLP, in the Trust's 1995 Annual Report to Shareholders. As of August 31, 1995, the California Intermediate-Term Municipal Portfolio had not commenced operations. Additional performance information is set forth in the 1995 Annual Report to Shareholders which is available upon request and without charge by calling 1-800-342-5734.
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD
/1/ The California Tax Exempt Portfolio--Class C commenced operations on May 11, 1994.
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company that offers units of beneficial interest ("shares") in separate diversified and non-diversified investment portfolios. This Prospectus offers Class C shares of the Trust's California Tax Exempt Portfolio (the "Portfolio"). Shares of the Portfolio may also be purchased through Class A and Class B shares. Each class provides for variation in distribution or transfer agent costs, voting rights, and dividends. Additional information pertaining to the Trust may be obtained by writing to SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-342-5734.
The Portfolio's investment objective is to preserve principal value and maintain a high degree of liquidity while providing current income exempt from federal and, to the extent possible, California state personal income taxes. There can be no assurance that the Portfolio will be able to achieve its investment objective. It is a fundamental policy of the Portfolio to invest, under normal conditions, at least 80% of its net assets in municipal securities that produce interest that, in the opinion of bond counsel, is exempt from federal income tax (collectively, "Municipal Securities"), and the Portfolio will invest, under normal conditions, at least 80% of its net assets in securities the interest on which is not a preference item for purposes of the alternative minimum tax. Under normal conditions, at least 65% of the Portfolio's assets will be invested in municipal obligations the interest on which is exempt from California state personal income tax. These constitute municipal obligations of the state of California and its political subdivisions or municipal authorities and municipal obligations issued by territories or possessions of the United States. The Portfolio may invest, under normal conditions, up to 20% of its net assets in (1) Municipal Securities the interest on which is a preference item for purposes of the alternative minimum tax (although the Portfolio has no present intention of investing in such securities) and (2) taxable investments. In addition, for temporary defensive purposes when its investment adviser determines that market conditions warrant, the Portfolio may invest up to 100% of its assets in municipal obligations of states other than California or taxable money market instruments (including repurchase agreements, U.S. Treasury securities and instruments of certain U.S. commercial banks or savings and loan institutions). The Adviser will not invest more than 25% of Portfolio assets in municipal securities the interest on which is derived from revenues of similar type projects. This restriction does not apply to municipal securities in any of the following categories: public housing authorities; general obligations of states and localities; state and local housing finance authorities or municipal utilities systems.
There could be economic, business, or political developments which might affect all municipal securities of a similar type. To the extent that a significant portion of the Portfolio's assets are invested in municipal securities payable from revenues on similar projects, the Portfolio will be subject to the peculiar risks presented by such projects to a greater extent than it would be if the Portfolio's assets were not so invested. Moreover, in seeking to attain its investment objective the Portfolio may invest all or any part of its assets in municipal securities that are industrial development bonds.
In purchasing obligations, the Portfolio complies with the requirements of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), as that Rule may be amended from time to time. These requirements currently provide that the Portfolio must limit its investments to securities with remaining maturities of 397 days or less, and must maintain a dollar-weighted average maturity of 90 days or less. In addition, the Portfolio may only invest in securities (other than U.S. Government Securities) rated in one of the two highest categories for short-term securities by at least two nationally recognized statistical rating organizations ("NRSROs") (or by one NRSRO if only one NRSRO has rated the security), or, if unrated, determined by the Adviser (in accordance with procedures adopted by the Trust's Board of Trustees) to be of equivalent quality to rated securities in which the Portfolio may invest. Securities rated in the highest rating category (e.g., A- 1 by Standard & Poor's Corporation ("S&P")) by at least two NRSROs (or, if unrated, determined by the Adviser to be of comparable quality) are "first tier" securities. Securities rated in the second highest rating category (e.g., A-2 by S&P) by at least one NRSRO (or, if unrated, determined by the Adviser to be of comparable quality) are considered to be "second tier" securities. Although the Portfolio is governed by Rule 2a-7, its investment policies are more restrictive than those imposed by that Rule. The Portfolio may purchase the following types of municipal obligations, but only if such securities, at the time of purchase, either have the requisite rating or, if not rated, are of comparable quality as determined by the Adviser: (i) municipal bonds rated AA or better by S&P or Aa or better by Moody's; (ii) municipal notes rated at least SP-2 by S&P or MIG-2 or VMIG-2 by Moody's; and (iii) tax- exempt commercial paper rated at least A-2 by S&P or Prime-2 by Moody's. For a description of the Portfolio's permitted investments and ratings, see the "Description of Permitted Investments and Risk Factors" and the Statement of Additional Information.
California Risk Certain risks are inherent in the Portfolio's investments in Factors California municipal securities. These risks result from (1) amendments to the California Constitution and other statutes that limit the taxing and spending authority of California government entities, (2) the general financial condition of the State of California, and (3) a variety of California laws and regulations that may affect, directly or indirectly, California municipal securities. The ability of issuers of municipal securities to pay interest on, or repay principal of, municipal securities may be impaired as a result. A more complete description of these risks is contained in the Statement of Additional Information. The Portfolio's concentration in investments in California municipal securities involves greater risks than if their investments were more diversified. These risks arise from provisions in the California Constitution and other statutes that limit the taxing and spending authority of California governmental entities, as well as from the general financial condition of the State of California.
The investment objective and investment limitations are fundamental policies of the Portfolio. Fundamental policies cannot be changed with respect to the Trust or a Portfolio without the consent of the holders of a majority of the Trust's or the Portfolio's outstanding shares. It is a fundamental policy of the Portfolio to use its best efforts to maintain a constant net asset value of $1.00 per share.
1. Purchase securities of any issuer (except securities issued or guaranteed by the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the total assets of the Portfolio (based on current value at the time of investment) would be invested in the securities of such issuer. This restriction applies to 75% of the Portfolio's assets.
2. Purchase any securities which would cause more than 25% of the total assets of the Portfolio, based on fair market value at the time of such purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the United States Government or its agencies and instrumentalities or to investments in tax-exempt securities issued by governments or political subdivisions of governments.
3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of the total assets of the Portfolio. All borrowings will be repaid before making additional investments and any interest paid on such borrowings will reduce the income of the Portfolio.
The foregoing percentage limitations will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information.
SEI Financial Management Corporation (the "Manager" and the "Transfer Agent"), a wholly-owned subsidiary of SEI Corporation ("SEI"), provides the Trust with overall management services, regulatory reporting, all necessary office space, equipment, personnel and facilities, and serves as institutional transfer agent, dividend disbursing agent, and shareholder servicing agent. For these services, the Manager is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .23% of the average daily net assets of the Portfolio.The Manager has voluntarily agreed to waive a portion of its fees in order to limit the total operating expenses of Class C shares of the Portfolio to not more than .78%, as a percentage of the Portfolio's average daily net assets attributable to Class C shares, on an annualized basis.The Manager reserves the right, in its sole discretion, to terminate its voluntary fee waivers at any time. For the fiscal year ended August 31, 1995, the Portfolio paid management fees, after waivers, of .14% of its average daily net assets.
Weiss, Peck & Greer, L.L.C. (the "Adviser") serves as the Portfolio's investment adviser under an advisory agreement (the "Advisory Agreement") with the Trust. Under the Advisory Agreement, the Adviser invests the assets of the Portfolio, and continuously reviews, supervises and administers the investment programs of the Portfolio. The Adviser is independent of the Manager and SEI and discharges its responsibilities subject to the supervision of, and policies set by, the Trustees of the Trust. The Adviser is a limited liability company founded as a limited partnership in 1970, and engages in investment management, venture capital management and management buyouts. The Adviser has been active since its founding in managing portfolios of tax exempt securities. As of September 30, 1995, total assets under management were approximately $12.5 billion. The principal business address of the Adviser is One New York Plaza, New York, NY 10004. Janet Fiorenza acts as portfolio manager for the Portfolio. Ms. Fiorenza, a Principal of WPG, has been associated with WPG's Tax Exempt Fixed Income group since 1988 and its predecessor since 1980. For its services to the Portfolio, the Adviser is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of .05% of the combined average daily net assets of the money market portfolios of the Trust advised by the Adviser up to $500
million, .04% of such assets from $500 million to 1 billion, and .03% of such assets in excess of $1 billion. Such fees are allocated daily among these portfolios on the basis of their relative net assets. For the fiscal year ended August 31, 1995, the Portfolio paid advisory fees, after waivers, of .04% of its relative net assets.
SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI, serves as each Portfolio's distributor pursuant to a distribution agreement (the "Distribution Agreement") with the Trust. Each Class of the Trust has adopted a distribution plan (the "Class A Plan," "Class B Plan," "Class C Plan" and "Class D Plan," and, collectively, the "Plans") pursuant to Rule 12b-1 under the 1940 Act. Each Plan provides for reimbursement for expenses incurred by the Distributor, in an amount not to exceed .30% of the average daily net assets of each Portfolio on an annualized basis, and provided those expenses are permissible as to both type and amount under a budget adopted by the Board of Trustees, including those who are not interested persons and have no financial interest in the Plan or any related agreement ("Qualified Trustees"). Currently, the budget (shown here as a percentage of daily net assets) for each Portfolio is set at an annual rate of .06% for the California Tax Exempt Portfolio. Distribution-related expenses reimbursable to the Distributor under the budget include those related to the costs of the printing of reports, prospectuses, notices and similar materials for persons other than current shareholders, advertising expenses and promotional and sales expenses including expenses for travel, communication and compensation and benefits for sales personnel. Distribution expenses not attributable to a specific portfolio of the Trust are allocated among each of the portfolios of the Trust based on the basis of their relative average net assets. The Trust is not obligated to reimburse the Distributor for any expenditures in excess of the approved budget. The Class C Plan for the Portfolio, in addition to providing for the reimbursement payments described above, provides for payments to the Distributor at an annual rate of .50%, of the Portfolio's average daily net assets attributable to such Class C shares. This additional payment may be used to compensate financial institutions that provide distribution-related services to their customers. These payments are characterized as "compensation," and are not directly tied to expenses incurred by the Distributor; the payments the Distributor receives during any year may therefore be higher or lower than its actual expenses. These additional payments compensate the Distributor for its services in connection with distribution assistance or the provision of shareholder services, and some or all of it may be used to pay financial institutions and intermediaries such as banks, savings and loan associations, insurance companies, and investment counselors, broker-dealers (including the Distributor's affiliates and subsidiaries) for services or reimbursement of expenses incurred in connection with distribution assistance or the provision of shareholder services. If the Distributor's expenses are less
the Class C Plan, the Trust will still pay the full fee and the Distributor will realize a profit, but the Trust will not be obligated to pay in excess of the full fee, even if the Distributor's actual expenses are higher. It is possible that an institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes. These financial institutions may also charge separate fees to their customers. The Trust may execute brokerage or other agency transactions through the Distributor for which the Distributor may receive compensation. The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs, which will be paid for by the Distributor from the sales charge it receives or from any other source available to it. Under any such program, the Distributor will provide promotional incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to all dealers selling shares of the Portfolio. Such promotional incentives will be offered uniformly to all shares of the Portfolio, and also will be offered uniformly to all dealers, predicated upon the amount of shares of the Portfolio sold by such dealer.
Financial institutions may acquire shares of the Portfolio for their own account, or as a record owner on behalf of fiduciary, agency or custody accounts, by placing orders with the Transfer Agent. Institutions that use certain SEI proprietary systems may place orders electronically through those systems. State securities laws may require banks and financial institutions purchasing shares for their customers to register as dealers pursuant to state laws. Financial institutions which purchase shares for the accounts of their customers may impose separate charges on these customers for account services. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness on the same day. Shares of the Portfolio are offered only to residents of states in which the shares are eligible for purchase. Shares of the Portfolio may be purchased or redeemed on days on which the New York Stock Exchange is open for business ("Business Days"). However, money market fund shares cannot be purchased by Federal Reserve wire on federal holidays restricting wire transfers. Shareholders who desire to purchase shares for cash must place their orders with the Distributor prior to the calculation of net asset value on any Business Day for the order to be accepted on that Business Day. Cash investments must be transmitted or delivered in federal funds to the wire agent by the close of business on the same day the order is placed for the Portfolio. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust or shareholders to accept such purchase order.
The Trust will send shareholders a statement of shares owned after each transaction. The purchase price of shares is the net asset value next determined after a purchase order is received and accepted by the Trust. The purchase price of shares of the Portfolio is expected to remain constant at $1.00. The net asset value per share of the Portfolio is determined by dividing the total value of its investments and other assets, less any liability, by the total outstanding shares of the Portfolio. The Portfolio's investments will be valued by the amortized cost method described in the Statement of Additional Information. Net asset value per share is determined on each Business Day as of 2:00 p.m., Eastern time. The market value of the portfolio security is obtained by the Manager from an independent pricing service. Securities having maturities of 60 days or less at the time of purchase will be valued using the amortized cost method (described in the Statement of Additional Information), which approximates the securities' market value. The pricing service may use a matrix system to determine valuations of equity and fixed income securities. This system considers such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. The pricing service may also provide market quotations. The procedures of the pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Trustees. Portfolio securities for which market quotations are available are valued at the most recently quoted bid price on each Business Day. Shareholders who desire to redeem shares of the Portfolio must place their redemption orders with the Transfer Agent prior to the calculation of net asset value on any Business Day in order to be effective on that day. Otherwise, the redemption orders will be effective on the next Business Day. Payment for redemption orders from the Portfolio received before the calculation of net asset value will be made the same day by transfer of federal funds. The redemption price is the net asset value per share of the Portfolio next determined after receipt by the Transfer Agent of an effective redemption order. Purchase and redemption orders may be placed by telephone. Neither the Trust nor its transfer agent will be responsible for any loss, liability, cost or expense for acting upon wire instructions or upon telephone instructions that it reasonably believes to be genuine. The Trust and its transfer agent will each employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including requiring a form of personal identification prior to acting upon instructions received by telephone and recording telephone instructions. If market conditions are extraordinarily active, or other extraordinary circumstances exist, shareholders may experience difficulties placing redemption orders by telephone, and may wish to consider placing orders by other means.
From time to time the Portfolio may advertise its "current yield" and "effective yield." The Portfolio may also advertise a "tax equivalent yield". These figures are based on historical earnings and are not intended to indicate future performance. The "current yield" refers to the income generated by an investment in the Portfolio over a seven-day period which is then "annualized". That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" (also called "effective compound yield") is calculated similarly but, when annualized, the income earned by an investment in the Portfolio is assumed to be reinvested. The "effective yield" will be slightly higher than the "current yield" because of the compounding effect of this assumed reinvestment. A "tax equivalent yield" is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after-tax equivalent of the Portfolio's yield, assuming certain tax brackets for a shareholder. The Portfolio may periodically compare its performance to that of: (i) other mutual funds tracked by mutual fund rating services (such as Lipper Analytical), financial and business publications and periodicals; (ii) broad groups of comparable mutual funds; (iii) unmanaged indices which may assume investment of dividends but generally do not reflect deductions for administrative and management costs; or (iv) other investment alternatives. The performance on Class A shares of the Portfolio will normally be higher than that on Class B or Class C shares because of the additional distribution expenses charged to Class B and Class C shares.
The following summary of federal and state income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state or local income tax treatment of the Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Additional information concerning taxes is set forth in the Statement of Additional Information.
Tax Status of The Portfolio is treated as a separate entity for federal the Portfolio income tax purposes and is not combined with the Trust's other portfolios. The Portfolio intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so as to be relieved of federal income tax on net investment company taxable income and net capital gain (the excess of net long-term capital gain over net short-term capital loss) distributed to shareholders.
Tax Status of The Portfolio intends to distribute substantially all of its Distributions net investment income (including net short-term capital gain) to shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Portfolio's total assets consists of obligations the interest on which is excludable from gross income, the Portfolio may pay "exempt-interest dividends" to its shareholders. Exempt-interest dividends are excludable from a shareholder's gross income for federal income tax purposes but may have certain collateral federal tax consequences including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information. Any dividends paid out of income realized by the Portfolio on taxable securities will be taxable to shareholders as ordinary income (whether received in cash or in additional shares) to the extent of the Portfolio's earnings and profits and will not qualify for the dividends- received deduction for corporate shareholders. Distributions to shareholders of net capital gains of the Portfolio will be taxable to shareholders as long-term capital gain, whether received in cash or additional shares, and regardless of how long a shareholder has held the shares. Dividends declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in any such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if paid by the Portfolio at any time during the following January. The Portfolio intends to make sufficient distributions prior to the end of each calendar year to avoid liability for federal excise tax applicable to regulated investment companies. Interest on indebtedness incurred or continued by a shareholder in order to purchase or carry shares of the Portfolio is not deductible for federal income tax purposes. Furthermore, the Portfolio may not be an appropriate investment for persons (including corporations and other business entities) who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds. Such persons should consult their tax advisers before purchasing shares. Each Portfolio will report annually to its shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolio during the year to which the dividends relate. Each sale, exchange or redemption of the Portfolio's shares is a taxable transaction to the shareholder.
California The following is a general, abbreviated summary of Taxes certain of the provisions of the California Revenue and Taxation Code presently in effect as they directly govern the taxation of shareholders subject to California personal income tax. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive.
The Portfolio intends to qualify to pay dividends to shareholders that are exempt from California personal income tax ("California exempt-interest dividends"). The Portfolio will qualify to pay California exempt-interest dividends if (1) at the close of each quarter of the Portfolio's taxable year, at least 50 percent of the value of the Portfolio's total assets consists of obligations the interest on which would be exempt from California personal income tax if the obligations were held by an individual ("California Tax Exempt Obligations") and (2) the Portfolio continues to qualify as a regulated investment company. The Portfolio will notify its shareholders of the amount of exempt- interest dividends each year. If the Portfolio qualifies to pay California exempt- interest dividends, dividends distributed to shareholders will be considered California exempt-interest dividends if they meet certain requirements. See the Statement of Additional Information. Corporations subject to California franchise tax that invest in the Portfolio may not be entitled to exclude California exempt-interest dividends from income. Distributions that do not qualify for treatment as California exempt-interest dividends (including those distributions to shareholders taxable as long-term capital gains for federal income tax purposes) will be taxable to shareholders at ordinary income tax rates for California personal income tax purposes to the extent of the Portfolio's earnings and profits. Interest on indebtedness incurred or continued by a shareholder in connection with the purchase of shares of the Portfolio will not be deductible for California personal income tax purposes if the Portfolio distributes California exempt-interest dividends.
The Trust The Trust was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each portfolio. In addition to the Portfolios, the Trust consists of the following portfolios: Tax Free Portfolio, Institutional Tax Free Portfolio, Intermediate-Term Municipal Portfolio, Pennsylvania Municipal Portfolio, Kansas Tax Free Income Portfolio. Bainbridge Tax Exempt Portfolio, California Intermediate-Term Municipal Portfolio, New York Intermediate-Term Municipal Portfolio, and Pennsylvania Tax Free Portfolio. All consideration received by the Trust for shares of any portfolio and all assets of such portfolio belong to that portfolio and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation materials and reports to shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses.
Trustees of the The management and affairs of the Trust are supervised by Trust the Trustees under the laws of the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described above, certain companies provide essential services to the Trust.
Voting Rights Each share held entitles the shareholder of record to one vote. The shareholders of each portfolio or class will vote separately on matters relating solely to that portfolio or class, such as any distribution plan. As a Massachusetts business trust, the Trust is not required to hold annual meetings of shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Reporting The Trust issues unaudited financial statements semi- annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to shareholders of record.
Shareholder Shareholder inquiries should be directed to the Manager. SEI Inquiries Financial Management Corporation, 680 E. Swedesford Road, Wayne, Pennsylvania, 19087.
Dividends The net investment income (exclusive of capital gains) of the Portfolio is distributed in the form of dividends. The Portfolio declares dividends daily, and shareholders of close of each Business Day will be entitled to receive that day's dividend. Dividends are paid by the Portfolio on the first Business Day of each month. If any net capital gains are realized by the Portfolio, they will be distributed annually. Shareholders automatically receive all income dividends and capital gain distributions in additional shares, unless the shareholder has elected to take such payment in cash. Shareholders may change their election by providing written notice to the Manager at least 15 days prior to the distribution. The dividends on Class A shares of the Portfolio are normally higher than those on Class B or Class C shares because of the additional distribution expenses charged to Class B and Class C shares.
Counsel and Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Independent Arthur Andersen LLP serves as the independent public Public accountants of the Trust.
Custodian and CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box Wire Agent 7618, Philadelphia, PA 19101, serves as Custodian of the Trust's assets and acts as wire agent of certain cash of the Trust. The Custodian holds cash, securities and other assets of the Trust as required by the 1940 Act.
The following is a description of certain of the permitted investments for the Portfolios, and the associated risk factors:
Commercial Commercial Paper is a term used to describe unsecured short- Paper term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from one to 270 days.
Municipal Municipal Securities consist of (i) debt obligations issued Securities by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility, tolls from a toll bridge, for example. Certificates of participation represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds.
Repurchase Repurchase Agreements are agreements by which a Portfolio Agreements obtains a security and simultaneously commits to return the security to the seller at an agreed-upon price on an agreed- upon date. The Custodian will hold the security as collateral for the repurchase agreement. The Portfolio bears a risk of loss in the event the other party defaults on its obligations and the Portfolio is delayed or prevented from exercising its right to dispose of the collateral or if the Portfolio realizes a loss on the sale of the collateral. The Portfolio will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the 1940 Act.
Standby Securities subject to standby commitments or puts permit the Commitments and holder thereof to sell the securities at a fixed price prior Puts to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Portfolio owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Portfolio will limit standby commitment or put transactions to institutions believed to present minimal credit risk.
Variable and Certain of the obligations purchased by the Portfolio may Floating Rate carry variable or floating rates of interest and may involve Instruments a conditional or unconditional demand feature. Such obligations may include variable amount master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or at some other interval, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice period exceeding seven days may be considered illiquid if there is no secondary market for such security.
When-Issued and When-issued or delayed delivery transactions involve the Delayed purchase of an instrument with payment and delivery taking Delivery place in the future. Delivery of and payment for these Securities securities may occur a month or more after the date of the purchase commitment. The Portfolio will maintain with the custodian a separate account with liquid, high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date, and no interest accrues to the Portfolio before settlement. These securities are subject to market fluctuation due to changes in market interest rates, and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although a Portfolio generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, a Portfolio may dispose of a when-issued security or forward commitment prior to settlement if the Adviser deems it appropriate to do so.
MANAGER AND SHAREHOLDER SERVICING AGENT:
MORGAN GRENFELL CAPITAL MANAGEMENT INCORPORATED INTRUST BANK, N.A.
WEISS, PECK & GREER ADVISERS, INC.
STANDISH, AYER & WOOD, INC.
This Statement of Additional Information is not a Prospectus. It is intended to provide additional information regarding the activities and operations of SEI Tax Exempt Trust (the "Trust") and should be read in conjunction with the Trust's Prospectuses dated December 31, 1995. Prospectuses may be obtained by writing the Trust's distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658, or by calling 1-800-342-5734.
DESCRIPTION OF PERMITTED INVESTMENTS...................................... S-2 THE MANAGER AND SHAREHOLDER SERVICING AGENT............................... S-17 TRUSTEES AND OFFICERS OF THE TRUST........................................ S-24 DETERMINATION OF NET ASSET VALUE.......................................... S-29 PURCHASE AND REDEMPTION OF SHARES......................................... S-30 LIMITATION OF TRUSTEES' LIABILITY......................................... S-39
SEI Tax Exempt Trust (the "Trust") is an open-end management investment company established as a Massachusetts business trust pursuant to a Declaration of Trust dated March 15, 1982. The Declaration of Trust permits the Trust to offer separate series ("portfolios") of units of beneficial interest ("shares") and separate classes of portfolios. This Statement of Additional Information relates to the following portfolios: Tax Free, Institutional Tax Free, California Tax Exempt, Intermediate-Term Municipal, Pennsylvania Municipal, Pennsylvania Tax Free, Kansas Tax Free Income, and New York Intermediate-Term Municipal Portfolios (each a "Portfolio," and collectively, the "Portfolios"), and any different classes of the Portfolios. Except for differences between the Class A, Class B, Class C and Class D shares of any Portfolio pertaining to sales loads, distribution plans, transfer agency costs, voting rights and dividends, each share of each Portfolio represents an equal proportionate interest in that Portfolio with each other share of that Portfolio.
BANKERS' ACCEPTANCES - a bill of exchange or time draft drawn on and accepted by a commercial bank. It is used by corporations to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
CERTIFICATES OF DEPOSIT - a negotiable interest bearing instrument with a specific maturity. Certificates of deposit are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit have penalties for early withdrawal.
INVESTMENT COMPANY SHARES - Each Portfolio may invest in shares of other investment companies, to the extent permitted by applicable law and subject to certain restrictions. These investment companies typically incur fees that are separate from those fees incurred directly by the Portfolio. A Portfolio's purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying Portfolio expenses. Under applicable regulations, a Portfolio is prohibited from acquiring the securities of another investment company if, as a result of such acquisition: (1) the Portfolio owns more than 3% of the total voting stock of the other company; (2) securities issued by any one investment company represent more than 5% of the Portfolio's total assets; or (3) securities (other than treasury stock) issued by all investment companies represent more than 10% of the total assets of the Portfolio. See also "Investment Limitations."
It is the position of the staff of the Securities and Exchange Commission ("SEC") that certain nongovernmental issuers of collateralized mortgage obligations constitute investment companies pursuant to the Investment Company Act of 1940 (the "1940 Act"), and either (a) investments in such instruments are subject to the limitations set forth above or (b) the issuers of such instruments have received orders from the SEC exempting such instruments from the definition of investment company.
MUNICIPAL LEASES -- Each Portfolio may invest in instruments, or participations in instruments, issued in connection with lease obligations or installment purchase contract obligations of municipalities ("municipal lease obligations"). Although municipal lease obligations do not constitute general obligations of the issuing municipality, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate funds for, and make the payments due under the lease obligation. However, certain lease obligations contain "non-appropriation" clauses, which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose in the relevant years. Municipal lease obligations are a relatively new form of financing, and the market for such obligations is still developing. Municipal leases will be treated as liquid only if they satisfy criteria set forth in guidelines established by the Board of Trustees, and there can be no assurance that a market will exist or continue to exist for any municipal lease obligation.
MUNICIPAL NOTES consist of general obligation notes, tax anticipation notes (notes sold to finance working capital needs of the issuer in anticipation of receiving taxes on a future date), revenue anticipation notes (notes sold to provide needed cash prior receipt of expected non-tax revenues from a specific source), bond anticipation notes, tax and revenue anticipation notes, certificates of indebtedness, demand notes, and construction loan notes. The maturities of the instruments at the time of issue will generally range from three months to one year.
MUNICIPAL BONDS are debt obligations issued to obtain funds for various public purposes. A Portfolio may purchase private activity or industrial development bonds if the interest paid is exempt from federal income tax. These bonds are issued by or on behalf of public authorities to raise money to finance various privately-owned or -operated facilities for business and manufacturing, housing, sports, and pollution control. These bonds are also used to finance public facilities such as airports, mass transit systems, ports, parking or sewage or solid waste disposal facilities, as well as certain other categories. The payment of the principal and interest on such bonds is dependent solely on the ability of the facility's user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment.
RECEIPTS - interests in separately traded interest and principal component parts of U.S. Government obligations that are issued by banks or brokerage firms and are created by depositing U.S. Government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. Receipts include "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury Securities" ("CATS"). TIGRs and CATS are interests in private proprietary accounts while TRs and STRIPS (see "U.S. Treasury Obligations") are interests in accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon securities; for more information, see "Zero Coupon Securities."
REPURCHASE AGREEMENTS - agreements under which securities are acquired from a securities dealer or bank subject to resale on an agreed upon date and at an agreed upon price which includes principal and interest. The Portfolio involved bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Portfolio is delayed or prevented from exercising its rights to dispose of the collateral securities. The Advisers enter into repurchase agreements only with financial institutions which they deem to present minimal risk of bankruptcy during the term of the agreement based on guidelines which are periodically reviewed by the Board of Trustees. These guidelines currently permit the Portfolios to enter into repurchase agreements only with approved banks and primary securities dealers, as recognized by the Federal Reserve Bank of New York, which have minimum net capital of $100 million, or with a member bank of the Federal Reserve System. Repurchase agreements are considered to be loans collateralized by the underlying security. Repurchase agreements entered into by the Portfolios will provide that the underlying security at all times shall have a value at least equal to 102% of the price stated in the agreement. This underlying security will be marked to market daily. The Advisers monitor compliance with this requirement. Under all repurchase agreements entered into by the Portfolios, the Custodian or its agent must take possession of the underlying collateral. However, if the seller defaults, the Portfolios could realize a loss on the sale of the underlying security to the extent the proceeds of the sale are less than the resale price. In addition, even though the Bankruptcy Code provides protection for most repurchase agreements, if the seller should be involved in bankruptcy or insolvency proceedings, the Portfolios may incur delays and costs in selling the security and may suffer a loss of principal and interest if the Portfolios are treated as unsecured creditors.
STANDBY COMMITMENTS-PUT TRANSACTIONS - The Portfolios reserve the right to engage in put transactions. The Advisers have the authority to purchase securities at a price which would result in a yield to maturity lower than that generally offered by the seller at the time of purchase when the Portfolios can simultaneously acquire the right to sell the securities back to the seller, the issuer, or a third party (the "writer") at an agreed-upon price at any time during a stated period or on a certain date. Such a right is generally denoted as a "standby commitment" or a "put". The purpose of engaging in transactions involving puts is to maintain flexibility and liquidity to permit the Portfolios to meet redemptions and remain as fully invested as possible in municipal securities. The right to put the securities depends on the writer's ability to pay for the securities at the time the put is exercised. The Portfolios would limit their put transactions to institutions which the Adviser believes present minimum credit risks, and the Adviser would use its best efforts to initially determine and continue to monitor the financial strength of the sellers of the options by evaluating their financial statements and such other information as is available in the marketplace. It may, however, be difficult to monitor the financial strength of the writers because adequate current financial information may not be available. In the event that any writer is unable to honor a put for financial reasons, a Portfolio would be a general creditor (i.e., on a parity with all other unsecured creditors) of the writer. Furthermore, particular provisions of the contract between a Portfolio and the writer may excuse the writer from repurchasing the securities; for example, a change in the published rating of the underlying securities or any similar event that has an adverse effect on the issuer's credit or a provision in the contract that the put will not be exercised except in certain special cases, for example, to maintain portfolio liquidity. A Portfolio could, however, at any time sell the underlying portfolio security in the open market or wait until the portfolio security matures, at which time it should realize the full par value of the security.
The securities purchased subject to a put, may be sold to third persons at any time, even though the put is outstanding, but the put itself, unless it is an integral part of the security as originally issued, may not be marketable or otherwise assignable. Therefore, the put would have value only to the Portfolio. Sale of the securities to third parties or lapse of time with the put unexercised may terminate the right to put the securities. Prior to the expiration of any put option, a Portfolio could seek to negotiate terms for the extension of such an option. If such a renewal cannot be negotiated on terms satisfactory to the Portfolio, the Portfolio could, of course, sell the security. The maturity of the underlying security will generally be different from that of the put. The Intermediate-Term Municipal, Pennsylvania Municipal and Kansas Tax Free Income Portfolios will consider the "maturity" of a security subject to a put to be the first date on which it has the right to demand payment from the writer of the put although the final maturity of the security is later than such date.
The Trust has received a private letter ruling from the Internal Revenue Service that, to the extent it purchases securities subject to the right to put them back to the seller in order to maintain liquidity to meet redemption requirements, it will be treated as the owner of those securities for federal income tax purposes. No assurance can be given that legislative, judicial or administrative changes may not be forthcoming which could modify the Trust's private letter ruling.
TIME DEPOSITS - a non-negotiable receipt issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty are considered to be illiquid securities.
U.S. GOVERNMENT AGENCY OBLIGATIONS - agencies of the United States Government which issue obligations consist of, among others, Farmers Home Administration, Federal Farm Credit System, Federal Housing
Administration, Government National Mortgage Association, Maritime Administration, Small Business Administration, and The Tennessee Valley Authority. The Portfolios may purchase securities issued or guaranteed by the Government National Mortgage Association which represent participations in Veterans Administration and Federal Housing Administration backed mortgage pools. Obligations of instrumentalities of the United States Government include securities issued by, among others, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal Land Banks, Federal National Mortgage Association and the United States Postal Service. Some of these securities are supported by the full faith and credit of the United States Treasury (e.g., Government National Mortgage Association), others are supported by the right of the issuer to borrow from the Treasury and still others are supported only by the credit of the instrumentality (e.g., Federal National Mortgage Association). Guarantees of principal by agencies or instrumentalities of the U.S. Government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing the value of the obligation prior to maturity.
U.S. TREASURY OBLIGATIONS - bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the Federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS"). No Portfolio may actively trade STRIPS. STRIPS are sold as zero coupon securities; for more information, see "Zero Coupon Securities."
WHEN-ISSUED SECURITIES - These securities involve the purchase of debt obligations on a when-issued basis, in which case delivery and payment normally take place within 45 days after the date of commitment to purchase. The Portfolios will only make commitments to purchase obligations on a when-issued basis with the intention of actually acquiring the securities, but may sell them before the settlement date. The when-issued securities are subject to market fluctuation, and no interest accrues to the purchaser during this period. The payment obligation and the interest rate that will be received on the securities are each fixed at the time the purchaser enters into the commitment. Purchasing obligations on a when-issued basis is a form of leveraging and can involve a risk that the yields available in the market when the delivery takes place may actually be higher than those obtained in the transaction itself. In that case there could be an unrealized loss at the time of delivery.
Segregated accounts will be established with the Custodian and will maintain liquid assets in an amount at least equal in value to the Portfolios' commitments to purchase when-issued securities. If the value of these assets declines, the Portfolios will place additional liquid assets in the account on a daily basis so that the value of the assets in the account is equal to the amount of such commitments.
ZERO COUPON SECURITIES - STRIPS and Receipts (TRs, TIGRs and CATS) are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accredited over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities. See also "Taxes."
MUNICIPAL NOTE RATINGS. A Standard & Poor's Corporation ("S&P") note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
Amortization schedule (the larger the final maturity relative to other maturities the more likely it will be treated as a note).
Source of Payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc. ("Moody's") highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-1. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing or both. Municipal obligations rated MIG-2 and VMIG-2 are high quality. Margins of protection are ample although not so large as in the preceding group.
MUNICIPAL AND CORPORATE BOND RATINGS. Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high- quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degrees.
Bonds rated A by S&P have a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories.
Bonds which are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins or protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A by Moody's possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa by Moody's are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
COMMERCIAL PAPER RATINGS. Commercial paper rated A by S&P is regarded by S&P as having the greatest capacity for timely payment. Issues rated A are further refined by use of the numbers 1+, 1, 2 and 3 to indicate the relative degree of safety, issues rated A-1+ are those with an "overwhelming degree" of credit protection. Those rated A-1 reflect a "very strong" degree of safety regarding timely payment. Those rated A-2 reflect a "satisfactory" degree of safety regarding timely payment.
Commercial paper issuers rated Prime-1 or Prime-2 by Moody's are judged by Moody's to be of "superior" quality and "strong" quality, respectively, on the basis of relative repayment capacity.
1. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding 10% of the value of total assets. The California Tax Exempt Portfolio has a fundamental policy that to the extent such borrowing exceeds 5% of the value of the Portfolio's total assets, borrowing will be done from a bank and in accordance with the requirements of the 1940 Act. This borrowing provision is included solely to facilitate the orderly sale of portfolio securities to accommodate heavy redemption requests if they should occur and is not for investment purposes. All borrowings of the Portfolios, in excess of 5% of its total assets, will be repaid before making additional investments and any interest paid on such borrowings will reduce income.
2. Purchase securities of other investment companies except that the Intermediate-Term Municipal, Pennsylvania Municipal, Pennsylvania Tax Free, and Kansas Tax Free Income Portfolios may only purchase securities of money market funds and the New York Intermediate-Term Municipal Portfolio may purchase securities of other investment companies, in either case, as permitted by the 1940 Act and the rules and regulations thereunder.
3. Make loans, except that any Portfolio may purchase or hold debt instruments in accordance with its investment objective and policies and may enter into repurchase agreements, provided that repurchase agreements maturing in more than seven days, restricted securities and other illiquid securities are not to exceed, in the aggregate, 10% of the Portfolio's net assets, except for the Intermediate-Term Municipal and New York Intermediate-Term Municipal Portfolios for which it cannot exceed 15% of the Portfolio's net assets.
4. Pledge, mortgage or hypothecate assets except to secure temporary borrowings permitted by (1) above in aggregate amounts not to exceed 10% of the net assets of such Portfolio taken at current value at the time of the incurrence of such loan.
5. Invest in companies for the purpose of exercising control.
6. Acquire more than 10% of the voting securities of any one issuer.
7. Purchase or sell real estate, real estate limited partnership interests, commodities or commodities contracts including futures contracts. However, subject to its permitted investments, any Portfolio may invest in municipal securities or other obligations secured by real estate or other interests therein.
8. Make short sales of securities, maintain a short position or purchase securities on margin, except that the Portfolio may obtain short-term credits as necessary for the clearance of security transactions.
9. Act as an underwriter of securities of other issuers except as it may be deemed an underwriter in selling a portfolio security.
10. Issue senior securities (as defined in the 1940 Act) except in connection with permitted borrowings as described in the Prospectuses and this Statement of Additional Information or as permitted by rule, regulation or order of the SEC.
11. Purchase or retain securities of an issuer if, to the knowledge of the Trust, an officer, trustee, partner or director of the Trust or any investment adviser of the Trust owns beneficially more than 1/2 of 1% of the shares or securities of such issuer and all such officers, trustees, partners and directors owning more than 1/2 of 1% of such shares or securities together own more than 5% of such shares or securities.
12. Purchase securities of any company which has (with predecessors) a record of less than three years continuing operations (except (i) obligations issued or guaranteed by the United States Government, its agencies or instrumentalities, or (ii) municipal securities which are rated by at least two nationally recognized municipal bond rating services or determined by the Adviser to be of "high quality") if, as a result, more than 5% of the total assets (taken at current value) would be invested in such securities.
13. Purchase warrants, calls, straddles, spreads or combinations thereof, except as permitted by its Prospectus and this Statement of Additional Information.
14. Invest in interests in oil, gas or other mineral exploration or development programs. The Institutional Tax Free Portfolio, the Kansas Tax Free Income Portfolio and the California Tax Exempt Portfolio may not invest in oil, gas or mineral leases.
15. Invest more than 25% of total assets in issues within the same state or similar type projects (except in specified categories). This investment limitation applies to the Intermediate-Term Municipal Portfolio, Tax Free Portfolio, Institutional Tax Free Portfolio, and Pennsylvania Municipal Portfolio. For the Pennsylvania Municipal Portfolio, this limitation does not apply to the extent stated in its investment objective and policies.
The foregoing percentages will apply at the time of the purchase of a security. These investment limitations and the investment limitations in each Prospectus are fundamental policies of the Trust and may not be changed without shareholder approval, except that for the Kansas Tax Free Income Portfolio and New York Intermediate-Term Municipal Portfolio investment limitations 2, 4, 8, 11, 12, 13 and 14 are not fundamental and do not require shareholder approval to be amended. It is a fundamental policy of the Intermediate-Term Municipal and Pennsylvania Municipal Portfolios to abide by the maturity restrictions and to invest solely in the permitted investments described in this Statement of Additional Information and in their respective Prospectuses.
The following information constitutes only a brief summary, and is not intended as a complete description.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
The ability of issuers to pay interest on, and repay principal of, California municipal securities ("California Municipal Securities") may be affected by (1) amendments to the California Constitution and related statutes that limit the taxing and spending authority of California government entities, and related civil actions, (2) a wide variety of California laws and regulations, and (3) the general financial condition of the State of California.
AMENDMENTS TO THE CALIFORNIA CONSTITUTION AND RELATED STATUTES. Certain of the California Municipal Securities may be obligations of issuers who rely in whole or in part on ad valorem real property taxes as a source of revenue. On June 6, 1978, California voters approved an amendment to the California Constitution known as Proposition 13, which added Article XIIIA to the California Constitution. The effect of Article XIIIA is to limit ad valorem taxes on real property, and to restrict the ability of taxing entities to increase real property tax revenues. On November 7, 1978, California voters approved Proposition 8, and on June 3, 1986, California voters approved Proposition 46, both of which amended Article XIIIA. Article XIIIA may require further interpretation by both the Legislature and the courts to determine its applicability to specific situations involving the State and local taxing authorities.
OTHER RELEVANT CALIFORNIA LAWS. A wide variety of California laws and regulations may affect, directly or indirectly, the payment of interest on, or the repayment of the principal of, California Municipal Securities in which the Portfolio may invest. The impact of such laws and regulations on particular California Municipal Securities may vary depending upon numerous factors including, among others, the particular type of Municipal Security involved, the public purpose funded by the Municipal Security and the nature and extent of insurance or other security for payment of principal and interest on the Municipal Security. For example, California Municipal Securities which are payable only from the revenues derived from a particular facility may be adversely affected by California laws or regulations which make it more difficult for the particular facility to generate revenues sufficient to pay such interest and principal, including, among others, laws and regulations which limit the amount of fees, rates or other charges which may be imposed for use of the facility or which increase competition among facilities of that type or which limit or otherwise have the effect of reducing the use of such facilities generally, thereby reducing the revenues generated by the particular facility. California Municipal Securities, the payment of interest and principal on which is insured in whole or in part by a California governmentally created fund, may be adversely affected by California laws or regulations which restrict the aggregate insurance proceeds available for payment of principal and interest in the event of a default on such Municipal Securities.
THE GENERAL FINANCIAL CONDITION OF THE STATE OF CALIFORNIA. Since the start of the 1990-91 Fiscal Year, the State has faced the worst economic, fiscal, and budget conditions since the 1930s. Construction, manufacturing (especially aerospace), exports and financial services, among others, have all been severely affected.
The recession has seriously affected State tax revenues, which basically mirror economic conditions. It also caused increased expenditures for health and welfare programs. The State has been facing a structural imbalance in its budget with the largest programs supported by the General Fund - K-12 schools and community colleges, health and welfare, and corrections - growing at rates significantly higher than the growth rates for the principal revenue sources of the General Fund. As a result, the State has experienced recurring budget deficits.
ADDITIONAL CONSIDERATIONS. With respect to Municipal Securities issued by the State of California and its political subdivisions, as well as certain other governmental issuers such as the Commonwealth of Puerto Rico, the Trust cannot predict what legislation, if any, may be proposed in the California State Legislature as regards the California State personal income tax status of interest on such obligations, or which proposals, if any, might be enacted. Such proposals, if enacted, might materially adversely affect the availability of California Municipal Securities for investment by the Portfolios and the value of the Portfolios' investments.
SPECIAL CONSIDERATIONS RELATING TO KANSAS MUNICIPAL SECURITIES
STATE DEBT. The State does not issue general obligation debt but has issued certificates of participation which are subject to annual legislative appropriation. The State has also issued revenue bonds for the Highway and Turnpike systems, for various Regents system higher education facilities and for various state agency projects.
LOCAL GOVERNMENT DEBT. Local government in Kansas consists of numerous individual units. Each unit is distinct and independent of other local units, although they may overlap geographically. These various local governmental units are empowered by statute to issue general obligation and/or revenue supported debt. The degree to which overlapping debt exists will vary considerably across the state and is a factor in evaluating the risk involved in a given bond issue. Debt can be levied by counties, cities or townships, schools and districts (e.g., fire, sewer, rural water, drainage, etc.). The county treasurer is authorized to collect for and remit to the various issuers in the county the tax receipts due.
TAX LAW CHANGES. The State Legislature passed a statute that made all Kansas bond issues dated after December 31, 1987 exempt from Kansas income taxes. Prior to the passage of that statute only certain issues, primarily state and industrial development revenue bonds were exempt from Kansas income tax. This change in the law has made the Kansas municipal bond market more homogenous and deeper rather than segmented by tax status, as was the case previously. The change has increased the number and amount of high quality, rated issues available in the Kansas income tax-exempt market. The Legislature could change the situation by reverting to a narrower base of Kansas income tax-exempt issues, perhaps in response to budgetary constraints. This would make it more difficult for the Kansas Tax Free Income Portfolio to invest in Kansas income tax-exempt issues and would likely decrease the yield on the Portfolio's subsequent purchases.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES
REVENUES AND EXPENDITURES. New York's Governmental Funds receive a majority of their revenues from taxes levied by the State. Investment income, fees and assessments, abandoned property collections, and other varied sources supply the balance of the receipts for these Funds. New York's major expenditures are grants to local governments. These grants include disbursements for elementary, secondary and higher education, social services, drug abuse control, and mass transportation programs.
STATE DEBT. Under the State Constitution, the State may not, with limited exceptions for emergencies, undertake long term borrowing (i.e., borrowing for more than one year) unless the borrowing is authorized in a specific amount for a single work or purpose by the Legislature and approved by the voters. There is no limitation on the amount of long term debt that may be so authorized and subsequently incurred by the State. The State may undertake short term borrowings without voter approval (i) in the anticipation of the receipt of taxes and revenues, by issuing tax and revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds from the sale of duly authorized but unissued bonds, by issuing bond anticipation notes. The State Constitution provides that the State may guarantee the repayment of certain borrowings to carry out designated projects by the New York State Thruway Authority, the Job Development Authority and the Port Authority of New York and New Jersey.
NEW YORK CITY. The fiscal health of the State is closely related to the fiscal health of its localities, particularly the City, which has required and continues to require significant financial assistance from the State.
SPECIAL CONSIDERATIONS RELATING TO PENNSYLVANIA MUNICIPAL SECURITIES
REVENUES AND EXPENDITURES. The Constitution of Pennsylvania provides that operating budget appropriations may not exceed the estimated revenues and available surplus in the fiscal year for which funds are appropriated. Annual budgets are enacted for the General Fund and for certain special revenue funds which represent the majority of expenditures of the Commonwealth. Pennsylvania's Governmental Funds receive a majority of their revenues from taxes levied by the Commonwealth. Interest earnings, licenses and fees, lottery ticket sales, liquor store profits, miscellaneous revenues, augmentations and federal government grants supply the balance of the receipts of these funds. Revenues not required to be deposited in another fund are deposited in the General Fund. Pennsylvania's major expenditures include funding for education and public health and human services.
COMMONWEALTH DEBT. Current constitutional provisions permit Pennsylvania to issue the following types of debt: (i) debt to suppress insurrection or rehabilitate areas affected by disaster, (ii) electorate approved debt, (iii) debt for capital projects subject to an aggregate debt limit of 1.75 times the annual average tax revenues of the preceding five fiscal years and (iv) tax anticipation notes payable in the fiscal year of issuance. All debt except tax anticipation notes must be amortized in substantial and regular amounts.
Pennsylvania engages in short-term borrowing to fund expenses within a fiscal year through the sale of tax anticipation notes which must mature within the fiscal year of issuance. The principal amount issued, when added to that already outstanding, may not exceed in the aggregate 20% of the revenues estimated to accrue to the appropriate fund in the fiscal year. The Commonwealth is not permitted to fund deficits between fiscal years with any form of debt. All year- end deficit balances must be funded within the succeeding fiscal year's budget. Pending the issuance of bonds, Pennsylvania may issue bond anticipation notes subject to the applicable statutory and constitutional limitations generally imposed on bonds. The term of such borrowings may not exceed three years. The Commonwealth currently has no bond anticipation notes outstanding.
STATE-RELATED OBLIGATIONS. Certain state-created agencies have statutory authorization to incur debt for which legislation providing for state appropriations to pay debt service thereon is not required. The debt of these agencies is supported by assets of, or revenues derived from, the various projects financed and the debt of such agencies is not an obligation of Pennsylvania although some of the agencies are indirectly dependent on Commonwealth appropriations.
LOCAL GOVERNMENT DEBT. Local government in Pennsylvania consists of numerous individual units. Each unit is distinct and independent of other local units, although they may overlap geographically. There is extensive general legislation applying to local government. Municipalities may also issue revenue obligations without limit and without affecting their general obligation borrowing capacity if the obligations are projected to be paid solely from project revenues. Municipal authorities and industrial development authorities are also widespread in Pennsylvania. An authority is organized by a municipality acting singly or jointly with another municipality and is governed by a Board appointed by the governing unit of the creating municipality or municipalities. Typically, authorities are established to acquire, own and lease or operate one or more projects and to borrow money and issue revenue bonds to finance them.
The Trust is not prohibited from investing in obligations of banks which are clients of SEI Corporation ("SEI"). However, the purchase of shares of the Trust by them or by their customers will not be a consideration in determining which bank obligations the Trust will purchase. The Trust will not purchase obligations of any of the Advisers to the Trust. Distributions by a Portfolio out of income from taxable securities will generally be taxable to shareholders of such Portfolio as ordinary income.
THE MANAGER AND SHAREHOLDER SERVICING AGENT
The Management Agreement provides that SEI Financial Management Corporation (the "Manager") shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Management Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Manager in the performance of its duties or from reckless disregard of its duties and obligations thereunder.
The continuance of the Management Agreement must be specifically approved at least annually (i) by the vote of a majority of the Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio, and
(ii) by the vote of a majority of the Trustees of the Trust who are not parties to the Management Agreement or an "interested person" (as that term is defined in the 1940 Act) of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Management Agreement is terminable at any time as to any Portfolio without penalty by the Trustees of the Trust, by a vote of a majority of the outstanding shares of the Portfolio or by the Manager on not less than 30 days nor more than 60 days written notice.
The Manager, a wholly-owned subsidiary of SEI, was organized as a Delaware corporation in 1969 and has its principal business offices at 680 East Swedesford Road, Wayne, PA 19087. Alfred P. West, Jr., Henry H. Greer and Carmen V. Romeo constitute the Board of Directors of the Manager. Mr. West serves as the Chairman of the Board of Directors and Chief Executive Officer of the Manager and of SEI. Mr. Greer serves as President and Chief Operating Officer of the Manager and of SEI. SEI and its subsidiaries are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors and money managers. The Manager also serves as manager/administrator to these other mutual funds: The Achievement Funds Trust; The Advisors' Inner Circle Fund; The Arbor Fund; Bishop Street Funds; The Compass Capital Group; Conestoga Family of Funds; CoreFunds, Inc.; CrestFunds, Inc.; CUFund; First American Funds, Inc.; First American Investment Funds, Inc.; FFB Lexicon Funds; Insurance Investment Products Trust; Inventor Funds, Inc.; Marquis/sm/ Funds; Morgan Grenfell Investment Trust; The Pillar Funds; The PBHG Funds, Inc.; Rembrandt Funds(R); SEI Daily Income Trust; SEI Index Funds; SEI Institutional Managed Trust; SEI International Trust; SEI Liquid Asset Trust; 1784 Funds; Stepstone Funds; STI Classic Funds; and STI Classic Variable Trust.
For the fiscal years ended August 31, 1993, 1994 and 1995, the Portfolios paid management fees as follows:
*Not in operation during the period.
Each Advisory Agreement provides that each Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
The continuance of each Advisory Agreement after the first two (2) years must be specifically approved at least annually (i) by the vote of a majority of the outstanding shares of that Portfolio or by the Trustees, and (ii) by the vote of a majority of the Trustees who are not parties to such Advisory Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. Each Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to a Portfolio, by a majority of the outstanding shares of that Portfolio, on not less than 30 days nor more than 60 days written notice to the Adviser, or by the Adviser on 90 days written notice to the Trust.
For the fiscal years ended August 31, 1993, 1994 and 1995, the Portfolios paid advisory fees as follows:
*Not in operation during the period.
The Trust has adopted a Distribution Plan for Class A, Class B, Class C and Class D shares of the Portfolios (the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act which regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. In this regard, the Board of Trustees has determined that the Plans and the Distribution Agreement are in the best interests of the shareholders. Continuance of the Plans must be approved annually by a majority of the Trustees of the Trust and by a majority of the trustees who are not "interested persons" of the Trust as that term is defined in the 1940 Act and who have no direct or indirect financial interest in the operation of a Distribution Plan or in any agreements related thereto ("Qualified Trustees"). The Plans require that quarterly written reports of amounts spent under the Plans and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Plans may not be amended to increase materially the amount which may be spent thereunder without approval by a majority of the outstanding shares of the Portfolio or class affected. All material amendments of the Plans will require approval by a majority of the Trustees of the Trust and of the Qualified Trustees.
The Distribution Agreement and the Class A, Class B and Class C Distribution Plans provide for reimbursement for expenses incurred by the Distributor in an amount not to exceed .30% of the Portfolio's average daily net assets on an annualized basis provided those expenses are permissible as to both type and amount under a budget. The budget must be approved and monitored quarterly by the Trustees including Qualified Trustees. The Class B and Class C Plans provide for additional payments for distribution and shareholder services as described below.
The Class B and Class C Plans, in addition to providing for the reimbursement payments described above, provide for payments to the Distributor at an annual rate of .30% of the Class B average daily net assets and .50% of the Class C average daily net assets. These additional payments are characterized as "compensation," and are not directly tied to expenses incurred by the Distributor; the payments the Distributor receives during any year may therefore be higher or lower than its actual expenses. The Distributor may use these additional payments to compensate Class B and Class C shareholders that are institutions that provide administrative services to their customers. These institutions may also charge separate fees for these and related services. It is possible that an institution may offer different classes of shares to its customers and thus receive compensation with respect to different classes. Certain Class B and Class C shareholders offering shares to their customers may be required to register as dealers pursuant to state laws.
The Class D Distribution Plan adopted by the Class D shareholders provides that the Trust will pay the Distributor a fee of up to .30% of the average daily net assets of the Portfolios' Class D shares and a fee of up to .25% of the Tax Free, California Tax Exempt and Pennsylvania Tax Free Portfolios, which the Distributor can use to compensate broker-dealers and service providers, including SEI Financial Services Company and its affiliates which provide distribution related services to Class D shareholders or their customers who beneficially own Class D shares. The Class D Plan provides that, if there is more than one portfolio of the Trust having a Class D class, expenses incurred pursuant to the Class D Plan will be allocated among such several portfolios of the Trust on the basis of their relative net asset values, unless otherwise determined by a majority of the Qualified Trustees.
For the fiscal year ended August 31, 1995, the Portfolios paid the following amounts pursuant to the Distribution Plans:
*Not in operation during the period.
The distribution-related services that may be provided under the Plans include establishing and maintaining customer accounts and records; aggregating and processing purchase and redemption requests from customers; placing net purchase and redemption orders with the Distributor; automatically investing customer account cash balances; providing periodic statements to customers; arranging for wires; answering customer inquiries concerning their investments; assisting customers in changing dividend options, account designations, and addresses; performing sub-accounting functions; processing dividend payments from the Trust on behalf of customers; and forwarding shareholder communications from the Trust (such as proxies, shareholder reports, and dividend distribution, and tax notices) to these customers with respect to investments in the Trust. Certain state securities laws may require those financial institutions providing such distribution services to register as dealers pursuant to state law.
Except to the extent that the Manager or Advisers benefitted through increased fees from an increase in the net assets of the Trust which may have resulted in part from the expenditures, no interested person of the Trust nor any Trustee of the Trust who is not an interested person of the Trust had a direct or indirect financial interest in the operation of the Distribution Plans or related agreements.
For the fiscal years ended August 31, 1993, 1994 and 1995, the aggregate sales charges payable to the Distributor with respect to the Class D shares were as follows:
*Not in operation during the period.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and executive officers of the Trust and their principal occupations for the last five years are set forth below. Each may have held other positions with the named companies during that period. Unless otherwise noted, the business address of each Trustee and executive officer is SEI Financial Management Corporation, 680 East Swedesford Road, Wayne, PA 19087. Certain trustees and officers of the Trust also serve as trustees and officers of some or all of the following: The Achievement Funds Trust; The Advisors' Inner Circle Fund; The Arbor Fund; Bishop Street Funds; The Compass Capital Group; Conestoga Family of Funds; CoreFunds, Inc.; CrestFunds, Inc.; CUFund; First American Funds, Inc.; First American Investment Funds, Inc.; FFB Lexicon Funds; Insurance Investment Products Trust; Inventor Funds, Inc.; Marquis/sm/ Funds; Morgan Grenfell Investment Trust; The Pillar Funds; The PBHG Funds, Inc.; Rembrandt Funds(R); SEI Daily Income Trust; SEI Index Funds; SEI Institutional Managed Trust; SEI International Trust; SEI Liquid Asset Trust; 1784 Funds; Stepstone Funds; STI Classic Funds; and STI Classic Variable Trust, each of which is an open-end management investment company managed by SEI Financial Management Corporation and, except for Rembrandt/sm/ Funds, distributed by SEI Financial Services Company.
ROBERT A. NESHER - Chairman of the Board of Trustees* - Retired since 1994. Executive Officer -Executive Vice President of SEI, 1986-1994. Director and Executive Vice President of the Manager and Executive Vice President of the Distributor, September, 1981-1994.
RICHARD F. BLANCHARD - Trustee** - P.O. Box 76, Canfield Road, Convent Station, NJ 07961. Private Investor. Director of AEA Investors Inc. (acquisition and investment firm) June 1981-86, Director of Baker Hughes Corp. (oil service company) 1976-88. Director of Imperial Clevite Industries (transportation equipment company) 1981-87. Executive Vice President of American Express Company (financial services company), responsible for the investment function, before June 1981.
WILLIAM M. DORAN - Trustee* - 2000 One Logan Square, Philadelphia, PA 19103. Partner of Morgan, Lewis & Bockius LLP, counsel to the Trust, Manager and Distributor, Director and Secretary of SEI and Secretary of the Manager and Distributor.
F. WENDELL GOOCH - Trustee** - P.O. Box 190, Paoli, IN 47454. President, Orange County Publishing Co., Inc., since October 1981. Publisher of the Paoli News and the Paoli Republican and Editor of the Paoli Republican since January 1981; President, H & W Distribution, Inc. since July 1984. Executive Vice President, Trust Department, Harris Trust and Savings Bank and Chairman of the Board of Directors of The Harris Trust Company of Arizona before January 1981. Trustee of STI Classic Funds.
FRANK E. MORRIS - Trustee** - 105 Walpole Street, Dover, MA 02030. Retired since 1990. Peter Drucker Professor of Management, Boston College since 1989. President, Federal Reserve Bank of Boston, 1968-1988. Trustee of The Arbor Fund, Marquis Funds, Advisors' Inner Circle Fund, Advisors' Inner Circle Fund II, Inc. and FFB Lexicon Funds.
JAMES M. STOREY - Trustee** - Ten Post Office Square, Boston, MA, 02109. Retired since 1993. Formerly Partner of Dechert Price & Rhoads (law firm).
DAVID LEE - President, Chief Executive Officer - Senior Vice President of the Distributor since 1993. Vice President of the Distributor since 1991. President, GW Sierra Trust Funds prior to 1991.
CARMEN V. ROMEO - Treasurer, Assistant Secretary - Director, Executive Vice President, Chief Financial Officer and Treasurer of SEI since 1977. Director and Treasurer of the Manager and Distributor since 1981.
ROBERT B. CARROLL - Vice President, Assistant Secretary - Vice President, Assistant Secretary of SEI, the Manager and Distributor since 1994. United States Securities and Exchange Commission, Division of Investment Management, 1990-1994. Associate, McGuire, Woods, Battle and Boothe (law firm) prior to 1990.
KATHRYN L. STANTON - Vice President, Assistant Secretary - Vice President, Assistant Secretary of SEI, the Manager and Distributor since 1994. Associate, Morgan, Lewis & Bockius LLP (law firm), 1989-1994.
SANDRA K. ORLOW - Vice President, Assistant Secretary - Vice President and Assistant Secretary of the Manager and Distributor since 1988. Corporate Legal Assistant, Omni Exploration (oil and gas investment) prior to 1983.
KEVIN P. ROBINS - Vice President, Assistant Secretary - Senior Vice President and General Counsel of SEI, the Manager and the Distributor, and Assistant Secretary of SEI since 1994. Secretary of the Manager and the Distributor since 1994. Vice President and Assistant Secretary of SEI, the Manager and Distributor, 1992-1994. Associate, Morgan, Lewis & Bockius LLP (law firm) prior to 1992.
JOSEPH M. LYDON - Vice President, Assistant Secretary - Director of Business Administration of Fund Resources, SEI Corporation since 1995. Vice President of Fund Group and Vice President of Dreman Value Management (investment adviser), President of Dreman Financial Services, Inc. prior to 1995.
TODD CIPPERMAN - Vice President, Assistant Secretary - Vice President and Assistant Secretary of SEI, the Manager and the Distributor since 1995. Associate, Dewey Ballantine (law firm), 1994-1995. Associate, Winston & Strawn (law firm), 1991-1994.
JEFFREY A. COHEN - Controller, Assistant Secretary - CPA, Director, International and Domestic Funds Accounting, SEI Corporation since 1991. Audit Manager, Price Waterhouse prior to 1991.
RICHARD W. GRANT - Secretary - 2000 One Logan Square, Philadelphia, PA 19103, Partner, Morgan, Lewis & Bockius LLP, counsel to the Trust, Manager and Distributor.
JOHN H. GRADY, JR. - Assistant Secretary - 1800 M Street, N.W., Washington, DC 20036, Associate, Morgan, Lewis & Bockius LLP, Counsel to the Trust, Manager and Distributor. Associate, Ropes & Gray (law firm) prior to 1993.
* Messrs. Nesher and Doran are Trustees who may be deemed to be "interested persons" of the Trust as the term is defined in the Investment Company Act of 1940.
** Messrs. Blanchard, Gooch, Morris and Storey serve as members of the Audit Committee of the Trust.
The Trustees and officers of the Trust own less than 1% of the outstanding shares of the Trust. The Trust pays the fees for unaffiliated Trustees.
Compensation of officers and affiliated Trustees of the Trust is paid by the Manager. For the fiscal year ended August 31, 1995, the Trust paid the following amounts to the Trustees.
/1/ Retired - December 7, 1994
From time to time, the Portfolios may advertise yield and/or total return. These figures will be based on historical earnings and are not intended to indicate future performance.
The current yield of the Portfolios that are money market funds is calculated daily based upon the 7 days ending on the date of calculation ("base period"). The yield is computed by determining the net change (exclusive of capital changes) in the value of a hypothetical pre-existing shareholder account having a balance of one share at the beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts and dividing such net change by the value of the account at the beginning of the same period to obtain the base period return and multiplying the result by (365/7). Realized and unrealized gains and losses are not included in the calculation of the yield.
The Portfolios compute their effective compound yield by determining the net changes, exclusive of capital changes, in the value of a hypothetical pre- existing account having a balance of one share at the beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then compounding the base period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result, according to the following formula: Effective Yield = {(Base Period Return + 1)/365/7/} - 1. The current and the effective yields reflect the reinvestment of net income earned daily on portfolio assets.
From time to time, the Intermediate-Term Municipal, Pennsylvania Municipal, Kansas Tax Free Income, California Intermediate-Term Municipal and New York Intermediate-Term Portfolios may advertise yield. These figures will be based on historical earnings and are not intended to indicate future performance. The yield of these Portfolios refers to the annualized income generated by an investment in the Portfolios over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period generated each period over one year and is shown as a percentage of the investment. In particular, yield will be calculated according to the following formula:
Yield = 2([(a-b)/(cd) + 1)]/6/ - 1) where a = dividends and interest earned during the period; b = expenses accrued for the period (net of reimbursement); c = the current daily number of shares outstanding during the period that were entitled to receive dividends; and d = the maximum offering price per share on the last day of the period.
Actual yields will depend on such variables as asset quality, average asset maturity, the type of instruments a Portfolio invests in, changes in interest rates on money market instruments, changes in the expenses of the Portfolios and other factors.
Yields are one basis upon which investors may compare the Portfolios with other money market funds; however, yields of other money market mutual funds and other investment vehicles may not be comparable because of the factors set forth above and differences in the methods used in valuing portfolio instruments.
For the 7-day period ended August 31, 1995, the end of the Trust's most recent fiscal year, the Money Market Portfolios' current effective and tax-equivalent yields were as follows:
*Not in operation during the period
For the 30-day period ended August 31, 1995, yields on the Portfolios other than the Money Market Portfolios were as follows:
*Not in operation during the period.
From time to time, the Intermediate-Term Municipal, Pennsylvania Municipal, Kansas Tax Free Income, California Intermediate-Term Municipal and New York Intermediate-Term Municipal Portfolios may advertise total return. The total return of a Portfolio refers to the average compounded rate of return to a hypothetical investment for designated time periods (including, but not limited to, the period from which the Portfolio commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period. In particular, total return will be calculated according to the following formula: P(1 + T)n = ERV, where P = a hypothetical initial payment of $1,000; T = average annual total return; n = number of years; and ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the designated time period as of the end of such period.
Based on the foregoing, the average annual total returns for the Portfolios from inception through August 31, 1995 and for the one, five and ten year periods ended August 31, 1995 were as follows:
*Not in operation during period.
Each Portfolio may, from time to time, compare its performance to other mutual funds tracked by mutual fund rating services, to broad groups of comparable mutual funds or to unmanaged indices which may assume investment of dividends but generally do not reflect deductions for sales charges, administrative and management costs.
DETERMINATION OF NET ASSET VALUE
Securities of the Tax Free, Institutional Tax Free, California Tax Exempt, Bainbridge Tax Exempt and the Pennsylvania Tax Free Portfolios will be valued by the amortized cost method which involves valuing a security at its cost on the date of purchase and thereafter (absent unusual circumstances) assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuations in general market rates of interest on the value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by this method is higher or lower than the price the Trust would receive if it sold the instrument. During periods of declining interest rates, the daily yield of a Portfolio may tend to be higher than a like computation made by a company with identical investments utilizing a method of valuation based upon market prices and estimates of market prices for all of its portfolio securities. Thus, if the use of amortized cost by a Portfolio resulted in a lower aggregate portfolio value on a particular day, a prospective investor in a Portfolio would be able to obtain a somewhat higher yield than would result from investment in a company utilizing solely market values, and existing shareholders in the Portfolio would experience a lower yield. The converse would apply in a period of rising interest rates.
A Portfolio's use of amortized cost valuation and the maintenance of the Portfolio's net asset value at $1.00 are permitted by Rule 2a-7 under the 1940 Act, provided that certain conditions are met. Under Rule 2a-7 a money market portfolio must maintain a dollar-weighted average maturity of 90 days or less and not purchase any instrument having a remaining maturity of more than 397 days. In addition, money market funds may acquire only U.S. dollar denominated obligations that present minimal credit risks and that are "eligible securities" which means they are (i) rated, at the time of investment, by at least two nationally recognized statistical rating organizations (one if it is the only organization rating such obligation) in the highest short-term rating category or, if unrated, determined to be of comparable quality (a "first tier security"), or (ii) rated according to the foregoing criteria in the second highest short-term rating category or, if unrated, determined to be of comparable quality ("second tier security"). The Advisers will determine that an obligation presents minimal credit risk or that unrated instruments are of comparable quality in accordance with guidelines established by the Trustees. In the event a first tier security of the Tax Free Portfolio, Institutional Tax Free Portfolio, California Tax Exempt Portfolio, Bainbridge Tax Exempt Portfolio or the Pennsylvania Tax Free Portfolio is downgraded below first tier security status after purchase or the Adviser of any such Portfolio becomes aware that an unrated or second tier security has received any rating below the second highest rating category after purchase, the Portfolio's Adviser will either dispose of five business days or the Board of Trustees will reassess whether the security continues to present minimal credit risks. The Board may also delegate this responsibility to the Portfolio's Adviser with respect to the downgrade of a first tier security. The regulations also require the Trustees to establish procedures which are reasonably designed to stabilize the net asset value per unit at $1.00 for each Portfolio. However, there is no assurance that the Trust will be able to meet this objective. The Trust's procedures include the determination of the extent of deviation, if any, of each Portfolio's current net asset value per unit calculated using available market quotations from each Portfolio's amortized cost price per unit at such intervals as the Trustees deem appropriate and reasonable in light of market conditions and periodic reviews of the amount of the deviation and the methods used to calculate such deviation. In the event that such deviation exceeds 1/2 of 1%, the Trustees are required to consider promptly what action, if any, should be initiated; and, if the Trustees believe that the extent of any deviation may result in material dilution or other unfair results to shareholders, the Trustees are required to take such corrective action as they deem appropriate to eliminate or reduce such dilution or unfair results to the extent reasonably practicable. In addition, if any Portfolio incurs a significant loss or liability, the Trustees have the authority to reduce pro rata the number of shares of that Portfolio in each shareholder's account and to offset each shareholder's pro rata portion of such loss or liability from the shareholder's accrued but unpaid dividends or from future dividends.
Securities of the Intermediate-Term Municipal, Pennsylvania Municipal, Kansas Tax Free Income, California Intermediate-Term Municipal and New York Intermediate-Term Municipal Portfolios are valued by the Manager pursuant to valuations provided by an independent pricing service. The pricing service relies primarily on prices of actual market transactions as well as trader quotations. However, the service may also use a matrix system to determine valuations, which system considers such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Trustees.
PURCHASE AND REDEMPTION OF SHARES
The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period during which trading on the New York Stock Exchange is restricted, or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or evaluation of the portfolio securities is not reasonably practicable, or for such other periods as the SEC may be order permit. The Trust also reserves the right to suspend sales of shares of a Portfolio for any period during which the New York Stock Exchange, the Manager, a Portfolio's Adviser, the Distributor and/or the Custodian are not open for business.
In calculating the sales charge rates applicable to current purchases of Class D shares, members of the following affinity groups and clients of the following broker-dealers, each of which has entered into an agreement with the Distributor, are entitled to the following percentage-based discounts from the otherwise applicable sales charge:
Those members or clients who take advantage of a percentage-based reduction in the sales charge during the offering period noted above may continue to purchase shares at the reduced sales charge rate after the offering period relating to each such purchaser's affinity group or broker-dealer relationship has terminated.
Please contact the Distributor at 1-800-437-6016.
Stop-Payment Requests (Money Market Portfolios only): Investors may request a stop payment on checks by providing the Trust with a written authorization to do so. Oral requests will be accepted provided that the Trust promptly receives a written authorization. Such requests will remain in effect for six months unless renewed or canceled. The Trust will use its best efforts to effect stop-payment instructions, but does not promise or guarantee that such instructions will be effective. Shareholders requesting stop payment will be charged a $20 service fee per check which will be deducted from their accounts.
The following is a description of plans and privileges by which the sales charges imposed on the Class D shares of the Intermediate-Term Municipal Portfolio Pennsylvania Municipal Portfolio, New York Intermediate-Term Municipal Portfolio and California Intermediate-Term Municipal Portfolio may be reduced.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity discounts when his new investment, together with the current market value of all holdings of that shareholder in the Portfolios reaches a discount level. See "Additional Information About Doing Business With Us" in the Prospectuses for the sales charge on quantity purchases.
LETTER OF INTENT: The reduced sales charges are also applicable to the aggregate amount of purchases made by any such purchaser previously enumerated within a 13-month period pursuant to a written Letter of Intent provided by the Distributor, and not legally binding on the signer or a Portfolio which provides for the holding in escrow by the Distributor of 5% of the total amount intended to be purchased until such purchase is completed within the 13-month period. A Letter of Intent may be dated to include shares purchased up to 90 days prior to the date the Letter of Intent is signed. The 13-month period begins on the date of the earliest purchase. If the intended investment is not completed, the Manager will surrender an appropriate number of the escrowed shares for redemption in order to realize the difference.
DISTRIBUTION INVESTMENT OPTION: Distributions of dividends and capital gains made by the Portfolios may be automatically invested in shares of one of the Portfolios if shares of the Portfolio are available for sale. Such investments will be subject to initial investment minimums, as well as additional purchase minimums. A shareholder considering the Distribution Investment Option should obtain and read the prospectus of the other Portfolios and consider the differences in objectives and policies before making any investment.
REINSTATEMENT PRIVILEGE: A shareholder who has redeemed shares of any of the Portfolios has a one-time right to reinvest the redemption proceeds in shares of the Portfolios at their net asset value as of the time of reinvestment. Such a reinvestment must be made within 30 days of the redemption and is limited to the amount of the redemption proceeds. Although redemptions and repurchases of shares are taxable events, a reinvestment within such 30-day period in the same fund is considered a "wash sale" and results in the inability to recognize currently all or a portion of a loss realized on the original redemption for federal income tax purposes. The investor must notify the Transfer Agent at the time the trade is placed that the transaction is a reinvestment.
EXCHANGE PRIVILEGE: A shareholder may exchange the shares of these Portfolios, for which good payment has been received, in his account at any time, regardless of how long he has held his shares.
Each Exchange Request must be in proper form (i.e., if in writing, signed by the record owner(s) exactly as the shares are registered; if by telephone, proper account identification is given by the dealer or shareholder of record), and each exchange must involve either shares having an aggregate value of at least $1,000 or all the shares in the account. Each exchange involves the redemption of the shares of a Portfolio (the "Old Portfolio") to be exchanged and the purchase at net asset value of the shares of the other portfolios (the "New Portfolios") plus in certain cases, as disclosed in each Prospectus, any applicable sales charge. Any gain or loss on the redemption of the shares exchanged is reportable on the shareholder's federal income tax return, unless such shares were held in a tax-deferred retirement plan or other tax-exempt account. If the Exchange Request is received by the Distributor in writing or by telephone on any business day prior to the redemption cut-off time specified in each Prospectus, the exchange usually will occur on that day if all the restrictions set forth above have been complied with at that time. However, payment of the redemption proceeds by the Old Portfolio, and thus the purchase of shares of the New Portfolios, may be delayed for up to seven days if the Portfolios determine that such delay would be in the best interest of all of its shareholders. Investment dealers which have satisfied criteria established by the Portfolios may also communicate a shareholder's Exchange Request to the Portfolios subject to the restrictions set forth above. No more than five exchange requests may be made in any one telephone Exchange Request.
The following discussion of federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the regulations issued thereunder as in effect on the date of this Statement of Additional Information. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio will decide whether to distribute or retain all or part of any net capital gains (the excess of net long-term capital gains over net short-term capital losses) in any year for reinvestment. If any such gains are retained, the Portfolio will pay federal income tax thereon, and, if the Portfolio makes an election, the shareholders will include such undistributed gains in their income and shareholders subject to tax will be able to claim their share of the tax paid by the Portfolio as a credit against their federal income tax liability.
A gain or loss realized by a shareholder on the sale or exchange of shares of a Portfolio held as a capital asset will be capital gain or loss, and such gain or loss will be long-term if the holding period for the shares exceeds one year, and otherwise will be short-term. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced within the 61- day period beginning 30 days before and ending 30 days after the shares are disposed of. Any loss realized by a shareholder on the disposition of shares held 6 months or less is treated as a long-term capital loss to the extent of any distributions of net long-term capital gains received by the shareholder with respect to such shares or any inclusion of undistributed capital gain with respect to such shares.
Each Portfolio will generally be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute by the end of any calendar year at least 98% of its ordinary income and 98% of its capital gain net income (the excess of short- and long-term capital gains over short- and long-term capital losses) for the one-year period ending on October 31 of that year, plus certain other amounts.
Each Portfolio is required by federal law to withhold 31% of reportable payments (which may include dividends, capital gains distributions, and redemptions) paid to shareholders who have not certified on the Account Registration Form or on a separate form supplied by the Portfolio, that the Social Security or Taxpayer Identification Number provided is correct and that the shareholder is exempt from backup withholding or is not currently subject to backup withholding.
Each Portfolio within the Trust is generally treated as a separate corporation for federal income tax purposes, and thus the provisions of the Code generally will be applied to each Portfolio separately, rather than to the Trust as a whole. Net long-term and short-term capital gains, net income, and operating expenses therefore will be determined separately for each Portfolio.
If a Portfolio fails to qualify as a regulated investment company ("RIC") for any year, all of its income will be subject to tax at corporate rates, and its distributions (including capital gains distributions) will be taxable as ordinary income dividends to its shareholders, subject to the corporate dividends received deduction for corporate shareholders. No dividends of any Portfolio are expected to qualify for that deduction.
As noted in the Prospectuses for the Portfolios, exempt-interest dividends are excludable from a shareholder's gross income for regular federal income tax purposes. Exempt-interest dividends may nevertheless be subject to the alternative minimum tax (the "Alternative Minimum Tax") imposed by Section 55 of the Code or the environmental tax (the "Environmental Tax") imposed by Section 59A of the Code. The Alternative Minimum Tax is imposed at the rate of 26% to 28% in the case of non-corporate taxpayers and at the rate of 20% in the case of corporate taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The Environmental Tax is imposed at the rate of 0.12% and applies only to corporate taxpayers. The Alternative Minimum Tax and the Environmental Tax may be imposed in two circumstances. First, exempt-interest dividends derived from certain "private activity bonds" issued after August 7, 1986, will generally be an item of tax preference and therefore potentially subject to the Alternative Minimum Tax and the Environmental Tax. The Portfolios intend, when possible, to avoid investing in private activity bonds. Second, in the case of exempt-interest dividends received by corporate shareholders, all exempt- interest dividends, regardless of when the bonds from which they are derived were issued or whether they are derived from private activity bonds, will be included in the corporation's "adjusted current earnings," as defined in Section 56(g) of the Code, in calculating the corporation's alternative minimum taxable income for purposes of determining the Alternative Minimum Tax and the Environmental Tax.
The percentage of income that constitutes "exempt-interest dividends" will be determined for each year for the Portfolios and will be applied uniformly to all dividends declared with respect to the Portfolios during that year. This percentage may differ from the actual percentage for any particular day.
Interest on indebtedness incurred by shareholders to purchase or carry shares of the Portfolios will not be deductible for federal income tax purposes to the extent that the Portfolios distribute exempt-interest dividends during the taxable year. The deduction otherwise allowable to property and casualty insurance companies for "losses incurred" will be reduced by an amount equal to a portion of exempt-interest dividends received or accrued during any taxable year. Certain foreign corporations engaged in a trade or business in the United States will be subject to a "branch profits tax" on their "dividend equivalent amount" for the taxable year, which will include exempt-interest dividends. Certain Subchapter S corporations may also be subject to taxes on their "passive investment income," which could include exempt-interest dividends. Up to 85% of the Social Security benefits or railroad retirement benefits received by an individual during any taxable year will be included in the gross income of such individual if the individual's "modified adjusted gross income" (which includes exempt-interest dividends) plus one-half of the Social Security benefits or railroad retirement benefits received by such individual during that taxable year exceeds the base amount described in Section 86 of the Code.
Entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds should consult their tax advisors before purchasing shares of the Portfolios. "Substantial user" is defined generally as including a "non-exempt person" who regularly uses in trade or business a part of a facility financed from the proceeds of industrial development bonds.
Issuers of bonds purchased by the Portfolios (or the beneficiary of such bonds) may have made certain representations or covenants in connection with the issuance of such bonds to satisfy certain requirements of the Code that must be satisfied subsequent to the issuance of such bonds. Investors should be aware that exempt-interest dividends derived from such bonds may become subject to federal income taxation retroactively to the date thereof if such representations are determined to have been inaccurate or if the issuer of such bonds (or the beneficiary of such bonds) fails to comply with such covenants.
A Portfolio is not liable for any income or franchise tax in Massachusetts if it qualifies as a RIC for federal income tax purposes. Depending upon applicable state and local law, shareholders of a Portfolio may be exempt from state and local taxes on distributions of tax-exempt interest income derived from obligations of the state and/or municipalities in which they reside, but shareholders may be subject to tax on income derived from obligations of other jurisdictions. Each Portfolio will make periodic reports to shareholders of the source of distributions on a state-by-state basis. Shareholders should consult their tax advisors concerning the state and local tax consequences of investments in the Trust, which may differ from the federal income tax consequences described above.
The Trust has no obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policies established by the Trustees, the Advisers are responsible for placing orders to execute Portfolio transactions. In placing orders, it is the Trust's policy to seek to obtain the best net results taking into account such factors as price (including the applicable dealer spread), 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. While the Advisers generally seek reasonably competitive spreads or commissions, the Trust will not necessarily be paying the lowest spread or commission available. The Trust's policy of investing in securities with short maturities will result in high portfolio turnover. The Trust will not purchase portfolio securities from any affiliated person acting as principal except in conformity with the regulations of the SEC.
The Trust does not expect to use one particular dealer, but, subject to the Trust's policy of seeking the best net results, dealers who provide supplemental investment research to the Advisers may receive orders for transactions by the Trust. Information so received will be in addition to and not in lieu of the services required to be performed by the Advisers under the Advisory Agreements, and the expenses of the Advisers will not necessarily be reduced as a result of the receipt of such supplemental information.
The money market securities in which certain of the Portfolios invest are traded primarily in the over-the-counter market. Bonds and debentures are usually traded over-the-counter, but may be traded on an exchange. Where possible, a Portfolio's Adviser will deal directly with the dealers who make a market in the securities involved except in those circumstances where better prices and execution are available elsewhere. Such dealers usually are acting as principal for their own account. On occasion, securities may be purchased directly from the issuer. Money market securities are generally traded on a net basis and do not normally involve either brokerage commissions or transfer taxes. The cost of executing portfolio securities transactions of the Portfolio will primarily consist of dealer spreads and underwriting commissions.
It is expected that certain of the Portfolios may execute brokerage or other agency transactions through the Distributor, a registered broker-dealer, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and rules of the SEC. Under these provisions, the Distributor is permitted to receive and retain compensation for effecting portfolio transactions for a Portfolio on an exchange if a written contract is in effect between the Distributor and the Trust expressly permitting the Distributor to receive and retain such compensation. These provisions further require that commissions paid to the Distributor by the Trust for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time." In addition, the Portfolios may direct commission business to one or more designated broker-dealers, including the Distributor, in connection with payment of certain of the Portfolios' expenses by such broker-dealers. The Trustees, including those who are not "interested persons" of the Trust, have adopted procedures for evaluating the reasonableness of commissions paid to the Distributor and will review these procedures periodically.
Since the Trust does not market its shares through intermediary brokers or dealers, it is not the Trust's practice to allocate brokerage or principal business on the basis of sales of its shares which may be made through such firms. However, the Advisers may place portfolio orders with qualified broker- dealers who recommend the Trust to clients, and may, when a number of brokers and dealers can provide best price and execution on a particular transaction, consider such recommendations by a broker or dealer in selecting among broker- dealers.
Advisers may, consistent with the interests of the Portfolios, select brokers on the basis of the research services they provide to the Adviser. Such services may include analysis of the business or prospects of a company, industry or economic sector or statistical and pricing services. Information so received by the Advisers will be in addition to and not in lieu of the services required to be performed by an Adviser under the Advisory Agreements. If in the judgement of an Adviser the Portfolios, or other accounts managed by the Adviser, will be benefitted by supplemental research services, the Adviser is authorized to pay brokerage commissions to a broker furnishing such services which are in excess of commissions which another broker may have charged for effecting the same transaction. The expenses of an Adviser will not necessarily be reduced as a result of the receipt of such supplemental information.
For the fiscal year ended August 31, 1995 , the Portfolios paid brokerage fees as follows:
For the fiscal year ended August 31, 1993, no Portfolio paid any brokerage commissions. For the fiscal year ended August 31, 1994, the Portfolios paid the following brokerage commissions:
*Not in operation during the period.
It is expected that the portfolio turnover rate will normally not exceed 100% for any Portfolio. A portfolio turnover rate would exceed 100% if all of its securities, exclusive of U.S. Government securities and other securities whose maturities at the time of acquisition are one year or less, are replaced in the period of one year. Turnover rates may vary from year to year and may be affected by cash requirements for redemptions and by requirements which enable a Portfolio to receive favorable tax treatment.
For each of the fiscal years ending August 31, 1994 and 1995, the portfolio turnover rate for each of the following Portfolios was:
* Not in operation during the period.
The Declaration of Trust authorizes the issuance of an unlimited number of shares of each Portfolio, each of which represents an equal proportionate interest in that Portfolio. Each share upon liquidation entitles a shareholder to a pro rata share in the net assets of that Portfolio, after taking into account the Class B, Class C and Class D distribution expenses. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional portfolios of shares or classes of portfolios. Share certificates representing the shares will not be issued.
The Declaration of Trust provides that a Trustee shall be liable only for his own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or administrators, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his wilful misfeasance, bad faith, gross negligence or reckless disregard of his duties.
The Trust is an entity of the type commonly known as a "Massachusetts business trust". Under Massachusetts law, shareholders of such a Trust could, under certain circumstances, be held personally liable as partners for the obligations of the Trust. Even if, however, the Trust were held to be a partnership, the possibility of the shareholders' incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because, the Declaration of Trust provides for indemnification out of the Trust property for any shareholders held personally liable for the obligations of the Trust.
As of October 4, 1995, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% or more of the shares of the Portfolios. The Trust believes that most of the shares referred to below were held by the persons indicated in accounts for their fiduciary, agency, or custodial customers.
The financial statements in this Statement of Additional Information and the Financial Highlights included in the Prospectuses have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report, with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report.
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
FGIC Financial Guaranty Insurance Corporation TECP Tax Exempt Commercial Paper TRAN Tax & Revenue Anticipation Note VRDN Variable Rate Demand Note (A) Floating Rate Security -- the rate reflected on the Statement of Net Assets is the rate in effect on August 31, 1995. (B) Put and Demand Feature -- the date reported on the Statement of Net Assets is the lesser of the maturity date or the put date. (C) Securities are held in conjunction with a letter of credit from a major commercial bank or financial institution. (D) Pre-Refunded Security--the maturity date shown is the pre-refunded date.
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
AMBAC American Municipal Bond Assurance Company FGIC Financial Guaranty Insurance Corporation MBIA Municipal Bond Insurance Association TRAN Tax & Revenue Anticipation Note TECP Tax Exempt Commercial Paper VRDN Variable Rate Demand Note (A) Floating Rate Security -- the rate reflected on the Statement of Net Assets is the rate in effect on August 31, 1995. (B) Put and Demand Feature -- the date reported on the Statement of Net Assets is the lesser of the maturity date or the put date. (C) Securities are held in conjunction with a letter of credit from a major commercial bank or financial institution. (D) Pre-Refunded Security -- the maturity date shown is the pre-refunded date.
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
TECP Tax Exempt Commercial Paper TRAN Tax and Revenue Anticipation Note VRDN Variable Rate Demand Note (A) Floating Rate Security -- the rate reflected on the Statement of Net Assets is the rate in effect on August 31, 1995. (B) Put and Demand Feature -- the date reported on the Statement of Net Assets is the lesser of the maturity date or the put date. (C) Securities are held in conjunction with a letter of credit from a major commercial bank or financial institution. (D) Pre-Refunded Security--the maturity date shown is the pre-refunded date.
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
AMBAC American Municipal Bond Assurance Company MBIA Municipal Bond Insurance Association TECP Tax Exempt Commercial Paper TRAN Tax & Revenue Anticipation Note VRDN Variable Rate Demand Note (A) Floating Rate Security -- the rate reflected on the Statement of Net Assets is the rate in effect on August 31, 1995. (B) Put and Demand Feature -- the date reported on the Statements of Net Assets is the lesser of the maturity date or put date. (C) Securities are held in conjunction with a letter of credit from a major commercial bank or financial institution. (D) Pre-ReFunded Security--the maturity date shown is the pre-refunded date.
SEI Tax Exempt Trust -- August 31, 1995
FGIC Financial Guaranty Insurance Corporation MBIA Municipal Bond Insurance Association TECP Tax Exempt Commercial Paper TRAN Tax & Revenue Anticipation Note VRDN Variable Rate Demand Note (A) Floating Rate Security -- the rate reflected on the Statement of Net Assets is the rate in effect on August 31, 1995. (B) Put and Demand Feature -- the date reported on the Statement of Net Assets is the lesser of the maturity date or put date. (C) Securities are held in conjunction with a letter of credit from a major commercial bank or financial institution. (D) Pre-Refunded Security -- the maturity date shown is the pre-refunded date.
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
AMBAC American Municipal Bond Assurance Company FGIC Financial Guaranty Insurance Corporation MBIA Municipal Bond Insurance Association TRAN Tax & Revenue Anticipation Note VRDN Variable Rate Demand Note (A) Mandatory Redemption -- the date reported on the Statement of Net Assets is the mandatory redemption date. (B) Security is held in conjunction with a letter of credit from a major commercial bank or financial institution. (C) Pre-Refunded Security -- the maturity date shown is the pre-refunded date.
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust -- August 31, 1995
AMBAC American Municipal Bond Assurance Company BIGI Bond Investors Guaranty Insurance Corporation CGIC Capital Guaranty Insurance Corporation FGIC Financial Guaranty Insurance Corporation
MBIA Municipal Bond Insurance Association (A) Security is held in conjunction with a letter of credit from a major commercial bank or financial institution. (B) Income on bond may be subject to alternative minimum tax. (C) Put and Demand Feature -- the date reported on the Statement of Net Assets is the lesser of the maturity date or put date. (D) Pre-Refunded Security -- the maturity date shown is the pre-refunded date.
KANSAS TAX FREE INCOME PORTFOLIO
SEI Tax Exempt Trust -- August 31, 1995
KANSAS TAX FREE INCOME PORTFOLIO--CONTINUED
SEI Tax Exempt Trust -- August 31, 1995
KANSAS TAX FREE INCOME PORTFOLIO--CONTINUED
SEI Tax Exempt Trust -- August 31, 1995
KANSAS TAX FREE INCOME PORTFOLIO--CONTINUED
The accompanying notes are an integral part of the financial statements.
AMBAC American Municipal Bond Assurance Company CGIC Capital Guaranty Insurance Corporation FGIC Financial Guaranty Insurance Company GNMA Government National Mortgage Association MBIA Municipal Bond Investors Association (A) Securities are held in conjunction with a letter of credit from a commercial bank or financial institution. (B) Pre-Refunded Security -- the maturity date shown is the pre-refunded date.
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SEI Tax Exempt Trust -- For the year ended August 31, 1995
/1/ Includes class specific distribution expenses. /2/ The Massachusetts Intermediate-Term Municipal Portfolio closed on August 15, 1995.
The accompanying notes are an integral part of the financial statements.
STATEMENT OF CHANGES IN NET ASSETS (000) SEI Tax Exempt Trust--For the years ended August 31
/1/ The Pennsylvania Tax Free Portfolio commenced operations on January 21, 1994. /2/ The Massachusetts Intermediate-Term Municipal Portfolio closed on August 15, 1995.
The accompanying notes are an integral part of the financial statements.
For a Share Outstanding Throughout the Year
For a Share Outstanding Throughout the Year
** Total return does not reflect the sales charge on the Class D. + Return is for the period indicated and has not been annualized. 1 In August 1990, the Trustees changed the fiscal year end of the Trust from January 31 to August 31. 2 The Tax Free Portfolio--Class D commenced operations on November 1, 1994. 3 The California Tax Exempt Portfolio--Class A commenced operations on May 14, 1990. 4 The California Tax Exempt Portfolio--Class B closed on July 12, 1995. 5 The California Tax Exempt Portfolio--Class B commenced operations on January 5, 1994. 6 The California Tax Exempt Portfolio--Class C commenced operations on May 11, 1994. 7 The Bainbridge Tax Exempt Portfolio--Class A commenced operations on November 9, 1992. 8 The Institutional Tax Free Portfolio--Class B commenced operations on October 15, 1990. 9 The Pennsylvania Tax Free Portfolio--Class A commenced operations on January 21, 1994. 10 The Intermediate-Term Municipal Portfolio--Class A commenced operations on September 5, 1989. 11 The Intermediate-Term Municipal Portfolio--Class D commenced operations on September 28, 1993. 12 The Pennsylvania Municipal Portfolio--Class A commenced operations on August 14, 1989. 13 The Kansas Tax Free Income Portfolio--Class A commenced operations on December 10, 1990. 14 The Massachusetts Intermediate-Term Municipal Portfolio--Class A closed on August 15, 1995. The NAV shown is as of the last day prior to liquidation. 15 The Massachusetts Intermediate-Term Municipal Portfolio--Class A commenced operations on September 18, 1992.
The accompanying notes are an integral part of the financial statements.
SEI Tax Exempt Trust -- August 31, 1995
SEI Tax Exempt Trust (the "Trust"), was organized as a Massachusetts business trust under a Declaration of Trust dated March 15, 1982. The Trust is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company with eleven portfolios: the Tax Free Portfolio, the California Tax Exempt Portfolio, the Bainbridge Tax Exempt Portfolio, the Institutional Tax Free Portfolio, the Pennsylvania Tax Free Portfolio (collectively "the Money Market Portfolios"), the Intermediate-Term Municipal Portfolio, the Pennsylvania Municipal Portfolio, the Kansas Tax Free Income Portfolio, the Massachusetts Intermediate-Term Municipal Portfolio, the California Intermediate-Term Municipal Portfolio and the New York Intermediate- Term Municipal Portfolio (collectively "the Fixed Income Portfolios"). The Cal- ifornia Intermediate-Term Municipal Portfolio and the New York Intermediate- Term Municipal Portfolio had not commenced operations as of August 31, 1995. The Trust is registered to offer four classes of shares: Class A, Class B, Class C and Class D. The assets of each portfolio are segregated and a share- holder's interest is limited to the portfolio in which shares are held. On August 15, 1995, the Massachusetts Intermediate-Term Municipal Portfolio closed and all of the outstanding shares of the Portfolio were redeemed. SEI Financial Management Corporation voluntarily agreed to bear the costs associ- ated with the liquidation of the Portfolio which approximated $8,000 and in- cluded the amount of unamortized organizational expenses.
The following is a summary of the significant accounting policies followed by the Portfolios. Security Valuation -- Investment securities of each Money Market Portfolio are stated at amortized cost which approximates market value. Under this valua- tion method, purchase discounts and premiums on securities are accreted and am- ortized ratably to maturity. The market value for each security for each Fixed Income Portfolio is ob- tained from an independent pricing service. Debt obligations exceeding sixty days to maturity for which market quotations are readily available are valued at the most recently quoted bid price. Debt obligations with sixty days or less remaining until maturity may be valued at their amortized cost. Federal Income Taxes -- It is each Portfolio's intention to continue to qual- ify as a regulated investment company and to distribute all of its taxable in- come. Accordingly, no provision for Federal income taxes is required in the ac- companying financial statements. Net Asset Value Per Share -- The net asset value per share of each Portfolio is calculated on each business day. In general, it is computed by dividing the assets of each Portfolio, less its liabilities, by the number of outstanding shares of the Portfolio. The maximum offering price per share for the Class D shares of the Intermediate-Term Municipal Portfolio is equal to the net asset value per share plus a sales load of 3.50%. Classes -- Class specific expenses are borne by that class. Income, expenses, and realized and unrealized gains/losses are allocated to the respective class on the basis of the relative net asset value each day. Security Transactions and Investment Income -- Security transactions are ac- counted for on the trade date of the security purchase or sale. Costs used in determining net realized capital gains and losses on the sale of investment se- curities are those of the specific securities sold. Interest income is recog- nized on the accrual basis. Purchase discounts and premiums on securities held by the Fixed Income Portfolios are accreted and amortized to maturity using the scientific interest method, which approximates the effective interest method. Distributions to Shareholders -- Distributions from net investment income are declared on a daily basis and are payable on the first business day of the fol- lowing month for the Tax Free, the California Tax Exempt, the Bainbridge Tax Exempt, the Institutional Tax Free, the Pennsylvania Tax Free and the Massachu- setts Intermediate-Term Municipal Portfolios. Distributions from net investment income are declared each month and paid on the tenth day of
NOTES TO FINANCIAL STATEMENTS (Continued) SEI Tax Exempt Trust -- August 31, 1995 the following month for all other Portfolios. Any net realized capital gain on sales of securities after capital loss carryovers is distributed to the share- holders of the Portfolios at least annually. Effective in 1994, generally ac- cepted accounting principles require that differences between undistributed net investment income or accumulated net realized capital gains for financial re- porting and tax purposes, if permanent, be reclassified to/from paid in capi- tal. Accordingly, the following permanent differences, attributable to undis- tributed net investment income and accumulated net realized capital losses, have been reclassified to paid in capital:
3. ORGANIZATION COSTS AND TRANSACTIONS WITH AFFILIATES
The Trust and SEI Financial Management Corporation (the "Manager") are parties to a Management Agreement dated May 23, 1986 under which the manager provides management, administrative and shareholder services to the Portfolios for an annual fee of .36% each of the average daily net asset value of the Tax Free, Bainbridge Tax Exempt, Institutional Tax Free and Pennsylvania Tax Free Portfo- lios, .23% of the average daily net asset value of the California Tax Exempt Portfolio, .39% of the average daily net asset value of the Intermediate-Term Municipal Portfolio, .35% each of the average daily net asset value of the Pennsylvania Municipal and the Massachusetts Intermediate-Term Municipal Port- folios, and .15% of the average daily net asset value of the Kansas Tax Free Income Portfolio. However, the Manager has voluntarily agreed to waive a por- tion of its fee so that total expenses of each Portfolio will not exceed cer- tain annual expense limitations. Organizational costs have been capitalized by the Trust and are being amor- tized over sixty months commencing with operations. In the event any of the initial shares of the Trust are redeemed by any holder thereof during the pe- riod that the Trust is amortizing its organizational costs, the redemption pro- ceeds payable to the holder thereof by the Trust will be reduced by the unamor- tized organizational costs in the same ratio as the number of initial shares being redeemed bears to the number of initial shares outstanding at the time of redemption. These costs include legal fees for organizational work performed by a law firm of which an officer and a Trustee of the Trust is a partner. SEI Financial Services Company ("SFS") acts as the distributor of the shares of the Trust under distribution plans which provide for the Trust to reimburse SFS for certain distribution-related expenses incurred by SFS. With the excep- tion of the Kansas Tax Free Income Portfolio, such expenses for the Class A shares of the Trust may not exceed a budget approved and monitored by the Board of Trustees. In addition to providing for the reimbursement payments described above, the Class B, C and D distribution plans provide for additional payments to the Dis- tributor. These additional payments may be used to compensate financial insti- tutions that provide distribution-related services to their customers. Distri- bution-related expenses for the Class B, Class C and Class D shares of the Money Market Portfolios may not exceed .60%, .80% and .55%, respectively. Dis- tribution-related expenses for the Class B, Class C and Class D shares of the Fixed Income Portfolios may not exceed .60%, .80%, and .60%, respectively. Certain officers of the Trust are also officers and/or Directors of the Man- ager. The Trust pays each unaffiliated Trustee an annual fee for attendance at quarterly, interim and committee meetings. Compensation of officers and affili- ated Trustees is paid by the Manager.
Weiss, Peck, and Greer Advisers, Inc. ("WPGA") act as the Investment Advisor on behalf of the Tax Free, the California Tax Exempt, the Bainbridge Tax Exempt, the Institutional Tax Free, the Pennsylvania Tax Free and the Intermediate-Term Municipal Portfolios. For its services, WPGA receives a monthly fee equal to an annual rate of .05% of the combined daily net assets up to $500 million, .04% on the next $500 million and .03% of such assets in excess of $1 billion of the Tax Free, California Tax Exempt, the Bainbridge Tax Exempt, the Institutional Tax Free and the Pennsylvania Tax Free Portfolios. For the Intermediate-Term Municipal Portfolio, WPGA receives a monthly fee equal to an annual rate of .18% of the daily net assets up to $150 million and .16% of such assets in ex- cess of $150 million. WPGA has voluntarily agreed to waive a portion of its fee in an amount proportionate to the Manager in order to limit operating expenses in the Intermediate-Term Municipal Portfolio. Prior to July 3, 1995, Bessemer Trust Company, N.A. ("Bessemer") served as the Investment Adviser on behalf of the Pennsylvania Municipal Portfolio under an Investment Advisory Agreement dated June 30, 1989. For its services, Besse- mer received a monthly fee equal to an annual rate of .25% of the average daily net assets of the Portfolio. Commencing July 3, 1995, Morgan Grenfell Capital Management Incorporated ("MGCM") was appointed as the Investment Advisor of the Pennsylvania Municipal Portfolio. For its services, MGCM receives a monthly fee equal to an annual rate of .20% of the average daily net assets of the Portfo- lio. Under an Investment Advisory Agreement dated December 7, 1990, INTRUST Bank, N.A. in Wichita serves as the Investment Adviser on behalf of the Kansas Tax Free Income Portfolio. For its services INTRUST Bank receives a monthly fee equal to an annual rate of .30% of the average daily net assets of the Portfo- lio. INTRUST Bank has voluntarily agreed to waive the full amount of their fee in order to limit operating expenses. The Manager has voluntarily agreed to waive a portion of its fee in order to limit operating expenses of the Kansas Tax Free Income Portfolio. Under an Investment Advisory Agreement dated August 24, 1992, State Street Bank and Trust Company ("State Street") served as the Investment Adviser on be- half of the Massachusetts Intermediate-Term Municipal Portfolio. For its serv- ices State Street received a monthly fee equal to an annual rate of .25% of the average daily net assets of the Portfolio.
The cost of security purchases and the proceeds from the sale of securities, other than short-term investments for the period ended August 31, 1995, were as follows:
Subsequent to October 31, 1994, the Portfolios recognized net capital losses for tax purposes that have been deferred and can be used to offset future capi- tal gains at August 31, 1996. The Portfolios also had capital losses carryforward at August 31, 1995, as follows:
For tax purposes, the losses in the Portfolios can be carried forward for a maximum of eight years to offset any net realized capital gains. The total cost of securities and the net realized gains or losses on securi- ties sold for federal income tax purposes was not materially different from the amounts reported for financial reporting purposes. The aggregate gross unrealized appreciation on securities in which there was an excess of market
NOTES TO FINANCIAL STATEMENTS (Continued) SEI Tax Exempt Trust -- August 31, 1995 value over cost, the aggregate gross unrealized depreciation on securities in which there was an excess of cost over market value and the net unrealized ap- preciation at August 31, 1995, for each Portfolio are as follows:
The Portfolios have a bank line of credit. Borrowings under the line of credit are secured by investment securities of the Portfolios equal to 110% of such borrowings which may not exceed 10% of the Portfolios' total assets.
7. CONCENTRATION OF CREDIT RISK
The Portfolios invest in debt instruments of municipal issuers. The issuers' abilities to meet their obligations may be affected by economic developments in a specific state or region. The Trust invests in securities which include revenue bonds, tax exempt com- mercial paper, tax and revenue anticipation notes, and general obligation bonds. At August 31, 1995, the percentage of portfolio investments by each rev- enue source were as follows:
Many municipalities insure their obligations with insurance underwritten by insurance companies which undertake to pay a holder, when due, the interest and principal amount of an obligation if the issuer defaults on its obligation. Al- though bond insurance reduces the risk of loss due to default by an issuer, there is no assurance that the insurance company will meet its obligations. Al- so, some of the securities have credit enhancements (letters of credit or guar- antees issued by third party domestic or foreign banks or other institutions). At August 31, 1995, the percentage of the Portfolios' investments that were in- sured and the percentage of the Portfolios' investments that had credit en- hancements were as follows:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND TRUSTEES OF SEI TAX EXEMPT TRUST:
We have audited the accompanying statements of net assets of the Tax Free, Cal- ifornia Tax Exempt, Bainbridge Tax Exempt, Institutional Tax Free, Pennsylvania Tax Free, Intermediate-Term Municipal, Pennsylvania Municipal and Kansas Tax Free Income Portfolios of SEI Tax Exempt Trust as of August 31, 1995, and the related statements of operations, statements of changes in net assets and fi- nancial highlights for the periods presented. We have also audited the state- ment of operations of the Massachusetts Intermediate-Term Municipal Portfolio of SEI Tax Exempt Trust for the period ended August 15, 1995, and the related statements of changes in net assets and financial highlights for the periods presented. These financial statements and financial highlights are the respon- sibility of the Company's management. Our responsibility is to express an opin- ion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial high- lights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of Au- gust 31, 1995, by correspondence with the custodians and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Tax Free, California Tax Exempt, Bainbridge Tax Exempt, Institutional Tax Free, Pennsylvania Tax Free, Intermediate-Term Municipal, Pennsylvania Municipal and Kansas Tax Free Income Portfolios of SEI Tax Exempt Trust as of August 31, 1995, the results of their operations, changes in their net assets, and finan- cial highlights for the periods presented, and the results of operations of the Massachusetts Intermediate-Term Municipal Portfolio of the SEI Tax Exempt Trust for the period ended August 15, 1995, and the changes in its net assets and fi- nancial highlights for the periods presented, in conformity with generally ac- cepted accounting principles.
SEI Tax Exempt Trust -- August 31, 1995 For shareholders that do not have a August 31, 1995 tax year end, this notice is for informational purposes only. For shareholders with a August 31, 1995 tax year end, please consult your tax advisor as to the pertinence of this notice.
For the fiscal year ended August 31, 1995, each fund is designating the fol- lowing items with regard to distributions paid during the year.
(1) Qualifying dividends represent dividends which qualify for the corporate dividends received deduction. * Items (A) and (B) are based on a percentage of each fund's total distribu- tions. ** Items (D) and (E) are based on a percentage of ordinary income distributions of each fund. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T13:12:21 |
0000905148-96-000061 | 0000905148-96-000061_0000.txt | U.S. SECURITIES AND EXCHANGE COMMISSION
Annual Notice of Securities Sold
1. Name and address of issuer:
2. Name of each series or class of funds for which this notice is filed:
Sentinel Balanced Fund (the "Balanced Fund") Sentinel Bond Fund (the "Bond Fund") Sentinel New York Tax-Free Income Fund (the "New York Fund") Sentinel Short-Intermediate Government Fund (the "Short- Sentinel Tax-Free Income Fund (the "Tax-Free Fund") Sentinel U.S. Treasury Money Market Fund (the "Treasury Fund") Sentinel World Fund (the "World Fund")
3. Investment Company Act File Number:
4. Last day of fiscal year for which this notice is filed:
5. Check box if this notice is being filed more than 180 days after the close of the issuer's fiscal year for purposes of reporting securities sold after the close of the fiscal year but before termination of the issuer's 24f-2 declaration:
6. Date of termination of issuer's declaration under rule 24f-2(a)(1), if applicable:
7. Number and amount of securities of the same class or series which had been registered under the Securities Act of 1933 other than pursuant to rule 24f-2 in a prior fiscal year, but which remained unsold at the beginning of the fiscal year:
8. Number and amount of securities registered during the fiscal year other than pursuant to rule 24f-2:
Balanced Fund 19,568 Shares $ 289,998 Bond Fund 47,154 Shares $ 289,998 New York Fund None None Tax-Free Fund 421,273 Shares $ 5,543,953 Treasury Fund 3,102,363 Shares $ 3,102,363 World Fund 22,188 Shares $ 289,998
9. Number and aggregate sale price of securities sold during the fiscal year:
Balanced Fund 2,333,343 Shares $ 41,370,171 Bond Fund 3,095,605 Shares $ 21,142,982 New York Fund 86,231 Shares $ 1,064,091 Short-Intermediate Fund 2,233,440 Shares $ 22,267,397 Tax-Free Fund 1,503,210 Shares $ 21,556,031 Treasury Fund 150,294,330 Shares $150,294,331 World Fund 1,216,644 Shares $ 17,860,334
10. Number and aggregate sale price of securities sold during the fiscal year in reliance upon registration pursuant to rule 24f-2:
Balanced Fund 2,313,775 Shares $ 41,023,231 Bond Fund 3,048,451 Shares $ 20,820,920 New York Fund 86,231 Shares $ 1,064,091 Short-Intermediate Fund 2,233,440 Shares $ 22,267,397 Tax-Free Fund 1,081,937 Shares $ 15,514,977 Treasury Fund 147,191,967 Shares $147,191,967 World Fund 1,194,456 Shares $ 17,534,614
11. Number and aggregate sale price of securities issued during the fiscal year in connection with dividend reinvestment plans, if applicable:
Balanced Fund 564,931 Shares $8,552,193 Bond Fund 800,012 Shares $4,951,462 New York Fund 12,949 Shares $ 147,544 Short-Intermediate Fund 70,060 Shares $ 683,298 Tax-Free Fund 275,430 Shares $3,604,212 Treasury Fund 3,499,174 Shares $3,499,173 World Fund 61,344 Shares $ 761,890
12(a). Calculation of Balanced Fund registration fee:
(i) Aggregate sale price of securities sold during the fiscal year in reliance on rule 24f-2 (from Item 10):
(ii) Aggregate price of shares issued in connection with dividend reinvestment plans (from Item 11, if applicable):
(iii) Aggregate price of shares redeemed or repurchased during the fiscal year (if applicable):
(iv) Aggregate price of shares redeemed or repurchased and previously applied as a reduction to filing fees pursuant to rule 24e-2 (if applicable):
(v) Net aggregate price of securities sold and issued during the fiscal year in reliance on rule 24f-2 (line (i), plus line (ii), less line (iii), plus line (iv)) (if applicable):
(vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or other applicable law or regulation:
(vii) Fee due (line (i) or line (v) multiplied by line (vi)):
12(b). Calculation of Bond Fund registration fee:
(i) Aggregate sale price of securities sold during the fiscal year in reliance on rule 24f-2 (from Item 10):
(ii) Aggregate price of shares issued in connection with dividend reinvestment plans (from Item 11, if applicable):
(iii) Aggregate price of shares redeemed or repurchased during the fiscal year (if applicable):
(iv) Aggregate price of shares redeemed or repurchased and previously applied as a reduction to filing fees pursuant to rule 24e-2 (if applicable):
(v) Net aggregate price of securities sold and issued during the fiscal year in reliance on rule 24f-2 (line (i), plus line (ii), less line (iii), plus line (iv)) (if applicable):
(vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or other applicable law or regulation:
(vii) Fee due (line (i) or line (v) multiplied by line (vi)):
12(c). Calculation of New York Fund registration fee:
(i) Aggregate sale price of securities sold during the fiscal year in reliance on rule 24f-2 (from Item 10):
(ii) Aggregate price of shares issued in connection with dividend reinvestment plans (from Item 11, if applicable):
(iii) Aggregate price of shares redeemed or repurchased during the fiscal year (if applicable):
(iv) Aggregate price of shares redeemed or repurchased and previously applied as a reduction to filing fees pursuant to rule 24e-2 (if applicable):
(v) Net aggregate price of securities sold and issued during the fiscal year in reliance on rule 24f-2 (line (i), plus line (ii), less line (iii), plus line (iv)) (if applicable):
(vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or other applicable law or regulation:
(vii) Fee due (line (i) or line (v) multiplied by line (vi)):
12(d). Calculation of Short-Intermediate Fund registration fee:
(i) Aggregate sale price of securities sold during the fiscal year in reliance on rule 24f-2 (from Item 10):
(ii) Aggregate price of shares issued in connection with dividend reinvestment plans (from Item 11, if applicable):
(iii) Aggregate price of shares redeemed or repurchased during the fiscal year (if applicable):
(iv) Aggregate price of shares redeemed or repurchased and previously applied as a reduction to filing fees pursuant to rule 24e-2 (if applicable):
(v) Net aggregate price of securities sold and issued during the fiscal year in reliance on rule 24f-2 (line (i), plus line (ii), less line (iii), plus line (iv)) (if applicable):
(vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or other applicable law or regulation:
(vii) Fee due (line (i) or line (v) multiplied by line (vi)):
12(e). Calculation of Tax-Free Fund registration fee:
(i) Aggregate sale price of securities sold during the fiscal year in reliance on rule 24f-2 (from Item 10):
(ii) Aggregate price of shares issued in connection with dividend reinvestment plans (from Item 11, if applicable):
(iii) Aggregate price of shares redeemed or repurchased during the fiscal year (if applicable):
(iv) Aggregate price of shares redeemed or repurchased and previously applied as a reduction to filing fees pursuant to rule 24e-2 (if applicable):
(v) Net aggregate price of securities sold and issued during the fiscal year in reliance on rule 24f-2 (line (i), plus line (ii), less line (iii), plus line (iv)) (if applicable):
(vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or other applicable law or regulation:
(vii) Fee due (line (i) or line (v) multiplied by line (vi)):
12(f). Calculation of Treasury Fund registration fee:
(i) Aggregate sale price of securities sold during the fiscal year in reliance on rule 24f-2 (from Item 10):
(ii) Aggregate price of shares issued in connection with dividend reinvestment plans (from Item 11, if applicable):
(iii) Aggregate price of shares redeemed or repurchased during the fiscal year (if applicable):
(iv) Aggregate price of shares redeemed or repurchased and previously applied as a reduction to filing fees pursuant to rule 24e-2 (if applicable):
(v) Net aggregate price of securities sold and issued during the fiscal year in reliance on rule 24f-2 (line (i), plus line (ii), less line (iii), plus line (iv)) (if applicable):
(vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or other applicable law or regulation:
(vii) Fee due (line (i) or line (v) multiplied by line (vi)):
12(g). Calculation of World Fund registration fee:
(i) Aggregate sale price of securities sold during the fiscal year in reliance on rule 24f-2 (from Item 10):
(ii) Aggregate price of shares issued in connection with dividend reinvestment plans (from Item 11, if applicable):
(iii) Aggregate price of shares redeemed or repurchased during the fiscal year (if applicable):
(iv) Aggregate price of shares redeemed or repurchased and previously applied as a reduction to filing fees pursuant to rule 24e-2 (if applicable):
(v) Net aggregate price of securities sold and issued during the fiscal year in reliance on rule 24f-2 (line (i), plus line (ii), less line (iii), plus line (iv)) (if applicable):
(vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or other applicable law or regulation:
(vii) Fee due (line (i) or line (v) multiplied by line (vi)):
12(h). Total registration fee due for all series or classes of funds for which this notice is filed:
New York Fund $ 0.00
13. Check box if fees are being remitted to the Commission's lockbox depository as described in section 3a of the Commission's Rule of Informal and Other Procedures (17 CFR 202.3a).
Date of mailing or wire transfer of filing fees to the Commission's lockbox depository:
This report has been signed below by the following person on behalf of the issuer and in the capacities and on the dates indicated.
By (Signature and Title) /s/ Marvin Aber | 24F-2NT | 24F-2NT | 1996-01-12T00:00:00 | 1996-01-12T16:13:20 |
0000933094-96-000002 | 0000933094-96-000002_0000.txt | FLEXIBLE PREMIUM One Ameritas Way/5900 "O" Street VARIABLE UNIVERSAL LIFE P.O. Box 81889/Lincoln, NE 68501
This Prospectus describes a flexible premium variable universal life insurance policy ("Policy") offered by Ameritas Life Insurance Corp. ("ALIC"), a mutual life insurance company. The Policy is designed to provide insurance protection until the Policy Anniversary nearest the Insured's 100th birthday and at the same time provide flexibility to vary the frequency and amount of premium payments and to increase or decrease the level of death benefits payable under the Policy. This flexibility allows a Policyowner to provide for changing insurance needs under a single insurance policy.
The Policy guarantees the Death Benefit as long as the Policy remains in force. The Policyowner may choose death benefit Option A (generally, a level benefit that equals the Specified Amount of the Policy) or Option B (a variable benefit that generally equals the Specified Amount plus the Policy's Accumulation Value). The minimum initial Specified Amount for a policy is $100,000. The Policy provides for an Accumulation Value that can be obtained through Partial Withdrawals, surrender of the Policy, or through policy loans. There is no minimum guaranteed Accumulation Value. ALIC agrees to keep the Policy in force during the first three years and provide a Guaranteed Death Benefit during that time, so long as the cumulative monthly minimum Guaranteed Death Benefit Premium is paid.
The Policyowner has the right to examine the Policy and return it for a refund for a limited time (see page 21). The initial premium payment will be allocated to the Money Market portfolio of the Vanguard Variable Insurance Fund, as of the Issue Date, for 13 days, after deducting premium charges of no greater than 5% (currently, 3.5%) to pay for premium taxes and the expense of deferring the tax deduction of policy acquisition costs. After the 13-day period (see page 23), the Accumulation Value will be allocated to the Subaccounts of ALIC Separate Account LLVL ("Account") or the Fixed Account as selected by the Policyowner. The Accumulation Value, the duration of the death benefit and, if Option B is selected, the amount of the death benefit above the Specified Amount, will vary with the investment experience of the selected Subaccounts or the Fixed Account. The Accumulation Value will also be adjusted for other factors, including the amount of charges imposed and the premium payments made. The Policy will continue in force so long as the Net Cash Surrender Value is sufficient to pay certain monthly charges imposed in connection with the Policy.
The assets of each Subaccount are invested in shares of a corresponding portfolio of the Vanguard Variable Insurance Fund or the Neuberger & Berman Advisers Management Trust (collectively the "Funds"). The Vanguard Variable Insurance Fund is a mutual fund with seven portfolios: Money Market, High-Grade Bond, Balanced, Equity Index, Equity Income, Growth and International. The Neuberger & Berman Advisers Management Trust is a mutual fund with seven portfolios of which: Limited Maturity Bond, Balanced, Growth, and Partners are offered. The accompanying prospectuses for the various funds describe the investment objectives and policies and the risks of each of the portfolios of the Funds. The investment gains or losses of the monies placed in the various portfolio Subaccounts will be experienced by the Policyowner.
Replacing existing insurance with a Policy or purchasing a Policy as a means to obtain additional insurance protection if the purchaser already owns another flexible premium variable life insurance policy may not be advantageous.
This Prospectus Must Be Accompanied or Preceded By Current Prospectuses For The Vanguard Variable Insurance Fund, and the Neuberger & Berman Advisers Management Trust.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, OR BY ANY STATE SECURITIES REGULATORY AUTHORITY, NOR HAS THE COMMISSION, OR ANY STATE SECURITIES REGULATORY AUTHORITY, PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
The Date of This Prospectus is November 6, 1995, as revised December 19, 1995 and January 12, 1996.
ACCOUNT - Ameritas Life Insurance Corp. Separate Account LLVL, a separate investment account established by ALIC to receive and invest the net premiums paid under the Policy and allocated by the Policyowner to the Account.
ACCUMULATION VALUE - The total amount that a Policy provides for investment at any time. It is equal to the total of the Accumulation Value held in the Account, the Fixed Account, and any Accumulation Value held in the general account which secures policy loans.
ALIC - Ameritas Life Insurance Corp., a mutual life insurance company.
ATTAINED AGE - The Issue Age of the Insured plus the number of complete Policy Years that the policy has been in force.
BENEFICIARY - The person or persons designated in the application, unless later changed, to receive the Death Benefit (see page 26 and 27) for "Beneficiary" and "Change of Beneficiary").
DECLARED RATES - The interest rate declared by ALIC to be earned on amounts in the Fixed Account, which ALIC guarantees to be no less than 3.5%.
DEATH BENEFITS - The amount of insurance coverage provided under the selected death benefit option of the Policy.
DEATH BENEFIT PROCEEDS - The proceeds payable to the beneficiary upon receipt by ALIC of Satisfactory Proof of Death of the Insured while the Policy is in force. It is equal to: (l) the Death Benefit; plus (2) additional life insurance proceeds provided by any riders; minus (3) any outstanding policy debt; minus (4) any overdue monthly deduction, including the deduction for the month of death.
FIXED ACCOUNT - An account that is a part of ALIC's General Account to which all or a portion of net premiums and transfers may be allocated for accumulation at fixed rates of interest.
GENERAL ACCOUNT - The General Account of ALIC includes all of ALIC assets except those assets segregated into separate accounts.
GUARANTEED DEATH BENEFIT PREMIUM - A specified optional premium amount for the first three policy years which, if paid in advance on a monthly or yearly cumulative basis, after adjustment for policy loans or Partial Withdrawals, will keep the Policy in force during the first three policy years, so long as other policy provisions are met, even if the Net Cash Surrender Value is insufficient to cover monthly deductions. This benefit is provided without an additional policy charge.
INSURED - The person whose life is insured under the Policy.
ISSUE AGE - The age of the Insured at the Insured's birthday nearest the Policy Date.
ISSUE DATE - The date that all financial, contractual and administrative requirements have been met and processed for the Policy.
MATURITY DATE - The date ALIC pays any net cash surrender value, if the Insured is still living.
MONTHLY ACTIVITY DATE - The same date in each succeeding month as the Policy Date except should such monthly activity date fall on a date other than a valuation date, the monthly activity date will be the next valuation date.
NET AMOUNT AT RISK - The amount by which the death benefit that would be payable on a Monthly Activity Date exceeds the Accumulation Value on that date.
NET CASH SURRENDER VALUE - The Accumulation Value on the date of surrender less any outstanding policy debt.
NET PREMIUM - Premium paid less the premium charges (See Premiums, page 22 Charges and Deductions, page 24).
OUTSTANDING POLICY DEBT - The sum of all unpaid policy loans and accrued interest on policy loans.
PARTIAL WITHDRAWAL - A Policyowner's means of accessing a portion of the Accumulation Value without terminating coverage under the Policy. A Partial Withdrawal has limitations, is irrevocable, and has several policy cost and coverage implications (See pages 20 and 26).
PLANNED PERIODIC PREMIUMS - A selected schedule of equal premiums payable at fixed intervals. The Policyowner is not required to follow this schedule, nor does following this schedule ensure that the Policy will remain in force unless the payments meet the requirements of the Guaranteed Death Benefit Premium.
POLICY - The Flexible Premium Variable Universal Life Insurance Policy offered by ALIC and described in this Prospectus.
POLICYOWNER - The owner of the Policy, as designated in the application or as subsequently changed. If a Policy has been absolutely assigned, the assignee is the Policyowner. A collateral assignee is not the Policyowner.
POLICY ANNIVERSARY DATE - The same day as the Policy Date for each year the Policy remains in force.
POLICY DATE - As set forth in the Policy, the effective date for all coverage provided in the application. The Policy Date is used to determine policy anniversary dates, policy years and monthly activity dates. Policy anniversaries are measured from the Policy Date. The Policy Date and the Issue Date will be the same unless: 1) an earlier Policy Date is specifically requested, or 2) the Issue Date is later because additional premiums or application amendments are required at time of delivery. (See Issuance of a Policy, page 21.)
POLICY YEAR - The period from one Policy Anniversary Date until the next Policy Anniversary Date.
SATISFACTORY PROOF OF DEATH - Means all of the following must be submitted: (1) A certified copy of the death certificate; (4) Any other information that ALIC may reasonably require to establish the validity of the claim.
SPECIFIED AMOUNT - The minimum death benefit under the Policy, as selected by the Policyowner, which must be $100,000 or more at the Issue Date.
SUBACCOUNT - A subdivision of the Account. Each Subaccount invests exclusively in the shares of a specified portfolio of the Funds.
SURRENDER - Occurs when the policy is terminated before the maturity date during the Insured's life for its net cash surrender value. Coverage under the policy will terminate as of the date of a surrender.
VALUATION DATE - Any day on which the New York Stock Exchange is open for trading.
VALUATION PERIOD - The period between two successive Valuation Dates, commencing at the close of the New York Stock Exchange ("NYSE") on one Valuation Date and ending at the close of the NYSE on the next succeeding Valuation Date.
The following summary of Prospectus information and diagram of the Policy should be read in conjunction with the detailed information appearing elsewhere in this Prospectus. Unless otherwise indicated, the description of the Policy contained in this Prospectus assumes that the Policy is in force, current charges were used, and there is no outstanding indebtedness.
You can vary amount and frequency.
Premium taxes and the expense of deferring the tax deduction of policy acquisition costs - 3.5% This charge is guaranteed not to exceed 5% There is no premium load to cover sales and distribution expenses.
You direct the net premium to be invested in the Fixed Account or to the Separate Account which offers eleven different Subaccounts. The eleven Subaccounts invest in the corresponding portfolios (Funds) of the Vanguard Variable Insurance Fund or the Neuberger & Berman Advisers Management Trust.
Monthly charge for cost of insurance and cost of any riders.
Monthly charge for administrative expenses ($9.00 per month the first policy year and the 12-month period following an increase in specified amount, $4.50 per month currently thereafter). This charge is guaranteed not to exceed $9.00 per month.
Daily charge, at an annual rate of 0.75%, from the Subaccounts for mortality and expense risks. This charge is guaranteed not to exceed .90%. This charge is not deducted from Fixed Account assets.
LIVING BENEFITS RETIREMENT BENEFITS DEATH BENEFITS
Partial Withdrawals may Loans may be taken at a Income tax free to be made(subject to certain net zero interest rate after beneficiary. restrictions). The death ten years or when the policy- Available as lump benefit will be reduced by holder reaches 55 (whichever sum or under the the amount of the Partial occurs later). five payment methods Withdrawal. Should the policy lapse available as retire- Up to fifteen free trans- while loans are outstanding ment benefits. fers may be made each year the portion of the loan att- between the investment ributable to earnings will portfolios. become taxable distributions. Accelerated payment of up (See page 19). to 50% of the lowest Payments can be taken under scheduled death benefit is one or more of five different available under certain payment options. illness. The policy may be surren- dered at any time for its Net Cash Surrender Value. The policy has no sur- there is a charge for Partial Withdrawals.
The Policy is issued by Ameritas Life Insurance Corp. ("ALIC"), a Nebraska mutual life insurance company. A separate account of ALIC, Separate Account LLVL ("Account"), has been established to hold the assets supporting the Policy. The Account has eleven Subaccounts which correspond to, and are invested in, the portfolios of the Funds discussed herein. (See Ameritas Life Insurance Corp. and the Account, page 9, and The Funds, page 10.) The financial statements for ALIC can be found beginning on page 37.
This flexible premium variable universal life insurance policy ("Policy") allows the Policyowner, within limitations, to choose: (a) the amount and frequency of premium payments; (b) the manner in which the Policyowners Accumulation Values are invested; and (c) a choice of two death benefit options.
As long as the Policy remains in force, it will provide for: (1) life insurance coverage on the Insured up to age 100; (2) an Accumulation Value; (3) surrender rights (including Partial Withdrawals and Surrender); (4) policy loan privileges; and (5) a variety of optional benefits and riders that may be added to the Policy for an additional charge or without charge if certain minimum premiums are paid.
This Policy differs in two important respects from a conventional life insurance policy. First, the failure to pay a Planned Periodic Premium will not in itself cause the Policy to lapse.
Second, a Policy can lapse even if Planned Periodic Premiums have been paid unless the Guaranteed Death Benefit Premium requirements have been met. (See Payment and Allocation of Premiums, page 21.)
AMOUNTS. A minimum initial premium of at least 25% of the total first year monthly deductions including charges for riders, and any substandard risk adjustments must be paid in order to put the Policy in force. The minimum initial premium is less than the Guaranteed Death Benefit Premium. After the minimum initial premium is paid, unscheduled premiums may be paid in any amount and at any frequency, subject only to the maximum and minimum limitations set by ALIC and the maximum limitations set by Federal Income Tax Law. A Policyowner may also choose a Planned Periodic Premium which may include the minimum cumulative premiums necessary to keep in force the Guaranteed Death Benefit Provision.
A Policy will lapse when the Net Cash Surrender Value is insufficient to pay the monthly deduction unless the Guaranteed Death Benefit Provision is in effect. A period of 61 days from the date written notice of lapse is mailed to the Policyowner's last known address will be allowed for the Policyowner to make sufficient payment to keep the Policy in force for the Policyowner (grace period).
The Policyowner may select the manner in which the new premiums are allocated between the Fixed Account (See Fixed Account, page 13) and to one or more of the Subaccounts.
Net premiums, which equal the premiums paid less the premium charges, are first allocated for 13 days, as of the Issue Date, to the Subaccount for the Money Market Portfolio of the Vanguard Variable Insurance Fund. After the 13-day period the Accumulation Value will be allocated as selected by the Policyowner. The Policyowner may change the allocation instructions for premiums and may also make a special designation for unscheduled premiums. Subject to certain charges and restrictions, a Policyowner may also transfer amounts among the Subaccounts and the Fixed Account. (See Allocation of Premiums and Accumulation Value, page
The various Subaccounts available invest in a corresponding portfolio of the Funds. The Vanguard Variable Insurance Fund is a mutual fund with seven portfolios: Money Market, High-Grade Bond, Balanced, Equity Index, Equity Income, Growth and International. The Neuberger & Berman Advisers Management Trust is a mutual fund with seven portfolios of which: Limited Maturity, Balanced, Growth, and Partners are offered. A summary of the investment objectives for these portfolios is set forth at page 10 of this Prospectus, and detailed objectives of these portfolios are described in the accompanying prospectuses for the Funds. There is no assurance that these objectives will be met. The Policyowner bears the entire investment risk for amounts allocated to the Subaccounts.
DEATH BENEFIT PROCEEDS AND DEATH BENEFIT OPTIONS. While the Policy remains in force, ALIC will pay the Death Benefit Proceeds to the Beneficiary upon receipt of Satisfactory Proof of Death of the Insured. These proceeds may be paid in a lump sum or in accordance with an optional payment plan.
The Policy provides for two death benefit options. Under either option, so long as the Policy remains in force, the death benefit will not be less than the current Specified Amount of the Policy adjusted for any policy indebtedness and any overdue monthly deductions. The death benefit may, however, exceed the Specified Amount, depending upon the investment experience of the Policy. Death Benefit Option A provides for a level benefit equal to the current Specified Amount of the Policy, unless the Accumulation Value of the Policy on the date of the Insured's death multiplied by the applicable percentage set forth in the Policy is greater, in which case the death benefit is equal to that larger amount. Death Benefit Option B provides for a variable benefit equal to the current Specified Amount of the Policy plus the Policy's Accumulation Value on the date of the Insured's death, or if greater, the Accumulation Value of the Policy on the date of the Insured's death multiplied by the applicable percentage set forth in the Policy. (See Death Benefit Options, page 15)
Optional insurance benefits offered under the Policy include: Guaranteed Death Benefit provision; Children's Protection Rider; Cost Recovery Rider; Guaranteed Insurability Rider; Payor Waiver of Monthly Deductions on Disability; Accelerated Benefit Rider for Terminal Illness, Waiver of Monthly Deductions on Disability. These riders are not available in every state. The cost, if any, of these additional insurance benefits will be deducted from the Policy's Accumulation Value as a part of the monthly deduction. The Guaranteed Death Benefit provision is provided without cost but requires the described premium payments.
BENEFITS AT MATURITY. On the Maturity Date of the Policy, if the Insured is still living, the Policyowner will be paid the Net Cash Surrender Value of the Policy.
ACCUMULATION VALUE BENEFITS. The Policy's Accumulation Value in the Account will reflect the amount and frequency of premium payments, the investment experience of the chosen Subaccounts and the Fixed Account, policy loans, any Partial Withdrawals, and any charges imposed in connection with the Policy. The entire investment risk of the Account is borne by the Policyowner. ALIC does not guarantee a minimum Accumulation Value in the Account. (See Accumulation Value, page 17.) It does guarantee the Fixed Account.
The Policyowner may surrender the Policy at any time and receive its Net Cash Surrender Value. Subject to certain limitations, the Policyowner may also make a Partial Withdrawal from the Policy and obtain a portion of the Accumulation Value at any time prior to the maturity date. Partial Withdrawals will reduce both the Accumulation Value and the Death Benefit payable under the Policy. (See Partial Withdrawals, page 20) A charge will be deducted from the amount paid upon Partial Withdrawal. (See Partial Withdrawal Charge, page 26.)
POLICY LOANS. Policy loans, secured by the Accumulation Value of the Policy, are available. After the first policy anniversary, the Policyowner may obtain a loan at "regular" loan interest rates, which shall not exceed 6% annually.
After the later of age 55 or the tenth policy anniversary, the Policyowner can borrow against a limited amount of the Accumulation Value of the Policy at a "reduced" interest rate, which reduced rate is currently 3.5% and shall not exceed 4% annually ("reduced rate loan"). While the loan is outstanding, the Policyowner earns 3.5% interest on the Accumulation Values securing the loans. (For details concerning policy loan provisions, see page 19.)
Policy loans may have tax consequences and will affect earnings and Policy Accumulation Values. Should the policy lapse while loans are outstanding the portion of the loans attributable to earnings will become taxable distributions. Should the Policy become a modified endowment contract, loans (including loans to pay loan interest) will be taxable to the extent of any gain under the Policy. Further, a 10% penalty tax also applies to the taxable portion of any distribution prior to the Insured's age 59 1/2. (See Federal Tax Matters, page 29).
SALES CHARGE. There is no premium load to cover sales and distribution expenses.
PREMIUM CHARGES. Generally, a charge of no greater than 5% (currently 3.5%) of each premium will be deducted to compensate ALIC for premium tax charges (currently 2.5%) and the expenses of deferring the tax deduction of policy acquisition costs (currently 1.0%) before placing any amount in a Subaccount or the Fixed Account. ALIC does not expect to derive a profit from the premium charges. (See Deductions From Premium Payment, page 24).
MONTHLY CHARGES AGAINST THE ACCUMULATION VALUE.
a) A monthly maintenance charge of up to $9.00 [currently ALIC is charging $9.00 per month ($108.00 per year) during the first Policy Year and during the 12-month period after an increase in specified amount, and $4.50 per month ($54.00 per year) thereafter] to compensate ALIC for the continuing administrative costs of the Policy; plus
b) A monthly charge for the cost of insurance including the cost for any riders. (See Charges Deducted from Accumulation Value, page 24.)
SURRENDER CHARGE. This policy has no surrender charge. However, there is a charge for Partial Withdrawals. (See below).
TRANSFER CHARGE. Fifteen transfers of Accumulation Value per policy year will be permitted free of charge. A $10 administrative charge may be assessed for each additional transfer. The transfer charge will be deducted from the amount transferred. (See Transfer Charge, page 25.)
PARTIAL WITHDRAWAL CHARGE. A maximum charge, not to exceed the lesser of $50 or 2% of the amount withdrawn may be deducted for each Partial Withdrawal. (Currently, the charge is the lesser of $25 or 2%.) The charge will be deducted from the amount paid as a result of the Partial Withdrawal and will compensate ALIC for the administrative costs of Partial Withdrawals. A Partial Withdrawal charge is not assessed when a Policy is surrendered. (See Partial Withdrawal
DAILY CHARGES AGAINST THE ACCOUNT. A daily charge at an annual rate not to exceed .90% (currently .75%) of the average daily net assets of each Subaccount, but not the Fixed Account. This charge compensates ALIC for mortality and expense risks assumed in connection with the Policy. (See Daily Charges Against
No additional charges are currently made against the Account for federal, state or local taxes. If there is a material change from the expected treatment of ALIC under federal, state or local tax laws, ALIC may determine to make deductions from the Account to pay those taxes. (See Taxes, page 26.)
In addition, because the Account purchases shares of the Funds, the value of the units in each Subaccount will reflect the net asset value of shares of the various Funds held therein, and therefore, the investment advisory fee and other expenses incurred by the Funds. (See The Funds, page 10.)
TAX TREATMENT OF THE POLICY
Like death benefits payable under conventional life insurance policies, life insurance proceeds payable under the Policy are excludable from the taxable income of the Beneficiary. Should the Policy be deemed a modified endowment contract (see Federal Tax Matters-Tax Status of the Policy, page 29), Partial Withdrawals or Surrenders, assignments, policy pledges, and loans under the Policy will be taxable to the Policyowner to the extent of any gain under the Policy. Generally, a 10% penalty tax also applies to the taxable portion of any distribution prior to the Insured reaching age 59 1/2. (For further detail regarding taxation, see Federal Tax Matters, page 29.)
The Policyowner is granted a period of time (a "free look period") to examine a Policy and return it for a refund. The Policyowner may cancel the Policy within 45 days after Part I of the application is signed, within 10 days after the Policyowner receives the Policy, or 10 days after ALIC delivers a notice concerning cancellation, whichever is later. The amount of the refund is the greater of the premium paid or the premium paid adjusted by investment gains and losses. (See Refund Privilege, page 21.)
During the first 24 months after the policy date of the Policy, subject to certain restrictions, the Policyowner may exchange the Policy for a flexible premium adjustable life insurance policy issued and made available for exchange by ALIC. The policy provisions and applicable charges for the new Policy will be based on the same Policy Date and Issue Age as under the Policy. (See Exchange
Ameritas Life Insurance Corp. ("ALIC") is a mutual life insurance company domiciled in Nebraska since 1887. ALIC is currently licensed to sell life insurance in 49 states, and the District of Columbia. The Home Office of ALIC is at One Ameritas Way, 5900 "0" Street, Lincoln, Nebraska 68501.
ALIC and subsidiaries had total assets at December 31, 1994 of over $2.0 billion. ALIC enjoys a long standing A+ (Superior) rating from A.M. Best, an independent firm that analyzes insurance carriers. ALIC also has been rated A ("Excellent") by Weiss Research, Inc., and has an AA ("Excellent") rating from Standard & Poor's for claims-paying ability.
Ameritas Investment Corp., the principal underwriter of the policies, may publish in advertisements and reports to Policyowners, the ratings and other information assigned to ALIC by one or more independent rating services and charts and other information concerning dollar cost averaging, tax-deference, diversification, asset allocation, and other investment methods. ALIC may also publish information about Veritas, the direct-to-the- consumer Division of ALIC. The purpose of the ratings is to reflect the financial strength and/or claims-paying ability of ALIC. The ratings do not relate to the performance of the separate account.
Ameritas Life Insurance Corp. Separate Account LLVL ("the Account") was established under Nebraska law on August 24, 1994. The assets of the Account are held by ALIC and are segregated from all of ALIC's other assets. These assets are not chargeable with liabilities arising out of any other business which ALIC may conduct, including any income, gains, or losses of ALIC. Although the assets maintained in the Account will not be charged with any liabilities arising out of ALIC's other business, all obligations arising under the Policies are liabilities of ALIC who will maintain assets in the Account of a total market value at least equal to the reserve and other contract liabilities of the Account. Nevertheless, to the extent assets in the Account exceed ALIC's liabilities in the Account, the assets are available to cover the liabilities of
Account. ALIC may, from time to time, withdraw assets available to cover the General Account obligations. The Account is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a unit investment trust, which is a type of investment company. This does not involve any SEC supervision of the management or investment policies or practices of the Account. For state law purposes, the Account is treated as a Division of ALIC.
There are currently eleven Subaccounts within the Account available to Policyowners for new allocations. Each Subaccount of the Account will invest only in the shares of a corresponding portfolio of the Vanguard Variable Insurance Fund or the Neuberger & Berman Advisers Management Trust (collectively the "Funds"). Each fund is registered with the SEC under the 1940 Act as an open-end diversified management investment company.
The assets of each portfolio of the Funds are held separate from the assets of the other portfolios. Thus, each portfolio operates as a separate investment portfolio, and the income or losses of one portfolio generally have no effect on the investment performance of any other portfolio.
The investment objectives and policies of each portfolio are summarized below. There is no assurance that any of the portfolios will achieve their stated objectives. More detailed information, including a description of investment objectives, policies, restrictions, expenses and risks, is in the prospectuses for each of the Funds, which must accompany or precede this Prospectus. These Prospectuses should be read carefully together with this Prospectus and retained.
Each Policyowner should periodically consider the allocation among the Subaccounts in light of current market conditions and the investment risks attendant to investing in the Funds' various portfolios.
The Account will purchase and redeem shares from the Funds at net asset value. Shares will be redeemed to the extent necessary for ALIC to collect charges, pay the surrender values, Partial Withdrawals, and make policy loans or to transfer assets from one Subaccount to another, or to the Fixed Account, as requested by Policyowners. Any dividend or capital gain distribution received from a portfolio of the Funds will be invested immediately at net asset value in shares of that portfolio and retained as assets of the corresponding Subaccount.
Since the Vanguard Variable Insurance Fund and the Neuberger & Berman Advisers Management Trust are each designed to provide investment vehicles for variable annuity or variable life insurance contracts of various insurance companies and will be sold to separate accounts of other insurance companies as investment vehicles for various types of variable life insurance policies or variable annuity contracts, there is a possibility that a material conflict may arise between the interests of the Account and one or more of the separate accounts of another participating insurance company. In the event of a material conflict, the affected insurance companies agree to take any necessary steps, including removing its separate accounts from the Funds, to resolve the matter. The risks of such mixed and shared funding are described further in the prospectuses of the Funds.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS' PORTFOLIOS
Money Market Invests in high-quality money Seeks to provide current market obligations issued by income consistent with the financial institutions, non- preservation of capital financial corporations, and and liquidity. Also seeks the U.S. Government, its to maintain a stable net agencies and instrumental- asset value of $1.00 per ities. This policy includes share. will only invest in securities that mature in 13 months or less, and will maintain an 90 days or less.
High-Grade Bond Will invest in a statistically Seeks to duplicate the selected sample of fixed total return of publicly- income and mortgage-backed traded investment grade securities included in the fixed income securities Lehman Brothers Aggregate Bond in the aggregate by at- Index (the "Lehman Bond Index"). tempting to duplicate the The portfolio will invest 80% investment performance of or more of its assets in a broad investment grade securities included in the bond index. not less than 65% of its assets in U.S. Government or corporate bonds.
Balanced It is expected that common Seeks to provide capital stocks will represent 60% to growth and a reasonable 70% of the portfolio's total level of current income. assets. The remaining 30% to 40% of the portfolio's assets will be invested in high- ties. The portfolio may invest up to 10% of its assets in foreign securities.
Equity Index Expects to invest in all 500 Seeks to parallel the in- stocks in the Standard & Poor's vestment results of the 500 Composite Stock Index Standard & Poor's 500 ("S&P 500 Index") in approxi- Composite Stock Price mately the same proportions as Index (the "S&P 500"). they are represented in the Index.
Equity Income Under normal circumstances, at Seeks to provide a high least 80% of portfolio assets level of current income. will be invested in income- mon stocks. The portfolio may invest up to 20% of its assets income securities.
Growth Portfolio Invests primarily in equity Seeks to provide long- securities of seasoned U.S. term capital appreciation. prospects for growth.
International Invests primarily in appreci- Seeks to provide long- ation-oriented equity securi- term capital appreciation. to diversify its assets among as many as thirty foreign stock markets. May also enter change rates.
Limited Will invest in a diversified Seeks the highest current Maturity Bond portfolio of limited maturity income consistent with debt securities. Under normal low risk to principal and circumstances at least 65% of liquidity. As a secondary total assets are invested in objective, seeks to debt securities. Does not enhance its total return intend to concentrate 25% or through capital appreci- more of its total assets in ation when market factors debt securities of issuers in indicate this may be any single industry. Average available without sig- portfolio maturity may range nificant risk to principal. up to five years.
Growth Invests in common stocks the Seeks to provide capital investment adviser believes growth. ation.
Partners Invests primarily in common Seeks to provide capital stocks of established growth. oriented investment approach. sistent cash flow and support from asset values.
Balanced The investment adviser anti- Seeks to provide long-term cipates that investments will capital growth and reason- normally be managed so that able current income with- approximately 60% of the out undue risk to portfolio's total assets will principal. be invested in common stocks and the remaining assets will be invested in debt securities. stock portion of the port- adjusted downward as low as 50% or upward to as high as 70%. At least 25% of assets will be invested in fixed income senior securities.
Vanguard's Fixed Income Group provides advisory services to the Money Market and High-Grade Bond portfolios. Vanguard's Core Management Group provides advisory services to the Equity Index portfolio. Wellington Management Company, Newell Associates and Lincoln Capital Management serve as independent investment advisors to the Balanced, Equity Income, and Growth portfolios, respectively. The International portfolio employs Schroder Capital Management International, Inc. as the adviser. Vanguard charges a fee to each portfolio for providing management, distribution and marketing services.
Neuberger & Berman Management Incorporated is paid a fee to serve as investment adviser to the Neuberger & Berman Advisers Management Trust (the "Trust") portfolios.
In addition to the advisory fee, the Trust incurs the following expenses: legal, auditing or accounting expenses, trustee's fees and expenses, insurance premiums, brokers' commissions, taxes and governmental fees, expenses of issue or redemption of shares, expenses of registering or qualifying shares for sale, reports and notices to shareholders and variable contract owners, and fees and disbursements of custodians, transfer agents, registrars, shareholder servicing agents and dividend disbursing agents, and certain expenses with respect to membership fees of industry associations. These expenses are paid by Neuberger & Berman Management, Incorporated, which charges a fee for this service.
The amount of expenses borne by each portfolio for the most recent fiscal year was as follows:
The Advisers Management Trust has agreed to reimburse each Neuberger & Berman Portfolio to the extent that the aggregate operating expenses and its pro rata share of its corresponding series operating expenses, excluding the compensation of Neuberger & Berman Management from the portfolio, taxes, interest, extraordinary expenses, brokerage commission, and transaction costs that exceed 1% of the portfolio's average daily net asset value are in excess of an annual rate of 1.00%. This agreement is expected to continue in future years. In the absence of reimbursement, the portfolio's expenses may increase.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
ALIC reserves the right, subject to applicable law, and, if necessary, after notice to and prior approval from the SEC and/or state insurance authorities to make additions to, deletions from, or substitutions for the shares that are held in the Account or that the Account may purchase. The Account may, to the extent permitted by law, purchase other securities for other contracts or permit a conversion between contracts upon request by the Policyowners.
ALIC may, in its sole discretion, also establish additional Subaccounts of the Account, each of which would invest in shares corresponding to a new portfolio of the Funds or in shares of another investment company having a specified investment objective. ALIC may, in its sole discretion, establish new Subaccounts or eliminate one or more Subaccounts if marketing needs, tax considerations or investment conditions warrant. Any new Subaccounts may be made available to existing Policyowners on a basis to be determined by ALIC.
If any of these substitutions or changes are made, ALIC may by appropriate endorsement change the Policy to reflect the substitution or change. If ALIC deems it to be in the best interest of Policyowners, and subject to any approvals that may be required under applicable law, the Account may be operated as a management company under the 1940 Act, it may be deregistered under that Act if registration is no longer required, or it may be combined with other ALIC separate accounts. To the extent permitted by applicable law, ALIC may also transfer the assets of the Account associated with the Policies to another separate account. In addition, ALIC may, when permitted by law, restrict or eliminate any voting rights of Policyowners or other persons who have voting rights as to the Account.
The Policyowner will be notified of any material change in the investment policy of any portfolio in which the policyowner has an interest.
Policyowners may elect to allocate all or a portion of their premium payments to the Fixed Account, and they may also transfer monies from the Separate Account to the Fixed Account or from the Fixed Account to the Separate Account. (See
Payments allocated to the Fixed Account and transferred from the Separate Account to the Fixed Account are placed in the General Account of ALIC, which supports insurance and annuity obligations. The General Account includes all of ALIC's assets, except those assets segregated in the separate accounts. ALIC has the sole discretion to invest the assets of the General Account, subject to applicable law. ALIC bears an investment risk for all amounts allocated or transferred to the Fixed Account and interest credited thereto,
The Date of this Prospectus Supplement is January 12, 1996.
less any deduction for charges and expenses, whereas the Policyowner bears the investment risk that the declared rate described below, may fall to a lower rate after the expiration of a declared rate period. Because of exemptive and exclusionary provisions, interests in the General Account have not been registered under the Securities Act of 1933 (the "1933 Act") nor is the General Account registered as an investment company under the Investment Company Act of 1940 (the "1940" Act"). Accordingly neither the General Account nor any interest therein is generally subject to the provisions of the 1933 or 1940 Act.
We understand that the staff of the SEC has not reviewed the disclosures in this Prospectus relating to the Fixed Account portion of the Contract; however, disclosures regarding the Fixed Account portion of the Contract may be subject to generally applicable provisions of the Federal Securities Laws regarding the accuracy and completeness of statements made in prospectuses.
ALIC guarantees that it will credit interest at an effective annual rate of at least 3.5%. ALIC may, at its discretion, declare higher interest rate(s) for amounts allocated or transferred to the General Account ("Declared Rate(s)"). Each month ALIC will establish the declared rate for the monies transferred or allocated to the Fixed Account that month. The Policyowner will earn interest for a 12-month period on the amount transferred or allocated at the rate declared effective the month of transfer or allocation. During subsequent 12-month periods, the Policyowner will earn interest on the monies transferred and the increase thereon at the rate declared for each month for each such 12-month period.
The Policy is designed to provide the Policyowner with both lifetime insurance protection to the policy anniversary nearest the Insured's 100th birthday and flexibility in connection with the amount and frequency of premium payments and with the level of life insurance proceeds payable under the Policy.
The Policyowner is not required to pay scheduled premiums to keep a Policy in force, but may, subject to certain limitations, vary the frequency and amount of premium payments. Moreover, the Policy allows a Policyowner to adjust the level of death benefits payable under the Policy without having to purchase a new Policy by increasing (with evidence of insurability) or decreasing the Specified Amount. An increase in the Specified Amount will increase the optional Guaranteed Death Benefit Premium required. Thus, as insurance needs or financial conditions change, the Policyowner has the flexibility to adjust life insurance benefits and vary premium payments.
The Death Benefit may, and the Accumulation Value will, vary with the investment experience of the chosen Subaccounts of the Account. Thus the Policyowner benefits from any appreciation in value of the underlying assets, but bears the investment risk of any depreciation in value. As a result, whether or not a Policy continues in force may depend in part upon the investment experience of the chosen Subaccounts. The failure to pay a planned periodic premium will not necessarily cause the Policy to lapse, but the Policy could lapse even if planned periodic premiums have been paid, depending upon the investment experience of the Account. ALIC agrees to keep the Policy in force during the first three years and provide a Guaranteed Death Benefit during that period so long as the cumulative monthly Guaranteed Death Benefit Premium is paid even though the Guaranteed Death Benefit Premium allowed by contract may not, after the payment of monthly insurance and administrative charges, generate positive Net Cash Surrender Values.
As long as the Policy remains in force, ALIC will, upon satisfactory proof of the Insured's death, pay the Death Benefit Proceeds of a Policy in accordance with the death benefit option in effect at the time of the Insured's death. The amount of the death benefits payable will be determined at the end of the Valuation Period during which the Insured's death occurred. The Death Benefit Proceeds may be paid in a lump sum or under one or more of the payment options set forth in the Policy. (See Payment Options, page 18.)
Death Benefit Proceeds will be paid to the surviving beneficiary or beneficiaries specified in the application or as subsequently changed. If no beneficiary is chosen, the proceeds will be paid to the Policyowner's estate.
The Policy provides two Death Benefit options and the Policyowner selects one of the options in the application. The Death Benefit under either option will never be less than the current Specified Amount of the Policy as long as the Policy remains in force (see Policy Lapse and Reinstatement, page 23). The minimum initial Specified Amount is currently $100,000. Defined differences, assisted by graphic illustrations are as follows:
[GRAPHIC OMITTED] (OMITTED GRAPH ILLUSTRATES PAYOUT UNDER DEATH BENEFIT OPTION A, SPECIFICALLY BY SHOWING THE RELATIONSHIP, OVER TIME, BETWEEN THE SPECIFIED AMOUNT AND THE ACCUMULATION VALUE.)
Death Benefit Option A. Pays a Face Amount of Death Benefit equal to the Specified Amount or the Accumulation Value multiplied by the Death Benefit Ratio (as illustrated at Point A) whichever is greater.
Under Option A, the Death Benefit is the current Specified Amount of the Policy or, if greater, the applicable percentage of Accumulation Value on the date of death. The applicable percentage is 250% for Insureds with an attained age 40 or younger on the policy anniversary prior to the date of death. For Insureds with an attained age over 40 on that policy anniversary, the percentage declines. For example, the percentage at age 40 is 250%, at age 50 is 185%, at age 60 is 130%, at age 70 is 115%, at age 80 is 105%, and at age 95 is 100%. Accordingly, under Option A the Death Benefit will remain level at the Specified Amount unless the applicable percentage of Accumulation Value exceeds the current Specified Amount, in which case the amount of the Death Benefit will vary as the Accumulation Value varies. Policyowners who prefer to have favorable investment performance, if any, reflected in higher Accumulation Value, rather than increased insurance coverage, generally should select Option A.
[GRAPHIC OMITTED] (OMITTED GRAPH ILLUSTRATES PAYOUT UNDER DEATH BENEFIT OPTION B, SPECIFICALLY BY SHOWING THE RELATIONSHIP, OVER TIME, BETWEEN THE SPECIFIED AMOUNT AND THE ACCUMULATION VALUE.)
Death Benefit Option B. Pays a Face Amount of Death Benefit equal to the Specified Amount plus the Policy's Accumulation Value or the Accumulation Value multiplied by the Death Benefit Ratio, whichever is greater.
Under Option B, the death benefit is equal to the current Specified Amount plus the Accumulation Value of the Policy or, if greater, the applicable percentage of the Accumulation Value on the date of death. The applicable percentage is the same as under Option A: 250% for Insureds with an attained age 40 or younger on the policy anniversary prior to the date of death, and for Insureds with an attained age over 40 on that policy anniversary the percentage declines. Accordingly, under Option B the amount of the death benefit will always vary as the Accumulation Value varies (but will never be less than the Specified Amount). Policyowners who prefer to have favorable investment performance, if any, reflected in increased insurance coverage, rather than higher Accumulation Values, generally should select Option B.
CHANGE IN DEATH BENEFIT OPTION. The Death Benefit option may be changed once per year after the first policy year by sending ALIC a written request. The effective date of such a change will be the monthly activity date on or following the date the change is approved by ALIC. A change may have Federal Tax consequences.
If the Death Benefit option is changed from Option A to Option B, the Death Benefit after the change will equal the Specified Amount before the change plus the Accumulation Value on the effective date of the change and will require evidence of insurability before the change is made. If the death benefit option is changed from Option B to Option A, the Specified Amount under Option A after the change will equal the death benefit under Option B on the effective date of change.
No charges will be imposed upon a change in Death Benefit option, nor will such a change in and of itself result in an immediate change in the amount of a Policy's Accumulation Value. However, a change in the Death Benefit option may affect the monthly cost of insurance charge since this charge varies with the Net Amount at Risk, which is the amount by which the Death Benefit that would be payable on a monthly activity date exceeds the Accumulation Value on that date. Changing from Option B to Option A will generally decrease, in the future, the Net Amount at Risk, and therefore the cost of insurance charges. Changing from Option A to Option B will increase the Net Amount at Risk. Such a change will result in an immediate increase in the cost of insurance charges because of the increased coverage. (See Charges and Deductions, page 24 and Federal Tax
CHANGE IN SPECIFIED AMOUNT. Subject to certain limitations, after the first policy year, a Policyowner may increase or decrease the Specified Amount of a Policy. A change in Specified Amount may affect the cost of insurance rate and the Net Amount at Risk, both of which may affect a Policyowner's cost of insurance charge and have Federal Tax consequences. (See Charges and Deductions, page 24 and Federal Tax Matters, page 29.)
Any increase or decrease in the Specified Amount will become effective on the Monthly Activity Date on or next following the date a written request is approved by ALIC. The Specified Amount of a Policy may be changed only once per year and ALIC may limit the size of a change in a policy year. The Specified Amount remaining in force after any requested decrease may not be less than $100,000 in the first three policy years and $75,000 thereafter. In addition, if following the decrease in Specified Amount, the Policy would not comply with the maximum premium limitations required by Federal Tax Law (See Premiums, page 22), the decrease may be limited or Accumulation Value may be returned to the Policyowner at the Policyowner's election, to the extent necessary to meet these requirements.
Increases in the Specified Amount will be allowed after the first policy year. For an increase in the Specified Amount, a written supplemental application must be submitted. ALIC may also require additional evidence of insurability. Although an increase need not necessarily be accompanied by an additional premium, in certain cases an additional premium will be required to effect the requested increase. (See Premiums upon Increases in Specified Amount, page 23). The minimum amount of any increase is $25,000, and an increase cannot be made if the Insured's attained age is over 80. An increase in the Specified Amount will result in certain increased charges, which will be deducted from the Accumulation Value of the Policy on each Monthly Activity Date. An increase in the Specified Amount during the time the Guaranteed Death Benefit provision is in effect will increase the premium requirements for that provision. (See Charges and Deductions, page 24.)
METHODS OF AFFECTING INSURANCE PROTECTION
A Policyowner may increase or decrease the pure insurance protection (Net Amount at Risk) provided by a Policy - the difference between the Death Benefit and the Accumulation Value - in several ways as insurance needs change. These ways include increasing or decreasing the Specified Amount of insurance, changing the level of premium payments, and making a Partial Withdrawal of the Policy's Accumulation Value. Certain of these changes may have Federal Tax consequences. The consequences of each of these methods will depend upon the individual circumstances.
The duration of the Policy generally depends upon the Accumulation Value. The Policy will remain in force so long as the Net Cash Surrender Value is sufficient to pay the monthly deduction. (See Charges Deducted from Accumulation Value, page 24.) Where, however, the Net Cash Surrender Value is insufficient to pay the monthly deduction and the grace period expires without an adequate payment by the Policyowner, the Policy will lapse and terminate without value. (See Policy Lapse and Reinstatement, page 23.) ALIC agrees to keep the policy in force during the first three years and provide a Guaranteed Death Benefit so long as the cumulative Guaranteed Death Benefit premium is paid. (See Additional
The Policy's Accumulation Value in the Account or the Fixed Account will reflect the investment performance of the chosen Subaccounts of the Account or the Fixed Account, the net premiums paid, any Partial Withdrawals, and the charges assessed in connection with the Policy. A Policyowner may at any time surrender the Policy and receive the Policy's Net Cash Surrender Value. (See Surrenders, page 20.) There is no guaranteed minimum Accumulation Value.
DETERMINATION OF ACCUMULATION VALUE. Accumulation Value is determined on each Valuation Date. On the policy Issue Date, the Accumulation Value in a Subaccount will equal the portion of any net premium allocated to the Subaccount, reduced by the portion of the first monthly deductions allocated to that Subaccount. (See Allocation of Premiums and Accumulation Value, page 23.) Thereafter, on each Valuation Date, the Accumulation Value of a Policy will equal:
(a) The aggregate of the values attributable to the Policy in each of the Subaccounts on the Valuation Date, determined for each Subaccount by multiplying the Subaccount's unit value by the number of Subaccount units allocated to the Policy; plus
(b) The value of the Fixed Account; plus
(c) Any Accumulation Value impaired by policy debt held in the General Account;
(d) Any net premiums received on that Valuation Date; less
(e) Any Partial Withdrawal, and its charge, made on that Valuation Date; less
(f) Any monthly deduction to be made on that Valuation Date; less
(g) Any federal or state income taxes charged against the Accumulation Value.
In computing the Policy's Accumulation Value, the number of Subaccount units allocated to the Policy is determined after any transfers among Subaccounts, or the Fixed Account, (and deduction of transfer charges) but before any other Policy transactions, such as receipt of net premiums and Partial Withdrawals, on the Valuation Date. Because the Accumulation Value is dependent upon a number of variables, a Policy's Accumulation Value cannot be predetermined.
THE UNIT VALUE. The unit value of each Subaccount reflects the investment performance of that Subaccount. The unit value of each Subaccount shall be calculated by (i) multiplying the per share net asset value of the corresponding Fund portfolio on the Valuation Date times the number of shares held by the Subaccount, before the purchase or redemption of any shares on that date; minus (ii) a charge not exceeding an annual rate of .90% for mortality and expense risk; and (iii) dividing the result by the total number of units held in the Subaccount on the Valuation Date, before the purchase or redemption of any units on that date. (See Daily Charges Against the Account, page 26.)
If the Insured is living, ALIC will pay the Net Cash Surrender Value of the Policy on the Maturity Date to the Policyowner. The Policy will mature on the policy anniversary nearest the Insured's 100th birthday, if living.
Death Benefit Proceeds under the Policy will usually be paid within seven days after ALIC receives Satisfactory Proof of Death. Accumulation Value benefits will ordinarily be paid within seven days of receipt of a written request. Payments may be postponed in certain circumstances. (See Postponement of Payments, page 27.) The Policyowner may decide the form in which the benefits will be paid. During the Insured's lifetime, the Policyowner may arrange for the Death Benefit Proceeds to be paid in a lump sum or under one or more of the optional methods of payment described below. Changes must be in writing and will revoke all prior elections. These choices are also available if the Policy is surrendered or matures. If no election is made, ALIC will pay the benefits in a lump sum. When death benefits are payable in a lump sum and no election for an optional method of payment is in force at the death of the Insured, the beneficiary may select one or more of the optional methods of payment. Further, if the Policy is assigned, any amounts due to the assignee will first be paid in one sum. The balance, if any, may be applied under any payment option. Once payments have begun, the payment option may not be changed.
PAYMENT OPTIONS. The minimum amount of each payment is $100. If a payment would be less than $100 ALIC has the right to make payments less often so that the amount of each payment is at least $100. Once a payment option is in effect, the proceeds will be transferred to ALIC's general account. ALIC may make other payment options available in the future. For additional information concerning these options, see the Policy itself. The following payment options are currently available:
OPTION AI--INTEREST PAYMENT OPTION. ALIC will hold any amount applied under this option. Interest on the unpaid balance will be paid or credited each month at a rate determined by ALIC.
OPTION AII--FIXED AMOUNT PAYABLE OPTION. Each payment will be for an agreed fixed amount. Payments continue until the amount ALIC holds runs out.
OPTION B--FIXED PERIOD PAYMENT OPTION. Equal payments will be made for any period selected up to 20 years.
OPTION C--LIFETIME PAYMENT OPTION. Equal monthly payments are based on the life of a named person. Payments will continue for the lifetime of that person. Variations provide for guaranteed payments for a period of time.
OPTION D--JOINT LIFETIME PAYMENT OPTION. Equal monthly payments are based on the lives of two named persons. While both are living, one payment will be made each month. When one dies, the same payment will continue for the lifetime of the other.
As an alternative to the above payment options, the proceeds may be paid in any other manner approved by ALIC.
LOAN PRIVILEGES. After the first policy anniversary, the Policyowner may borrow up to 100% of the Net Cash Surrender Value after adjustment for loan interest and guaranteed monthly deductions for the remainder of the policy year. The loans will be made at regular and, as described below, reduced loan interest rates. Loans usually are funded within seven days after receipt of a written request. The loan may be repaid at any time while the Insured is living, prior to the Maturity Date. Loans may have a tax consequence. (See Federal Tax Matters, page 29).
LOAN INTEREST. ALIC charges interest to Policyowners at regular and reduced rates. Regular loans will accrue interest on a daily basis at a rate of up to 6% per year. ALIC is currently charging 5.5% on regular loans. If unpaid when due, interest will be added to the amount of the loan and bear interest at the same rate. After the later of age 55 or the tenth policy anniversary, the Policyowner may borrow each year a limited amount of the Accumulation Value of the Policy at a reduced interest rate. Interest will accrue on a daily basis at a rate of up to 4% per year. ALIC is currently charging 3.5% interest on reduced rate loans. The amount available at the reduced rate is 10% of the Accumulation Value as of the later of age 55 or the 10th policy anniversary (the start date) times the number of years since the start date, increased by the accrued interest charges on the reduced loan amount.
EFFECT OF POLICY LOANS. When a loan is made, Accumulation Value equal to the amount of the loan will be transferred from the Account and/or the Fixed Account to the General Account of ALIC as security for the indebtedness. The Policyowner earns 3.5% interest on the Accumulation Values securing the loans. The Accumulation Value transferred out of the Account will be allocated among the Subaccounts or the Fixed Account in accordance with the instructions given when the loan is requested. The minimum amount which can remain in a Subaccount or the Fixed Account as a result of a loan is $100. If no instructions are given the amounts will be withdrawn in proportion to the various Accumulation Values in the Subaccounts or the Fixed Account. If loan interest is not paid when due in any Policy Year, on the Policy Anniversary thereafter, ALIC will loan the interest and allocate the amount transferred to secure the excess indebtedness among the Subaccounts and the Fixed Account as set out just above. No charge will be imposed for these transfers. A policy loan will permanently affect the Accumulation Value of a Policy, and may permanently affect the amount of the Death Benefits Proceeds, even if the loan is repaid.
Interest earned on amounts held in the general account will be allocated to the Subaccounts and the Fixed Account on each policy anniversary in the same proportion that net premiums are being allocated to those Subaccounts and the Fixed Account at the time. Upon repayment of indebtedness, the portion of the repayment allocated in accordance with the repayment of indebtedness provision (see below) will be transferred to increase the Accumulation Value in that Subaccount or the Fixed Account.
OUTSTANDING POLICY DEBT. The outstanding policy debt equals the total of all policy loans and accrued interest on policy loans. If the policy debt exceeds the Accumulation Value, and any accrued expenses, the Policyowner must pay the excess. ALIC will send a notice of the amount which must be paid. If the Policyowner does not make the required payment within the 61 days after ALIC sends the notice, the Policy will terminate without value. Should the policy lapse while policy loans are outstanding the portion of the loans attributable to earnings will become taxable. A Policyowner may lower the risk of a policy lapsing while loans are outstanding as a result of a reduction in the market value of investments in the various Subaccounts by investing in a diversified group of lower risk investment portfolios and/or transferring the funds to the Fixed Account and receiving a guaranteed rate of return. Should a substantial reduction be experienced, the Policyowner may need to lower anticipated Partial Withdrawals and loans, repay loans, make additional premium payments, or take other action to avoid policy lapse. A lapsed Policy may later be reinstated. (See Policy Lapse and Reinstatement, page 23.)
REPAYMENT OF INDEBTEDNESS. Unscheduled premiums paid while a policy loan is outstanding are treated as repayment of indebtedness only if the Policyowner so requests. As indebtedness is repaid, the Accumulation Value in the general account securing the indebtedness repaid will be allocated among the Subaccounts and the Fixed Account in the same proportion that net premiums are being allocated at the time of repayment.
At any time during the lifetime of the Insured and prior to the Maturity Date, the Policyowner may Surrender the Policy by sending a written request to ALIC. The amount available for Surrender is the Net Cash Surrender Value at the end of the Valuation Period during which the Surrender request is received at ALIC's Home Office. Surrenders will generally be paid within seven days of receipt of the written request. (See Postponement of Payments, page 27.) Surrenders may have tax consequences. (See Tax Treatment of Policy Proceeds, page 30.)
If the Policy is being surrendered, the Policy itself must be returned to ALIC along with the request. ALIC will pay the Net Cash Surrender Value. Coverage under the Policy will terminate as of the date of a Surrender. A Policyowner may elect to have the amount paid in a lump sum or under a payment option. (See
Partial withdrawals are irrevocable. The amount of a Partial Withdrawal may not exceed the Net Cash Surrender Value on the date the request is received and may not be less than $500. The Net Cash Surrender Value after a Partial Withdrawal must be the greater of $1,000 or an amount sufficient to maintain the policy in force for the remainder of the policy year.
The amount paid will be deducted from the Subaccounts or the Fixed Account according to the instructions of the Policyowner when the Partial Withdrawal is requested, provided that the minimum amount remaining in a Subaccount as a result of the allocation is $100. If no instructions are given, the amounts will be withdrawn in proportion to the various Accumulation Values in the Subaccounts and/or Fixed Account.
The Death Benefit will be reduced by the amount of any Partial Withdrawal and may affect the way in which the cost of insurance charge is calculated and the Net Amount at Risk under the Policy. (See Monthly Deduction - Cost of Insurance, page 25; Death Benefit Options--Methods of Affecting Insurance Protection, page 17.) If Option B is in effect, the Specified Amount will not change, but the Accumulation Value will be reduced.
The Specified Amount remaining in force after a Partial Withdrawal may not be less than $100,000 during the first three policy years and $75,000 thereafter. Any request for a Partial Withdrawal that would reduce the Specified Amount below this amount will not be implemented. A Partial Withdrawal charge not to exceed the lesser of $50 or 2% of the amount withdrawn is deducted from each Partial Withdrawal amount paid. Currently, the charge is the lesser of $25 or 2% of the amount withdrawn. (See Partial Withdrawal Charge, page 26.)
Accumulation Value may be transferred among the Subaccounts of the Account and to the Fixed Account as often as desired. The transfers may be ordered in person, by mail or by telephone. The total amount transferred each time must be at least $250, or the balance of the Subaccount, if less. During the 30-day period following the Policy Anniversary Date, transfers may be made from the Fixed Account to various Subaccounts. The amount that may be transferred is limited to the greater of: 25% of the Accumulation Value of the Fixed Account; the amount of any transfer from the Fixed Account during the prior thirteen months; or $1,000. The minimum amount that may remain in a Subaccount or the Fixed Account after a transfer is $100.
The privilege to initiate transactions by telephone will be made available to Policyowners automatically. ALIC will employ reasonable procedures to confirm that instructions communicated by telephone are genuine, and if it does not, ALIC may be liable for any losses due to unauthorized or fraudulent instructions. The procedures ALIC follows for transactions initiated by telephone include requiring the Policyowner to provide the policy number at the time of giving transfer instructions; ALIC's tape recording of all telephone transfer instructions; and the provision, by ALIC, of written confirmation of telephone transactions.
The first fifteen transfers per policy year will be permitted free of charge. Thereafter, a transfer charge of $10 may be imposed each additional time amounts are transferred and will be deducted from the amount transferred. (See Transfer Charge, page 25.) Transfers resulting from policy loans or exercise of the exchange privilege will not be subject to a transfer charge. ALIC may at any time revoke or modify the transfer privilege, including the minimum amount transferable.
The Policy's transfer privilege is not intended to afford Policyowners a way to speculate on short-term movements in the market. Accordingly, in order to prevent excessive use of the transfer privilege that may potentially disrupt the management of the Account and increase transaction costs, the Account has established a policy of limiting excessive transfer activity.
You may make two substantive transfers from each Portfolio (at least 30 days part) during any calendar year. A substantive transfer is a transfer from a Subaccount for the lesser of: i) 51% of the Accumulation Value or ii) $100,000. This restriction does not limit non-substantive transfers and does not apply to transfers from the Money Market portfolio. All transfers must be for at least $250, or, if less, the balance of the Subaccount.
Transfers may be subject to additional restrictions at the fund level.
The Policyowner may cancel the Policy within 10 days after the Policyowner receives it, within 10 days after ALIC delivers a notice of the Policyowner's right of cancellation, or within 45 days of completing Part I of the application, whichever is later. If a Policy is cancelled within this time period the refund will be the greater of the premium paid or the premium paid adjusted by investment gains or losses.
To cancel the Policy, the Policyowner must mail or deliver the policy and the notice of cancellation to ALIC at the Home Office. Delivery to an agent is not sufficient. A refund of premiums paid by check may be delayed until the check has cleared the Policyowner's bank. (See Postponement of Payments, page 27.)
During the first 24 policy months after the Policy Date of the Policy, the Policyowner may exchange the Policy for a flexible premium adjustable life insurance policy approved for exchange and issued by ALIC. No new evidence of insurability will be required.
The Policy Date, Issue Age and risk classification for the Insured will be the same under the new Policy as under the old. In addition, the policy provisions and applicable charges for the new Policy and its riders will be based on the same Policy Date and Issue Age as under the Policy. Accumulation Values for the exchange and payments will be established after making adjustments for investment gains or losses and after recognizing variance, if any, between payment or charges, dividends or Accumulation Values under the flexible contract and under the new Policy. The Policyowner may elect either the same Specified Amount or the same net amount at risk for the new Policy as under the old.
To make the change, the Policy, a completed application for exchange and any required payment must be received by ALIC. The exchange will be effective on the Valuation Date when all financial and contractual arrangements for the new Policy have been completed.
PAYMENT AND ALLOCATION OF PREMIUMS
Individuals wishing to purchase a Policy must complete an application and submit it to ALIC. A Policy will generally be issued only to individuals 80 years of age or less on their nearest birthday who supply satisfactory evidence of insurability to ALIC. ALIC may, at its sole discretion, issue a Policy to an individual above the age of 80. Acceptance is subject to ALIC's underwriting rules, and ALIC reserves the right to reject an application for any reason.
The Policy Date is the effective date of coverage for all coverage applied for in the original application. The Policy Date is used to determine policy anniversary dates, policy years and policy months. The Policy Date and the Issue Date will be the same unless: 1) an earlier Policy Date is specifically requested, or 2) the Issue Date is later because additional premiums or application amendments were needed. When there are additional requirements before issue (see below) the Policy Date will be the date it is sent for delivery and the Issue Date will be the date the requirements are met. The Issue Date is the date that all financial, contractual and administrative requirements have been met and processed for the Policy. When all required premiums and application amendments have been received by ALIC in its Home Office, the Issue Date will be the date the Policy is mailed to the Policyowner or sent to the agent for delivery to the Policyowner. When application amendments or additional premiums need to be obtained upon delivery of the Policy, the Issue Date will be when the policy receipt and Federal Funds are received; and the application amendments are received and reviewed in ALIC's Home Office. The initial premium payment will be allocated to the Money Market Portfolio of the Vanguard Variable Insurance Fund as of the issue date, for 13 days. After the expiration of the refund period, the Accumulation Value will be allocated to the Subaccounts or the Fixed Account as selected by the Policyowner.
Interim conditional insurance coverage may be issued prior to the policy date, provided that certain conditions are met. Upon the completion of an application and the payment of the required amount at the time of the application, the amount of the interim coverage is limited to the smaller of: (a) the amount of insurance applied for, (b) $100,000, or (c) $25,000 if the proposed Insured is under age 10 or over age 60 at nearest birthday.
No insurance will take effect before an amount equal to or greater than the minimum initial premium is received by ALIC in Federal Funds. The minimum initial premium is 25% of the total first year charges and deductions including charges for riders and any substandard risk adjustments. The minimum initial premium is less than the Guaranteed Death Benefit Premium. Subsequent premiums are payable at ALIC's Home Office.
Subject to certain limitations, a Policyowner has flexibility in determining the frequency and amount of premiums. However, unless the Policyowner has paid sufficient premiums to pay the cost of insurance, the monthly maintenance and mortality and expense risk charges, the Policy may have a zero Net Cash Surrender Value and lapse. ALIC agrees to keep the Policy in force during the first three years and provide a Guaranteed Death Benefit so long as the cumulative monthly Guaranteed Death Benefit Premium is paid even though, in certain instances, these premiums may not, after the payment of monthly insurance and administrative charges, generate positive Net Cash Surrender Values. (See Additional Insurance Benefits (Riders), page 28.)
PLANNED PERIODIC PREMIUMS. At the time the Policy is issued each Policyowner may determine a Planned Periodic Premium schedule that provides for the payment of level premiums at selected intervals. The Planned Periodic Premium schedule may include the Guaranteed Death Benefit Premium. The Policyowner is not required to pay premiums in accordance with this schedule. The Policyowner has considerable flexibility to alter the amount and frequency of premiums paid. ALIC does reserve the right to limit the number and amount of additional or unscheduled premium payments.
Policyowners can also change the frequency and amount of Planned Periodic Premiums by sending a written request to the Home Office, although ALIC reserves the right to limit any increase. Premium payment notices will be sent annually, semi-annually or quarterly, depending upon the frequency of the Planned Periodic Premiums. Payment of the Planned Periodic Premiums does not guarantee that the Policy remains in force unless the Guaranteed Death Benefit provision is in effect. Instead, the duration of the Policy depends upon the Policy's Net Cash Surrender Value. (See Duration of the Policy, page 17.) Unless the Guaranteed Death Benefit provision is in effect, even if Planned Periodic Premiums are paid by the Policyowner, the Policy will lapse any time the Net Cash Surrender Value is insufficient to pay certain monthly charges, and a grace period expires without a sufficient payment. (See Policy Lapse and Reinstatement, page 23.)
PREMIUM LIMITATIONS. In no event may the total of all premiums paid, both planned and unscheduled, exceed the current maximum premium limitations established by federal tax laws.
If at any time a premium is paid which would result in total premiums exceeding the current maximum premium limitation, ALIC will only accept that portion of the premium which will make total premiums equal the maximum. Any part of the premium in excess of that amount will be returned or applied as otherwise agreed and no further premiums will be accepted until allowed by the current maximum premium limitations prescribed by law. ALIC may require additional evidence of insurability if any premium payment would result in an increase in the Policy's net amount at risk on the date the premium is received.
PREMIUMS UPON INCREASES IN SPECIFIED AMOUNT. Depending upon the Accumulation Value of the Policy at the time of an increase in the Specified Amount of the Policy and the amount of the increase requested by Policyowner, an additional premium payment may be required. ALIC will notify the Policyowner of any premium required to fund the increase. This required premium must be made as a single payment. The Accumulation Value of the Policy will immediately be increased by the amount of the payment, less the applicable premium charge.
ALLOCATION OF PREMIUMS AND ACCUMULATION VALUE
ALLOCATION OF NET PREMIUMS. In the application for a Policy, the Policyowner allocates net premiums to one or more Subaccounts of the Account or to the Fixed Account. The minimum percentage that may be allocated to any one Subaccount or to the Fixed Account is 10% of the net premium, and fractional percentages may not be used. The allocations must total 100%. The allocation for future net premiums may be changed without charge by providing proper notification to the Home Office. If there is any outstanding policy debt at the time of a payment, ALIC will treat the payment as a premium payment unless otherwise instructed in proper written notice.
The initial premium payment will be allocated to the Money Market portfolio of the Vanguard Variable Insurance Fund as of the Issue Date, for 13 days. Thereafter, the Accumulation Value will be allocated to the Subaccounts or the Fixed Account as selected by the Policyowner. Premium payments received by ALIC prior to the Issue Date are held in the general account until the Issue Date and are credited with interest at a rate determined by ALIC for the period from the date the payment has been converted into Federal Funds (monies of member banks within the Federal Reserve System which are held on deposit at a Federal Reserve Bank) that are available to ALIC. In no event will interest be credited prior to the Policy Date.
ACCUMULATION VALUE. The value of the Subaccounts of the Separate Account will vary with the investment performance of these Subaccounts and the Policyowner bears the entire investment risk. This will affect the Policy's Accumulation Value, and may affect the Death Benefit as well. Policyowners should periodically review their allocations of premiums and values in light of market conditions and overall financial planning requirements.
LAPSE. Unlike conventional life insurance policies, the failure to make a Planned Periodic Premium payment will not itself cause the Policy to lapse. Lapse will occur when the Net Cash Surrender Value is insufficient to cover the monthly deduction and a grace period expires without a sufficient payment unless the Guaranteed Death Benefit provision is in effect. The grace period is 61 days from the date ALIC mails a notice that the grace period has begun. ALIC will notify the Policyowner at the beginning of the grace period by mail addressed to the last known address on file with ALIC. The notice will specify the premium required to keep the Policy in force. Failure to pay the required amount within the grace period will result in lapse of the Policy. If the Insured dies during the grace period, any overdue monthly deductions and outstanding policy debt will be deducted from the proceeds.
If the Net Cash Surrender Value is insufficient to cover the monthly deduction, the Policyowner must pay a premium during the grace period sufficient to cover the monthly deductions and premium charges for the three policy months after commencement of the grace period to avoid lapse. (See Charges and Deductions, page 24).
REINSTATEMENT. A lapsed Policy may be reinstated any time within three years (five years in Missouri) from the beginning of the grace period, but before the Maturity Date. Reinstatement will be effected based on the Insured's underwriting classification at the time of the reinstatement.
Reinstatement is subject to the following:
a. Evidence of insurability of the Insured satisfactory to ALIC (including evidence of insurability of any person covered by a rider to reinstate the
b. Any policy debt will be reinstated with interest due and accrued;
c. The Policy cannot be reinstated if it has been surrendered for its full
d. The payment of a premium sufficient to pay monthly and other policy deductions for the three months following reinstatement and to pay premium charges on the premiums paid; and
e. If the reinstatement occurs during the first three Policy Years, you may pay premiums in the amount necessary to meet the cumulative monthly requirements of the Guaranteed Death Benefit Premium as of the date of reinstatement.
The amount of Accumulation Value on the date of reinstatement will be equal to the amount of the Net Cash Surrender Value on the date of lapse, increased by the premium paid at reinstatement, less the premium charges and the amounts stated above. If any policy debt was reinstated, that debt will be held in ALIC's General Account. Accumulation Value calculations will then proceed as described under "Accumulation Value" on page 17.
The effective date of reinstatement will be the first Monthly Activity Date on or next following the date of approval by ALIC of the application for reinstatement.
Charges will be deducted in connection with the Policy to compensate ALIC for: (1) providing the insurance benefits set forth in the Policy and any optional insurance benefits added by rider; (2) administering the Policy; (3) assuming certain risks in connection with the Policy; and (4) incurring expenses in distributing the Policy. The nature and amount of these charges are described more fully below.
SALES CHARGE. There is no premium load to cover sales and distribution expenses.
PREMIUM CHARGES. A deduction of up to 5% (currently 3.5%) of the premium will be made from each premium payment to pay state premium taxes (currently 2.5%) and the expense of deferring the tax deduction of policy acquisition costs (currently 1.0%). The deduction represents an amount ALIC considers necessary to pay all premium taxes imposed by the states and their subdivisions and to defray the cost of capitalizing certain policy acquisition expenses as required by Internal Revenue Code Section 848. ALIC does not expect to derive a profit from the premium charges.
As to state premium taxes, these vary from state to state and currently range from .75 percent to 3.5 percent. Therefore, the deduction ALIC makes from each premium payment may be higher or lower than the actual premium tax imposed by a particular jurisdiction. The rate of tax imposed is subject to change by governmental entity.
CHARGES DEDUCTED FROM ACCUMULATION VALUE
MONTHLY DEDUCTION. Charges will be deducted as of the Policy Date and on each Monthly Activity Date thereafter from the Accumulation Value of the Policy to compensate ALIC for administrative expenses and insurance provided. These charges will be allocated among the Subaccounts, and the Fixed Account on a pro rata basis. Each of these charges is described in more detail below.
MAINTENANCE CHARGE. To compensate ALIC for the ordinary administrative expenses expected to be incurred in connection with a Policy, the monthly deduction includes a $9.00 per policy charge (currently $9.00 the first policy year and the first 12 months following an increase in Specified Amount and $4.50 during all other months). This maintenance charge is levied throughout the life of the Policy and is guaranteed not to increase above $9.00 per month. ALIC does not expect to make any profit from the monthly maintenance charge.
COST OF INSURANCE. Because the cost of insurance depends upon several variables, the cost for each policy month can vary from month to month. ALIC will determine the monthly cost of insurance charges by multiplying the applicable cost of insurance rate by the Net Amount at Risk for each policy month. The Net Amount at Risk on any Monthly Activity Date is the amount by which the Death Benefit which would have been payable on that Monthly Activity Date exceeds the Accumulation Value on that date.
COST OF INSURANCE RATE. The annual cost of insurance rate is based on the Insured's sex, attained age, policy duration, Specified Amount, and risk class. The rate will vary if the Insured is a smoker, non-smoker, a preferred non-smoker or is considered a substandard risk and rated with a tabular extra rating. For the initial Specified Amount, the cost of insurance rate will not exceed those shown in the Table of Policy Charges shown in the schedule pages of the Policy. These guaranteed rates are based on the Insured's age nearest birthday and are equal to the 1980 Commissioners Standard Ordinary Smoker and Non-Smoker, Male and Female Mortality Tables. The current rates range between 40% and 100% of the rates based on the 1980 Commissioners Standard Ordinary Tables, based on ALIC's own mortality experience. Policies issued on a unisex basis are based upon the 1980 Commissioners Standard Ordinary Table B assuming 80% male and 20% female lives. The cost of insurance rates, and payment options for policies issued in Montana and certain other states are on a sex-neutral (unisex) basis. Any change in the cost of insurance rates will apply to all persons of the same age, sex, Specified Amount and risk class and whose policies have been in effect for the same length of time.
If the underwriting class for any increase in the Specified Amount or for any increase in Death Benefit resulting from a change in Death Benefit option from A to B is not the same as the underwriting class at issue, the cost of insurance rate for the increase will reflect the underwriting class which would apply for such increase. Decreases will also be reflected in the cost of insurance rate as discussed earlier.
The actual charges made during the policy year will be shown in the annual report delivered to Policyowners.
RATE CLASS. The rate class of an Insured may affect the cost of insurance rate. ALIC currently places Insureds into both standard rate classes and substandard classes that involve a higher mortality risk. In an otherwise identical policy, an Insured in the standard rate class will have a lower cost of insurance than an Insured in a rate class with higher mortality risks. If a Policy is rated at issue with a tabular extra rating, the guaranteed rate is a multiple of the guaranteed rate for a standard issue. This multiple factor is shown in the Schedule of Benefits in the Policy, and may be from 1.37 to 4 times the guaranteed rate for a standard issue.
Insureds may also be assigned a flat extra rating to reflect certain additional risks. The cost of insurance rate will be increased by the flat extra rating.
The policy has no surrender charge and may be surrendered at any time during the Insured's lifetime for the policy's Net Cash Surrender Value. There is a charge, however, for Partial Withdrawals. (See Partial Withdrawal Charge, page 26).
A transfer charge of $10.00 (guaranteed not to increase) may be imposed for each additional transfer among the Subaccounts after fifteen per policy year to compensate ALIC for the costs of effecting the transfer. Since the charge reimburses ALIC for the cost of effecting the transfer only, ALIC does not expect to make any profit from the transfer charge. This charge will be deducted from the amount transferred. The transfer charge will not be imposed on transfers that occur as a result of policy loans or the exercise of exchange rights.
A charge currently not greater than the lesser of $25 or 2% of the amount withdrawn (guaranteed not to be greater than the lesser of $50 or 2% of the amount withdrawn) will be imposed for each Partial Withdrawal to compensate ALIC for the administrative costs in effecting the requested payment and in making necessary calculations for any reductions in Specified Amount which may be required by reason of the Partial Withdrawal. A Partial Withdrawal charge is not assessed when a Policy is surrendered.
DAILY CHARGES AGAINST THE ACCOUNT
A daily charge will be deducted from the value of the net assets of the Account to compensate ALIC for mortality and expense risks assumed in connection with the Policy. This daily charge from the Account is currently at the rate of 0.002049% (equivalent to an annual rate of 0.75%) and will not exceed 0.002459% (equivalent to an annual rate of .90%) of the average daily net assets of the Account. The daily charge will be deducted from the net asset value of the Account, and therefore the Subaccounts, on each Valuation Date. Where the previous day or days was not a Valuation Date, the deduction on the Valuation Date will be 0.002049% (or 0.002459%, if applicable) multiplied by the number of days since the last Valuation Date. No mortality and expense charges will be deducted from the amounts in the Fixed Account.
ALIC believes that this level of charge is within the range of industry practice for comparable flexible premium variable universal life policies.
The mortality risk assumed by ALIC is that Insureds may live for a shorter time than assumed, and that an aggregate amount of death benefits greater than that assumed accordingly will be paid. The expense risk assumed is that expenses incurred in issuing and administering the policies will exceed the administrative charges provided in the policies.
In addition to the charges against the account described just above, management fees and expenses will be assessed by the Vanguard Variable Insurance Fund and Neuberger & Berman Advisers Management Trust against the amounts invested in the various portfolios. No portfolio fees will be assessed against amounts placed in the Fixed Account.
TAXES. Currently, no additional charges are made against the Account for federal, state or local income taxes. ALIC may, however, make such a charge in the future if income or gains within the Account will incur any federal, or any significant state or local income tax liability, or if the federal, state or local tax treatment of ALIC changes. Charges for such taxes, if any, would be deducted from the Account and/or the Fixed Account. (See Federal Tax Matters,
THE CONTRACT. The Policy, the application, any supplemental applications, and any riders, amendments or endorsements make up the entire contract. Only the President, Vice President, Secretary or Assistant Secretary can modify the Policy. Any changes must be made in writing, and approved by ALIC. No agent has the authority to alter or modify any of the terms, conditions or agreements of the Policy or to waive any of its provisions.
CONTROL OF POLICY. The Policyowner is as shown in the application or subsequent written endorsement. Subject to the rights of any irrevocable beneficiary and any assignee of record, all rights, options, and privileges belong to the Policyowner, if living; otherwise to any successor-owner or owners, if living; otherwise to the estate of the last owner to die.
BENEFICIARY. The Policyowner may name both primary and contingent beneficiaries in the application. Payments will be shared equally among beneficiaries of the same class unless otherwise stated. If a beneficiary dies before the Insured, payments will be made to any surviving beneficiaries of the same class; otherwise to any beneficiary(ies) of the next class; otherwise to the owner; otherwise to the estate of the owner.
CHANGE OF BENEFICIARY. The Policyowner may change the beneficiary by written request at any time during the Insured's lifetime unless otherwise provided in the previous designation of beneficiary. The change will take effect as of the date the change is recorded at the Home Office. ALIC will not be liable for any payment made or action taken before the change is recorded.
CHANGE OF OWNER OR ASSIGNMENT. In order to change the owner of the Policy or assign Policy rights, an assignment of the Policy must be made in writing and filed with ALIC at its Home Office. The change will take effect as of the date the change is recorded at the Home Office, and ALIC will not be liable for any payment made or action taken before the change is recorded. Payment of proceeds is subject to the rights of any assignee of record. A collateral assignment is not a change of ownership.
PAYMENT OF PROCEEDS. The proceeds are subject first to any indebtedness to ALIC and then to the interest of any assignee of record. The balance of any Death Benefit Proceeds shall be paid in one sum to the designated beneficiary unless an Optional Method of Payment is selected. If no beneficiary survives the Insured, the proceeds shall be paid in one sum to the Policyowner, if living; otherwise to any successor-owner, if living; otherwise to the Policyowner's estate. Any proceeds payable on the Maturity Date or upon full surrender shall be paid in one sum unless an Optional Method of Payment is elected.
INCONTESTABILITY. The Policy or reinstated Policy is incontestable after it has been in force for two years from the policy date (or reinstatement effective date) during the lifetime of the Insured. An increase in the Specified Amount or addition of a rider after the Policy Date shall be incontestable after such increase or addition has been in force for two years from its effective date during the lifetime of the Insured. However, this two year provision shall not apply to riders that provide disability or accidental death benefits.
MISSTATEMENT OF AGE OR SEX. If the age or sex of the Insured or any person insured by rider has been misstated, the amount of the death benefit will be adjusted. The Death Benefit will be adjusted to the amount that would be purchased by the most recent cost of insurance deductions using the correct cost of insurance rate.
SUICIDE. Suicide within two years of the Policy Date is not covered by the Policy unless otherwise provided by a state's Insurance law. If the Insured, while sane or insane, commits suicide within two years after the policy date, ALIC will pay only the premiums received less any Partial Withdrawals, the cost for riders and any outstanding policy debt. If the Insured, while sane or insane, commits suicide within two years after the effective date of any increase in the Specified Amount, ALIC's liability with respect to such increase will only be its total cost of insurance applied to the increase. The laws of Missouri provide that death by suicide at any time is covered by the Policy, and further that suicide by an insane person may be considered an accidental death.
POSTPONEMENT OF PAYMENTS. Payment of any amount upon Surrender, Partial Withdrawals, policy loans, benefits payable at death or maturity, and transfers may be postponed whenever: (i) the New York Stock Exchange is closed other than customary weekend and holiday closings, or trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission; (ii) the Commission by order permits postponement for the protection of Policyowners; (iii) an emergency exists, as determined by the Commission, as a result of which disposal of securities is not reasonably practicable or it is not reasonably practicable to determine the value of the Account's net assets; or (iv) Surrender, loans or Partial Withdrawals from the Fixed Account may be deferred for up to 6 months from the date of written request. Payments under the Policy of any amounts derived from premiums paid by check may be delayed until such time as the check has cleared the Policyowner's bank.
REPORTS AND RECORDS. ALIC will maintain all records relating to the Account and will mail to the Policyowner, at the last known address of record, within 30 days after each Policy Anniversary, an annual report which shows the current Accumulation Value, Net Cash Surrender Value, Death Benefit, premiums paid, outstanding policy debt and other information. The Policyowner will also be sent a periodic report for the Funds and a list of the portfolio securities held in each portfolio of the Funds.
Subject to certain requirements, one or more of the following additional insurance benefits may be added to a Policy by rider. All riders are not available in all states. The cost, if any, of additional insurance benefits will be deducted as part of the monthly deduction. (See Charges Deducted From Accumulation Value-Monthly Deduction, page 24.)
ACCELERATED BENEFIT RIDER FOR TERMINAL ILLNESS (LIVING BENEFIT RIDER). Upon satisfactory proof of terminal illness after the two-year contestable period (no waiting period in certain states) ALIC will accelerate the payment of up to 50% of the lowest scheduled Death Benefit as provided by eligible coverages, less an amount up to two guideline level premiums.
Future premium allocations after the payment of the benefit must be allocated to the Fixed Account. Payment will not be made for amounts less than $4,000 or more than $250,000 on all policies issued by ALIC or its affiliates. ALIC may charge the lesser of 2% of the benefit or $50 as a Partial Withdrawal charge to cover the costs of administration.
Satisfactory proof of terminal illness must include a written statement from a licensed physician who is not related to the Insured or the Policyowner stating that the Insured has a non-correctable medical condition that, with a reasonable degree of medical certainty, will result in the death of the Insured in less than 12 months (6 months in certain states) from the physician's statement. Further, the condition must first be diagnosed while the Policy was in force.
The accelerated benefit first will be used to repay any outstanding policy loans and unpaid loan interest, and will also affect future loans, Partial Withdrawals, and Surrender. The accelerated benefit will be treated as a lien against the policy Death Benefit and will thus reduce the proceeds payable on the death of the Insured. There is no extra premium for this rider.
CHILDREN'S PROTECTION RIDER. Provides for term insurance on the Insured's children, as defined in the rider. Under the terms of the rider, the Death Benefit will be payable to the named beneficiary upon the death of any insured child. Upon receipt of proof of the Insured's death before the rider terminates, the rider will be considered paid up for the term of the rider.
GUARANTEED INSURABILITY RIDER. Provides that the Policyowner can purchase additional insurance for the Insured by increasing the Specified Amount of the Policy at certain future dates without evidence of insurability.
WAIVER OF MONTHLY DEDUCTIONS ON DISABILITY. Provides, while the Insured is disabled, for the waiver of monthly deduction for expense charges and the cost of insurance charges including table ratings and flat extras for the policy and all riders.
PAYOR WAIVER OF MONTHLY DEDUCTIONS ON DISABILITY. Provides, while the covered person is disabled, for the waiver of monthly deductions for expense charges and the cost of insurance charges including table ratings and flat extras for the policy and all riders. This rider is available for Insureds ages 0 to 14.
COST RECOVERY RIDER. This rider allows a one time special Partial Withdrawal without reducing the Specified Amount. There is no charge for this rider.
Ameritas Investment Corp. ("Investment Corp."), a wholly-owned subsidiary of ALIC will act as the principal underwriter of the Policies, pursuant to an Underwriting Agreement between itself and ALIC. Investment Corp. was organized under the laws of the State of Nebraska on December 29, 1983 and is a registered broker/dealer pursuant to the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers.
There is no premium load to cover sales and distribution expenses. To the extent that sales and distribution expenses are paid, if at all, ALIC will pay them from its other assets or surplus in its general account, which include amounts derived from mortality and expense risk charges and other charges made under the Policy. Policies can be purchased directly from ALIC through Veritas, a direct-to-consumer Division of ALIC, with salaried employees who are Registered Representatives of Investment Corp. and who will not receive compensation related to the purchase.
Policies can be purchased from field representatives who are Registered Representatives of Investment Corp., or from Registered Representatives of other registered broker-dealers authorized to sell the policies subject to applicable law. In these situations, Investment Corp. or the other broker-dealer may receive compensation in an amount no greater than 9% of the target first year premium paid plus the first year cost of any riders, and 2% of excess first year premium. In years thereafter, Investment Corp. or the other broker-dealer may receive asset based compensation at an annualized rate of .1% per policy year of the Net Cash Surrender Value. Investment Corp. or the other broker-dealer may pass a portion of this compensation on to the Registered Representative or the manager of the Registered Representative.
Upon any subsequent increase in Specified Amount or any subsequent increase in riders, marketing allowances will also be paid based on the amount of the increase in Specified Amount or increase in rider.
The following discussion provides a general description of the federal income tax considerations associated with the Policy. This discussion is not intended as tax advice. No attempt has been made to consider in detail any applicable state or other tax (except premium taxes, see discussion "Premium Charges," page 24) laws. Counsel and other competent advisors should be consulted for more complete information before a Policy is purchased.
(a) TAXATION OF ALIC. After ALIC issues the Policies, ALIC believes it will be taxed as a life insurance company under Part I of Subchapter L of the Internal Revenue Code of 1986, (the "Code"). At that time, since the Account is not an entity separate from ALIC, and its operations form a part of ALIC, it will not be taxed separately as a "regulated investment company" under Subchapter M of the Code. Net investment income and realized net capital gains on the assets of the Account are reinvested and automatically retained as a part of the reserves of the Policy and are taken into account in determining the Death Benefit and Accumulation Value of the Policy. ALIC believes that Account net investment income and realized net capital gains will not be taxable to the extent that such income and gains are retained as reserves under Policy.
ALIC does not currently expect to incur any additional federal income tax liability attributable to the Account with respect to the sale of the Policies. Accordingly, no charge is being made currently to the Account for federal income taxes. If, however, ALIC determines that it may incur such taxes attributable to the Account, it may assess a charge for such taxes against the Account.
ALIC may also incur state and local taxes (in addition to premium taxes for which a deduction from premiums is currently made). At present, they are not charges against the Account. If there is a material change in state or local tax laws, charges for such taxes attributable to the Account, if any, may be assessed against the Account.
(b) TAX STATUS OF THE POLICY. The Code (section 7702) includes a definition of a life insurance contract for federal tax purposes, which places limitations on the amount of premiums that may be paid for the Policy and the relationship of the Accumulation Value to the Death Benefit. ALIC believes that the Policy meets the statutory definition of a life insurance contract. If the Death Benefit of a Policy is increased or decreased, the applicable definitional limitations may change. In the case of a decrease in the death benefit, a Partial Withdrawal, a change from Option B to Option A, or any other such change that reduces future benefits under the Policy during the first 15 years after a Policy is issued and that results in a cash distribution to the Policyowners in order for the Policy to continue complying with the section 7702 definitional limitations on premiums and Accumulation Values, such distributions will be taxable as ordinary income to the Policyowner (to the extent of any gain in the Policy) as prescribed in section 7702.
The Code (section 7702A) also defines a "modified endowment contract" for federal tax purposes which causes distributions to be taxed as ordinary income to the extent of any gain. This Policy will become a "modified endowment contract" if the premiums paid into the Policy fail to meet a 7-pay premium test as outlined in Section 7702A of the Code.
Certain benefits the Insured may elect under this Policy may be material changes affecting the 7-pay premium test. These include changes in Death Benefits and changes in the Specified Amount. Should the Policy become a "modified endowment contract", Partial Withdrawal or Surrenders, assignments, pledges, and loans (including loans to pay loan interest) under the Policy will be taxable to the extent of any gain under the Policy. A 10% penalty tax also applies to the taxable portion of any distribution prior to the Insured's age 59 1/2 . The 10% penalty tax does not apply if the Insured is disabled as defined under the Code or if the distribution is paid out in the form of a life annuity on the life of the Insured or the joint lives of the Insured and beneficiary. One may avoid a Policy becoming a modified endowment contract by, among other things, not making excessive payments or reducing benefits. Should one deposit excessive premiums during a policy year, that portion that is returned by ALIC within 60 days after the Policy Anniversary will reduce the premiums paid to avoid the Policy becoming a modified endowment contract.
The Code (Section 817(h)) also authorizes the Secretary of the Treasury (the "Treasury") to set standards by regulation or otherwise for the investments of the Account to be "adequately diversified" in order for the Policy to be treated as a life insurance contract for federal tax purposes. The Account, through the Funds, intends to comply with the diversification requirements prescribed by the Treasury in temporary regulations published in the Federal Register on September 15, 1986, which affect how the Fund's assets may be invested.
However, ALIC believes that the Funds will meet the diversification requirements and ALIC will monitor compliance with this requirement. Thus, ALIC believes that the Policy will be treated as a life insurance contract for federal tax purposes.
In connection with the issuance of temporary regulations relating to the diversification requirements, the Treasury announced that such regulations do not provide guidance concerning the extent to which owners may direct their investments to particular divisions of a separate account. Regulations in this regard are expected in the near future. It is not clear what these regulations will provide nor whether they will be prospective only. It is possible that when regulations are issued, the Policy may need to be modified to comply with such regulations. For these reasons, the Company reserves the right to modify the Policy as necessary to prevent the Policyowner from being considered the owner of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life insurance contract for federal tax purposes.
(c) TAX TREATMENT OF POLICY PROCEEDS. ALIC believes that the Policy will be treated in a manner consistent with a fixed benefit life insurance policy for federal income tax purposes. Thus, ALIC believes that the death benefit payable will be excludable from the gross income of the beneficiary under Section 101(a)(1) of the Code and the Policyowner will not be deemed to be in constructive receipt of the Accumulation Value under the Policy until its actual Surrender. However, in the event of certain cash distributions under the Policy resulting from any change which reduces future benefits under the Policy, the distribution will be taxed in whole or in part as ordinary income (to the extent of gain in the Policy). See discussion above, "Tax Status of the Policy."
ALIC also believes that loans received under a Policy will be treated as indebtedness of the Policyowner and that no part of any loan under a Policy will constitute income to the Policyowner so long as the Policy remains in force, unless the Policy becomes a Modified Endowment Contract. Should the policy lapse while policy loans are outstanding, the portion of the loans attributable to earnings will become taxable. Generally, interest paid on any loan under a Policy owned by an individual will not be tax-deductible.
In addition, interest on any loan under a Policy owned by a taxpayer and covering the life of any individual who is an officer or is financially interested in the business carried on by that taxpayer will not be tax
deductible to the extent the aggregate amount of such loans with respect to Policies covering such individual exceeds $50,000. Further, even as to interest on loans up to $50,000 per such individual, such interest would not be deductible if the Policy were deemed for federal tax purposes to be a single premium life insurance contract. Policyowners should consult a competent tax advisor as to whether the Policy would be so deemed.
The right to exchange the Policy for a flexible premium adjustable life insurance policy (See Exchange Privilege, page 21), the right to change owners (See General Provisions, page 26), and the provision for Partial Withdrawals (See Surrenders, page 20) may have tax consequences depending on the circumstances of such exchange, change, or Partial Withdrawal. Upon Surrender or when maturity benefits are paid, if the amount received plus any outstanding policy debt exceeds the total premiums paid, (the "basis"), that are not treated as previously withdrawn by the Policyowner, the excess generally will be taxed as ordinary income.
Federal estate and state and local estate, inheritance, and other tax consequences of ownership or receipt of Policy proceeds depend on applicable law and the circumstances of each Policyowner or beneficiary. In addition, if the Policy is used in connection with tax-qualified retirement plans, certain limitations prescribed by the Internal Revenue Service on, and rules with respect to the taxation of, life insurance protection provided through such plans may apply.
SAFEKEEPING OF THE ACCOUNT'S ASSETS
ALIC holds the assets of the Account. The assets are kept physically segregated and held separate and apart from the General Account assets, except for the Fixed Account. ALIC maintains records of all purchases and redemptions of Funds shares by each of the Subaccounts.
ALIC is the legal holder of the shares held in the Subaccounts of the Account and as such has the right to vote the shares; to elect Directors of the Funds, to vote on matters that are required by the 1940 Act and upon any other matter that may be voted upon at a shareholders's meeting. To the extent required by law, ALIC will vote all shares of the Funds held in the Account at regular and special shareholder meetings of the Funds in accordance with instructions received from Policyowners based on the number of shares held as of the record date declared by the Fund's Board of Directors.
The number of Fund shares in a Subaccount for which instructions may be given by a Policyowner is determined by dividing the Policy's Accumulation Value held in that Subaccount by the net asset value of one share in the corresponding portfolio of the Fund. Fractional shares will be counted. Fund shares held in each Subaccount for which no timely instructions from Policyowners are received and Fund shares held in each Subaccount which do not support Policyowner interests will be voted by ALIC in the same proportion as those shares in that Subaccount for which timely instructions are received. Voting instructions to abstain on any item to be voted will be applied on a pro rata basis to reduce the votes eligible to be cast. Should applicable federal securities laws or regulations permit, ALIC may elect to vote shares of the Fund in its own right.
DISREGARD OF VOTING INSTRUCTION. ALIC may, if required by state insurance officials, disregard voting instructions if those instructions would require shares to be voted to cause a change in the subclassification or investment objectives or policies of one or more of the Funds' Portfolios, or to approve or disapprove an investment adviser or principal underwriter for the Funds. In addition, ALIC itself may disregard voting instructions that would require changes in the investment objectives or policies of any portfolio or in an investment adviser or principal underwriter for the Funds, if ALIC reasonably disapproves those changes in accordance with applicable federal regulations. If ALIC does disregard voting instructions, it will advise Policyowners of that action and its reasons for the action in the next annual report or proxy statement to Policyowners.
ALIC, a mutual life insurance company organized under the laws of Nebraska, is subject to regulation by the Nebraska Department of Insurance. On or before March 1 of each year an NAIC convention blank covering the operations and reporting on the financial condition of ALIC and the Account as of December 31 of the preceding year must be filed with the Nebraska Department of Insurance. Periodically, the Nebraska Department of Insurance examines the liabilities and reserves of ALIC and the Account and certifies their adequacy.
In addition, ALIC is subject to the insurance laws and regulations of other states within which it is licensed or may become licensed to operate. The policies offered by the Prospectus are available in the various states as approved. Generally, the Insurance Department of any other state applies the laws of the state of domicile in determining permissible investments.
EXECUTIVE OFFICERS AND DIRECTORS OF ALIC
Shows name and position(s) with ALIC followed by the principal occupations for
LAWRENCE J. ARTH, DIRECTOR, CHAIRMAN OF THE BOARD, & CHEIF EXECUTIVE OFFICER* Director, Chairman of the Board, President, Chief Executive Officer: Pathmark Assurance Company, Bankers Life Nebraska Company, BLN Financial Services, Inc.; Director, Chairman of the Board: Veritas Corp., Ameritas Investment Corp., FMA Realty Inc., Ameritas Investment Advisors, Inc.; Director, Chairman of the Board, Chief Executive Officer: Ameritas Variable Life Insurance Company; Chairman, President, Chief Executive Officer: Lincoln Gateway Shopping Center, Inc.; Director, Chairman of the Board, Chief Executive Officer: First Ameritas Life Insurance Corp. of New York; Director: Ameritas Bankers Assurance Company, Ameritas Managed Dental Plan, Inc.
KENNETH C. LOUIS, PRESIDENT AND CHIEF OPERATING OFFICER* Director, President, Chief Operating Officer: Ameritas Variable Life Insurance Company; Director: First Ameritas Life Insurance Corp. of New York, Ameritas Investment Advisors, Inc., Ameritas Investment Corp., Veritas Corp., Ameritas Bankers Assurance Company, Bankers Life Nebraska Company, BLN Financial Services, Inc., FMA Realty, Inc., Lincoln Gateway Shopping Center, Inc., Pathmark Assurance Company, Ameritas Managed Dental Plan, Inc.
NORMAN M. KRIVOSHA, EXECUTIVE VICE PRESIDENT, SECRETARY AND CORPORATE Director, Secretary: Ameritas Investment Advisors Inc., Ameritas Investment Corp., BLN Financial Services Inc., Ameritas Bankers Assurance Company, Veritas Corp., Pathmark Assurance Company, Bankers Life Nebraska Company; FMA Realty, Inc., Ameritas Variable Life Insurance Company, Ameritas Managed Dental Plan, Inc.; Vice President, Secretary and General Counsel: First Ameritas Life Insurance Corp. of New York; Secretary: Lincoln Gateway Shopping Center, Inc.
JON C. HEADRICK, EXECUTIVE VICE PRESIDENT-INVESTMENTS AND TREASURER* Treasurer to: Veritas Corp., Ameritas Bankers Assurance Company, Bankers Life Nebraska Company, Pathmark Assurance Company, Ameritas Variable Life Insurance Company, First Ameritas Life Insurance Corp. of New York, Ameritas Managed Dental Plan, Inc.; Director, Vice President and Treasurer to: BLN Financial Services Inc.; Director, President and Treasurer: FMA Realty Inc.; Director, President, Chief Executive Officer and Treasurer: Ameritas Investment Corp.; Director, President, Chief Executive Officer: Ameritas Investment Advisors Inc.
ROBERT C. BARTH, SECOND VICE PRESIDENT AND ASSISTANT CONTROLLER*
WAYNE E. BREWSTER, VICE PRESIDENT-VARIABLE SALES* Vice President-Variable Sales: Ameritas Variable Life Insurance Company.
ROBERT W. BUSH, EXECUTIVE VICE PRESIDENT-INDIVIDUAL INSURANCE* Chairman, President, CEO: CUNA Mutual Financial Services Corporation; CUNA Brokerage Services, Inc.; Century Financial Services Corp.; CUNA Mutual General Agency of Texas, Inc.; CM Field Services, Inc.; Plan America Program, Inc.; Director: CU Financial and Insurance Services, Inc.; CUNA Mutual Insurance Agency of Alabama, Inc.; CUNA Mutual Insurance Agency of Massachusetts, Inc.; CUNA Mutual Life Insurance Agency of Mississippi, Ltd.; CUNA Mutual Casualty Insurance Agency of Mississippi, Inc.; CUNA Mutual Insurance Agency of New Mexico, Inc; CUNA Mutual Insurance Agency of Ohio, Inc.; Vice President: CUNA Mutual Funds Management Company, L.L.C.; Senior Vice President: CUNA Mutual Insurance Society; CUNA Mutual Investment Corporation; CUMIS Insurance Society, Inc.; League General Insurance Company; Members Life Insurance Company; CUNA Mutual Insurance Agency, Inc.; Century Life of America; Century Life Insurance Co.
JAN M. CONNOLLY, VICE PRESIDENT-CORPORATE OPERATIONS, PLANNING AND QUALITY*
WILLIAM W. COOK, JR., DIRECTOR** Chairman, President, Chief Executive Officer: The Beatrice National Bank and Trust Co.
GERALD B. DIMON, VICE PRESIDENT-HUMAN RESOURCES*
President, Director: Globe Corporation; Director: Security Pacific Bank Arizona, Security Pacific Bancorp Southwest, Bancwest Mortgage Corp., Security Pacific Corporation, Security Pacific National Bank, Ellsworth Financial Corp., Iliff, Thorn & Co., CalMat Co., Dean Foods Company, Continental Bank, Continental Bank Corp.; Advisory Director: Myers Craig Vallone Co.; Trustee: Mayo Foundation
JAMES R. HAIRE, SENIOR VICE PRESIDENT-CORPORATE ACTUARY AND STRATEGIC Director: Pathmark Assurance Co.; Director and Vice President: Ameritas Variable Life Insurance Company, First Ameritas Life Insurance Corp.of New York
THOMAS D. HIGLEY, VICE PRESIDENT - INDIVIDUAL FINANCIAL OPERATIONS AND ACTUARY* Vice President and Actuary: Ameritas Variable Life Insurance Company, First Ameritas Life Insurance Corp. of New York; Director, Vice President and Actuary:
LESLIE D. INMAN, VICE PRESIDENT - GROUP STRATEGIC ALLIANCES* National Sales Director, VP and National Marketing Manager: American Bankers
STEVEN K. ISAACS, VICE PRESIDENT-GROUP FIELD SALES* District Director-Sales; Regional Vice President-Sales: Fortis Benefits
MIKE JASKOLKA, SECOND VICE PRESIDENT - INFORMATION SERVICES*
MARTY L. JOHNSON, SECOND VICE PRESIDENT - INDIVIDUAL UNDERWRITING* Reinsurance Underwriting Consultant: TransAmerica Occidental Life; Senior Underwriter: Amaco Life Insurance Company
KENNETH R. JONES, VICE PRESIDENT, CORPORATE COMPLIANCE AND ASSISTANT Assistant Vice President and Assistant Secretary: Bankers Life Nebraska Company, Pathmark Assurance Company; Vice President-Corporate Compliance and Assistant Secretary: Ameritas Investment Advisors, Inc., Ameritas Investment Corp., Ameritas Variable Life Insurance Company, First Ameritas Life Insurance Corp.
President: The Brookhollow Group; General Partner: Windsor Associates
President: Krohn Corporation; Chairman of the Board: Commercial Federal Corpor-
WILLIAM W. LESTER, VICE PRESIDENT-SECURITIES*
President, Manager: Maddux Cattle Company
JOANN M. MARTIN, SENIOR VICE PRESIDENT-CONTROLLER AND CHIEF FINANCIAL OFFICER* Director: Ameritas Managed Dental Plan, Inc.; Comptroller to: Veritas Corp., Bankers Life Nebraska Company, Pathmark Assurance Company; Director, Treasurer: Lincoln Gateway Shopping Center Inc.; Director, Comptroller: Ameritas Variable Life Insurance Company; Director, Comptroller, Assistant Secretary: Ameritas Bankers Assurance Company; Vice President, Comptroller: First Ameritas Life Insurance Corp. of New York; Director: Ameritas Investment Advisors, Inc., Ameritas Investment Corp., BLN Financial Services, Inc., FMA Realty, Inc.
The Date of this Prospectus Supplement is December 19, 1995.
BRUCE R. MCMULLEN, M.D., VICE PRESIDENT AND MEDICAL DIRECTOR*
DAVID C. MOORE, EXECUTIVE VICE PRESIDENT-GROUP AND PENSIONS* Director: Bankers Life Nebraska Company, Pathmark Assurance Company; Director, Chairman of the Board: Ameritas Bankers Assurance Company; Director, Chairman of the Board: Ameritas Managed Dental Plan, Inc.; Vice President-Product
WILLIAM W. NELSON, VICE PRESIDENT-GROUP ADMINISTRATION* Director: Ameritas Bankers Assurance Company; Vice President: Ameritas Managed Dental Plan, Inc.
DALE NIEBUHR, SECOND VICE PRESIDENT - INTERNAL AUDIT*
Chairman Emeritus; Formerly Chairman of the Board and Treasurer: Olsson
GARY R. RAYMOND, VICE PRESIDENT - GROUP ACTUARY* Director: Ameritas Bankers Assurance Company
BARRY C. RITTER, SENIOR VICE PRESIDENT - INFORMATION SERVICES*
PAUL C. SCHORR, III, DIRECTOR** President and CEO: ComCor Holding, Inc.; Chairman: Ebco/Commonwealth, Inc.; President, Chief Executive Officer: Fishbach Corp., Commonwealth Companies, Inc.
President: William C. Smith & Co.; President, Chairman, Chief Executive Officer: FirsTier Bank, N.A.; President, Chief Operating Officer, Chairman, Chief Executive Officer: FirsTier Financial, Inc.
DONALD R. STADING, VICE PRESIDENT AND GENERAL COUNSEL - INSURANCE AND Director, Assistant Secretary: Ameritas Bankers Assurance Company; Director, Assistant Secretary: Ameritas Managed Dental Plan, Inc.; Corporate Counsel/ Lending Group: National Bank of Commerce
NEAL E. TYNER, DIRECTOR, CHAIRMAN EMERITUS** NET Consultants, Formerly Chairman of the Board and CEO of ALIC;
KENNETH L. VANCLEAVE, VICE PRESIDENT - GROUP MARKETING AND MANAGED CARE* Director, Vice President: Ameritas Managed Dental Plan, Inc.; Assistant Vice
RICHARD W. VAUTRAVERS, VICE PRESIDENT - AMERITAS LOW-LOAD* Director, President: Veritas Corp., First Ameritas Life Insurance Corp. of New
Vice President-Network Infrastructure: U.S. West Communications; Vice President- Technical Services: U.S. West Communication, Inc.
STEVEN L. WELTON, VICE PRESIDENT-INDIVIDUAL MARKETING*
* Principal business address: Ameritas Life Insurance Corp, One Ameritas Way, 5900 "O" Street, P.O. Box 81889, Lincoln, Nebraska 68501.
** Principal address for: James P. Abel, NEBCO, Inc., P.O. Box 80268, Lincoln, Nebraska 68501; Duane W. Acklie, Crete Carrier Corporation, P.O. Box 81228, Lincoln, Nebraska 68501; William W. Cook, Jr., The Beatrice National Bank and Trust Company, P.O. Box 100, Beatrice, Nebraska 68310; Bert A. Getz, Globe Corporation, 3634 Civic Center Blvd., Scottsdale, Arizona 85251; James R. Knapp, Brookhollow Group, One Brookhollow Drive, Santa Ana, California 92705; Robert F. Krohn, Krohn Corporation 1427 South 85th Ave., Omaha, Nebraska 68124; Wilfred Maddux, Maddux Cattle Company, P.O. Box 217, Wauneta, Nebraska 69045; John E. Olsson, Olsson Associates, 1111 Lincoln Mall, P.O. Box 84608, Lincoln, Nebraska 68501; Paul C. Schorr, III, ComCor Holding, Inc., 6940 "O" Street, Suite 336, P.O. Box 57310, Lincoln, Nebraska 68505; William C. Smith, William C. Smith & Co., Cornhusker Plaza, Suite 401, 301 So. 13th Street, Lincoln, Nebraska 68508; Neal E. Tyner, NET Consultants, 6940 O Street, Suite 324, Lincoln, Nebraska 68510; Winston J. Wade, US West Communications, 700 W Mineral Avenue, Room SD, A15.02, Littleton, Colorado 80120
*** Where an individual has held more than one position with an organization during the last 5-year period, the last position held has been given.
The Date of this Prospectus Supplement is January 12, 1996.
All matters of Nebraska law pertaining to the Policy, including the validity of the Policy and ALIC's right to issue the Policy under Nebraska Insurance Law, have been passed upon by Norman M. Krivosha, Director and Secretary.
There are no legal proceedings to which the Account is a party or to which the assets of the Account are subject. ALIC is not involved in any litigation that is of material importance in relation to its total assets or that relates to its total assets or that related to the Account.
Financial statements for the Account are not being provided for the period ended December 31, 1994, because the Policies underlying the Separate Account were not offered for sale until December 19, 1995. The financial statements of ALIC as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994, included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
Actuarial matters included in this Prospectus have been examined by Thomas P. McArdle, Assistant Vice President- Associate Actuary of Ameritas Life Insurance Corp., as stated in the opinion filed as an exhibit to the registration statement.
A registration statement has been filed with the Securities and Exchange Commission, under the Securities Act of 1933, as amended, with respect to the Policy offered hereby. This Prospectus does not contain all the information set forth in the registration statement and the amendments and exhibits to the registration statement, to all of which reference is made for further information concerning the Account, ALIC and the Policy offered hereby. Statements contained in this Prospectus as to the contents of the Policy and other legal instruments are summaries. For a complete statement of the terms thereof reference is made to such instruments as filed.
The financial statements of ALIC which are included in this Prospectus should be considered only as bearing on the ability of ALIC to meet its obligations under the Policies. They should not be considered as bearing on the investment performance of the assets held in the Account.
The Date of this Prospectus Supplement is December 19, 1995.
Ameritas Life Insurance Corp. Separate Account LLVL ("the Account") was established on August 24, 1994 under Nebraska Law by Ameritas Life Insurance Corp. ("ALIC") a mutual life insurance company to receive and invest premium payment and variable life insurance policies invested by ALIC. The account is registered under the Investment Company Act of 1940, as amended, as a unit investment trust.
There are eleven subaccounts in the separate account each of which invests only in the corresponding portfolio of the Vanguard Variable Insurance Fund or the Neuberger & Berman Advisers Management Trust. The assets of the account are segregated from the assets and liabilities of ALIC.
Prior to the effective date of the prospectus the account has had no business activities, has no assets or liabilities and has no financial statement.
We have audited the accompanying parent company only balance sheets of Ameritas Life Insurance Corp., a mutual life insurance company, as of December 31, 1994 and 1993, and the related parent company only statements of operations and policyowners' contingency reserves, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Ameritas Life Insurance Corp. as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with statutory accounting practices which are considered generally accepted accounting principles for mutual life insurance companies.
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Ameritas Life Insurance Corp. is a mutual life insurance company chartered by the State of Nebraska. Its operations consist of life and health insurance and annuity and pension contracts. Wholly-owned insurance subsidiaries include Ameritas Variable Life Insurance Company, First Ameritas Life Insurance Corp. of New York, Pathmark Assurance Company, and Bankers Life Nebraska Company, a holding company, which owns 100% of Ameritas Bankers Assurance Company. In addition to the insurance subsidiaries the Company conducts other diversified financial service-related operations through the following wholly-owned subsidiaries: Veritas Corp. (a marketing organization for low-load insurance products); BLN Financial Services, Inc., which owns 100% of Ameritas Investment Corp. (a broker/ dealer), Ameritas Investment Advisors, Inc. (an advisor providing investment management services to the Company and other insurance companies); FMA Realty Inc. (a real estate management firm); and Ameritas Managed Dental Plan, Inc. (a prepaid dental organization).
The accompanying financial statements have been prepared in accordance with life insurance accounting practices prescribed or permitted by the Insurance Department of the State of Nebraska. While appropriate for mutual life insurance companies, such accounting practices differ in certain respects from generally accepted accounting principles followed by other business enterprises. The Financial Accounting Standards Board (FASB) has undertaken consideration of changing those methods constituting generally accepted accounting principles applicable to mutual life insurance companies. In accordance with pronouncements issued by the FASB in 1993 and 1994, financial statements prepared on the basis of statutory accounting practices can no longer be described as prepared in conformity with generally accepted accounting principles for fiscal years beginning after December 15, 1995.
The Company is permitted by the Insurance Department of the State of Nebraska to establish a deferred income tax liability to account for future taxes expected to be paid although such a liability is not required (see Note 5, Federal Income Taxes).
The principal prescribed accounting and reporting practices followed are:
Investments are reported according to valuation procedures prescribed by the National Association of Insurance Commissioners (NAIC), and generally: bonds and mortgage loans are valued at amortized cost; real estate at cost less accumulated depreciation when an operating investment, on the equity method when operated as a partnership, or at amortized cost when a purchase lease; preferred stock at cost; common stock of unaffiliated companies at market value; and investments in subsidiaries and investments in limited partnerships are valued on the equity basis.
Realized capital gains and losses, including valuation allowances on specific investments, are recorded in the Statements of Operations and unrealized gains and losses are credited or changed to Policyowners' Contingency Reserves.
Investments in subsidiaries are reported in the balance sheets at equity in net assets. Dividends from these subsidiaries are included in investment income. The equity in undistributed net earnings or loss is credited or charged to Policyowners' Contingency Reserves.
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
The following amounts report totals for subsidiaries at December 31 and for the years then ended:
Services are provided and received by and between the Company and its subsidiaries under administrative service agreements. The costs/recoveries associated with these agreements are reflected in operations.
The Company has entered into guarantee agreements with two of its life insurance subsidiaries, Ameritas Variable Life Insurance Company and Ameritas Bankers Assurance Company. Under the agreements the Company guarantees the full, complete and absolute performance of all duties and obligations of these affiliates. Most of the affiliate amounts shown above relate to these subsidiaries.
The Company subsequent to year end, entered into a guarantee agreement with its subsidiary, Ameritas Managed Dental Plan, Inc. Under the agreement, the Company guarantees to maintain surplus of the affiliate at the required minimum level.
Certain assets (primarily furniture and equipment and software) are designated as "non-admitted" under Insurance Department accounting requirements. These assets are excluded from the balance sheets by adjustments to policyowners' contingency reserves. As of December 31, 1994 and 1993, "non-admitted assets" were $11.7 million and $12.0 million, respectively.
Separate account assets and liabilities are segregated and are exclusively for the benefit of certain pension contract holders. Assets in separate accounts are held at market value.
Policy reserves for life and annuity policies are established and maintained on the basis of published mortality tables using assumed interest rates and valuation methods established by the insurance Department of the State of Nebraska. The liability for funds left on deposit with the Company includes deposit administration funds deposited on behalf of employer-employee or trustee groups to provide immediate and future retirement benefits. These funds are part of the general funds of the Company. The Company is not responsible for the adequacy of these funds to meet specified fund benefits. Reserves for unpaid claims include claims reported and unpaid and claims not yet reported, the latter estimated on the basis of historical experience. As such amounts are necessarily estimates, the ultimate liability will differ from the amount recorded and will be reflected in operations when additional information becomes known. The interest maintenance reserve is calculated based on the prescribed method developed by the NAIC. Realized gains and losses, net of tax, resulting from interest rate changes on fixed income investments are deferred and credited to this reserve. These gains and losses are then amortize into investment income over what would have been the remaining years to maturity of the underlying investment. Amortization included in investment income, was $1.2 million, $0.6 million, and $0.2 million for 1994, 1993, and 1992.
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
The asset valuation reserve is a required appropriation of surplus to provide for possible losses that may occur on certain investments held by the Company. The reserve is computed based on holdings of bonds, stocks, mortgages, real estate and short-term investments and realized and unrealized gains and losses, other than those resulting from interest rate changes. Changes in the reserve are charged or credited to policyowners' contingency reserves.
RECOGNITION OF PREMIUM INCOME AND RELATED EXPENSES Premiums are credited to revenue over the premium paying periods of the related policy. Annuity and pension fund deposits are recognized as income when received. Policy acquisition costs, such as commissions and other marketing and issuance expenses incurred in connection with acquiring new business, are charged to operations as incurred.
Premium income for the year ended December 31 consists of the following:
A portion of the Company's business has been issued on a participating basis. The amount of policyowners dividends to be paid is determined annually by the Board of Directors.
The Company files a consolidated life/non-life return with its subsidiaries. An agreement among the members of the consolidated group provides for distribution of consolidated tax results as if filed on a separate return basis. The current income tax expense or benefit (including effects of capital gains and losses and net operating losses) is apportioned generally on a sub-group (life/non-life) basis.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate a value:
For publicly traded securities, fair value is determined using an independent pricing source. For securities without a readily ascertainable fair value, the value has been determined using an interest rate spread matrix based upon quality, weighted average maturity and Treasury yields.
The carrying amount approximates fair value because of the short maturity of these instruments.
Mortgage loans in good standing are valued on the basis of discounted cash flow. The interest rate that is assumed is based upon the weighted average term of the mortgage and appropriate spread over Treasuries. Mortgage loans in default totaling $3.9 million and $4.4 million at December 31, 1994 and 1993 are not included in the fair value calculation or carrying amount.
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
Because real estate purchase leases include renewal options and residual interests in real estate, a fair value was not practicably determinable. All other real estate is excluded from the fair value calculation.
For publicly traded securities, fair value is determined using prices provided by the NAIC. Stocks in affiliates are carried on the equity method and therefore not included as part of the fair value disclosure.
Fair values for venture capital partnerships are estimated based on values as last reported by the partnership and discounted for their lack of marketability. Real estate partnerships are carried on the equity method and are excluded from the fair value disclosure.
The fair value of these assets approximates book value.
Loans on life insurance policies Fair values for policy loans are estimated using a discounted cash flow analysis at interest rates currently offered for similar loans. Policy loans with similar characteristics are aggregated for purposes of the calculations.
The carrying amounts reported in the balance sheet equals fair value.
Fair value of accrued investment income equals stated value.
Funds left on deposit with a fixed maturity are valued at discounted present value using market interest rates. Funds on deposit which do not have fixed maturities are carried at the amount payable on demand at the reporting date.
Estimated fair values presented below, as of December 31, do not necessarily represent the value for which the financial instrument could have been sold:
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
3. INVESTMENTS IN BONDS AND STOCKS-OTHER THAN AFFILIATES:
The table below provides additional information relating to bonds and stocks-other than affiliates held by the general account at December 31, 1994:
The carrying value and fair value of bonds at December 31, 1994 by contractual maturity are shown below. Maturity is determined based on call date, if any. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
3. INVESTMENTS IN BONDS AND STOCKS-OTHER THAN AFFILIATES(continued):
Bonds not due at a single maturity date have been included in the above table in the year of final maturity.
There were no sales of investments in bonds in 1994 or 1992, while sales in 1993 resulted in proceeds of $7.4 million and gross gains of $0.6 million.
4. RESERVE FOR UNPAID CLAIMS:
Activity in the accident and health reserve for unpaid claims and claim adjustment expense is summarized as follows:
The provisions for federal income taxes is based on the current law. Current law requires companies to defer policy acquisition costs and amortize those costs in future periods. A second requirement, which effectively taxes surplus as defined under the law, remains in place. As a result of the deferred acquisition costs and "surplus tax" requirements the provision for federal income taxes exceeds the statutory corporate rate.
The tax returns for the years through 1990 have been examined and settled.
The Company provides deferred taxes for temporary differences resulting from certain transactions, including those related to investments in tax benefit leases, unrealized gains and losses and other investment transactions.
In the ordinary course of business, the Company assumes and cedes reinsurance with other insurers and reinsurers. These arrangements provide greater diversification of business and limit the maximum net loss potential on large risks.
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
Following is a summary of the transactions through reinsurance operations:
The Company remains contingently liable in the event that a reinsurer is unable to meet the obligations ceded under the reinsurance agreement.
7. EMPLOYEE AND AGENT BENEFIT PLANS:
The Company's non-contributory defined benefit pension plan covers substantially all full-time employees. Pension costs include current service costs, which are accrued and funded on a current basis, and past service costs, which are amortized over the average remaining service life of all employees on the adoption date. The assets of this plan are not segregated.
Following is a summary of plan benefit and asset information using a January 1st valuation date:
The Company has generally funded annually the maximum allowed under IRS regulations. The Company made contributions totaling $ 1.5 million, $1.6 million, and $1.3 million in 1994, 1993, and 1992 respectively.
The Company's employees and agents also participate in defined contribution plans that cover substantially all full-time employees and agents. Total Company contributions were $.8 million in 1994, 1993, and 1992.
The Company's also provides certain health care and life insurance benefits for retired employees on a self. funded basis. Substantially all of the Company's employees may, in accordance with the plans applicable to such benefits, become eligible for these benefits if they attain retirement age, with sufficient service and participation in the plan prior to retirement while working for the Company. In 1993, a $3.2 million reserve was established through a charge to policyowners' contigency reserve as required by the NAIC. Prior to January 1, 1993 the costs of this plan was recorded on a pay as incurred basis.
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
In December 1994 the Board of Directors for Ameritas Variable Life Insurance Company (AVLIC) and the Company approved a plan of statutory merger of the companies. The merger, which will combine the assets and liabilities of the companies, has an effective date of May 1, 1995, or at such later date as all required regulatory approvals can be obtained. The plan of merger has been approved by the Insurance Department of the State of Nebraska. Selected financial information for AVLIC as of and for the year ended December 31, is as follows:
Investment: As of December 31, 1994, commitments were outstanding for investments to be made in 1995 and after, totaling approximately $26.0 million. Securities commitments represented $24.2 million, and mortgage loan and real estate commitments approximated $1.8 million. These commitments have been made in the normal course of investment operations. State life and health guaranty funds: As a condition of doing business, all states and jurisdictions have adopted laws requiring membership in life and health insurance guaranty funds. Member companies are subject to assessments each year based on life, health or annuity premiums collected in the state. In some states these assessments may be applied against premium taxes. The Company has estimated its costs related to past insolvencies and has provided a reserve included in other liabilities of $1.6 million and $1.2 million as of December 31, 1994 and 1993, respectively.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
A. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Ameritas Life Insurance Corp. is a mutual life insurance company chartered by the State of Nebraska. Its operations consist of life and health insurance and annuity and pension contracts. Wholly-owned insurance subsidiaries include Ameritas Variable Life Insurance Company, First Ameritas Life Insurance Corp. of New York, Pathmark Assurance Company, and Bankers Life Nebraska Company, a holding company, which owns 100% of Ameritas Bankers Assurance Company. In addition to the insurance subsidiaries the Company conducts other diversified financial service-related operations through the following wholly-owned subsidiaries: Veritas Corp. (a marketing organization for low-load insurance products); BLN Financial Services, Inc., which owns 100% of Ameritas Investment Corp. (a broker/ dealer), Ameritas Investment Advisors, Inc. (an advisor providing investment management services to the Company and other insurance companies); FMA Realty Inc. (a real estate management firm); and Ameritas Managed Dental Plan, Inc. (a prepaid dental organization).
The accompanying financial statements have been prepared in accordance with life insurance accounting practices prescribed or permitted by the Insurance Department of the State of Nebraska. While appropriate for mutual life insurance companies, such accounting practices differ in certain respects from generally accepted accounting principles followed by other business enterprises. The Financial Accounting Standards Board (FASB) has undertaken consideration of changing those methods constituting generally accepted accounting principles applicable to mutual life insurance companies. In accordance with pronouncements issued by the FASB in 1993 and 1994, financial statements prepared on the basis of statutory accounting practices can no longer be described as prepared in conformity with generally accepted accounting principles for fiscal years beginning after December 15, 1995.
B. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL STATEMENTS:
Management believes that all adjustments, consisting of only normal recurring accruals, considered necessary for a fair presentation of the unaudited interim financial statements have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the years ended December 31, 1994, 1993 and 1992.
In December, 1994 the Board of Directors for the Company and Ameritas Variable Life Insurance Company approved a plan of statutory merger of the companies. The merger, which will combine the assets and liabilities of the companies, had an effective date of May 1, 1995, or at such later date as all required regulatory approvals can be obtained. The plan of merger has been approved by the Insurance Department of the State of Nebraska. The merger was subsequently postponed until May 1, 1996.
ILLUSTRATIONS OF DEATH BENEFITS AND NET CASH SURRENDER VALUES
The following tables illustrate how the Net Cash Surrender Values and Death Benefits of a Policy may change with the investment experience of the Fund. The tables show how the Net Cash Surrender Values and Death Benefits of a Policy issued to an Insured of a given age and specified underwriting risk classification who pays the given premium at issue would vary over time if the investment return on the assets held in each portfolio of the Funds were a uniform, gross, after-tax annual rate of 0%, 6%, or 12%. The tables on pages 54 through 57 illustrate a Policy issued to a male, age 45, under a Preferred rate non-smoker underwriting risk classification. This policy provides for a standard smoker and non-smoker, and preferred non-smoker classification and different rates for certain Specified Amounts. The Net Cash Surrender Values and Death Benefits would be different from those shown if the gross annual investment rates of return averaged 0%, 6%, and 12% over a period of years, but fluctuated above and below those averages for individual policy years, or if the Insured were assigned to a different underwriting risk classification.
The second column of the tables shows the accumulated value of the premiums paid at 5%. The following columns show the Net Cash Surrender Values and the Death Benefits for uniform hypothetical rates of return shown in these tables. The tables on pages 54 and 56 are based on the current cost of insurance rates, current expense deductions and the current percent of premium loads. These reflect the basis on which ALIC currently sells its Policies. The maximum cost of insurance rates allowable under the Policy are based upon the 1980 Commissioner's Standard Ordinary Smoker and Non-Smoker, Male and Female Mortality Tables. ALIC anticipates reflecting future improvements in actual mortality experience through adjustments in the current cost of insurance rates actually applied. ALIC also anticipates reflecting any future improvements in expenses incurred by applying lower percent of premiums of loads and other expense deductions. The death benefits and cash values shown in the tables on pages 55 and 57 are based on the assumption that the maximum allowable cost of insurance rates as described above ("guaranteed cost") and maximum allowable expense deductions are made throughout the life of the Policy.
The amounts shown for the Net Cash Surrender Values and Death Benefits reflect the fact that the net investment return of the Subaccounts is lower than the gross, after-tax return of the assets held in the Funds as a result of expenses paid by the Fund and charges levied against the Subaccounts. The values shown take into account an average of the daily investment advisory fee paid by each portfolio available for investment (the equivalent to an annual rate of .46% of the aggregate average daily net assets of the Fund), the expenses incurred by the Fund (.13%), and the daily charge by ALIC to each Subaccount for assuming mortality and expense risks (which is equivalent to a charge at an annual rate of 0.75% on pages 54 and 56 and at an annual rate of .90% on page 55 and 57 of the average net assets of the Subaccounts). The Advisers Management Trust has agreed to reimburse each Neuberger & Berman Portfolio to the extent that the aggregate operating expenses and its pro rata share of its corresponding series operating expenses, excluding the compensation of Neuberger & Berman Management from the portfolio, taxes, interest, extraordinary expenses, brokerage commission, and transaction costs that exceed 1% of the portfolio's average daily net asset value are in excess of an annual rate of 1.00%. This agreement is expected to continue in future years. The illustrated gross annual investment rates of return of 0%, 6%, and 12% were computed after deducting these amounts and correspond to approximate net annual rates of -1.34%, 4.66% and 10.66% on pages 54 and 56 and -1.49%, 4.51% and 10.51% respectively, on pages 55 and 57.
The hypothetical values shown in the tables do not reflect any additional charges for Federal Income tax burden attributable to the Account, since ALIC is not currently making such charges. However, such charges may be made in the future and, in that event, the gross annual investment rate of return would have to exceed 0 percent, 6 percent, or 12 percent by an amount sufficient to cover the tax charges in order to produce the Death Benefits and values illustrated. (See Federal Tax Matters, page 30).
The tables illustrate the policy values that would result based upon the hypothetical investment rates of return if premiums are paid as indicated, if all net premiums are allocated to the Account, and if no policy loans have been made. The tables are also based on the assumptions that the policyowner has not requested an increase or decrease in the initial Specified Amount, that no Partial Withdrawals have been made, and that no more than fifteen transfers have been made in any policy year so that no transfer charges have been incurred. Illustrated values would be different if the proposed Insured were female, a smoker, in substandard risk classification, or were another age, or if a higher or lower premium was illustrated.
Upon request, ALIC will provide comparable illustration based upon the proposed Insured's age, sex and underwriting classification, the Specified Amount, the Death Benefit option, and Planned Periodic Premium schedule requested, and any available riders requested.
The Date of this Prospectus Supplement is January 12, 1996.
The Date of this Prospectus Supplement is January 12, 1996.
The Date of this Prospectus Supplement is January 12, 1996.
The Date of this Prospectus Supplement is January 12, 1996.
The Date of this Prospectus Supplement is January 12, 1996.
The information below covering the period of 1926-1994 is an examination of the basic relationship between risk and return among the different asset classes, and between nominal and real (inflation adjusted) returns. The information is provided because the Policyowners have varied investment portfolios available which have different investment objectives and policies. The chart generally demonstrates how different classes of investments have performed during the period. The study of asset returns provides a period long enough to include most of the major types of events that investors have experienced in the past and may experience in the future. This is a historical record and is not intended as a projection of future performance.
The graph depicts the growth of a dollar invested in common stocks, small company stocks, long-term government bonds, Treasury bills, and a hypothetical asset returning the inflation rate over the period from the end of 1925 to the end of 1994. All results assume reinvestment of dividends on stocks or coupons on bonds and no taxes. Transaction costs are not included, except in the small stock index starting in 1982. Charges associated with a variable insurance policy are not reflected in the chart.
Each of the cumulative index values is initiated at $1.00 at year-end 1925. The graph illustrates that common stocks and small stocks gained the most over the entire 69-year period: investments of one dollar would have grown to $810.54 and $2,842.77, respectively, by year-end 1994. This growth, however, was earned by taking substantial risk. In contrast, long-term government bonds (with an approximate 20-year maturity), which exposed the holder to less risk, grew to only $25.86.
The lowest risk strategy over the past 68 years was to buy U.S. Treasury bills. Since Treasury bills tended to track inflation, the resulting real (inflation-adjusted) returns were near zero for the entire 1926-1994 period.
(GRAPHIC OMITTED)(OMITTED GRAPH ILLUSTRATES LONG TERM MARKET TRENDS AS DESCRIBED IN THE NARRATIVE ABOVE.)
Year End 1925 = $1.00 Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook (C)Ibbotson Associates, Chicago. All Rights Reserved.
The Standard and Poor's (S & P 500) is a weighted index of 500 widely held stocks: 400 Industrials, 40 Financial Company Stocks, 40 Public Utilities, and 20 Transportation stocks, most of which are traded on the New York Stock Exchange. This information is provided because the policyowners have varied investment options available. The investment options, except the Fixed Account and the Money Market Account, involve investments in the stock market. The S & P 500 is generally regarded as an accurate composite of the overall stock market. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T10:32:24 |
0000225930-96-000007 | 0000225930-96-000007_0003.txt | RULE 24F-2 NOTICE FOR TEMPLETON FUNDS, INC.
I. This Notice is filed on behalf of Templeton Funds, Inc. (the "Company") for the fiscal year ended August 31, 1995.
IV. The Company sold 26,740,660 shares of the Templeton World Fund series of its common stock and 300,849,243 shares of the Templeton Foreign Fund series of its common stock during the fiscal year.
V. The Company sold an aggregate of 327,589,903 shares during the fiscal year ended August 31, 1995 in reliance upon its registration of an indefinite amount of shares pursuant to Rule 24f-2 for an actual aggregate sales price of $3,198,576,180. During that period, the Company redeemed an aggregate of 134,240,983 shares for an aggregate amount of $1,417,344,262. Because this Notice is being filed within 60 days of the end of the Company's fiscal year, the Company's filing fee of $614,217.90 is based upon the net sales amount of $1,781,231,918.1
An opinion of counsel stating that the shares sold during the fiscal year ended August 31, 1995 were legally issued, fully paid and non-assessable accompanies this Notice.
1 $3,198,576,180 - $1,417,344,262 = $1,781,231,918
$1,781,231,918 X (1/29 X 1%) = $614,217.90
As counsel for Templeton Funds, Inc. (the "Company") during the fiscal year ended August 31, 1995, we are familiar with the registration of the Company under the Investment Company Act of 1940 (File No. 811-2781) and with the registration statement relating to its shares of common stock (the "Shares") under the Securities Act of 1933 (File No. 2-60067). We have also examined such other corporate records, agreements, documents and instruments as we deemed appropriate.
Based upon the foregoing, it is our opinion that the 327,589,903 Shares (representing 26,740,660 Shares of Templeton World Fund and 300,849,243 Shares of Templeton Foreign Fund) sold at the public offering price and delivered by the Company against receipt of the net asset value of the Shares during the Company's fiscal year ended August 31, 1995 were duly and validly authorized, legally and validly issued, fully paid, and non-assessable.
We consent to the filing of this opinion in connection with the Notice pursuant to Rule 24f-2 under the Investment Company Act of 1940 for the fiscal year ended August 31, 1995 to be filed on behalf of the Company with the Securities and Exchange Commission. | N14EL24 | EX-99.17 | 1996-01-12T00:00:00 | 1996-01-12T15:54:55 |
0000950168-96-000043 | 0000950168-96-000043_0000.txt | PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
(Exact name of registrant as specified in its charter)
(Address of principal executive offices)
Registrant's telephone number, including area code)
On January 10, 1996, a Committee of the Board of Directors of the Registrant (the "Committee") approved the implementation of a medium-term note program, pursuant to which certain officers of the Registrant may cause it to issue from time to time up to $1,500,000,000 aggregate principal amount of certain medium-term notes, which may be senior debt securities, designated as the Senior Medium-Term Notes, Series E (the "Senior Medium-Term Notes") or subordinated debt securities, designated as the Subordinated Medium-Term Notes, Series E (the "Subordinated Medium-Term Notes" and, together with the Senior Medium-Term Notes, the "Medium-Term Notes"), or any combination thereof, and may establish the price, terms and conditions and the specific method of distribution of the Medium-Term Notes. The Senior Medium-Term Notes will be issued under an Indenture dated as of January 1, 1995 between the Registrant and First Trust of New York, National Association, as successor trustee to BankAmerica National Trust Company. The Subordinated Medium-Term Notes will be issued under an Indenture dated as of January 1, 1995 between the Registrant and The Bank of New York. The resolutions of the Committee are included as Exhibit 99.1 hereto.
On January 10, 1996, the Registrant entered into a distribution agreement with the agents named therein (the "United States Distribution Agreement"), the terms of which will govern sales of the Medium-Term Notes. The Medium-Term Notes are described generally in the Prospectus dated November 24, 1995 constituting a part of the Registration Statement (hereinafter described), as supplemented by a Prospectus Supplement dated January 10, 1996. The United States Distribution Agreement is included as Exhibit 99.2 hereto.
The Medium-Term Notes will be issued from time to time pursuant to the Registrant's Registration Statement on Form S-3, as amended, Registration No. 33-63097 (the "Registration Statement"), on a delayed basis pursuant to Rule 415 under the Securities Act of 1933, as amended. The Registration Statement registered up to $3,000,000,000 aggregate initial offering price of the Registrant's unsecured debt securities (either senior or subordinated), shares of its preferred stock (whichmay be represented by depositary shares) and shares of its common stock and was declared effective on November 24, 1995. The Registrant has not yet issued any securities under the Registration Statement.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
4.1 Indenture dated as of January 1, 1995 between NationsBank Corporation and First Trust of New York, National Association, as successor trustee to BankAmerica National Trust Company, incorporated herein by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-3, as amended,
4.2 Form of Senior Medium-Term Note, Series
4.3 Form of Senior Medium-Term Note, Series
4.4 Indenture dated as of January 1, 1995 between NationsBank Corporation and The Bank of New York, as trustee, incorporated herein by reference to Exhibit 4.5 of the Registrant's Registration Statement on Form S-3, as amended, Registration No. 33-57533
4.5 Form of Subordinated Medium-Term Note,
4.6 Form of Subordinated Medium-Term Note,
99.1 Resolutions of a Committee of the Board of Directors dated January 10, 1996 with respect to the terms of the offering of
99.2 Master United States Distribution Agreement dated January 10, 1996 with respect to the offering of the Medium-
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
By: /s/ Paul J. Polking | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T15:18:58 |
0000927356-96-000015 | 0000927356-96-000015_0000.txt | PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) January 11, 1996
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (Commission (I.R.S Employer incorporation) File Number) Identification No.)
12200 N. Pecos Street Denver, Colorado 80234-3439 (Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report).
On January 11, 1996, the Company issued the following press release:
January 11, 1996. Brion G. Wise, Chairman of the Board and Chief Executive Officer of Western Gas Resources, Inc. ("Western") (NYSE: WGR) today announced that Bill M. Sanderson will retire as President and Chief Operating Officer of the Company effective March 31, 1996. Mr. Wise also announced that the Company's Board of Directors has elected Lanny F. Outlaw, currently Executive Vice President, to succeed Mr. Sanderson.
Mr. Sanderson, 66, joined Western in 1981 as Vice President and has been President, Chief Operating Officer and a Director since 1987. He will remain with Western as a member of the Board of Directors. Mr. Outlaw, 59, who has over 36 years of experience in the oil and gas industry, will become President and Chief Operating Officer.
Mr. Wise stated, "It is with both regret and the utmost appreciation that we have accepted Bill Sanderson's notice of retirement. He has made an invaluable contribution to the Company during his 15-year tenure and directed our efforts during a tremendous period of growth. We are extremely pleased that he will continue his service as a board member and help provide guidance and direction to our management team.
"As for his successor, Lanny Outlaw has been a valued and respected member of Western's management team for 9 years, and his leadership in the business development area was instrumental in the acquisition growth of the Company. His widely varied experience, knowledge and industry contacts have been and will continue to be of great benefit to the Company and its operations. Lanny has also been instrumental in the formation and implementation of the Company's future business plan, particularly in the operations and business development areas."
Mr. Outlaw stated, "Western has built an excellent base of assets and assembled an experienced management team, but weak natural gas and natural gas liquids prices and our recent financial performance have limited the Company's ability to profitably expand its operations. The Company needs to improve its earnings and financial structure, aggressively pursue new growth opportunities and expand its marketing efforts. I look forward to working with Bill and Brion and the rest of management as we execute the Company's future business plan."
Mr. Outlaw joined Western in 1987 and has held various management positions with Western, having most recently served as Executive Vice President of Operations, Business Development and Engineering. Prior to joining Western, he worked for Shell Oil Company from 1958 to 1987 and held several management positions within their Exploration and Production department. He received an Engineering degree from the South Dakota School of Mines and Technology.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: January 11, 1996 By: /s/WILLIAM J. KRYSIAK | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T11:10:19 |
0000950124-96-000215 | 0000950124-96-000215_0000.txt | Helene Curtis Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollars in thousands, except per-share data)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1995
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
325 NORTH WELLS STREET, CHICAGO, ILLINOIS 60610 (Address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
At November 30, 1995, there were 6,850,922 shares of Common Stock and 3,044,829 shares of Class B Common Stock outstanding.
Helene Curtis Industries, Inc. and Subsidiaries
PART I - FINANCIAL INFORMATION
Helene Curtis Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollars in thousands, except per-share data)
The accompanying notes are an integral part of the consolidated financial statements.
Helene Curtis Industries, Inc. and Subsidiaries
The accompanying notes are an integral part of the consolidated financial statements.
Helene Curtis Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
The accompanying notes are an integral part of the consolidated financial statements.
Helene Curtis Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The interim consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation are reflected herein. All such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year.
These statements do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the audited financial statements and related notes included in the Company's annual report to stockholders for the year ended February 28, 1995. The consolidated balance sheet as of February 28, 1995 is derived from these audited financial statements.
Advertising and promotion costs are generally expensed in the fiscal year incurred. For interim reporting purposes, such costs are charged to operations as a percentage of sales, based on estimated sales and estimated advertising and promotion costs for the full year.
The consolidated statements of earnings include research and development costs of $7,141 and $21,704 for the three and nine months ended November 30, 1995, respectively, and $6,720 and $20,481 for the three and nine months ended November 30, 1994, respectively.
Helene Curtis Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Receivables, principally trade, consist of the following amounts:
Inventories consist of the following components:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Helene Curtis Industries, Inc. and Subsidiaries RESULTS OF OPERATIONS - THREE MONTHS ENDED NOVEMBER 30, 1995 AND 1994
Consolidated net sales for the three months ended November 30, 1995, decreased $15,345, or 5%, compared with the corresponding period last year. Excluding the benefit of favorable foreign currency translation, overall sales declined seven percentage points.
Domestic net sales, accounting for 61% of worldwide net sales, decreased 2% compared with the corresponding period last year. This decrease was attributable to the decline in hair care sales which was partly offset by the continued growth in the antiperspirant/deodorant and skin care categories.
The Company's U.S. hair care sales in total were down 9% as gains for Salon Selectives were more than offset by declines for Suave, Vibrance and Finesse. Sales of Suave decreased with particularly weak results in both shampoos and conditioners. Vibrance sales were also down as the brand has just been reformulated, repackaged and repositioned as Vibrance Organic Care. Salon Selectives sales increased due to higher sales of shampoos and conditioners.
The Company's sales growth in the antiperspirant/deodorant category exceeded the overall U.S. market growth where Suave and Degree combined for a sales increase of 9%. In other domestic categories, skin care recorded a 23% increase led by strong sales growth of both Suave skin lotion and facial products. Sales of the Company's professional or salon business also increased slightly.
International net sales, representing 39% of consolidated net sales, decreased 11% (15% in local currency) compared with the corresponding period last year. This decline was attributable primarily to lower sales in Japan and the United Kingdom which were adversely impacted by the same economic and competitive circumstances experienced in the first half of this year.
Sales in Japan, the Company's largest foreign subsidiary, decreased 23% in local currency and 18% with the benefit of favorable foreign currency translation. All of the subsidiary's hair care brands recorded lower sales as a result of the combined effects of a weak economy, aggressive industry-wide discounting practices and increased competitive activity. In the United Kingdom, sales decreased considerably due to the continuing impact of significant advertising and promotion by the Company's largest competitors and the disappointing results of last year's restage of Finesse.
Helene Curtis Industries, Inc. and Subsidiaries RESULTS OF OPERATIONS - THREE MONTHS ENDED NOVEMBER 30, 1995 AND 1994
In Canada, sales increases were attributable primarily to the positive response to initial shipments of Helene Curtis Organic Care which was partly offset by lower sales in Finesse and Salon Selectives. Degree antiperspirant/deodorant sales continued to register strong growth in all international markets in which the brand competes including Canada, Australia, New Zealand and Scandinavia.
Cost of sales remained relatively flat despite the lower sales volume. As a percent of net sales, cost of sales increased to 47.4% in the current period from 45.0% last year. The increase is attributable primarily to higher material and packaging costs coupled with the lower absorption of overhead costs as inventories were reduced from year ago levels.
Selling, general and administrative expenses increased $4,813, or 3%. As a percent of net sales, these expenses increased to 56.8% in the current period from 52.0% last year, driven by a 3% increase in advertising and promotion expense. This increase reflects higher spending in the U.S. on the Vibrance Organic Care introduction and in Japan in response to competitive pressures. Higher selling expenses and increased investment in research and development also contributed to the increase in selling, general and administrative expenses.
The effective tax rate remained constant at 47% in the current period compared with the prior year.
Net losses were $7,196 ($.76 per share) in the current period compared with net earnings of $3,363 ($.35 per share) in the prior year. The decrease was attributable primarily to the decline in sales and gross margins and the increase in advertising and promotion expenses. On a geographic basis, earnings were lower in the U.S. and losses in Japan and the UK increased as a result of the continued impact of economic and competitive pressures on sales.
Helene Curtis Industries, Inc. and Subsidiaries RESULTS OF OPERATIONS - NINE MONTHS ENDED NOVEMBER 30, 1995 AND 1994
Consolidated net sales for the nine months ended November 30, 1995, decreased $10,432, or 1%, compared with the corresponding period last year. Excluding the benefit of favorable foreign currency translation, overall sales declined about four percentage points.
Domestic net sales, accounting for 65% of worldwide net sales, increased 1% compared with the corresponding period last year. This increase was attributable primarily to continued growth in the antiperspirant/deodorant and skin care categories. The Company's hair care sales in total were down 3% due primarily to lower sales of Salon Selectives and Vibrance.
The U.S. hair care market, the largest market in which the Company competes, has grown about 2% over the past year. Sales of Salon Selectives, Suave and Finesse decreased due to significantly lower sales of styling aids. Vibrance sales were down as the brand has just been reformulated, repackaged and repositioned as Vibrance Organic Care.
The Company's sales growth in the antiperspirant/deodorant category exceeded the overall U.S. market growth of 3% where Degree and Suave combined for a sales increase of 14%. In other domestic categories, the Company's skin care products recorded a 23% increase led by Suave Skin Therapy Lotions while sales of the professional or salon business decreased as the market continued to decline.
International net sales, representing 35% of consolidated net sales, decreased 5% (13% in local currency) compared with the corresponding period last year. This decline was attributable to lower sales in Japan and the United Kingdom which were partially offset by sales increases in Scandinavia, Canada and U.S. exports.
Sales in Japan, the Company's largest foreign subsidiary, decreased 19% in local currency and 9% with the benefit of favorable foreign currency translation. All of the subsidiary's hair care brands recorded lower sales as a result of difficult market and economic circumstances coupled with increased competition. The compounded effects of the Kobe earthquake, a weak economy and increasingly aggressive discounting practices across all major retail segments resulted in shrinking retail sales for the Company and the hair care industry as a whole. In the United Kingdom, sales decreased considerably due to the continuing impact of significant advertising and promotion by the Company's largest competitors and the disappointing results of last year's restage of Finesse.
Helene Curtis Industries, Inc. and Subsidiaries RESULTS OF OPERATIONS - NINE MONTHS ENDED NOVEMBER 30, 1995 AND 1994
In Canada, the positive response to initial shipments of Helene Curtis Organic Care and continued growth in Salon Selectives were offset partly by lower sales of Finesse. Degree antiperspirant/deodorant sales continued to register strong growth in all international markets in which the brand competes including Canada, Australia, New Zealand and Scandinavia.
Cost of sales increased $8,016, or 2%, despite the lower sales volume. As a percent of net sales, cost of sales increased to 46.2% in the current period from 44.8% last year. Increases in material and packaging costs domestically and changes in product sales mix to lower margin products were partially offset by negotiated cost decreases in Japan.
Selling, general and administrative expenses increased $2,144, or less than 1%. As a percent of net sales, these expenses increased to 53.0% in the current period from 52.1% last year. Advertising and promotion expense decreased reflecting lower spending in the U.S. while spending in Canada was higher in support of the Helene Curtis Organic Care introduction. Lower total advertising and promotion expenses were more than offset by increased investment in research and development and higher selling and administrative costs.
Interest expense increased $472, or 7%, attributable to the higher average cost of borrowing as compared to the same period a year ago.
The effective tax rate was 53% in the current period compared with 47% in the prior year, primarily as a result of the Company's inability to recognize currently the tax benefits from the losses being incurred in Japan this year.
Net earnings decreased to $206 ($.02 per share) from $11,396 ($1.20 per share) in the prior year. The decrease was attributable primarily to the lower sales volume and lower gross margins. On a geographic basis, earnings were lower in Japan and the UK as a result of the impact of economic and competitive pressures on sales. Earnings from other international businesses declined reflecting the launch of Helene Curtis Organic Care in Canada and the Company's recent entry into Mexico. These declines in the international business overall were offset by the continued improvement in the U.S. consumer business.
Helene Curtis Industries, Inc. and Subsidiaries FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents increased to $10,539, compared with $5,136 at year end. Capital expenditure requirements were funded through operating cash flows and increased borrowings.
Net cash provided by operating activities decreased to $15,653 from $64,058 in the first nine months of the prior year due primarily to increased working capital and lower net earnings. In comparing amounts on November 30, 1995 to the prior year end, receivables decreased by $77,372 due to lower sales for the current quarter compared with the fourth quarter of the prior year. Inventories increased by $8,448 as a result of lower than anticipated sales in Japan. The increase in other current assets of $28,914 was attributable to the deferral of advertising and promotion costs during interim quarters. Payables and accrued expenses decreased by $49,324 due primarily to the payment of income tax, lower advertising and promotion accruals in Japan and the timing of payments for inventory. Working capital increased to $156,759 at November 30, 1995, compared with $152,585 at February 28, 1995. The current ratio increased to 1.73 from 1.60 : 1.
Capital spending increased to $21,612 from $17,824 in the first nine months of the prior year. Capital expenditures in both years reflected primarily a large number of smaller projects to improve manufacturing, distribution and communication capabilities and efficiencies.
The total-debt-to-total-capital ratio increased slightly to 41.4%, compared with 39.5% at year end. The total debt increased to $155,741 from $143,954 with fixed-cost borrowings representing about 55% of total outstanding debt.
Dividend payments increased to $2,222 from $1,624 in the prior year reflecting an increase of two cents per share for each quarterly cash dividend. On October 10, 1995, the Board of Directors declared the third quarterly cash dividend of eight cents per share (previously six cents per share) for Common stockholders and Class B Common stockholders.
Management believes that funds to be provided from operations and present credit arrangements will be sufficient to meet anticipated working capital, capital spending and other funding requirements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 - Computations of Earnings per Share
Exhibit 27 - Financial Data Schedule (submitted with EDGAR filing)
(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended November 30, 1995.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(REGISTRANT) Helene Curtis Industries, Inc.
BY (SIGNATURE) S/ Mary J. Oyer
(NAME AND TITLE) Mary J. Oyer, Vice President | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T14:43:59 |
0000912938-96-000061 | 0000912938-96-000061_0000.txt | UNDER THE SECURITIES EXCHANGE ACT OF 1934
(Title of Class of Securities)
Check the following box if a fee is being paid with this |X| statement. (A fee is not required only if the filing person: (1) has a previous statement on file reporting beneficial ownership of more than five percent of the class of securities described in Item 1; and (2) has filed no amendment subsequent thereto reporting beneficial ownership of five percent or less of such class.)
*The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter the disclosures provided in a prior cover page.
The information required in the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).
CUSIP NO. 87872T10 13G PAGE 2 OF 4 PAGES
1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Massachusetts Financial Services Company ("MFS") 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) / / (b) / / 4 CITIZENSHIP OR PLACE OF ORGANIZATION
NUMBER OF 5 SOLE VOTING POWER SHARES 1,068,140 shares of common stock OWNED BY 6 SHARED VOTING POWER REPORTING 7 SOLE DISPOSITIVE POWER PERSON 1,095,440 shares of common stock 9 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,095,440 shares of common stock which are also beneficially owned by certain other non-reporting entities as well as MFS.
10 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (9) EXCLUDES CERTAIN SHARES* 11 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 9 12 TYPE OF REPORTING PERSON*
*SEE INSTRUCTION BEFORE FILLING OUT!
SCHEDULE 13G PAGE 3 OF 4 PAGES
ITEM 1: (a) NAME OF ISSUER:
(b) ADDRESS OF ISSUER'S PRINCIPAL EXECUTIVE OFFICES:
ITEM 2: (a) NAME OF PERSON FILING:
Massachusetts Financial Services Company ("MFS")
(b) ADDRESS OF PRINCIPAL BUSINESS OFFICE OR, IF NONE, RESIDENCE:
See Item 4 on page 2
(d) TITLE OF CLASS OF SECURITIES:
ITEM 3: See Item 12 on page 2
ITEM 4: (a) AMOUNT BENEFICIALLY OWNED:
See Item 9 on page 2
See Item 11 on page 2
(c) NUMBER OF SHARES AS TO WHICH SUCH PERSON HAS:
See Items 5 and 7 on page 2
SCHEDULE 13G PAGE 4 OF 4 PAGES
ITEM 5: OWNERSHIP OF FIVE PERCENT OR LESS OF A CLASS:
ITEM 6: OWNERSHIP OF MORE THAN FIVE PERCENT ON BEHALF OF ANOTHER PERSON:
ITEM 7: IDENTIFICATION AND CLASSIFICATION OF THE SUBSIDIARY WHICH ACQUIRED THE SECURITY BEING REPORTED ON BY THE PARENT HOLDING COMPANY:
ITEM 8: IDENTIFICATION AND CLASSIFICATION OF MEMBERS OF THE GROUP:
ITEM 9: NOTICE OF DISSOLUTION OF GROUP:
By signing below I certify that to the best of my knowledge and belief, the securities referred to above were acquired in the ordinary course of business and were not acquired for the purpose of and do not have the effect of changing or influencing the control of the issuer of such securities and were not acquired in connection with or as a participant in any transaction having such purposes or effect.
After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. | SC 13G | SC 13G | 1996-01-12T00:00:00 | 1996-01-12T14:33:51 |
0000225322-96-000001 | 0000225322-96-000001_0000.txt | 001 A000000 FIDELITY SUMMER STREET TRUST 002 A000000 82 DEVONSHIRE STREET 007 C020100 FIDELITY CAPITAL & INCOME FUND
011 A00AA01 FIDELITY DISTRIBUTORS CORPORATION 012 A00AA01 FIDELITY SERVICE CO. 020 A000001 AUTRANET, INC. 020 A000002 ADAMS, HARKNESS & HILL, INC. 020 A000003 CJ LAWRENCE MORGAN GRENFEL INC. 020 A000004 GOLDMAN, SACHS & CO. 020 A000005 SMITH BARNEY SHEARSON INC. 020 A000006 MORGAN STANLEY & CO INC. 020 A000007 PAINEWEBBER INC. 020 A000008 WHEAT FIRST BUTCHER SINGER, INC. 020 A000009 EQUITABLE SECURITIES CORP. 020 A000010 FRIEDMAN, BILLINGS, RAMSEY & CO., INC. 022 A000001 DONALDSON, LUFKIN & JENRETTE SECURITIES CORP.
022 A000002 CHEMICAL BANKING CORP. 022 A000003 WASSERSTEIN PERELLA SECURITIES, INC. 022 A000004 MORGAN STANLEY & CO., INC. 022 A000005 CS FIRST BOSTON CORP. 022 A000006 CHASE SECURITIES, INC. 022 A000007 BEAR STEARNS & CO. INC. 022 A000008 GOLDMAN SACHS & CO. 022 A000009 SALOMON BROTHERS INC. 022 A000010 MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.
008 A000101 FIDELITY MANAGEMENT & RESEARCH COMPANY 008 A000102 FIDELITY MANAGEMENT & RESEARCH (U.K.), INC. 008 A000103 FIDELITY MANAGEMENT & RESEARCH (FAR EAST) INC 013 A000101 COOPERS & LYBRAND L.L.P. 014 A000101 FIDELITY DISTRIBUTORS CORPORATION
014 A000102 FIDELITY BROKERAGE SERVICES, INC. 014 A000103 FIDELITY BROKERAGE SERVICES, LTD. 015 A000101 THE BANK OF NEW YORK | NSAR-A | NSAR-A | 1996-01-12T00:00:00 | 1996-01-12T15:34:23 |
0000312904-96-000001 | 0000312904-96-000001_0000.txt | 001 A000000 JOHN HANCOCK CASH MANAGEMENT FUND 002 A000000 101 HUNTINGTON AVENUE 008 A000001 JOHN HANCOCK ADVISERS, INC. 011 A000001 JOHN HANCOCK FUNDS, INC. 012 A000001 JOHN HANCOCK INVESTOR SERVICES CORPORATION
013 A000001 ERNST & YOUNG LLP 014 A000001 JOHN HANCOCK DISTRIBUTORS, INC. 014 A000002 JOHN HANCOCK FUNDS, INC. 014 A000003 TUCKER ANTHONY, INC. 014 A000004 SUTRO & CO., INC. 014 A000005 FREEDOM DISTRIBUTORS CORPORATION 014 A000006 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY 015 A000001 STATE STREET BANK AND TRUST COMPANY 015 A000002 CITIBANK, N.A. 015 A000003 WESTPAC BANKING CORPORATION 015 A000004 GIROCREDIT AKTIENGESELLSCHAFT DER SPARKASSEN 015 A000005 STANDARD CHARTERED BANK 015 A000007 CITIBANK, N.A.
015 A000008 CANADA TRUSTCO MORTGAGE COMPANY 015 A000009 CITIBANK, N.A. 015 A000010 THE HONGKONG AND SHANGHAI BANKING CORP. LTD. 015 D010010 PEOPLES REP.OF CHINA 015 A000011 CITITRUST COLOMBIA S.A. SOCIEDAD FIDUCIARIA 015 A000012 BARCLAYS BANK PLC 015 A000013 DEN DANSKE BANK 015 A000014 MERITA BANK LIMITED 015 A000017 NATIONAL BANK OF GREECE S.A.
015 A000018 STANDARD CHARTERED BANK 015 A000019 CITIBANK BUDAPEST RT. 015 A000020 DEUTSCHE BANK AG 015 A000021 STANDARD CHARTERED BANK 015 A000022 BANK OF IRELAND 015 A000023 BANK HAPOALIM B.M. 015 A000024 MORGAN GUARANTY TRUST COMPANY 015 A000025 THE DAIWA BANK, LIMITED 015 D010026 REPUBLIC OF KOREA 015 A000027 STANDARD CHARTERED BANK MALAYSIA BERHAD
015 A000028 CITIBANK MEXICO, S.A. 015 A000029 MEESPIERSON N.V. 015 A000030 ANZ BANKING GROUP (NEW ZEALAND) LIMITED 015 A000031 CHRISTIANIA BANK OG KREDITKASSE 015 A000032 DEUTSCHE BANK AG 015 A000033 CITIBANK, N.A. 015 A000034 STANDARD CHARTERED BANK 015 A000035 BANCO COMERICAL PORTUGUES 015 A000036 THE DEVELOPMENT BANK OF SINGAPORE LTD. 015 A000037 BANCO SANTANDER, S.A. 015 A000038 THE HONGKONG AND SHANGHAI BANKING CORP. LTD.
015 A000039 SKANDINAVISKA ENSKILDA BANKEN 015 A000040 UNION BANK OF SWITZERLAND 015 A000041 THE SUMITOMO TRUST & BANKING CO., LTD. 015 A000042 STANDARD CHARTERED BANK 015 A000043 CITIBANK, N.A. 015 A000044 STATE STREET BANK AND TRUST COMPANY 015 A000045 CITIBANK, N.A. 015 A000046 CITIBANK, N.A. 015 A000047 BARCLAYS BANK OF BOTSWANA LIMITED 015 A000048 CESKOSLOVENSKA OBCHODNI BANKA, A.S.
015 A000050 BARCLAYS BANK OF GHANA LIMITED 015 A000051 THE BRITISH BANK OF THE MIDDLE EAST 015 A000052 BARCLAYS BANK OF KENYA LIMITED 015 A000053 BANQUE COMMERCIALE DU MAROC 015 A000054 CITIBANK POLAND S.A. 015 A000055 STANDARD BANK OF SOUTH AFRICA LIMITED 015 A000056 BARCLAYS BANK OF ZAMBIA LIMITED 015 A000057 BARCLAYS BANK OF ZIMBABWE LIMITED 015 A000058 THE HONGKONG AND SHANGHAI BANKING CORP. LTD. 015 A000059 BARCLAYS BANK OF SWAZILAND LIMITED
015 A000060 CESKOSLOVENSKA OBCHODNA BANKA A.S. 022 A000001 LEHMAN BROS INC. 022 A000002 SWISS BANK CORP. 022 A000003 MERRILL LYNCH PIERCE FENNER & SMITH 022 A000004 C.S. FIRST BOSTON CORP. 022 A000006 BANKERS TRUST COMPANY 022 A000007 SEARS ROEBUCK ACCEPTANCE CORP. 022 A000008 MORGAN STANLEY & CO.
022 A000009 GOLDMAN SACHS & CO. 022 A000010 BEAR STEARNS CO. | NSAR-A | NSAR-A | 1996-01-12T00:00:00 | 1996-01-12T11:44:33 |
0000882377-96-000004 | 0000882377-96-000004_0000.txt | Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 28, 1995
(as depositor under a Pooling and Servicing Agreement, dated as of December 1, 1995, providing for, among other things, the issuance of Mortgage Pass-Through
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction (Commission (I.R.S. Employer of Incorporation) File Number) Identification No.)
NEW YORK, NEW YORK 10005 (Address of Principal (Zip Code)
Registrant's telephone number, including area code, is (212) 504-3000
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
For a description of the Certificates and the Mortgage Pool, refer to the Pooling and Servicing Agreement.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
4.1 Pooling and Servicing Agreement, dated as of December 1, 1995, among DLJ Mortgage master servicer, and Bankers Trust Company, Certificates, Series 1995-QE11.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
4.1 Pooling and Servicing Agreement, dated as of P* December 1, 1995, among DLJ Mortgage Acceptance Corp., as depositor, Temple-Inland Mortgage Corporation, as master servicer, and Bankers Trust Company, as trustee, Mortgage Pass-Through Certificates, Series 1995-QE11.
* The Mortgage Loan Schedule attached as an exhibit to the Pooling and Servicing Agreement has been filed on paper pursuant to a continuing hardship exemption from certain electronic filing requirements. | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T12:15:49 |
0000950130-96-000104 | 0000950130-96-000104_0002.txt | <DESCRIPTION>AMENDMENT NO. 3 TO AMENDED & RESTATED CREDIT AGRMT
AMENDED AND RESTATED LOAN AGREEMENT
THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT dated as of January 10, 1996, by and among NU HORIZONS ELECTRONICS CORP., a Delaware corporation, NIC COMPONENTS CORP., NU HORIZONS INTERNATIONAL CORP., each a New York corporation, NU VISIONS MANUFACTURING, INC., a Massachusetts corporation, and NU HORIZONS/MERIT ELECTRONICS CORP., a Delaware corporation, having their respective principal offices at 6000 New Horizons Boulevard, North Amityville, New York (collectively, the "Borrowers") and NATWEST BANK, N.A., formerly known as National Westminster Bank USA, a national banking association, having offices at 100 Jericho Quadrangle, Jericho, New York (the "Bank").
The Borrowers and the Bank entered into an Amended and Restated Loan Agreement dated as of April 29, 1994 as amended by a First Amendment dated as of August 24, 1994 and a Second Amendment dated as of November 29, 1995 (collectively, the "Loan Agreement"), under which certain financial accommodations were made available by the Bank to the Borrowers. Unless otherwise expressly provided herein, all capitalized terms used in this Third Amendment to Amended and Restated Loan Agreement shall have the respective meanings ascribed to such terms in the Loan Agreement.
The Borrowers have requested that the Bank modify certain of the terms set forth in the Loan Agreement and the Bank is willing to comply with such request but only upon and subject to the following terms and conditions.
NOW THEREFORE, in consideration of the premises and the mutual covenants and promises exchanged herein, the parties hereto mutually agree as follows:
1. Section 6.1 of The Amended and Restated Loan Agreement is hereby amended by the Borrowers and the Bank to read as follows:
Current Ratio and Quick Ratio. Maintain at all times (i) a ratio of consolidated current assets to consolidated current liabilities of at least 2.10 to 1.0, and (ii) a ratio of consolidated current assets composed of cash on hand or on deposit in banks and marketable Eligible Investment Securities plus Eligible Accounts Receivable to consolidated current liabilities of at least .85 to 1.0.
2. It is expressly understood and agreed that all collateral security for the Revolving Credit Loans and other extensions of credit set forth in the Amended and Restated Loan Agreement prior to the amendment provided for herein is and shall continue to be collateral security for the Revolving Credit Loans and other extensions of credit provided in the Amended and Restated Loan Agreement as herein amended. Without limiting the generality of the foregoing, the Borrowers hereby absolutely and unconditionally confirm that (i) each document and instrument executed by the Borrowers pursuant to the Amended and Restated Loan Agreement continues in full force and effect, is ratified and confirmed and is and shall continue to be applicable to the Amended and Restated Loan Agreement (as herein amended), and (ii) the Amended and Restated Note is hereby ratified and confirmed and shall remain in full force and effect in accordance with its terms. The terms "Revolving Credit Note" and "Note" shall include any Amended and Restated Revolving Credit Note.
3. In order to induce the Bank to enter into this Third Amendment to Amended and Restated Loan Agreement, the Borrowers represent and warrant to the Bank that each of their representations and warranties made in the Amended and Restated Loan Agreement is true and correct as of the date hereof except as otherwise set forth in writing(s) to which the Bank is a party.
4. No modification or waiver of any provisions of the Amended and Restated Loan Agreement or any other agreement or instrument made or issued pursuant thereto or contemplated thereby, nor consent to any departure by the Borrowers therefrom shall, in any event, be effective unless made in writing and signed by the Bank and the Borrowers, and then any such modification or waiver shall be effective only in the specific instance and for the purpose for which given unless otherwise specified therein. No notice to, or demand on, the Borrowers in any case shall, of itself, entitle them to any further notice or demand in similar or other circumstances.
5. The Borrowers agree to pay on demand, and the Bank may charge any deposit or loan accounts(s) of the Borrowers, for all expenses incurred by the Bank in connection with the negotiation, preparation and administration (including any future waiver or modification and legal counsel as to the rights and duties of the Bank) of this Third Amendment to Amended and Restated Loan Agreement.
6. The amendments set forth herein are limited precisely as written and shall not be deemed to (a) be a consent to or waiver of any other term or condition of the Amended and Restated Loan Agreement or of any of the documents referred to therein or (b) prejudice any right or rights which the Bank may now have or may have in the future under or in connection with the
Amended and Restated Loan Agreement or any of the documents referred to therein.
7. This Third Amendment to Amended and Restated Loan Agreement is dated for convenience as of January 10, 1996 and shall be effective retroactive to November 30, 1995 on the delivery of an executed counterpart hereof to the Borrowers. This Third Amendment to Amended and Restated Loan Agreement may be executed in counterparts, each of which shall constitute an original, and each of which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to Amended and Restated Loan Agreement to be duly executed and delivered by their duly authorized officers, all as of the day and year first above written.
NU HORIZONS ELECTRONICS CORP. NIC COMPONENTS CORP.
By: /s/ Paul Durando By: /s/ Paul Durando
NU HORIZONS INTERNATIONAL CORP. NU VISIONS MANUFACTURING, INC.
By: /s/ Paul Durando By: /s/ Paul Durando
NU HORIZONS/ NATWEST BANK N.A. MERIT ELECTRONICS CORP. formerly known as
By: /s/ Paul Durando By: /s/ Jeffrey B. Carstens Paul Durando Jeffrey B. Carstens
On the 10th day of January, 1996, before me personally came PAUL DURANDO, to me known, who, being by me duly sworn, did depose and say that he resides at c/o 6000 New Horizons Boulevard, North Amityville, New York; that he is the Vice President-Finance of NU HORIZONS ELECTRONICS CORP., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation.
STATE OF NEW YORK) Dianne J. Judd :ss.: Notary Public, State of New York COUNTY OF NASSAU ) No. 30-5005169 Commission Expires Nov. 30, 1996
On the 10th day of January, 1996, before me personally came PAUL DURANDO, to me known, who, being by me duly sworn, did depose and say that he resides at c/o 6000 New Horizons Boulevard, North Amityville, New York; that he is the Vice President-Finance of NIC COMPONENTS CORP., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation.
STATE OF NEW YORK) Dianne J. Judd :ss.: Notary Public, State of New York COUNTY OF NASSAU ) No. 30-5005169 Commission Expires Nov. 30, 1996
On the 10th day of January, 1996, before me personally came PAUL DURANDO, to me known, who, being by me duly sworn, did depose and say that he resides at c/o 6000 New Horizons Boulevard, North Amityville, New York; that he is the Vice President-Finance of NU HORIZONS INTERNATIONAL CORP., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation.
STATE OF NEW YORK) Dianne J. Judd :ss.: Notary Public, State of New York COUNTY OF NASSAU ) No. 30-5005169 Commission Expires Nov. 30, 1996
On the 10th day of January, 1996, before me personally came PAUL DURANDO, to me known, who, being by me duly sworn, did depose and say that he resides at c/o 6000 New Horizons Boulevard, North Amityville, New York; that he is the Vice President-Finance of NU VISIONS MANUFACTURING, INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation.
STATE OF NEW YORK) Dianne J. Judd :ss.: Notary Public, State of New York COUNTY OF NASSAU ) No. 30-5005169 Commission Expires Nov. 30, 1996
On the 10th day of January, 1996, before me personally came PAUL DURANDO, to me known, who, being by me duly sworn, did depose and say that he resides at c/o 6000 New Horizons Boulevard, North Amityville, New York; that he is the Vice President-Finance of NU HORIZONS/MERIT ELECTRONICS CORP., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation.
STATE OF NEW YORK) Dianne J. Judd :ss.: Notary Public, State of New York COUNTY OF NASSAU ) No. 30-5005169 Commission Expires Nov. 30, 1996
On the 10th day of January, 1996, before me personally came JEFFREY B. CARSTENS, to me known, who, being by me duly sworn, did depose and say that he resides at c/o 100 Jericho Quadrangle, Jericho, New York; that he is a Vice President of NATWEST BANK N.A., the banking institution described in and which executed the foregoing instrument; and that he signed his name thereto by authority of such banking institution.
STATE OF NEW YORK) Dianne J. Judd :ss.: Notary Public, State of New York COUNTY OF NASSAU ) No. 30-5005169 Commission Expires Nov. 30, 1996
ELEVENTH AMENDMENT TO REVOLVING CREDIT
ELEVENTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT dated as of January 10, 1996, by and between NU HORIZONS ELECTRONICS CORP., a Delaware corporation having its executive offices at 6000 New Horizons Boulevard, North Amityville, New York (the "Company") and NATWEST BANK, N.A. formerly known as National Westminster Bank USA, a national banking association, having offices at 100 Jericho Quadrangle, Jericho, New York (the "Bank").
The Company and the Bank entered into a Revolving Credit and Term Loan Agreement dated as of May 26, 1988 (as amended by the First Amendment dated as of March 19, 1990, the Second Amendment dated as of February 28, 1991, the Third Amendment dated as of April 1, 1992, the Fourth Amendment dated as of April 8, 1992, a Fifth Amendment dated as of August 1, 1992, a Sixth Amendment dated as of October 1, 1992, a Seventh Amendment dated as of May 20, 1993, an Eighth Amendment dated as of January 14, 1994, a Ninth Amendment dated as of April 29, 1994, a Tenth Amendment dated as of November 29, 1995 and as may be further amended, the "Loan Agreement"), pursuant to which certain financial accommodations were made available by the Bank to the Company. Unless otherwise expressly provided herein, all capitalized terms used in this Eleventh Amendment shall have the respective meanings ascribed to such terms in the Loan Agreement.
The Company has requested that the Bank modify certain of the terms set forth in the Loan Agreement and the Bank is willing to comply with such request but only upon and subject to the following terms and conditions.
NOW THEREFORE, in consideration of the premises and mutual covenants and promises exchanged herein, the parties hereto mutually agree as follows:
1. Section 5.10 (c) of The Loan Agreement is hereby amended by the Company and the Bank to read as follows:
Current Ratio and Quick Ratio. Maintain at all times (y) a ratio of consolidated current assets to consolidated current liabilities of at least 2.10 to 1.0, and (z) a ratio of consolidated current assets composed of cash on hand or on deposit in banks and marketable Eligible Investment Securities plus Eligible Accounts Receivable current liabilities of at least .85 to 1.0.
2. It is expressly understood and agreed that all collateral security for the Loans and other extensions of credit set forth in the Loan Agreement prior to the amendments provided for herein is and shall continue to be collateral security for the Loans and other extensions of credit provided in the Loan Agreement as herein amended. Without limiting the generality of the foregoing, the Company hereby absolutely and unconditionally confirms that (i) each document and instrument executed by the Company pursuant to the Loan Agreement continues in full force and effect, is ratified and confirmed and is and shall continue to be applicable to the Loan Agreement (as herein amended) and (ii) the Notes are hereby ratified and confirmed and shall remain in full force and effect in accordance with their respective terms. Nonetheless, at the request of the Bank, the Company shall promptly execute and deliver replacement notes to evidence all indebtedness outstanding under the Loan Agreement as hereby amended. The term "Notes" shall include any such replacement notes.
3. In order to induce the Bank to enter into this Eleventh Amendment to Loan Agreement, the Company represents and warrants to the Bank that each of its representations and warranties made in the Loan Agreement is true and correct as of the date hereof except as otherwise set forth in writing(s) to which the Bank is a party. Notwithstanding the foregoing, to the extent that the representations and warranties contained in the Loan Agreement and in that certain amended and restated loan agreement dated as of April 29, 1994 among the Company, certain related corporations and the Bank (as previously amended and as may be amended from time to time, the "Restated Loan Agreement") differ, the representations and warranties contained in the Restated Loan Agreement shall control.
4. No modifications or waiver or any provisions of the Loan Agreement or any other agreement or instrument made or issued pursuant thereto or contemplated thereby, nor consent to any departure by the Company therefore shall, in any event, be effective unless made in writing and signed by the Bank and the Company, and then any such modification or waiver shall be effective only in the specific instance and for the purpose for which given unless otherwise specified therein. No notice to, or demand on, the Company in any case shall, of itself, entitle it to any further notice or demand in similar or other circumstances.
5. The Company agrees to pay on demand, and the Bank may charge any deposit or loan account(s) of the Company, for all expenses incurred by the Bank in connection with the negotiation, preparation and administration (including any future waiver or modification and legal counsel as to the rights and duties of the Bank) of this Eleventh Amendment to Loan Agreement.
6. This amendment is limited precisely as written and shall not be deemed to (a) be a consent or waiver of any other term or condition of the Loan Agreement or of any of the documents referred to therein or (b) prejudice any right or rights which the Bank may now have or may have in the future under or in connection with the Loan Agreement or any of the documents referred to therein.
7. This Eleventh Amendment to Loan Agreement is dated for convenience of as January 10, 1996 and shall be effective retroactive to November 30, 1995 on the delivery of an executed counterpart to the Company. This Eleventh Amendment to Loan Agreement may be executed in counterparts, each of which shall constitute an original, and each of which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to Loan Agreement to be duly executed and delivered by their duly authorized officers, all as of the day and year first above written.
STATE OF NEW YORK ) :ss.:
On the 10th day of January, 1996, before me personally came PAUL DURANDO, to me known, who, being by me duly sworn, did depose and say that he resides at c/o 6000 New Horizons Boulevard, North Amityville, New York; that he is the Vice President-Finance of NU HORIZONS ELECTRONICS CORP., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation.
STATE OF NEW YORK) Dianne J. Judd :ss.: Notary Public, State of New York COUNTY OF NASSAU ) No. 30-5005169 Commission Expires Nov. 30, 1996
On the 10th day of January, 1996, before me personally came JEFFREY B. CARSTENS, to me known, who, being by me duly sworn, did depose and say that he resides at c/o 100 Jericho Quadrangle, Jericho, New York; that he is a Vice President of NATWEST BANK N.A., the banking institution described in and which executed the foregoing instrument; that he signed his name thereto by authority of such banking institution.
Notary Public, State of New York Commission Expires Nov. 30, 1996 | 10-Q | EX-10.15 | 1996-01-12T00:00:00 | 1996-01-12T16:15:33 |
0000898430-96-000096 | 0000898430-96-000096_0001.txt | Anthony S. S. Chan Sandra O'Halloran Chief Financial Officer Director, Investor Relations
NEXGEN(tm) EXPECTS REDUCED REVENUE AND EARNINGS FOR SECOND QUARTER OF FISCAL 1996
MILPITAS, California, January 12, 1996, /PR NewsWire/ -- NexGen, Inc., (Nasdaq: NXGN) today announced, based on a preliminary assessment, that financial results for the second fiscal quarter ended December 31, 1995 will be significantly lower than the first quarter of fiscal year 1996. During the prior quarter ended September 30, 1995, the Company reported sales of $16.6 million and a net loss of $20.5 million, or $0.62 per share. For the fiscal second quarter, NexGen expects sales to be between $2 million to $4 million. The net loss will also be increased by a substantial write-down in the second fiscal quarter in the value of the Company's Nx586(r) based inventory, currently carried at approximately $25 million. NexGen estimates the net loss, prior to any adjustment for the inventory write-down, will be between $25 million and $30 million.
The Company believes that its sales shortfall is attributable in large part to customers' deferral of purchasing decisions after the announcement of NexGen's proposed merger with Advanced Micro Devices, Inc. ("AMD"). In addition, the pricing pressures experienced in the September quarter continued in the December quarter for the Company's P90 and P100 products.
On October 20, 1995, Advanced Micro Devices (AMD) and NexGen announced that both companies had signed a definitive agreement under which AMD will acquire NexGen in an all-stock merger transaction subject to shareholder approval. The shareholder meeting will take place for both companies on Tuesday, January 16, 1996. Assuming shareholder approval, the merger is expected to close shortly thereafter.
Except for historical information contained herein, the matters set forth in this press release are forward looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward looking statements, including the final determination of inventory reserves based on the outlook at the end of each quarter for the products in inventory and on manufacturing lines, competitive pressures, including anticipated decreases in average selling prices of
NexGen's products and the effects of price protection granted to customers, availability and cost competitiveness of products from NexGen's suppliers, timing of significant orders, and the risk factors set forth in NexGen's and AMD's Joint Proxy Statement/Prospectus relating to the proposed merger.
NexGen, Inc. develops and utilizes industry-leading processor technologies to deliver high performance x86 processors to mainstream PC users. NexGen, with headquarters in Milpitas, California, currently holds many patents for its leading-edge x86 processor technology. For product information, call 1-800-8NEXGEN (1-800-863-9436) or 408-435-0202, or you can reach us on the Web at http://www.nexgen.com.
Nx586 is a registered trademark of NexGen, Inc. NexGen is a trademark of NexGen, Inc. All other product names used in this press release are for identification purposes only and may be trademarks of their respective companies. | 8-K | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T15:40:45 |
0000938663-96-000002 | 0000938663-96-000002_0000.txt | SUPPLEMENT DATED DECEMBER 1, 1995 TO THE PROSPECTUS DATED JULY 1, 1995
The information on the GrandView REIT Index Fund, GrandView Realty Growth Fund, GrandView Residential Realty Income Fund, GrandView Retail Realty Income Fund, and GrandView Healthcare Realty Income Fund (the "Funds"), each a series of the GrandView Investment Trust (the "Trust"), contained in the Funds' Prospectus dated July 1, 1995 (the "Prospectus"), is amended to reflect the following updated information:
1. The date of the Statement of Additional Information referenced on the cover page of the Prospectus is changed to December 1, 1995, and as amended or supplemented from time to time.
2. The following "FINANCIAL HIGHLIGHTS" section is added to the Prospectus:
The financial data included in the table below has been derived from unaudited financial statements of the Funds. The information in the table below should be read in conjunction with each Fund's latest unaudited financial statements and notes thereto for the fiscal period ended September 30, 1995, which are included in the Statement of Additional Information, a copy of which may be obtained at no charge by calling the Funds. Further information about the performance of each Fund will be contained in the Annual Report of each Fund, a copy of which may be obtained, when available, at no charge by calling the Funds.
(For a Share Outstanding Throughout the Period)
For the period from July 3, 1995 (commencement of operations) to September
(a) Does not reflect payment of the maximum sales charge. (b) Annualized.
3. The information under "Information About Fund Shares - Net Asset Value and Pricing of Orders" is deleted in its entirely and updated with the following information:
Net Asset Value and Pricing of Orders
Shares of each Fund are sold at their public offering price, which is the net asset value per share plus the applicable sales charge, if any. Net asset value per share of a Fund is determined by dividing the value of its assets, less liabilities, by the number of shares outstanding. The net asset value is computed once daily, on each day the New York Stock Exchange (the "Exchange") is open, at 4:00 p.m. New York time.
Securities are valued at the last quoted sale price, at the time the valuation is made, on the principal exchange or market where they are traded. Securities which have not traded on the date of valuation, or securities for which sales prices are not generally reported, are valued at the mean between the current bid and asked prices. All assets of the Fund for which there is no other readily available valuation method are valued at their fair value as determined in good faith at the direction of the Trustees.
An order for shares received by a broker-dealer or bank prior to such 4:00 p.m. New York time is effected at the offering price determined at such time on the day the order is received. It is the responsibility of broker-dealers and banks to transmit orders promptly to the Distributor. An order received by a broker-dealer or bank after such 4:00 p.m. time will be confirmed at the offering price as of such 4:00 p.m. time on the next trading day.
An order to purchase shares is not binding on, and may be rejected by, the Trust or the Distributor until it has been confirmed in writing by the Distributor and payment has been received.
4. The information on the shares of the Funds as described under "Information About Fund Shares - Description of Shares and Voting Rights" in the Prospectus is supplemented with the following additional information:
As of November 9, 1995, the following persons or entities owned of record or beneficially more that 25% of the shares of the Funds: GrandView Advisers, Inc., 127 GrandView Drive, East Glastonbury, Connecticut 06033, record holder with respect to 34.036% of the GrandView Residential Retail Income Fund; Maryanne S. Aylesworth, 127 GrandView Drive, East Glastonbury, Connecticut 06033, record holder with respect to 27.693% of the GrandView Residential Retail Income Fund; Winsor H. Aylesworth, 127 GrandView Drive, East Glastonbury, Connecticut 06033, record holder with respect to 35.014% of the GrandView Residential Retail Income Fund; GrandView Advisers, Inc., 127 GrandView Drive, East Glastonbury, Connecticut 06033, record holder with respect to 30.726% of the GrandView Retail Realty Income Fund; Winsor H. Aylesworth, 127 GrandView Drive, East Glastonbury, Connecticut 06033, record holder with respect to 31.614% of the GrandView Retail Realty Income Fund; GrandView Advisers, Inc., 127 GrandView Drive, East Glastonbury, Connecticut 06033, record holder with respect to 25.456% of the GrandView Healthcare Realty Income Fund; and Winsor H. Aylesworth, 127 GrandView Drive, East Glastonbury, Connecticut 06033, record holder with respect to 25.490% of the GrandView Healthcare Realty Income Fund. Accordingly, these persons or entities may be deemed to be "controlling persons" of the Funds within the meaning of the 1940 Act.
GrandView Residential Realty Income Fund GrandView Retail Realty Income Fund GrandView Healthcare Realty Income Fund
Rocky Mount, North Carolina 27802-0069
1. THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. . . . . . . . . . . . 2 3. PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 14 4. DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES; ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . 14 5. MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6. PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 23 7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES. . . . . . . . . . 23 8. CERTAIN ADDITIONAL TAX MATTERS. . . . . . . . . . . . . . . . . . . . . 24 9. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 25
GrandView Investment Trust (the "Trust") is an open-end, registered management investment company offering five mutual funds which are described in this Statement of Additional Information: GrandView REIT Index Fund, GrandView Realty Growth Fund, GrandView Residential Realty Income Fund, GrandView Retail Realty Income Fund and GrandView Healthcare Realty Income Fund (the "Funds"). Each of the Funds (other than the GrandView REIT Index Fund) is a non- diversified fund. The address and telephone number of the Trust are 105 North Washington St., Rocky Mount, North Carolina 27802, 1-800-525-3863.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY, ANY BANK OR INSURED DEPOSITARY INSTITUTION, NOR ARE THEY INSURED OR OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY. INVESTMENTS IN MUTUAL FUNDS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
This Statement of Additional Information sets forth information which may be of interest to investors but which is not necessarily included in the Trust's Prospectus dated July 1, 1995, as supplemented by a Supplement dated December 1, 1995, by which shares of the Funds are offered. This Statement of Additional Information should be read in conjunction with the Prospectus, a copy of which may be obtained by an investor without charge by contacting the Funds' Distributor (see inside back cover for address and phone number).
This Statement of Additional Information is NOT a prospectus and is authorized for distribution to prospective investors only if preceded or accompanied by an effective prospectus.
GrandView Investment Trust (the "Trust") is an open-end management investment company that was organized as a business trust under the laws of the Commonwealth of Massachusetts on February 6, 1995. This Statement of Additional Information describes shares of the GrandView REIT Index Fund ("REIT Index Fund"), GrandView Realty Growth Fund ("Realty Growth Fund"), GrandView Residential Realty Income Fund ("Residential Realty Income Fund"), GrandView Retail Realty Income Fund ("Retail Realty Income Fund") and GrandView Healthcare Realty Income Fund ("Healthcare Realty Income Fund"), which are series of the Trust. References in this Statement of Additional Information to the "Prospectus" are to the Prospectus, dated July 1, 1995, as supplemented by a Supplement dated December 1, 1995, of the Trust by which shares of the Funds are offered.
GrandView Advisers, Inc. (the "Adviser") is investment adviser to each of the Funds. The Adviser manages the investments of the Funds from day to day in accordance with each Fund's investment objective and policies. The selection of investments for the Funds and the way they are managed depend on the conditions and trends in the economy and the financial marketplaces.
The Board of Trustees of the Trust provides broad supervision over the affairs of the Funds. The Nottingham Company, L.L.C., the administrator and fund accounting, dividend disbursing and transfer agent of each Fund ("Nottingham" or the "Administrator"), supervises the overall administration of the Funds. Shares of the Funds are continuously sold by Capital Investment Group, Inc., the Funds' distributor ("Capital Investment Group" or the "Distributor"). Shares of each Fund are sold at net asset value, plus any applicable sales charge. The sales charge may be reduced on purchases involving substantial amounts and may be eliminated in certain circumstances. The Trust has adopted a Distribution Plan (the "Distribution Plan") in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act") which provides for payment of a distribution fee to Capital Investment Group from each Fund. The Board of Trustees does not currently intend to authorize the payment of any such fee from the REIT Index Fund, although they have the authority under the Distribution Plan to do so in the future.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The REIT Index Fund, the Realty Growth Fund, the Residential Realty Income Fund, the Retail Realty Income Fund and the Healthcare Realty Income Fund seek both current income and long-term growth of capital. Each Fund invests primarily in securities of real estate investment trusts ("REITs") and other real estate industry companies. The Funds differ in the degree to which they emphasize income or capital growth, and employ different policies to achieve their objectives.
The investment objective of the REIT Index Fund is to provide its investors with investment results which correspond to the performance of the GrandView REIT Index. The Fund seeks to achieve its objective by investing in the equity securities of the REITs comprising the Index.
The primary investment objective of the Realty Growth Fund is long-term growth of capital. Current income is a secondary objective.
The primary investment objective of each of the Residential Realty Income Fund, the Retail Realty Income Fund and the Healthcare Realty Income Fund is current income. Long-term growth of capital is a secondary objective of each of these Funds.
The investment objective of each Fund may be changed without approval by that Fund's shareholders, but shareholders will be given written notice at least 30 days before any change is implemented. Of course, there can be no assurance that any Fund will achieve its investment objective.
The Prospectus contains a discussion of the various types of securities in which each Fund may invest and the risks involved in such investments. The following supplements the information contained in the Prospectus concerning the investment objective, policies and techniques of each Fund.
The investment objective of the REIT Index Fund is to provide its investors with investment results which correspond to the performance of the GrandView REIT Index (the "Index"). The Fund seeks to achieve its objective by investing in the equity securities of the REITs comprising the Index. The REIT Index Fund intends to be as fully invested at all times as is reasonably practicable and will attempt to approximate the weightings of the securities held in its portfolio to the weightings of the securities in the Index.
The Index was developed and is maintained by the Adviser. It currently consists of the equity securities of 60 REITs which, as of March 31, 1995, represented approximately 65% of the total market capitalization of all REITs which are publicly traded in the United States and includes REITs within each of thirteen industry sectors identified by the Adviser. Any changes made to the composition of the Index by the Adviser will be based solely on market capitalization criteria. The Index is weighted by market capitalization, and in formulating the list of REITs which comprise the Index, the Adviser chooses REITs which represent all sectors of the REIT industry as identified by the Adviser. The Index is reset as needed in order to reflect changes in the market, and in any event, at least semiannually. The Index is presently comprised of the following REITs:
Security Capital Pacific Trust NYSE $1,375,140,561 Equity Residential Prop. NYSE $1,035,340,639 United Dominion Realty NYSE $798,644,556 Merry Land & Inv. Co. NYSE $712,229,375 Post Properties Inc. NYSE $550,068,371 BRE Properties, Inc. NYSE $369,528,750 Oasis Residential, Inc. NYSE $365,347,035 Wellsford Residential Tr. NYSE $361,436,523 Evans Withycombe Res. NYSE $325,228,750 Camden Property Trust NYSE $321,066,141 Starwood Lodging Trust NYSE $388,396,631 RFS Hotel Investors, Inc. NASDAQ $375,500,750 Felcor Suite Hotels, Inc. NASDAQ $244,957,500 Security Capital Ind. Trust NYSE $1,059,337,500 Liberty Property Trust NYSE $449,289,770 First Industrial Rlty. Trust NYSE $377,627,980 Manufacturer Home Com. NYSE $420,417,000 ROC Communities, Inc. NYSE $287,293,438 Health Care Property Investors NYSE $966,923,732 Health & Retirement Properties NYSE $924,846,344 Nationwide Health Prop. NYSE $793,760,000 National Health Investors NYSE $566,745,185 Omega HealthCare Investors NYSE $531,424,461 American Health Properties NYSE $452,395,000 Duke Realty Investments, Inc. NYSE $742,331,250 Washington REIT SBI ASE $470,730,046 CWM Mortgage Holdings, Inc. NYSE $548,562,200 Capstead Mortgage Corporation NYSE $493,554,000 Resource Mortgage Capital, Inc. NYSE $407,612,473 Crescent R. E. Equities, Inc. NYSE $652,588,554 Highwood Properties, Inc. NYSE $495,850,000 Beacon Properties Corp. NYSE $411,468,750 Simon Property Group NYSE $1,359,935,113 Debartolo Realty Corp. NYSE $766,670,226 General Growth Properties, Inc NYSE $562,496,550 Taubman Centers, Inc. NYSE $443,303,130 CBL & Associates Prop. NYSE $431,883,798 Crown American Realty Trust NYSE $226,129,745 Chelsea GCA Realty NYSE $332,359,375 Factory Stores of America Inc. NYSE $234,795,280 New Plan Realty Trust NYSE $1,172,492,250 Weingarten Realty Investors NYSE $934,713,625 Vornado Realty Trust NYSE $908,960,138 Kimco Realty Corp. NYSE $894,711,080 Federal Realty Investment Trust NYSE $740,777,125 Developers Diversified Realty NYSE $562,075,624 Glimcher Realty Trust NYSE $445,519,750 Realty Income Corp. NYSE $412,000,875 Storage Equities Inc. NYSE $783,043,723 Shurgard Storage Centers, Inc. NYSE $562,075,177 Storage USA Inc. REIT NYSE $532,707,373 Franchise Finance Corp. NYSE $865,390,459 National Golf Properties, Inc. NYSE $232,356,250 CA. Jockey Club & Bay Meadows ASE $92,771,269
REITs pool investors' funds for investment primarily in income producing real estate or real estate related loans or interests. A REIT is not taxed on income distributed to its shareholders or unitholders if it complies with regulatory requirements relating to its organization, ownership, assets and income and a regulatory requirement that it distribute to its shareholders or unitholders at least 95% of its taxable income for each taxable year. Generally, REITs can be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest the majority of their assets directly in real property and derive their income primarily from rents and capital gains from appreciation realized through property sales. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs. Mortgage REITs invest the majority of their assets in real estate mortgages and derive their income primarily from interest payments. Mortgage REITs are sensitive to the credit quality of the underlying borrowers. Hybrid REITs combine the characteristics of both Equity and Mortgage REITs. The value of REITs may be affected by management skill, cash flow and tax and regulatory requirements.
The investment objective of the Realty Growth Fund is long-term growth of capital. Current income is a secondary objective. In selecting investments for the Fund, the Adviser will emphasize equity securities of real estate industry companies which it believes are undervalued or which it believes to have significant "turnaround" potential. For purposes of the Fund's investments, a "real estate industry company" is a company that derives at least 50% of its gross revenues or net profits from the ownership, development, construction, financing, management or sale of commercial, industrial or residential real estate. The equity securities in which the Fund will invest may include common stocks, shares of beneficial interest and securities with common stock characteristics, such as preferred stock, warrants and debt securities convertible into common stock. The debt securities in which the Fund will invest may include bonds, notes and other short-term debt obligations. In determining whether a security is undervalued, the Adviser may take into account price-earnings ratios, cash flows, relationships of asset value to market prices of the securities, interest or dividend payment histories and other factors which it believes to be relevant. The Adviser may determine that a company has "turnaround" potential based on, for example, changes in management or financial restructurings. The Fund's performance depends on conditions in the real estate industry.
The investment objective of the Residential Realty Income Fund is current income. Long-term growth of capital is a secondary objective of the Fund. Under normal circumstances, at least 65% of the Fund's total assets are invested in debt and equity securities of REITs and other companies in the residential sector of the real estate industry. A company will be deemed to be in the residential sector of the real estate industry if it derives at least 50% of its gross revenues or net profits from the ownership, development, construction, financing, management or sale of real estate used primarily for residential purposes.
The investment objective of the Retail Realty Income Fund is current income. Long-term growth of capital is a secondary objective of the Fund. Under normal circumstances, at least 65% of the Fund's total assets are invested in debt and equity securities of REITs and other companies in the retail sector of the real estate industry. A company will be deemed to be in the retail sector of the real estate industry if it derives at least 50% of its gross revenues or net profits from the ownership, development, construction, financing, management or sale of real estate used primarily for retail purposes.
The investment objective of the Healthcare Realty Income Fund is current income. Long-term growth of capital is a secondary objective of the Fund. Under normal circumstances, at least 65% of the Fund's total assets are invested in debt and equity securities of REITs and other companies in the healthcare sector of the real estate industry. A company will be deemed to be in the healthcare sector of the real estate industry if it derives at least 50% of its gross revenues or net profits from the ownership, development, construction, financing, management or sale of real estate used primarily for healthcare purposes.
Because the Funds invest primarily in the real estate industry, their investments may be subject to certain risks associated with the direct ownership of real estate. These risks include: declines in the value of real estate; risks related to general and local economic conditions, overbuilding and increased competition; increases in property taxes and operating expenses; and variations in rental income. For more information on these and other risks of investing in the real estate industry, see "INVESTMENT OBJECTIVE AND POLICIES - Risks of Investing" in the Prospectus.
The policies described above and those described below are not fundamental and may be changed without shareholder approval.
The Funds (other than the REIT Index Fund) may invest in securities that directly or indirectly represent participations in, or are collateralized by and payable from, mortgage loans secured by real property ("Mortgage-Backed Securities").
Mortgage-Backed Securities represent pools of mortgage loans assembled for sale to investors by various governmental agencies such as the Government National Mortgage Association ("Ginnie Mae") and government-related organizations such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), as well as by nongovernmental issuers such as commercial banks, savings and loan institutions, mortgage bankers, and private mortgage insurance companies. Although certain Mortgage-Backed Securities are guaranteed by a third party or otherwise similarly secured, the market value of the security, which may fluctuate, is not so secured. If the Adviser purchases a Mortgage-Backed Security at a premium, that portion may be lost if there is a decline in the market value of the security whether resulting from changes in interest rates or prepayments in the underlying mortgage collateral. As with other interest- bearing securities, the prices of such securities are inversely affected by changes in interest rates. However, though the value of a Mortgage-Backed Security may decline when interest rates rise, the converse is not necessarily true since in periods of declining interest rates the mortgages underlying the securities are prone to prepayment. For this and other reasons, a Mortgage-Backed Security's stated maturity may be shortened by unscheduled prepayments on the underlying mortgages and, therefore, it is not possible to predict accurately the securities' return to a Fund. In addition, regular payments received in respect of Mortgage-Backed Securities include both interest and principal. No assurance can be given as to the return a Fund will receive when these amounts are reinvested.
There are a number of important differences among the agencies and instrumentalities of the U.S. Government that issue Mortgage-Backed Securities and among the securities that they issue. Mortgage-Backed Securities issued by Ginnie Mae include Ginnie Mae Mortgage Pass-Through Certificates which are guaranteed as to the timely payment of principal and interest by Ginnie Mae. This guarantee is backed by the full faith and credit of the United States. Ginnie Mae is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. Ginnie Mae certificates also are supported by the authority of Ginnie Mae to borrow funds from the U.S. Treasury to make payments under its guarantee. Mortgage-Backed Securities issued by Fannie Mae include Fannie Mae Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are guaranteed as to timely payment of the principal and interest by Fannie Mae. Fannie Maes are solely the obligations of Fannie Mae and are not backed by or entitled to the full faith and credit of the United States. Fannie Mae is a government-sponsored organization owned entirely by private stockholders. Mortgage-Backed Securities issued by Freddie Mac include Freddie Mac Mortgage Participation Certificates (also known as "Freddie Macs" or "PC's"). Freddie Mac is a corporate instrumentality of the United States, created pursuant to an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or by any Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When Freddie Mac does not guarantee timely payment of principal, Freddie Mac may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable.
The Funds (other than the REIT Index Fund) may also invest in Mortgage-Backed Securities which are collateralized mortgage obligations structured on pools of mortgage pass-through certificates or mortgage loans ("CMOs" and "REMICs") and derivative multiple-class mortgage-backed securities ("Stripped Mortgage- Backed Securities" or "SMBSs").
For temporary defensive purposes, each Fund (other than the REIT Index Fund) may invest up to 100% of its total assets in short-term investments. Each Fund (including the REIT Index Fund) may also make short-term investments for liquidity purposes (e.g., in anticipation of redemptions or purchases of securities). The Funds may invest in short-term investments consisting of corporate commercial paper and other short-term commercial obligations, in each case rated or issued by companies with similar securities outstanding that are rated Prime-l, Aa or better by Moody's Investors Service, Inc. ("Moody's") or A-1, AA or better by Standard & Poor's Ratings Group ("Standard & Poor's"); obligations (including certificates of deposit, time deposits, demand deposits and bankers' acceptances) of banks with securities outstanding that are rated Prime-l, Aa or better by Moody's, or A-1, AA or better by Standard & Poor's; obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities with remaining maturities not exceeding 18 months; securities of registered investment companies, subject to the provisions of the 1940 Act; and repurchase agreements. These investments may have a lower yield than would be available from investments with a lower quality or longer term.
The Funds (other than the REIT Index Fund) may invest in debt securities which are rated Caa or higher by Moody's or CCC or higher by Standard & Poor's or Fitch Investors Service, Inc. ("Fitch") or equivalent unrated securities. However, no Fund may invest more than 10% of its assets (25% for the Realty Growth Fund) in debt securities rated lower than Baa by Moody's or BBB by Standard & Poor's or Fitch or securities not rated by Moody's, Standard & Poor's or Fitch which the Adviser deems to be of equivalent quality. Bonds rated BB or Ba or below (or comparable unrated securities) are commonly referred to as "junk bonds" and are considered speculative and may be questionable as to principal and interest payments. In some cases, such bonds may be highly speculative, have poor prospects for reaching investment standing and be in default. As a result, investment in such bonds will entail greater risks than those associated with investment in investment-grade bonds (i.e., bonds rated BBB or better by Standard & Poor's or Fitch or Baa or better by Moody's).
An economic downturn could severely affect the ability of highly leveraged issuers to service their debt obligations or to repay their obligations upon maturity. Factors having an adverse impact on the market value of lower rated securities will have an adverse effect on a Fund's net asset value to the extent it invests in such securities. In addition, the Fund may incur additional expenses to the extent it is required to seek recovery upon a default in payment of principal or interest on its portfolio holdings.
The secondary market for junk bond securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities, a factor which may have an adverse effect on a Fund's ability to dispose of a particular security when necessary to meet its liquidity needs. Under adverse market or economic conditions, the secondary market for junk bond securities could contract further, independent of any specific adverse changes in the condition of a particular issuer. As a result, the Adviser could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating the Fund's net asset value.
Since investors generally perceive that there are greater risks associated with the medium to lower rated securities of the type in which certain of the Funds may invest, the yields and prices of such securities may tend to fluctuate more than those for higher rated securities. In the lower quality segments of the fixed-income securities market, changes in perceptions of issuers' creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in higher quality segments of the fixed- income securities market resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income securities is the supply and demand for similarly rated securities. In addition, the prices of fixed-income securities fluctuate in response to the general level of interest rates. Fluctuations in the prices of portfolio securities subsequent to their acquisition will not affect cash income from such securities but will be reflected in a Fund's net asset value.
Medium to lower rated and comparable non-rated securities tend to offer higher yields than higher rated securities with the same maturities because the historical financial condition of the issuers of such securities may not have been as strong as that of other issuers. In addition to the risk of default, there are the related costs of recovery on defaulted issues. The Adviser will attempt to reduce these risks through diversification of each Fund's portfolio and by analysis of each issuer and its ability to make timely payments of income and principal, as well as broad economic trends in corporate developments.
Foreign Real Estate Companies and Associated Risks
Each Fund (other than the REIT Index Fund) may invest in securities of non- U.S. real estate companies. The risks of investing in real estate and real estate companies are described in the Prospectus and above under "Investment Policies." Investing in securities issued by companies whose principal business activities are outside the United States may involve significant risks not present in U.S. investments. For example, the value of these securities fluctuates based on the relative strength of the U.S. dollar. In addition, there is generally less publicly available information about non- U.S. issuers, particularly those not subject to the disclosure and reporting requirements of the U.S. securities laws. Non-U.S. issuers are generally not bound by uniform accounting, auditing and financial reporting requirements comparable to those applicable to U.S. issuers. Investments in securities of non-U.S. issuers also involve the risk of possible adverse changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitations on the removal of funds or other assets of a Fund, political or financial instability or diplomatic and other developments which would affect such investments. Further, economies of other countries or areas of the world may differ favorably or unfavorably from the economy of the U.S.
It is anticipated that in most cases the best available market for securities of non-U.S. real estate companies would be on exchanges or in over-the-counter markets located outside the U.S. Non-U.S. securities markets, while growing in volume and sophistication, are generally not as developed as those in the U.S., and securities of some non-U.S. real estate companies (particularly those located in developing countries) may be less liquid and more volatile than securities of comparable U.S. companies. Non-U.S. security trading practices, including those involving securities settlement where Fund assets may be released prior to receipt of payments, may expose the Funds to increased risk in the event of a failed trade or the insolvency of a non-U.S. broker-dealer. In addition, non-U.S. brokerage commissions are generally higher than commissions on securities traded in the U.S. and may be non- negotiable. In general, there is less overall governmental supervision and regulation of non-U.S. securities exchanges, brokers and listed companies than in the U.S.
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary receipts for securities of non-U.S. issuers provide an alternative method for the Funds to make non-U.S. investments. These securities are not usually denominated in the same currency as the securities into which they may be converted. Generally, ADRs, in registered form, are designed for use in U.S. securities markets and EDRs and GDRs, in bearer form, are designed for use in European and global securities markets. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities. EDRs and GDRs are European and global receipts, respectively, evidencing a similar arrangement.
The Funds may invest in securities of non-U.S. real estate companies that impose restrictions on transfer within the United States or to United States persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than securities of non-U.S. real estate companies of the same class that are not subject to such restrictions.
Each Fund may invest in repurchase agreements collateralized by securities in which that Fund may otherwise invest. Repurchase agreements are agreements by which the Fund purchases a security and simultaneously commits to resell that security to the seller (which is usually a member bank of the U.S. Federal Reserve System or a member firm of the New York Stock Exchange (or a subsidiary thereof)) at an agreed-upon date within a number of days (usually not more than seven) from the date of purchase. The resale price reflects the purchase price plus an agreed-upon market rate of interest which is unrelated to the coupon rate or maturity of the purchased security. A repurchase agreement involves the obligation of the seller to pay the agreed upon price, which obligation is in effect secured by the value of the underlying security, usually U.S. Government or Government agency issues. Under the 1940 Act, repurchase agreements may be considered to be loans by the buyer. The Fund's risk is limited to the ability of the seller to pay the agreed-upon amount on the delivery date. If the seller defaults, the underlying security constitutes collateral for the seller's obligation to pay although that Fund may incur certain costs in liquidating this collateral and in certain cases may not be permitted to liquidate this collateral. All repurchase agreements entered into by the Funds are fully collateralized, with such collateral being marked to market daily.
Each Fund may enter into reverse repurchase agreements. Reverse repurchase agreements involve the sale of securities held by the Fund and the agreement by the Fund to repurchase the securities at an agreed upon price, date and interest payment. When the Fund enters into reverse repurchase transactions, securities of a dollar amount equal in value to the securities subject to the agreement will be maintained in a segregated account with the Fund's custodian. The segregation of assets could impair the Fund's ability to meet its current obligations or impede investment management if a large portion of the Fund's assets are involved. Reverse repurchase agreements are considered to be a form of borrowing.
Consistent with applicable regulatory requirements and in order to generate income, each Fund may lend its securities to broker-dealers and other institutional borrowers. Such loans will usually be made only to member banks of the U.S. Federal Reserve System and to member firms of the New York Stock Exchange (and subsidiaries thereof). Loans of securities would be secured continuously by collateral in cash, cash equivalents, or U.S. Treasury obligations maintained on a current basis at an amount at least equal to the market value of the securities loaned. The cash collateral would be invested in high quality short-term instruments. The Fund would have the right to call a loan and obtain the securities loaned at any time on customary industry settlement notice (which will not usually exceed five days). During the existence of a loan, the Fund would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned and would also receive compensation based on investment of the collateral. The Fund would not, however, have the right to vote any securities having voting rights during the existence of the loan, but would call the loan in anticipation of an important vote to be taken among holders of the securities or of the giving or withholding of their consent on a material matter affecting the investment. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower fail financially. However, the loans would be made only to entities deemed by the Adviser to be of good standing, and when, in the judgment of the Adviser, the consideration which can be earned currently from loans of this type justifies the attendant risk. If the Adviser determines to make loans, it is not intended that the value of the securities loaned by the Fund would exceed 30% of the value of its net assets.
Restricted Securities and Illiquid Investments
The Trust may purchase securities for the Funds that are not registered ("restricted securities") under the Securities Act of 1933 (the "Securities Act"), but can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act. Provided that a dealer or institutional trading market in such securities exists, these restricted securities are not treated as illiquid securities for purposes of the Fund's investment limitations.
The Trust does not invest more than 15% of any Fund's net assets in illiquid investments, which include securities for which there is no readily available market, securities subject to contractual restrictions on resale and restricted securities, unless the Trustees determine, based on the trading markets for the specific restricted security, that it is liquid. The Trust's Trustees may adopt guidelines and delegate to the Adviser the daily function of determining and monitoring liquidity of restricted securities. The Trust's Trustees, however, retain sufficient oversight and are ultimately responsible for the determinations.
Each Fund may purchase securities on a "when-issued" or on a "forward delivery" basis. It is expected that, under normal circumstances, the applicable Fund would take delivery of such securities. When the Fund commits to purchase a security on a "when-issued" or on a "forward delivery" basis, it sets up procedures consistent with SEC policies. Since those policies currently require that an amount of the Fund's assets equal to the amount of the purchase be held aside or segregated to be used to pay for the commitment, the Fund will always have cash, cash equivalents or high quality debt securities sufficient to cover any commitments or to limit any potential risk. However, even though the Funds do not intend to make such purchases for speculative purposes and intend to adhere to the provisions of SEC policies, purchases of securities on such bases may involve more risk than other types of purchases. For example, the Fund may have to sell assets which have been set aside in order to meet redemptions. Also, if the Adviser determines it is advisable as a matter of investment strategy to sell the "when-issued" or "forward delivery" securities, the Fund would be required to meet its obligations from the then available cash flow or the sale of securities, or, although it would not normally expect to do so, from the sale of the "when- issued" or "forward delivery" securities themselves (which may have a value greater or less than the Fund's payment obligation).
To hedge against changes in securities prices, each Fund may purchase and sell various kinds of futures contracts, and purchase and write (sell) call and put options on any of such futures contracts. Each Fund may also purchase put and call options on securities indices that are based on securities in which it may invest. The futures contracts may be based on various securities (such as U.S. Government securities), securities indices and other financial instruments and indices. A Fund may engage in futures and related options transactions for bona fide hedging and non-hedging purposes as described below. All futures contracts entered into by a Fund are traded on U.S. exchanges or boards of trade that are licensed and regulated by the Commodity Futures Trading Commission (the "CFTC") or on foreign exchanges.
A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a Fund can seek to offset a decline in the value of its current portfolio securities through the sale of futures contracts. When interest rates are falling or securities prices are rising, a Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later be available in the market when it effects anticipated purchases.
Positions taken in the futures markets are not normally held to maturity but are instead liquidated through offsetting transactions which may result in a profit or a loss. A clearing corporation associated with the exchange on which futures on securities are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date.
Hedging, by use of futures contracts, seeks to establish with more certainty the effective price and rate of return on portfolio securities and securities that a Fund owns or proposes to acquire. A Fund may, for example, take a "short" position in the futures market by selling futures contracts in order to hedge against an anticipated rise in interest rates that would adversely affect the value of the Fund's portfolio securities. Such futures contracts may include contracts for the future delivery of securities held by a Fund or securities with characteristics similar to those of a Fund's portfolio securities. If, in the opinion of the Adviser, there is a sufficient degree of correlation between price trends for a Fund's portfolio securities and futures contracts based on securities indices, a Fund may also enter into such futures contracts as part of its hedging strategy. Although under some circumstances prices of securities in a Fund's portfolio may be more or less volatile than prices of such futures contracts, the Adviser will attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any such differential by having a Fund enter into a greater or lesser number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting a Fund's securities portfolio. When hedging of this character is successful, any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of a Fund's portfolio securities would be substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures contracts. This would be done, for example, when a Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices or currency exchange rates then available in the applicable market to be less favorable than prices or rates that are currently available.
The acquisition of put and call options on futures contracts will give a Fund the right (but not the obligation) for a specified price to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, a Fund obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of a Fund's assets. By writing a call option, a Fund becomes obligated, in exchange for the premium, to sell a futures contract, which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium which may partially offset an increase in the price of securities that a Fund intends to purchase. However, a Fund becomes obligated to purchase a futures contract which may have a value lower than the exercise price. Thus, the loss incurred by a Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. A Fund will incur transaction costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option on the same series. There is no guarantee that such closing transactions can be effected. A Fund's ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market.
A Fund may use options on futures contracts for bona fide hedging or non- hedging purposes as discussed below.
A Fund will engage in futures and related options transactions only for bona fide hedging or non-hedging purposes in accordance with CFTC regulations which permit investment companies registered under the 1940 Act to engage in such transactions without requiring their sponsors to be registered as commodity pool operators. No Fund is permitted to engage in speculative futures trading. A Fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities held by the Fund or in securities which it expects to purchase. Except as stated below, a Fund's futures transactions will be entered into for traditional hedging purposes -- i.e., futures contracts will be sold to protect against a decline in the price of securities that the Fund owns, or futures contracts will be purchased to protect the Fund against an increase in the price of securities it intends to purchase. In particular cases, when it is economically advantageous for a Fund to do so, a long futures position may be terminated or an option may expire without the corresponding purchase of securities or other assets.
No Fund may purchase or sell non-hedging futures contracts or purchase or sell related non-hedging options, except for closing purchase or sale transactions, if immediately thereafter the sum of the amount of initial margin deposits on the Fund's existing non-hedging futures and related non-hedging options positions and the amount of premiums paid for existing non-hedging options on futures (net of the amount the positions are "in the money") would exceed 5% of the market value of the Fund's total assets. These transactions involve brokerage costs, require margin deposits and, in the case of contracts and options obligating a Fund to purchase securities and currencies, require the Fund to segregate assets to cover such contracts and options.
Transaction costs associated with futures contracts and related options involve brokerage costs, require margin deposits and, in the case of contracts and options obligating a Fund to purchase securities or currencies, require a Fund to segregate assets to cover such contracts and options.
While transactions in futures contracts and options on futures may reduce certain risks, such transactions themselves entail certain other risks. Thus, while a Fund may benefit from the use of futures and options on futures, unanticipated changes in interest rates or securities prices may result in a poorer overall performance for a Fund than if it had not entered into any futures contracts or options transactions. In the event of an imperfect correlation between a futures position and a portfolio position which is intended to be protected, the desired protection may not be obtained and the Fund may be exposed to risk of loss.
The Trust, on behalf of the Funds, has adopted the following policies which may not be changed with respect to any Fund without approval by holders of a majority of the outstanding voting securities of that Fund, which as used in this Statement of Additional Information means the vote of the lesser of (i) 67% or more of the outstanding voting securities of the respective Fund present at a meeting at which the holders of more than 50% of the outstanding voting securities of the Fund are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities of the respective Fund. The term "voting securities" as used in this paragraph has the same meaning as in the 1940 Act.
(1) Borrow money, except that as a temporary measure for extraordinary or emergency purposes it may borrow from banks and enter into reverse repurchase agreements in an amount not to exceed 33 1/3% of the current value of its respective net assets, including the amount borrowed (and no Fund may purchase any securities at any time at which borrowings exceed 5% of the total assets of the Fund, taken at market value). It is intended that a Fund would borrow money only from banks and only to accommodate requests for the repurchase of shares of the Fund while effecting an orderly liquidation of portfolio securities.
(2) Make short sales of securities or purchase securities on margin, except that the Trust may purchase and sell various types of futures contracts and may obtain short term credits as necessary for the clearance of security transactions.
(3) Underwrite securities issued by other persons, except to the extent that the Fund may be considered an underwriter within the meaning of the Securities Act of 1933 in the disposition of restricted securities.
(4) Make loans to other persons except (a) through the lending of its portfolio securities, but not in excess of 33 1/3%, of the Fund's net assets,(b) through the use of fixed time deposits or repurchase agreements or the purchase of short-term obligations or (c) by purchasing all or a portion of an issue of debt securities; for purposes of this paragraph 4 the purchase of short-term commercial paper or a portion of an issue of debt securities which are part of an issue to the public shall not be considered the making of a loan.
(5) Purchase or sell real estate (including limited partnership interests but excluding securities secured by real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts in the ordinary course of business, except that the Fund may purchase and sell mortgage-related securities and may hold and sell real estate acquired as a result of the ownership of securities by the Fund.
(6) Issue any senior security (as that term is defined in the 1940 Act) if such issuance is specifically prohibited by the 1940 Act or the rules and regulations promulgated thereunder, except as appropriate to evidence a debt incurred without violating Investment Restriction (1) above.
(7) In the case of the REIT Index Fund, with respect to 75% of its total assets, purchase securities of any issuer if such purchase at the time thereof would cause more than 5% of the Fund's assets (taken at market value) to be invested in the securities of such issuer (other than securities or obligations issued or guaranteed by the United States government or any agency or instrumentality thereof); provided that, for purposes of this restriction the issuer of an option or futures contract shall not be deemed to be the issuer of the security or securities underlying such contract.
(8) In the case of the REIT Index Fund, with respect to 75% of its total assets, purchase securities of any issuer if such purchase at the time thereof would cause more than 10% of the voting securities of such issuer to be held by the Fund.
(9) Invest 25% or more of its assets in securities of issuers in any one industry (other than securities or obligations issued or guaranteed by the United States government or any agency or instrumentality thereof), except that it will invest at least 25% of its assets in securities of issuers in the real estate industry.
In order to comply with certain state and federal statutes and policies each Fund does not as a matter of operating policy: (i) borrow money for any purpose in excess of 10% of the net assets of the Fund (taken at cost) (the Fund will not purchase any securities for the Fund at any time at which borrowings exceed 5% of the total assets of the Fund (taken at market value)), (ii) sell any security which the Fund does not own unless by virtue of the ownership of other securities there is at the time of sale a right to obtain securities, without payment of further consideration, equivalent in kind and amount to the securities sold and provided that if such right is conditional the sale is made upon the same conditions, (iii) invest for the purpose of exercising control or management, (iv) purchase securities issued by any registered investment company, except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, or except when such purchase, though not made in the open market, is part of a plan of merger or consolidation; provided, however, that the Fund will not purchase the securities of any registered investment company if such purchase at the time thereof would cause more than 10% of the total assets of the Fund (taken in each case at the greater of cost or market value) to be invested in the securities of such issuers or would cause more than 3% of the outstanding voting securities of any such issuer to be held for the Fund, (v) invest more than 15% of the net assets of the Fund in securities that are not readily marketable or which are subject to legal or contractual restrictions on resale including debt securities for which there is no established market and fixed time deposits and repurchase agreements maturing in more than seven days, (vi) purchase or retain any securities issued by an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Trust, or is an officer or director of the Adviser, if after the purchase of the securities of such issuer by the Fund, one or more of such persons owns beneficially more than 1/2 of 1% of the shares or securities, or both, all taken at market value, of such issuer, and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, all taken at market value, (vii) make short sales of securities, except that the Trust may purchase and sell various types of futures contracts and may obtain short term credits as necessary for the clearance of security transactions, (viii) invest more than 5% of the Fund's net assets in warrants (valued at the lower of cost or market), but not more than 2% of the Fund's net assets may be invested in warrants not listed on the New York Stock Exchange or the American Stock Exchange, (ix) with respect to 50% of the Fund's total assets, invest more than 5% of its total assets in the securities of any one issuer and, as to the remaining 50% of the Fund's total assets, invest more than 25% in the securities of any one issuer, (x) purchase securities of any issuer if, as to 75% of the assets of the Fund at the time of purchase, more than 10% of the voting securities of any issuer would be held by the Fund, or (xi) invest more than 15% of the Fund's total assets in the securities of issuers which together with any predecessors (including public and private predecessor operating companies) have a record of less than three years of continuous operating or securities of issuers which are restricted as to disposition, despite any determinations made by the Board of Trustees that such securities are liquid.
Except as provided below, in order to comply with Rule 260.140.85(b) of Title 10 of the California Code of Regulations, a Fund will not engage in short sales (other than sales against the box) or margin purchases, in writing, buying or selling puts and calls on securities, stock index futures, options on stock index futures, securities, stock index futures, options on stock index futures, financial futures contracts or options thereon, or in other investment practices which, in the opinion of the California Commissioner of Corporations, are highly speculative, unless the securities of the Fund are offered only to a limited class of purchasers and are subject to other sales limitations as the California Commissioner of Corporations may require, and adequate disclosure is made of the speculative nature of the security. However, a Fund may engage in writing puts or calls if each of the following conditions are met: (i) the security underlying the put or call is within the investment policies of the Fund and the option is issued by the Options Clearing Corporation, (ii) the aggregate value of the securities underlying the calls or obligations underlying the puts determined as of the date the options are sold shall not exceed 25% of the net assets of the Fund, (iii) the securities subject to the exercise of a call written by the Fund must be owned by the Fund at the time the call is sold and must continue to be owned by the Fund until the call has been exercised, has lapsed, or the Fund has purchased a closing call, and such purchase has been confirmed, thereby extinguishing the Fund's obligation to deliver securities pursuant to the call it has sold, and (iv) at the time a put is written the Fund must establish a segregated account with its custodian consisting of cash or short term United States Government securities equal in value to the amount the Fund will be obligated to pay upon exercise of the put; this account must be maintained until the put is exercised, has expired, or the Fund has purchased a closing put, which is a put of the same series as the one previously written. A Fund may buy and sell puts and calls on securities, stock index futures or options on stock index futures, or financial futures or options on financial futures, if such options are written by other persons and if (i) the options or futures are offered through the facilities of a national securities association approved by the California Commissioner of Corporations or are listed on a national securities or commodities exchange, (ii) the aggregate premiums paid on all such options which are held at any time do not exceed 20% of the Fund's total net assets, and (iii) the aggregate margin deposits required on all such futures or options thereon held at any time do not exceed 5% of the Fund's total assets.
These policies are not fundamental and may be changed by each Fund without the approval of its shareholders in response to changes in state and federal requirements.
If a percentage restriction on investment or utilization of assets set forth above or referred to in the Prospectus is adhered to at the time an investment is made or assets are so utilized, a later change in percentage resulting from changes in the value of the securities held for a Fund will not be considered a violation of policy.
A total rate of return quotation for each Fund is calculated for any period by (a) dividing (i) the sum of the net asset value per share on the last day of the period and the net asset value per share on the last day of the period of shares purchasable with dividends and capital gains distributions declared during such period with respect to a share held at the beginning of such period and with respect to shares purchased with such dividends and capital gains distributions, by (ii) the public offering price per share on the first day of such period, and (b) subtracting 1 from the result. Any annualized total rate of return quotation is calculated by (x) adding 1 to the period total rate of return quotation calculated above, (y) raising such sum to a power which is equal to 365 divided by the number of days in such period, and (z) subtracting 1 from the result. Total rates of return may also be calculated on investments at various sales charge levels or at net asset value. Any performance data which is based on a reduced sales charge or net asset value per share would be reduced if the maximum sales charge were taken into account.
Any current yield quotation for a Fund consists of an annualized historical yield, carried at least to the nearest hundredth of one percent, based on a 30 calendar day or one month period and is calculated by (a) raising to the sixth power the sum of 1 plus the quotient obtained by dividing the Fund's net investment income earned during the period by the product of the average daily number of shares outstanding during the period that were entitled to receive dividends and the maximum public offering price per share on the last day of the period, (b) subtracting 1 from the result, and (c) multiplying the result by 2.
The aggregate total rate of return for the Funds for the period from July 3, 1995 (commencement of operations) to September 30, 1995 was as follows: REIT Index Fund, -0.09% (with maximum sales load) and 3.00% (with no sales load); Realty Growth Fund, -6.17% (with maximum sales load) and -1.75% (with no sales load); Residential Realty Income Fund, -5.36% (with maximum sales load) and - 0.90% (with no sales load); Retail Realty Income Fund, -6.17% (with maximum sales load) and -1.75% (with no sales load); and Healthcare Realty Income Fund, -3.62% (with maximum sales load) and 0.93% (with no sales load). For the thirty day period ended September 30, 1995, the yield of the Funds was as follows: REIT Index Fund, 6.44% (with maximum sales load) and 6.64% (with no sales load); Realty Growth Fund, 2.74% (with maximum sales load) and 2.87% (with no sales load); Residential Realty Income Fund, 5.20% (with maximum sales load) and 5.45% (with no sales load); Retail Realty Income Fund, 7.89% (with maximum sales load) and 8.27% (with no sales load); and Healthcare Realty Income Fund, 6.19% (with maximum sales load) and 6.48% (with no sales load). These performance quotations should not be considered as representative of the Funds' performance for any specified period in the future. Aggregate total return is calculated similarly to annual total rate of return, except that the return is aggregated rather than annualized.
4. DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES; ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The net asset value of each share of each Fund is determined each day during which the New York Stock Exchange is open for trading (a "Business Day"). As of the date of this Statement of Additional Information, the New York Stock Exchange is open for trading every weekday except for the following holidays (or the days on which they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. This determination of net asset value of shares of a Fund is made once each day at 4 p.m. New York time by dividing the value of each Fund's net assets (i.e., the value of its assets less its liabilities, including expenses payable or accrued) by the number of shares of the Fund outstanding at the time the determination is made. A share's net asset value is effective for orders received by the Distributor prior to its calculation and prior to the close of the Business Day on which such net asset value is determined.
For purposes of calculating net asset value per share, all assets and liabilities initially expressed in non-U.S. currencies will be converted into U.S. dollars at the prevailing market rates at the time of valuation. Equity securities are valued at the last quoted sale price, at the time of valuation, on the principal exchange or market where they are traded. Securities which have not traded on the date of valuation, or securities for which sales prices are not generally reported, are valued at the mean between the current bid and asked prices. Securities listed on a non-U.S. exchange are valued at the last quoted sale price available before the time when net assets are valued. Bonds and other fixed income securities (other than short-term obligations) are valued on the basis of valuations furnished by a pricing service, use of which has been approved by the Board of Trustees. In making such valuations, the pricing service utilizes both dealer-supplied valuations and electronic data processing techniques that take into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data, without exclusive reliance upon quoted prices or exchange or over-the- counter prices, since such valuations are believed to reflect more accurately the fair value of such securities. Short-term obligations (maturing in 60 days or less) are valued at amortized cost, which constitutes fair value as determined by the Board of Trustees. Futures contracts are normally valued at the settlement price on the exchange on which they are traded. Securities for which there are no such valuations are valued at fair value as determined in good faith by or at the direction of the Board of Trustees.
Trading in securities on most non-U.S. exchanges and over-the-counter markets is normally completed before 4:00 p.m. New York time and may also take place on days on which the New York Stock Exchange is closed. If events materially affecting the value of non-U.S. securities occur between the time when the exchange on which they are traded closes and the time when a Fund's net asset value is calculated, such securities will be valued at fair value in accordance with procedures established by and under the general supervision of the Board of Trustees.
Interest income on long-term obligations held for a Fund is determined on the basis of interest accrued plus amortization of "original issue discount" (generally, the difference between issue price and stated redemption price at maturity) and premiums (generally, the excess of purchase price over stated redemption price at maturity). Interest income on short-term obligations is determined on the basis of interest accrued less amortization of any premium.
Subject to compliance with applicable regulations, the Trust has reserved the right to pay the redemption price of shares of each Fund, either totally or partially, by a distribution in kind of readily marketable securities (instead of cash). The securities so distributed would be valued at the same amount as that assigned to them in calculating the net asset value for the shares being sold. If a holder of shares received a distribution in kind, that holder could incur brokerage or other charges in converting the securities to cash.
Redemptions of shares of the REIT Index Fund made within six months of purchase are subject to a redemption fee in the amount of 1% of the net asset value of the shares redeemed. Redemptions of shares of the REIT Index Fund made between six and twelve months after purchase will be subject to a redemption fee of 0.50% of the net asset value of the shares redeemed. No redemption fee is imposed if the proceeds are immediately invested in shares of one or more of the other Funds, but a further redemption of shares of the other Fund may result in a redemption fee at the rate which would have been applicable if the shareholder had continued to hold shares of the REIT Index Fund. All redemption fees are payable to the applicable Fund. The Board of Trustees of the Trust has adopted a policy of waiving the redemption fee otherwise applicable to a redemption by an omnibus account.
Redemption proceeds are normally paid by check within seven days after receipt of a redemption request. However, the right of any shareholder to receive payment with respect to any redemption may be suspended or the payment of the redemption proceeds postponed during any period in which (a) trading in the markets a Fund normally utilizes is restricted, or an emergency, as defined by the rules and regulations of the SEC, exists making disposal of a Fund's investments or determination of its net asset value not reasonably practicable; (b) the New York Stock Exchange is closed (other than customary weekend and holiday closings); or (c) the SEC has by order permitted such suspension.
If an investor anticipates purchasing sufficient shares to entitle the investor to a quantity discount alone or in combination with any shares of other series of the Trust within a 13-month period, the investor may obtain such shares at the same reduced sales charge as though the total quantity were invested in one lump sum by completing a Letter of Intent on the terms described below. Subject to acceptance by the Distributor and the conditions mentioned below, each purchase will be made at a public offering price applicable to a single transaction of the dollar amount specified in the Letter of Intent. The shareholder must inform the Distributor that the Letter of Intent is in effect each time shares are purchased. The shareholder makes no commitment to purchase additional shares, but if his or her purchases within 13 months plus the value of shares credited toward completion of the Letter of Intent do not total the sum specified, an increased sales charge will apply as described below. A purchase not originally made pursuant to a Letter of Intent may be included under a subsequent Letter of Intent executed within 90 days of the original purchase if the Distributor is informed in writing of this intent within the 90-day period. The value of shares of a Fund held prior to the commencement of a Letter of Intent may be included, at their cost or maximum offering price (whichever is higher), as a credit toward the completion of a Letter of Intent, but the reduced sales charge applicable to the amount covered by such Letter is applied only to new purchases. Neither income dividends nor capital gain distributions taken in additional shares will apply toward the completion of the Letter of Intent. The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intent is deducted from the total purchases made under such Letter.
If the investment specified in the Letter of Intent is not completed (either prior to or by the end of the 13-month period), the Administrator will redeem, within 20 days of the expiration of the Letter of Intent, an appropriate number of the shares in order to realize the difference between the reduced sales charge that would apply if the investment under the Letter of Intent had been completed and the sales charge that would normally apply to the number of shares actually purchased. By completing and signing the Letter of Intent, the shareholder irrevocably appoints the Administrator his or her attorney to surrender for redemption any or all shares purchased under the Letter of Intent with full power of substitution in the premises.
A shareholder qualifies for cumulative quantity discounts on the purchase of shares when his or her new investment, together with the current offering price value of all holdings of that shareholder in the Funds, reaches a discount level. See "INFORMATION ABOUT FUND SHARES - How to Purchase Shares" in the Prospectus for the sales charges on quantity discounts. A shareholder must provide the Distributor with information to verify that the quantity sales charge discount is applicable at the time the investment is made.
Shares of each Fund for which payment has been received (i.e., an established account) may be exchanged at their net asset value for shares of each other Fund. No initial sales charge is imposed on shares being acquired through an exchange unless the sales charge of the Fund being exchanged into is greater than the current sales charge of the Fund (in which case an initial sales charge will be imposed at a rate equal to the difference). No redemption fee is imposed on shares being disposed of through an exchange; however, a redemption fee may apply to redemptions of shares acquired through an exchange of shares of the REIT Index Fund at the rate which would have been applicable if the shareholder had continued to hold shares of the REIT Index Fund. Exchanges will be made only after proper instructions in writing or by telephone (an "Exchange Request") are received for an established account by the Distributor.
Each Exchange Request must be in proper form (see "How to Redeem Shares" in the Prospectus), and each exchange must involve either shares having an aggregate value of at least $1,000 ($5,000 for the REIT Index Fund) or all the shares in the shareholder's account. Each exchange involves the redemption of the shares of a Fund to be exchanged and the purchase at net asset value of the shares of the other Fund. Any gain or loss on the redemption of the shares exchanged is reportable on the shareholder's Federal income tax return, unless such shares were held in a tax-deferred retirement plan or other tax- exempt account. If the Exchange Request is received by the Distributor in writing or by telephone on any business day prior to 4:00 p.m. New York time, the exchange usually will occur on that day if all the restrictions set forth above have been complied with at that time. However, payment of the redemption proceeds by a Fund, and thus the purchase of shares of the other Fund, may be delayed for up to seven days if the Fund determines that such delay would be in the best interest of all of its shareholders.
The Trustees and officers of the Trust, their ages, and their principal occupations during the past five years are set forth below. Their titles may have varied during that period. Asterisks indicate that those Trustees and officers are "interested persons" (as defined in the 1940 Act) of the Trust.
Winsor H. Aylesworth*, age 48 - President and Treasurer of the Trust; President and Director, GrandView Advisers, Inc. (since March, 1995); President and Director, WHA Enterprises, Inc. (since September, 1991); Executive Vice President, Loan Review Department, Bank of Boston Connecticut (1990 - 1993). His address is 127 Grandview Drive, Glastonbury CT 06033.
Arthur Collins, age 66 - Trustee of the Trust; President, Collins Enterprises LLC/Collins Development Corporation (since 1972); Director, Connecticut National Bank (1986 - 1992). His address is 53 Forest Avenue, Old Greenwich, CT 06870.
Richard W. Jagolta, age 61 - Trustee of the Trust; Business Development Manager, Polaroid Corporation (1957 - April, 1995). His address is 40 Blueridge Avenue, Saugus, MA 01906.
Raymond H. Weaving, age 54 - Trustee of the Trust; Director of Lending, Massachusetts Housing Investment Corporation (since November, 1993); Vice President and Team Leader, Baybank Boston, Inc. (1992 - 1993); Consultant, Malden Trust Co. (1991 - 1992); Division Executive, Bank of Boston (1965 - 1991). His address is 11 Perry Henderson Drive, Framingham, MA 01701.
Winsor H. Aylesworth*, age 48 - President and Treasurer of the Trust; President and Director, GrandView Advisers, Inc. (since March, 1995); President and Director, WHA Enterprises, Inc. (since September, 1991); Executive Vice President, Loan Review Department, Bank of Boston Connecticut (1990 - 1993). His address is 127 Grandview Drive, Glastonbury CT 06033.
Lucille C. Carlson*, age 37 - Vice President of the Trust; Director, GrandView Advisers, Inc. (since March, 1995); Director of Research, WHA Enterprises, Inc. (since July, 1993) Assistant Vice President, Loan Review Department, Bank of Boston Connecticut (1991 - April, 1995); Real Estate Management Officer, John Hancock Properties, Inc. (1987 - 1990). Her address is 127 Grandview Drive, Glastonbury CT 06033.
David F. Wolf*, age 48 - Vice President of the Trust; Director, GrandView Advisers, Inc. (since March, 1995); Director of Marketing, WHA Enterprises, Inc. (since July, 1993); Financial Planning Consultant, John Hancock Financial Services, Inc. (1992 - May, 1995); real estate developer (1991 - 1992); Account Executive, NCNB Securities, Inc. (1990 - 1991); Stock Broker, Shearson Lehman Brothers, Inc. (1983 - 1990). Mr. Wolf is a registered representative of the Funds' Distributor, Capital Investment Group, Inc. His address is 127 Grandview Drive, Glastonbury CT 06033.
Frank P. Meadows, III*, age 34 - Secretary of the Trust; Commission Based Broker, Capital Investment Group, Inc. (since October, 1993); Managing Director, The Nottingham Company, Inc. (since January, 1988); Commission Based Broker, Mid-Atlantic Securities (1989 - 1993). His address is 105 North Washington Street, Rocky Mount, NC 27802.
To provide the initial capital of the Trust, on May 18, 1995, GrandView Advisers, Inc. purchased an aggregate of 2000 shares of each of the Funds at the net asset value of $10 per share for an aggregate purchase price of $100,000.
The Declaration of Trust of the Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, unless, as to liability to the Trust, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices, or unless with respect to any other matter it is finally adjudicated that they did not act in good faith in the reasonable belief that their actions were in the best interests of the Trust. In the case of settlement, such indemnification will not be provided unless it has been determined by a court or other body approving the settlement or other disposition, or by a reasonable determination, based upon a review of readily available facts, by vote of a majority of disinterested Trustees of the Trust, or in a written opinion of independent counsel, that such officers or Trustees have not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Principal Holders of Voting Securities
As of January 10, 1995, the Trustees and officers of the Trust as a group owned beneficially (i.e., had voting and/or investment power) 55.151% of the then outstanding shares of the REIT Index Fund; 61.704% of the then outstanding shares of the Realty Growth Fund; 96.743% of the then outstanding shares of the Residential Realty Income Fund; 99.985% of the then outstanding shares of the Retail Income Fund; and 77.404% of the then outstanding shares of the Healthcare Realty Income Fund. On the same date the following shareholders owned of record more than 5% of the outstanding shares of beneficial interest of the Funds. Except as provided below, no person is known by the Trust to be the beneficial owner of more than 5% of the outstanding shares of the Funds as of January 10, 1995.
Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership* Percent
Winsor H. Aylesworth 1,972.283 shares 16.049%
Marie T. Aylesworth 972.763 shares 7.916%
Maryanne S. Aylesworth 1,572.044 shares 12.792%
Lucille C. Carlson & Suk-Ying Chan 1,004.016 shares 8.170%
GrandView Advisers, Inc. 2,000.000 shares 16.274%
Chuck K. Chan 1,416.311 shares 11.525%
Peter A. Harvey 995.857 shares 8.103%
Robert F. Schatz 1,542.145 shares 12.459%
Winsor H. Aylesworth 2,084.268 shares 20.513%
Maryanne S. Aylesworth 1,665.909 shares 16.395%
Lucille Carlson & Suk-Ying Chan 519.384 shares 5.112%
GrandView Advisers, Inc. 2,000.000 shares 19.684%
Peter A. Harvey 1,049.765 shares 10.332%
Charles P. Collins 925.281 shares 6.154%
Chuck K. Chan 980.509 shares 9.650%
Winsor H. Aylesworth 2,057.485 shares 35.014%**
Maryanne S. Aylesworth 1,627.292 shares 27.693%**
GrandView Advisers, Inc. 2,000.000 shares 34.036%**
Winsor H. Aylesworth 2,083.538 shares 31.614%**
Maryanne S. Aylesworth 1,644.526 shares 24.953%**
Lucille Carlson & Suk-Ying Chan 529.419 shares 8.033%
GrandView Advisers, Inc. 2,024.975 shares 30.726%**
Winsor H. Aylesworth 2,002.722 shares 25.490%**
Marie T. Aylesworth 987.167 shares 12.564%
Maryanne S. Aylesworth 1,591.830 shares 20.260%
Lucille C. Carlson & Suk-Ying Chan 486.976 shares 6.198%
GrandView Advisers, Inc. 2,000.000 shares 25.456%**
Dorothy J. Wolf 499.351 shares 6.356%
* All amounts indicated are believed by the Trust to be owned both of record and beneficially by the indicated shareholders.
** Under applicable SEC regulations, this shareholder is deemed to control the Fund in question.
GrandView Advisers, Inc. manages the assets of each Fund pursuant to separate investment advisory agreements (the "Advisory Agreements"). Subject to such policies as the Board of Trustees may determine, the Adviser manages the securities of each Fund and makes investment decisions for each Fund. The Adviser furnishes at its own expense all services, facilities and personnel necessary in connection with managing each Fund's investments and effecting securities transactions for each Fund. Each of the Advisory Agreements will continue in effect until April 26, 1997 and thereafter as long as such continuance is specifically approved at least annually by the Board of Trustees or by a vote of a majority of the outstanding voting securities of the applicable Fund, and, in either case, by a majority of the Trustees of the Trust who are not parties to the Advisory Agreement or interested persons of any such party, at a meeting called for the purpose of voting on the Advisory Agreement.
Winsor H. Aylesworth, Lucille C. Carlson and David F. Wolf own, respectively, 60%, 20% and 20% of the outstanding capital stock of the Adviser, and serve as co-portfolio managers for the Funds. They collectively have over 50 years experience in the commercial real estate finance and management and securities businesses. Winsor H. Aylesworth, President, Treasurer and Director of the Adviser, has had over ten years of experience with Bank of Boston Corporation and Bank of Boston Connecticut. At Bank of Boston, Mr. Aylesworth's responsibilities included forming and managing workout and OREO groups and overseeing the disposition of real estate properties and other assets by the OREO groups. Mr. Aylesworth was also responsible for managing Bank of Boston Corporation's Florida Loan Production Office and for overseeing the granting of construction loans on investment grade real estate. Lucille C. Carlson, a Director of the Adviser, has managed cases on non-performing assets, including loan restructuring and OREO management and disposition, for Bank of Boston Connecticut. Ms. Carlson has served as a real estate asset management officer, managing an institutional grade real estate portfolio comprised of commercial property and other portfolios consisting of real estate property and mortgages for John Hancock Properties Inc. and Cigna Investments Inc., and has served as a securities and equity analyst. David F. Wolf, a Director of the Adviser, has over eight years of experience as a financial consultant, serving as a consultant for John Hancock Financial Services and Shearson Lehman Brothers. Mr. Wolf has acted as an account executive for NCNB Securities and has professional experience in the areas of real estate developing, lending, workouts and asset management. Mr. Aylesworth, Ms. Carlson and Mr. Wolf also own all of the outstanding capital stock of WHA Enterprises, Inc., which since 1991 has published a monthly newsletter on the REIT industry known as The Winsor Report. The Adviser was organized in March, 1995 and has no previous experience as an investment adviser.
Each of the Advisory Agreements provides that the Adviser may render services to others. Each Advisory Agreement is terminable without penalty on not more than 60 days' nor less than 30 days' written notice by the Trust when authorized either by a vote of a majority of the outstanding voting securities of the applicable Fund or by a vote of a majority of the Board of Trustees, or by the Adviser on not more than 60 days' nor less than 30 days' written notice, and will automatically terminate in the event of its assignment. Each Advisory Agreement provides that neither the Adviser nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions for the applicable Fund, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties under the Advisory Agreement.
Upon termination of any contract with GrandView Advisers, Inc., or any corporation affiliated therewith, acting as investment adviser or manager, the Board of Trustees will promptly change the name of the Trust and of each of the Funds to a name which does not include "GrandView" or any approximation or abbreviation thereof.
The Prospectus contains a description of the fees payable to the Adviser for services under the Advisory Agreements.
Pursuant to an administrative services agreement (the "Administrative Services Agreement"), Nottingham serves as the administrator and fund accounting, dividend disbursing and transfer agent for the Funds. Under the Administrative Services Agreement Nottingham provides the Trust with general office facilities and supervises the overall administration of the Trust, including, among other responsibilities, the negotiation of contracts and fees with, and the monitoring of performance and billings of, the Trust's independent contractors and agents; the preparation and filing of all documents required for compliance by the Trust with applicable laws and regulations; and arranging for the maintenance of books and records of the Trust. The Administrator provides persons satisfactory to the Board of Trustees to serve as Trustees and officers of the Trust. Such Trustees and officers, as well as certain other employees and Trustees of the Trust, may be directors, officers or employees of Nottingham or its affiliates.
The Administrative Services Agreement with the Trust provides that Nottingham may render administrative services to others. The Administrative Services Agreement with the Trust terminates automatically if it is assigned and may be terminated without penalty by vote of a majority of the outstanding voting securities of the Trust or by either party on not more than 90 days' written notice. The Administrative Services Agreement with the Trust also provides that neither Nottingham, as the Administrator, nor its personnel shall be liable for any error of judgment or mistake of law or for any act or omission in the administration or management of the Trust, except for willful misfeasance, bad faith or gross negligence in the performance of its or their duties or by reason of reckless disregard of its or their obligations and duties under the Trust's Administrative Services Agreement.
The Prospectus contains a description of the fees payable to the Administrator under the Administrative Services Agreement.
Capital Investment Group serves as the Distributor of each Fund's shares pursuant to a Distribution Agreement (the "Distribution Agreement") with the Trust. Unless otherwise terminated, the Distribution Agreement for the Funds remains in effect until April 26, 1996 and, for each Fund, thereafter will continue from year to year upon annual approval by the Trust's Board of Trustees, or by the vote of a majority of the outstanding voting securities of the Trust and by the vote of a majority of the Board of Trustees who are not parties to the Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. The Agreement will terminate in the event of its assignment, as defined in the 1940 Act.
The Trust has adopted a Distribution Plan in accordance with Rule 12b-1 under the 1940 Act with respect to shares of the Funds after concluding that there is a reasonable likelihood that the Distribution Plan will benefit each Fund and its shareholders. The Distribution Plan provides that each Fund will pay a monthly distribution fee to the Distributor at an annual rate not to exceed 0.25% of such Fund's average daily net assets. The Board of Trustees does not currently intend to authorize the payment of any such fee from the REIT Index Fund, although they have the authority under the Distribution Plan to do so in the future.
The Distributor may use all or any portion of any such distribution fee to pay for employee salaries, bonuses and other overhead expenses, service fees to be paid to certain banks and broker-dealers which provide certain services to their customers who hold Fund shares, and other such distribution-related expenses.
The Distribution Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Trust's Trustees and a majority of the Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreement related to the Plan (for purposes of this paragraph "Qualified Trustees"). The Distribution Plan requires that the Trust and the Distributor provide to the Board of Trustees, and the Board of Trustees review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Distribution Plan. The Distribution Plan further provides that the selection and nomination of the Qualified Trustees is committed to the discretion of the disinterested Trustees (as defined in the 1940 Act) then in office. The Distribution Plan may be terminated with respect to any Fund at any time by a vote of a majority of the Trust's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Fund. The Distribution Plan may not be amended to increase materially the amount of a Fund's permitted expenses thereunder without the approval of a majority of the outstanding securities of that Fund and may not be materially amended in any case without a vote of a majority of both the Trustees and Qualified Trustees. The Distributor will preserve copies of any plan, agreement or report made pursuant to the Distribution Plan for a period of not less than six years from the date of the Plan, and for the first two years the Distributor will preserve such copies in an easily accessible place.
As contemplated by the Distribution Plan, Capital Investment Group acts as the agent of the Trust in connection with the offering of shares of the Funds pursuant to the Distribution Agreement. After the prospectuses and periodic reports of the Funds have been prepared, set in type and mailed to existing shareholders, the Distributor pays for the printing and distribution of copies thereof which are used in connection with the offering of shares of the Funds to prospective investors.
David F. Wolf, a registered representative of the Funds' Distributor, may receive brokerage commissions from the Distributor in connection with sales of shares of the Funds. Mr. Wolf is a Vice President of the Trust and a Director of GrandView Advisers, Inc.
The Trust has entered into a Custodian Agreement with Wachovia Bank of North Carolina, N.A., pursuant to which custodial services are provided for the Trust and the Funds. The address of Wachovia Bank of North Carolina, N.A. is 301 North Main Street, Winston-Salem, North Carolina 27102.
KPMG Peat Marwick LLP are the independent auditors for the Trust. The address of KPMG Peat Marwick LLP is Suite 1900, 1021 East Cary Street, Richmond, Virginia 23219.
Bingham, Dana & Gould serve as counsel for the Trust. The address of Bingham, Dana & Gould is 150 Federal Street, Boston, Massachusetts 02110.
The Trust trades securities for a Fund if it believes that a transaction net of costs (including custodian charges) will help achieve the Fund's investment objective. Changes in the portfolio of the REIT Index Fund will be effected primarily to accommodate cash flows into and out of the Fund and changes in the GrandView REIT Index. Changes in a Fund's investments are generally made without regard to the length of time a security has been held, or whether a sale would result in the recognition of a profit or loss. Therefore, the rate of turnover is not a limiting factor when changes are appropriate. It is anticipated that the portfolio turnover rate of the REIT Index Fund and of each of the other Funds will not exceed 75% and 100%, respectively, in the coming year. The amount of a Fund's brokerage commissions and realization of taxable capital gains will tend to increase as the level of portfolio activity increases.
The primary consideration in placing portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of execution at the most favorable prices and in the most effective manner possible. The Adviser attempts to achieve this result by selecting broker- dealers to execute transactions on behalf of each Fund on the basis of their professional capability, the value and quality of their brokerage services, and the level of their brokerage commissions. In the case of securities traded in the over-the-counter market (where no stated commissions are paid but the prices include a dealer's markup or markdown), the Adviser normally seeks to deal directly with the primary market makers, unless in its opinion, best execution is available elsewhere. In the case of securities purchased from underwriters, the cost of such securities generally includes a fixed underwriting commission or concession. From time to time, soliciting dealer fees are available to the Adviser on the tender of a Fund's securities in so- called tender or exchange offers. Such soliciting dealer fees are in effect recaptured for the Funds by the Adviser. At present no other recapture arrangements are in effect.
Under the Advisory Agreements, in connection with the selection of such brokers or dealers and the placing of such orders, the Adviser is directed to seek for each Fund in its best judgment, prompt execution in an effective manner at the most favorable price. Subject to this requirement of seeking the most favorable price, securities may be bought from or sold to broker- dealers who have furnished statistical, research and other information or services to the Adviser or the Funds, subject to any applicable laws, rules and regulations.
The investment advisory fee that each Fund pays to the Adviser will not be reduced as a consequence of the Adviser's receipt of brokerage and research services. While such services are not expected to reduce the expenses of the Adviser, the Adviser would, through the use of the services, avoid the additional expenses which would be incurred if it should attempt to develop comparable information through its own staff.
In certain instances there may be securities that are suitable as an investment for a Fund, as well as for one or more of the Adviser's other clients (including other Funds). When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could adversely affect the price of or the size of the position obtainable in a security for a Fund. When purchases or sales of the same security for a Fund and for other portfolios managed by the Adviser occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantages available to large volume purchases or sales.
7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional Shares of Beneficial Interest (par value $0.0001 per share) of each series and to divide or combine the shares of any series into a greater or lesser number of shares of that series without thereby changing the proportionate beneficial interests in that series. While there are at present no series of the Trust other than the Funds, the Trust has reserved the right to create and issue additional series of shares, as well as classes of shares within each series. Each share of each Fund represents an equal proportionate interest in the Fund with each other share. Shares of each series participate equally in the earnings, dividends and distribution of net assets of the particular series upon liquidation or dissolution. Shares of each series are entitled to vote separately to approve advisory agreements or changes in investment policy, but shares of all series may vote together in the election or selection of Trustees and accountants for the Trust. In matters affecting only a particular Fund, only shares of that particular Fund are entitled to vote.
Shareholders are entitled to one vote for each share held on matters on which they are entitled to vote. Shareholders in the Trust do not have cumulative voting rights, and shareholders owning more than 50% of the outstanding shares of the Trust may elect all of the Trustees of the Trust if they choose to do so and in such event the other shareholders in the Trust would not be able to elect any Trustee. The Trust is not required to hold, and has no present intention of holding, annual meetings of shareholders, but the Trust will hold special meetings of shareholders when in the judgment of the Trustees it is necessary or desirable to submit matters for a shareholder vote. Shareholders have, under certain circumstances (e.g., upon the application and submission of certain specified documents to the Trustees by a specified number of shareholders), the right to communicate with other shareholders in connection with requesting a meeting of shareholders for the purpose of removing one or more Trustees. Shareholders also have under certain circumstances the right to remove one or more Trustees without a meeting by a declaration in writing by a specified number of shareholders. No material amendment may be made to the Trust's Declaration of Trust without the affirmative vote of the holders of a majority of the outstanding shares of each series affected by the amendment. Shares have no preference, pre-emptive, conversion or similar rights. Shares, when issued, are fully paid and non-assessable, except as set forth below.
The Trust may enter into a merger or consolidation, or sell all or substantially all of its assets (or all or substantially all of the assets belonging to any series of the Trust), if approved by a vote of the holders of two-thirds of the Trust's outstanding shares, voting as a single class, or of the affected series of the Trust, as the case may be, except that if the Trustees of the Trust recommend such sale of assets, merger or consolidation, the approval by vote of the holders of a majority of the Trust's outstanding shares, or of the affected series, would be sufficient. The Trust or any series of the Trust, as the case may be, may be terminated (i) by a vote of a majority of the outstanding voting securities of the Trust or the affected series or (ii) by the Trustees by written notice to the shareholders of the Trust or the affected series. If not so terminated, the Trust will continue indefinitely.
It is not contemplated that share certificates will be issued for the shares. However, upon the written request of a shareholder, the Trustees, in their discretion, may authorize the issuance of share certificates and promulgate appropriate rules and regulations as to their use.
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a business trust may, under certain circumstances, be held personally liable as partners for its obligations and liabilities. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust and provides for indemnification and reimbursement of expenses out of Trust property for any shareholder held personally liable for the obligations of the Trust. The Declaration of Trust of the Trust also provides that the Trust may maintain appropriate insurance (e.g., fidelity bonding, and errors and omissions insurance) for the protection of the Trust, its shareholders, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of the Trust are not binding upon the Trustees individually but only upon the property of the Trust and that the Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust of the Trust protects a Trustee against any liability to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
8. CERTAIN ADDITIONAL TAX MATTERS
Each of the Funds has elected to be treated and intends to qualify each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), by meeting all applicable requirements of Subchapter M, including requirements as to the nature of a Fund's gross income, the amount of Fund distributions, and the composition and holding period of a Fund's portfolio assets. Provided all such requirements are met, no U.S. federal income or excise taxes will be required to be paid by the Funds, although non-U.S. source income earned by each Fund may be subject to non-U.S. withholding taxes. If a Fund should fail to qualify as a "regulated investment company" for any year, the Fund would incur a regular corporate federal income tax upon its taxable income, and distributions by that Fund would generally be taxable as ordinary income to shareholders.
The portion of each Fund's ordinary income dividends attributable to dividends received in respect of equity securities of U.S. issuers is normally eligible for the dividends received deduction for corporations subject to U.S. federal income taxes. Availability of the deduction for particular shareholders is subject to certain limitations, and deducted amounts may be subject to the alternative minimum tax and result in certain basis adjustments. Any dividend that is declared by a Fund in October, November or December of any calendar year, that is payable to shareholders of record in such a month and that is paid the following January will be treated as if received by the shareholders on December 31 of the year in which the dividend is declared.
Any Fund distribution will have the effect of reducing the per share net asset value of shares in the Fund by the amount of the distribution. Shareholders purchasing shares shortly before the record date of any distribution may thus pay the full price for the shares and then effectively receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of any of the Funds by a shareholder that holds such shares as a capital asset will be treated as long-term capital gain or loss if the shares have been held for more than twelve months and otherwise as a short-term capital gain or loss. However, any loss realized upon a disposition of shares in a Fund held for six months or less will be treated as long-term capital loss to the extent of any distributions of net capital gain made with respect to those shares. Any loss realized upon a disposition of shares may also be disallowed under rules relating to wash sales. Gain may be increased (or loss reduced) upon a redemption of shares of a Fund within 90 days after their purchase followed by any purchase (including purchases by exchange or by reinvestment) of shares of that same Fund.
The Funds' transactions in forward contracts will be subject to special tax rules that may affect the amount, timing and character of Fund income and distributions to shareholders. For example, certain positions held by a Fund on the last business day of each taxable year will be marked to market (i.e., treated as if closed out) on that day, and any gain or loss associated with the positions will be treated as 60% long-term and 40% short-term capital gain or loss. Certain positions held by a Fund that substantially diminish its risk of loss with respect to other positions in its portfolio may constitute "straddles," and may be subject to special tax rules that would cause deferral of Fund losses, adjustments in the holding periods of Fund securities and conversion of short-term into long-term capital losses. Certain tax elections exist for straddles that may alter the effects of these rules. The Funds will limit their activities in forward contracts to the extent necessary to meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to non-U.S. investments of the Funds. Investment income received by a Fund from non-U.S. securities may be subject to non-U.S. income taxes withheld at the source. The United States has entered into tax treaties with many other countries that may entitle a Fund to a reduced rate of tax or an exemption from tax on such income. The Funds intend to qualify for treaty-reduced rates where available. It is not possible, however, to determine the Funds' effective rate of non-U.S. tax in advance since the amount of the Funds' respective assets to be invested within various countries is not known.
(A) GrandView Investment Trust (the "Trust") was organized as a business trust under the laws of the Commonwealth of Massachusetts on February 7, 1995. The GrandView REIT Index Fund, GrandView Realty Growth Fund, GrandView Residential Realty Income Fund, Grandview Retail Realty Income Fund, and GrandView Healthcare Realty Income Fund (collectively the "Funds") are open-ended management investment companies, each a series of the GrandView Investment Trust. GrandView REIT Index Fund is a diversified fund and GrandView Realty Growth Fund, GrandView Residential Realty Income Fund, GrandView Retail Realty Income Fund, and GrandView Healthcare Realty Income Fund are non-diversified funds. The Funds have an unlimited number of authorized shares. The Funds had no operations other than organizational matters and activities in connection with the purchase of 2,000 shares from each of the five funds by GrandView Advisers, Inc. It is currently intended that, upon the effectiveness of the Trust's registration statement with the Securities and Exchange Commission, shares will be offered to the public.
(B) The Funds will bear the cost of all organizational expenses including the fees for registering and qualifying the Funds' shares for distribution. Fees and expenses for the organization and registration of shares of the Funds are estimated to be $133,875 and will be amortized over 60 months. In the event any of the initial shares are redeemed by any holder thereof during the 60 month amortization period, redemption proceeds will be reduced by any unamortized organizational expenses in the same proportion as the number of initial shares of the Fund(s) being redeemed bears to the number of initial shares of the Fund(s) outstanding at the time of the redemption.
(C) The Funds intend to qualify each year and elect to be taxed as regulated investment companies under Subchapter M of the United States Internal Revenue Code of 1986, as amended (the Code). Thus, the Funds intend to be relieved of any federal income tax liability by distributing virtually all of their net investment income and capital gains, if any, to their shareholders. The Funds intend to avoid excise taxable tax liability by making the required distributions under the Code.
(D) Subject to the general supervision of the Funds' Board of Trustees and in accordance with the Funds' investment policies, GrandView Advisers, Inc., of East Glastonbury, Connecticut (the "Adviser"), will manage the Funds' investments. For its advisory services, the Adviser will receive a monthly management fee based on an annual percentage of the Funds' daily net assets indicated as follows:
(E) Capital Investment Group, Inc. will be the Funds' Distributor (the "Distributor"). For its services, which include making payments to qualified securities dealers for sales of Fund shares, the Distributor will receive commissions consisting of the portion of the sales charge on sales of fund shares remaining after amounts allowed to securities dealers. Under a Distribution Plan applicable to all of the Funds except for the Grandview REIT Index Fund, payments of up to 0.25% annually of a Fund's average net assets may be made to the Distributor and others to compensate and reimburse them for activities intended to result in the sale of Fund shares and the servicing of accounts of Fund shareholders.
American Health Properties, Inc. 100 $2,162 Avalon Properties, Inc. 100 2,038 Camden Property Trust 200 4,425 Carr Realty Corporation 100 1,875 Chelsea GCA Realty, Inc. 100 2,987 Federal Realty Investment Trust 300 7,013 First Industrial Realty Trust, Inc 400 8,000 HGI Realty, Inc. 100 2,400 Merry Land & Investment Company 200 4,225 New Plan Realty Trust 100 2,212 Oasis Residential, Inc. 100 2,250 ROC Communities, Inc. 100 2,312 Realty Income Corporation 550 11,619 Security Capital Pacific Trust 500 9,500 Taubman Centers, Inc. 200 2,000 Washington Real Estate Investment 200 3,050 Weingarten Realty Investors 100 3,538 Wellsford Residential Property Trust 550 11,756
Total Common Stocks (Cost $88,384) 88,637
American Health Properties, Inc. 10 163
Total Preferred Stocks (Cost $196) 163
Total Value of Investments (Cost $88,580) 81.31% 88,800 Other Assets Less Liabilities 18.69% 20,406
(a) Aggregate cost for federal income tax purposes is the same. Unrealized appreciation (depreciation) of securities for federal income tax purposes is as follow:
See acccompanying notes to financial statements
STATEMENT OF ASSETS AND LIABILITIES
Investments at value (Cost $88,580) $88,800 Deferred organization expenses, net (note 3) 26,775
(applicable to 10,710 shares outstanding; unlimited shares of no par value beneficial interest authorized) $109,206
NET ASSET VALUE AND REPURCHASE PRICE PER SHARE ($109,206 / 10,710 shares) $10.20
(100 / 97 of $10.20 adjusted to nearest cent) $10.51
Undistributed net investment loss (56) Net unrealized appreciation on investments 220
See accompanying notes to financial statements
Investment advisory fees (note 2) 36 Fund administration fees (note 2) 23 Registration and filing administration fees 129
Expense reimbursements (note 2) (355) Investment advisory fees waived (note 2) (36) Fund administration fees waived (note 2) (16)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Increase in unrealized appreciation on investments 220
Net realized and unrealized gain on investments 220
Net increase in net assets resulting from operations $1,333
See accompanying notes to financial statements
STATEMENTS OF CHANGES IN NET ASSETS
Increase in unrealized appreciation on investments 220
Net increase in net assets resulting from operations 1,333
(a)Increase in net assets resulting from
Total increase in net assets 109,206
(a) A summary of capital share activity follows: For the period from July 3, 1995
See accompanying notes to financial statements
(For a Share Outstanding Throughout the Period)
Net Asset Value, Beginning of Period $10.00
Net realized and unrealized gain on investments 0.21
Total from investment operations 0.30
Net Asset Value, End of Period $10.20
Net assets, end of period $109,206
Ratio of expenses to average net assets
Ratio of net investment income to average net assets
(a) Does not include sales load.
See accompanying notes to financial statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The GrandView REIT Index Fund (the "Fund") is a non-diversified series of shares of beneficial interest of GrandView Investment Trust (the "Trust"). The Trust, an open-end registered management investment company, was organized on February 6, 1995 as a Massachusetts Business Trust and is registered under the Investment Company Act of 1940. The Fund began operations on July 3, 1995. The following is a summary of significant accounting policies followed by the Fund.
A. Security Valuation - The Fund's investments in securities are carried at market value. Securities listed on an exchange or quoted on a national market system are valued at 4:00 p.m., New York time on the day of valuation. Other securities traded in the over-the- counter market and listed securities for which no sale was reported on that date are valued at the most recent bid price. Securities for which market quotations are not readily available, if any, are valued by an independent pricing service or determined following procedures approved by the Board of Trustees. Short-term investments are valued at cost which approximates market value.
B. Federal Income Taxes - No provision has been made for federal income taxes since it is the policy of the Fund to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to make sufficient distributions of taxable income to relieve it from all federal income taxes.
C. Investment Transactions - Investment transactions are recorded on the trade date. Realized gains and losses are determined using the specific identification cost method. Interest income is recorded daily on the accrual basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date.
D. Distributions to Shareholders - The Fund generally declares dividends quarterly payable on a date selected by the Trust's Trustees. In addition, distributions may be made annually in December out of net realized gains through October 31 of that year. The Fund may make a supplemental distribution subsequent to the end of its fiscal year ending March 31.
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, GrandView Advisers, Inc. (the "Advisor") provides the Fund with a continuous program of supervision of the Fund's assets, including the composition of its portfolio, and furnishes advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. As compensation for its services, the Advisor receives a fee at the annual rate of 0.35% of the Fund's average daily net assets.
Currently, the Fund does not offer its shares for sale in states which require limitations to be placed on its expenses. The Advisor currently intends to voluntarily waive or reimburse all or a portion of its fee to limit total Fund operating expenses to 1.05% of the average daily net assets of the Fund. There can be no assurance that the foregoing voluntary fee waivers or reimbursements will continue. The Advisor has voluntarily waived its fee amounting to $36 ($0.01 per share) and has voluntarily reimbursed a portion of the Fund's operating expenses for the period ended September 30, 1995. The total fees waived and expenses reimbursed by the Advisor amounted to $391.
The Fund's administrator, The Nottingham Company, Inc. (the "Administrator"), provides administrative services to and is generally responsible for the overall management and day-to-day operations of the Fund pursuant to an accounting and administrative agreement with the Trust. As compensation for its services, the Administrator receives a fee at the annual rate of 0.225% of the Fund's first $25 million of average daily net assets, 0.20% of the next $25 million of average daily net assets,and 0.175% of average daily net assets over $50 million. Addition- ally, the Administrator charges the Fund for servicing of shareholder accounts and registration of the Fund's shares. The Administrator also charges the Fund for certain expenses involved with the daily valuation of portfolio securities. The Administrator has voluntarily waived a portion of its fees and reimbursed the Fund for expenses amounting to $16 for the period ended September 30, 1995.
Capital Investment Group, Inc. (the "Distributor") serves as the Fund's principal underwriter and distributor. The Distributor receives any sales charges imposed on purchases of shares and re-allocates a portion of such charges to dealers through whom the sale was made, if any. For the period from July 3, 1995 to September 30, 1995, the Distributor retained sales charges in the amount of $17.
Certain Trustees and officers of the Trust are also officers of the Advisor, the distributor or the Administrator.
At September 30, 1995, the Advisor held 2,000 or 19% of the Fund shares outstanding.
NOTE 3 - DEFERRED ORGANIZATION EXPENSES
All expenses of the Fund incurred in connection with its organization and the registration of its shares have been assumed by the Fund.
The organization expenses are being amortized over a period of sixty months. Investors purchasing shares of the Fund bear such expenses only as they are amortized against the Fund's investment income.
In the event any of the initial shares of the Fund are redeemed during the amortization period, the redemption proceeds will be reduced by a pro rata portion of any unamortized organization expenses in the same proportion as the number of initial shares being redeemed bears to the number of initial shares of the Fund outstanding at the time of the redemption.
NOTE 4 - PURCHASES AND SALES OF INVESTMENTS
Purchases of investments, other than short-term investments, aggregated $88,580 for the period ended September 30, 1995. There were no sales of investments during this period.
NOTE 5 - DISTRIBUTIONS TO SHAREHOLDERS
For the period ended September 30, 1995, the Fund made distributions classified as ordinary income in the amount of $1,169. Shareholders should consult a tax advisor on how to report distributions for state and local income tax purposes.
Real Estate Investment Trust - 87.47% (a)Angeles Participating Mortgage Trus 3,000 $1,687 (a)Banyan Hotel Investment Fund 1,500 1,875 Bedford Property Investors, Inc. 200 1,325 Burnham Pacific Properties, Inc. 200 2,350 Crescent Real Estate Equities, Inc. 200 6,150 Crown American Realty Trust 300 2,475 First Union Real Estate Investments 200 1,475 G&L Realty Corporation 200 2,025 Highwoods Properties, Inc. 200 5,275 (a)Homeplex Mortgage Investments Corpo 1,000 1,750 Innkeepers USA Trust 600 5,700 IRT Property Company 400 3,850 Jameson Inns, Inc. 400 3,550 (a)Koger Equity, Inc. 400 3,950 (a)Meridian Point Realty Trust VII Com 2,000 1,750 MGI Properties, Inc. 300 4,650 (a)Mortgage and Realty Trust 3,000 937 RFS Hotel Investors, Inc. 200 3,050 RPS Realty Trust 500 2,250 RYMAC Mortgage Investment Corporati 5,700 6,412 Sizeler Property Investors, Inc. 300 2,813 (a)TIS Mortgage Investment Company 1,000 2,000 United Mobile Homes, Inc. 300 2,925 (a)Vinland Property Trust 2,900 3,263 Winston Hotels, Inc. 500 5,625
Total Common Stocks (Cost $79,041) 79,112
REPURCAHSE AGREEMENT (b) - 11.55% 5.34%, due October 2, 1995
Total Value of Investments (Cost $89,489) 99.03% 89,560 Other Assets Less Liabilities 0.97% 880
(b) Joint repurchase agreement entered into September 30, 1995, with a maturity value of $15,080,609 collateralized by $11,129,000 U.S. Treasury Notes, 9.8750%, due November 15, 2015. The aggregate market value of the collateral at September 30, 1995 was $15,374,653. The Fund's pro rata interest in the collateral at September 30, 1995 was $10,655. The Fund's pro rata interest in the joint repurchase agreement is taken into possession by the Fund upon entering into the repurchase agreement. The collateral is marked to market daily to ensure its market value is at least 102 percent of the sales price of the repurchase agreement.
(c) Aggregate cost for federal income tax purposes is the same. Unrealized appreciation (depreciation) of securities for federal income tax purposes is as follow:
See acccompanying notes to financial statements
STATEMENT OF ASSETS AND LIABILITIES
Investments at value (Cost $89,488) $89,561 Deferred organization expenses, net (note 4) 26,775 Due from advisor (note 2) 508
Disbursements in excess of cash on demand deposit 69
(applicable to 9,233 shares outstanding; unlimited shares of no par value beneficial interest authorized) $90,440
NET ASSET VALUE AND REPURCHASE PRICE PER SHARE ($90,440 / 9,233 shares) $9.80
(100 / 95.5 of $9.80 adjusted to nearest cent) $10.26
Undistributed net investment loss 64 Undistributed net realized gain on investments 784 Net unrealized appreciation on investments 72
See accompanying notes to financial statements
Investment advisory fees (note 2) 102 Fund administration fees (note 2) 31 Registration and filing administration fees 146
Expense reimbursements (note 2) (574) Investment advisory fees waived (note 2) (102) Fund administration fees waived (note 2) (31)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from security transactions 784 Increase in unrealized appreciation on investments 72
Net realized and unrealized gain on investments 856
Net increase in net assets resulting from operations $1,242
See accompanying notes to financial statements
STATEMENTS OF CHANGES IN NET ASSETS
Net realized gain from investment transactions 784 Increase in unrealized appreciation on
Net increase in net assets resulting from
Net realized gain from investment transactions 0
Decrease in net assets resulting from distributions (322)
(a)Increase in net assets resulting from
Total increase in net assets 90,440
(a) A summary of capital share activity follows: For the period from July 3, to
See accompanying notes to financial statements
(For a Share Outstanding Throughout the Period)
Net Asset Value, Beginning of Period $10.00
Net realized and unrealized gain on investments (0.20)
Total from investment operations (0.19)
Net Asset Value, End of Period $9.80
Net assets, end of period $90,440
Ratio of expenses to average net assets
Ratio of net investment income to average net assets After expense reimbursements 0.93% (b)
(a) Does not include sales load.
See accompanying notes to financial statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The GrandView Realty Growth Fund (the "Fund") is a non-diversified series of shares of beneficial interest of GrandView Investment Trust (the "Trust"). The Trust, an open-end registered management investment company, was organized on February 6, 1995 as a Massachusetts Business Trust and is registered under the Investment Company Act of 1940. The Fund began operations on July 3, 1995. The following is a summary of significant accounting policies followed by the Fund.
A. Security Valuation - The Fund's investments in securities are carried at market value. Securities listed on an exchange or quoted on a national market system are valued at 4:00 p.m., New York time on the day of valuation. Other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the most recent bid price. Securities for which market quotations are not readily available, if any, are valued by an independent pricing service or determined following procedures approved by the Board of Trustees. Short-term investments are valued at cost which approximates market value.
B. Federal Income Taxes - No provision has been made for federal income taxes since it is the policy of the Fund to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to make sufficient distributions of taxable income to relieve it from all federal income taxes.
C. Investment Transactions - Investment transactions are recorded on the trade date. Realized gains and losses are determined using the specific identification cost method. Interest income is recorded daily on the accrual basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date.
D. Distributions to Shareholders - The Fund generally declares dividends semi-annually payable on a date selected by the Trust's Trustees. In addition, distributions may be made annually in December out of net realized gains through October 31 of that year. The Fund may make a supplemental distribution subsequent to the end of its fiscal year ending March 31.
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, GrandView Advisers, Inc. (the "Advisor") provides the Fund with a continuous program of supervision of the Fund's assets, including the composition of its portfolio, and furnishes advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. As compensation for its services, the Advisor receives a fee at the annual rate of 1.00% of the Fund's average daily net assets.
Currently, the Fund does not offer its shares for sale in states which require limitations to be placed on its expenses. The Advisor currently intends to voluntarily waive or reimburse all or a portion of its fee to limit total Fund operating expenses to 2.00% of the average daily net assets of the Fund. There can be no assurance that the foregoing voluntary fee waivers or reimbursements will continue. The Advisor has voluntarily waived its fee amounting to $102 ($0.01 per share) and has voluntarily reimbursed a portion of the Fund's operating expenses for the period ended September 30, 1995. The total fees waived and expenses reimbursed by the Advisor amounted to $676.
The Fund's administrator, The Nottingham Company, Inc. (the "Administrator"), provides administrative services to and is generally responsible for the overall management and day-to-day operations of the Fund pursuant to an accounting and administrative agreement with the Trust. As compensation for its services, the Administrator receives a fee at the annual rate of 0.30% of the Fund's first $25 million of average daily net assets, 0.275% of the next $25 million of average daily net assets,and 0.225% of average daily net assets over $50 million. Additionally, the Administrator charges the Fund for servicing of shareholder accounts and registration of the Fund's shares. The Administrator also charges the Fund for certain expenses involved with the daily valuation of portfolio securities. The Administrator has voluntarily waived a portion of its fees amounting to $31 for the period ended September 30, 1995.
Capital Investment Group, Inc. (the "Distributor") serves as the Fund's principal underwriter and distributor. The Distributor receives any sales charges imposed on purchases of shares and re-allocates a portion of such charges to dealers through whom the sale was made, if any. For the period from July 3, 1995 to September 30, 1995, the Distributor retained sales charges of $8.
Certain Trustees and officers of the Trust are also officers of the Advisor, the distributor or the Administrator.
At September 30, 1995, the Advisor held 2,000 shares or 22% of the Fund shares outstanding.
NOTE 3 - DISTRIBUTION COSTS
The Board of Trustees, including a majority of the Trustees who are not "interested persons" of the Trust as defined in the Investment Company Act of 1940 (the "Act"), adopted a distribution plan pursuant to Rule 12b-1 of the Act (the "Plan"). The Act regulates the manner in which a regulated investment company may assume costs of distributing and promoting the sales of its shares and servicing of its shareholder accounts.
The Plan provides that the Fund may incur certain costs, which may not exceed 0.25% per annum of the Fund's average daily net assets for each year elapsed subsequent to adoption of the Plan, for payment to the distributor for items such as advertising expenses, selling expenses, commissions, travel or other expenses reasonably intended to result in sales of shares of the Fund or support servicing of shareholder accounts.
NOTE 4 - DEFERRED ORGANIZATION EXPENSES
All expenses of the Fund incurred in connection with its organization and the registration of its shares have been assumed by the Fund.
The organization expenses are being amortized over a period of sixty months. Investors purchasing shares of the Fund bear such expenses only as they are amortized against the Fund's investment income.
In the event any of the initial shares of the Fund are redeemed during the amortization period, the redemption proceeds will be reduced by a pro rata portion of any unamortized organization expenses in the same proportion as the number of initial shares being redeemed bears to the number of initial shares of the Fund outstanding at the time of the redemption.
NOTE 5 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales investments, other than short-term investments, aggregated $80,068 and $ 1,811 respectively, for the period ended September 30, 1995.
GrandView Residential Realty Income Fund
Real Estate Investment Trust -78.28% Asset Investors Corporation 500 $1,375 ASR Investments Corporation 400 7,200 Boddie-Noell Properties, Inc. 200 2,575 Bay Apartment Communities, Inc. 100 2,150 Columbus Realty Trust 200 3,800 Essex Property Trust, Inc. 300 5,287 Irvine Apartment Communitites, Inc. 100 1,762 Merry Land & Investment Company, Inc. 100 2,113 Pacific Gulf Properties, Inc. 200 3,250 Real Estate Investment Trust of Californi 200 3,325 American Real Estate Investment Corporati 400 3,300 Sizeler Property Investors, Inc. 200 1,875 South West Property Trust 200 2,550 United Dominion Realty 200 2,850 Walden Residential Properties, Inc. 100 1,888
Total Common Stocks (Cost $45,642) 45,300
REPURCHASE AGREEMENT (a) - 19.85% Wachovia Bank 11,487 6.45% 10-01-95 11,487
Total Value of Investments (Cost $57,129)(b) 98.13% 56,787 Other Assets Less Liabilities 1.87% 1,083
(a) Joint repurchase agreement entered into September 30, 1995, with a maturity value of $15,080,609 collateralized by $11,129,000 U.S. Treasury Notes, 9.8750%, due November 15, 2015. The aggregate market value of the collateral at September 30, 1995 was $15,374,653. The Fund's pro rata interest in the collateral at September 30, 1995 was $11,715. The Fund's pro rata interest in the joint repurchase agreement is taken into possession by the Fund upon entering into the repurchase agreement. The collateral is marked to market daily to ensure its market value is at least 102 percent of the sales price of the repurchase agreement.
(b) Aggregate cost for federal income tax purposes is the same. Unrealized appreciation (depreciation) of securities for federal income tax purposes is as follow:
See acccompanying notes to financial statements
GrandView Residential Realty Income Fund
STATEMENT OF ASSETS AND LIABILITIES
Investments at value (Cost $57,129) $56,787 Deferred organization expenses, net (note 4) 26,775
Disbursements in excess of cash on demand deposit 150
(applicable to 5,860 shares outstanding; unlimited shares of no par value beneficial interest authorized) $57,870
NET ASSET VALUE AND REPURCHASE PRICE PER SHARE ($57,870 / 5,860 shares) $9.87
(100 / 95.5 of $9.87 adjusted to nearest cent) $10.34
Undistributed net investment income 327 Net unrealized depreciation on investments (342) See accompanying notes to financial statements
GrandView Residential Realty Income Fund
For the period ended September 30, 1995
Registration and filing administration fees 278 Investment advisory fees (note 2) 55 Fund administration fees (note 2) 24
Expense reimbursements (note 2) (1,958) Investment advisory fees waived (note 2) (55) Fund administration fees waived (note 2) (2)
Increase in unrealized depreciation on investments (342)
Unrealized loss on investments (342)
Net increase in net assets resulting from operations $277
See accompanying notes to financial statements
GrandView Residential Realty Income Fund
STATEMENTS OF CHANGES IN NET ASSETS
Increase in unrealized depreciation on investments (342)
Net increase in net assets resulting from operations 277
Decrease in net assets resulting from distributions (292)
Increase in net assets resulting from capital share transactions (a) 57,885
Total increase in net assets 57,870
(a) A summary of capital share activity follows: For the period from July 3, 1995
See accompanying notes to financial statements
GrandView Residential Realty Income Fund
(For a Share Outstanding Throughout the Period)
Net Asset Value, Beginning of Period $10.00
Net unrealized loss on investments (0.19)
Total from investment operations (0.08)
Net Asset Value, End of Period $9.87
Net assets, end of period $57,870
Ratio of expenses to average net assets
Ratio of net investment income to average net assets
(a) Does not include sales load.
See accompanying notes to financial statements
GrandView Residential Realty Income Fund
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The GrandView Residential Realty Income Fund (the "Fund") is a non- diversified series of shares of beneficial interest of GrandView Investment Trust (the "Trust"). The Trust, an open-end registered management investment company, was organized on February 6, 1995 as a Massachusetts Business Trust and is registered under the Investment Company Act of 1940. The Fund began operations on July 3, 1995. The following is a summary of significant accounting policies followed by the Fund.
A. Security Valuation - The Fund's investments in securities are carried at market value. Securities listed on an exchange or quoted on a national market system are valued at 4:00 p.m., New York time on the day of valuation. Other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the most recent bid price. Securities for which market quotations are not readily available, if any, are valued by an independent pricing service or determined following procedures approved by the Board of Trustees. Short-term investments are valued at cost which approximates market value.
B. Federal Income Taxes - No provision has been made for federal income taxes since it is the policy of the Fund to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to make sufficient distributions of taxable income to relieve it from all federal income taxes.
C. Investment Transactions - Investment transactions are recorded on the trade date. Realized gains and losses are determined using the specific identification cost method. Interest income is recorded daily on the accrual basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date.
D. Distributions to Shareholders - The Fund generally declares dividends monthly payable on a date selected by the Trust's Trustees. In addition, distributions may be made annually in December out of net realized gains through October 31 of that year. The Fund may make a supplemental distribution subsequent to the end of its fiscal year ending March 31.
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, GrandView Advisers, Inc. (the "Advisor") provides the Fund with a continuous program of supervision of the Fund's assets, including the composition of its portfolio, and furnishes advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. As compensation for its services, the Advisor receives a fee at the annual rate of 0.70% of the Fund's average daily net assets.
Currently, the Fund does not offer its shares for sale in states which require limitations to be placed on its expenses. The Advisor currently intends to voluntarily waive or reimburse all or a portion of its fee to limit total Fund operating expenses to 1.75% of the average daily net assets of the Fund. There can be no assurance that the foregoing voluntary fee waivers or reimbursements will continue. The Advisor has voluntarily waived its fee amounting to $55 ($0.02 per share) and has voluntarily reimbursed a portion of the Fund's operating expenses for the period ended September 30, 1995. The total fees waived and expenses reimbursed by the Advisor amounted to $2,013.
GrandView Residential Realty Income Fund
The Fund's administrator, The Nottingham Company, Inc. (the "Administrator"), provides administrative services to and is generally responsible for the overall management and day-to-day operations of the Fund pursuant to an accounting and administrative agreement with the Trust. As compensation for its services, the Administrator receives a fee at the annual rate of 0.30% of the Fund's first $25 million of average daily net assets, 0.275% of the next $25 million of average daily net assets,and 0.225% of average daily net assets over $50 million. Additionally, the Administrator charges the Fund for servicing of shareholder accounts and registration of the Fund's shares. The Administrator also charges the Fund for certain expenses involved with the daily valuation of portfolio securities. The Administrator has voluntarily waived a portion of its fees and reimbursed the Fund for expenses amounting to $2 for the period ended September 30, 1995.
Capital Investment Group, Inc. (the "Distributor") serves as the Fund's principal underwriter and distributor. The Distributor receives any sales charges imposed on purchases of shares and re-allocates a portion of such charges to dealers through whom the sale was made, if any. For the period from July 3, 1995 to September 30, 1995, the Distributor retained sales charges in the amount of $8.
Certain Trustees and officers of the Trust are also officers of the Advisor, the distributor or the Administrator.
At September 30, 1995, the Advisor held 2,000 shares or 34% of the Fund shares outstanding.
NOTE 3 - DISTRIBUTION COSTS
The Board of Trustees, including a majority of the Trustees who are not "interested persons" of the Trust as defined in the Investment Company Act of 1940 (the "Act"), adopted a distribution plan pursuant to Rule 12b-1 of the Act (the "Plan"). The Act regulates the manner in which a regulated investment company may assume costs of distributing and promoting the sales of its shares and servicing of its shareholder accounts.
The Plan provides that the Fund may incur certain costs, which may not exceed 0.25% per annum of the Fund's average daily net assets for each year elapsed subsequent to adoption of the Plan, for payment to the distributor for items such as advertising expenses, selling expenses, commissions, travel or other expenses reasonably intended to result in sales of shares of the Fund or support servicing of shareholder accounts. The distributor has voluntarily waived all of such expenses under the Plan for the period ended September 30, 1995.
NOTE 4 - DEFERRED ORGANIZATION EXPENSES
All expenses of the Fund incurred in connection with its organization and the registration of its shares have been assumed by the Fund.
The organization expenses are being amortized over a period of sixty months. Investors purchasing shares of the Fund bear such expenses only as they are amortized against the Fund's investment income.
GrandView Residential Realty Income Fund
In the event any of the initial shares of the Fund are redeemed during the amortization period, the redemption proceeds will be reduced by a pro rata portion of any unamortized organization expenses in the same proportion as the number of initial shares being redeemed bears to the number of initial shares of the Fund outstanding at the time of the redemption.
NOTE 5 - PURCHASES AND SALES OF INVESTMENTS
Purchases of investments, other than short-term investments, aggregated $45,642 for the period ended September 30, 1995. There were no sales of investments during this period.
NOTE 6 - DISTRIBUTIONS TO SHAREHOLDERS
For the period ended September 30, 1995, the Fund made distributions classified as ordinary income in the amount of $292. Shareholders should consult a tax advisor on how to report distributions for state and local income tax purposes.
GrandView Retail Realty Income Fund
Alexander Haagen Properties, Inc. 100 $1,163 Burnham Pacific Properties, Inc. 400 4,700 Crown American Realty Trust 300 2,475 DeBartolo Realty Corporation 200 2,800 Excel Realty Trust, Inc. 200 3,950 Factory Stores of America, Inc. 200 3,975 First Washington Realty Trust, Inc. 200 3,500 IRT Property Company 200 1,925 Kranzco Realty Trust 300 5,063 Malan Realty Investors, Inc. 200 3,125 Mark Centers Trust 200 2,450 Mid-Atlantic Realty Trust 300 2,681 Regency Realty Corporation 200 3,525 Sizeler Property Investors, Inc. 200 1,875 Tucker Properties Corporation 200 2,225 Western Investment Real Estate Trust 200 2,275
Total Common Stocks (Cost $55,990) 55,232
REPURCHASE AGREEMENT (a) - 4.58% 6.45%, due October 1, 1995
Total Value of Investments (Cost $58,693) 98.13% 57,935 Other Assets Less Liabilities 1.86% 1,101
(a) Joint repurchase agreement entered into September 30, 1995, with a maturity value of $15,080,609 collateralized by $11,129,000 U.S. Treasury Notes, 9.8750%, due November 15, 2015. The aggregate market value of the collateral at September 30, 1995 was $15,374,653. The Fund's pro rata interest in the collateral at September 30, 1995 was $2,752. The Fund's pro rata interest in the joint repurchase agreement is taken into possession by the Fund upon entering into the repurchase agreement. The collateral is marked to market daily to ensure its market value is at least 102 percent of the sales price of the repurchase agreement.
(b) Aggregate cost for federal income tax purposes is the same. Unrealized appreciation (depreciation) of securities for federal income tax purposes is as follow:
See acccompanying notes to financial statements
GrandView Retail Realty Income Fund
STATEMENT OF ASSETS AND LIABILITIES
Investments at value (Cost $58,694) $57,935 Deferred organization expenses, net (note 4) 26,775
(applicable to 6,041 shares outstanding; unlimited shares of no par value beneficial interest authorized) $59,036
NET ASSET VALUE AND REPURCHASE PRICE PER SHARE ($59,036 / 6,041 shares) $9.77
(100 / 95.5 of $9.77 adjusted to nearest cent) $10.23
Undistributed net investment income 532 Net unrealized depreciation on investments (759)
See acccompanying notes to financial statements
GrandView Retail Realty Income Fund
Investment advisory fees (note 2) 54 Fund administration fees (note 2) 21 Registration and filing administration fees 269
Expense reimbursements (note 2) (2,086) Investment advisory fees waived (note 2) (54)
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Increase in unrealized depreciation on investments (759)
Net realized and unrealized loss on investments (759)
Net increase in net assets resulting from operations $104
See accompanying notes to financial statements
GrandView Retail Realty Income Fund
STATEMENTS OF CHANGES IN NET ASSETS
Increase in unrealized depreciation on investments (759)
Net increase in net assets resulting from
Decrease in net assets resulting from distributions (331)
(a)Increase in net assets resulting from
Total increase in net assets 59,036
(a) A summary of capital share activity follows: For the period from July 3, 1995
See accompanying notes to financial statements
GrandView Retail Realty Income Fund
(For a Share Outstanding Throughout the Period)
Net Asset Value, Beginning of Period $10.00
Net realized and unrealized loss on investments (0.32)
Total from investment operations (0.17)
Net Asset Value, End of Period $9.77
Net assets, end of period $59,036
Ratio of expenses to average net assets
Ratio of net investment income(loss) to average net assets Before expense reimbursements (16.55%) (b)
(a) Does not include sales load (b) Annualized.
See accompanying notes to financial statements
GrandView Retail Realty Income Fund
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The GrandView Retail Realty Income Fund (the "Fund") is a non-diversified series of shares of beneficial interest of GrandView Investment Trust (the "Trust"). The Trust, an open-end registered management investment company, was organized on February 6, 1995 as a Massachusetts Business Trust and is registered under the Investment Company Act of 1940. The Fund began operations on July 3, 1995. The following is a summary of significant accounting policies followed by the Fund.
A. Security Valuation - The Fund's investments in securities are carried at market value. Securities listed on an exchange or quoted on a national market system are valued at 4:00 p.m., New York time on the day of valuation. Other securities traded in the over-the- counter market and listed securities for which no sale was reported on that date are valued at the most recent bid price. Securities for which market quotations are not readily available, if any, are valued by an independent pricing service or determined following procedures approved by the Board of Trustees. Short-term investments are valued at cost which approximates market value.
B. Federal Income Taxes - No provision has been made for federal income taxes since it is the policy of the Fund to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to make sufficient distributions of taxable income to relieve it from all federal income taxes.
C. Investment Transactions - Investment transactions are recorded on the trade date. Realized gains and losses are determined using the specific identification cost method. Interest income is recorded daily on the accrual basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date.
D. Distributions to Shareholders - The Fund generally declares dividends monthly payable on a date selected by the Trust's Trustees. In addition, distributions may be made annually in December out of net realized gains through October 31 of that year. The Fund may make a supplemental distribution subsequent to the end of its fiscal year ending March 31.
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, GrandView Advisers, Inc. (the "Advisor") provides the Fund with a continuous program of supervision of the Fund's assets, including the composition of its portfolio, and furnishes advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. As compensation for its services, the Advisor receives a fee at the annual rate of 0.70% of the Fund's average daily net assets.
Currently, the Fund does not offer its shares for sale in states which require limitations to be placed on its expenses. The Advisor currently intends to voluntarily waive or reimburse all or a portion of its fee to limit total Fund operating expenses to 1.75% of the average daily net assets of the Fund. There can be no assurance that the foregoing voluntary fee waivers or reimbursements will continue. The Advisor has voluntarily waived its fee amounting to $54 ($0.02 per share) and has voluntarily reimbursed a portion of the Fund's operating expenses for the period ended September 30, 1995. The total fees waived and expenses reimbursed by the Advisor amounted to $2,140.
GrandView Retail Realty Income Fund
The Fund's administrator, The Nottingham Company, Inc. (the "Administrator"), provides administrative services to and is generally responsible for the overall management and day-to-day operations of the Fund pursuant to an accounting and administrative agreement with the Trust. As compensation for its services, the Administrator receives a fee at the annual rate of 0.30% of the Fund's first $25 million of average daily net assets, 0.275% of the next $25 million of average daily net assets,and 0.225% of average daily net assets over $50 million. Addition- ally, the Administrator charges the Fund for servicing of shareholder accounts and registration of the Fund's shares. The Administrator also charges the Fund for certain expenses involved with the daily valuation of portfolio securities.
Capital Investment Group, Inc. (the "Distributor") serves a s the Fund's principal underwriter and distributor. The Distributor receives any sales charges imposed on purchases of shares and re-allocates a portion of such charges to dealers through whom the sale was made, if any. For the period from July 3, 1995 to September 30, 1995, there were no sales charges distributed.
Certain Trustees and officers of the Trust are also officers of the Advisor, the distributor or the Administrator.
At September 30, 1995, the Advisor held 2,025 shares or 34% of the Fund shares outstanding.
NOTE 3 - DISTRIBUTION COSTS
The Board of Trustees, including a majority of the Trustees who are not "interested persons" of the Trust as defined in the Investment Company Act of 1940 (the "Act"), adopted a distribution plan pursuant to Rule 12b-1 of the Act (the "Plan"). The Act regulates the manner in which a regulated investment company may assume costs of distributing and promoting the sales of its shares and servicing of its shareholder accounts.
The Plan provides that the Fund may incur certain costs, which may not exceed 0.25% per annum of the Fund's average daily net assets for each year elapsed subsequent to adoption of the Plan, for payment to the distributor for items such as advertising expenses, selling expenses, commissions, travel or other expenses reasonably intended to result in sales of shares of the Fund or support servicing of shareholder accounts. The distributor has voluntarily waived all of such expenses under the Plan for the period ended September 30, 1995.
NOTE 4 - DEFERRED ORGANIZATION EXPENSES
All expenses of the Fund incurred in connection with its organization and the registration of its shares have been assumed by the Fund.
The organization expenses are being amortized over a period of sixty months. Investors purchasing shares of the Fund bear such expenses only as they are amortized against the Fund's investment income.
GrandView Retail Realty Income Fund
In the event any of the initial shares of the Fund are redeemed during the amortization period, the redemption proceeds will be reduced by a pro rata portion of any unamortized organization expenses in the same proportion as the number of initial shares being redeemed bears to the number of initial shares of the Fund outstanding at the time of the redemption.
NOTE 5 - PURCHASES AND SALES OF INVESTMENTS
Purchases of investments, other than short-term investments, aggregated $55,990 for the period ended September 30, 1995. There were no sales of investments during this period.
NOTE 6 - DISTRIBUTIONS TO SHAREHOLDERS
For the period ended September 30, 1995, the Fund made distributions classified as ordinary income in the amount of $331. Shareholders should consult a tax advisor on how to report distributions for state and local income tax purposes.
GrandView Healthcare Realty Income Fund
American Health Properties, Inc. 100 $2,162 Capstone Capital Trust, Inc. 400 7,550 G&L Realty Corporation 500 5,062 Health Care Property Investors, Inc. 100 3,387 Health Care REIT, Inc. 600 9,375 Health and Retirement Property Trust 500 7,813 Healthcare Realty Trust, Inc. 100 2,075 LTC Properties, Inc. 200 2,875 National Health Investors, Inc. 100 3,025 Nationwide Health Properties, Inc. 100 4,100 OMEGA Healthcare Investors, Inc. 100 2,675 Universal Health Realty Income Trust 700 11,638
Total Common Stocks (Cost $65,630) 65,200
REPURCAHSE AGREEMENT (b) - 6.80% 6.45%, due October 1, 1995
Total Value of Investments (Cost $70,524) 97.44% 70,094 Other Assets Less Liabilities 2.56% 1,841
(a) Joint repurchase agreement entered into September 30, 1995, with a maturity value of $15,080,609 collateralized by $11,129,000 U.S. Treasury Notes, 9.8750%, due November 15, 2015. The aggregate market value of the collateral at September 30, 1995 was $15,374,653. The Fund's pro rata interest in the collateral at September 30, 1995 was $4,997. The Fund's pro rata interest in the joint repurchase agreement is taken into possession by the Fund upon entering into the repurchase agreement. The collateral is marked to market daily to ensure its market value is at least 102 percent of the sales price of the repurchase agreement.
(b) Aggregate cost for federal income tax purposes is the same. Unrealized appreciation (depreciation) of securities for tax purposes is as follow
See acccompanying notes to financial statements
GrandView Healthcare Realty Income Fund
STATEMENT OF ASSETS AND LIABILITIES
Investments at value (Cost $70,524) $70,094 Deferred organization expenses, net (note 4) 26,775
(applicable to 7,164 shares outstanding; unlimited shares of no par value beneficial interest authorized) $71,935
NET ASSET VALUE AND REPURCHASE PRICE PER SHARE ($71,935 / 7,164 shares) $10.04
(100 / 95.5 of $10.04 adjusted to nearest cent) $10.51
Undistributed net investment income 377 Net unrealized depreciation on investments (430)
See accompanying notes to financial statements
GrandView Healthcare Realty Income Fund
Investment advisory fees (note 2) 63 Fund administration fees (note 2) 25 Registration and filing administration fees 269
Expense reimbursements (note 2) (2,019) Investment advisory fees waived (note 2) (63)
REALIZED AND UNREALIZED (LOSS) ON INVESTMENTS
Increase in unrealized depreciation on investments (430)
Net realized and unrealized loss on investments (430)
Net increase in net assets resulting from operations $322
See accompanying notes to financial statements
GrandView Healthcare Realty Income Fund
STATEMENTS OF CHANGES IN NET ASSETS
Increase in unrealized depreciation on investments (430)
Net increase in net assets resulting from
Decrease in net assets resulting from distributions (375)
(a)Increase in net assets resulting from
Total increase in net assets 71,935
(a) A summary of capital share activity follows: For the period from July 3, 1995 to
See accompanying notes to financial statements
GrandView Healthcare Realty Income Fund
(For a Share Outstanding Throughout the Period)
Net Asset Value, Beginning of Period $10.00
Net realized and unrealized loss on investments (0.01)
Total from investment operations 0.09
Net Asset Value, End of Period $10.04
Net assets, end of period $71,935
Ratio of expenses to average net assets
Ratio of net investment income(loss) to average net assets
(a) Does not include sales load
See accompanying notes to financial statements
GrandView Healthcare Realty Income Fund
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The GrandView Healthcare Realty Income Fund (the "Fund") is a non- diversified series of shares of beneficial interest of GrandView Investment Trust (the "Trust"). The Trust, an open-end registered management investment company, was organized on February 6, 1995 as a Massachusetts Business Trust and is registered under the Investment Company Act of 1940. The Fund began operations on July 3, 1995. The following is a summary of significant accounting policies followed by the Fund.
A. Security Valuation - The Fund's investments in securities are carried at market value. Securities listed on an exchange or quoted on a national market system are valued at 4:00 p.m., New York time on the day of valuation. Other securities traded in the over-the- counter market and listed securities for which no sale was reported on that date are valued at the most recent bid price. Securities for which market quotations are not readily available, if any, are valued by an independent pricing service or determined following procedures approved by the Board of Trustees. Short-term investments are valued at cost which approximates market value.
B. Federal Income Taxes - No provision has been made for federal income taxes since it is the policy of the Fund to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to make sufficient distributions of taxable income to relieve it from all federal income taxes.
C. Investment Transactions - Investment transactions are recorded on the trade date. Realized gains and losses are determined using the specific identification cost method. Interest income is recorded daily on the accrual basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date.
D. Distributions to Shareholders - The Fund generally declares dividends monthly payable on a date selected by the Trust's Trustees. In addition, distributions may be made annually in December out of net realized gains through October 31 of that year. The Fund may make a supplemental distribution subsequent to the end of its fiscal year ending March 31.
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, GrandView Advisers, Inc. (the "Advisor") provides the Fund with a continuous program of supervision of the Fund's assets, including the composition of its portfolio, and furnishes advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. As compensation for its services, the Advisor receives a fee at the annual rate of 0.70% of the Fund's average daily net assets.
Currently, the Fund does not offer its shares for sale in states which require limitations to be placed on its expenses. The Advisor currently intends to voluntarily waive or reimburse all or a portion of its fee to limit total Fund operating expenses to 1.75% of the average daily net assets of the Fund. There can be no assurance that the foregoing voluntary fee waivers or reimbursements will continue. The Advisor has voluntarily waived its fee amounting to $63 ($0.02 per share) and has voluntarily reimbursed a portion of the Fund's operating expenses for the period ended September 30, 1995. The total fees waived and expenses reimbursed by the Advisor amounted to $2,082.
GrandView Healthcare Realty Income Fund
The Fund's administrator, The Nottingham Company, Inc. (the "Administrator"), provides administrative services to and is generally responsible for the overall management and day-to-day operations of the Fund pursuant to an accounting and administrative agreement with the Trust. As compensation for its services, the Administrator receives a fee at the annual rate of 0.30% of the Fund's first $25 million of average daily net assets, 0.275% of the next $25 million of average daily net assets,and 0.225% of average daily net assets over $50 million. Addition- ally, the Administrator charges the Fund for servicing of shareholder accounts and registration of the Fund's shares. The Administrator also charges the Fund for certain expenses involved with the daily valuation of portfolio securities.
Capital Investment Group, Inc. (the "Distributor") serves as the Fund's principal underwriter and distributor. The Distributor receives any sales charges imposed on purchases of shares and re-allocates a portion of such charges to dealers through whom the sale was made, if any. For the period from July 3, 1995 to September 30, 1995, there were no sales charges distributed.
Certain Trustees and officers of the Trust are also officers of the Advisor, the distributor or the Administrator.
At September 30, 1995, the Advisor held 2,000 shares or 28% of the Fund shares outstanding.
NOTE 3 - DISTRIBUTION COSTS
The Board of Trustees, including a majority of the Trustees who are not "interested persons" of the Trust as defined in the Investment Company Act of 1940 (the "Act"), adopted a distribution plan pursuant to Rule 12b-1 of the Act (the "Plan"). The Act regulates the manner in which a regulated investment company may assume costs of distributing and promoting the sales of its shares and servicing of its shareholder accounts.
The Plan provides that the Fund may incur certain costs, which may not exceed 0.25% per annum of the Fund's average daily net assets for each year elapsed subsequent to adoption of the Plan, for payment to the distributor for items such as advertising expenses, selling expenses, commissions, travel or other expenses reasonably intended to result in sales of shares of the Fund or support servicing of shareholder accounts. The distributor has voluntarily waived all of such expenses under the Plan for the period ended September 30, 1995.
NOTE 4 - DEFERRED ORGANIZATION EXPENSES
All expenses of the Fund incurred in connection with its organization and the registration of its shares have been assumed by the Fund.
The organization expenses are being amortized over a period of sixty months. Investors purchasing shares of the Fund bear such expenses only as they are amortized against the Fund's investment income.
GrandView Healthcare Realty Income Fund
In the event any of the initial shares of the Fund are redeemed during the amortization period, the redemption proceeds will be reduced by a pro rata portion of any unamortized organization expenses in the same proportion as the number of initial shares being redeemed bears to the number of initial shares of the Fund outstanding at the time of the redemption.
NOTE 5 - PURCHASES AND SALES OF INVESTMENTS
Purchases of investments, other than short-term investments, aggregated $65,630 for the period ended September 30, 1995. There were no sales of investments during this period.
NOTE 6 - DISTRIBUTIONS TO SHAREHOLDERS
For the period ended September 30, 1995, the Fund made distributions classified as ordinary income in the amount of $375. Shareholders should consult a tax advisor on how to report distributions for state and local income tax purposes. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T12:47:05 |
0000891020-96-000021 | 0000891020-96-000021_0001.txt | <DESCRIPTION>PLAN AND AGREEMENT OF MERGERS DATED 1/10/96
AGREEMENT AND PLAN OF MERGERS
DATED AS OF JANUARY 10, 1996
EXHIBIT A - STOCK OPTION AGREEMENT EXHIBIT B - VOTING AGREEMENT EXHIBIT C - FORM OF AFFILIATE AGREEMENT EXHIBIT D - EMPLOYMENT AGREEMENT WITH GARY M. BOLYARD EXHIBIT E - EMPLOYMENT AGREEMENT WITH JOSEPH E. RIORDAN EXHIBIT F - FORM OF EMPLOYMENT AGREEMENT EXHIBIT G - FORM OF LEGAL OPINION OF COUNSEL TO THE COMPANY AND EXHIBIT H - FORM OF LEGAL OPINION OF COUNSEL TO INTERWEST AND
AGREEMENT AND PLAN OF MERGERS
AGREEMENT AND PLAN OF MERGERS, dated as of the 10th day of January 1996 (this "Plan"), by and among CENTRAL BANCORPORATION (the "Company"), CENTRAL WASHINGTON BANK ("CWB"), NORTH CENTRAL WASHINGTON BANK ("NCWB"), INTERWEST BANCORP, INC. ("InterWest") and INTERWEST SAVINGS BANK ("InterWest Savings").
(A) THE COMPANY. The Company is a corporation duly organized and existing in good standing under the laws of the State of Washington, with its principal executive offices located in Wenatchee, Washington. The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. As of the date hereof, the Company has 3,000,000 authorized shares of common stock, $1.67 par value per share ("Company Common Stock")(no other class of capital stock being authorized), of which 1,014,565 shares of Company Common Stock are issued and outstanding. As of the date hereof, the Company had 134,350 shares of Company Common Stock reserved for issuance under employee and director stock option plans pursuant to which options covering 96,836 shares of Company Common Stock are outstanding as of the date hereof.
(B) CWB. CWB is a commercial bank duly organized and existing in good standing under the laws of the State of Washington, with its principal executive offices located in Wenatchee, Washington. As of the date hereof, CWB has 171,406 authorized shares of common stock, $10.00 par value per share ("CWB Common Stock")(no other class of capital stock being authorized), of which 154,509 shares of CWB Common Stock are issued and outstanding. All of the issued and outstanding CWB Common Stock are owned by the Company. As of September 30, 1995, CWB had capital of $12,345,000, divided into common stock of $1,545,000, surplus of $3,934,000, and undivided profits of $6,917,000, net of unrealized loss on investment securities of $51,000.
(C) NCWB. NCWB is a commercial bank duly organized and existing in good standing under the laws of the State of Washington, with its principal executive offices located in Omak, Washington. As of the date hereof, NCWB has 1,000,000 authorized shares of common stock, no par value ("NCWB Common Stock") (no other class of capital stock being authorized), of which 10,000 shares of NCWB Common Stock are issued and outstanding. All of the issued and outstanding NCWB Common Stock are owned by the Company. As of September 30, 1995, NCWB had capital of $4,815,000, divided into common stock of $1,500,000, surplus of $2,619,000, and undivided profits of $685,000, net of unrealized gain on investment securities of $11,000.
(D) INTERWEST. InterWest is a corporation duly organized and existing in good standing under the laws of the State of Washington, with its principal executive offices located in Oak Harbor, Washington. As of the date hereof, InterWest has 20,000,000 authorized shares of common stock, $.20 par value per share ("InterWest Common Stock") (no other class of capital stock being authorized), of which 6,398,398 shares of InterWest Common Stock were issued and outstanding as of September 30, 1995.
(E) INTERWEST SAVINGS. InterWest Savings is a savings bank duly organized and existing under the laws of the State of Washington, with its principal executive offices located in Oak Harbor, Washington. As of the date hereof, InterWest Savings has 6,000,000 authorized shares of common stock, $.20 par value per share ("InterWest Savings Common Stock") (no other class of capital stock being authorized), of which 200 shares are issued and outstanding and owned by InterWest. As of September 30, 1995, InterWest Savings had capital of $90,141,183, divided into common stock of $200, surplus of $15,759,688 and undivided profits, including capital reserves, of $74,381,315.
(F) STOCK OPTION AGREEMENT; VOTING AGREEMENT. Immediately after the execution and delivery of this Plan, as a condition and an inducement to InterWest's willingness to enter into this Plan, the Company and InterWest agree to enter into a Stock Option Agreement (the "Stock Option Agreement") in the form attached hereto as Exhibit A, pursuant to which the Company is granting to InterWest an option to purchase, under certain circumstances, shares of Company Common Stock. As a condition and an inducement to InterWest's and
InterWest Savings' willingness to enter into this Plan, the directors and officers of CWB and NCWB (collectively, the "Banks") and the Company have entered into an agreement with InterWest and InterWest Savings in the form attached hereto as Exhibit B, pursuant to which, among other things, each such individual has agreed to vote his or her shares of Company Common Stock in favor of approval of the transactions contemplated by this Plan at the Meeting (as hereinafter defined).
(G) RIGHTS, ETC. Except as Previously Disclosed in Schedule 4.1(C), there are no shares of capital stock of the Company or the Banks authorized and reserved for issuance, neither the Company nor either Bank has any Rights (as defined below) issued or outstanding and neither the Company nor either Bank has any commitment to authorize, issue or sell any such shares or any Rights, except pursuant to (i) this Plan or (ii) the Stock Option Agreement. The terms "Rights" means securities or obligations convertible into or exchangeable for, or giving any person any right to subscribe for or acquire, or any options, calls or commitments relating to, shares of capital stock. There are no preemptive rights in respect of the Company Common Stock.
(H) APPROVALS. The Board of Directors of each of the Company, CWB, NCWB, InterWest and InterWest Savings has approved, at meetings of each of such Board of Directors, this Plan and, in the case of the Company and InterWest, the Stock Option Agreement and has authorized the execution hereof and thereof in counterparts.
(I) OTHER. It is the intention of the Parties that the Mergers (as hereinafter defined) shall include the right of InterWest to acquire the assets and assume the liabilities of the subsidiaries of the Company and to assign such right to any corporation which InterWest controls. Pursuant to the foregoing and under the authority of Revenue Rulings 64-73 and 70-224, InterWest may assign its right to acquire the assets and assume the liabilities of the subsidiaries of the Company to InterWest Savings, and may also direct each such subsidiary to transfer all of its assets and liabilities to InterWest Savings on the Effective Date (as hereinafter defined), or at any time thereafter, including by means of a statutory merger.
In consideration of their mutual promises and obligations, the Parties further agree as follows:
(A) DEFINITIONS. Capitalized terms used in this Plan have the following meanings:
"Acquisition Transaction" means (1) a merger, consolidation or similar transaction involving InterWest or any of its significant subsidiaries, (2) the disposition, by sale, lease, exchange or otherwise, of assets or deposits of InterWest or any of its significant subsidiaries representing in either case 25% or more of the consolidated assets or deposits of InterWest and its subsidiaries, or (3) the issuance, sale or other disposition (including by way of merger, consolidation, share exchange or any similar transaction) of securities representing 25% or more of the voting power of InterWest or any of its significant subsidiaries other than the issuance of InterWest Common Stock upon the exercise of outstanding options or the conversion of outstanding convertible securities of InterWest.
"Appraisal Laws" has the meaning assigned to such term in Section 1.1(E).
"Asset Classification" has the meaning assigned to such term in Section 4.1(T).
"Banks" has the meaning assigned to such term in paragraph (F) of the Recitals to this Plan.
"Bank Financial Reports" has the meaning assigned to such term in Section 4.1(H).
"Bank Mergers" has the meaning assigned to such term in Section 1.2(A).
"Business Day" means any day other than a Saturday, Sunday, or a legal holiday in the State of Washington.
"Code" has the meaning assigned to such term in Section 4.1(Q)(2).
"Company Option" has the meaning assigned to such term in Section 2.8.
"Compensation and Benefit Plans" has the meaning assigned to such term in Section 4.1(Q)(1).
"Continuing Bank" has the meaning assigned to such term in Section 1.2(A).
"Continuing Corporation" has the meaning assigned to such term in Section 1.1(A).
"Corporate Merger" has the meaning assigned to such term in Section 1.1(A).
"Daily Sales Price" for any trading day shall be equal to the average of the bid and ask prices per share of all market makers, as reported on Bloomberg Financial Markets, of InterWest Common Stock on the Nasdaq Stock Market reporting system.
"Department" has the meaning assigned to such term in Section 4.1(H).
"Derivatives Contract" means an exchange-traded or over-the-counter swap, forward, future, option, cap, floor or collar financial contract or any other contract that (1) is not included on the balance sheet of the Holding Company Financial Reports or the InterWest Financial Reports, as the case may be, and (2) is a derivative contract (including various combinations thereof).
"Director" means the Director of the Department.
"Dissenting Shares" means the shares of Company Common stock held by those shareholders of the Company who have timely and properly exercised their dissenters' rights in accordance with the Appraisal Laws.
"Effective Date" has the meaning assigned to such term in Section 1.3.
"Eligible Company Common Stock" means shares of Company Common Stock other than Exception Shares and Dissenting Shares.
"Employment Agreement" shall mean any of Exhibits D, E and F attached hereto.
"Environmental Law" means (1) any federal, state and local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, legal doctrine, order, judgment, decree, injunction, requirement or agreement with any governmental entity, relating to (a) the protection, preservation or restoration of the environment (including air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety, or (b) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Material, in each case as amended and as now in effect, including the Federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, and the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as amended and as now in effect, and (2) any common law or equitable doctrine (including injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Material.
"ERISA" has the meaning assigned to such term in Section 4.1(Q)(2).
"ERISA Affiliate" has the meaning assigned to such term in Section 4.1(Q)(3).
"ERISA Plans" has the meaning assigned to such term in Section 4.1(Q)(2).
"Exception Shares" means shares held by any of the Company's Subsidiaries or by InterWest or any of its Subsidiaries, in each case other than in a fiduciary capacity or as a result of debts previously contracted.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.
"Exchange Agent" has the meaning assigned to such term in Section 2.4.
"Exchange Ratio" has the meaning assigned to such term in Section 2.1(B).
"FDIC" means the Federal Deposit Insurance Corporation.
"Financial Reports" has the meaning assigned to such term in Section 4.1(H).
"Federal Reserve Board" means the Board of Governors of the Federal Reserve System.
"GAAP" means generally accepted accounting principles consistently applied.
"Hazardous Material" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law, whether by type or quantity, including any oil or other petroleum product, toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos, asbestos containing material, urea formaldehyde foam insulation, lead and polychiorinated biphenyl.
"Holding Company Financial Reports" has the meaning assigned to such term in Section 4.1(H).
"Indemnified Party" has the meaning assigned to such term in Section 5.18(A).
"InterWest Option" has the meaning assigned to such term in Section 2.8.
"InterWest Price" means the price equal to the average (rounded to the nearest penny) of each Daily Sales Price of InterWest Common Stock for the ten consecutive trading days beginning on and including the twentieth trading day immediately preceding the Effective Date, subject to any adjustment that may be required in connection with the adjustment of the Exchange Ratio pursuant to Section 2.5.
"Loan/Fiduciary Property" means any property owned or controlled by the Company or any of its Subsidiaries or in which the Company or any of its Subsidiaries holds a security or other interest, and, where required by the context, includes any such property where the Company or any of its Subsidiaries constitutes the owner or operator of such property, but only with respect to such property.
"Material Adverse Effect" means with respect to any Party an event, occurrence or circumstance (including (i) the making of any provisions for possible loan and lease losses, write-downs of other real estate and taxes and (ii) any breach of a representation or warranty contained herein by such Party) that (a) has or is reasonably likely to have a material adverse effect on the financial condition, results of operations, business or prospects of such Party and its subsidiaries, taken as a whole, or (b) would materially impair such Party's ability to perform its obligations under this Plan or the Stock Option Agreement or the consummation of any of the transactions contemplated hereby or thereby.
"Meeting" has the meaning assigned to such term in Section 5.2.
"Mergers" has the meaning assigned to such term in Section 1.2(A).
"Multiemployer Plans" has the meaning assigned to such term in Section 4.1(Q)(2).
"Nasdaq" means the National Association of Securities Dealers Automated Quotations system.
"Option" has the meaning assigned to such term in the Stock Option Agreement.
"Option Shares" has the meaning assigned to such term in the Stock Option Agreement.
"Participation Facility" means any facility in which the Company or any of its Subsidiaries participates in the management and, where required by the context, includes the owner or operator of such facility.
"Party" means a party to this Plan.
"Pension Plan" has the meaning assigned to such term in Section 4.1(Q)(2).
"Previously Disclosed" means information provided by a Party in a Schedule that is delivered by that Party to the other Party contemporaneously with the execution of this Plan and specifically designated as information "Previously Disclosed" pursuant to this Plan.
"Pre-Triggering Event InterWest Price" means the price equal to the average (rounded to the nearest penny) of each Daily Sales Price of InterWest Common Stock for the ten consecutive trading days beginning on and including the twentieth trading day immediately preceding the date of the Triggering Event, subject to any adjustment that may be required in connection with the adjustment of the Exchange Ratio pursuant to Section 2.5.
"Proxy Statement" has the meaning assigned to such term in Section 5.2.
"Registration Statement" has the meaning assigned to such term in Section 5.2.
"Regulatory Authorities" means federal or state governmental agencies, authorities or departments charged with the supervision or regulation of depository institutions or engaged in the insurance of deposits.
"RCW" means the Revised Code of Washington.
"Rights" has the meaning assigned to such term in paragraph (G) of the Recitals to this Plan.
"Securities Act" means the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder.
"SEC" means the Securities and Exchange Commission.
"Stock Option Agreement" has the meaning assigned to such term in paragraph (F) of the Recitals to this Plan.
"Subsidiary" with respect to any entity means each partnership or corporation, the majority of the outstanding partnership interests, capital stock or voting power of which is (or upon the exercise of all outstanding warrants, options and other rights would be) owned, directly or indirectly, at the time in question by such entity.
"Tax Returns" has the meaning assigned to such term in Section 4.1(BB).
"Taxes" means federal, state, local or foreign income, gross receipts, windfall profits, severance, property, production, sales, use, license, excise, franchise, employment, withholding or similar taxes imposed on the income, properties or operations of the respective Party or its Subsidiaries, together with any interest, additions, or penalties with respect thereto and any interest in respect of such additions or penalties.
"Termination Date" has the meaning assigned to such term in Section 1.3.
"Third Party" means a person within the meaning of Sections 3(a)(9) and 13(d)(3) of the Exchange Act, excluding (1) the Company or any Subsidiary of the Company and (2) InterWest or any Subsidiary of InterWest.
"Total Consideration" means the dollar amount obtained by multiplying $34.00 by the aggregate number of shares of Eligible Company Common Stock issued and outstanding immediately prior to the Effective Date.
"Triggering Event" means any one or more of the following events:
(1) InterWest shall have authorized, recommended, publicly proposed or publicly announced an intention to authorize, recommend or propose, or entered into an agreement with any Third Party to effect an Acquisition Transaction.
(2) Any Third Party shall have made a bona fide proposal to InterWest or its stockholders by public announcement, or by written communication that is or becomes the subject of public disclosure, to engage in an Acquisition Transaction.
(3) Any Third Party, other than in connection with a transaction to which the Company has given its prior written consent, shall have filed an application or notice with the Federal Reserve Board, or other federal or state bank regulatory authority, for approval to engage in an Acquisition Transaction.
(4) Any Third Party shall have commenced (as such term is defined in Rule 14d-2 under the Exchange Act) or shall have filed a registration statement under the Securities Act with respect to, a tender offer or exchange offer to purchase any shares of InterWest Common Stock such that, upon consummation of such offer, such Third Party would own or control 20% or more of the then outstanding shares of InterWest Common Stock.
(B) GENERAL INTERPRETATION. Except as otherwise expressly provided in this Plan or unless the context clearly requires otherwise, the terms defined in this Plan include the plural as well as the singular; the words "hereof," "herein," "hereunder," "in this Plan" and other words of similar import refer to this Plan as a whole and not to any particular Article, Section or other subdivision; and references in this Plan to Articles, Sections, Schedules, and Exhibits refer to Articles and Sections of and Schedules and Exhibits to this Plan. Whenever the words "include," "includes," or "including" are used in this Plan, they shall be deemed to be followed by the words "without limitation." Unless otherwise stated, references to Subsections refer to the Subsections of the Section in which the reference appears. All pronouns used in this Plan include the masculine, feminine and neuter gender, as the context requires. All accounting terms used in this Plan that are not expressly defined in this Plan have the respective meanings given to them in accordance with GAAP.
1.1. THE CORPORATE MERGER. Subject to the provisions of this Plan, on the Effective Date:
(A) THE CONTINUING CORPORATION. In accordance with the terms of RCW Ch. 23B.11, the Company shall merge into InterWest (the "Corporate Merger"), the separate existence of the Company shall cease and InterWest (the "Continuing Corporation") shall survive, and the name of the Continuing Corporation shall be "InterWest Bancorp, Inc."
(B) RIGHTS, ETC. Upon consummation of the Corporate Merger, the Continuing Corporation shall possess all of the rights, privileges, immunities and franchises, of a public as well as of a private nature, of each of the merging corporations; and all property, real, personal and mixed, and all debts due on whatever account, and all other choses in action, and all and every other interest, of or belonging to or due to each of the corporations so merged, shall be deemed to be vested in the Continuing Corporation without further act or deed; and the title to any real estate or any interest therein, vested in each of such corporations, shall not revert or be in any way impaired by reason of the Corporate Merger.
(C) LIABILITIES. The Continuing Corporation shall be responsible and liable for all the liabilities, obligations and penalties of each of the corporations so merged.
(D) ARTICLES OF INCORPORATION; BYLAWS; DIRECTORS; OFFICERS. The Articles of Incorporation and Bylaws of the Continuing Corporation shall be those of InterWest, as in effect immediately prior to the Corporate Merger becoming effective. The directors and officers of InterWest in office immediately prior to the Corporate Merger becoming effective shall be the directors and officers of the Continuing Corporation, together with such additional directors and officers as may otherwise be agreed to by the Parties and as may thereafter be elected, who shall hold office until such time as their successors are elected and qualified.
(E) DISSENTING SHARES. Notwithstanding anything to the contrary herein, each Dissenting Share whose holder, as of the Effective Date of the Merger, has not effectively withdrawn or lost his dissenters' rights under RCW 23B.13 (the "Appraisal Laws") shall not be converted into or represent a right to receive InterWest Common Stock, but the holder thereof shall be entitled only to such rights as are granted by the Appraisal Laws. Each holder of Dissenting Shares who becomes entitled to payment for his Company Common Stock pursuant to the provisions of the Appraisal Laws shall receive payment therefor from InterWest (but only after the amount thereof shall have been agreed upon or finally determined pursuant to the Appraisal Laws).
1.2. THE BANK MERGERS. Immediately following consummation of the Corporate Merger on the Effective Date or as soon thereafter as InterWest may deem appropriate:
(A) THE CONTINUING BANK. The Banks shall be merged with and into InterWest Savings (the "Bank Mergers" and together with the Corporate Merger, the "Mergers"), the separate existence of the Banks shall cease and InterWest Savings (the "Continuing Bank") shall survive, the name of the Continuing Bank shall be "InterWest Savings Bank", and the Continuing Bank shall continue to conduct the business of a savings bank at its main office in Oak Harbor, Washington and at the legally established branches of the Banks and InterWest Savings.
(B) RIGHTS, ETC. Upon consummation of the Bank Mergers, the Continuing Bank shall possess all the rights, privileges, immunities and franchises, of a public as well as of a private nature, of each of the Banks so merged; and all property, real personal and mixed, and all debts due on whatever account, and all other choses in action, and all and every other interest, of or belonging to or due to each of the Banks so merged, shall be taken and deemed to be transferred to and vested in the Continuing Bank without further act or deed, including appointments, designations and nominations and all other rights and interests in any fiduciary capacity; and the title to any real estate or any interest therein, vested in each of such Banks, shall not revert or be in any way impaired by reason of the Bank Mergers.
(C) LIABILITIES, ETC. The Continuing Bank shall be responsible and liable for all the liabilities, obligations and penalties of the Banks so merged (including liabilities arising out of the operation of any trust departments). All rights of creditors and obligors and all liens on the property of each of each of the Banks and InterWest Savings shall be preserved unimpaired.
(D) CHARTER; BYLAWS; DIRECTORS; OFFICERS. The articles of incorporation and bylaws of the Continuing Bank shall be those of InterWest Savings, as in effect immediately prior to the Bank Mergers becoming effective. The directors and officers of InterWest Savings in office immediately prior to the Bank Mergers becoming effective shall be the directors and officers of the Continuing Bank, together with such additional directors and officers as may otherwise be agreed to by the Parties and as may thereafter be elected, who shall hold office until such time as their successors are elected and qualified.
(E) OUTSTANDING STOCK OF THE CONTINUING BANK. The shares of InterWest Savings Common Stock issued and outstanding immediately prior to the Effective Date shall, on and after the Effective Date, remain as issued and outstanding shares of InterWest Savings Common Stock, and the holders thereof shall retain their rights therein.
(F) OUTSTANDING STOCK OF THE BANKS. The Continuing Corporation shall deliver all of the issued and outstanding shares of the Banks to the Continuing Bank for cancellation.
1.3. EFFECTIVE DATE. Unless the Parties agree upon another date, the "Effective Date" will be the date ten (10) Business Days after the fulfillment or waiver of each condition precedent set forth in, and the granting of each approval (and expiration of any waiting period) required by, Article VI. If the Mergers are not consummated in accordance with this Plan on or prior to September 30, 1996 (the "Termination Date"), the Company or InterWest may terminate this Plan in accordance with Article VII. Prior to the Effective Date, InterWest and the Company shall execute and deliver to the Secretary of State of the State of Washington articles of merger in accordance with applicable law.
2.1 CORPORATE MERGER CONSIDERATION. Subject to the provisions of this Plan, on the Effective Date:
(A) OUTSTANDING INTERWEST COMMON STOCK. The shares of InterWest Common Stock issued and outstanding immediately prior to the Effective Date shall, on and after the Effective Date, remain as issued and outstanding shares of InterWest Common Stock.
(B) OUTSTANDING COMPANY COMMON STOCK. Each share of Eligible Company Common Stock issued and outstanding immediately prior to the Effective Date shall, by virtue of the Corporate Merger, automatically and without any action on the part of the holder thereof, become and be converted into the right to receive 1.7 shares of InterWest Common Stock (as subject to adjustment pursuant to this paragraph, the "Exchange Ratio"); provided, however, that (1) in the event that the InterWest Price is greater than the Collar Price and no Triggering Event has occurred, then each share of Eligible Company Common Stock issued and outstanding immediately prior to the Effective Date shall become and be converted into the right to receive the greater of: (i) 1.41 shares of InterWest Common Stock or (ii) that number of shares of InterWest Common Stock obtained by dividing the Total Consideration by the InterWest Price, and by further dividing the quotient so reached by the aggregate number of all shares of Eligible Company Common Stock issued and outstanding immediately prior to the Effective Date and (2) in the event that the InterWest Price is greater than the Collar Price and a Triggering Event has occurred, then each share of Eligible Company Common Stock issued and outstanding immediately prior to the Effective Date shall become and be converted into the right to receive the greater of: (i) 1.41 shares of InterWest Common Stock or (ii) that number of shares of InterWest Common Stock obtained by dividing the Total Consideration by the Pre-Triggering Event InterWest Price, and by further dividing the quotient so reached by the aggregate number of all shares of Eligible Company Common Stock issued and outstanding immediately prior to the Effective Date.
2.2. STOCKHOLDER RIGHTS; STOCK TRANSFERS. On the Effective Date, holders of Company Common Stock shall cease to be, and shall have no rights as, stockholders of the Company, other than to receive the consideration provided under this Article II. After the Effective Date, there shall be no transfers on the stock transfer books of the Company or the Continuing Corporation of the shares of Company Common Stock which were issued and outstanding immediately prior to the Effective Date.
2.3. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no fractional shares of InterWest Common Stock and no certificates or scrip therefor, or other evidence of ownership thereof, will be issued in the Corporate Merger; instead, InterWest shall pay to each holder of Company Common Stock who would otherwise be entitled to a fractional share an amount in cash determined by multiplying such fraction by the InterWest Price.
2.4. EXCHANGE PROCEDURES. As promptly as practicable after the Effective Date, InterWest shall send or cause to be sent to each former stockholder of the Company of record immediately prior to the Effective Date transmittal materials for use in exchanging such stockholder's certificates for Company Common Stock for the consideration set forth in this Article II. The certificates representing the shares of InterWest Common Stock into which shares of such stockholder's Company Common Stock are converted on the Effective Date, any fractional share checks which such stockholder shall be entitled to receive, and any dividends paid on such shares of InterWest Common Stock for which the record date for determination of stockholders entitled to such dividends is on or after the Effective Date, will be delivered to such stockholder only upon delivery to InterWest Savings (the "Exchange Agent") of the certificates representing all of such shares of Company Common Stock (or indemnity satisfactory to InterWest and the Exchange Agent, in their judgment, if any of such certificates are lost, stolen or destroyed). No interest will be paid on any such fractional share checks or dividends to which the holder of such shares shall be entitled to receive upon such delivery. Certificates surrendered for exchange by any person constituting an "affiliate" of the Company for purposes of Rule 145 of the Securities Act shall not be exchanged for certificates representing InterWest Common Stock until InterWest has received a written agreement from such person as specified in Section 5.10.
2.5. ANTI-DILUTION PROVISIONS. In the event InterWest changes the number of shares of InterWest Common Stock issued and outstanding prior to the Effective Date as a result of a stock split, stock dividend, recapitalization or similar transaction with respect to the outstanding InterWest Common Stock and the record date therefor shall be prior to the Effective Date, the Exchange Ratio shall be proportionately adjusted.
2.6. EXCEPTION SHARES. Each of the Exception Shares of Company Common Stock shall be canceled and retired at the effectiveness of the Corporate Merger and no consideration shall be issued in exchange therefor.
2.7. RESERVATION OF RIGHT TO REVISE TRANSACTION. InterWest may at any time change the method of effecting the acquisition of the Company and the Banks by InterWest (including the provisions of this Article II) if and to the extent it deems such change to be desirable; provided, however, that no such change shall (i) alter or change the amount or kind of consideration to be issued to holders of Company Common Stock as provided for in this Plan or (ii) adversely affect the tax treatment to the Company stockholders as a result of receiving such consideration.
2.8. OPTIONS. On the Effective Date, by virtue of the Corporate Merger, and without any action on the part of any holder of an option, each option granted by the Company to purchase shares of Company Common Stock ("Company Option") that is then outstanding and unexercised shall be converted into and become an option to purchase InterWest Common Stock ("InterWest Option") on the same terms and conditions as are in effect with respect to the Company Option immediately prior to the Effective Date, except that (i) each such InterWest Option may be exercised solely for shares of InterWest Common Stock, (ii) the number of shares of InterWest Common Stock subject to such InterWest Option shall be equal to the number of shares of Company Common Stock subject to such Option immediately prior to the Effective Date multiplied by the Exchange Ratio, the product being rounded, if necessary, up or down to the nearest whole share, and (iii) the per share exercise price under each such InterWest Option shall be adjusted by dividing the per share exercise price of the Company Option by the Exchange Ratio, and rounding up to the nearest cent. The number of shares of Company Common Stock which are issuable upon exercise of Options as of the date hereof are Previously Disclosed in Schedule 2.8. Following the Effective Date, InterWest shall use its best efforts to prepare and file with the SEC a registration statement on Form S-8 covering shares of InterWest Common Stock to be issued upon the exercise of stock options assumed by InterWest pursuant to this Section 2.8.
ARTICLE III. ACTIONS PENDING CONSUMMATION
Without the prior written consent of InterWest, each of the Company and the Banks shall conduct its and each of its Subsidiaries' business in the ordinary and usual course consistent with past practice and shall use its best efforts to maintain and preserve its and each of its Subsidiaries' business organization, employees and advantageous business relationships and retain the services of its and each of its Subsidiaries' officers and key employees identified by InterWest Savings, and each of the Company and the Banks will not, and will cause each of its Subsidiaries not to, agree to:
3.1. CAPITAL STOCK. Except for or as otherwise permitted in or expressly contemplated by this Plan or the Stock Option Agreement or as Previously Disclosed in Schedule 4.1(C), issue, sell or otherwise permit to become outstanding any additional shares of capital stock of the Company, the Banks or any of their Subsidiaries, or any Rights with respect thereto, or enter into any agreement with respect to the foregoing, or permit any additional shares of Company Common Stock to become subject to grants of employee stock options, stock appreciation rights or similar stock- based employee compensation rights.
3.2. DIVIDENDS, ETC. Make, declare or pay any dividend on or in respect of (other than a $.40 per share dividend declared on Company Common Stock on January 10, 1996 and an additional $.40 per share dividend to be declared on July 10, 1996 if the Corporate Merger has not been completed by such date), or declare or make any distribution on, or directly or indirectly combine, redeem, reclassify, purchase or otherwise acquire, any shares of its capital stock or, other than as permitted in or contemplated by this Plan or the Stock Option Agreement, authorize the creation or issuance of, or issue, any additional shares of its capital stock or any Rights with respect thereto.
3.3. INDEBTEDNESS; LIABILITIES; ETC. Other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money, assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual corporation or other entity.
3.4. LINE OF BUSINESS; OPERATING PROCEDURES; ETC. Except as may be directed by any regulatory agency, (i) change its lending, investment, liability management or other material banking policies in any material respect, except such changes as are in accordance and in an effort to comply with Section 5.11, or (ii) commit to incur any further capital expenditures beyond those Previously Disclosed in Schedule 3.4 other than in the ordinary course of business and not exceeding $30,000 individually or $100,000 in the aggregate.
3.5. LIENS AND ENCUMBRANCES. Impose, or suffer the imposition, on any shares of stock of any of its Subsidiaries, any lien, charge or encumbrance, or permit any such lien, charge or encumbrance to exist, except for an existing lien that encumbers CWB Common Stock and secures a loan to the Company from Key Bank of Washington.
3.6. COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Except as Previously Disclosed in Schedule 3.6, enter into or amend any employment, severance or similar agreement or arrangement with any of its directors, officers or employees, or grant any salary or wage increase, amend the terms of any Company Option (except for an amendment to extend the period of exercisability of any stock option held by a nonemployee director of the Company for up to four years following the Effective Date) or increase any employee benefit (including incentive or bonus payments), except normal individual increases in regular compensation to employees in the ordinary course of business consistent with past practice.
3.7. BENEFIT PLANS. Except as Previously Disclosed in Schedule 3.7, enter into or modify (except as may be required by applicable law) any pension, retirement, stock option, stock purchase, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement related thereto, in respect of any of its directors, officers or other employees, including taking any action that accelerates the vesting or exercise of any benefits payable thereunder.
3.8. CONTINUANCE OF BUSINESS. Dispose of or discontinue any portion of its assets, business or properties, that is material to the Company and its Subsidiaries taken as a whole, or merge or consolidate with, or acquire all or any portion of, the business or property of any other entity that is material to the Company and its Subsidiaries taken as a whole (except foreclosures or acquisitions by the Banks in their fiduciary capacity, in each case in the ordinary course of business consistent with past practice).
3.9. AMENDMENTS. Amend its Articles of Incorporation or Bylaws.
3.10. CLAIMS. Settle any claim, litigation, action or proceeding involving any liability for material money damages or restrictions upon the operations of the Company or any of its Subsidiaries.
3.11. CONTRACTS. Except as previously disclosed on Schedule 3.11, enter into, renew, terminate or make any change in any material contract, agreement or lease, except in the ordinary course of business consistent with past practice with respect to contracts, agreements and leases that are terminable by it without penalty on no more than 60 days prior written notice.
3.12. LOANS. Extend credit other than in accordance with existing lending policies, except that the Banks shall not, without the prior written consent of InterWest, make any new loan or modify, restructure or renew any existing nonperforming loan to any borrower if the amount of the resulting loan, when aggregated with all other loans or extensions of credit to such person or entity (or which would be required to be aggregated for loans to one borrower limitations) would be in excess of $250,000 for any new customer or $750,000 to any customer as of the date of this Plan.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
4.1. THE COMPANY AND THE BANKS REPRESENTATIONS AND WARRANTIES. Each of the Company and the Banks hereby represents and warrants to InterWest and InterWest Savings as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with respect to the Company and its Subsidiaries are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. Each of the Company and its Subsidiaries is duly qualified to do business and is in good standing in the States of the United States and foreign jurisdictions where the failure to be duly qualified, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on it. Each of the Company and its Subsidiaries has in effect all federal state, local, and foreign governmental authorizations necessary for it to own or lease its properties and assets and to carry on its business as it is now conducted, the absence of which, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on it.
(C) SHARES. The outstanding shares of the Company and its Subsidiaries' capital stock are validly issued and outstanding, fully paid and nonassessable, and subject to no preemptive rights. Except as Previously Disclosed in Schedule 4.1(C), there are no shares of capital stock or other equity securities of the Company or its Subsidiaries outstanding and no outstanding Rights with respect thereto (except as provided under the Stock Option Agreement).
(D) THE COMPANY SUBSIDIARIES. The Company has Previously Disclosed in Schedule 4.1(D) a list of all of its Subsidiaries. Each of its Subsidiaries that is a bank is an "insured depository institution" as defined in the Federal Deposit Insurance Act, as amended, and applicable regulations thereunder. No equity securities of any of its Subsidiaries are or may become required to be issued (other than to the Company or one of its Subsidiaries) by reason of any Rights with respect thereto. There are no contracts, commitments, understandings or arrangements by which any of its Subsidiaries is or may be bound to sell or otherwise issue any shares of such Subsidiary's capital stock, and there are no contracts, commitments, understandings or arrangements relating to the rights of the Company or its Subsidiaries, as applicable, to vote or to dispose of such shares. All of the shares of capital stock of each of its Subsidiaries held by the Company or one of its Subsidiaries are fully paid and nonassessable and are owned by the Company or one of its Subsidiaries free and clear of any charge, mortgage, pledge, security interest, restriction, claim, lien or encumbrance (except for the lien that encumbers CWB Common Stock and secures a loan to the Company from Key Bank of Washington). Each of its Subsidiaries is in good standing under the laws of the jurisdiction in which it is incorporated or organized, and is duly qualified to do business and in good standing in the jurisdictions where the failure to be duly qualified is reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on it. Except as Previously Disclosed in Schedule 4.1(D), it does not own beneficially, directly or indirectly, any shares of any equity securities or similar interests of any corporation, bank, partnership, joint venture, business trust, association or other organization. In the case of representations by the Company, the deposits of its Subsidiaries that are banks are insured by the Bank Insurance Fund of the FDIC.
(E) CORPORATE POWER. Each of the Company and its Subsidiaries has the corporate power and authority to carry on its business as it is now being conducted and to own all its material properties and assets.
(F) CORPORATE AUTHORITY. Subject to any necessary receipt of approval by its stockholders referred to in Section 6.1, this Plan and the Stock Option Agreement have been authorized by all necessary corporate action of the Company and each of its Subsidiaries that is a Party, and each such agreement is a valid and binding agreement of the Company and such Subsidiaries, enforceable against the Company and such Subsidiaries in accordance with its terms, subject to bankruptcy, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general equity principles.
(G) NO DEFAULTS. Subject to the approval by its shareholders referred to in Section 6.1, the required regulatory approvals referred to in Section 6.1, and the required filings under federal and state securities laws, and except as Previously Disclosed in Schedule 4.1(G), the execution, delivery and performance of this Plan and the Stock Option Agreement, and the consummation by the Company and each of its Subsidiaries that is a Party of the transactions contemplated hereby and thereby, does not and will not (i) constitute a breach or violation of, or a default under, any law, rule or regulation or any judgment, decree, order, governmental permit or license, or agreement, indenture or instrument of the Company or of any of its Subsidiaries or to which the Company or any of its Subsidiaries or its or their properties is subject or bound, which breach, violation or default is reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on it, (ii) constitute a breach or violation of, or a default under, the Articles of Incorporation, Charter or Bylaws of its or any of its Subsidiaries, or (iii) require any consent or approval under any such law, rule, regulation, judgment, decree, order, governmental permit or license or the consent or approval of any other party to any such agreement, indenture or instrument, other than any such consent or approval that, if not obtained, would not be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on it.
(H) FINANCIAL REPORTS. Except as Previously Disclosed in Schedule 4.1(H), (i) as to the Company, its Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and all other documents filed or to be filed subsequent to December 31, 1994 under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form filed with the SEC (in each such case, the "Holding Company Financial Reports"), and (ii) as to each of the Company's Subsidiaries that is a bank, its call report for the fiscal year ended December 31, 1994, and all other financial reports filed or to be filed subsequent to December 31, 1994, in the form filed with the FDIC and the Department of Financial Institutions of the State of Washington ("Department") (in each case, the "Bank Financial Reports" and together with the Holding Company Financial Reports, the "Financial Reports") did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading; and each of the balance sheets in or incorporated by reference into the Financial Reports (including the related notes and schedules thereto) fairly presents and will fairly present the financial position of the entity or entities to which it relates as of its date, and each of the statements of income and changes in stockholders' equity and cash flows or equivalent statements in the Bank Financial Reports (including any related notes and schedules thereto) fairly presents and will fairly present the results of operations, changes in stockholders' equity and cash flows, as the case may be, of the entity or entities to which it relates for the periods set forth therein, in each case in accordance with GAAP during the periods involved, except in each case as may be noted therein, subject to normal and recurring year- end audit adjustments in the case of unaudited statements.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. Neither the Company nor any of its Subsidiaries has any obligation or liability (contingent or otherwise) that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on it, except (i) as reflected in its Holding Company Financial Reports prior to the date of this Plan and (ii) for commitments and obligations made, or liabilities incurred, in the ordinary course of business consistent with past practice since December 31, 1994. Since December 31, 1994, neither the Company nor any of its Subsidiaries has incurred or paid any obligation or liability (including any obligation or liability incurred in connection with any acquisitions in which any form of direct financial assistance of the federal government or any agency thereof has been provided to any Subsidiary) which, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on it.
(J) NO EVENTS. Except as Previously Disclosed on Schedule 4.1(J), since December 31, 1994, no event has occurred that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on it.
(K) PROPERTIES. Except as reserved against in its Holding Company Financial Reports, the Company and each of its Subsidiaries have good and marketable title, free and clear of all liens, encumbrances, charges, defaults, or equities of any character, to all of the properties and assets, tangible and intangible, reflected in its Holding Company Financial Reports as being owned by the Company or its Subsidiaries as of the dates thereof other than those that, individually or in the aggregate, are not reasonably likely to have a Material except those sold or otherwise disposed of in the ordinary course of business. All buildings and all material fixtures, equipment, and other property and assets that are held under leases or subleases by the Company or any of its Subsidiaries are held under valid leases or subleases enforceable in accordance with their respective terms, other than any such exceptions to validity or enforceability that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect on it.
(L) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in Schedule 4.1(L), no litigation, proceeding or controversy before any court or governmental agency is pending that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on the Company or any of its Subsidiaries or that alleges claims under any fair lending law or other law relating to discrimination, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act and the Home Mortgage Disclosure Act, and, to the best of its knowledge, no such litigation, proceeding or controversy has been threatened; and except as Previously Disclosed in Schedule 4.1(L), neither the Company nor any of its Subsidiaries or any of its or their material properties or their officers, directors or controlling persons is a party to or is subject to any order, decree, agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, any Regulatory Authority, and neither the Company nor any of its Subsidiaries has been advised by any of such Regulatory Authorities that such authority is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum or understanding, commitment letter or similar submission.
(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in Schedule 4.1(M), each of the Company and its Subsidiaries:
(1) has all permits, licenses, authorizations, orders and approvals of, and has made all filings, applications and registrations with, all Regulatory Authorities that are required in order to permit it to own its businesses presently conducted and that are material to the business of it and its Subsidiaries taken as a whole; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to its best knowledge, no suspension or cancellation of any of them is threatened; and all such filings, applications and registrations are current;
(2) has received no notification or communication from any Regulatory Authority or the staff thereof (i) asserting that the Company or any of its Subsidiaries is not in compliance with any of the statutes, regulations or ordinances which such Regulatory Authority enforces, which, as a result of such noncompliance in any such instance, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on the Company or its Subsidiaries, (ii) threatening to revoke any license, franchise, permit or governmental authorization, which revocation, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on the Company or its Subsidiaries, or (iii) requiring any of the Company or its Subsidiaries (or any of its or their officers, directors or controlling persons) to enter into a cease and desist order, agreement or memorandum of understanding (or requiring the board of directors thereof to adopt any resolution or policy);
(3) is not required to give prior notice to any federal banking or thrift agency of the proposed addition of an individual to its board of directors or the employment of an individual as a senior executive; and
(4) is in compliance in all material respects with all fair lending laws or other laws relating to discrimination, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act and the Home Mortgage Disclosure Act.
(N) MATERIAL CONTRACTS. Except as Previously Disclosed in Schedule 4.1(N), none of the Company or its Subsidiaries, nor any of its respective assets, businesses or operations, is a party to, or is bound or affected by, or receives benefits under, any contract or agreement or amendment thereto that in each case would be required to be filed as an exhibit to a Form 10-K filed by the Company that has not been filed as an exhibit to the Company's Form 10-K filed for the fiscal year ended December 31, 1994. Neither the Company nor any of its Subsidiaries is in default under any contract, agreement, commitment, arrangement, lease, insurance policy or other instrument to which it is a party, by which its respective assets, business or operations may be bound or affected, or under which it or any of its respective assets, business or operations receives benefits, which default, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on the Company or its Subsidiaries, and there has not occurred any event that, with the lapse of time or the giving of notice or both, would constitute such a default. Except as Previously Disclosed in Schedule 4.1(N), neither the Company nor any of its Subsidiaries is subject to or bound by any contract containing covenants which limit the ability of the Company or any of its Subsidiaries to compete in any line of business or with any person or which involve any restriction of geographical area in which, or method by which, the Company or any of its Subsidiaries may carry on its business (other than as may be required by law or any applicable Regulatory Authority).
(O) REPORTS. Since January 1, 1991, each of the Company and its Subsidiaries has filed all reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with (i) the FDIC, (ii) the Department, (iii) the Federal Home Loan Bank and the Federal Home Loan Bank System, and (iv) any other applicable Regulatory Authorities. As of their respective dates (and without giving effect to any amendments or modifications filed after the date of this Plan with respect to reports and documents filed before the date of this Plan), each of such reports and documents, including the financial statements, exhibits and schedules thereto, complied in all material respects with all of the statutes, rules and regulations enforced or promulgated by the Regulatory Authority with which they were filed and did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.
(P) NO BROKERS. All negotiations relative to this Plan and the transactions contemplated hereby have been carried on by it directly with the other Parties and no action has been taken by it that would give rise to any valid claim against any Party for a brokerage commission, finder's fee or other like payment (except for a fee to be paid by the Company to Columbia Financial Advisors, Inc.).
(1) Schedule 4.1(Q)(1) contains a complete list of all bonus, deferred compensation, pension, retirement, profit-sharing, thrift savings, employee stock ownership, stock bonus, stock purchase restricted stock and stock option plans, all employment or severance contracts, all medical, dental, health and life insurance plans, all other employee benefit plans, contracts or arrangements and any applicable "change of control" or similar provisions in any plan, contract or arrangement maintained or contributed to by the Company or any of its Subsidiaries for the benefit of employees, former employees, directors, former directors or their beneficiaries (the "Compensation and Benefit Plans"). True and complete copies of all Compensation and Benefit Plans of the Company and its Subsidiaries, including any trust instruments and/or insurance contracts, if any, forming a part thereof, and all amendments thereto, have been supplied to the other Parties.
(2) All "employee benefit plans" within the meaning Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), other than "multiemployer plans" within the meaning of Section 3(37) of ERISA ("Multiemployer Plans"), covering employees or former employees of the Company and its Subsidiaries (the "ERISA Plans"), to the extent subject to ERISA, are in substantial compliance with ERISA. Except as Previously Disclosed in Schedule 4.1(Q)(2), each ERISA Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA ("Pension Plan") and which is intended to be qualified under Section 401(a) of the Internal Revenue Code of 1986 (as amended, the "Code") has received a favorable determination letter from the Internal Revenue Service, and it is not aware of any circumstances reasonably likely to result in the revocation or denial of any such favorable determination letter or the inability to receive such a favorable determination letter. There is no material pending or, to its knowledge, threatened litigation relating to the ERISA Plans. Neither the Company nor any of its Subsidiaries has engaged in a transaction with respect to any ERISA Plan that could subject the Company or any of its Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material.
(3) No liability under Subtitle C or D of Title IV of ERISA has been or is expected to be incurred by the Company or any of its Subsidiaries with respect to any ongoing, frozen or terminated "single-employer plan," within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them, or the single-employer plan of any entity which is considered one employer with the Company under Section 4001(a)(15) of ERISA or Section 414 of the Code (an "ERISA Affiliate"). Neither the Company nor any of its Subsidiaries presently contributes to a Multiemployer Plan, nor have they contributed to such a plan within the past five calendar years. No notice of a "reportable event," within the meaning of Section 4043 of ERISA for which the 30-day reporting requirement has not been waived, has been required to be filed for any Pension Plan or by any ERISA Affiliate within the past 12-month period.
(4) All contributions required to be made under the terms of any ERISA Plan have been timely made. Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA. Neither the Company nor any of its Subsidiaries has provided, or is required to provide, security to any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(5) Under each Pension Plan which is a single- employer plan, as of the last day of the most recent plan year, the actuarially determined present value of all "benefit liabilities," within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the plan's most recent actuarial valuation) did not exceed the then current value of the assets of such plan, and there has been no material change in the financial condition of such plan since the last day of the most recent plan year.
(6) Neither the Company nor any of its Subsidiaries has any obligations for retiree health and life benefits under any plan, except as set forth in Schedule 4.1(Q)(6). There are no restrictions on the rights of the Company or any of its Subsidiaries to amend or terminate any such plan without incurring any liability thereunder.
(7) Except as Previously Disclosed in Schedule 4.1(Q)(7), neither the execution and delivery of this Plan nor the consummation of the transactions contemplated hereby will (i) result in any payment (including severance, unemployment compensation, golden parachute or otherwise) becoming due to any director or any employee of the Company or any of its Subsidiaries under any Compensation and Benefit Plan or otherwise from the Company or any of its Subsidiaries, (ii) increase any benefits otherwise payable under any Compensation and Benefit Plan, or (iii) result in any acceleration of the time of payment or vesting of any such benefit.
(R) NO KNOWLEDGE. The Company and its Subsidiaries know of no reason why the regulatory approvals referred to in Section 6.2 should not be obtained.
(S) LABOR AGREEMENTS. Neither the Company nor any of its Subsidiaries is a party to or is bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is the Company or any of its Subsidiaries the subject of a proceeding asserting that it or any such Subsidiary has committed an unfair labor practice (within the meaning of the National Labor Relations Act) or seeking to compel it or such Subsidiary to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving it or any of its Subsidiaries, pending or, to the best of its knowledge, threatened, nor is it aware of any activity involving its or any of the Subsidiaries' employees seeking to certify a collective bargaining unit or engaging in any other organization activity.
(T) ASSET CLASSIFICATION. The Company and its Subsidiaries have Previously Disclosed in Schedule 4.1(T) a list, accurate and complete in all material respects, of the aggregate amounts of loans, extensions of credit or other assets of the Company and its Subsidiaries that have been classified by it as of December 31, 1995 (the "Asset Classification"); and no amounts of loans, extensions of credit or other assets that have been classified as of December 31, 1995 by any regulatory examiner as "Other Loans Specially Mentioned," "Substandard," "Doubtful" "Loss," or words of similar import are excluded from the amounts disclosed in the Asset Classification, other than amounts of loans, extensions of credit or other assets that were charged off by the Company or any Subsidiary prior to December 31, 1995.
(U) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan losses shown on the consolidated balance sheets in the December 31, 1994 Holding Company Financial Reports of the Company was, and the allowance for possible loan losses to be shown on subsequent Holding Company Financial Reports of the Company will be, adequate in the opinion of the Board of Directors of the Company to provide for possible losses, net of recoveries relating to loans previously charged off, on loans outstanding (including accrued interest receivable) as of the date thereof.
(V) INSURANCE. Each of the Company and its Subsidiaries has taken all requisite action (including the making of claims and the giving of notices) pursuant to its directors' and officers' liability insurance policy or policies in order to preserve all rights thereunder with respect to all matters that are known to the Company, except for such matters which, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect on the Company or its Subsidiaries. Set forth in Schedule 4.1(V) is a list of all insurance policies maintained by or for the benefit of the Company or its Subsidiaries or their respective directors, officers, employees or agents.
(W) AFFILIATES. Except as Previously Disclosed in Schedule 4.1(W), to the best of the Company's knowledge, there is no person who, as of the date of this Plan, may be deemed to be an "affiliate" of the Company as that term is used in Rule 145 under the Securities Act.
(X) STATE TAKEOVER LAWS; ARTICLES OF INCORPORATION. The Company and its Subsidiaries have taken all necessary action to exempt this Plan and the Stock Option Agreement and the transactions contemplated hereby and thereby from, and this Plan and the Stock Option Agreement and the transactions contemplated hereby and thereby are exempt from (i) any applicable state takeover laws, including, but not limited to, RCW Ch. 23B.19, and (ii) any takeover-related provisions of the Company's and its Subsidiaries' Articles of Incorporation.
(Y) NO FURTHER ACTION. The Company and its Subsidiaries have taken all action so that the entering into of this Plan and the Stock Option Agreement, and the consummation of the transactions contemplated hereby and thereby (including the Mergers and the exercise of the Option) or any other action or combination of actions, or any other transactions, contemplated hereby or thereby do not and will not (i) require a vote of shareholders (other than as set forth in Section 6.1), or (ii) result in the grant of any rights to any person under the Articles of Incorporation, Charter or Bylaws of the Company or any of its Subsidiaries or under any agreement to which the Company or any such Subsidiaries is a party, or (iii) restrict or impair in any way the ability of the other Parties to exercise the rights granted hereunder or under the Stock Option Agreement.
(1) To the Company's knowledge, it and each of its Subsidiaries, the Participation Facilities and the Loan/Fiduciary Properties are, and have been, in compliance with all Environmental Laws, except for instances of noncompliance which are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on the Company or its Subsidiaries.
(2) There is no proceeding pending or, to the Company's knowledge, threatened before any court, governmental agency or board or other forum in which the Company or any of its Subsidiaries or any Participation Facility has been, or with respect to threatened proceedings, reasonably would be expected to be, named as a defendant or potentially responsible party (i) for alleged noncompliance (including by any predecessor) with any Environmental Law or (ii) relating to the release or threatened release into the environment of any Hazardous Material, whether or not occurring at or on a site owned, leased or operated by the Company or any of its Subsidiaries or any Participation Facility, except for such proceedings pending or threatened that are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on the Company or its Subsidiaries or have been Previously Disclosed in Schedule 4.1(Z)(2).
(3) There is no proceeding pending or, to the Company's knowledge, threatened before any court, governmental agency or board or other forum in which any Loan/Fiduciary Property (or the Company or any of its Subsidiaries in respect of any Loan/Fiduciary Property) has been, or with respect to threatened proceedings, reasonably would be expected to be, named as a defendant or potentially responsible party (i) for alleged noncompliance (including by any predecessor) with any Environmental Law or (ii) relating to the release or threatened release into the environment of any Hazardous Material, whether or not occurring at or on a Loan/Fiduciary Property, except for such proceedings pending or threatened that are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on the Company or have been Previously Disclosed in Schedule 4.1(Z)(3).
(4) To the Company's knowledge, there is no reasonable basis for any proceeding of a type described in subparagraphs (2) or (3) of this paragraph (Z), except as has been Previously Disclosed in Schedule 4.1(Z)(4).
(5) To the Company's knowledge, during the period of (i) ownership or operation by the Company or any of its Subsidiaries of any of their respective current properties, (ii) participation in the management of any Participation Facility by the Company or any of its Subsidiaries, or (iii) holding of a security or other interest in a Loan/Fiduciary Property by the Company or any of its Subsidiaries, there have been no releases of Hazardous Material in, on, under or affecting any such property, Participation Facility or Loan/Fiduciary Property, except for such releases that are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on the Company or its Subsidiaries or have been Previously Disclosed in Schedule 4.1(Z)(5).
(6) To the Company's knowledge, prior to the period of (i) ownership or operation by the Company or any of its Subsidiaries of any of their respective current properties, (ii) participation in the management of any Participation Facility by the Company or any of its Subsidiaries, or (iii) holding of a security or other interest in a Loan/Fiduciary Property by the Company or any of its Subsidiaries, there were no releases of Hazardous Material in, on, under or affecting any such property, Participation Facility or Loan/Fiduciary Property, except for such releases that are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on the Company or its Subsidiaries or have been Previously Disclosed in Schedule 4.1(Z)(6).
(AA) OPTION SHARES. The Option Shares, when issued upon exercise of the Option, will be validly issued, fully paid and nonassessable and subject to no preemptive rights.
(BB) TAX REPORTS. Except as Previously Disclosed in Schedule 4.1(BB), (i) all reports and returns with respect to Taxes that are required to be filed by or with respect to the Company or its Subsidiaries, including consolidated federal income tax returns of the Company and its Subsidiaries (collectively, the "Tax Returns"), have been duly filed, or requests for extensions have been timely filed and have not expired, for periods ended on or prior to the most recent fiscal year-end, except to the extent all such failures to file, taken together, are not reasonably likely to have a Material Adverse Effect on the Company or its Subsidiaries, and such Tax Returns were true, complete and accurate in all material respects, (ii) all Taxes shown to be due on the Tax Returns have been paid in full, (iii) the Tax Returns have been examined by the Internal Revenue Service or the appropriate state, local or foreign taxing authority or the period for assessment of the Taxes in respect of which such Tax Returns were required to be filed has expired, (iv) all Taxes due with respect to completed and settled examinations have been paid in full, (v) no issues have been raised by the relevant taxing authority in connection with the examination of any of the Tax Returns which are reasonably likely, individually or in the aggregate, to result in a determination that would have a Material Adverse Effect on the Company or its Subsidiaries, except as reserved against in the Holding Company Financial Reports of the Company, and (vi) no waivers of statutes of limitations (excluding such statutes that relate to years under examination by the Internal Revenue Service) have been given by or requested with respect to any Taxes of the Company or its Subsidiaries.
(CC) ACCURACY OF INFORMATION. The statements with respect to the Company and its Subsidiaries contained in this Plan, the Stock Option Agreement, the Schedules and any other written documents executed and delivered by or on behalf of the Company or any other Party pursuant to the terms of or relating to this Plan are true and correct in all material respects, and such statements and documents do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading.
(EE) DERIVATIVES CONTRACTS. None of the Company or its Subsidiaries is a party to or has agreed to enter into a Derivatives Contract or owns securities that are referred to as "structured notes" except for those Derivatives Contracts and structured notes Previously Disclosed in Schedule 4.1(EE). Schedule 4.1(EE) includes a list of any assets of the Company or its Subsidiaries that are pledged as security for each such Derivatives Contract.
(FF) ACCOUNTING CONTROLS. Each of the Company and its Subsidiaries has devised and maintained systems of internal accounting controls sufficient to provide reasonable assurances that (i) all material transactions are executed in accordance with management's general or specific authorization, (ii) all material transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP, and to maintain proper accountability for items, (iii) access to the material property and assets of the Company and its Subsidiaries is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for items is compared with the actual levels at reasonable intervals and appropriate action is taken with respect to any differences.
(GG) COMMITMENTS AND CONTRACTS. Neither the Company nor any of its Subsidiaries is a party or subject to any of the following (whether written or oral, express or implied):
(1) except as Previously Disclosed in Schedule 4.1(GG), any employment contract or understanding (including any understandings or obligations with respect to severance or termination pay liabilities or fringe benefits) with any present or former officer, director or employee (other than those which are terminable at will by the Company or any such Subsidiary without any obligation on the part of the Company or any such Subsidiary to make any payment in connection with such
(2) except as Previously Disclosed in Schedule 4.1(GG), any real or personal property lease with annual rental payments aggregating $10,000 or more; or
(3) except as Previously Disclosed in Schedule 4.1(GG), any material contract with any affiliate.
4.2. INTERWEST AND INTERWEST SAVINGS REPRESENTATIONS AND WARRANTIES. Each of InterWest and InterWest Savings hereby represents and warrants to the Company and the Banks as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with respect to InterWest and InterWest Savings are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. Each of InterWest and InterWest Savings is duly qualified to do business and is in good standing in the States of the United States and foreign jurisdictions where the failure to be duly qualified, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on it. Each of InterWest and its Subsidiaries has in effect all federal state, local, and foreign governmental authorizations necessary for it to own or lease its properties and assets and to carry on its business as it is now conducted, the absence of which, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on InterWest.
(C) SHARES. The outstanding shares of InterWest's capital stock are validly issued and outstanding, fully paid and nonassessable, and subject to no preemptive rights. Except as Previously Disclosed in Schedule 4.2(C), there are no shares of capital stock or other equity securities of it or its Subsidiaries outstanding and no outstanding Rights with respect thereto.
(D) CORPORATE POWER. Each of InterWest and InterWest Savings has the corporate power and authority to carry on its business as it is now being conducted and to own all its material properties and assets.
(E) CORPORATE AUTHORITY. Subject to any necessary receipt of approval by its stockholders referred to in Section 6.1, this Plan, the Stock Option Agreement and each of the Employment Agreements have been authorized by all necessary corporate action of InterWest and InterWest Savings and each such agreement is a valid and binding agreement of InterWest and InterWest Savings, enforceable against InterWest and InterWest Savings in accordance with its terms, subject to bankruptcy, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general equity principles.
(F) NO DEFAULTS. Subject to the approval by its shareholders referred to in Section 6.1, the required regulatory approvals referred to in Section 6.1, and the required filings under federal and state securities laws, and except as Previously Disclosed in Schedule 4.2(F), the execution, delivery and performance of this Plan, and the Stock Option Agreement, and each of the Employment Agreements and the consummation by InterWest and each of its Subsidiaries that is a Party to the transactions contemplated hereby and thereby, does not and will not (i) constitute a breach or violation of, or a default under, any law, rule or regulation or any judgment, decree, order, governmental permit or license, or agreement, indenture or instrument of InterWest or of any of its Subsidiaries or to which InterWest or any of its Subsidiaries or its or their properties is subject or bound, which breach, violation or default is reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on InterWest, (ii) constitute a breach or violation of, or a default under, the Articles of Incorporation, Charter or Bylaws of its or any of its Subsidiaries, or (iii) require any consent or approval under any such law, rule, regulation, judgment, decree, order, governmental permit or license or the consent or approval of any other party to any such agreement, indenture or instrument, other than any such consent or approval that, if not obtained, would not be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on InterWest.
(G) FINANCIAL REPORTS. Except as Previously Disclosed in Schedule 4.2(G), in the case of InterWest, its Annual Report on Form 10-K for the fiscal year ended September 30, 1995, and all other documents filed or to be filed subsequent to September 30, 1995 under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form filed with the SEC (in each such case, the "InterWest Financial Reports"), did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading; and each of the balance sheets in or incorporated by reference into the InterWest Financial Reports (including the related notes and schedules thereto) fairly presents and will fairly present the financial position of the entity or entities to which it relates as of its date and each of the statements of income and changes in stockholders' equity and cash flows or equivalent statements in the InterWest Financial Reports (including any related notes and schedules thereto) fairly presents and will fairly present the results of operations, changes in stockholders' equity and changes in cash flows, as the case may be, of the entity or entities to which it relates for the periods set forth therein, in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein, subject to normal and recurring year-end audit adjustments in the case of unaudited statements.
(H) NO EVENTS. Except as Previously Disclosed on Schedule 4.2(H), since September 30, 1995, no event has occurred which is reasonably likely to have a Material Adverse Effect on it.
(I) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in Schedule 4.2(I), no litigation, proceeding or controversy before any court or governmental agency is pending that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on InterWest and its Subsidiaries or that alleges claims under any fair lending law or other law relating to discrimination, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act and the Home Mortgage Disclosure Act, and, to the best of its knowledge, no such litigation, proceeding or controversy has been threatened; and except as Previously Disclosed in Schedule 4.2(I), neither InterWest nor any of its Subsidiaries or any of its or their material properties or their officers, directors or controlling persons is a party to or is subject to any order, decree, agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, any Regulatory Authority, and neither InterWest nor any of its Subsidiaries has been advised by any of such Regulatory Authorities that such authority is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum or understanding, commitment letter or similar submission.
(J) REPORTS. Since September 30, 1995, each of InterWest and its Subsidiaries has filed all reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with (i) the FDIC, (ii) the Department, (iii) the Federal Home Loan Bank and the Federal Home Loan Bank System, and (iii) any other applicable Regulatory Authorities. As of their respective dates (and without giving effect to any amendments or modifications filed after the date of this Plan with respect to reports and documents filed before the date of this Plan), each of such reports and documents, including the financial statements, exhibits and schedules thereto, complied in all material respects with all of the statutes, rules and regulations enforced or promulgated by the Regulatory Authority with which they were filed and did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.
(K) ACCURACY OF INFORMATION. The statements with respect to InterWest and its Subsidiaries contained in this Plan, the Stock Option Agreement, the Schedules and any other written documents executed and delivered by or on behalf of InterWest or any other Party pursuant to the terms of this Plan are true and correct in all material respects, and such statements and documents do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading.
(L) DERIVATIVES CONTRACTS. None of InterWest or its Subsidiaries is a party to or has agreed to enter into a Derivatives Contract or owns securities that are referred to as "structured notes" except for those Derivatives Contracts and structured notes Previously Disclosed in Schedule 4.2(L). Schedule 4.2(L) includes a list of any assets of InterWest or its Subsidiaries that are pledged as security for each such Derivatives Contract.
(M) ABSENCE OF UNDISCLOSED LIABILITIES. Neither InterWest nor any of its Subsidiaries has any obligation or liability (contingent or otherwise) that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on it, except (i) as reflected the Interwest Financial Reports prior to the date of this Plan and (ii) for commitments and obligations made, or liabilities incurred, in the ordinary course of business consistent with past practice since September 30, 1995. Since September 30, 1995, neither InterWest nor any of its Subsidiaries has incurred or paid any obligation or liability (including any obligation or liability incurred in connection with any acquisitions in which any form of direct financial assistance of the federal government or any agency thereof has been provided to any Subsidiary) which, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on it.
Each of the Company and the Banks hereby covenants to InterWest and InterWest Savings, and each of InterWest and InterWest Savings hereby covenants to the Company and the Banks, that:
5.1. BEST EFFORTS. Subject to the terms and conditions of this Plan and to the exercise by its Board of Directors of such Board's fiduciary duties, it shall use its best efforts in good faith to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or desirable, or advisable under applicable laws, so as to permit consummation of the Mergers by June 30, 1996 and to otherwise enable consummation of the transactions contemplated hereby and (in the case of the Company and InterWest) by the Stock Option Agreement, and shall cooperate fully with the other Parties to that end (it being understood that any amendments to the Registration Statement or a resolicitation of proxies as a consequence of an Acquisition Transaction in which InterWest or any of its subsidiaries is involved shall not violate this covenant).
5.2. THE PROXY. In the case of the Company: it shall promptly assist InterWest in the preparation of a proxy statement (the "Proxy Statement") to be mailed to the holders of the Company Common Stock in connection with the transactions contemplated hereby and to be filed by InterWest in a registration statement (the "Registration Statement") with the SEC as provided in Section 5.8, which shall conform to all applicable legal requirements, and it shall call a special meeting (the "Meeting") of the holders of Company Common Stock to be held as soon as practicable for purposes of voting upon the transactions contemplated hereby and the Company shall use its best efforts to solicit and obtain votes of the holders of Company Common Stock in favor of the transactions contemplated hereby and, subject to the exercise of its fiduciary duties, the Board of Directors of the Company shall recommend approval of such transactions by such holders.
5.3. REGISTRATION STATEMENT COMPLIANCE WITH SECURITIES LAWS. When the Registration Statement or any post-effective amendment or supplement thereto shall become effective, and at all times subsequent to such effectiveness, up to and including the date of the Meeting, such Registration Statement, and all amendments or supplements thereto, with respect to all information set forth therein furnished or to be furnished by or on behalf of the Company relating to the Company or its Subsidiaries and by or on behalf of InterWest relating to InterWest or its Subsidiaries, (i) will comply in all material respects with the provisions of the Securities Act and any other applicable statutory or regulatory requirements and (ii) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading; provided, however, in no event shall any Party be liable for any untrue statement of a material fact or omission to state a material fact in the Registration Statement made in reliance upon, and in conformity with, written information concerning another Party furnished by or on behalf of such other Party specifically for use in the Registration Statement.
5.4. REGISTRATION STATEMENT EFFECTIVENESS. In the case of InterWest: it will advise the Company, promptly after InterWest receives notice thereof, of the time when the Registration Statement has become effective or any supplement or amendment has been filed, of the issuance of any stop order or the suspension of the qualification of the InterWest Common Stock for offering or sale in any jurisdiction, of the initiation or threat of any proceeding for any such purpose, or of any request by the SEC for the amendment or supplement of the Registration Statement or for additional information.
5.5. PRESS RELEASES. The Company and the Banks will not, without the prior approval of InterWest, and InterWest and InterWest Savings will not, without the prior approval of the Company, issue any press release or written statement for general circulation relating to the transactions contemplated hereby, except as otherwise required by law.
(A) Upon reasonable notice, the Company and the Banks shall afford InterWest and its officers, employees, counsel, accountants and other authorized representatives, access, during normal business hours throughout the period up to the Effective Date, to all of the properties, books, contracts, commitments and records of the Company and its Subsidiaries and, during such period, the Company and the Banks shall furnish promptly to InterWest (i) a copy of each material report, schedule and other document filed by the Company and its Subsidiaries with any Regulatory Authority and (ii) all other information concerning the business, properties and personnel of the Company and its Subsidiaries as InterWest may reasonably request, provided that no investigation pursuant to this Section 5.6 shall affect or be deemed to modify or waive any representation or warranty made by the Company or the Banks in this Plan or the conditions to the obligations of the Company and the Banks to consummate the transactions contemplated by this Plan; and
(B) InterWest will not use any information obtained pursuant to this Section 5.6 for any purpose unrelated to the consummation of the transactions contemplated by this Plan and, if this Plan is terminated, will hold all confidential information and documents obtained pursuant to this paragraph in confidence (as provided in Section 8.6) unless and until such time as such information or documents become publicly available other than by reason of any action or failure to act by InterWest or as it is advised by counsel that any such information or document is required by law or applicable stock exchange rule to be disclosed, and in the event of the termination of this Plan, InterWest will, upon request by the Company, deliver to the Company all documents so obtained by InterWest or destroy such documents and, in the case of destruction, will certify such fact to the Company.
5.7. ACQUISITION PROPOSALS. In the case of the Company: Without the prior written consent of InterWest, the Company shall not, and it shall cause its Subsidiaries not to, solicit, initiate or encourage inquiries or proposals with respect to, or, except as required by the fiduciary duties of the Board of Directors of the Company (as advised in writing by its outside counsel), furnish any nonpublic information relating to or participate in any negotiations or discussions concerning, any acquisition or purchase of all or a substantial portion of the assets of, or a substantial equity interest in, the Company or any of its Subsidiaries or any merger or other business combination with the Company or any of its Subsidiaries other than as contemplated by this Plan; it shall instruct its and its Subsidiaries' officers, directors, agents, advisors and affiliates to refrain from doing any of the foregoing; and it shall notify InterWest immediately if any such inquiries or proposals are received by, or any such negotiations or discussions are sought to be initiated with, the Company or any of its Subsidiaries.
5.8. REGISTRATION STATEMENT PREPARATION; REGULATORY APPLICATIONS PREPARATION. In the case of InterWest: InterWest shall, as promptly as practicable following the date of this Plan, prepare and file the Registration Statement with the SEC and InterWest shall use its best efforts to cause the Registration Statement to be declared effective as soon as practicable after the filing thereof. InterWest shall, as promptly as practicable following the date of this Plan, prepare and file all necessary notices or applications with the FDIC, the Federal Reserve Board, and the Department.
5.9. BLUE-SKY FILINGS. In the case of InterWest: InterWest shall use its best efforts to obtain, prior to the effective date of the Registration Statement, all necessary state securities laws or "blue sky" permits and approvals, provided that InterWest shall not be required by virtue thereof to submit to general jurisdiction in any state.
5.10. AFFILIATE AGREEMENTS. In the case of the Company: The Company will use its best efforts to induce each person who may be deemed to be an "affiliate" of the Company for purposes of Rule 145 under the Securities Act to execute and deliver to InterWest on or before the mailing of the Proxy Statement for the Meeting an agreement in the form attached hereto as Exhibit C restricting the disposition of such affiliate's shares of the Company Common Stock and the shares of InterWest Common Stock to be received by such person in exchange for such person's shares of Company Common Stock. In the case of InterWest: InterWest agrees to use its best efforts to maintain the availability of Rule 145 for use by such "affiliates".
5.11. CERTAIN POLICIES OF THE COMPANY AND THE BANKS. In the case of each of the Company and the Banks: Each shall, at InterWest's request: (i) modify and change its loan, litigation and other reserve and real estate valuation policies and practices (including loan classifications and levels of reserves), and (ii) generally conform its operating, lending and compliance policies and procedures, immediately prior to the Effective Date so as to be consistent on a mutually satisfactory basis with those of InterWest and GAAP; provided, however, that prior to any such modification or change, InterWest shall certify that the conditions to the obligation of InterWest under Section 6.1 and 6.2 to consummate the transactions contemplated hereby, other than the condition set forth in Section 6.1(G) have been satisfied or waived. The Company's and the Banks' representations, warranties and covenants contained in this Plan shall not be deemed to be untrue or breached in any respect for any purpose as a consequence of any modifications or changes undertaken solely on account of this Section 5.11.
5.12. STATE TAKEOVER LAW. In the case of the Company: The Company shall not take any action that would cause the transactions contemplated by this Plan or the Stock Option Agreement to be subject to any applicable state takeover statute and the Company shall take all necessary steps to exempt (or ensure the continued exemption of) the transactions contemplated by this Plan and the Stock Option Agreement from, or, if necessary, challenge the validity or applicability of, any applicable state takeover law.
5.13. NO RIGHTS TRIGGERED. In the case of the Company: Except for those consents of third parties Previously Disclosed on Schedule 4.1(G) the Company shall take all necessary steps to ensure that the entering into of this Plan and the Stock Option Agreement and the consummation of the transactions contemplated hereby and thereby (including the Mergers and the exercise of the Option) and any other action or combination of actions, or any other transactions contemplated hereby or thereby, do not and will not (i) result in the grant of any rights to any person under the Articles of Incorporation or Bylaws of the Company or under any agreement to which the Company or any of its Subsidiaries is a party or (ii) restrict or impair in any way the ability of InterWest or InterWest Savings to exercise the rights granted hereunder or under the Stock Option Agreement.
5.14. SHARES LISTED. In the case of InterWest: InterWest shall use its best efforts to cause to be listed, prior to the Effective Date, on the Nasdaq National Market upon official notice of issuance the shares of InterWest Common Stock to be issued to the holders of Company Common Stock.
5.15. REGULATORY APPLICATIONS. In the case of each of InterWest and InterWest Savings each shall: (i) promptly prepare and submit applications to the appropriate Regulatory Authorities for approval of the Merger, and (ii) promptly make all other appropriate filings to secure all other approvals, consents and rulings which are necessary for the consummation of the Mergers by InterWest and InterWest Savings.
5.16. REGULATORY DIVESTITURES. In the case of the Company: Effective on or before the Effective Date, the Company shall cease engaging in such activities as InterWest shall advise the Company in writing are not permitted to be engaged in by InterWest under applicable law following the Effective Date and, to the extent required by any Regulatory Authority as a condition of approval of the transactions contemplated by this Plan, the Company shall divest any Subsidiary engaged in activities or holding assets that are impermissible for InterWest or InterWest Savings, on terms and conditions agreed to by InterWest; provided, however, that prior to taking such action, InterWest shall certify that the conditions to the obligations of InterWest under Sections 6.1 and 6.2 to consummate the transactions contemplated hereby, other than the condition set forth in Section 6.1(G), have been satisfied or waived.
(A) During the period from the date of this Plan to the Effective Date, each of the Company and InterWest shall, and shall cause its representatives to, confer on a regular and frequent basis with representatives of the other.
(B) Each of the Company and InterWest shall promptly notify the other of (i) any material change in the business or operations of it or its Subsidiaries, (ii) any material complaints, investigations or hearings (or communications indicating that the same may be contemplated) of any Regulatory Authority relating to it or its Subsidiaries, (iii) the initiation or threat of material litigation involving or relating to it or its Subsidiaries, or (iv) any event or condition that might reasonably be expected to cause any of its representations or warranties set forth herein not to be true and correct in all material respects as of the Effective Date or prevent it or its Subsidiaries from fulfilling its or their obligations hereunder.
(A) For a period of five years from and after the Effective Date, InterWest shall indemnify, defend and hold harmless the present and former directors, officers and employees of the Company and its Subsidiaries (each, an "Indemnified Party") against all costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, and arising out of matters existing or occurring at or prior to the Effective Date (including the transactions contemplated by this Plan and the Stock Option Agreement), whether asserted or claimed prior to, at or after the Effective Date, to the fullest extent that the Company would have been permitted under Washington law and its articles of incorporation or bylaws in effect on the date of this Plan to indemnify such person (and InterWest will also advance expenses as incurred to the fullest extent permitted under applicable law so long as the person to whom expenses are advanced provides an undertaking to repay such advances within a reasonable period of time if it is ultimately determined that Washington law does not allow for such indemnification). InterWest further agrees to review obtaining directors' and officers' liability insurance for the board of directors and officers of InterWest.
(B) Any Indemnified Party wishing to claim indemnification under paragraph (A) of this Section 5.18, upon learning of such claim, action, suit, proceeding or investigation, shall promptly notify InterWest thereof; provided, that the failure so to notify shall not affect the obligations of InterWest under paragraph (A) of this Section 5.18 (unless such failure materially and adversely increases InterWest's liability under such paragraph (A)). In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Date), (i) InterWest shall have the right to assume the defense thereof and InterWest shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that InterWest shall be obligated pursuant to this paragraph (B) to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction for any single action, suit or proceeding, (ii) the Indemnified Parties will cooperate in the defense of any such matter, and (iii) InterWest shall not be liable for any settlement effected without its prior written consent.
(C) If InterWest or any of its successors or assigns shall consolidate with or merge into any other entity and shall not be the continuing or surviving entity of such consolidation or merger or shall transfer all or substantially all of its assets to any entity, then and in each case, proper provision shall be made so that the successors and assigns of InterWest shall assume the obligations set forth in this Section 5.18.
(D) InterWest shall pay all expenses, including attorneys' fees, that may be incurred by any Indemnified Party in enforcing the indemnity and other obligations provided for in this Section 5.18. The rights of each Indemnified Party hereunder shall be in addition to any other rights such Indemnified Party may have under the articles of incorporation or bylaws of the Company or under applicable Washington law.
5.19. INTERWEST PROXY STATEMENT; SHAREHOLDER APPROVAL. InterWest shall call a meeting of shareholders to be held as soon as reasonably practicable after the date of the Plan for the purpose of approving the Plan, and such other related matters as it deems appropriate. In connection with such meeting of shareholders, (i) InterWest shall prepare a proxy statement to be filed with the SEC and with any other appropriate Regulatory Authorities and shall mail or cause to be mailed such proxy statement to the InterWest shareholders and shall provide the Company with the opportunity to review and comment on the proxy statement, (ii) the Company shall furnish to InterWest all information concerning the Company and the Banks as InterWest may reasonably request in connection with the preparation of the proxy statement, (iii) the Board of Directors of InterWest shall recommend, subject to compliance with their legal and fiduciary duties as advised in writing by counsel, to the InterWest shareholders the approval of the Plan, and (iv) InterWest shall use its best efforts, subject to compliance with its legal and fiduciary duties as advised in writing by counsel, to obtain the approval of InterWest shareholders.
5.20. OTHER EMPLOYMENT AGREEMENTS. Prior to the Effective Date, InterWest Savings shall offer to employ Scott Southwick, Marla Chase and Mark Rasmussen following the Effective Date upon the terms and conditions of the Employment Agreement substantially in the form attached hereto as Exhibit F at an annual base salary not less than such officers received from the Company and the Banks prior to the Effective Date.
ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGERS
6.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each Party to consummate the transactions contemplated by this Plan is subject to the written waiver by such Party or the fulfillment on or prior to the Effective Date of each of the following conditions:
(A) SHAREHOLDER VOTES. This Plan shall have been duly approved by the affirmative vote of the holders of at least two- thirds of the outstanding shares of Company Common Stock and the holders of at least a majority of the outstanding shares of InterWest Common Stock, in each case in accordance with applicable law and the articles and bylaws of the Company and InterWest, respectively.
(B) REGULATORY APPROVALS. Procurement by the Parties of all necessary regulatory consents and approvals by the appropriate Regulatory Authorities and the expiration of any waiting periods relating thereto; provided, however, that no such approval or consent shall have imposed any condition or requirement that, in the opinion of InterWest, would deprive InterWest of the material economic or business benefits of the transactions contemplated by this Plan.
(C) NO INJUNCTION. There shall not be in effect any order, decree or injunction of any court or agency of competent jurisdiction that enjoins or prohibits consummation of any of the transactions contemplated hereby.
(D) EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall have become effective and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC or any other Regulatory Authority.
(E) BLUE-SKY PERMITS. InterWest shall have received all state securities laws and "blue sky" permits necessary to consummate the Corporate Merger.
(F) TAX OPINION. InterWest and the Company shall have received an opinion from Breyer & Aguggia to the effect that (i) the Corporate Merger constitutes a reorganization under Section 368 of the Code and (ii) no gain or loss will be recognized by stockholders of the Company who receive shares of InterWest Common Stock in exchange for their shares of the Company Common Stock, except that gain or loss may be recognized as to cash received in lieu of fractional share interests, and, in rendering their opinion, Breyer & Aguggia may require and rely upon representations contained in certificates of officers of InterWest, the Company and others.
(G) NASDAQ LISTING. The shares of InterWest Common Stock to be issued pursuant to this Plan shall have been approved for listing on the Nasdaq National Market subject only to official notice of issuance.
(H) EMPLOYMENT CONTRACTS. The Employment Agreements attached as Exhibits D and E shall have been duly executed and delivered by all parties to such agreements.
6.2. CONDITIONS TO OBLIGATIONS OF INTERWEST. The obligations of InterWest and InterWest Savings to consummate the transactions contemplated by this Plan also is subject to the written waiver by InterWest or the fulfillment on or prior to the Effective Date of each of the following conditions:
(A) LEGAL OPINION. InterWest shall have received an opinion, dated the Effective Date, of Graham & Dunn, counsel for the Company and the Banks, in form reasonably satisfactory to InterWest, which shall cover the matters contained in Exhibit G.
(B) OFFICERS' CERTIFICATE. (i) Each of the representations and warranties contained herein of the Company and the Banks shall be true and correct as of the date of this Plan and upon the Effective Date with the same effect as though all such representations and warranties had been made on the Effective Date, except for any such representations and warranties that specifically relate to an earlier date, which shall be true and correct as of such earlier date and except as otherwise provided in Section 5.11 and (ii) each and all of the agreements and covenants of the Company and the Banks to be performed and complied with pursuant to this Plan on or prior to the Effective Date shall have been duly performed and complied with in all material respects, and InterWest and InterWest Savings shall have received a certificate signed by the Chief Executive Officers and the Chief Financial Officers of the Company and the Banks dated the Effective Date, to such effect.
(C) DELOITTE & TOUCHE LETTERS. InterWest shall have received from Deloitte & Touche LLP a letter, dated the date of or shortly prior to (i) the mailing of the Proxy Statement and (ii) the Effective Date, in form and substance satisfactory to InterWest, with respect to the Company's consolidated financial position and results of operations, which letters shall be based upon "agreed upon procedures" undertaken by such firm.
(D) RECEIPT OF AFFILIATE AGREEMENTS. InterWest shall have received from each affiliate of the Company the agreement referred to in Section 5.10.
(E) ADVERSE CHANGE. During the period from December 31, 1994 to the Effective Date, there shall not have been any material adverse change in the financial position or results of operations of the Company or the Banks nor shall the Company or the Banks have sustained any loss or damage to its properties, whether or not insured, that materially affects its ability to conduct its business; and InterWest shall have received a certificate dated the Effective Date signed by the Chief Executive Officers of the Company and the Banks to such effect.
(F) DISSENTERS' RIGHTS. The number of shares of Company Common Stock for which cash is to be paid because dissenters' rights of appraisal under the Appraisal Laws shall have been effectively preserved as of the Effective Date or because of the payment of cash in lieu of fractional shares of InterWest Common Stock shall not exceed in the aggregate ten percent of the outstanding shares of Company Common Stock.
(G) POOLING LETTERS. InterWest shall have received a letter dated as of the Effective Date, in form and substance acceptable to InterWest, from Ernst & Young LLP and Central shall have received a letter dated as of the Effective Date from Deloitte & Touche LLP, in form and substance acceptable to InterWest, to the effect that the Merger will qualify for pooling-of- interests accounting treatment.
6.3. CONDITIONS TO OBLIGATIONS OF COMPANY AND BANKS. The obligations of the Company and the Banks to consummate the transactions contemplated by this Plan also are subject to the written waiver by the Company and the Banks or the fulfillment on or prior to the Effective Date of each of the following conditions:
(A) LEGAL OPINION. The Company and the Banks shall have received an opinion, dated the Effective Date, of Breyer & Aguggia, special counsel for InterWest, in form reasonably satisfactory to the Company, which shall cover the matters contained in Exhibit H.
(B) OFFICER'S CERTIFICATE. (i) Each of the representations and warranties contained herein of InterWest and InterWest Savings shall be true and correct as of the date of this Plan and upon the Effective Date with the same effect as though all such representations and warranties had been made on the Effective Date, except for any such representations and warranties that specifically relate to an earlier date, which shall be true and correct as of such earlier date, and (ii) each and all of the agreements and covenants of InterWest and InterWest Savings to be performed and complied with pursuant to this Plan on or prior to the Effective Date shall have been duly performed and complied with in all material respects, and the Company and the Banks shall have received a certificate signed by an executive officer of each of InterWest and InterWest Savings dated the Effective Date, to such effect.
(C) ADVERSE CHANGE. During the period from September 30, 1995 to the Effective Date, there shall not have been any material adverse change in the financial position or results of operations of the InterWest and InterWest Savings nor shall InterWest or InterWest Savings have sustained any loss or damage to its properties, whether or not insured, that materially affects its ability to conduct its business; and InterWest shall have received a certificate dated the Effective Date signed by the Chief Executive Officers of InterWest and InterWest Savings to such effect.
This Plan may be terminated prior to the Effective Date, either before or after receipt of required stockholder approvals:
7.1 MUTUAL CONSENT. By the mutual consent of InterWest and the Company, if the Board of Directors of each so determines by vote of a majority of the members of its entire board.
7.2 BREACH. By InterWest or the Company, if its Board of Directors so determines by vote of a majority of the members of its entire Board, in the event of (i) a material breach by the other party of any representation or warranty contained herein, which breach cannot be or has not been cured within thirty (30) days after the giving of written notice to the breaching party of such breach, or (ii) a breach by the other party of any of the material covenants or agreements contained herein, which breach cannot be or has not been cured within thirty (30) days after the giving of written notice to the breaching party of such breach.
7.3 DELAY. By InterWest or the Company, if its Board of Directors so determines by vote of a majority of the members of its entire Board, in the event that the Corporate Merger is not consummated by September 30, 1996.
7.4 NO STOCKHOLDER APPROVAL. By InterWest or the Company, if its Board of Directors so determines by a vote of a majority of the members of its entire Board, in the event that any stockholder approval contemplated by Section 6.1 is not obtained at the Meeting, including any adjournment or adjournments thereof.
7.5 INTERWEST COMMON STOCK PRICE. By the Company, within five Business Days after the end of the ten trading day period used to determine the InterWest Price, if the InterWest Price is less than $17.00 and InterWest, in its sole discretion, does not elect by written notice to the Company to adjust the Exchange Ratio so that the InterWest Price multiplied by the Exchange Ratio equals $28.90.
(A) GENERAL CONSEQUENCES. Subject to subsection (B) of this Section 7.6, in the event of the termination or abandonment of this Plan pursuant to the provisions of Sections 7.1 through 7.5, this Plan shall become void and have no force or effect, without any liability on the part of the Parties or any of their respective directors or officers or shareholders with respect to this Plan.
(B) OTHER CONSEQUENCES. Notwithstanding anything in this Plan to the contrary, no termination of this Plan will relieve any Party of any liability for breach of this Plan or for any misrepresentation under this Plan or be deemed to constitute a waiver of any remedy available for such breach or misrepresentation. In any action or proceeding in connection with such breach or misrepresentation, the prevailing party will be entitled to reasonable attorneys' fees and expenses.
8.1. SURVIVAL. Only those agreements and covenants in this Plan that by their express terms apply in whole or in part after the Effective Date shall survive the Effective Date. All other representations, warranties, and covenants shall be deemed only to be conditions of the Mergers and shall not survive the Effective Date. If the Mergers are abandoned and this Plan is terminated, the provisions of Article VII shall apply and the agreements of the Parties in Sections 5.6(B), 8.5 and 8.6 shall survive such abandonment and termination.
8.2. WAIVER; AMENDMENT. Prior to the Effective Date, any provision of this Plan may be (i) waived in writing by the Party benefitted by the provision, or (ii) amended or modified at any time (including the structure of the transactions contemplated hereby) by an agreement in writing among the Parties approved by their respective Boards of Directors and executed in the same manner as this Plan, except that, after the vote by the stockholders of the Company, the consideration to be received by the stockholders of the Company for each share of Company Common Stock shall not thereby be altered. Nothing contained in this Section 8.2 is intended to modify InterWest's rights pursuant to Section 2.7.
8.3. COUNTERPARTS. This Plan may be executed in one or more counterparts, each of which shall be deemed to constitute an original. This Plan shall become effective when one counterpart has been signed by each Party.
8.4. GOVERNING LAW. This Plan shall be governed by, and interpreted in accordance with, the laws of the State of Washington, except as federal law may be applicable.
8.5. EXPENSES. Each Party will bear all expenses incurred by it in connection with this Plan and the transactions contemplated hereby, except printing expenses which shall be shared equally between the Company and InterWest.
8.6. CONFIDENTIALITY. Except as otherwise provided in Section 5.6(B), each of the Parties and their respective agents, attorneys and accountants will maintain the confidentiality of all information provided in connection herewith which has not been publicly disclosed.
8.7. NOTICES. All notices, requests and other communications hereunder to a Party shall be in writing and shall be deemed to have been duly given when delivered by hand, telegram or telex (confirmed in writing) to such Party at its address set forth below or such other address as such Party may specify by notice to the Parties.
If to InterWest or InterWest Savings to:
Zylstra, Beeksma, Waller and Skinner
If to the Company or the Banks to:
8.8. ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan and the Stock Option Agreement together represent the entire understanding of the Parties with reference to the transactions contemplated hereby and thereby and supersede any and all other oral or written agreements previously made. Nothing in this Plan or the Stock Option Agreement, expressed or implied, is intended to confer upon any person, other than the Parties or their respective successors, any rights, remedies, obligations or liabilities under or by reason of this Plan or the Stock Option Agreement.
8.9. BENEFIT PLANS. Upon consummation of the Corporate Merger, all employees of the Company and its Subsidiaries shall be deemed as at-will employees of InterWest and its Subsidiaries except for those employees who are parties to the Employment Agreements. From and after the Effective Date, employees of the Company and its Subsidiaries shall be generally entitled to participate in the pension, benefit and similar plans on substantially the same terms and conditions as employees of InterWest and its Subsidiaries. For the purpose of determining eligibility to participate in such plans and the vesting of benefits under such plans (but not for the accrual of benefits under such plans), InterWest shall give effect to years of service with the Company or the Company's Subsidiaries, as the case may be, as if such service were with InterWest or its Subsidiaries. InterWest shall use its best efforts to facilitate the rollover of the 401(k) plan maintained by the Company into the 401(k) plan maintained by InterWest Savings.
8.10. HEADINGS. The headings contained in this Plan are for reference purposes only and are not part of this Plan.
IN WITNESS WHEREOF, the Parties have caused this instrument to be executed in counterparts by their duly authorized officers, all as of the day and year first above written. | 8-K | EX-2 | 1996-01-12T00:00:00 | 1996-01-12T14:34:35 |
0000898430-96-000108 | 0000898430-96-000108_0001.txt | [LETTERHEAD OF CHRISTENSEN, WHITE, MILLER, FINK, JACOBS, GLASER & SHAPIRO]
3799 Las Vegas Boulevard South
RE: REGISTRATION STATEMENT ON FORM S-8
You have requested our opinion, as counsel for MGM Grand, Inc., a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended, of 2,500,000 shares (the "Shares") of the Company's common stock, $.01 par value per share ("Common Stock"), issuable pursuant to the Company's Nonqualified Stock Option Plan and the Company's Incentive Stock Option Plan (collectively, the "Option Plans"). The Shares are the subject of the Company's Registration Statement on Form S-8 to be filed with the Securities and Exchange Commission on or about January 12, 1996 (the "Registration Statement").
In rendering our opinion herein, we have assumed the satisfaction of the following conditions: the issuance of the Shares to be issued under the Option Plans and all stock option agreements entered into in connection therewith in accordance with the terms thereof; the issuance by any applicable regulatory agencies of all appropriate permits, consents, approvals, authorizations and orders relating to the issuance and sale of the Shares in their respective jurisdictions; the Registration Statement becoming effective; the offering and sale of the Shares in the manner set forth in the Option Plans and pursuant to said permits, consents, approvals, authorizations and orders; the reservation by the Company of a sufficient number of shares of Common Stock for issuance upon exercise of outstanding options under the Option Plans; and the receipt by the Company of full consideration for the Common Stock issued under the Option Plans in accordance with the respective terms of the Option Plans and all stock option agreements entered into in connection therewith. In addition, our opinion herein bankruptcy, reorganization, insolvency, fraudulent, conveyance, moratorium or other laws affecting creditors' rights generally from time to time in effect, and Delaware law and regulations, and no opinion is being rendered as to the availability of specific performance, injunctive remedies or other forms of equitable relief.
Based upon the foregoing, it is our opinion that the Shares, when issued, will be legally issued, fully paid and nonassessable.
This opinion is addressed solely to the Company and no one else has the right to rely upon it, nor may anyone release it, quote from it or employ it in any transaction other than the Registration Statement without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the references to our firm contained therein.
CHRISTENSEN, WHITE, MILLER, FINK, JACOBS | S-8 | EX-5 | 1996-01-12T00:00:00 | 1996-01-12T17:07:08 |
0000950009-96-000026 | 0000950009-96-000026_0000.txt | Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
(Date of Report; Date of Earliest Event Reported)
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (IRS Employer Identification Number)
3333 Sargent Road, Jackson, Michigan 49201 (Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code)
The Company has executed a Credit Agreement dated as of December 21, 1995, with two banks for a $65,000,000 line of credit which, effective on that date, replaced the $35,000,000 unsecured line of credit previously available under a Revolving Credit Agreement with Jacobson Credit Corp. and $30,000,000 outstanding under a Term Loan Agreement with the Company, both with the same two banks.
The Revolving Credit portion of the Credit Agreement provides for borrowings of up to $45,000,000, subject to a borrowing base limitation, at either or both of two interest rate alternatives, at the Company's option. Based on current rates, one of these options is below the prime interest rate of the lending banks, but is higher than the previous facility. Borrowings under the Revolving Credit line mature on June 30, 1998, with one year renewals subject to approval of both banks by June 30 of each year, beginning in 1996. The Revolving Credit line carries a commitment fee equal to two-tenths of 1% per annum on the unused portion of the line and a facility fee of one-tenth of 1% per annum on the total line. No compensating balances are required.
The Term Loan portion of the Credit Agreement totals $20,000,000 at a fixed rate of 7.99% and provides for payments of interest only through December 31, 1997, with quarterly principal payments of $1,000,000 commencing on March 31, 1998, through the maturity date of December 31, 2002.
Borrowings under the Credit Agreement are guaranteed by the Company's subsidiaries and secured by receivables under Jacobson credit plans and will be secured by first mortgages on selected properties. The new facility includes, among other things, covenants requiring minimum net worth, a minimum cash flow ratio and a maximum funded debt to net worth ratio.
4(d) Credit Agreement dated as of December 21, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: January 11, 1996 By: /s/ Mark K. Rosenfeld Chairman of the Board and
Date: January 11, 1996 By: /s/ Paul W. Gilbert Vice Chairman of the Board
4(d) Credit Agreement dated as of December 21, 1995 | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T13:36:28 |
0000898430-96-000097 | 0000898430-96-000097_0000.txt | PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
Filed by the Registrant [X]
Filed by the Party other than the Registrant [_]
[_]CONFIDENTIAL, FOR USE OF THE Check the appropriate box: COMMISSION ONLY (AS PERMITTED BY
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a- 6(i)(3).
[_] 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 transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to Exchange ActRule 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:
[_] 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.
(2) Form, Schedule or Registration Statement No.:
3 IMPERIAL PROMENADE, STE. 300
1995 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD [MARCH 8], 1996
You are cordially invited to attend the 1995 Annual Meeting (the "Meeting") of Stockholders of AmeriQuest Technologies, Inc. ("AmeriQuest"), to be held at the offices of AmeriQuest, located at 3 Imperial Promenade, Ste. 300, Santa Ana, California 92707, on [March 8], 1996, at [ ] a.m., local time.
The matters expected to be acted upon at the Meeting are described in detail in the following Notice of 1995 Annual Meeting of Stockholders and Proxy Statement.
The Board of Directors has fixed the close of business on [February 9], 1996 as the record date for determination of stockholders entitled to notice of and to vote at the Meeting or any postponements or adjournments thereto.
It is important that you use this opportunity to take part in the affairs of AmeriQuest by voting on the business to come before this Meeting. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING. Returning the Proxy does not deprive you of your right to attend the Meeting and to vote your shares in person.
We look forward to seeing you at the Meeting.
NOTICE OF 1995 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD [MARCH 8], 1996
TO THE STOCKHOLDERS OF AMERIQUEST TECHNOLOGIES, INC.:
Notice is hereby given that the 1995 Annual Meeting (the "Meeting") of Stockholders of AmeriQuest Technologies, Inc. ("AmeriQuest") will be held at the offices of AmeriQuest, located at 3 Imperial Promenade, Ste. 300, Santa Ana, California 92707, on [March 8], 1996, at [ ] a.m., local time, for the following purposes:
1. To elect seven directors of AmeriQuest, each to serve until the next Annual Meeting of Stockholders and until his successor has been elected and qualified or until his earlier resignation or removal. AmeriQuest's Board of Directors intends to present the following nominees for election as directors:
D. Stephen DeWindt Mark C. Mulford Marc L. Werner Harold L. Clark
2. To approve an amendment to AmeriQuest's Certificate of Incorporation to increase the authorized number of shares of Common Stock issuable by AmeriQuest from 30,000,000 shares to 200,000,000 shares.
3. To approve an amendment to AmeriQuest's Certificate of Incorporation to provide that the authorized number of shares of Preferred Stock issuable by AmeriQuest be 5,000,000 shares.
4. To approve the conversion of AmeriQuest Series G Preferred Stock into AmeriQuest Common Stock.
5. To ratify certain prior issuances of securities by AmeriQuest.
6. To approve the adoption of the 1996 Equity Incentive Plan for awards for up to 2,000,000 shares of AmeriQuest Common Stock.
7. To ratify the selection of Arthur Andersen LLP as independent accountants for AmeriQuest for fiscal year 1996.
8. To transact such other business as may properly come before the Meeting or any postponements or adjournments thereof.
The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.
Only stockholders of record at the close of business on [February 9], 1996 are entitled to notice of and to vote at the Meeting or any adjournments or postponements thereof.
BY ORDER OF THE BOARD OF DIRECTORS
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
1995 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD [MARCH 8], 1996
The accompanying proxy is solicited on behalf of the Board of Directors (the "Board") of AmeriQuest Technologies, Inc., a Delaware corporation ("AmeriQuest"), for use at the 1995 Annual Meeting of Stockholders of AmeriQuest (the "Meeting") to be held at the offices of AmeriQuest, located at 3 Imperial Promenade, Ste. 300, Santa Ana, California 92707, on [March 8], 1996, at [ ] a.m., local time, and at any postponements or adjournments thereof. All proxies will be voted in accordance with the instructions contained therein and, if no choice is specified, the proxies will be voted in favor of the nominees and the proposals set forth in the accompanying Notice of Meeting and this Proxy Statement. This Proxy Statement and the accompanying form of proxy were first mailed to stockholders on or about [ ], 1996. An annual report for the fiscal year ended June 30, 1995 accompanies this Proxy Statement.
VOTING RIGHTS AND SOLICITATION OF PROXIES
Only holders of record of AmeriQuest's Common Stock and Preferred Stock at the close of business on [February 9], 1996 (the "Record Date") will be entitled to vote at the Meeting. On the Record Date, AmeriQuest had the following shares outstanding and entitled to vote: [28,373,424] shares of Common Stock, 810,811 shares of Series A Preferred Stock (each of which share was convertible as of the Record Date into ten shares of Common Stock), 1,785,714 shares of Series B Preferred Stock (each of which share was convertible as of the Record Date into ten shares of Common Stock) and 25,830.1 shares of Series G Preferred Stock (each of which share was convertible as of the Record Date into one hundred shares of Common Stock). Holders of AmeriQuest's Common Stock are entitled to one vote for each share held as of the Record Date. Holders of AmeriQuest's Preferred Stock are entitled to vote the number of shares of Common Stock into which their shares of Preferred Stock are convertible as of the Record Date. Consequently, AmeriQuest had [56,921,684] shares of Common Stock and Preferred Stock (on an as-converted to Common Stock basis) outstanding and entitled to vote at the Meeting. The holders of the Common Stock and the Preferred Stock will vote together and not as a separate class. A majority of those shares will constitute a quorum for the transaction of business at the Meeting. Shares may not be voted cumulatively.
Directors will be elected, as described in Proposal No. 1, by a plurality of the votes of the shares of Common Stock and Preferred Stock present in person or represented by proxy at the Meeting and issued and outstanding on the Record Date, voting together as a single class. In each case where the stockholder has appropriately specified how the Proxy is to be voted, it will be voted in accordance with the specifications so made. Proposal No. 2 requires for approval the affirmative vote of a majority of the voting power of all shares of Common Stock and Preferred Stock issued and outstanding on the Record Date, voting together as a single class. Proposal No. 3 requires for approval the affirmative vote of (i) a majority of the voting power of all shares of Common Stock and Preferred Stock issued and outstanding on the Record Date, voting together as a single class, and (ii) a majority of the voting power of all shares of Series A, Series B, Series D, Series E and Series F Preferred Stock issued and outstanding on the Record Date, voting together as a single class. Proposal Nos. 4, 5 and 6 each requires for approval the affirmative vote of a majority of the voting power of the shares of Common Stock and Preferred Stock present in person or represented by proxy at the Meeting and issued and outstanding on the Record Date, voting together as a single class. All votes will be tabulated by the inspector of elections appointed for the Meeting who will separately tabulate, for each proposal, affirmative and negative votes, abstentions and broker non-votes. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker non- votes will be counted toward a quorum but are not counted for any purpose in determining whether a matter has been approved.
The expenses of soliciting proxies to be voted at the Meeting will be paid by AmeriQuest. Following the original mailing of the proxies and other soliciting materials, AmeriQuest and/or its agents may also solicit proxies by mail, telephone, telegraph or in person. Following the original mailing of the proxies and other soliciting materials, AmeriQuest will request that brokers, custodians, nominees and other record holders of AmeriQuest's Common Stock and Preferred Stock forward copies of the proxy and other soliciting materials to persons for whom they hold shares of Common Stock and Preferred Stock and request authority for the exercise of proxies. In such cases, AmeriQuest, upon the request of the record holders, will reimburse such holders for their reasonable expenses.
Any person signing a proxy in the form accompanying this Proxy Statement has the power to revoke it prior to the Meeting or at the Meeting prior to the vote pursuant to the proxy. A proxy may be revoked by (i) delivering to the Secretary of AmeriQuest prior to the vote at the Meeting an instrument in writing, bearing a date later than the proxy, stating that the proxy is revoked, (ii) delivering to the Secretary of AmeriQuest prior to the vote at the Meeting another duly executed proxy relating to the same shares, bearing a date later than the proxy or (iii) attending the Meeting and voting in person (although attendance at the Meeting will not, by itself, revoke a proxy). Please note, however, that if a stockholder's shares are held of record by a broker, bank or other nominee and that stockholder wishes to vote at the Meeting, the stockholder must bring to the Meeting a letter from the broker, bank or other nominee confirming that stockholder's beneficial ownership of the shares.
At the Meeting, stockholders will elect directors to hold office until the next Annual Meeting of Stockholders and until their respective successors have been elected and qualified or until such directors' earlier resignation or removal. The size of the Board is currently set at seven members. Accordingly, seven persons will be nominated for election at the Meeting to be the directors of AmeriQuest. In the election of directors, each stockholder is entitled to one vote for each share of Common Stock held as of the Record Date and the number of votes for each share of Preferred Stock held as of the Record Date equal to the number of shares of Common Stock into which that share of Preferred Stock is convertible as of the Record Date. Each share represented by the accompanying proxy will be voted for the election of the seven nominees recommended by the Board unless the proxy is marked in such a manner as to withhold authority so to vote. Shares may not be voted cumulatively. If any nominee for any reason is unable to serve, or for good cause will not serve, as a director, the proxies may be voted for such substitute nominee as the proxy holder may determine. AmeriQuest is not aware of any nominee who will be unable to or, for good cause, will not serve as a director.
The following table sets forth certain information regarding the persons nominated to become directors of AmeriQuest.
D. Stephen DeWindt (age 40) was appointed to serve as a Director, Chairman of the Board of Directors and Chief Executive Officer of AmeriQuest in August 1995. Mr. DeWindt was appointed to serve in these positions in connection with the Purchase Agreement, dated as of August 7, 1995, between Computer 2000 AG, Computer 2000 Inc. and AmeriQuest (the "Computer 2000 Purchase Agreement") as described below in Proposal 2. From October 1994 to January 1996, Mr. DeWindt served as President and a Director of Computer 2000 Inc., the wholly-owned subsidiary of C2000 AG which owns a majority of AmeriQuest's voting capital stock (see "Security Ownership of Certain Beneficial Owners and Management"). Computer 2000 AG is a German company engaged in distributing hardware, software and communications products for professional personal computers. From May 1992 to September 1995, Mr. DeWindt served as one of four Co-Presidents of Computer 2000 AG and the head of its Group Sales & Marketing, responsible for the geographic regions of Northern Europe, North America and the Middle East. From May 1984 to April 1992, Mr. DeWindt served as Director of worldwide sales for the reseller channel at Intel Corp., a manufacturer of semiconductors.
Dr. Harry Krischik (age 44) was appointed to serve as a Director and Co- Chairman of the Board of Directors of AmeriQuest in August 1995 in connection with the Computer 2000 Purchase Agreement (as described below in Proposal 2). For more than the last five years, Dr. Krischik also has served as one of the Co-Presidents of Computer 2000 AG, with responsibility for the areas of logistics, electronic data processing and human resources and regional responsibility for North America, Southern Europe and Latin America.
Marc L. Werner (age 38) has served as a Director of AmeriQuest since December 1993 and as Vice-Chairman of AmeriQuest since August 1995 and served as Chairman of the Board of Directors of AmeriQuest from December 1993 to August 1995. Since 1986, Mr. Werner also has been employed by the Werner Co. and currently serves as President and Director for Werner Financial, Inc. and various companies affiliated with the Werner Co. Since 1986, Mr. Werner also has served as a President and Director of Manufacturers Indemnity and Insurance Company of America (a company which underwrites insurance for the Werner Co.).
Mark C. Mulford (age 41) was appointed to serve as a Director, President and Chief Operating Officer of AmeriQuest in August 1995 in connection with the Computer 2000 Purchase Agreement (as described below in Proposal 2). From March 1995 to August 1995, Mr. Mulford served as a Director of Group Projects with Computer 2000 AG. From 1986 to March 1995, Mr. Mulford served with Frontline Distribution Ltd., Computer 2000 AG's largest foreign subsidiary, which conducts business in the United Kingdom, most recently as Managing Director.
Holger Heims (age 32) was appointed to serve as a Director, Vice President (Operational Controlling) and Assistant Secretary of AmeriQuest in August 1995 in connection with the Computer 2000 Purchase Agreement (as described below in Proposal 2). From October 1994 to January 1996, Mr. Heims served as Vice President, Assistant Secretary and a Director of Computer 2000 Inc., and from October 1995 to January 1996, Mr. Heims also served as Secretary and Treasurer of Computer 2000 Inc. From October 1991 to September 1995, Mr. Heims served with Computer 2000 AG as Director of Investments, Tax & Legal. From May 1989 to October 1991, Mr. Heims was a partner in the firm of Heims Tax Consultants.
Dr. Harold L. Clark (age 60) has served as a Director of AmeriQuest since May 1994. Since December 1995, Dr. Clark has served as a computer industry consultant. From August 1995 to December 1995, Dr. Clark had been a consultant to AmeriQuest. From January 1994 to August 1995, Dr. Clark was the President and Chief Executive Officer of AmeriQuest. From April 1993 to December 1993, Dr. Clark was the President and Chief Executive Officer of CDS Distribution, Inc., a wholly-owned subsidiary of AmeriQuest engaged in wholesale distribution of computer products. From February 1991 to December 1992, Dr. Clark served as President, Chief Operating Officer and a Director of Everex Systems, Inc. (a manufacturer of computer equipment). In 1993, subsequent to Dr. Clark's departure, Everex Systems, Inc. filed for protection under Chapter 11 of the Federal bankruptcy laws. A plan of reorganization for Everex Systems was confirmed by the U.S. Bankruptcy Court in 1994. From 1989 through 1991, Dr. Clark served as a computer industry consultant. From 1984 to 1989, Dr. Clark served as President of Ingram Micro, Inc. (a computer wholesale distributor).
Robert H. Beckett (age 62) was appointed as a Director to AmeriQuest's Board in October 1994 pursuant to a series of agreements described in Proposal 2 below, whereby AmeriQuest acquired Robec, Inc., a microcomputer distributor ("Robec"). In light of continuing negotiations between Robec and AmeriQuest concerning consummation of those agreements, Mr. Beckett resigned from the Board in June 1995. After consummation of the agreements, Mr. Beckett was reappointed to the Board in December 1995. For the last 17 years, Mr. Beckett has served as the Chairman of the Board of Directors and President of Robec, which became a wholly-owned subsidiary of AmeriQuest in November 1995.
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES
The Board met 15 times, including telephone conference meetings, and did not act by written consent, during fiscal year 1995. No director, with the exception of Robert H. Beckett and Eric J. Werner, attended fewer than 75% of the aggregate of the total number of meetings of the Board (held during the period for which he was a director) and the total number of meetings held by all committees of the Board on which such director served (during the period that such director served).
Standing committees of the Board include an Audit Committee and a Compensation Committee. The Board does not have a nominating committee or a committee performing similar functions.
Dr. Harry Krischik, Marc L. Werner and Harold L. Clark are the current members of the Audit Committee. During fiscal year 1995, Marc L. Werner, Eric J. Werner and William T. Walker, Jr. were the members of the Audit Committee, which did not meet during fiscal 1995. The Audit Committee meets with independent accountants to review the adequacy of AmeriQuest's internal control systems and financial reporting procedures; reviews the general scope of AmeriQuest's annual audit and the fees charged by the independent accountants; reviews and monitors the performance of non-audit services by AmeriQuest's auditors, reviews the fairness of any proposed transaction between any officer, director or other affiliate of AmeriQuest and AmeriQuest, and after such review, makes recommendations to the full Board; and performs such further functions as may be required by any stock exchange or over-the- counter market upon which AmeriQuest's Common Stock may be listed.
D. Stephen DeWindt, Dr. Harry Krischik and Marc L. Werner are the current members of the Compensation Committee. During fiscal year 1995, Marc L. Werner, Terren S. Peizer and William N. Silvis were the members of the Compensation Committee, which met 3 times during fiscal year 1995. The Compensation Committee of the Board performs four principal tasks: it recommends to the full Board the compensation of AmeriQuest's Chief Executive Officer, reviews and takes action on the recommendations of the Chief Executive Officer as to the appropriate compensation of AmeriQuest's other officers, approves the granting of any bonuses to officers and reviews other compensation and personnel development matters generally.
During fiscal year 1995, AmeriQuest paid former outside directors William T. Walker, Jr. and William N. Silvis $2,500 per quarter as director fees. AmeriQuest reimbursed all its outside directors during fiscal 1995 for the expenses they incurred in attending Board meetings. Marc L. Werner and Eric J. Werner have not sought reimbursement for outside director fees for fiscal year 1995. AmeriQuest currently pays its outside directors compensation equal to $2,500 per quarter for serving as directors and reimburses them for the expenses they incur in attending Board meetings.
AmeriQuest did not in fiscal 1995, nor does it currently, pay its inside directors any additional compensation for serving as directors or reimburse them for the expenses they incur in attending Board meetings. AmeriQuest did not in fiscal 1995, nor does it currently, pay its directors any additional compensation for committee participation or special assignments. Outside directors are not eligible to receive stock options under the proposed 1996 Equity Incentive Plan of AmeriQuest described in Proposal 6 below.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE NOMINATED DIRECTORS
APPROVAL OF AN AMENDMENT OF AMERIQUEST'S CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK ISSUABLE BY
Stockholders are being asked to approve an amendment of AmeriQuest's Certificate of Incorporation, which has been approved by the Board subject to stockholder approval, to increase the authorized number of shares of Common Stock issuable by AmeriQuest from 30,000,000 shares to 200,000,000 shares. If this increase in the authorized Common Stock of AmeriQuest is approved by the stockholders at the Meeting, then the amendment of AmeriQuest's Certificate of Incorporation effecting this increase will be filed by AmeriQuest with the Secretary of State of the State of Delaware and will become effective upon the date of filing.
A portion of the additional shares available for issuance upon the proposed increase in the authorized Common Stock of AmeriQuest will be used for the purposes described below.
1. FOR ISSUANCE OF AMERIQUEST COMMON STOCK UPON (I) CONVERSION OF SHARES OF CURRENTLY OUTSTANDING AMERIQUEST PREFERRED STOCK AND WARRANTS TO ACQUIRE SHARES OF AMERIQUEST PREFERRED STOCK HELD BY COMPUTER 2000 INC., WHICH CONVERSION OCCURS AUTOMATICALLY UPON THE NECESSARY INCREASE IN AMERIQUEST'S AUTHORIZED SHARES OF COMMON STOCK AND (II) POSSIBLE EXERCISE OF A CERTAIN MAINTENANCE OPTION HELD BY COMPUTER 2000 INC.
On August 21, 1995, in exchange for the cancellation by Computer 2000 Inc. of a debt in the principal amount of $18 million and an additional investment by Computer 2000 Inc. of $31,250,000, AmeriQuest issued to Computer 2000 Inc. in a transaction described below (i) 810,811 shares of AmeriQuest Series A Preferred Stock (convertible into 8,108,110 shares of AmeriQuest Common Stock, subject to adjustment), (ii) 1,785,714 shares of AmeriQuest Series B Preferred Stock (convertible into 17,857,140 shares of AmeriQuest Common Stock, subject to adjustment), (iii) the Achievement Warrants (defined below), which, subject to adjustment, are presently exercisable for up to 1,403,475 shares of AmeriQuest Series D Preferred Stock (convertible into 14,034,750 shares of AmeriQuest Common Stock, subject to adjustment), (iv) the Acquisition Maintenance Warrant (as defined below), which, subject to adjustment, is presently exercisable for up to 218,307 shares of AmeriQuest Series E Preferred Stock (convertible into 5,457,675 shares of AmeriQuest Common Stock, subject to adjustment), (v) the Unit Maintenance Warrants (as defined below), which, subject to adjustment, are presently exercisable for up to 514,857 shares of AmeriQuest Series F Preferred Stock (convertible into 5,148,570 shares of AmeriQuest Common Stock, subject to adjustment), and (vi) the Maintenance Option (as defined below), which as of the Record Date was exercisable for at least approximately [5,281,305] shares of AmeriQuest Common Stock (subject to adjustment).
Upon the proposed increase in the authorized Common Stock of AmeriQuest, (i) the 810,811 shares of AmeriQuest Series A Preferred Stock would automatically convert into 8,108,110 shares of AmeriQuest Common Stock, (ii) the 1,785,714 shares of AmeriQuest Series B Preferred Stock would automatically convert into 17,857,140 shares of AmeriQuest Common Stock, (iii) the Achievement Warrants, rather than being exercisable for up to 1,403,475 shares of AmeriQuest Series D Preferred Stock, would instead be exercisable for up to 14,034,750 shares of AmeriQuest Common Stock (subject to adjustment), which is the same number of shares of AmeriQuest Common Stock into which such shares of AmeriQuest Series D Preferred Stock are convertible, (iv) the Acquisition Maintenance Warrant, rather than being exercisable for up to 218,307 shares of AmeriQuest Series E Preferred Stock, would instead be exercisable for up to 5,457,698 shares of AmeriQuest Common Stock (subject to adjustment), which is the same number of shares of AmeriQuest Common Stock into which such shares of AmeriQuest Series E Preferred Stock are convertible (subject to decrease due to rounding), (v) the Unit Maintenance Warrants, rather than being exercisable for up to 514,857 shares of AmeriQuest Series F Preferred Stock, would instead be exercisable for up to 5,148,574 shares of AmeriQuest Common Stock
(subject to adjustment), which is the same number of shares of AmeriQuest Common Stock into which such shares of AmeriQuest Series F Preferred Stock are convertible (subject to decrease due to rounding), and (vi) the Maintenance Option, which as of the Record Date was exercisable for at least approximately [5,281,305] shares of AmeriQuest Common Stock (subject to adjustment), may be exercised in full pursuant to the terms thereof.
AmeriQuest's Certificate of Designations setting forth the rights, preferences and privileges of AmeriQuest Series A, Series B, Series D, Series E and Series F Preferred Stock provides that all such Preferred Stock will automatically convert into AmeriQuest Common Stock at such time as there is a sufficient number of authorized shares of AmeriQuest Common Stock to effect the conversion into Common Stock of all outstanding shares of such Preferred Stock and the exercise of all outstanding warrants and options exercisable for such Preferred Stock. Inasmuch as the currently authorized number of shares of AmeriQuest Common Stock is insufficient to effect such conversion and exercise, stockholder approval of the increase in the authorized number of shares of AmeriQuest Common Stock is necessary to accommodate the automatic conversion into AmeriQuest Common Stock of the 810,811 shares of AmeriQuest Series A Preferred Stock and 1,785,714 shares of AmeriQuest Series B Preferred Stock and the exercise in full for AmeriQuest Common Stock of the Achievement Warrants, the Acquisition Maintenance Warrant, the Unit Maintenance Warrants and the Maintenance Option.
By approving the increase in the authorized number of shares of Common Stock of AmeriQuest, stockholders will be deemed also to have approved (i) the automatic conversion into AmeriQuest Common Stock of the 810,811 shares of AmeriQuest Series A Preferred Stock and 1,785,714 shares of AmeriQuest Series B Preferred Stock, (ii) to allow the Achievement Warrants, the Acquisition Maintenance Warrant and the Unit Maintenance Warrants to be exercisable for Common Stock instead of Preferred Stock and (iii) to allow for the possible exercise in full of the Maintenance Option for Common Stock.
The following is a summary description of the transactions pursuant to which AmeriQuest issued the 810,811 shares of AmeriQuest Series A Preferred Stock, the 1,785,714 shares of AmeriQuest Series B Preferred Stock, the Achievement Warrants, the Acquisition Maintenance Warrant, the Unit Maintenance Warrants and the Maintenance Option.
(a) Purchase of Stock, Warrants and Option.
Pursuant to a Purchase Agreement, dated as of August 7, 1995, between Computer 2000 AG, Computer 2000 Inc. and AmeriQuest (the "Computer 2000 Purchase Agreement"), the following transactions, among others, occurred on August 21, 1995:
(i) Computer 2000 Inc. assigned certain promissory notes in the principal amount of $18 million and paid an additional $31,250,000.00 to AmeriQuest in exchange for the issuance by AmeriQuest of (a) 810,811 shares of AmeriQuest Series A Preferred Stock (convertible into 8,108,110 shares of AmeriQuest Common Stock, subject to adjustment), (b) 1,785,714 shares of AmeriQuest Series B Preferred Stock (convertible into 17,857,140 shares of AmeriQuest Common Stock, subject to adjustment) and (c) warrants (the "Achievement Warrants") to purchase an aggregate of 1,403,475 shares of AmeriQuest Series D Preferred Stock (convertible into 14,034,750 shares of AmeriQuest Common Stock, subject to adjustment) exercisable at $.53 per share of Series D Preferred Stock ($.053 per share of Common Stock on an as-if-converted to Common Stock basis).
Assuming the exercise by Computer 2000 Inc. of the Achievement Warrants, the conversion of the Series D Preferred Stock issuable upon such exercise and the conversion of the Series A and Series B Preferred Stock issued as described in the preceding paragraph, AmeriQuest will have issued to Computer 2000 Inc. 40,000,000 shares of Common Stock at an average purchase price of approximately $1.25 per share.
The Achievement Warrants are exercisable in increments equal to approximately one-eighth of the total number of shares purchasable thereunder in the event that any of the following gross sales targets (each a "Performance Milestone") is achieved by AmeriQuest during the eight quarters in the 24-month period ended June 30, 1997: $150 million for the first quarter, $160 million for the second quarter, $190 million for the third quarter, $200 million for the fourth quarter, $220 million for the fifth quarter, $230 million for
the sixth quarter, $270 million for the seventh quarter and $280 million for the eighth quarter. AmeriQuest did not achieve the Performance Milestone for the first quarter, which ended September 30, 1995. However, whether or not AmeriQuest achieves any or all of the Performance Milestones, (i) Achievement Warrants for 700,000 shares of Series D Preferred Stock (convertible into 7,000,000 shares of Common Stock, subject to adjustment), in addition to the Achievement Warrants exercisable due to the achievement of any Performance Milestones, will become exercisable on or after July 31, 1996 and (ii) Achievement Warrants for the remaining shares of Series D Preferred Stock will become exercisable on or after July 31, 1997. Moreover, the Achievement Warrants may be exercised at any time to the extent required in order for Computer 2000 Inc. to own 51% of the outstanding voting shares of AmeriQuest's capital stock. The Achievement Warrants will cease to be exercisable on August 21, 1998.
(ii) In consideration for Computer 2000 Inc.'s exchange of the promissory notes and an additional investment of $31,250,000.00, as described in paragraph (i) above, AmeriQuest granted to Computer 2000 Inc. the following pari passu rights with respect to the number of shares issuable under other outstanding warrants, options and other rights to acquire shares of AmeriQuest Common Stock that AmeriQuest has previously granted, or is obligated to grant to others:
(1) If the total number of shares of Common Stock issued by AmeriQuest in connection with the Robec Acquisition exceeds 2,800,000 shares of AmeriQuest Common Stock, including shares issued upon the exercise of options or warrants granted, assumed or exchanged in connection with the Robec Acquisition (such shares as are so issued in excess of 2,800,000 shares are referred to as the "Incremental Shares"), then Computer 2000 Inc. will have the right, pursuant to a warrant granted by AmeriQuest (the "Acquisition Maintenance Warrant"), to purchase a number of shares of AmeriQuest Series E Preferred Stock (each such share convertible to 25 shares of AmeriQuest Common Stock, subject to adjustment) that will be convertible into a number of shares of AmeriQuest Common Stock equal to the number of Incremental Shares. AmeriQuest issued to Robec shareholders a total of 5,372,710 shares of AmeriQuest Common Stock and 25,830.10 shares of AmeriQuest Series G Preferred Stock convertible into 2,583,010 shares of AmeriQuest Common Stock (subject to adjustment) and Robec stock options were converted into options to purchase up to 301,978 shares of AmeriQuest Common Stock. Therefore, the total number of shares of AmeriQuest Common Stock issued or issuable as a consequence of the Robec Acquisition is 8,257,698 shares (subject to adjustment), and the Acquisition Maintenance Warrant is presently exercisable for up to 218,307 shares of AmeriQuest Series E Preferred Stock (convertible into 5,457,675 shares of Common Stock, subject to adjustment). The exercise price of the Acquisition Maintenance Warrant is $1.25 per share of Series E Preferred Stock ($.05 per share of Common Stock on an as-if-converted to Common Stock). The Acquisition Maintenance Warrant is exercisable at such time, and from time-to-time, as Incremental Shares are issued and, for each such issuance, will remain exercisable for six months thereafter.
(2) In connection with a private placement in the months of May, June and July of 1995 by AmeriQuest of equity securities, AmeriQuest issued stock and warrants to investors, which included warrants to purchase up to 5,148,574 shares of AmeriQuest Common Stock during a three year period at an exercise price of $1.05 per share (the "Unit Warrants"). If and to the extent that any of the Unit Warrants are exercised, then Computer 2000 Inc. will have the right, pursuant to certain warrants issued by AmeriQuest (the "Unit Maintenance Warrants"), to purchase a number of shares of AmeriQuest Series F Preferred Stock (each such share convertible to 10 shares of AmeriQuest Common Stock, subject to adjustment) that will be convertible into a number of shares of AmeriQuest Common Stock equal to the number of shares issued upon exercise of the Unit Warrants (the "Unit Warrant Shares"). The exercise price of the Unit Maintenance Warrants is $5.25 per share of Series F Preferred Stock ($.525 per share of Common Stock on an as-if-converted to Common Stock). The Unit Maintenance Warrants are exercisable only if and to the extent that any Unit Warrant Shares are issued and, for each such issuance, will remain exercisable for six months thereafter. [As of the Record Date, no Unit Warrants had been exercised, so the Unit Maintenance Warrants were not yet exercisable for any shares of Series
(3) AmeriQuest also granted to Computer 2000 Inc. an option (the "Maintenance Option") to purchase a number of shares of AmeriQuest Common Stock (or other equity securities, as applicable) equal to the number of shares of AmeriQuest Common Stock (or other equity securities) that AmeriQuest issues upon exercise or conversion of all options, warrants or other rights (other than shares subject to the Unit Maintenance Warrants and Acquisition Maintenance Warrant) outstanding as of the date of the Computer 2000 Purchase Agreement (the "Miscellaneous AmeriQuest Options") to acquire (upon conversion or otherwise) any shares ("Additional Shares") of Common Stock or other equity securities of AmeriQuest. The Maintenance Option is exercisable from time-to-time with respect to each issuance of an Additional Share upon the issuance of such Additional Share, will terminate six months after notice to Computer 2000 Inc. of such issuance (subject to extension under certain circumstances) and will be exercisable for the same consideration and on the same terms as the consideration for which and terms under which such Additional Share is issued. Approximately [5,281,305] shares of AmeriQuest Common Stock are issuable as of the Record Date upon exercise of the Miscellaneous AmeriQuest Options.
(b) Board of Directors and Management.
Consistent with Computer 2000 Inc.'s acquisition of a majority of AmeriQuest's outstanding voting capital stock and in connection with the Computer 2000 Purchase Agreement, changes were made in AmeriQuest's Board of Directors and management. In August 1995, three of AmeriQuest's existing Directors, Terren Peizer, Eric J. Werner and William N. Silvis, resigned from the Board (Gregory A. White had resigned as a Director in July 1995) and five persons designated by Computer 2000 Inc. were appointed Directors of AmeriQuest. These designees were D. Stephen DeWindt, Klaus J. Laufen and Dr. Harry Krischik, who, at the time, were three of Computer 2000 AG's four Co- Presidents, Mark Mulford, who was a Director of Group Projects with Computer 2000 AG, and Holger Heims, who was Computer 2000 AG's Director of Investment, Tax and Legal. Mr. Laufen has since resigned in December 1995 as a Director of AmeriQuest. Mr. DeWindt was appointed Chairman of the Board and Chief Executive Officer of AmeriQuest, Dr. Krischik was appointed Co-Chairman of the Board, and Mr. Mulford was appointed AmeriQuest's President and Chief Operating Officer. Messrs. DeWindt, Mulford and Heims are no longer officers or directors of Computer 2000 AG or any affiliates thereof other than AmeriQuest. Harold L. Clark, AmeriQuest's Chief Executive Officer, and Stephen G. Holmes, AmeriQuest's Secretary, Treasurer and Chief Financial Officer, resigned from those positions as a condition of the closing.
The Computer 2000 Purchase Agreement also provides that, if AmeriQuest incurs any liability, costs or expenses in connection with certain contingencies (primarily related to certain existing litigation and employee terminations) in excess of $2,000,000, then AmeriQuest may be required to issue to Computer 2000 Inc. additional shares of AmeriQuest Common Stock equal to the amount of such excess divided by $1.25. Further, pursuant to the Computer 2000 Purchase Agreement, AmeriQuest has agreed to indemnify Computer 2000 Inc., Computer 2000 AG and their respective shareholders, officers, directors, agents, employees, representatives, attorneys, successors and assigns from losses, costs, expenses and damages arising out of any misrepresentation or breach by AmeriQuest under the Computer 2000 Purchase Agreement or the related agreements once those losses, costs, expenses and damages exceed $100,000 in the aggregate. Such indemnity will, at Computer 2000's option, be payable in cash or shares of AmeriQuest Common Stock valued at the lesser of $1.25 or the then current market price based on a five day average. Computer 2000 has not notified AmeriQuest of whether it will assert that it is entitled to indemnification under the Computer 2000 Purchase Agreement.
All of the shares of AmeriQuest Common Stock to be issued to Computer 2000 Inc. in the above-described transactions (the "Registrable Securities") will be restricted securities, subject to the resale restrictions of Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). AmeriQuest and Computer 2000 Inc.
have entered into a Registration Rights Agreement which provides that Computer 2000 Inc. can require AmeriQuest to register the Registrable Securities with the Securities and Exchange Commission ("SEC") on Form S-3, or other appropriate form if Form S-3 is not available, and keep such registration effective for three years. Computer 2000 Inc. also has the right to require AmeriQuest to file a registration statement under the Securities Act covering the registration of the Registrable Securities then outstanding having an aggregate offering price to the public of not less than $5,000,000 and to keep such registration effective for up to 120 days.
(e) No Stockholder Approval for the Transactions under the Computer 2000 Purchase Agreement.
The transactions provided for in the Computer 2000 Purchase Agreement did not require prior approval or subsequent ratification by the stockholders under AmeriQuest's Certificate of Incorporation or Delaware General Corporation Law. However, the transactions would normally have required approval of AmeriQuest's stockholders pursuant to certain listing requirements of the New York Stock Exchange (the "NYSE"). Prior to the consummation of the transactions provided for in the Computer 2000 Purchase Agreement, the Audit Committee of the Board determined that due to AmeriQuest's financial condition and needs for financing any delays necessary in securing stockholder approval prior to the transactions would seriously jeopardize the financial viability of AmeriQuest. At the time, AmeriQuest was financially distressed and, in the opinion of the Audit Committee, financial survival was heavily dependent upon effecting the proposed transactions with Computer 2000 Inc. at the earliest practicable date. Because of the determination, the Board approved AmeriQuest's proceeding with the transactions provided for in the Computer 2000 Purchase Agreement without seeking stockholder approval in reliance upon an exemption to the NYSE's Shareholder Approval Policy applicable to companies in financial distress. The NYSE accepted AmeriQuest's application of the exemption.
2. FOR ISSUANCE OF AMERIQUEST COMMON STOCK UPON CONVERSION OF 25,830.1 SHARES OF AMERIQUEST SERIES G PREFERRED STOCK ISSUED IN CONNECTION WITH THE ROBEC ACQUISITION.
In November 1995, in connection with the acquisition of Robec, Inc. ("Robec") by AmeriQuest (the "Robec Acquisition"), AmeriQuest issued to certain shareholders of Robec, including Robec's Chairman and Chief Executive Officer Robert H. Beckett (the "Principal Robec Shareholders"), 25,830.1 shares of AmeriQuest Series G Preferred Stock (which shares are convertible into 2,583,010 shares of AmeriQuest Common Stock, subject to adjustment).
Upon the proposed increase in the authorized Common Stock of AmeriQuest, and upon the satisfaction of certain other conditions described in the following paragraph, the 25,830.1 shares of AmeriQuest Series G Preferred Stock would automatically convert into 2,583,010 shares of AmeriQuest Common Stock.
Pursuant to AmeriQuest's Certificate of Designations setting forth the rights, preferences and privileges of AmeriQuest Series G Preferred Stock, the 25,830.1 shares of AmeriQuest Series G Preferred Stock will automatically convert into AmeriQuest Common Stock at such time as all three of the following conditions have been satisfied: (a) the stockholders of AmeriQuest approve (i) the conversion of AmeriQuest Series G Preferred Stock into AmeriQuest Common Stock, which approval is the subject of Proposal 4 below, and (ii) an increase in the authorized number of shares of AmeriQuest Common Stock to a number sufficient to accommodate the conversion of all outstanding shares of AmeriQuest Series A, Series B, Series D, Series E, Series F and Series G Preferred Stock into AmeriQuest Common Stock and the payment of all stock dividends payable with respect to the AmeriQuest Series G Preferred Stock, which approval is one of the subjects of this Proposal, and (b) AmeriQuest causes a shelf registration statement to become effective on Form S-3 under the Securities Act that will enable the resale from time-to-time in the public market of the shares of AmeriQuest Common Stock that are received upon conversion of the AmeriQuest Series G Preferred Stock. [AmeriQuest has filed this registration statement, but it has not yet been declared effective by the Securities and Exchange Commission.]
The following is a summary description of the Robec Acquisition and the conversion of the AmeriQuest Series G Preferred Stock:
Pursuant to the Amended and Restated Agreement and Plan of Reorganization, dated as of August 11, 1994, among AmeriQuest, Robec and the Principal Robec Shareholders, as amended by Amendment No. 1, dated as of August 4, 1995, and Amendment No. 2, dated as of August 15, 1995 (as amended, the "Robec Acquisition Agreement"), AmeriQuest agreed to purchase all of the outstanding shares of Robec in a two step transaction. In step one, the Principal Robec Shareholders exchanged in September 1994, 2,224,029 of their shares of Robec Common Stock for 1,402,805 shares of AmeriQuest Common Stock. As a result of the exchange, AmeriQuest acquired 50.1% of the outstanding shares of Robec Common Stock. Step two was the merger of a wholly-owned subsidiary of AmeriQuest into Robec, whereby Robec would become a wholly-owned subsidiary of AmeriQuest. Under the Robec Acquisition Agreement, step two (the merger) could not be accomplished until it was approved by the Robec shareholders. In September 1995, the Robec shareholders approved the merger.
The Robec Acquisition Agreement required AmeriQuest to issue additional shares to the Principal Robec Shareholders upon consummation of the merger if the market value of AmeriQuest Common Stock (during specified periods preceding the date of the meeting of Robec's shareholders held to consider the merger) was below $3.00. As a result of this requirement, AmeriQuest was obligated to issue an additional 2,583,010 shares of AmeriQuest Common Stock to the Principal Robec Shareholders upon consummation of the merger. The issuance of the total number of shares of AmeriQuest Common Stock issued or issuable in the Robec Acquisition would have exceeded the authorized number of shares of AmeriQuest Common Stock. Additionally, while the issuance of the total number of shares of Common Stock issued or issuable in the Robec Acquisition did not require prior approval or subsequent ratification by the stockholders under AmeriQuest's Certificate of Incorporation or Delaware General Corporation Law, such issuance would have required the approval by the stockholders pursuant to certain NYSE listing requirements.
On November, 10 1995, in order to accomplish the Robec Acquisition without the delay that would have been necessitated by seeking the approval of the stockholders of AmeriQuest, AmeriQuest entered into an Exchange Agreement with the Principal Robec Shareholders. Pursuant to the Exchange Agreement, AmeriQuest issued to the Principal Robec Shareholders 25,830.10 shares of a newly created Series G Preferred Stock of AmeriQuest, which shares are convertible into 2,583,010 shares of AmeriQuest Common Stock, the same number of shares of AmeriQuest Common Stock that the Principal Robec Shareholders would have otherwise received upon consummation of the merger pursuant to the terms of the Robec Acquisition Agreement.
The merger was consummated on November 13, 1995, whereupon Robec became a wholly-owned subsidiary of AmeriQuest. In the merger, the shares of Robec which remained outstanding were canceled and AmeriQuest issued 3,969,905 shares of AmeriQuest Common Stock in exchange for the Robec shares, and the outstanding Robec stock options were converted into options to purchase up to 301,978 additional shares of AmeriQuest Common Stock.
Pursuant to the terms of the Robec Acquisition Agreement, AmeriQuest was required to cause Robert H. Beckett, the Chairman and Chief Executive Officer of Robec, to be appointed as a Director of AmeriQuest and to nominate Mr. Beckett for reelection to the Board at each of the next two annual meetings of AmeriQuest's stockholders. Mr. Beckett was appointed to AmeriQuest's Board in October 1994, but then resigned from the Board in June 1995 as a result of continuing negotiations between AmeriQuest and Robec regarding consummation of the Robec Acquisition. After the completion of the Robec Acquisition, Mr. Beckett was appointed to the Board in December 1995.
(b) Conversion of the AmeriQuest Series G Preferred Stock.
Conditions of Conversion. The 25,830.1 shares of AmeriQuest Series G Preferred Stock which were issued to the Principal Robec Shareholders will automatically convert into an aggregate of 2,583,010 shares of AmeriQuest Common Stock (subject to adjustment) when all of the conditions precedent described above have been satisfied.
Dividend Penalty. For the period commencing September 29, 1995 and ending on the date on which the AmeriQuest Series G Preferred Stock is converted into AmeriQuest Common Stock, AmeriQuest must pay a dividend on the AmeriQuest Series G Preferred Stock at the rate of 15% per annum (based on the deemed initial issuance price of $1.1875 per share of AmeriQuest Common Stock into which the AmeriQuest Series G Preferred Stock may be convertible), which dividend will be payable in shares of AmeriQuest Common Stock (valued for the purposes of the dividend at $1.1875 per share) on the earlier date of conversion or redemption of the Series G Preferred Stock. If the AmeriQuest Series G Preferred Stock is not converted before April 30, 1996, then, for the period commencing April 30, 1996 and ending on the date on which the AmeriQuest Series G Preferred Stock is converted into AmeriQuest Common Stock, AmeriQuest must pay an additional dividend on the Series G Preferred Stock each month in shares of Common Stock equal to 10% of the shares of Common Stock then issuable upon conversion of the AmeriQuest Series G Preferred Stock (the "Dividend Penalty"), payable on the last day of each month (or on the date of conversion if the AmeriQuest Series G Preferred Stock is converted during any month).
Right of Redemption. If the AmeriQuest Series G Preferred Stock is not converted before November 9, 2000, each holder of any outstanding AmeriQuest Series G Preferred Stock will have the right to cause AmeriQuest to redeem such holder's shares of AmeriQuest Series G Preferred Stock (the "Right of Redemption") at a price equal to the liquidation preference ($1.1875 per share of AmeriQuest Common Stock into which the AmeriQuest Series G Preferred Stock may be convertible) plus any accrued and unpaid dividends.
3. CONVERSION OF OUTSTANDING AMERIQUEST OPTIONS AND WARRANTS.
As of the Record Date, outstanding AmeriQuest options and warrants (excluding the Maintenance Option) were exercisable for up to approximately [10,731,857] shares of AmeriQuest Common Stock, which, together with the [28,373,424] shares of AmeriQuest Common Stock outstanding on the Record Date, exceeded the number of authorized shares of AmeriQuest Common Stock by approximately [9,105,287] shares. An increase in the number of authorized shares of AmeriQuest Common Stock would permit the exercise in full of all such outstanding AmeriQuest options and warrants.
Additional shares available for issuance upon the proposed increase in the authorized Common Stock of AmeriQuest not issued for the purposes described in items 1, 2 and 3 above would be available for issuance from time-to-time for general corporate purposes (such as possible stock splits, stock dividends, acquisitions of companies or assets, sales of stock or securities convertible into stock, stock options or other employee benefit plans). In addition, to address its financing requirements, AmeriQuest may seek additional equity financing by the sale of its capital stock. Additionally, AmeriQuest is submitting to the stockholders for approval at the Meeting the 1996 Equity Incentive Plan as described in Proposal 6, under which, if approved, an aggregate of 2,000,000 shares of AmeriQuest Common Stock will be available for issuance. Except as described in the prior two sentences and in items 1, 2 and 3 above, AmeriQuest currently has no specific plans, arrangements or understandings with respect to the issuance of additional shares for such purposes. AmeriQuest believes that the availability of the additional shares will provide it with flexibility to meet business needs as they arise, to take advantage of favorable opportunities and to respond to a changing corporate environment.
As of the Record Date, there were [28,373,424] shares of AmeriQuest Common Stock issued and outstanding. Assuming that no additional shares of AmeriQuest Common Stock are issued from the Record Date until the effective date of the amendment to AmeriQuest's Certificate of Incorporation increasing the authorized number of shares of Common Stock of AmeriQuest, and assuming the issuance of 28,548,260 shares of AmeriQuest Common Stock upon the conversion of the 810,811 shares of AmeriQuest Series A Preferred Stock, 1,785,714 shares of AmeriQuest Series B Preferred Stock and 25,830.1 shares of AmeriQuest Series G Preferred Stock described in items 1 and 2 above, there would be upon the effective date of the amendment [56,921,684] shares of AmeriQuest Common Stock issued and outstanding, approximately [40,654,184] shares of AmeriQuest Common Stock reserved for issuance upon exercise of outstanding AmeriQuest options and warrants (including the Achievement Warrants, the Acquisition Maintenance Warrant, the Unit Maintenance Warrants and the Maintenance Option) and approximately [102,424,120] shares of Common Stock otherwise available for issuance.
As discussed above, a favorable vote on this Proposal will satisfy one of the conditions precedent for automatic conversion into AmeriQuest Common Stock of the 25,830.1 shares of AmeriQuest Series G Preferred Stock issued to the Principal Robec Shareholders. If such conversion occurs before April 30, 1996, then AmeriQuest will not be obligated to pay the Dividend Penalty or satisfy the Right of Redemption.
If stockholders do not approve this Proposal, then the shares of Series A and B Preferred Stock held by Computer 2000 Inc. will not convert into Common Stock, and the Achievement Warrants, the Acquisition Maintenance Warrant and the Unit Maintenance Warrant also held by Computer 2000 Inc. will continue to be exercisable for shares of Preferred Stock rather than Common Stock, as described above. Further, the shares of Series G Preferred Stock held by the Robec Principal Shareholders will not convert into Common Stock. As a result, (i) the holders of outstanding shares of Series A, Series B, Series D, Series E and Series F Preferred Stock would continue to have the right to approve (voting as a single class) certain actions of AmeriQuest, such as certain mergers or sales of assets of AmeriQuest and (ii) in the event of any liquidation, dissolution or winding up of AmeriQuest, AmeriQuest would continue to be obligated to pay to the holders of outstanding shares of Series A, Series B, Series D, Series E, Series F and Series G Preferred Stock, prior to making any payment to the holders of Common Stock, $22.20 per share of Series A Preferred Stock, $17.50 per share of Series B Preferred Stock, $0.53 per share of Series D Preferred Stock, $1.25 per share of Series E Preferred Stock, $5.25 per share of Series F Preferred Stock, $118.75 per share of Series G Preferred Stock (the holders of Series G Preferred Stock would also be paid their accrued and unpaid dividends), subject to adjustment. (AmeriQuest would not be obligated to pay to the holders of those shares of Preferred Stock any further payments once their liquidation preference has been paid). Further, AmeriQuest would continue to be obligated to pay the Dividend Penalty and satisfy the Right of Redemption with respect to the outstanding shares of Series G Preferred Stock. Additionally, AmeriQuest would be unable to honor its outstanding AmeriQuest options and warrants, and its ability to seek additional equity financing would be significantly limited.
Approval of the amendment to AmeriQuest's Certificate of Incorporation to increase the authorized Common Stock of AmeriQuest requires the affirmative vote of a majority of the voting power of all shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock issued and outstanding on the Record Date, voting together as a single class.
On November 10, 1995, Computer 2000 Inc. entered into a Voting Agreement (the "Robec Voting Agreement"), pursuant to which Computer 2000 Inc. agreed (a) to vote its shares of AmeriQuest's capital stock in favor of (i) approving the conversion of AmeriQuest Series G Preferred Stock into AmeriQuest Common Stock and (ii) increasing the authorized number of shares of AmeriQuest Common Stock and (b) to use its best efforts to cause AmeriQuest to fulfill its obligations to cause the resale of the shares issued upon conversion of AmeriQuest Series G Preferred Stock to be registered on Form S-3. On the Record Date, Computer 2000 Inc.
held [26,497,250] shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock (on an as converted to Common Stock basis). Such shares comprise an aggregate of approximately [46.6]% of the total number of shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock (on an as converted to Common Stock basis) outstanding on the Record Date and entitled to vote on this Proposal. Additionally, on the Record Date, the Principal Robec Shareholders held [4,797,326] shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock (on an as converted to Common Stock basis). Such shares comprise an aggregate of approximately [8.4]% of the total number of shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock (on an as converted to Common Stock basis) outstanding on the Record Date and entitled to vote on this Proposal. However, the Principal Robec Shareholders are not contractually obligated to vote their shares of AmeriQuest's capital stock in favor of increasing the authorized number of shares of AmeriQuest Common Stock.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF AN AMENDMENT OF AMERIQUEST'S CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK ISSUABLE BY AMERIQUEST FROM 30,000,000 SHARES TO 200,000,000
APPROVAL OF AN AMENDMENT OF AMERIQUEST'S CERTIFICATE OF INCORPORATION TO PROVIDE THAT THE AUTHORIZED NUMBER OF SHARES OF PREFERRED STOCK ISSUABLE BY AMERIQUEST BE 5,000,000 SHARES
Stockholders are being asked to approve an amendment of AmeriQuest's Certificate of Incorporation, which has been approved by the Board subject to stockholder approval, to provide that the authorized number of shares of Preferred Stock issuable by AmeriQuest be 5,000,000 shares. If this Proposal is approved by the stockholders at the Meeting, then the amendment of AmeriQuest's Certificate of Incorporation effecting such authorized number will be filed by AmeriQuest with the Secretary of State of the State of Delaware and will become effective upon the date of filing.
Any additional shares available for issuance upon approval of this Proposal would be available for issuance from time-to-time for general corporate purposes (such as possible stock splits, stock dividends, acquisitions of companies or assets, or sales of stock or securities convertible into stock). AmeriQuest currently has no specific plans, arrangements or understandings with respect to the issuance of shares for such purposes. AmeriQuest believes that the availability of the shares will provide it with flexibility to meet business needs as they arise, to take advantage of favorable opportunities and to respond to a changing corporate environment.
AmeriQuest's current Certificate of Incorporation provides that AmeriQuest is authorized to issue 5,000,000 shares of Preferred Stock. Since the filing of that Certificate of Incorporation, AmeriQuest has adopted and filed with the Secretary of State of Delaware Certificates of Designations setting forth the rights, preferences and privileges of AmeriQuest Series A, Series B, Series D, Series E, Series F and Series G Preferred Stock, which designate a total of 4,940,688 shares of Preferred Stock consisting of 810,811 shares of Series A Preferred Stock, 1,785,714 shares of Series B Preferred Stock, 1,403,475 shares of Series D Preferred Stock, 400,000 shares of Series E Preferred Stock, 514,857 shares of Series F Preferred Stock and 25,831 shares of Series G Preferred Stock. As of the Record Date, there were 810,811 shares of Series A Preferred Stock issued and outstanding, 1,785,714 shares of Series B Preferred Stock issued and outstanding and 25,830.1 shares of Series G Preferred Stock issued and outstanding. Consequently, as of the Record Date, there were 2,377,644.9 additional shares of Preferred Stock which AmeriQuest was authorized to issue, of which 1,403,475 shares of Series D Preferred Stock were reserved for issuance upon exercise of the Achievement Warrants, up to 400,000 shares of Series E Preferred Stock were reserved for issuance upon exercise of the Acquisition Maintenance Warrant and 514,857 shares of Series F Preferred Stock were reserved for issuance upon exercise of the Unit Maintenance Warrant, leaving AmeriQuest authorized to issue 59,312.9 shares of Preferred Stock for other purposes.
If Proposals 2 and 4 are approved and all other conditions to the conversion of the Series G Preferred Stock are satisfied prior to the filing of the amendment to AmeriQuest's Certificate of Incorporation contemplated by this Proposal (and assuming no additional shares of Preferred Stock are issued upon exercise of the Achievement Warrants, the Acquisition Maintenance Warrant or the Unit Maintenance Warrant), then upon filing of the amendment to the Certificate of Incorporation no shares of Preferred Stock would be outstanding, AmeriQuest would be authorized to issue 5,000,000 shares of Preferred Stock and, therefore, approval of this Proposal would have the effect of authorizing AmeriQuest to issue 2,622,355.1 more shares of Preferred Stock than it would have been authorized to issue absent approval of this Proposal. The Certificates of Designations for the existing series of Preferred Stock provide that none of the designated shares of Preferred Stock acquired by AmeriQuest by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares so acquired by AmeriQuest, which under the assumptions of this paragraph would consist of the outstanding shares of Series A, Series B and Series G Preferred Stock, will be canceled, retired and eliminated from the shares which AmeriQuest will be authorized to issue. Under the assumptions of this paragraph, these shares would be retired and eliminated prior to the filing of the amendment of AmeriQuest's Certificate of Incorporation. Additionally, the Board would be authorized to decrease the number of authorized but unissued shares of Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock and such shares would resume the status of Preferred Stock without any designated powers, rights or preferences.
If Proposal 2 is approved, but either Proposal 4 is not approved or any of the other conditions to the conversion of the Series G Preferred Stock are not satisfied (and assuming no additional shares of Preferred Stock are issued upon exercise of the Achievement Warrants, the Acquisition Maintenance Warrant or the Unit Maintenance Warrant), then upon filing of the amendment to the Certificate of Incorporation an aggregate of 25,830.1 shares of Preferred Stock, consisting completely of Series G Preferred Stock, would remain outstanding, AmeriQuest would be authorized to issue 4,974,169.9 additional shares of Preferred Stock and, therefore, approval of this Proposal would have the effect of authorizing AmeriQuest to issue 2,596,525 more shares of Preferred Stock than it would it would have been authorized to issue absent approval of this Proposal.
If Proposal 2 is not approved (and assuming no additional shares of Preferred Stock are issued upon exercise of the Achievement Warrants, the Acquisition Maintenance Warrant or the Unit Maintenance Warrant), then upon filing of the amendment to the Certificate of Incorporation an aggregate of 2,622,355.1 shares of Preferred Stock, consisting of 810,811 shares of Series A Preferred Stock, 1,785,714 shares of Series B Preferred Stock and 25,830.1 shares of Series G Preferred Stock, would remain outstanding, AmeriQuest would be authorized to issue 2,377,644.9 additional shares of Preferred Stock and, therefore, approval of this Proposal would have the effect of authorizing AmeriQuest to issue no more shares of Preferred Stock than it would it would have been authorized to issue absent approval of this Proposal. Of the authorized and unissued shares of Preferred Stock, 1,403,475 shares of Series D Preferred Stock would remain reserved for issuance upon exercise of the Achievement Warrants, up to 400,000 shares of Series E Preferred Stock would remain reserved for issuance upon exercise of the Acquisition Maintenance Warrant and 514,857 shares of Series F Preferred Stock would remain reserved for issuance upon exercise of the Unit Maintenance Warrant.
The Board is authorized, subject to any limitations prescribed by Delaware law, to provide for the issuance of any authorized but unissued shares of Preferred Stock in one or more series, to establish from time-to-time the number of shares to be included in each such series, to fix the powers, preferences and rights of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding), without any further vote or action by AmeriQuest's stockholders. The Board may authorize the issuance of Preferred Stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of AmeriQuest Common Stock. Consequently, the issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of AmeriQuest.
Approval of the amendment to AmeriQuest's Certificate of Incorporation to provide that the authorized number of shares of Preferred Stock issuable by AmeriQuest be 5,000,000 requires the affirmative vote of (i) a majority of the voting power of all shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock issued and outstanding on the Record Date, voting together as a single class, and (ii) a majority of the voting power of all shares of AmeriQuest Series A, Series B, Series D, Series E and Series F Preferred Stock issued and outstanding on the Record Date, voting together as a single class.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT OF AMERIQUEST'S CERTIFICATE OF INCORPORATION TO PROVIDE THAT THE AUTHORIZED NUMBER OF SHARES OF PREFERRED STOCK ISSUABLE BY AMERIQUEST BE 5,000,000 SHARES
OF AMERIQUEST SERIES G PREFERRED STOCK INTO AMERIQUEST COMMON STOCK
Stockholders are being asked to approve the conversion of AmeriQuest Series G Preferred Stock into AmeriQuest Common Stock.
As more fully described in Proposal 2 above, in connection with the Robec Acquisition, AmeriQuest issued to the Principal Robec Shareholders an aggregate of 25,830.1 shares of AmeriQuest Series G Preferred Stock, which shares will be automatically converted into an aggregate of 2,583,010 shares of AmeriQuest Common Stock (subject to adjustment) upon the satisfaction of certain conditions precedent described in Proposal 2. One such condition, set forth in AmeriQuest's Certificate of Designations setting forth the rights, preferences and privileges of AmeriQuest Series G Preferred Stock, is that AmeriQuest's stockholders must approve the conversion of AmeriQuest Series G Preferred Stock into AmeriQuest Common Stock.
If the 25,830.1 shares of AmeriQuest Series G Preferred Stock issued to the Principal Robec Shareholders convert into AmeriQuest Common Stock before April 30, 1996, then, as described in Proposal 2 above, AmeriQuest will not be obligated to pay the Dividend Penalty or satisfy the Right of Redemption.
If stockholders do not approve this Proposal, then the shares of Series G Preferred Stock held by the Robec Principal Shareholders will not convert into Common Stock. As a result, AmeriQuest will continue to be obligated to pay the Dividend Penalty and satisfy the Right of Redemption.
Approval of the conversion of AmeriQuest Series G Preferred Stock into AmeriQuest Common Stock requires the affirmative vote of a majority of the voting power of the shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock present in person or by proxy at the Meeting and issued and outstanding on the Record Date, voting together as a single class.
As described in Proposal 2 above, pursuant to the Robec Voting Agreement, Computer 2000 Inc. has agreed, among other things, to vote its shares of AmeriQuest's capital stock in favor of approving the conversion of AmeriQuest Series G Preferred Stock into AmeriQuest Common Stock. On the Record Date, Computer 2000 Inc. held [26,497,250] shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock (on an as converted to Common Stock basis). Such shares comprise an aggregate of approximately [46.6]% of the total number of shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock (on an as converted to Common Stock basis) outstanding on the Record Date and entitled to vote on this Proposal. Additionally, on the Record Date, the Principal Robec Shareholders held [4,797,326] shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock (on an as converted to Common Stock basis). Such shares comprise an aggregate of approximately [8.4]% of the total number of shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock (on an as converted to Common Stock basis) outstanding on the Record Date and entitled to vote on this Proposal. However, the Principal Robec Shareholders are not contractually obligated to vote their shares of AmeriQuest's capital stock in favor of approving the conversion of AmeriQuest Series G Preferred Stock into AmeriQuest Common Stock.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE CONVERSION OF AMERIQUEST SERIES G PREFERRED STOCK INTO AMERIQUEST COMMON STOCK
ISSUANCES BY AMERIQUEST OF SECURITIES
Stockholders are being asked to ratify certain prior issuances by AmeriQuest of securities to various parties as described below (the "Prior Issuances"). The Prior Issuances did not require prior approval or subsequent ratification by the stockholders under AmeriQuest's Certificate of Incorporation or Delaware General Corporation Law. AmeriQuest believes that, based upon discussions with the NYSE, ratification of the Prior Issuances may be necessary to meet AmeriQuest's listing requirements with the NYSE.
DESCRIPTION OF PRIOR ISSUANCES OF SECURITIES
The following table summarizes the Prior Issuances which the stockholders are being asked to ratify:
(1) In December 1993, AmeriQuest granted to Dr. Clark a non-qualified stock option exercisable for 250,000 shares of Common Stock at $2.00 per share (subject to proportional adjustment in the event of stock splits, stock combinations, stock dividends, recapitalizations and mergers), expiring six years from the date of grant, subject to earlier termination upon termination of employment. This option vested in 25% increments
every 14 months. Pursuant to a Settlement Agreement and Release entered into between AmeriQuest and Dr. Clark in connection with the termination of his employment, this option was repriced in August 1995 to be exercisable at $1.00 per share, was deemed fully vested and exercisable only during the two year period following the repricing. At the time this option was granted and at the time this option was repriced, Dr. Clark was the Chief Executive Officer of AmeriQuest. AmeriQuest granted this option as an employment incentive and expects to use the proceeds from any exercise thereof for general working capital purposes.
(2) In December 1993, AmeriQuest granted to Mr. Holmes a non-qualified stock option exercisable for 100,000 shares of Common Stock at $2.00 per share (subject to proportional adjustment in the event of stock splits, stock combinations, stock dividends, recapitalizations and mergers), expiring six years from the date of grant, subject to earlier termination upon termination of employment. This option vested in 25% increments every 14 months. Pursuant to a Settlement Agreement and Release entered into between AmeriQuest and Mr. Holmes in connection with the termination of his employment, this option was repriced in August 1995 to be exercisable at $1.00 per share, was deemed fully vested and exercisable only during the two year period following the repricing. At the time this option was granted and at the time this option was repriced, Mr. Holmes was the Chief Financial Officer of AmeriQuest. AmeriQuest granted this option as an employment incentive and expects to use the proceeds from any exercise thereof for general working capital purposes.
(3) In December 1993, AmeriQuest granted to Mr. Rusert a non-qualified stock option exercisable for 100,000 shares of Common Stock at $2.00 per share (subject to proportional adjustment in the event of stock splits, stock combinations, stock dividends, recapitalizations and mergers), expiring six years from the date of grant, subject to earlier termination upon termination of employment. This option vested in 25% increments every 14 months. Pursuant to a Severance Agreement entered into between AmeriQuest and Mr. Rusert in connection with the termination of his employment, in October 1994 the vesting of this option was accelerated such that it is exercisable for 50,000 shares of Common Stock and is exercisable only until [ ]. At the time this option was granted, Mr. Rusert was the Chief Operating Officer of AmeriQuest. AmeriQuest granted this option as an employment incentive and expects to use the proceeds from any exercise thereof for general working capital purposes.
(4) In March 1994, AmeriQuest granted to Manufacturers Indemnity and Insurance Company of America ("MIICA") a non-qualified option exercisable for 150,000 shares of Common Stock at $4.50 per share (subject to proportional adjustment in the event of stock splits, stock dividends, recapitalizations and mergers), expiring five years from the date of grant (subject to earlier expiration if at least one representative of MIICA is not serving AmeriQuest as a director/consultant and as a member of AmeriQuest's acquisition committee). This option vested when AmeriQuest's operations attained a sales "run rate" of $300 million per year. At the time this option was granted, Marc L. Werner and Eric J. Werner were Directors of both MIICA and of AmeriQuest. Marc L. Werner remains a Director of AmeriQuest, and Eric J. Werner resigned in August 1995 as a Director of AmeriQuest. This option was granted as incentive for Marc L. Werner and Eric J. Werner to assist AmeriQuest with its policy of growth by acquisition of other companies. AmeriQuest expects to use the proceeds from any exercise of this option for general working capital purposes.
(5) In October 1994, AmeriQuest sold to MIICA 200,000 shares of Common Stock at $2.50 per share. The purchase price at which AmeriQuest sold these shares was $0.10 per share greater than the purchase price at which AmeriQuest sold promissory notes convertible into shares in the 1994 Private Placement completed in October 1994 described in footnote (8) below. MIICA paid in cash the total par value for the shares of $2,000 and remains obligated to pay the balance of $498,000. This payment obligation is unsecured and does not bear interest. Payment was originally due in October 1995, but, in July 1995, AmeriQuest extended the due date until September 1996. At the time these shares were purchased, Marc L. Werner and Eric J. Werner were Directors of both MIICA and AmeriQuest. AmeriQuest expects to use the proceeds from the sale of these shares for general working capital purposes.
(6) In October 1994, AmeriQuest sold to Dr. Clark 200,000 shares of Common Stock at $2.50 per share. The purchase price at which AmeriQuest sold these shares was $0.10 per share greater than the purchase price at which AmeriQuest sold promissory notes convertible into shares in the 1994 Private Placement completed in October 1994 described in footnote (8) below. Dr. Clark paid in cash the total par value for the shares of
$2,000 and tendered a non-interest bearing promissory note for the balance of $498,000, which promissory note is secured by these shares purchased. The promissory note was originally due in October 1995, but, in July 1995, AmeriQuest extended the due date until September 1996. At the time Dr. Clark purchased these shares, he was the Chief Executive Officer of AmeriQuest. AmeriQuest expects to use the proceeds from the sale of these shares for general working capital purposes.
(7) In October 1994, AmeriQuest sold to Mr. Holmes 50,000 shares of Common Stock at $2.50 per share. The purchase price at which AmeriQuest sold these shares was $0.10 per share greater than the purchase price at which AmeriQuest sold promissory notes convertible into shares in the 1994 Private Placement completed in October 1994 described in footnote (8) below. Mr. Holmes paid in cash the total par value for the shares of $500 and tendered a non-interest bearing promissory note for the balance of $124,500, which promissory note is secured by these shares purchased. The promissory note was originally due in October 1995, but, in July 1995, AmeriQuest extended the due date until September 1996. At the time Mr. Holmes purchased these shares, he was the Chief Financial Officer of AmeriQuest. AmeriQuest expects to use the proceeds from the sale of these shares for general working capital purposes.
(8) In October 1994, AmeriQuest sold to various investors in a private placement Unsecured, Convertible Promissory Notes for an aggregate purchase price of $3,696,000 (the "1994 Private Placement"). AmeriQuest applied the proceeds of the 1994 Private Placement to acquire Ross White Enterprises, Inc. d/b/a "National Computer Distributors" ("NCD"). Each Unsecured, Convertible Promissory Note matured in November 1994 and was convertible at any time prior to maturity into such number of units as was equal to the principal payable thereunder divided by $2.40, with each unit consisting of one share of Common Stock and one warrant to purchase one share of Common Stock. The principal amount of each note was unsecured and bore interest at the rate of the "Six-month Treasuries Rate". Accrued and unpaid interest was to be forgiven upon conversion of the notes to units. The Unsecured, Convertible Promissory Notes sold in the 1994 Private Placement were convertible into units consisting of an aggregate of 1,540,000 shares of Common Stock and warrants to purchase an aggregate of 1,540,000 shares of Common Stock. Each warrant was exercisable for a four year period at $3.50 per share (subject to proportional adjustment in the event of stock splits, stock combinations, stock dividends, recapitalizations and mergers); provided, that, if AmeriQuest were to sell Common Stock at a price per share less than the exercise price then in effect under the warrant at any time during the period beginning in October 1994 and ending in April 1995, then the exercise price would be reduced to that price per share. The Unsecured, Convertible Promissory Notes were automatically to convert into shares and warrants as described above upon the consummation of the acquisition of NCD. AmeriQuest agreed to register the shares issued and issuable upon conversion of the Unsecured, Convertible Promissory Notes.
In November 1994, the acquisition by AmeriQuest of NCD closed and, as a result, the Unsecured, Convertible Promissory Notes automatically converted into shares and warrants as described above. The exercise price of all the warrants issued in connection with the 1994 Private Placement was reduced to $1.75 per share in August 1995 to reflect the sale of Common Stock at $1.75 per share in the 1995 Private Placement (described below in footnote (10)). The shares issued and issuable in the 1994 Private Placement were registered with the SEC on Form S-3 in July 1995.
MIICA purchased an Unsecured, Convertible Promissory Note in the 1994 Private Placement for a purchase price of $456,000. MIICA advanced this sum prior to the purchase of Unsecured, Convertible Promissory Notes by any other participant in the 1994 Private Placement (except for Wendover Financial Company, which, as explained in the following paragraph, purchased an Unsecured, Convertible Promissory Note at the same time as MIICA) and prior to the determination of the final terms under which Unsecured, Convertible Promissory Notes would be sold in the 1994 Private Placement. MIICA purchased its Unsecured, Convertible Promissory Note under the agreement that the terms thereof would be the same terms that would subsequently be agreed upon by the other participants in the 1994 Private Placement. Upon the conversion in November 1994 of the Unsecured, Convertible Promissory Note purchased by MIICA, AmeriQuest issued to MIICA 190,000 shares of Common Stock and warrants to purchase 190,000 shares of Common Stock. At the time MIICA purchased the Unsecured, Convertible Promissory Note and at the time that the Unsecured, Convertible Promissory Note was converted into stock and warrants, Marc L. Werner and Eric J. Werner were Directors of both MIICA and AmeriQuest.
Wendover Financial Company ("Wendover") purchased an Unsecured, Convertible Promissory Note in the 1994 Private Placement for a purchase price of $240,000. Wendover advanced this sum prior to the purchase of Unsecured, Convertible Promissory Notes by any other participant in the 1994 Private Placement (except for MIICA, which purchased an Unsecured, Convertible Promissory Note at the same time as Wendover) and prior to the determination of the final terms under which Unsecured, Convertible Promissory Notes would be sold in the 1994 Private Placement. Wendover purchased its Unsecured, Convertible Promissory Note under the agreement that the terms thereof would be the same terms that would subsequently be agreed upon by the other participants in the 1994 Private Placement. Upon the conversion in November 1994 of the Unsecured, Convertible Promissory Note purchased by Wendover, AmeriQuest issued to Wendover 100,000 shares of Common Stock and warrants to purchase 100,000 shares of Common Stock. At the time Wendover purchased the Unsecured, Convertible Promissory Note and at the time that the Unsecured, Convertible Promissory Note was converted into stock and warrants, Terren S. Peizer was affiliated with Wendover and was a Director of AmeriQuest. Mr. Peizer resigned in August 1995 as a Director of AmeriQuest.
(9) Over the months of May, June and July in 1995, AmeriQuest sold to various investors in a private placement (the "1995 Private Placement") units consisting of an aggregate of 2,574,287 shares of AmeriQuest Common Stock and 2,574,287 warrants to purchase an aggregate of 5,148,574 shares of AmeriQuest Common Stock (collectively, the "1995 Private Placement Common Shares"). The aggregate purchase price for the units was $4,505,002.25. Each unit was sold for $1.75 and consisted of one share of AmeriQuest Common Stock and one warrant to purchase two shares of AmeriQuest Common Stock. Each such warrant is exercisable for a three year period at $1.05 per share (subject to proportional adjustment in the event of stock splits, stock combinations, stock dividends, recapitalizations and mergers). In the event AmeriQuest sells shares of its Common Stock in financings to third parties (which the Board believes excludes Computer 2000 AG and Computer 2000 Inc.) at a price per share less than $1.75 at any time during a certain period beginning in July 1995 and ending in December 1996, including, without limitation, shares issued upon the conversion of outstanding debt or equity securities, AmeriQuest must issue additional shares to the purchasers of the shares of Common Stock purchased as part of the units in such a number as to effectively reduce the purchase price of the units to the same price per share as the shares sold to the other parties during such period. This anti-dilution protection does not apply to any outstanding securities, any outstanding rights to acquire securities or any securities issued upon exercise of options or warrants granted, previously or in the future, to employees or consultants. AmeriQuest agreed to register as soon as possible the 1995 Private Placement Common Shares, but has not yet done so. AmeriQuest used the proceeds of the 1995 Private Placement to reduce its outstanding debt obligations and for general working capital purposes.
MIICA purchased in the 1995 Private Placement for a total purchase price of $1,190,000 units consisting of an aggregate of 680,000 shares of Common Stock and 680,000 warrants to purchase an aggregate of 1,360,000 shares of Common Stock. MIICA advanced this sum prior to the purchase of units by any other participant in the 1995 Private Placement and prior to the determination of the final terms under which units would be sold in the 1995 Private Placement. MIICA purchased its units under the agreement that the terms thereof would be the same terms that would subsequently be agreed upon by the other participants in the 1995 Private Placement. At the time MIICA purchased the units, Marc L. Werner and Eric J. Werner were Directors of both MIICA and AmeriQuest.
(10) In July 1995, AmeriQuest canceled options exercisable for 2,500, 2,500, 15,000 and 15,000 shares at $1.50, $1.50, $2.00 and $3.375 per share, respectively, previously granted to Mr. Walker and, in lieu thereof, granted to Mr. Walker 35,000 fully-paid shares of Common Stock in consideration of prior services rendered by Mr. Walker to AmeriQuest. At the time AmeriQuest issued these shares, Mr. Walker was a Director of AmeriQuest.
(11) In July 1995, AmeriQuest canceled an option exercisable for 15,000 shares at $3.375 per share, previously granted to Mr. Silvis and, in lieu thereof, granted to Mr. Silvis 15,000 fully-paid shares of Common Stock in consideration of prior services rendered by Mr. Silvis to AmeriQuest. At the time AmeriQuest issued these shares, Mr. Silvis was a Director of AmeriQuest.
PURPOSE AND EFFECT OF PROPOSAL
This Proposal is intended to allow AmeriQuest to meet certain listing requirements of the NYSE. As interpreted by the NYSE, those listing requirements require AmeriQuest, in order to maintain the listing of its Common Stock on the NYSE, to obtain stockholder approval of certain issuances of Common Stock (or in connection with certain issuances of Common Stock), including issuances to insiders of AmeriQuest. AmeriQuest believes that stockholder ratification of the Prior Issuances will be deemed by the NYSE to satisfy this requirement. If the Prior Issuances are not ratified, then the NYSE may take the position that the shares of Common Stock issued or issuable in connection with the Prior Issuances cannot be listed on the NYSE and that all AmeriQuest's Common Stock will be de-listed from trading on the NYSE. If such de-listing occurs, the Common Stock might be tradeable only in the over- the-counter market (the "pink sheets"). Continued listing of AmeriQuest Common Stock on the NYSE is also dependent on continued compliance with other listing requirements that cannot be addressed by stockholder action, including the existence of abnormally low selling price or volume of trading and unsatisfactory financial conditions and/or operating results. As a result of AmeriQuest's recent stock price and historical losses, the NYSE has had discussions with AmeriQuest regarding those matters and there can be no assurance that the NYSE will not take action to delist AmeriQuest Common Stock from trading due to such factors or other reasons.
Ratification of the Prior Issuances requires the affirmative vote of a majority of the voting power of the shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock present in person or represented by proxy at the Meeting and issued and outstanding on the Record Date, voting together as a single class.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION OF THE PRIOR
Stockholders are being asked to approve AmeriQuest's 1996 Equity Incentive Plan (the "1996 Plan").
On [ ], 1996, the Board unanimously adopted the 1996 Plan and resolved to reserve, subject to approval of Proposal 2 above, 2,000,000 shares of AmeriQuest Common Stock for issuance thereunder. The 1996 Plan is intended to replace AmeriQuest's present stock option plans, under which AmeriQuest does not intend to grant any additional stock options. No shares will be issued pursuant to the 1996 Plan unless and until stockholder approval of the 1996 Plan has been obtained. The closing price of AmeriQuest Common Stock on the NYSE on the Record Date was $[ ] per share.
The following is a summary of the principal provisions of the 1996 Plan, as it is proposed to be approved. Reference is made to the full text of the 1996 Plan.
Shares Subject to the 1996 Plan. As explained above, an aggregate of 2,000,000 shares of AmeriQuest Common Stock will be reserved by the Board for issuance under the 1996 Plan. If any award granted pursuant to the 1996 Plan expires or terminates for any reason without being exercised or shares issued and returned in whole or in part, the shares released from such award will again become available for grant and purchase under the 1996 Plan.
Eligibility. Awards may be granted under the 1996 Plan to employees, officers, directors, consultants and advisors of AmeriQuest, or any parent, subsidiary or affiliate of AmeriQuest. A Stock Option Committee (the "Committee"), to be appointed by the Board, in its sole discretion will select the recipients of awards (the "Participants"). The maximum number of shares that may be issued to any one Participant under the 1996 Plan is 500,000 shares in any calendar year, except in the case of a new employee who is eligible to receive 800,000 shares in the year that employment commences. As of [ ], 1996, approximately [ ] persons were eligible to receive awards under the 1996 Plan.
Administration. The 1996 Plan will be administered by the Committee, the members of which are appointed by the Board. The persons whom the Board will appoint to the Committee will be "disinterested persons", as that term is defined in the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and "outside directors", as that term is defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
Subject to the terms of the 1996 Plan, the Committee will determine the persons who are to receive awards, the number of shares subject to each such award and the terms and conditions of each such award. However, the Chief Executive Officer will be authorized to make grants to non-officer employees of awards to purchase no more than 10,000 shares pursuant to guidelines established by the Committee. The Committee will have the authority to construe and interpret any of the provisions of the 1996 Plan or any awards granted thereunder.
Stock Options. Options granted under the 1996 Plan may be incentive stock options ("ISOs") within the meaning of Section 422 of the Code, or nonqualified stock options ("NQSOs"); however, only employees of AmeriQuest, or of a parent or subsidiary of AmeriQuest, may be granted ISOs. Options under the 1996 Plan will have a maximum term of ten (10) years after the date of grant for holders of 10% or less of AmeriQuest's, or any parent's or subsidiary's, outstanding capital stock. The option term will be limited to five (5) years for holders of more than 10% of such stock.
The exercise price of an ISO granted under the 1996 Plan may not be less than the Fair Market Value (as defined in the 1996 Plan) of AmeriQuest Common Stock on the date of grant, except that for an option granted to a person holding more than 10% of the total combined voting power of all classes of stock of AmeriQuest or any parent or subsidiary of AmeriQuest, the exercise price must be not less than 110% of such Fair Market Value. The exercise price of an NQSO granted under the 1996 Plan may not be less than 85% of the Fair Market Value of AmeriQuest Common Stock on the date of grant.
The exercise of options granted under the 1996 Plan, plus any applicable income tax withholding, may be paid (1) in cash (by check); or where permitted by law and approved by the Committee, in its sole discretion, at the time of grant; (2) by cancellation of indebtedness of AmeriQuest to the Participant; (3) by a full recourse promissory note bearing reasonable interest, provided that the portion of the purchase price equal to the par value of the shares shall be paid in cash; (4) by surrender of shares of AmeriQuest Common Stock owned by the Participant for at least six months and having a fair market value on the date of surrender equal to the aggregate exercise price of the option; (5) by waiver of compensation due to or accrued by the Participant for services rendered; (6) by a "same-day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (a "NASD Dealer"); (7) by a "margin" commitment from the Participant and a NASD Dealer; or (8) by any combination of the foregoing.
Restricted Stock Awards. The Committee may grant Participants restricted stock awards to purchase stock either in addition to, or in tandem with, other awards under the 1996 Plan. Restricted stock awards will be subject to such restrictions as the Committee may impose. These restrictions may be based upon completion of a specified number of years of service with AmeriQuest or upon completion of performance goals as set out in advance. Prior to the grant of any award, the Committee must: (a) determine the nature, length (not to exceed five years) and starting date of any performance period for restricted stock awards; (b) select from among the performance factors to be used to measure performance goals, if any; and (c) determine the number of shares that may be awarded to the Participant. Prior to the payment of any award, the Committee must determine the extent to which such award has been earned. No award with respect to any individual Participant during any performance period can exceed 30% of the shares reserved under the 1996 Plan. The purchase price for such awards must be no less than the par value of AmeriQuest's Common Stock on the date of the award. Payment of the purchase price for restricted stock may be made as described under "Stock Options" above.
Stock Bonus Awards. The Committee may grant Participants stock bonus awards either in addition to, or in tandem with, other awards under the 1996 Plan, under such terms, conditions and restrictions as the Committee may determine. Stock Bonus Awards will be subject to such restrictions as the Committee imposes. These restrictions may be based upon completion of a specified number of years of service with AmeriQuest or upon completion of performance goals set out in advance. Prior to the grant of any award, the Committee shall: (a) determine the nature, length (not to exceed five years) and starting date of any performance period for stock bonuses; (b) select from among the performance factors to be used to measure performance goals, if any; and (c) determine the number of shares that may be awarded to the Participant. Prior to the payment of any award, the Committee must determine the extent to which such awards have been earned. No stock bonuses with respect to any individual Participant during any performance period can exceed 30% of the shares reserved under the 1996 Plan. Payment of any stock bonus award will be in shares of Common Stock (valued at its then fair market value) or cash.
Mergers, Consolidations, Change of Control. In the event of a merger, consolidation, dissolution or liquidation of AmeriQuest, the sale of substantially all the assets of AmeriQuest or any other similar corporate transaction, the successor corporation may assume, replace or substitute equivalent options in exchange for those granted under the 1996 Plan or provide substantially similar consideration, shares or other property subject to repurchase restrictions no less favorable to Participants under the 1996 Plan. In the event that the successor corporation, if any, does not assume or substitute the options, the options shall expire on such transaction at the time and upon the conditions as the Committee determines.
Amendment of the 1996 Plan. The Committee may at any time amend or terminate the 1996 Plan, including amendment of any form of grant, exercise agreement or instrument to be executed pursuant to the 1996 Plan. However, the Committee may not amend the 1996 Plan in any manner that requires stockholder approval pursuant to the Code, or the regulations promulgated thereunder, or the Exchange Act, or Rule 16b-3 (or its successor) promulgated thereunder.
Term of the 1996 Plan. The 1996 Plan will terminate in [ ], 2006, ten (10) years from the date the 1996 Plan was adopted by the Board.
THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY STATEMENT OF THE FEDERAL INCOME TAX CONSEQUENCES TO AMERIQUEST AND PARTICIPANTS ASSOCIATED WITH STOCK OPTIONS GRANTED UNDER THE 1996 PLAN. THE FEDERAL TAX LAWS MAY CHANGE AND THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES FOR ANY PARTICIPANT WILL DEPEND UPON HIS OR HER INDIVIDUAL CIRCUMSTANCES. EACH PARTICIPANT HAS BEEN, AND IS, ENCOURAGED TO SEEK THE ADVICE OF A QUALIFIED TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PARTICIPATION IN THE 1996 PLAN.
Incentive Stock Options. The Participant will not recognize income upon grant of an ISO and will not incur tax on its exercise (unless the Participant is subject to the alternative minimum tax described below). If the Participant holds the stock acquired upon exercise of an ISO (the "ISO Shares") for one year after the date the option was exercised and for two years after the date the option was granted, the Participant generally will realize long-term capital gain or loss (rather than ordinary income or loss) upon disposition of the ISO Shares. This gain or loss will be equal to the difference between the amount realized upon such disposition and the amount paid for the ISO shares.
If the Participant disposes of ISO Shares prior to the expiration of either required holding period (a "disqualifying disposition"), then gain realized upon such disposition, up to the difference between the fair market value of the ISO Shares on the date of exercise (or, if less, the amount realized on a sale of such shares) and the option exercise price, will be treated as ordinary income. Any additional gain will be long-term or short-term capital gain, depending upon the amount of time the ISO Shares were held by the Participant.
Alternative Minimum Tax. The difference between the fair market value of the ISO shares on the date of exercise and the exercise price will be an adjustment to income for purposes of the alternative minimum tax (the "AMT"). The AMT (imposed to the extent it exceeds the taxpayer's regular tax) is 26% of an individual taxpayer's alternative minimum taxable income (28% in the case of alternative minimum taxable income in excess of $175,000). Alternative minimum taxable income is determined by adjusting regular taxable income for certain items, increasing that income by certain tax preference items (including the difference between the fair market value of the ISO Shares on the date of exercise and the exercise price) and reducing this amount by the applicable exemption amount ($45,000 in the case of a joint return, subject to reduction under certain circumstances). If a disqualifying disposition of the ISO Shares occurs in the same calendar year as exercise of the ISO, there is no AMT adjustment with respect to those shares. Also upon a sale of ISO Shares that is not a disqualifying disposition, alternative minimum taxable income is reduced in the year of sale by the excess of fair market value of the ISO Shares at exercise over the amount paid for the ISO Shares. Special rules apply where all or a portion of the exercise price is paid by tendering shares of AmeriQuest Common Stock.
Nonqualified Stock Options. A Participant will not recognize any taxable income at the time a NQSO is granted. However, upon exercise of a NQSO the Participant will include in income as compensation an amount equal to the difference between the fair market value of the shares on the date of exercise and the Participant's exercise price. The included amount will be treated as ordinary income by the Participant and may be subject to income tax and FICA withholding by AmeriQuest (either by payment in cash or withholding out of the Participant's salary). Upon resale of the shares by the Participant, any subsequent appreciation or depreciation in the value of the shares will be treated as capital gain or loss. Special rules apply where all or a portion of the exercise price is paid by tendering shares of AmeriQuest Common Stock.
Restricted Stock and Stock Bonus Awards. Restricted stock, stock bonus awards and performance awards will generally be subject to tax at the time of receipt of shares of AmeriQuest Common Stock or cash, unless there are restrictions that enable the Participant to defer tax. At the time that tax is incurred, the tax treatment will be similar to that discussed above for NQSOs.
Tax Treatment of AmeriQuest. AmeriQuest generally will be entitled to a deduction in connection with the exercise of a NQSO by a Participant or upon the receipt of restricted stock or stock bonus awards by a Participant to the extent that the Participant recognizes ordinary income and AmeriQuest withholds tax. AmeriQuest will be entitled to a deduction in connection with the disposition of ISO Shares only to the extent that the Participant recognizes ordinary income on a disqualifying disposition of the ISO Shares.
ERISA. The 1996 Plan is not subject to any of the provisions of the Employee Retirement Income Security Act of 1974.
The grant of awards under the 1996 Plan will be within the discretion of the Committee. For this reason, the awards to be granted to officers and key employees under the Plan are not determinable.
Approval of the 1996 Equity Incentive Plan requires the affirmative vote of the voting power of a majority of the shares of AmeriQuest Common Stock and AmeriQuest Preferred Stock present in person or by proxy at the Meeting and issued and outstanding on the Record Date, voting together as a single class.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE 1996 EQUITY INCENTIVE PLAN FOR 2,000,000 SHARES OF AMERIQUEST COMMON STOCK
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
AmeriQuest has selected Arthur Andersen LLP as its independent accountants to perform the audit of AmeriQuest's financial statements for fiscal year 1996, and the stockholders are being asked to ratify such selection. Representatives of Arthur Andersen LLP are expected to be present at the Meeting, will have the opportunity to make a statement at the Meeting if they desire to do so and are expected to be available to respond to appropriate questions.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION OF ARTHUR ANDERSEN LLP AS INDEPENDENT ACCOUNTANTS FOR AMERIQUEST FOR THE
The following table sets forth, as of November 30, 1995, information relating to the beneficial ownership of AmeriQuest's Common Stock and Preferred Stock by (i) each person known to AmeriQuest to be the beneficial owner of more than five percent of any such class of AmeriQuest's outstanding voting securities, (ii) each director and nominee, (iii) each of the Named Executive Officers (as defined below in "Executive Compensation"), and (iv) all directors and executive officers as a group. Except for the Robec Voting Agreement described in Proposal 2 above, AmeriQuest knows of no other agreement among its stockholders which relates to voting or investment power over its securities.
(1) Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
(2) Shares of Common Stock or Preferred Stock subject to options and warrants that are exercisable as of, or exercisable within 60 days of, November 30, 1995 are deemed to be outstanding and to be beneficially owned by the person or entity holding such option or warrant for the purpose of computing the percentage ownership of such person or entity but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or entity. Percentages of less than 1% are represented by an asterisk.
(3) The address for the Named Executive Officers, directors and nominees is: 3 Imperial Promenade, Suite 300, Santa Ana, California 92707.
(4) Includes 810,811 shares of Series A Preferred Stock, 1,785,714 shares of Series B Preferred Stock, 127,219 shares of Series D Preferred Stock subject to a warrant exercisable within 60 days after November 30, 1995 and 218,307 shares of Series E Preferred Stock subject to a warrant exercisable within 60 days after November 30, 1995, all held of record by Computer 2000 Inc. Each outstanding share of Series A and Series B Preferred Stock will automatically convert into ten shares of AmeriQuest Common Stock and each outstanding share of Series E Preferred Stock will automatically convert into twenty-five shares of AmeriQuest Common Stock when there are a sufficient number of authorized shares of AmeriQuest Common Stock reserved to effect the conversion into Common Stock of all outstanding shares of AmeriQuest Series A, Series B, Series D, Series E and Series F Preferred Stock and the exercise of all outstanding rights, options, warrants or other securities convertible, exchangeable or exercisable for such Preferred Stock. Computer 2000 Inc. also holds (i) the Achievement Warrants, which, upon the occurrence of certain events, are exercisable for up to 1,403,475 shares of AmeriQuest Series D Preferred Stock (which shares of Series D Preferred Stock are convertible into 14,034,750 shares of AmeriQuest Common Stock, subject to adjustment), (ii) the Unit Maintenance Warrants, which, upon the occurrence of certain events, are exercisable for up to 514,857 shares of AmeriQuest Series F Preferred Stock (which shares of Series F Preferred Stock are convertible into 5,148,570 shares of AmeriQuest Common Stock, subject to adjustment) and (iii) the Maintenance Option, which, upon the occurrence of certain events, is exercisable for at least approximately [5,281,305] shares of AmeriQuest Common Stock. The Achievement Warrants, the Unit Maintenance Warrants and the Maintenance Option are described above in Proposal 2.
(5) Represents the shares held of record by Computer 2000 Inc. (see footnote (4) above).
(6) Represents 1,605,273 shares of Common Stock and 1,700,000 shares of Common Stock subject to warrants exercisable within 60 days after November 30, 1995, each held of record by Manufacturers Indemnity and Insurance Company of America.
(7) Mr. DeWindt is the Chairman of the Board of Directors and Chief Executive Officer of AmeriQuest.
(8) Represents the shares held of record by Computer 2000 Inc. (see footnote (4) above). Mr. Krischik is a member of the Management Board of Computer 2000 AG (the sole shareholder of Computer 2000 Inc.) and a member of the Board of Directors of Computer 2000 Inc. and, therefore, may be deemed to have shared voting power over the shares of AmeriQuest held by Computer 2000 Inc. Mr. Krischik disclaims beneficial ownership of all shares of AmeriQuest held by Computer 2000 Inc. Mr. Krischik is the Co-Chairman of the Board of Directors of AmeriQuest.
(9) Represents 80,000 shares of Common Stock held of record by Mr. Werner, of which 20,000 shares are held by Mr. Werner as custodian for certain of his children, as well as the shares held of record by Manufacturers Indemnity and Insurance Company of America referred to in footnote (6) above. Mr. Werner is the President and a Director of Manufacturers Indemnity and Insurance Company of America and, therefore, may be deemed to have shared voting and investment powers over the shares of AmeriQuest held by Manufacturers Indemnity and Insurance Company of America. Mr. Werner disclaims beneficial ownership of all shares of AmeriQuest held by Manufacturers Indemnity and Insurance Company of America. Mr. Werner is Vice-Chairman of the Board of Directors of AmeriQuest.
(10) Mr. Mulford is President, Chief Operating Officer and a Director of AmeriQuest.
(11) Mr. Heims is a Director of AmeriQuest.
(12) Includes 250,000 shares subject to an option exercisable within 60 days after November 30, 1995 (pursuant to the terms of a severance agreement between Dr. Clark and AmeriQuest; for a description of the severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below). Dr. Clark served as President, Chief Executive Officer and a Director of AmeriQuest as of the end of fiscal year 1995. Dr. Clark resigned as an officer of AmeriQuest in August 1995, although he remains a Director of AmeriQuest.
(13) Includes 100,000 shares subject to an option exercisable within 60 days after November 30, 1995 (pursuant to the terms of a severance agreement between Mr. Holmes and AmeriQuest; for a description of the severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below). Mr. Holmes served as Chief Financial Officer, Secretary, Treasurer and a Director of AmeriQuest as of the end of fiscal year 1995. Mr. Holmes resigned as an officer of AmeriQuest in August 1995 and as a Director in January 1996, although he remains a consultant to AmeriQuest.
(14) Includes 16,583.92 shares of Series G Preferred Stock held of record by Mr. Beckett. Each outstanding share of Series G Preferred Stock will automatically convert into one hundred shares of AmeriQuest Common Stock upon the satisfaction of certain conditions described in Proposal 2. Mr. Beckett is a Director of AmeriQuest and Chairman of the Board of Directors and President of Robec.
(15) Includes 191,731 shares subject to a warrant exercisable within 60 days after November 30, 1995, which is held of record by Corporate Efficiency Consulting. Mr. Grubstein is a Director and holds half of the outstanding equity of Corporate Efficiency Consulting and, therefore, may be deemed to have shared voting and investment powers over shares of AmeriQuest held by Corporate Efficiency Consulting. Mr. Grubstein disclaims beneficial ownership of all shares of AmeriQuest held by Corporate Efficiency Consulting. Mr. Grubstein served as a Senior Vice President of AmeriQuest as of the end of fiscal year 1995. Mr. Grubstein resigned as an officer of AmeriQuest in August 1995, although he remains an employee of AmeriQuest.
(16) Represents shares subject to an option exercisable within 60 days after November 30, 1995 (pursuant to the terms of a severance agreement between Mr. Crystal and AmeriQuest; for a description of the severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below). This option expired unexercised in December 1995. Mr. Crystal served as a Senior Vice President-Marketing and Purchasing of AmeriQuest as of the end of fiscal year 1995. Mr. Crystal's employment by AmeriQuest terminated in September 1995.
(17) Represents shares subject to an option exercisable within 60 days after November 30, 1995 (pursuant to the terms of a severance agreement between Mr. Lytle and AmeriQuest; for a description of the severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below). This option expired unexercised in December 1995. Mr. Lytle served as a Senior Vice President-Operations of AmeriQuest as of the end of fiscal year 1995. Mr. Lytle's employment by AmeriQuest terminated in September 1995.
(18) Mr. Bransky served as the President and Chief Executive Officer of Kenfil, a wholly-owned subsidiary of AmeriQuest, until March 1995, when his employment by Kenfil terminated upon expiration of his Employment Agreement.
(19) Includes 100,000 shares subject to an option exercisable within 60 days after November 30, 1995 (pursuant to the terms of a severance agreement between Ms. Miltner and AmeriQuest; for a description of the severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below). Ms. Miltner served as Executive Vice President--Sales and Marketing of AmeriQuest until March 1995, when her employment by AmeriQuest terminated.
(20) None of the Named Executive Officers (as defined below in "Executive Compensation") remains an officer of AmeriQuest. The executive officers of AmeriQuest as of November 30, 1995 were D. Stephen DeWindt, Mark C. Mulford, Donald W. Resnick and Dennis C. Fairchild. The shares owned by all directors and executive officers as a group include the shares referred to in footnotes (7) through (12) above and footnote (14) above, as well as 19,431 additional shares and 150,000 additional shares subject to options and warrants exercisable within 60 days after November 30, 1995.
The following table sets forth certain information regarding the current executive officers of AmeriQuest.
For information regarding the positions and offices with AmeriQuest held by Messrs. DeWindt and Mulford, please refer to the discussion regarding nominees for election as directors in "Directors/Nominees" under Proposal 1 above.
Donald Resnick (age 53) has served as Chief Financial Officer, Treasurer and Secretary of AmeriQuest since August 1995. From June 1995 to August 1995, Mr. Resnick was the President and Chief Operating Officer of AmeriQuest. From August 1994 to May 1995, Mr. Resnick was the Chief Operating Officer of NCD, a computer distributor that was acquired by AmeriQuest in August 1994. From June 1991 to July 1994, Mr. Resnick was engaged in various venture capital activities. From November 1977 to May 1991, Mr. Resnick was employed by Digital Equipment Corporation (a manufacturer of computers), most recently as its International Chief Financial Officer.
Dennis C. Fairchild (age 46) has served as Chief Accounting Officer of AmeriQuest since June 1995 and Assistant Secretary since August 1995. From January 1994 to June 1995, Mr. Fairchild was the Chief Financial Officer of NCD. From April 1990 to January 1994, Mr. Fairchild was a partner in Coral Springs Connections, the owner of Southeast Frozen Foods (a food distributor), and served as Chief Financial Officer of Southeast Frozen Foods. Southeast Frozen Foods filed in January 1991 for protection under Chapter 11 of the Federal bankruptcy laws. Coral Springs Connections subsequently purchased Southeast Frozen Foods out of bankruptcy.
The following table provides information concerning the annual and long-term compensation of the Chief Executive Officer of AmeriQuest during fiscal year 1995 and each of the four other highest paid executive officers who served as such at the end of fiscal year 1995, and for two of the other highest paid executive officers who severed employment with AmeriQuest prior to the end of fiscal year 1995 (collectively, the "Named Executive Officers"), for services rendered to AmeriQuest and its subsidiaries in all capacities during the fiscal years 1995, 1994 and 1993. This information includes the dollar values of base salaries and bonus awards, the numbers of stock options granted and certain other compensation, if any, whether paid or deferred. AmeriQuest does not provide long-term compensation benefits other than stock options.
The Named Executive Officers named in the table below are no longer employees of AmeriQuest. For more information regarding the termination of their employment, please see the discussion in Proposal 2 above regarding the transactions under the Computer 2000 Purchase Agreement and "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below. This table does not discuss the compensation of the current executive officers of AmeriQuest, who are identified under the caption "Executive Officers" above, because this table solely discloses information regarding compensation during fiscal years 1995, 1994 and 1993, the last three completed fiscal years. For a description of employment agreements entered into by AmeriQuest with certain executive officers, please see "Employment compensation of the current executive officers of AmeriQuest will be disclosed, as may be required, in AmeriQuest's Proxy Statement for the next Annual Meeting of Stockholders.
(1) The Named Executive Officers named in the table below are no longer employees of AmeriQuest. For more information regarding the termination of their employment, please see the discussion in Proposal 2 above regarding the transactions under the Computer 2000 Purchase Agreement and "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below. This table does not discuss the compensation of the current executive officers of AmeriQuest, who are identified under the caption "Executive Officers" above, because this table solely discloses information regarding compensation during fiscal years 1995, 1994 and 1993, the last three completed fiscal years. For a description of employment agreements entered into by AmeriQuest with certain executive officers, please see "Employment Agreements" below. The compensation of the current executive officers of AmeriQuest will be disclosed, as may be required, in AmeriQuest's Proxy Statement for the next Annual Meeting of Stockholders.
(2) In fiscal years 1995, 1994 and 1993, no executive officer received perquisites or other personal benefits, securities or property which exceeded the lesser of $50,000 or 10% of such executive officer's salary and bonus.
(3) In October 1994, Messrs. Clark and Holmes were granted the right to purchase 200,000 shares and 50,000 shares, respectively, of AmeriQuest Common Stock for $2.50 per share. Dr. Clark purchased all such 200,000 shares in October 1995, paying in cash the total par value for the shares of $2,000 and tendering a non-interest bearing promissory note for the balance of $498,000, which promissory note is secured by these shares purchased. Mr. Holmes purchased all such 50,000 shares in October 1995, paying in cash the total par value for the shares of $500 and tendering a non-interest bearing promissory note for the balance of $124,500, which promissory note is secured by these shares purchased. Both promissory notes were originally to be repaid in October 1995, but, in July 1995, AmeriQuest extended the due date of these
promissory notes until September 1996. The dollar value of the compensation appearing in the table is based on the difference of the closing sales price of AmeriQuest Common Stock in October 1994 on the date the shares were purchased ($3-3/8), and the $2.50 purchase price per share.
(4) Dr. Clark's annual compensation includes compensation received as a consultant in fiscal years 1994 and 1993 in the amounts of $59,861 and $18,000, respectively. Dr. Clark's employment by AmeriQuest terminated in August 1995, although he remains a Director of AmeriQuest. Pursuant to a severance agreement, Dr. Clark's stock option exercisable for 250,000 shares (granted in fiscal year 1994), which had been exercisable at $2.00 per share, was repriced in August 1995, after the end of fiscal year 1995, to be exercisable at $1.00 per share. For a more complete description of Dr. Clark's severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below.
(5) Mr. Holmes' employment by AmeriQuest terminated in August 1995 and he resigned as a Director in January 1996, although he remains a consultant to AmeriQuest. Pursuant to a severance agreement, Mr. Holmes' stock option exercisable for 100,000 shares (granted in fiscal year 1994), which had been exercisable at $2.00 per share, was repriced in August 1995, after the end of fiscal year 1995, to be exercisable at $1.00 per share. For a more complete description of Mr. Holmes' severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below.
(6) Mr. Grubstein resigned as an officer of AmeriQuest in August 1995, although he remains an employee of AmeriQuest.
(7) Mr. Crystal's employment by AmeriQuest terminated in September 1995. For a description of Mr. Crystal's severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below.
(8) Mr. Lytle's employment by AmeriQuest terminated in September 1995. For a description of Mr. Lytle's severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below.
(9) Mr. Bransky's employment by Kenfil, a wholly-owned subsidiary of AmeriQuest, terminated in March 1995 upon the expiration of his Employment Agreement.
(10) Ms. Miltner's employment by AmeriQuest terminated in March 1995. For a description of Ms. Miltner's severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants of stock options made during fiscal year 1995 to each of the Named Executive Officers.
(1) In accordance with the rules of the SEC, the table sets forth the hypothetical gains or "option spreads" that would exist for the option at the end of its six-year term. These gains are based on assumed rates of annual compounded stock price appreciation of 0%, 5% and 10% from the date the option was granted to the end of the option term. The 0%, 5% and 10% assumed annual compound rates of stock price appreciation are mandated by the rules of the SEC and do not represent AmeriQuest's estimate or projection of future Common Stock prices.
(2) In July 1994, AmeriQuest granted to Mr. Crystal a non-qualified stock option exercisable for 100,000 shares of Common Stock at $3.15 per share, expiring six years from the date of grant, subject to earlier termination upon termination of employment. This option vested in 25% increments every 14 months. Mr. Crystal's employment by AmeriQuest terminated in September 1995. Pursuant to a severance agreement, Mr. Crystal's stock option was deemed to be fully vested but exercisable only during the 90 day period following the date of his termination of employment. This option expired unexercised in December 1995. For a more complete description of Mr. Crystal's severance agreement, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
The following table provides, as to the Named Executive Officers, information concerning unexercised stock options at June 30, 1995. None of the Named Executive Officers exercised any stock options during fiscal year 1995.
(1) Based on the closing price of AmeriQuest's Common Stock on the NYSE on June 30, 1995 ($2.00).
As described in Proposal 2 above, in connection with Computer 2000 Inc.'s acquisition of a majority of AmeriQuest's outstanding voting capital stock and pursuant to the Computer 2000 Purchase Agreement, changes were made in AmeriQuest's management. Effective August 21, 1995, Harold L. Clark, AmeriQuest's Chief Executive Officer, and Stephen G. Holmes, AmeriQuest's Secretary, Treasurer and Chief Financial Officer, resigned from those offices as a condition of the closing. Effective August 22, 1995, D. Stephen DeWindt was appointed Co-Chairman of the Board and Chief Executive Officer of AmeriQuest, Mark C. Mulford was appointed President and Chief Operating Officer of AmeriQuest and Holger Heims was appointed Vice President (Operational Controlling) of AmeriQuest. The following is a description of the Employment Agreements entered into by AmeriQuest with each of Messrs. DeWindt, Mulford and Heims. For a description of the severance agreements entered into by AmeriQuest with each of Messrs. Clark and Holmes, as well as with certain other prior officers of AmeriQuest, see "Certain Relationships and Related Transactions--Severance Arrangements with Preceding Management" below.
AmeriQuest and D. Stephen DeWindt entered into an Employment Agreement, dated as of September 1, 1995, which provides that (i) AmeriQuest will employ Mr. DeWindt as Chief Executive Officer during the 24 month term of the agreement, (ii) AmeriQuest will pay Mr. DeWindt an initial minimum salary of $210,000 per year, (iii) Mr. DeWindt is eligible to earn a bonus of up to $336,000 during his first year of employment upon satisfaction of specified performance criteria, (iv) Mr. DeWindt is eligible to earn a bonus payable in AmeriQuest stock upon satisfaction of specified performance criteria and (v) in the event of the termination of Mr. DeWindt's employment other than for "cause", AmeriQuest will pay Mr. DeWindt the compensation and benefits otherwise payable under the agreement through the six month period following the date of the notice terminating his employment.
AmeriQuest and Mark C. Mulford entered into an Employment Agreement, dated as of September 1, 1995, which provides that (i) AmeriQuest will employ Mr. Mulford as President and Chief Operating Officer during the 12 month term of the agreement, (ii) AmeriQuest will pay Mr. Mulford an initial minimum salary of $190,000 per year, (iii) AmeriQuest will pay reasonable costs to relocate Mr. Mulford from Holland to Southern California, (iv) Mr. Mulford is eligible to earn a bonus of up to $304,000 during his first year of employment upon satisfaction of specified performance criteria, (v) Mr. Mulford is eligible to earn a separate $100,000 bonus upon satisfaction of specified performance criteria, (vi) in the event of the termination of Mr. Mulford's employment other than for "cause", AmeriQuest will pay Mr. Mulford the compensation and benefits otherwise payable under the agreement through the three month period following the date of the notice terminating his employment and (vii) for up to 3 months following the termination of the agreement, AmeriQuest will pay to Mr. Mulford the difference, if any, by which the net proceeds received by Mr. Mulford upon sale of the personal residence which he may purchase in Southern California are less than the price he initially paid for such residence.
AmeriQuest and Holger Heims entered into an Employment Agreement, dated as of October 1, 1995, which provides that (i) AmeriQuest will employ Mr. Heims as Vice President (Operational Controlling) during the term of the agreement which continues until August 31, 1996, (ii) AmeriQuest will pay Mr. Heims an initial salary of $150,000 per year and (iii) in the event of the termination of Mr. Heims' employment other than for "cause" or Mr. Heims elects to terminate his employment, AmeriQuest will pay Mr. Heims the compensation and benefits otherwise payable under the agreement through the three month period following the date of the notice terminating his employment.
Since the beginning of fiscal year 1995 until August 21, 1995, the Compensation Committee consisted of Marc L. Werner, Terren S. Peizer and William N. Silvis, and since August 22, 1995, the Compensation Committee has consisted of D. Stephen DeWindt, Dr. Harry Krischik and Marc L. Werner.
During the period that Marc Werner was a member of the Compensation Committee, Mr. Werner also was President and a Director of Manufacturers Indemnity and Insurance Company of America ("MIICA"), a stockholder of AmeriQuest.
In October 1994, AmeriQuest sold to MIICA 200,000 shares of Common Stock at $2.50 per share. The purchase price at which AmeriQuest sold these shares was $0.10 per share greater than the purchase price at which AmeriQuest offered and sold shares in the 1994 Private Placement completed in October 1994 described in Proposal 5 above. MIICA paid in cash the total par value for the shares of $2,000.00 and remains obligated to pay the balance of $498,000. This payment obligation is unsecured and does not bear interest. This payment obligation was originally due in October 1995, but, in July 1995, AmeriQuest extended the due date until September 1996. At the time these shares were purchased, Marc L. Werner and Eric J. Werner were Directors of both MIICA and AmeriQuest, and Marc Werner was a member of the Compensation Committee.
In October 1994, MIICA purchased an Unsecured, Convertible Promissory Note in the 1994 Private Placement for a purchase price of $456,000, as described in Proposal 5 above. The principal amount of this note was unsecured and bore interest at the rate of the "Six-month Treasuries Rate". Accrued and unpaid interest was to be forgiven upon conversion of the note to units. MIICA advanced this sum prior to the purchase of Unsecured, Convertible Promissory Notes by any other participant in the 1994 Private Placement (except for Wendover Financial Company, which, as explained in the following paragraph, purchased an Unsecured, Convertible Promissory Note at the same time as MIICA) and prior to the determination of the final terms under which Unsecured, Convertible Promissory Notes would be sold in the 1994 Private Placement. MIICA purchased its Unsecured, Convertible Promissory Note under the agreement that the terms thereof would be the same terms that would subsequently be agreed upon by the other participants in the 1994 Private Placement. Upon the conversion in November 1994 of the Unsecured, Convertible Promissory Note purchased by MIICA, AmeriQuest issued to MIICA 190,000 shares of Common Stock and warrants to purchase 190,000 shares of Common Stock, initially exercisable at $3.50 per share and subsequently adjusted to be exercisable at $1.75 per share. At the time MIICA purchased the Unsecured, Convertible Promissory Note and at the time that the Unsecured, Convertible Promissory Note was converted into stock and warrants, Marc L. Werner and Eric J. Werner were Directors of both MIICA and AmeriQuest, and Marc L. Werner was a member of the Compensation Committee.
In October 1994, Wendover Financial Company ("Wendover") purchased an Unsecured, Convertible Promissory Note in the 1994 Private Placement for a total purchase price of $240,000, as described in Proposal 5 above. The principal amount of this note was unsecured and bore interest at the rate of the "Six-month Treasuries Rate". Accrued and unpaid interest was to be forgiven upon conversion of the note to units. Wendover advanced this sum prior to the purchase of Unsecured, Convertible Promissory Notes by any other participant in the 1994 Private Placement (except for MIICA, which purchased an Unsecured, Convertible Promissory Note at the same time as Wendover) and prior to the determination of the final terms under which Unsecured, Convertible Promissory Notes would be sold in the 1994 Private Placement. Wendover purchased its Unsecured, Convertible Promissory Note under the agreement that the terms thereof would be the same terms that would subsequently be agreed upon by the other participants in the 1994 Private Placement. Upon the conversion in November 1994 of the Unsecured, Convertible Promissory Note purchased by Wendover, AmeriQuest issued to Wendover 100,000 shares of Common Stock and warrants to purchase 100,000 shares of Common Stock, initially exercisable at $3.50 per share and subsequently adjusted to be exercisable at $1.75 per share. At the time Wendover purchased the Unsecured, Convertible Promissory Note and at the time that the Unsecured, Convertible Promissory Note was converted into stock and warrants, Terren S. Peizer was affiliated with Wendover and was a Director of AmeriQuest and a member of the Compensation Committee.
In May 1995, MIICA purchased in the 1995 Private Placement for a total purchase price of $1,190,000 units consisting of an aggregate of 680,000 shares of Common Stock and 680,000 warrants to purchase an aggregate of 1,360,000 shares of Common Stock, as described in Proposal 5 above. Each warrant is exercisable at $1.05 per share. MIICA advanced this sum prior to the purchase of units by any other participant in the 1995 Private Placement and prior to the determination of the final terms under which units would be sold in the 1995 Private
Placement. MIICA purchased its units under the agreement that the terms thereof would be the same terms that would subsequently be agreed upon by the other participants in the 1995 Private Placement. At the time MIICA purchased the units, Marc L. Werner and Eric J. Werner were Directors of both MIICA and AmeriQuest, and Marc Werner was a member of the Compensation Committee.
In October 1994, AmeriQuest granted to William N. Silvis a stock option exercisable for 15,000 shares of AmeriQuest Common Stock at $3.375 per share and vesting over a three-year period. In July 1995, AmeriQuest canceled this stock option and, in lieu thereof, granted to Mr. Silvis 15,000 fully-paid shares of Common Stock in consideration of prior services rendered by Mr. Silvis to AmeriQuest. At the time AmeriQuest granted this stock option and issued these shares of Common Stock, Mr. Silvis was a Director of AmeriQuest and a member of the Compensation Committee.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board performs four principal tasks: it recommends to the full Board the compensation of AmeriQuest's Chief Executive Officer, reviews and takes action on the recommendations of the Chief Executive Officer as to the appropriate compensation of AmeriQuest's other officers, approves the granting of any bonuses to officers and reviews other compensation and personnel development matters generally.
In fulfilling these duties, it is the objective of the Compensation Committee to have a policy that will enable AmeriQuest to attract, retain and reward executive officers of outstanding ability.
AmeriQuest's compensation policy for executives is to pay competitively and to be fair in the administration of pay. This is the same policy applicable to all employees of AmeriQuest. Base salary levels for AmeriQuest's executive officers are intended to be generally competitive with other comparable companies, taking into account such factors as the level of responsibility involved, the need for special expertise and the specific individual's experience and prior performance at AmeriQuest.
Executive base salaries are reviewed by the Committee annually, with any adjustments normally becoming effective on January 1. During this review the Committee considers the performance of AmeriQuest during the prior year, the individual executive's contribution to that performance and changes in the role and responsibility of the executive during that year.
Calendar year 1994 was a very difficult year for AmeriQuest, with a substantial loss being reported for the fiscal year 1994. Likewise, AmeriQuest has struggled to maintain market share to date in 1995, and continues to report losses. These losses have been a combination of operating and restructuring losses.
AmeriQuest also has Stock Option Plans which are administered by a separate Stock Option Committee. AmeriQuest has never issued restricted stock or stock appreciation rights to executive officers, and it does not have any long-term incentive plans other than the Stock Option Plans.
Non-qualified stock options were granted during 1994 to the five highest paid executive officers of AmeriQuest, as follows: Harold L. Clark, 250,000 shares; Carol L. Miltner, 100,000 shares; Stephen G. Holmes, 100,000 shares; Mike Rusert, 100,000 shares and Peter Lytle, 40,000 shares. During 1995, non- qualified options were granted to Howard B. Crystal, 100,000 shares; and options were granted in connection with business operations acquired, including 610,000 shares to former NCD employees and 121,798 to employees of Robec, Inc. AmeriQuest also allowed Messrs. Clark and Holmes to purchase 200,000 and 50,000 shares, respectively for $2.50 per share for consideration consisting of the par value paid in cash and Promissory Notes in the amounts of $298,000 and $124,500, respectively, which are due September 30, 1996.
On December 6, 1993, the Compensation Committee was appointed, consisting of Messrs. Marc Werner, Terren Peizer and William Silvis. Accordingly, this report has been signed by these directors.
August 7, 1995 COMPENSATION COMMITTEE
The Named Executive Officers are no longer employees of AmeriQuest. For more information regarding the termination of their employment, please see the discussion in Proposal 2 above respecting the transactions under the Computer 2000 Purchase Agreement and "Certain Relationships and Related Transactions-- Severance Arrangements with Preceding Management" below. Therefore, the preceding Report of the Compensation Committee does not discuss the policies and actions of the Compensation Committee as they relate to the current executive officers of AmeriQuest, who are identified under the caption "Executive Officers" above, because this report only discusses policies and actions relating to fiscal year 1995, the last completed fiscal year. For a description of employment agreements entered into by AmeriQuest with certain executive officers, please see "Employment Agreements" above. The policies and actions of the Compensation Committee as they relate to the current executive officers of AmeriQuest will be discussed, as may be required, in the Report of the Compensation Committee contained in AmeriQuest's Proxy Statement for the next Annual Meeting of Stockholders.
The stock price performance graph below is required by the SEC and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act or under the Exchange Act, except to the extent that AmeriQuest specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under such Acts.
The graph below compares the percentage change in the cumulative stockholder return on AmeriQuest Common Stock from June 30, 1991 through June 30, 1995 with the percentage change in the cumulative total return over the same period on (i) the CRSP Index for the NASDAQ Stock Market--US Companies, and (ii) the CRSP Index for the NASDAQ Stock Market--Computer Manufacturing Companies. This graph assumes an initial investment of $100 on July 1, 1991 in each of AmeriQuest Common Stock, the CRSP Index for the NASDAQ Stock Market--US Companies and the CRSP Index for the NASDAQ Stock Market--Computer Manufacturing Companies.
COMPARISON OF CUMULATIVE TOTAL RETURN AQS, NASDAQ CRSP-COMPUTER MANUFACTURING COMPANIES AND
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to the Employment Agreements between AmeriQuest and each of D. Stephen DeWindt, Mark C. Mulford and Holger Heims described above in "Employment Agreements".
ISSUANCES BY AMERIQUEST OF SECURITIES
Reference is hereby made to the issuances by AmeriQuest of securities to Manufacturers Indemnity and Insurance Company of America, Wendover Financial Company and William N. Silvis described above in "Compensation Committee Interlocks and Insider Participation".
In October 1994, AmeriQuest sold to Harold Clark 200,000 shares of Common Stock at $2.50 per share. The purchase price at which AmeriQuest sold these shares was $0.10 per share greater than the purchase price at which AmeriQuest sold promissory notes convertible into shares in the 1994 Private Placement completed in October 1994 described in Proposal 5 above. Dr. Clark paid in cash the total par value for the shares of $2,000 and tendered a non-interest bearing promissory note for the balance of $498,000, which promissory note is secured by these shares purchased. The promissory note was originally due in October 1995, but, in July 1995, AmeriQuest extended the due date until September 1996. At the time Dr. Clark purchased these shares, he was the Chief Executive Officer of AmeriQuest.
In October 1994, AmeriQuest sold to Stephen Holmes 50,000 shares of Common Stock at $2.50 per share. The purchase price at which AmeriQuest sold these shares was $0.10 per share greater than the purchase price at which AmeriQuest sold promissory notes convertible into shares in the 1994 Private Placement completed in October 1994 described in Proposal 5 above. Mr. Holmes paid in cash the total par value for the shares of $500 and tendered a non-interest bearing promissory note for the balance of $124,500, which promissory note is secured by these shares purchased. The promissory note was originally due in October 1995, but, in July 1995, AmeriQuest extended the due date until September 1996. At the time Mr. Holmes purchased these shares, he was the Chief Financial Officer of AmeriQuest.
Prior to fiscal year 1995, AmeriQuest granted to William T. Walker, Jr. stock options which, after subsequent adjustment, were exercisable for 2,500, 2,500 and 15,000 shares of AmeriQuest Common Stock at $1.50, $1.50 and $2.00 per share, respectively. In October 1994, AmeriQuest granted to Mr. Walker, then a director of AmeriQuest, a stock option exercisable for 15,000 shares of AmeriQuest Common Stock at $3.375 per share and vesting over a three-year period. In July 1995, AmeriQuest canceled those stock options held by Mr. Walker exercisable for a total of 35,000 shares, and, in lieu thereof, granted to Mr. Walker 35,000 fully-paid shares of Common Stock in consideration of prior services rendered by Mr. Walker to AmeriQuest. At the time AmeriQuest issued these shares of Common Stock, Mr. Walker was a Director of AmeriQuest.
On August 21, 1995, as more fully described in Proposal 2 above, AmeriQuest issued to Computer 2000 Inc. (i) 810,811 shares of AmeriQuest Series A Preferred Stock (convertible into 8,108,110 shares of AmeriQuest Common Stock, subject to adjustment), (ii) 1,785,714 shares of AmeriQuest Series B Preferred Stock (convertible into 17,857,140 shares of AmeriQuest Common Stock, subject to adjustment), (iii) the Achievement Warrants, which, subject to adjustment, are presently exercisable for up to 1,403,475 shares of AmeriQuest Series D Preferred Stock (convertible into 14,034,750 shares of AmeriQuest Common Stock, subject to adjustment), (iv) the Acquisition Maintenance Warrant which, subject to adjustment, is presently exercisable for up to 218,307 shares of AmeriQuest Series E Preferred Stock (convertible into 5,457,675 shares of AmeriQuest Common Stock, subject to adjustment), (v) the Unit Maintenance Warrants, which, subject to adjustment, are presently exercisable for up to 514,857 shares of AmeriQuest Series F Preferred Stock (convertible into 5,148,570 shares of AmeriQuest Common Stock, subject to adjustment), and (vi) the Maintenance Option, which as of the Record Date was exercisable for at least approximately [5,281,305] shares of AmeriQuest Common Stock (subject to adjustment). Additionally, in connection with the Computer 2000 Purchase Agreement, (i) the following five persons designated by Computer 2000 Inc. were appointed as Directors of AmeriQuest: D. Stephen DeWindt, Klaus J. Laufen, Dr. Harry Krischik, Mark C. Mulford and Holger Heims (Mr. Laufen has since resigned in December 1995 as a Director of AmeriQuest), (ii) Mr. DeWindt was appointed Chairman of the Board and Chief Executive Officer of AmeriQuest, (iii) Dr. Krischik was appointed Co-Chairman of the Board of AmeriQuest and (iv) Mr. Mulford was appointed President and Chief Operating Officer of AmeriQuest.
SEVERANCE ARRANGEMENTS WITH PRECEDING MANAGEMENT
Harold Clark's employment by AmeriQuest terminated in August 1995. Prior to such termination, Dr. Clark had been President and Chief Executive Officer of AmeriQuest. Additionally, prior to such termination, in December 1993, AmeriQuest had granted to Dr. Clark a non-qualified stock option exercisable for 250,000 shares of Common Stock at $2.00 per share, expiring six years from the date of grant, subject to earlier termination upon termination of employment. This option vested in 25% increments every 14 months. Pursuant to the Employment Agreement, dated as of December 3, 1993, between Dr. Clark and AmeriQuest, Dr. Clark was entitled in the event of the termination of his employment other than for "cause" to severance pay in an amount equal to two years of his base salary and, in such event, his stock options would be deemed fully vested. Pursuant to the Settlement Agreement and Release executed August 16, 1995, Dr. Clark and AmeriQuest, in settlement of a dispute between the parties regarding the termination of Dr. Clark's employment, agreed to severance terms which were different than those provided in his Employment Agreement. Pursuant to that Settlement Agreement and Release (i) Dr. Clark agreed to consult with AmeriQuest for a four month period following the date of termination of his employment and, in consideration therefor, AmeriQuest agreed to pay Dr. Clark a mutually agreeable rate per project or period and paid Dr. Clark a retainer equal to $270,000, (ii) Dr. Clark's option described above was repriced effective on the effective date of the Settlement Agreement and Release to be exercisable at $1.00 per share, was deemed fully vested and exercisable only during the two year period following the date of his termination of employment, (iii) AmeriQuest agreed to use its best efforts to file a registration statement with the SEC with respect to the shares of AmeriQuest Common Stock issuable upon exercise of Dr. Clark's stock option and (iv) Dr. Clark agreed to release AmeriQuest and certain other parties from certain claims relating to his employment by AmeriQuest. Additionally, in connection with the termination of his employment, AmeriQuest paid Dr. Clark $20,000 for accrued vacation. Dr. Clark remains a Director of AmeriQuest.
Stephen Holmes' employment by AmeriQuest terminated in August 1995. Prior to such termination, Mr. Holmes had been Chief Financial Officer, Treasurer and Secretary of AmeriQuest. Additionally, prior to such termination, in June 1992, AmeriQuest had granted to Mr. Holmes a non-qualified stock option exercisable for 10,000 shares of Common Stock at $1.50 per share. Additionally, in December 1993, AmeriQuest had granted to Mr. Holmes a non-qualified stock option exercisable for 100,000 shares of Common Stock at $2.00 per share, expiring six years from the date of grant, subject to earlier termination upon termination of employment. The December 1993 option vested in 25% increments every 14 months. Pursuant to the Employment Agreement, dated as of December 3, 1993, between Mr. Holmes and AmeriQuest, Mr. Holmes was entitled in the event of the termination of his employment other than for "cause" to severance pay in an amount equal to two years of his base salary and, in such event, his stock options would be deemed fully vested. Pursuant to the Settlement Agreement and Release executed August 16, 1995, Mr. Holmes and AmeriQuest, in settlement of a dispute between the parties regarding the termination of Mr. Holmes' employment, agreed to severance terms which were different than those provided in his Employment Agreement. Pursuant to that Settlement Agreement and Release, (i) Mr. Holmes agreed to consult with AmeriQuest for a four month period following the date of termination of his employment and, in consideration therefor, AmeriQuest agreed to pay Mr. Holmes $12,500 per month, (ii) AmeriQuest paid Mr. Holmes $160,000, $100,000 of which was paid 8 days after the date of the Settlement Agreement and Release and $60,000 of which was payable on or before January 5, 1996, (iii) the December 1993 option for 100,000 shares was repriced effective on the effective date of the Settlement Agreement and Release to be exercisable at $1.00 per share, was deemed fully vested and exercisable only during the two year period following the date of his termination of employment, (iv) AmeriQuest agreed to use its best efforts to file a registration statement with the SEC with respect to the shares of issuable upon exercise of Mr. Holmes' stock option and (v) Mr. Holmes agreed to release AmeriQuest and certain other parties from certain claims relating to his employment by AmeriQuest. Additionally, in connection with the termination of his employment, AmeriQuest paid Mr. Holmes approximately $11,500 for accrued vacation. The June 1993 option for 10,000 shares expired unexercised according to its terms 3 months after the termination of Mr. Holmes' employment. Mr. Holmes resigned in January 1996 as a Director of AmeriQuest, although he remains a consultant to AmeriQuest.
Peter Lytle's employment by AmeriQuest terminated in September 1995. Prior to such termination, Mr. Lytle had been Senior Vice President-Operations of AmeriQuest. Additionally, prior to such termination, in December 1993, AmeriQuest had granted to Mr. Lytle a non-qualified stock option exercisable for 40,000 shares of Common Stock at $2.00 per share, expiring six years from the date of grant, subject to earlier termination upon termination of employment. This option vested in 25% increments every 14 months. Pursuant to the Employment Agreement, dated as of December 3, 1993, between Mr. Lytle and AmeriQuest, Mr. Lytle was entitled in the event of the termination of his employment other than for "cause" to severance pay in an amount equal to one year of his base salary and, in such event, his stock options would be deemed fully vested. Pursuant to the Severance Agreement, dated September 19, 1995, between Mr. Lytle and AmeriQuest, (i) AmeriQuest paid Mr. Lytle approximately $110,500 and (ii) Mr. Lytle's stock option described above was deemed fully vested and exercisable only during the 90 day period following the date of his termination of employment. This option expired unexercised in December 1995.
Howard Crystal's employment by AmeriQuest terminated in September 1995. Prior to such termination, Mr. Crystal had been Senior Vice President-Marketing and Purchasing of AmeriQuest. Additionally, prior to such termination, in July 1994, AmeriQuest had granted to Mr. Crystal a non-qualified stock option exercisable for 100,000 shares of Common Stock at $3.15 per share, expiring six years from the date of grant, subject to earlier termination upon termination of employment. This option vested in 25% increments every 14 months. Pursuant to the Employment Agreement, dated as of July 14, 1994, between Mr. Crystal and AmeriQuest, Mr. Crystal was entitled in the event of the termination of his employment other than for "cause" to severance pay in an amount equal to one year of his base salary and, in such event, his stock options would be deemed fully vested. Pursuant to the Severance Agreement, dated September 19, 1995, between Mr. Crystal and AmeriQuest, (i) AmeriQuest paid Mr. Crystal $125,000 and (ii) Mr. Crystal's option described above was deemed fully vested and exercisable only during the 90 day period following the date of his termination of employment. This option expired unexercised in December 1995.
Irwin Bransky's employment by Kenfil, a wholly-owned subsidiary of AmeriQuest, terminated in March 1995, the date on which the Employment Agreement, dated June 2, 1994, between Mr. Bransky and Kenfil terminated by its terms. Prior to such termination, Mr. Bransky had been President and Chief Executive Officer of Kenfil. Mr. Bransky was not entitled to, and was not paid, any severance pay by Kenfil upon the termination of his employment.
Carol Miltner's employment by AmeriQuest terminated in March 1995. Prior to such termination, Ms. Miltner had been Executive Vice President-Sales and Marketing of AmeriQuest. Additionally, prior to such termination, in December 1993, AmeriQuest had granted to Ms. Miltner a non-qualified stock option exercisable for 100,000 shares of Common Stock at $2.00 per share, expiring six years from the date of grant, subject to earlier termination upon termination of employment. This option vested in 25% increments every 14 months. Pursuant to the Employment Agreement, dated as of December 3, 1993, between Ms. Miltner and AmeriQuest, Ms. Miltner was entitled in the event of the termination of her employment other than for "cause" to severance pay in an amount equal to two years of her base salary and, in such event, her stock options would be deemed fully vested. Pursuant to the Severance Agreement, dated March 21, 1995, between Ms. Miltner and AmeriQuest, (i) AmeriQuest paid Ms. Miltner $10, (ii) AmeriQuest paid The Consulting Group, which is wholly-owned by Ms. Miltner, $75,000 for services rendered in 1995 and (iii) Ms. Miltner's stock option described above was deemed fully vested and exercisable only during the one year period following the date of her termination of employment.
Gregory A. White's employment by AmeriQuest terminated in July 1995. Prior to such termination, Mr. White had been Chief Operating Officer of AmeriQuest. Additionally, prior to such termination, in November 1994, AmeriQuest had granted to Mr. White two stock options. One stock option was exercisable for 375,000 shares of Common Stock at $3.50 per share, expiring six years from the date of grant, subject to earlier termination upon termination of employment. This option vested in 25% increments every 14 months. The other stock option was exercisable for 82,500 shares of Common Stock at $0.05 per share, expiring in December 1995. This option was fully vested on the date of grant. Pursuant to the Employment Agreement, dated as of October 1994, between Mr. White and AmeriQuest, Mr. White was entitled in the event of the termination of his employment other than for "cause" to severance pay in an amount equal to two years of his base salary, the payment of premiums on his health insurance program during the two year period following termination and, in such event, his stock options would be deemed fully vested. Pursuant to the Confidential Separation Agreement and General Release entered into by Mr. White and AmeriQuest, in settlement of a dispute between those parties regarding the termination of Mr. White's employment, those parties agreed to severance terms which were different than those provided in this Employment Agreement. Pursuant to that Confidential Separation Agreement and General Release, (i) AmeriQuest agreed to pay Mr. White $500,000 within three (3) business days following the closing of the transactions contemplated by the Computer 2000 Purchase Agreement, (ii) AmeriQuest agreed to pay Mr. White regular salary until the earlier of the date that the previously-referenced $500,000 payment was made or September 30, 1995, (iii) AmeriQuest agreed to continue health insurance coverage for Mr. White and his dependents until the earlier of the date that Mr. White and his dependents are covered by a new employer's health plan or July 11, 1997, (iv) Mr. White's stock option exercisable for 375,000 shares was deemed fully vested and exercisable only during the two year period following the date of the Confidential Separation Agreement and General Release, (v) AmeriQuest agreed to register the shares of AmeriQuest Common Stock issuable upon exercise of Mr. White's two stock options no later than October 15, 1995, (vi) AmeriQuest agreed to allow Mr. White to retain $155,000 he borrowed from AmeriQuest as an interest-free loan, which shall be due and payable as soon as the average trading price for AmeriQuest's Common Stock during any 20 consecutive day period equals or exceeds $3.50 and the shares of AmeriQuest Common Stock issuable upon exercise of Mr. White's stock option for 82,500 shares are freely tradable pursuant to a registration statement or Rule 144 promulgated under the Securities Act, (vii) AmeriQuest forgave its outstanding loan of $75,000 made to Mr. White to assist him in relocating his family from Florida to California and (viii) AmeriQuest and Mr. White agreed to release each other from any and all claims.
Thomas F. Ross' employment by AmeriQuest terminated in November 1995. Prior to such termination, Mr. Ross had been Executive Vice President-Operations of AmeriQuest. Additionally, prior to such termination AmeriQuest had granted to Mr. Ross stock options exercisable for 125,000 shares and 27,500 shares of Common Stock at $3.50 per share and $0.05 per share, respectively. Pursuant to the Employment Agreement, dated as of October 1994, between Mr. Ross and AmeriQuest, Mr. Ross was entitled in the event of the termination of his employment other than for "cause" to severance pay in an amount equal to two years of his base salary and, in such event, his stock options would be deemed fully vested. Pursuant to the Severance Agreement, dated November 3, 1995, between Mr. Ross and AmeriQuest, (i) AmeriQuest paid Mr. Ross approximately $350,000, (ii) Mr. Ross acknowledged an earlier debt to AmeriQuest in the amount of approximately $116,500 and delivered to AmeriQuest a note for such amount, (iii) Mr. Ross' stock options described above were deemed fully vested and exercisable only during the one year period following the date of his termination of employment and (iv) AmeriQuest and Mr. Ross executed a mutual release.
Any AmeriQuest stockholder who wishes to submit a proposal for presentation to AmeriQuest's 1996 Annual Meeting of Stockholders must submit the proposal to AmeriQuest, 3 Imperial Promenade, Ste. 300, Santa Ana, California 92707, Attention: Mr. Donald W. Resnick, Secretary, not later than September 30, 1996 for inclusion, if appropriate, in AmeriQuest's proxy statement and form of proxy relating to its 1996 Annual Meeting of Stockholders.
OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16 of the Exchange Act requires AmeriQuest's directors and officers, and persons who beneficially own more than 10% of AmeriQuest's Common Stock to file initial reports of ownership and reports of changes in ownership with the SEC and the NYSE. Such persons are required by SEC regulation to furnish AmeriQuest with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms furnished to AmeriQuest and written representations from the executive officers and directors, AmeriQuest believes that all Section 16(a) filing requirements were met for AmeriQuest's fiscal year 1995, except as follows: (i) Howard Crystal has failed to file a Form 3 reporting his appointment as Senior Vice President of Marketing and Purchasing in July 1994, a position from which he resigned in September 1995; (ii) Irwin Bransky has failed to file a Form 3 reporting his position as President and Chief Executive Officer of Kenfil, Inc. upon the acquisition in September 1994 of Kenfil, Inc. by AmeriQuest, a position from which he was released in March 1995; (iii) William Walker failed to file a Form 4 reporting the grant in October 1994 by AmeriQuest of an option exercisable for Common Stock, at which time Mr. Walker was a Director of AmeriQuest; (iv) William Silvis failed to file a Form 4 reporting the grant in October 1994 by AmeriQuest of an option exercisable for Common Stock, at which time Mr. Silvis was a Director of AmeriQuest; (v) Marc Werner failed to file a Form 4 reporting the purchase in October 1994 by Manufacturers Indemnity and Insurance Company of America ("MIICA") of shares of Common Stock, at which time Mr. Werner was a Director of both MIICA and AmeriQuest; (vi) Eric Werner failed to file a Form 4 reporting the purchase in October 1994 by MIICA of shares of Common Stock, at which time Mr. Werner was a Director of both MIICA and AmeriQuest; (vii) Harold Clark failed to file a Form 4 reporting his purchase in October 1994 of shares of Common Stock, at which time Dr. Clark was the Chief Executive Officer of AmeriQuest; (viii) Stephen Holmes failed to file a Form 4 reporting his purchase in October 1994 of shares of Common Stock, at which time Mr. Holmes was the Chief Financial Officer of AmeriQuest; (ix) Marc Werner failed to file a Form 4 reporting the purchase in October 1994 by MIICA of notes convertible into shares of Common Stock and warrants exercisable for Common Stock, at which time Mr. Werner was a Director of both MIICA and AmeriQuest; (x) Eric Werner failed to file a Form 4 reporting the purchase in October 1994 by MIICA of notes convertible into shares of Common Stock and warrants exercisable for Common Stock, at which time Mr. Werner was a Director of both MIICA and AmeriQuest; (xi) Terren Peizer filed late a Form 4 reporting the purchase in October 1994 of notes convertible into shares of Common Stock and warrants exercisable for Common Stock, at which time Mr. Peizer was a Director of AmeriQuest; (xii) Robert H. Beckett filed late a Form 3 reporting his appointment as a Director of AmeriQuest in October 1994; (xiii) Thomas Ross filed late a Form 3 reporting his appointment as an officer of AmeriQuest in November 1994; (xiv) Gregory White filed late a Form 3 reporting his appointment as the Chief Operating Officer of AmeriQuest in November 1994; (xv) MIICA failed to file a Form 3 reporting its purchase in May 1995 of shares of Common Stock and warrants exercisable for Common Stock, thereby causing MIICA to become a "ten percent holder" of AmeriQuest; (xvi) Marc Werner failed to file a Form 4 reporting the purchase in May 1995 by MIICA of shares of Common Stock and warrants exercisable for Common Stock, at which time Mr. Werner was a director of both MIICA and AmeriQuest; and (xvii) Eric Werner failed to file a Form 4 reporting the purchase in May 1995 by MIICA of shares of Common Stock and warrants exercisable for Common Stock, at which time Mr. Werner was a director of both MIICA and AmeriQuest.
The Board does not presently intend to bring any other business before the Meeting, and, so far as is known to the Board, no matters are to be brought before the Meeting except as specified in the Notice of the Meeting. As to any business that may properly come before the Meeting, however, it is intended that proxies, in the form enclosed, will be voted in respect thereof in accordance with the judgment of the persons voting such proxies.
AS ADOPTED JANUARY , 1996
1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent, Subsidiaries and Affiliates, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 2,000,000 Shares. Subject to Sections 2.2 and 18, Shares that: (a) are subject to issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) are subject to an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price; or (c) are subject to an Award that otherwise terminates without Shares being issued will again be available for grant and issuance in connection with future Awards under this Plan. At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent, Subsidiary or Affiliate of the Company; provided such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. No person will be eligible to receive more than 500,000 Shares in any calendar year under this Plan pursuant to the grant of Awards hereunder, other than new employees of the Company or of a Parent, Subsidiary or Affiliate of the Company (including new employees who are also officers and directors of the Company or any Parent, Subsidiary or Affiliate of the Company) who are eligible to receive up to a maximum of 800,000 Shares in the calendar year in which they commence their employment. A person may be granted more than one Award under this Plan.
4.1 Committee Authority. This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to this
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
(f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent, Subsidiary or Affiliate of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the administration of this Plan.
4.2 Committee Discretion. Any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company.
4.3 Exchange Act Requirements. If two or more members of the Board are Outside Directors, the Committee will be comprised of at least two (2) members of the Board, all of whom are Outside Directors and Disinterested Persons. During all times that the Company is subject to Section 16 of the Exchange Act, the Company will take appropriate steps to comply with the disinterested administration requirements of Section 16(b) of the Exchange Act, which will consist of the appointment by the Board of a Committee consisting of not less than two (2) members of the Board, each of whom is a Disinterested Person.
5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO ("Stock Option Agreement"), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option.
5.3 Exercise Period. Options will be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ("Ten Percent Stockholder") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for the exercise of Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines.
5.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that: (i) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "Exercise Agreement") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased.
5.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following:
(a) If the Participant is Terminated for any reason except retirement under a qualified retirement plan, death or Disability, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO), but in any event, no later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's retirement under a qualified retirement plan, death or Disability (or the Participant dies within three (3) months after a Termination other than because of Participant's death or disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability, or (b) twelve (12) months after the Termination Date when the Termination is for Participant's death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options.
5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable.
5.8 Limitations on ISOs. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company or any Affiliate, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs.
In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOs will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price"), the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement ("Restricted Stock Purchase Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award will be determined by the Committee and will be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Stockholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of this Plan.
6.3 Restrictions. Restricted Stock Awards will be subject to such restrictions (if any) as the Committee may impose. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or part, based on length of service, performance or such other factors or criteria as the Committee may determine.
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent, Subsidiary or Affiliate of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent, Subsidiary or Affiliate of the Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "Performance Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent, Subsidiary or Affiliate and/or individual performance factors or upon such other criteria as the Committee may determine.
7.2 Terms of Stock Bonuses. The Committee will determine the number of Shares to be awarded to the Participant and whether such Shares will be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will determine: (a) the nature, length and starting date of any period during which performance is to be measured (the "Performance Period") for each Stock Bonus; (b) the performance goals and criteria to be used to measure the performance, if any; (c) the number of Shares that may be awarded to the Participant; and (d) the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash, whole Shares, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine.
7.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Bonus only to the extent earned as of the date of Termination in accordance with the Performance Stock Bonus Agreement, unless the Committee will determine otherwise.
8. PAYMENT FOR SHARE PURCHASES.
8.1 Payment. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public
(c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
(e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the
Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant.
9.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements.
9.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by a Participant to have Shares withheld for this purpose will be made in writing in a form acceptable to the Committee and will be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, then except as provided below, the election will be irrevocable as to the particular Shares as to which the election is made;
(c) all elections will be subject to the consent or disapproval of the
(d) if the Participant is an Insider and if the Company is subject to Section 16(b) of the Exchange Act: (1) the election may not be made within six (6) months of the date of grant of the Award, except as otherwise permitted by SEC Rule 16b-3(e) under the Exchange Act, and (2) either (A) the election to use stock withholding must be irrevocably made at least six (6) months prior to the Tax Date (although such election may be revoked at any time at least six (6) months prior to the Tax Date) or (B) the exercise of the Option or election to use stock withholding must be made in the ten (10) day period beginning on the third day following the release of the Company's quarterly or annual summary statement of sales or earnings; and
(e) in the event that the Tax Date is deferred until six (6) months after the delivery of Shares under Section 83(b) of the Code, the Participant will receive the full number of Shares with respect to which the exercise occurs, but such Participant will be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date.
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 Voting and Dividends. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's original Purchase Price pursuant to Section 12.
10.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as consistent with the specific Plan and Award Agreement provisions relating thereto. During the lifetime of the Participant an Award will be exercisable only by the Participant, and any elections with respect to an Award, may be made only by the Participant.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement (a) a right of first refusal to purchase all Shares that a Participant (or a subsequent transferee) may propose to transfer to a third party, and/or (b) a right to repurchase a portion of or all Shares held by a Participant following such Participant's Termination at any time within ninety (90) days after the later of Participant's Termination Date and the date Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at: (A) with respect to Shares that are "Vested" (as defined in the Award Agreement), the higher of: (l) Participant's original Purchase Price, or (2) the Fair Market Value of such Shares on Participant's Termination Date, provided, that such right of repurchase (i) must be exercised as to all such "Vested" Shares unless a Participant consents to the Company's repurchase of only a portion of such "Vested" Shares and (ii) terminates when the Company's securities become publicly traded; or (B) with respect to Shares that are not "Vested" (as defined in the Award Agreement), at the Participant's original Purchase Price, provided, that the right to repurchase at the original Purchase Price lapses at the rate of at least 20% per year over five (5) years from the date the Shares were purchased (or from the date of grant of options in the case of Shares obtained pursuant to a Stock Option Agreement and Stock Option Exercise Agreement), and if the right to repurchase is assignable, the assignee must pay the Company, upon assignment of the right to repurchase, cash equal to the excess of the Fair Market Value of the Shares over the original Purchase Price.
13. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate Participant's employment or other relationship at any time, with or without cause.
18.1 Assumption or Replacement of Awards by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company (other than any stockholder which merges (or which owns or controls another corporation which merges) with the Company in such merger) cease to own their shares or other equity interests in the Company, (d) the sale of substantially all of the assets of the Company, or (e) any other transaction which qualifies as a "corporate transaction" under Section 424(a) of the Code wherein the stockholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company from or by the stockholders of the Company), any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Options, as provided above, pursuant to a transaction described in this Subsection 18.1, such Options will expire on such transaction at such time and on such conditions as the Board will determine.
18.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, sale of assets or other "corporate transaction."
18.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company's award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on the date of adoption by the Board (the "Effective Date"). This Plan shall be approved by the stockholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board. Upon the Effective Date, the Board may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial stockholder approval of this Plan; (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the stockholders of the Company; and (c) in the event that stockholder approval of such increase is not obtained within the time period provided herein, all Awards granted hereunder will be canceled, any Shares issued pursuant to any Award will be canceled, and any purchase of Shares hereunder will be rescinded. So long as the Company is subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 (or its successor), as amended, with respect to stockholder approval.
20. TERM OF PLAN. Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of stockholder approval.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans or (if the Company is subject to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder, respectively.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
23. DEFINITIONS. As used in this Plan, the following terms will have the following meanings:
"Affiliate" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise.
"Award" means any award under this Plan, including any Option, Restricted Stock or Stock Bonus.
"Award Agreement" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee appointed by the Board to administer this Plan, or if no such committee is appointed, the Board.
"Company" means Ameriquest Technologies, Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation.
"Disability" means a disability, whether temporary or permanent, partial or total, within the meaning of Section 22(e)(3) of the Code, as determined by the Committee.
"Disinterested Person" means a director who has not, during the period that person is a member of the Committee and for one year prior to commencing service as a member of the Committee, been granted or awarded equity securities pursuant to this Plan or any other plan of the Company or any Parent, Subsidiary or Affiliate of the Company, except in accordance with the requirements set forth in Rule 16b-3(c)(2)(i) (and any successor regulation thereto) as promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the SEC.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option.
"Fair Market Value" means, as of any date, the value of a share of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the New York Stock Exchange, its closing price on the New York Stock Exchange on the last trading day prior to the date of determination as reported in The Wall Street Journal;
(b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the last trading day prior to the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal;
(c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the last trading day prior to the date of determination as reported in The Wall
(d) if none of the foregoing is applicable, by the Committee in good faith.
"Insider" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act.
"Outside Director" means any director who is not; (a) a current employee of the Company or any Parent, Subsidiary or Affiliate of the Company; (b) a former employee of the Company or any Parent, Subsidiary or Affiliate of the Company who is receiving compensation for prior services (other than benefits under a tax-qualified pension plan); (c) a current or former officer of the Company or any Parent, Subsidiary or Affiliate of the Company; or (d) currently receiving compensation for personal services in any capacity, other than as a director, from the Company or any Parent, Subsidiary or Affiliate of the Company; provided, however, that at such time as the term "Outside Director", as used in Section 162(m) of the Code is defined in regulations promulgated under Section 162(m) of the Code, "Outside Director" will have the meaning set forth in such regulations, as amended from time to time and as interpreted by the Internal Revenue Service.
"Option" means an award of an option to purchase Shares pursuant to Section 5.
"Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if at the time of the granting of an Award under this Plan, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
"Participant" means a person who receives an Award under this Plan.
"Plan" means this Ameriquest Technologies, Inc. 1996 Equity Incentive Plan, as amended from time to time.
"Restricted Stock Award" means an award of Shares pursuant to Section 6.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor security.
"Stock Bonus" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7.
"Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, director, consultant, independent contractor or advisor to the Company or a Parent, Subsidiary or Affiliate of the Company, except in the case of sick leave, military leave, or any other leave of absence approved by the Committee, provided that such leave is for a period of not more than ninety (90) days, or reinstatement upon the expiration of such leave is guaranteed by contract or statute. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date").
PROXY FOR 1995 ANNUAL MEETING OF STOCKHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints D. Stephen DeWindt and Donald W. Resnick, and each of them, the attorney and proxy of the undersigned, with full power of substitution, and hereby authorizes them to represent and to vote all the shares of Common Stock and Preferred Stock of AmeriQuest Technologies, Inc. ("AmeriQuest"), which the undersigned is entitled to vote at the 1995 Annual Meeting of Stockholders of AmeriQuest (the "Meeting") to be held at the offices of AmeriQuest, located at 3 Imperial Promenade, Ste. 300, Santa Ana, California 92707, on [March 8], 1996, at [ ] a.m., local time, and at any and all postponements or adjournments thereof, with all of the powers the undersigned would possess if personally present, as follows:
[_] FOR all nominees listed below (except as [_] WITHHOLDING AUTHORITY to vote indicated to the contrary below). If any for all nominees listed such nominee for any reason is unable to below serve, or for good cause will not serve, as a director, then this Proxy will be voted for such substitute nominee as the proxy holders may determine.
Nominees: D. Stephen DeWindt, Harry Krischik, Marc L. Werner, Mark Mulford, Holger Heims, Harold L. Clark and Robert H. Beckett.
Instruction:To withhold authority to vote for any individual nominee, write that nominee's name in the space provided below:
2. TO APPROVE AN AMENDMENT TO AMERIQUEST'S CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK ISSUABLE BY AMERIQUEST FROM 30,000,000 SHARES TO 200,000,000 SHARES. [_] FOR [_] AGAINST [_] ABSTAIN
3. TO APPROVE AN AMENDMENT TO AMERIQUEST'S CERTIFICATE OF INCORPORATION TO PROVIDE THAT THE AUTHORIZED NUMBER OF SHARES OF PREFERRED STOCK ISSUABLE BY AMERIQUEST BE 5,000,000. [_] FOR [_] AGAINST [_] ABSTAIN
4. TO APPROVE THE CONVERSION OF AMERIQUEST SERIES G PREFERRED STOCK INTO AMERIQUEST COMMON STOCK. [_] FOR [_] AGAINST [_] ABSTAIN
5. TO RATIFY CERTAIN PRIOR ISSUANCES BY AMERIQUEST OF SECURITIES. [_] FOR [_] AGAINST [_] ABSTAIN
6. TO APPROVE THE ADOPTION OF THE 1996 EQUITY INCENTIVE PLAN FOR AWARDS FOR UP TO 2,000,000 SHARES OF AMERIQUEST COMMON STOCK. [_] FOR [_] AGAINST [_] ABSTAIN
7. TO RATIFY THE SELECTION OF ARTHUR ANDERSEN LLP AS INDEPENDENT ACCOUNTANTS FOR AMERIQUEST FOR FISCAL YEAR 1996. [_] FOR [_] AGAINST [_] ABSTAIN
8. THE TRANSACTION OF SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS OF THE MEETING.
The Board of Directors recommends that you vote FOR the election of all nominees listed in Proposal 1, FOR Proposal 2, FOR Proposal 3, FOR Proposal 4, FOR Proposal 5, FOR Proposal 6, and FOR Proposal 7.
TO VOTE IN ACCORDANCE WITH THE RECOMMENDATION OF THE BOARD OF DIRECTORS, JUST SIGN AND DATE THIS PROXY.
THIS PROXY WILL BE VOTED AS DIRECTED ABOVE. WHEN NO CHOICE IS INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES LISTED IN PROPOSAL 1, FOR PROPOSAL 2, FOR PROPOSAL 3, FOR PROPOSAL 4, FOR PROPOSAL 5, FOR PROPOSAL 6, AND FOR PROPOSAL 7. In their discretion, the proxy holders are authorized to vote upon such other business as may properly come before the Meeting or any adjournments or postponements thereof to the extent authorized by Rule 14a-4(c) promulgated under the Securities Exchange Act of 1934, as amended. If you expect to attend the Meeting, please check this box [_] .
Please sign exactly as your name(s) appear(s) on your stock certificate. If shares of stock stand of record in the names of two or more persons or in the name of husband and wife, whether as joint tenants or otherwise, both or all of such persons should sign this Proxy. If shares of stock are held of record by a corporation, this Proxy should be executed by the president or vice president and the secretary or Proxy for a deceased stockholder should give their full title. Please date this Proxy.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED RETURN ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING. | PRE 14A | PRE 14A | 1996-01-12T00:00:00 | 1996-01-12T15:52:41 |
0000950109-96-000200 | 0000950109-96-000200_0010.txt | RE: ADMINISTRATION AND ACCOUNTING SERVICES FEES
This letter constitutes our agreement with respect to compensation to be paid to PFPC Inc.("PFPC") under the terms of an Administration and Accounting Services Agreement between PFPC and Weiss Treasury Fund ("you" or the "Fund") dated _________________, 1995 (the "Agreement"). Pursuant to Paragraph 11 of that Agreement, and in consideration of the services to be provided to each of the Fund's investment portfolios listed on Exhibit A of the Agreement, as such Exhibit A may be amended from time to time (each, a "Portfolio"), you will pay PFPC the following:
1. An annual administration and accounting services fee, calculated daily and payable monthly based upon the following: .10% of the first $200 million of average net assets; .075% of the next $200 million of average net assets; .05% of the next $200 million of average net assets; and .03% of average net assets in excess of $600 million.
2. PFPC's out-of-pocket expenses including, but not limited to, overnight express charges, outside independent pricing service charges, and travel expenses incurred for board meeting attendance.
3. A minimum monthly fee of $8,333 per Portfolio, exclusive of out-of- pocket expenses. The minimum monthly fee for each Portfolio with respect to such Portfolio's first year of operations, exclusive of out-of-pocket expenses, shall be waived for start-up portfolios in accordance with the following step-in schedule:
If during the next three years, PFPC is removed from the Agreement referenced above, the Fund shall pay any costs of time and material associated with the deconversion and PFPC will recoup 100% of the fees waived during the first two years.
The fee for the period from the date hereof until the end of that year shall be prorated according to the proportion which such period bears to the full annual period.
If the foregoing accurately sets forth our agreement and you intend to be legally bound thereby, please execute a copy of this letter and return it to us. | N-1/A | EX-99.4 | 1996-01-12T00:00:00 | 1996-01-11T17:32:37 |
0000950156-96-000039 | 0000950156-96-000039_0000.txt | File Nos. 2-99977 and 811-4596
LANDMARK NEW YORK TAX FREE RESERVES (A member of the Landmark(SM) Family of Funds)
This Prospectus describes Landmark New York Tax Free Reserves, a mutual fund in the Landmark Family of Funds. The Fund is a type of mutual fund commonly referred to as a "triple tax-exempt money market fund." Citibank, N.A. is the investment adviser of the Fund. INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; HOWEVER, THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO. PROSPECTIVE INVESTORS SHOULD ALSO BE AWARE THAT SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
This Prospectus concisely sets forth information about the Fund that a prospective investor should know before investing. A Statement of Additional Information dated January 2, 1996 (and incorporated by reference in this Prospectus) has been filed with the Securities and Exchange Commission. Copies of the Statement of Additional Information may be obtained without charge, and further inquiries about the Fund may be made, by contacting the investor's shareholder servicing agent (see inside back cover for address and phone number).
Condensed Financial Information .......................................... 4 Valuation of Shares ...................................................... 7 Net Income and Distributions ............................................. 9 Appendix A -- Permitted Investments and Appendix B -- Ratings of Municipal Obligations ...........................16 Appendix C -- Taxable Equivalent Yield Tables ............................19
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
See the body of the Prospectus for more information on the topics discussed in this summary.
THE FUND: This Prospectus describes Landmark New York Tax Free Reserves, a triple tax-exempt money market mutual fund.
INVESTMENT OBJECTIVES AND POLICIES: To provide its shareholders with high levels of current income exempt from federal, New York State and New York City personal income taxes, preservation of capital and liquidity. The Fund invests primarily in short-term, high quality obligations issued by state and municipal governments and by public authorities, the interest on which is exempt from federal income taxes ("Municipal Obligations"), including obligations of the State of New York and its political subdivisions. There can be no assurance that the Fund will achieve its objectives.
INVESTMENT ADVISER AND DISTRIBUTOR: Citibank, N.A. ("Citibank" or the "Adviser"), a wholly-owned subsidiary of Citicorp, is the investment adviser. Citibank and its affiliates manage more than $73 billion in assets worldwide. The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS" or the "Distributor") is the distributor of shares of the Fund. See "Management."
PURCHASES AND REDEMPTIONS: Customers of Shareholder Servicing Agents may purchase and redeem shares of the Fund on any Business Day. See "Purchases" and "Redemptions."
PRICING: Shares of the Fund are purchased and redeemed at net asset value (normally $1.00 per share) without a sales load or redemption fees. While there are no sales loads, shares of the Fund are subject to a distribution fee. See "Purchases," "Redemptions" and "Management -- Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of most other Landmark Funds. See "Exchanges."
DIVIDENDS: Declared daily and distributed monthly. Shares begin accruing dividends on the day they are purchased. See "Net Income and Distributions."
REINVESTMENT: Dividends may be received either in cash or in Fund shares at net asset value, subject to the policies of a shareholder's Shareholder Servicing Agent. See "Net Income and Distributions."
WHO SHOULD INVEST: The Fund is designed for investors seeking liquidity, preservation of capital and current income exempt from federal income taxes, and for whom long-term capital growth is not a consideration. The Fund is also designed for investors seeking income exempt from New York State and New York City personal income taxes and who are willing to bear the increased risk of an investment portfolio which is concentrated in obligations of the State of New York and its political subdivisions. See "Investment Information."
RISK FACTORS: There can be no assurance that the Fund will achieve its investment objectives. In addition, while the Fund intends to maintain a stable net asset value of $1.00 per share, there can be no assurance that the Fund will be able to do so. Investments in high quality, short-term instruments may, in many circumstances, result in a lower yield than would be available from investments with a lower quality or a longer term.
The Fund is a non-diversified mutual fund, which means that it is not subject to any statutory restrictions under the Investment Company Act of 1940 limiting the investment of its assets in one or relatively few issuers. The Fund may therefore invest a relatively high percentage of its assets in the obligations of a limited number of issuers. Also, the Fund may invest 25% or more of its assets in securities of issuers in similar or related industries or issuers located in the same state. Under normal circumstances, the Fund invests primarily in obligations of the State of New York and its political subdivisions. As a result, the Fund is more susceptible to any single economic, political or regulatory occurrence.
Certain investment practices also may entail special risks. Prospective investors should read "Risk Considerations" for more information about risk factors.
The following table summarizes estimated shareholder transaction and annual operating expenses for shares of the Fund.*
ANNUAL FUND OPERATING EXPENSES, AFTER FEE WAIVERS AND REIMBURSEMENTS (AS A PERCENTAGE OF AVERAGE NET ASSETS): Shareholder Servicing Agent Fees ............................... .25% Other Operating Expenses ....................................... .07% Total Fund Operating Expenses(1).................................. .65%
* This table is intended to assist investors in understanding the various costs and expenses that a shareholder of the Fund will bear, either directly or indirectly. The table shows the fees paid by the Fund to various service providers after giving effect to expected voluntary partial fee waivers. (1) Absent fee waivers and reimbursements, investment management fees, 12b-1 fees, administrative services fees and total fund operating expenses would be .20%, .20%, .25% and .97%, respectively. There can be no assurance that the fee waivers and reimbursements reflected in the table will continue at their present levels. Under the administrative services plan adopted by the Fund, the aggregate of the fee paid to the Administrator, the fees paid to the Shareholder Servicing Agents and the fee paid to the Distributor under the rule 12b-1 distribution plan (not including the .10% portion of the fee that may be charged in anticipation of or reimbursement for print or electronic media advertising, see "Distribution Arrangements" below) may not exceed .60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. Individual components of the aggregate may vary from time to time. For more information on costs and expenses, see "Management" and "General Information -- Expenses." (2) Fees under the 12b-1 distribution plan are asset-based sales charges. Long-term shareholders in the Fund could pay more in sales charges than the economic equivalent of the maximum front-end sales charges permitted by the National Association of Securities Dealers, Inc.
EXAMPLE: A shareholder of the Fund would pay the following expenses on a $1,000 investment, assuming redemption at the end of each period indicated below:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
The Example assumes that all dividends are reinvested, and expenses are based on the Fund's fiscal year ended August 31, 1995, after waivers and reimbursements. If waivers and reimbursements were not in place, the amounts in the Example would be $10, $31, $54 and $119, respectively. The assumption of a 5% annual return is required by the Securities and Exchange Commission for all mutual funds, and is not a prediction of the Fund's future performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The following table provides condensed financial information about the Fund for the periods indicated. This information should be read in conjunction with the financial statements appearing in the Fund's Annual Report to Shareholders, which are incorporated by reference in the Statement of Additional Information. The financial statements and notes, as well as the table below, covering periods through August 31, 1995 have been audited by Deloitte & Touche LLP, independent certified public accountants, whose report is included in the Fund's Annual Report. Copies of the Annual Report may be obtained without charge from an investor's Shareholder Servicing Agent (see inside of back cover for address and phone number).
INVESTMENT OBJECTIVES: The investment objectives of the Fund are to provide its shareholders with high levels of current income exempt from federal, New York State and New York City personal income taxes, preservation of capital and liquidity.
The investment objectives of the Fund may not be changed without approval by the Fund's shareholders. Of course, there can be no assurance that the Fund will achieve its investment objectives.
INVESTMENT POLICIES: The Fund seeks its objectives by investing primarily in short-term, high quality fixed rate and variable rate obligations issued by or on behalf of states and municipal governments and their authorities, agencies, instrumentalities and political subdivisions, the interest on which is exempt from federal income taxes (these securities are referred to as "Municipal Obligations"). As a fundamental policy, the Fund invests at least 80% of its assets, under normal circumstances, in the following types of Municipal Obligations and in participation interests in these obligations issued by banks, insurance companies or other financial institutions ("Participation Interests"):
(1) Municipal bonds that at the date of purchase are rated Aa or better by Moody's Investors Service, Inc. ("Moody's") or AA or better by Standard & Poor's Rating Group ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or are unrated but are of comparable quality as determined by the Adviser on the basis of a credit evaluation of the obligor, or of the bank issuing the Participation Interest or guarantee of the bonds, or of any insurance issued in support of the bonds or the Participation Interest;
(2) Municipal notes that at the date of purchase are rated MIG2/VMIG2 or better by Moody's, SP-2 or better by S&P or F-2 or better by Fitch, or are unrated but are of comparable quality as determined by the Adviser; and
(3) Municipal commercial paper that at the date of purchase is rated Prime-2 or better by Moody's, A-2 or better by S&P or F-2 or better by Fitch, or is unrated but is of comparable quality as determined by the Adviser.
See Appendix A for an explanation of Municipal Obligations and Appendix B for an explanation of ratings of Municipal Obligations.
Under normal circumstances, the Fund invests at least 65% of its assets in Municipal Obligations the interest on which is exempt from federal, New York State and New York City personal income taxes (these securities are referred to as "New York Municipal Obligations"). The Fund is a "triple tax-exempt money market fund." New York Municipal Obligations include Municipal Obligations of the State of New York and its political subdivisions and of Puerto Rico and other U.S. territories and their political subdivisions. To the extent that acceptable New York Municipal Obligations are not available to the Fund, the Fund may purchase Municipal Obligations issued by issuers in other states. The interest on these securities will be subject to New York State and New York City personal income taxes.
Although the Fund attempts to invest all of its assets in Municipal Obligations, the Fund may invest up to 20% of its assets in taxable securities (such as U.S. Government obligations or certificates of deposit of domestic banks). Any taxable securities in which the Fund invests are of comparable quality to the Municipal Obligations in which the Fund invests.
In determining the tax status of interest on Municipal Obligations, the Adviser relies on opinions of bond counsel who may be counsel to the issuer.
$1.00 NET ASSET VALUE. The Fund employs specific investment policies and procedures designed to maintain a constant net asset value of $1.00 per share. There can be no assurance, however, that a constant net asset value will be maintained on a continuing basis. See "Net Income and Distributions."
90-DAY AVERAGE MATURITY. All of the Fund's investments mature in 397 days or less from the date of purchase, have a variable rate of interest adjusted no less frequently than every 397 days, or are purchased pursuant to a repurchase agreement which provides for repurchase by the seller within 397 days from the date of purchase. The average maturity of the Fund's investments (on a dollar-weighted basis) is 90 days or less. All of the Fund's investments are "eligible securities" within the meaning of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), and are determined by the Adviser to present minimal credit risks. Investment in high quality, short-term instruments may, in many circumstances, result in a lower yield than would be available from investment in instruments with a lower quality or a longer term.
PERMITTED INVESTMENTS. Uninvested cash may be held temporarily for the Fund pending investment. The Fund may borrow from banks up to 15% of its total assets for temporary or emergency purposes. For more information regarding permitted investments and investment practices, see Appendix A. The Fund will not necessarily invest or engage in each of the investments and investment practices in Appendix A but reserves the right to do so.
INVESTMENT IN ANOTHER INVESTMENT COMPANY. The Fund may, in the future, seek its investment objectives by investing all of its investable assets in an open-end management investment company having the same investment objectives and policies and substantially the same investment restrictions as those of the Fund. This investment would be made only with the prior approval of the Fund's shareholders and only if the Fund's Trustees believe that the aggregate per share expenses of the Fund and such other investment company would be less than or approximately equal to the expenses which the Fund would incur if the assets of the Fund were to continue to be invested directly in portfolio securities.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains a list of specific investment restrictions which govern the Fund's investment policies. Certain of these specific restrictions may not be changed without shareholder approval. Except as otherwise indicated, the Fund's investment restrictions and policies may be changed without shareholder approval. If a percentage or rating restriction (other than a restriction as to borrowing) is adhered to at the time an investment is made, a later change in percentage or rating resulting from changes in the Fund's securities will not be a violation of policy.
BROKERAGE TRANSACTIONS. The primary consideration in placing the Fund's security transactions with broker-dealers for execution is to obtain and maintain the availability of execution at the most favorable prices and in the most effective manner possible.
The risks of investing in the Fund vary depending upon the nature of the securities held, and the investment practices employed, on its behalf. Certain of these risks are described below.
NON-DIVERSIFIED STATUS. The Fund is a non-diversified mutual fund. This means that it is not subject to any statutory restrictions under the 1940 Act limiting the investment of its assets in one or relatively few issuers (although certain diversification requirements are imposed by the Internal Revenue Code). Since the Fund may invest a relatively high percentage of its assets in the obligations of a limited number of issuers, the value of shares of the Fund may be more susceptible to any single economic, political or regulatory occurrence than the value of shares of a diversified mutual fund would be. The Fund also may invest 25% or more of its assets in securities the issuers of which are located in the same state or the interest on which is paid from revenues of similar type projects or that are otherwise related in such a way that a single economic, business or political development or change affecting one of the securities would also affect other securities. Investors should consider the greater risk inherent in these policies when compared with a more diversified mutual fund.
"CONCENTRATION" IN PARTICIPATION INTERESTS. The Fund may invest more than 25% of its assets in Participation Interests in Municipal Obligations which are secured by bank letters of credit or guarantees. Banks are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of this industry is largely dependent upon the availability and cost of capital funds for the purpose of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of this industry and exposure to credit losses arising from possible financial difficulties of borrowers might affect a bank's ability to meet its obligations under a letter of credit or guarantee. For additional information concerning variable rate instruments and Participation Interests, see Appendix A.
INVESTMENT PRACTICES. Certain of the investment practices employed for the Fund may entail certain risks. See Appendix A.
RISKS AFFECTING INVESTMENTS IN NEW YORK MUNICIPAL OBLIGATIONS. The Fund intends to invest a high proportion of its assets in New York Municipal Obligations. Payment of interest and principal of these Municipal Obligations is dependent on the continuing ability of issuers in New York and obligors of state, municipal and public authority debt obligations to meet their obligations. Investors in the Fund should consider the greater risks inherent in the Fund's concentration in these obligations when compared with the safety that comes with a less geographically concentrated investment portfolio. The Adviser believes that by maintaining the Fund's investment portfolio in liquid, short-term high quality New York Municipal Obligations, including Participation Interests and other variable rate instruments that have high quality credit support from banks, insurance companies or other financial institutions, the Fund is somewhat insulated from the credit risks that may exist for long-term New York Municipal Obligations.
Investors should be aware of special economic factors affecting New York before investing in the Fund. While these factors are summarized below, a more detailed description is set forth in the Statement of Additional Information and the Appendix thereto (see "Investment Objectives, Policies and Restrictions -- Risk Factors Affecting Investment in New York Municipal Obligations" in the Statement of Additional Information). The information below and in the Statement of Additional Information is a summary of certain information contained in official statements of issuers of New York Municipal Obligations and does not purport to be complete. The Fund is not responsible for the accuracy or timeliness of this information.
New York State and other issuers of New York Municipal Obligations over the past several years have experienced financial difficulties, which caused the credit ratings of certain of their obligations to be downgraded by certain rating agencies. There can be no assurance that credit ratings on obligations of New York State, New York City and other New York Municipal Obligations will not be downgraded again.
Investors also should compare the yield available on a portfolio of single state issues with the yield of a more diversified portfolio including other state issues before making an investment decision. For a comparison of yields on Municipal Obligations and taxable securities, see Appendix C.
Net asset value per share of the Fund is determined each day the New York Stock Exchange is open for trading (a "Business Day"). This determination is made once each day as of 12:00 noon, Eastern time, by adding the market value of all of the Fund's securities and other assets, then subtracting the liabilities charged to the Fund, and then dividing the result by the number of the Fund's outstanding shares. The Fund attempts to stabilize the net asset value of its shares at $1.00 by valuing portfolio securities using the amortized cost method; however, there can be no assurance that the Fund's net asset value will always remain at $1.00 per share. The net asset value per share is effective for orders received and accepted by the Distributor prior to its calculation.
The amortized cost method involves valuing a security at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated value of a security is higher or lower than the price the Fund would receive if the security were sold.
Shares of the Fund are offered continuously and may be purchased on any Business Day without a sales load at the shares' net asset value next determined after an order is transmitted to and accepted by the Distributor. Shares may be purchased either through a securities broker which has a sales agreement with the Distributor or through a bank or other financial institution which has an agency agreement with the Distributor. Shares of the Fund are being offered exclusively to customers of a Shareholder Servicing Agent (i.e., a financial institution, such as a federal or state-chartered bank, trust company, savings and loan association or savings bank, or a securities broker, that has entered into a shareholder servicing agreement concerning the Fund). The Fund and the Distributor reserve the right to reject any purchase order and to suspend the offering of Fund shares for a period of time.
While there is no sales load imposed on shares of the Fund, the Distributor receives fees from the Fund pursuant to a Distribution Plan. See "Management -- Distribution Arrangements."
Each shareholder's account is established and maintained by his or her Shareholder Servicing Agent, which will be the shareholder of record of the Fund. Each Shareholder Servicing Agent may offer services to its customers such as pre-authorized or automatic purchase and redemption programs and "sweep" checking programs, and may establish its own terms, conditions and charges with respect to services it offers to its customers. Charges for these services may include fixed annual fees and account maintenance fees. The effect of any of these fees will be to reduce the net return on the investment of customers of that Shareholder Servicing Agent.
Shareholder Servicing Agents will not transmit purchase orders to the Distributor until they have received the purchase price in federal or other immediately available funds. If Fund shares are purchased by check, there will be a delay (usually not longer than two business days) in transmitting the purchase order until the check is converted into federal funds.
Shares of the Fund may be exchanged for shares of the other Landmark Funds that are made available by a shareholder's Shareholder Servicing Agent, or may be acquired through an exchange of shares of those funds. No initial sales charge is imposed on shares being acquired through an exchange unless the shares being acquired are subject to a sales charge that is greater than the current sales charge of the Fund (in which case an initial sales charge will be imposed at a rate equal to the difference). Contingent deferred sales charges may apply to redemptions of some shares of other Landmark Funds disposed of or acquired through an exchange.
Shareholders must place exchange orders through their Shareholder Servicing Agents, and may do so by telephone if their account applications so permit. For more information on telephone transactions see "Redemptions." All exchanges will be effected based on the relative net asset values per share next determined after the exchange order is received by the Distributor. See "Valuation of Shares." Shares of the Fund may be exchanged only after payment in federal funds for the shares has been made.
This exchange privilege may be modified or terminated at any time, upon at least 60 days' notice when such notice is required by SEC rules, and is available only in those jurisdictions where such exchanges legally may be made. See the Statement of Additional Information for further details. Before making any exchange, shareholders should contact their Shareholder Servicing Agents to obtain more information and prospectuses of the Landmark Funds to be acquired through the exchange.
Fund shares may be redeemed at their net asset value (normally $1.00 per share) next determined after a redemption request in proper form is received by a shareholder's Shareholder Servicing Agent. Shareholders may redeem shares of the Fund only by authorizing their Shareholder Servicing Agents to redeem such shares on their behalf through the Distributor.
REDEMPTIONS BY MAIL. Shareholders may redeem Fund shares by sending written instructions in proper form (as determined by a shareholder's Shareholder Servicing Agent) to their Shareholder Servicing Agents. Shareholders are responsible for ensuring that a request for redemption is in proper form.
REDEMPTIONS BY TELEPHONE. Shareholders may redeem or exchange Fund shares by telephone, if their account applications so permit, by calling their Shareholder Servicing Agents. During periods of drastic economic or market changes or severe weather or other emergencies, shareholders may experience difficulties implementing a telephone exchange or redemption. In such an event, another method of instruction, such as a written request sent via an overnight delivery service, should be considered. The Fund and each Shareholder Servicing Agent will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures may include recording of the telephone instructions and verification of a caller's identity by asking for his or her name, address, telephone number, Social Security number, and account number. If these or other reasonable procedures are not followed, the Fund or the Shareholder Servicing Agent may be liable for any losses to a shareholder due to unauthorized or fraudulent instructions. Otherwise, the shareholder will bear all risk of loss relating to a redemption or exchange by telephone.
PAYMENT OF REDEMPTIONS. The proceeds of a redemption are paid in federal funds normally on the Business Day the redemption is effected, but in any event within seven days. If a shareholder requests redemption of shares which were purchased recently, the Fund may delay payment until it is assured that good payment has been received. In the case of purchases by check, this can take up to ten days. See "Determination of Net Asset Value" in the Statement of Additional Information regarding the Fund's right to pay the redemption price in kind with securities (instead of cash).
Questions about redemption requirements should be referred to the shareholder's Shareholder Servicing Agent. The right of any shareholder to receive payment with respect to any redemption may be suspended or the payment of the redemption price postponed during any period in which the New York Stock Exchange is closed (other than weekends or holidays) or trading on the Exchange is restricted or if an emergency exists.
The Fund's net income is determined each Business Day (and on such other days as is necessary in order to comply with the 1940 Act). This determination is made once during each such day as of 12:00 noon, Eastern time. Substantially all the Fund's net income is declared as a dividend to shareholders of record at the time of such determination. Shares begin accruing dividends on the day they are purchased, and accrue dividends up to and including the day prior to redemption. Dividends are distributed monthly on or prior to the last business day of each month. Unless a shareholder elects to receive dividends in cash (subject to the policies of the shareholder's Shareholder Servicing Agent), dividends are distributed in the form of full and fractional additional Fund shares at the rate of one share of the Fund for each one dollar of dividend income.
Since the Fund's net income is declared as a dividend each time the Fund's net income is determined, the net asset value per share of the Fund is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder's investment in the Fund, representing the reinvestment of dividend income, is reflected by an increase in the number of shares of the Fund in the shareholder's account.
Because of the short-term maturities of the portfolio investments of the Fund, the Fund does not expect to realize long-term capital gains or losses. Any net realized short-term capital gains will be declared and distributed to the Fund's shareholders annually after the close of the Fund's fiscal year. Distributions of short-term capital gains are taxable to shareholders as described in "Tax Matters". Any realized short-term capital losses will be offset against short-term capital gains or, to the extent possible, utilized as capital loss carryover. The Fund may distribute short-term capital gains more frequently than annually, reduce shares to reflect capital losses or make distributions of capital if necessary in order to maintain the Fund's net asset value of $1.00 per share.
It is expected that the Fund will have a positive net income at the time of each determination thereof. If for any reason the Fund's net income is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, the Fund would first offset the negative amount with respect to each shareholder account from the dividends declared during the month with respect to those accounts. If and to the extent that negative net income exceeds declared dividends at the end of the month, the Fund would reduce the number of outstanding Fund shares by treating each shareholder as having contributed to the capital of the Fund that number of full and fractional shares in his or her account which represents his or her share of the amount of such excess. Each shareholder would be deemed to have agreed to such contribution in these circumstances by his or her investment in the Fund.
TRUSTEES AND OFFICERS: The Fund is supervised by its own Board of Trustees. A majority of the Trustees are not affiliated with the Adviser. More information on the Trustees and officers of the Fund appears under "Management" in the Statement of Additional Information.
INVESTMENT ADVISER: CITIBANK. The Fund draws on the strength and experience of Citibank. Citibank offers a wide range of banking and investment services to customers across the United States and throughout the world, and has been managing money since 1822. Its portfolio managers are responsible for investing in money market, equity and fixed income securities. Citibank and its affiliates manage more than $73 billion in assets worldwide, including the Landmark Funds and Portfolios. Citibank is a wholly-owned subsidiary of Citicorp.
Citibank manages the assets of the Fund pursuant to an investment advisory agreement (the "Advisory Agreement"). Subject to policies set by the Fund's Trustees, Citibank makes investment decisions for the Fund.
ADVISORY FEES. For its services under the Advisory Agreement, the Adviser receives investment advisory fees, which are accrued daily and paid monthly, of 0.20% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. The Adviser has voluntarily agreed to waive a portion of its investment advisory fee.
For the fiscal year ended August 31, 1995, the investment advisory fees payable to Citibank from the Fund were $1,405,747, of which $242,164 was voluntarily waived (after waiver, 0.17% of the Fund's average daily net assets for that fiscal year).
BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan and other relationships with the issuers of securities purchased on behalf of the Fund, including outstanding loans to such issuers which may be repaid in whole or in part with the proceeds of securities so purchased. Citibank has informed the Fund that, in making its investment decisions, it does not obtain or use material inside information in the possession of any division or department of Citibank or in the possession of any affiliate of Citibank.
BANK REGULATORY MATTERS. The Glass-Steagall Act prohibits certain financial institutions, such as Citibank, from underwriting securities of open-end investment companies, such as the Fund. Citibank believes that its services under the Advisory Agreement and the activities performed by it or its affiliates as Shareholder Servicing Agents and sub-administrator are not underwriting and are consistent with the Glass-Steagall Act and other relevant federal and state laws. However, there is no controlling precedent regarding the performance of the combination of investment advisory, shareholder servicing and sub-administrative activities by banks. State laws on this issue may differ from applicable federal law and banks and financial institutions may be required to register as dealers pursuant to state securities laws. Changes in either federal or state statutes or regulations, or in their interpretations, could prevent Citibank or its affiliates from continuing to perform these services for the Fund. If Citibank or its affiliates were to be prevented from acting as the Adviser, sub-administrator or a Shareholder Servicing Agent, the Fund would seek alternative means for obtaining these services. The Fund does not expect that shareholders would suffer any adverse financial consequences as a result of any such occurrence.
ADMINISTRATIVE SERVICES PLAN: The Fund has an administrative services plan (the "Administrative Services Plan") which provides that the Fund may obtain the services of an administrator, a transfer agent, a custodian, a fund accountant and one or more Shareholder Servicing Agents, and may enter into agreements providing for the payment of fees for such services. Under the Administrative Services Plan, the total of the fees paid to the Fund's Administrator and Shareholder Servicing Agents and the distribution fee paid to the Distributor (other than any fee concerning electronic or other media advertising) may not exceed 0.60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. Within this overall limitation, individual fees may vary. See "Administrator," "Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund Accountant."
ADMINISTRATOR: LFBDS provides certain administrative services to the Fund under an administrative services agreement. These administrative services include providing general office facilities, supervising the overall administration of the Fund, and providing persons satisfactory to the Board of Trustees to serve as Trustees and officers of the Fund. These Trustees and officers may be directors, officers or employees of LFBDS or its affiliates.
For these services, the Administrator receives fees accrued daily and paid monthly of 0.25% of the average daily net assets of the Fund on an annualized basis for the Fund's then-current fiscal year. However, the Administrator has voluntarily agreed to waive a portion of the fees payable to it.
LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc. "Landmark" is a service mark of LFBDS.
SUB-ADMINISTRATOR: Pursuant to a sub-administrative services agreement, Citibank performs such sub-administrative duties for the Fund as from time to time are agreed upon by Citibank and LFBDS. Citibank's compensation as sub- administrator is paid by LFBDS.
SHAREHOLDER SERVICING AGENTS: The Fund has entered into separate shareholder servicing agreements with each Shareholder Servicing Agent pursuant to which that Shareholder Servicing Agent provides shareholder services, including answering customer inquiries, assisting in processing purchase, exchange and redemption transactions and furnishing Fund communications to shareholders. For these services, each Shareholder Servicing Agent receives a fee from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund represented by shares owned by investors for whom such Shareholder Servicing Agent maintains a servicing relationship.
Some Shareholder Servicing Agents may impose certain conditions on their customers in addition to or different from those imposed by the Fund, such as requiring a minimum initial investment or charging their customers a direct fee for their services. Each Shareholder Servicing Agent has agreed to transmit to its customers who are shareholders of the Fund appropriate prior written disclosure of any fees that it may charge them directly and to provide written notice at least 30 days prior to imposition of any transaction fees.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust Company acts as transfer agent, dividend disbursing agent and custodian for the Fund. State Street also provides fund accounting services to the Fund and calculates the daily net asset value of the Fund.
DISTRIBUTION ARRANGEMENTS: LFBDS is the Distributor of the Fund's shares and also serves as distributor for each of the other Landmark Funds and as a Shareholder Servicing Agent for certain investors. As Distributor, LFBDS bears the cost of compensating personnel involved in the sale of shares of the Fund and bears all costs of travel, office expenses (including rent and overhead) and equipment. In those states where LFBDS is not a registered broker-dealer, shares of the Fund are sold through Signature Broker-Dealer Services, Inc., as dealer.
Under a plan of distribution for the Fund (the "Plan"), the Fund pays the Distributor a fee at an annual rate not to exceed 0.10% of the average daily net assets of the Fund. The Plan also permits the Fund to pay the Distributor an additional fee (not to exceed 0.10% of the average daily net assets of the Fund) in anticipation of or as reimbursement for print or electronic media advertising expenses incurred in connection with the sale of Fund shares. However, the Distributor has agreed to waive a portion of these fees. The Plan was adopted in accordance with Rule 12b-1 under the 1940 Act.
The Fund and the Distributor provide to the Trustees quarterly a written report of amounts expended pursuant to the Plan and the purposes for which the expenditures were made.
From time to time LFBDS may make payments for distribution and/or shareholder servicing activities out of its past profits or any other sources available to it.
FEDERAL INCOME TAXES: This discussion of taxes is for general information only. Investors should consult their own tax advisers about their particular situations.
The Fund intends to meet requirements of the Internal Revenue Code applicable to regulated investment companies so that it will not be liable for any federal income or excise taxes.
The Fund expects that most of its net income will be attributable to interest on Municipal Obligations and as a result most of the Fund's dividends to shareholders will be excludable from shareholders' gross income. However, the Fund may invest from time to time in taxable securities, and certain Fund dividends may be subject to the federal alternative minimum tax. It is also possible, but not intended, that the Fund may realize short-term or long-term capital gains or losses. Generally, distributions from the Fund's short-term capital gains will be taxed as ordinary income, and distributions from long-term net capital gains will be taxed as such regardless of how long the shares of the Fund have been held. Dividends and distributions are treated in the same manner for federal tax purposes whether they are paid in cash or as additional shares.
Fund dividends of tax-exempt income are taken into account in determining the amount of a shareholder's social security and railroad retirement benefits that may be subject to federal income tax. No deduction may be claimed for interest on indebtedness incurred or carried for the purpose of purchasing or holding Fund shares. Investors who are, or who are related to, "substantial users" of facilities financed by private activity bonds should consult their tax advisers before buying Fund shares.
Early each year, the Fund will notify its shareholders of the amount and federal tax status of distributions paid to shareholders for the preceding year.
The account application asks each new shareholder to certify that the shareholder's Social Security or taxpayer identification number is correct and that the shareholder is not subject to 31% backup withholding for failing to report income to the IRS. The Fund may be required to withhold (and pay over to the IRS for the shareholder's credit) 31% of certain distributions paid to shareholders who fail to provide this information or otherwise violate IRS regulations.
STATE AND LOCAL TAXES: Except as noted below, Fund dividends which are excludable from shareholders' gross income for federal income tax purposes may not necessarily be exempt from the income or other tax laws of any state or local taxing authority. Investors should consult their own tax advisers in this regard.
To the extent that dividends received from the Fund are derived from interest on New York Municipal Obligations, the dividends will also be excluded from the gross income of individual shareholders who are New York residents for New York State and New York City personal income tax purposes. DIVIDENDS FROM THE FUND ARE NOT EXCLUDED IN DETERMINING NEW YORK STATE OR NEW YORK CITY FRANCHISE TAXES ON CORPORATIONS AND FINANCIAL INSTITUTIONS.
Fund performance may be quoted in advertising, shareholder reports and other communications in terms of yield, effective yield, tax equivalent yield, total rate of return or tax equivalent total rate of return. All performance information is historical and is not intended to indicate future performance. Yields and total rates of return fluctuate in response to market conditions and other factors.
The Fund may provide its period and average annualized "total rates of return" and "tax equivalent total rates of return." The "total rate of return" refers to the change in the value of an investment in the Fund over a stated period and is compounded to include the value of any shares purchased with any dividends or capital gains declared during such period. Period total rates of return may be "annualized." An "annualized" total rate of return assumes that the period total rate of return is generated over a one-year period. The "tax equivalent total rate of return" refers to the total rate of return that a fully taxable money market fund would have to generate in order to produce an after-tax total rate of return equivalent to that of the Fund. The use of a tax equivalent total rate of return allows investors to compare the total rates of return of the Fund, the dividends from which are exempt from federal personal income taxes, with the total rates of return of funds the dividends from which are not so tax exempt.
The Fund may provide annualized "yield," "effective yield" and "tax equivalent yield" quotations. The "yield" of the Fund refers to the income generated by an investment in the Fund over a seven-day period (which period is stated in any such advertisement or communication). This income is then annualized; that is, the amount of income generated by the investment over that period is assumed to be generated each week over a 365-day period and is shown as a percentage of the investment. The "effective yield" is calculated similarly, but when annualized the income earned by the investment during that seven-day period is assumed to be reinvested. The effective yield is slightly higher than the yield because of the compounding effect of this assumed reinvestment. The "tax equivalent yield" refers to the yield that a fully taxable money market fund would have to generate in order to produce an after-tax yield equivalent to that of the Fund. The use of a tax equivalent yield allows investors to compare the yield of the Fund, the dividends from which are exempt from federal personal income tax, with yields of funds the dividends from which are not so tax exempt. The Fund may also provide yield, effective yield and tax equivalent yield quotations for longer periods.
Of course, any fees charged by a shareholder's Shareholder Servicing Agent will reduce that shareholder's net return on his or her investment. See the Statement of Additional Information for more information concerning the calculation of yield and total rate of return quotations for the Fund.
ORGANIZATION: Landmark New York Tax Free Reserves is a non-diversified series of Landmark Multi-State Tax Free Funds (the "Trust"). The Trust is a Massachusetts business trust which was organized on August 30, 1985; it was known as Landmark New York Tax Free Reserves until its name was changed effective December 18, 1991. The Trust is a non-diversified, open-end management investment company registered under the 1940 Act. There are presently two active series of the Trust in addition to the Fund.
Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for the trust's obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the trust itself was unable to meet its obligations.
VOTING AND OTHER RIGHTS: The Trust may issue an unlimited number of shares, may create new series of shares and may divide shares in each series into classes. Each share of the Trust gives the shareholder one vote in Trustee elections and other matters submitted to shareholders for vote. All shares of each series of the Trust have equal voting rights except that, in matters affecting only a particular series, only shares of that particular series are entitled to vote.
At any meeting of shareholders of the Fund, a Shareholder Servicing Agent may vote any shares of which it is the holder of record and for which it does not receive voting instructions proportionately in accordance with the instructions it received for all other shares of which that Shareholder Servicing Agent is the holder of record.
The Trust's activities are supervised by its Board of Trustees. As a Massachusetts business trust, the Trust is not required to hold annual shareholder meetings. Shareholder approval will usually be sought only for changes in the Fund's fundamental investment restrictions and for the election of Trustees under certain circumstances. Trustees may be removed by shareholders under certain circumstances. Each share of the Fund is entitled to participate equally in dividends and other distributions and the proceeds of any liquidation of the Fund.
CERTIFICATES: The Fund's Transfer Agent maintains a share register for shareholders of record, i.e., Shareholder Servicing Agents. Share certificates are not issued.
EXPENSES: For the fiscal year ended August 31, 1995, total operating expenses of the Fund, after giving effect to fee waivers and reimbursements, were 0.65% of the Fund's average daily net assets for that fiscal year. All fee waivers and reimbursements are voluntary and may be reduced or terminated at any time.
The Statement of Additional Information dated the date hereof contains more detailed information about the Fund, including information related to (i) investment policies and restrictions, (ii) the Trustees, officers, Adviser and Administrator, (iii) securities transactions, (iv) the Fund's shares, including rights and liabilities of shareholders, (v) the methods used to calculate performance information, (vi) programs for the purchase of shares, and (vii) the determination of net asset value.
No person has been authorized to give any information or make any representations not contained in this Prospectus in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Fund or its distributor. This Prospectus does not constitute an offering by the Fund or its distributor in any jurisdiction in which such offering may not lawfully be made.
MUNICIPAL BONDS. Municipal bonds are debt obligations of states, cities, municipalities and municipal agencies and authorities which generally have a maturity at the time of issue of one year or more and which are issued to raise funds for various public purposes, such as construction of a wide range of public facilities, refunding outstanding obligations or obtaining funds for institutions and facilities. The two principal classifications of municipal bonds are "general obligation" and "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. The principal of and interest on revenue bonds are payable from the income of specific projects or authorities and generally are not supported by the issuer's general power to levy taxes. In some cases, revenues derived from specific taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of private activity bonds ("IDBs") are issued by or on behalf of public authorities to provide funding for various privately operated industrial facilities, such as warehouse, office, plant and store facilities and environmental and pollution control facilities. IDBs are, in most cases, revenue bonds. The payment of the principal and interest on IDBs usually depends solely on the ability of the user of the facilities financed by the bonds or other guarantor to meet its financial obligations and, in certain instances, the pledge of real and personal property as security for payment. Many IDBs may not be readily marketable; however, the IDBs or the participation certificates in IDBs purchased by the Fund will have liquidity because they generally will be supported by demand features to "high quality" banks, insurance companies or other financial institutions.
MUNICIPAL NOTES. There are four major varieties of state and municipal notes: Tax and Revenue Anticipation Notes ("TRANs"); Tax Anticipation Notes ("TANs"); Revenue Anticipation Notes ("RANs"); and Bond Anticipation Notes ("BANs"). TRANs, TANs and RANs are issued by states, municipalities and other tax-exempt issuers to finance short-term cash needs or, occasionally, to finance construction. Many TRANs, TANs and RANs are general obligations of the issuing entity payable from taxes or designated revenues, respectively, expected to be received within the related fiscal period. BANs are issued with the expectation that their principal and interest will be paid out of proceeds from renewal notes or bonds to be issued prior to the maturity of the BANs. BANs are issued by both general obligation and revenue bond issuers usually to finance such items as land acquisition, facility acquisition and/or construction and capital improvement projects.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS. Variable rate instruments provide for a periodic adjustment in the interest rate paid on the instrument and usually permit the holder to receive payment of principal and accrued interest upon a specified number of day's notice. Variable rate instrument in which the Fund may invest include participation interests in Municipal Obligations owned by a bank, insurance company or other financial institution or affiliated organization ("Participation Interests"). A variable rate instrument or a Participation Interest may be backed by an irrevocable letter of credit or guarantee of, or a right to put to, a bank, or an insurance policy of an insurance company. See "Stand-by Commitments." Purchase of a Participation Interest may involve the risk that the Fund will not be deemed to be the owner of the underlying Municipal Obligation for purposes of the ability to claim tax exemption of interest paid on that Municipal Obligation. If interest rates rise or fall, the rates payable on variable rate instruments will generally be readjusted. As a result variable rate instruments do not offer the same opportunity for capital appreciation or loss as fixed rate instruments.
STAND-BY COMMITMENTS. When the Fund purchases Municipal Obligations it may also acquire stand-by commitments from banks with respect to such Municipal Obligations. The Fund also may acquire stand-by commitments from broker-dealers. Under a stand-by commitment, a bank or broker-dealer agrees to purchase at the Fund's option a specified Municipal Obligation at a specified price. A stand-by commitment is the equivalent of a "put" option with respect to a particular Municipal Obligation. The Fund intends to acquire stand-by commitments solely to facilitate liquidity. Stand-by commitments are subject to certain risks, which include the ability of the issuer of the commitment to pay for the Municipal Obligations at the time the commitment is exercised, the fact that the commitment is not marketable, and that the maturity of the underlying security will generally be different from that of the commitment.
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable securities, the Fund may purchase securities on a "when-issued" or on a "forward delivery" basis, which means that the securities would be delivered to the Fund at a future date beyond customary settlement time. Under normal circumstances, the Fund takes delivery of the securities. In general, the purchaser does not pay for the securities until received and does not start earning interest until the contractual settlement date. While awaiting delivery of the securities, the Fund establishes a segregated account consisting of cash, cash equivalents or high quality debt securities equal to the amount of the Fund's commitments to purchase "when-issued" securities. An increase in the percentage of the Fund's assets committed to the purchase of securities on a "when-issued" basis may increase the volatility of its net asset value.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. Repurchase agreements are transactions in which an institution sells the Fund a security at one price, subject to the Fund's obligation to resell and the selling institution's obligation to repurchase that security at a higher price normally within a seven day period. There may be delays and risks of loss if the seller is unable to meet its obligation to repurchase. Repurchase agreements may involve Municipal Obligations or other securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. The Fund may invest up to 10% of its net assets in securities for which there is no readily available market. These illiquid securities may include privately placed restricted securities for which no institutional market exists. The absence of a trading market can make it difficult to ascertain a market value for illiquid investments. Disposing of illiquid investments may involve time-consuming negotiation and legal expenses, and it may be difficult or impossible for the Fund to sell them promptly at an acceptable price.
The ratings of Moody's Investors Service, Inc., Standard & Poor's Ratings Group and Fitch Investors Service, Inc. represent their opinions as to the quality of various debt obligations. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, Municipal Obligations with the same maturity, coupon and rating may have different yields while Municipal Obligations of the same maturity and coupon with different ratings may have the same yield.
*As described by the rating agencies. Ratings are generally given to securities at the time of issuance. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST LONG-TERM DEBT RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt edged". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, or fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
Note: Those bonds in the Aa group which Moody's believes possess the strongest investment attributes are designated by the symbol Aa 1.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES:
Moody's ratings for state and municipal short-term obligations are designated Moody's Investment Grade ("MIG"). Such ratings recognize the differences between short-term credit risk and long-term risk. A short-term rating ("VMIG") may also be assigned to variable rate demand obligations. Factors affecting the liquidity of the borrower and short-term cyclical elements are critical in short-term ratings, while other factors of major importance in bond risk, long-term secular trends, for example, may be less important over the short run. Symbols used are as follows:
MIG 1/VMIG 1 -- Notes bearing this designation are of the best quality, with strong protection from established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 -- Notes bearing this designation are of high quality, with margins of protection ample although not so large as in the preceding group.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually senior short-term obligations not having an original maturity in excess of one year.
Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of senior short-term debt obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: (1) leading market positions in well established industries; (2) high rates of return on funds employed; (3) conservative capitalization structures with moderate reliance on debt and ample asset protection; (4) broad margins in earnings coverage of fixed financial charges and high internal cash generation; and (5) well established access to a range of financial markets and assured sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST LONG-TERM DEBT RATINGS:
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree.
Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus or minus sign to show relative standing within the AA rating category.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES:
A Standard & Poor's note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other maturities the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics are given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST COMMERCIAL PAPER RATINGS:
A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days.
A -- Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 -- This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation.
A-2 -- Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated A-1.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S DUAL RATINGS:
Standard & Poor's assigns "dual" ratings to all debt issues that have as part of their structure a put option or demand feature.
The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the put option or demand feature. The long-term debt rating symbols are used for bonds to denote the long-term maturity and the commercial paper rating symbols are used to denote the put option (for example, "AAA/A-1+"). For demand debt, the note rating symbols are used with the commercial paper rating symbols (for example, "SP-1+/A-1+").
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S TWO HIGHEST BOND RATINGS:
The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality.
AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+".
Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus or minus sign to show relative standing within the AA rating category.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S THREE HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES:
The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+".
F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-2+" and "F-1" ratings.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER RATINGS:
The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+".
F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-1+" and "F-1" ratings.
(RATES FOR 1995+ UNDER FEDERAL AND NEW YORK PERSONAL INCOME TAX LAWS)
The tables below show the approximate taxable bond yields which are equivalent to tax-exempt bond yields under 1995 federal and New York personal income tax laws. SUCH YIELDS MAY DIFFER UNDER THE LAWS APPLICABLE TO SUBSEQUENT YEARS IF THE EFFECT OF ANY SUCH LAW IS TO CHANGE ANY TAX BRACKET OR THE AMOUNT OF TAXABLE INCOME WHICH IS APPLICABLE TO A TAX BRACKET. Separate calculations, showing the applicable taxable income brackets, are provided for investors who file joint returns and for investors who file individual returns. While it is expected that a substantial portion of the dividends paid to shareholders of the Fund will be exempt from federal, New York State and New York City personal income taxes, portions of such dividends from time to time may be subject to federal income taxes and/or New York State and New York City personal income taxes.
FOR CITIBANK NEW YORK RETAIL BANKING AND BUSINESS AND PROFESSIONAL CUSTOMERS: Citibank, N.A. 450 West 33rd Street, New York, NY 10001 (212) 564-3456 or (800) 846-5300
P.O. Box 5130, New York, NY 10126-5130 Call Your Citigold Executive, or in NY or CT (800) 285-1701, or for all other states (800) 285-1707
FOR CITIBANK PRIVATE BANKING CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 Call Your Citibank Private Banking Account Officer, Registered Representative or (212) 559-5959
FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS: Citibank, N.A. 153 East 53rd Street, New York 10043
FOR CITIBANK NORTH AMERICAN INVESTOR SERVICES CLIENTS: Citibank, N.A. 111 Wall Street, New York, NY 10043 Call Your Account Manager or (212) 657-9100
FOR CITICORP INVESTMENT SERVICES CUSTOMERS: One Court Square, Long Island City, NY 11120 Call Your Investment Consultant or (800) 846-5200 (212) 736-8170 in New York City
New York Tax Free Reserves
National Tax Free Income Fund New York Tax Free Income Fund
Emerging Asian Markets Equity Fund
C. Oscar Morong, Jr., Chairman William S. Woods, Jr.
*Affiliated Person of Administrator and Distributor
153 East 53rd Street, New York, NY 10043
The Landmark Funds Broker-Dealer Services, Inc. 6 St. James Avenue, Boston, MA 02116
State Street Bank and Trust Company 225 Franklin Street, Boston, MA 02110
125 Summer Street, Boston, MA02110
150 Federal Street, Boston, MA 02110
NYTFR/P/96/RB Printed on Recycled Paper [Symbol]
File Nos. 2-99977 and 811-4596
LANDMARK CONNECTICUT TAX FREE RESERVES (A member of the Landmark(SM) Family of Funds)
This Prospectus describes Landmark Connecticut Tax Free Reserves, a mutual fund in the Landmark Family of Funds. The Fund is a type of mutual fund commonly referred to as a "double tax-exempt money market fund." Citibank, N.A. is the investment adviser of the Fund. INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; HOWEVER, THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO. PROSPECTIVE INVESTORS SHOULD ALSO BE AWARE THAT SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. This Prospectus concisely sets forth information about the Fund that a prospective investor should know before investing. A Statement of Additional Information dated January 2, 1996 (and incorporated by reference in this Prospectus) has been filed with the Securities and Exchange Commission. Copies of the Statement of Additional Information may be obtained without charge, and further inquiries about the Fund may be made, by contacting the investor's shareholder servicing agent (see inside back cover for address and phone number).
Condensed Financial Information .......................................... 4 Valuation of Shares ...................................................... 7 Net Income and Distributions ............................................. 9 Appendix A -- Permitted Investments and Appendix B -- Ratings of Municipal Obligations ...........................16 Appendix C -- Taxable Equivalent Yield Tables ............................19
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
See the body of the Prospectus for more information on the topics discussed in this summary.
THE FUND: This Prospectus describes Landmark Connecticut Tax Free Reserves, a double tax-exempt money market mutual fund.
INVESTMENT OBJECTIVES AND POLICIES: To provide its shareholders with high levels of current income exempt from both federal and Connecticut personal income taxes, preservation of capital and liquidity. The Fund invests primarily in short-term, high quality obligations issued by state and municipal governments and by public authorities, the interest on which is exempt from federal income taxes ("Municipal Obligations"), including obligations of the State of Connecticut and its political subdivisions. There can be no assurance that the Fund will achieve its objectives.
INVESTMENT ADVISER AND DISTRIBUTOR: Citibank, N.A. ("Citibank" or the "Adviser"), a wholly-owned subsidiary of Citicorp, is the investment adviser. Citibank and its affiliates manage more than $73 billion in assets worldwide. The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS" or the "Distributor") is the distributor of shares of the Fund. See "Management."
PURCHASES AND REDEMPTIONS: Customers of Shareholder Servicing Agents may purchase and redeem shares of the Fund on any Business Day. See "Purchases" and "Redemptions."
PRICING: Shares of the Fund are purchased and redeemed at net asset value (normally $1.00 per share) without a sales load or redemption fees. While there are no sales loads, shares of the Fund are subject to a distribution fee. See "Purchases," "Redemptions" and "Management -- Distribution Arrangements."
Exchanges: Shares may be exchanged for shares of most other Landmark Funds. See "Exchanges."
DIVIDENDS: Declared daily and distributed monthly. Shares begin accruing dividends on the day they are purchased. See "Net Income and Distributions."
REINVESTMENT: Dividends may be received either in cash or in Fund shares at net asset value, subject to the policies of a shareholder's Shareholder Servicing Agent. See "Net Income and Distributions."
WHO SHOULD INVEST: The Fund is designed for investors seeking liquidity, preservation of capital and current income exempt from federal income taxes, and for whom long-term capital growth is not a consideration. The Fund is also designed for investors seeking income exempt from Connecticut personal income taxes and who are willing to bear the increased risk of an investment portfolio which is concentrated in obligations of the State of Connecticut and its political subdivisions. See "Investment Information."
RISK FACTORS: There can be no assurance that the Fund will achieve its investment objectives. In addition, while the Fund intends to maintain a stable net asset value of $1.00 per share, there can be no assurance that the Fund will be able to do so. Investments in high quality, short-term instruments may, in many circumstances, result in a lower yield than would be available from investments with a lower quality or a longer term.
The Fund is a non-diversified mutual fund, which means that it is not subject to any statutory restrictions under the Investment Company Act of 1940 limiting the investment of its assets in one or relatively few issuers. The Fund may therefore invest a relatively high percentage of its assets in the obligations of a limited number of issuers. Also, the Fund may invest 25% or more of its assets in securities of issuers in similar or related industries or issuers located in the same state. Under normal circumstances, the Fund invests primarily in obligations of the State of Connecticut and its political subdivisions. As a result, the Fund is more susceptible to any single economic, political or regulatory occurrence.
Certain investment practices also may entail special risks. Prospective investors should read "Risk Considerations" for more information about risk factors.
The following table summarizes estimated shareholder transaction and annual operating expenses for shares of the Fund.*
SHAREHOLDER TRANSACTION EXPENSES: ................................... None ANNUAL FUND OPERATING EXPENSES, AFTER FEE WAIVERS AND REIMBURSEMENTS (AS A PERCENTAGE OF AVERAGE NET ASSETS): Investment Management Fee(1) ........................................ .14% Shareholder Servicing Agent Fees .................................. .25% Other Operating Expenses .......................................... .26% Total Fund Operating Expenses(1) .................................... .65%
* This table is intended to assist investors in understanding the various costs and expenses that a shareholder of the Fund will bear, either directly or indirectly. The table shows the fees paid by the Fund to various service providers after giving effect to expected voluntary partial fee waivers. (1) Absent fee waivers and reimbursements, investment management fees, 12b-1 fees, administrative services fees and total fund operating expenses would be .20%, .20%, .25% and 1.16%, respectively. There can be no assurance that the fee waivers and reimbursements reflected in the table will continue at their present levels. Under the administrative services plan adopted by the Fund, the aggregate of the fee paid to the Administrator, the fees paid to the Shareholder Servicing Agents and the fee paid to the Distributor under the rule 12b-1 distribution plan (not including the .10% portion of the fee that may be charged in anticipation of or reimbursement for print or electronic media advertising, see "Distribution Arrangements" below) may not exceed .60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. Individual components of the aggregate may vary from time to time. For more information on costs and expenses, see "Management" and "General Information -- Expenses." (2) Fees under the 12b-1 distribution plan are asset-based sales charges. Long-term shareholders in a Fund could pay more in sales charges than the economic equivalent of the maximum front-end sales charges permitted by the National Association of Securities Dealers, Inc.
EXAMPLE: A shareholder of the Fund would pay the following expenses on a $1,000 investment, assuming redemption at the end of each period indicated below:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS $ 7 $21 $36 $81
The Example assumes that all dividends are reinvested, and expenses are based on the Fund's fiscal year ended August 31, 1995, after waivers and reimbursements. If waivers and reimbursements were not in place, the amounts in the Example would be $12, $37, $64 and $141, respectively. The assumption of a 5% annual return is required by the Securities and Exchange Commission for all mutual funds, and is not a prediction of the Fund's future performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The following table provides condensed financial information about the Fund for the periods indicated. This information should be read in conjunction with the financial statements appearing in the Fund's Annual Report to Shareholders, which are incorporated by reference in the Statement of Additional Information. The financial statements and notes, as well as the table below, covering the periods through August 31, 1995 have been audited by Deloitte & Touche LLP, independent certified public accountants, whose report is included in the Fund's Annual Report. Copies of the Annual Report may be obtained without charge from an investor's Shareholder Servicing Agent (see inside of back cover for address and phone number).
Net Asset Value, beginning of period ............... $ 1.00000 $ 1.00000 Net investment income .............................. 0.03564 0.01754 Less dividends from net investment income .......... (0.03564) (0.01754) Net Asset Value, end of period ..................... $ 1.00000 $ 1.00000
Net assets, end of period (000's omitted) .......... $46,556 $15,949 Ratio of expenses to average net assets ............ 0.22% 0.00%* Ratio of net investment income to average net assets 3.60% 2.16%* Total return ....................................... 3.62% 1.75%**
Note: If certain agents of the Fund had not voluntarily waived all or a portion of their fees from the Fund and the Administrator had not voluntarily assumed expenses for the period indicated, the ratios and net investment income per share would have been as follows:
Net investment income per share .................... $ 0.02732 $ 0.00128 RATIOS: Expenses to average net assets ..................... 1.06% 2.42%* Net investment income to average net assets ........ 2.76% 0.19%*
+ For the period from the start of business, December 1, 1993, to August 31, 1994.
INVESTMENT OBJECTIVES: The investment objectives of the Fund are to provide its shareholders with high levels of current income exempt from both federal and Connecticut personal income taxes, preservation of capital and liquidity.
The investment objectives of the Fund may not be changed without approval by the Fund's shareholders. Of course, there can be no assurance that the Fund will achieve its investment objectives.
INVESTMENT POLICIES: The Fund seeks its objectives by investing primarily in short-term, high quality fixed rate and variable rate obligations issued by or on behalf of states and municipal governments and their authorities, agencies, instrumentalities and political subdivisions, the interest on which is exempt from federal income taxes (these securities are referred to as "Municipal Obligations"). As a fundamental policy, the Fund invests at least 80% of its assets, under normal circumstances, in the following types of Municipal Obligations and in participation interests in these obligations issued by banks, insurance companies or other financial institutions ("Participation Interests"):
(1) Municipal bonds that at the date of purchase are rated Aa or better by Moody's Investors Service, Inc. ("Moody's") or AA or better by Standard & Poor's Rating Group ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or are unrated but are of comparable quality as determined by the Adviser on the basis of a credit evaluation of the obligor, or of the bank issuing the Participation Interest or guarantee of the bonds, or of any insurance issued in support of the bonds or the Participation Interest;
(2) Municipal notes that at the date of purchase are rated MIG 2/VMIG 2 or better by Moody's, SP-2 or better by S&P or F-2 or better by Fitch, or are unrated but are of comparable quality as determined by the Adviser; and
(3) Municipal commercial paper that at the date of purchase is rated Prime-2 or better by Moody's, A-2 or better by S&P or F-2 or better by Fitch, or is unrated but is of comparable quality as determined by the Adviser.
See Appendix A for an explanation of Municipal Obligations and Appendix B for an explanation of ratings of Municipal Obligations.
Under normal circumstances, the Fund invests at least 65% of its assets in Municipal Obligations the interest on which is exempt from both federal and Connecticut personal income taxes (these securities are referred to as "Connecticut Municipal Obligations"). The Fund is a "double tax-exempt money market fund." Connecticut Municipal Obligations include Municipal Obligations issued by or on behalf of the State of Connecticut, its political subdivisions and public entities created under Connecticut law, and obligations of Puerto Rico and other U.S. territories and their political subdivisions. To the extent that acceptable Connecticut Municipal Obligations are not available to the Fund, the Fund may purchase Municipal Obligations issued by issuers in other states. The interest on these securities will be subject to Connecticut personal income taxes.
Although the Fund attempts to invest all of its assets in Municipal Obligations, the Fund may invest up to 20% of its assets in taxable securities (such as U.S. Government obligations or certificates of deposit of domestic banks). Any taxable securities in which the Fund invests are of comparable quality to the Municipal Obligations in which the Fund invests.
In determining the tax status of interest on Municipal Obligations, the Adviser relies on opinions of bond counsel who may be counsel to the issuer.
$1.00 NET ASSET VALUE. The Fund employs specific investment policies and procedures designed to maintain a constant net asset value of $1.00 per share. There can be no assurance, however, that a constant net asset value will be maintained on a continuing basis. See "Net Income and Distributions."
90-DAY AVERAGE MATURITY. All of the Fund's investments mature in 397 days or less from the date of purchase, have a variable rate of interest adjusted no less frequently than every 397 days, or are purchased pursuant to a repurchase agreement which provides for repurchase by the seller within 397 days from the date of purchase. The average maturity of the Fund's investments (on a dollar-weighted basis) is 90 days or less. All of the Fund's investments are "eligible securities" within the meaning of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), and are determined by the Adviser to present minimal credit risks. Investment in high quality, short-term instruments may, in many circumstances, result in a lower yield than would be available from investment in instruments with a lower quality or a longer term.
PERMITTED INVESTMENTS. Uninvested cash reserves may be held temporarily for the Fund pending investment. The Fund may borrow from banks up to 15% of its total assets for temporary or emergency purposes. For more information regarding permitted investments and investment practices, see Appendix A. The Fund will not necessarily invest or engage in each of the investments and investment practices in Appendix A but reserves the right to do so.
INVESTMENT IN ANOTHER INVESTMENT COMPANY. The Fund may, in the future, seek its investment objectives by investing all of its investable assets in an open-end management investment company having the same investment objectives and policies and substantially the same investment restrictions as those of the Fund. This investment would be made only if the Fund's Trustees believe that the aggregate per share expenses of the Fund and such other investment company would be less than or approximately equal to the expenses which the Fund would incur if the assets of the Fund were to continue to be invested directly in portfolio securities.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains a list of specific investment restrictions which govern the Fund's investment policies. Certain of these specific restrictions may not be changed without shareholder approval. Except as otherwise indicated, the Fund's investment restrictions and policies may be changed without shareholder approval. If a percentage or rating restriction (other than a restriction as to borrowing) is adhered to at the time an investment is made, a later change in percentage or rating resulting from changes in the Fund's securities will not be a violation of policy.
BROKERAGE TRANSACTIONS. The primary consideration in placing the Fund's security transactions with broker-dealers for execution is to obtain and maintain the availability of execution at the most favorable prices and in the most effective manner possible.
The risks of investing in the Fund vary depending upon the nature of the securities held, and the investment practices employed, on its behalf. Certain of these risks are described below.
NON-DIVERSIFIED STATUS. The Fund is a non-diversified mutual fund. This means that it is not subject to any statutory restrictions under the 1940 Act limiting the investment of its assets in one or relatively few issuers (although certain diversification requirements are imposed by the Internal Revenue Code). Since the Fund may invest a relatively high percentage of its assets in the obligations of a limited number of issuers, the value of shares of the Fund may be more susceptible to any single economic, political or regulatory occurrence than the value of shares of a diversified mutual fund would be. The Fund also may invest 25% or more of its assets in securities the issuers of which are located in the same state or the interest on which is paid from revenues of similar type projects or that are otherwise related in such a way that a single economic, business or political development or change affecting one of the securities would also affect other securities. Investors should consider the greater risk inherent in these policies when compared with a more diversified mutual fund.
"CONCENTRATION" IN PARTICIPATION INTERESTS. The Fund may invest more than 25% of its assets in Participation Interests in Municipal Obligations which are secured by bank letters of credit or guarantees. Banks are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of this industry is largely dependent upon the availability and cost of capital funds for the purpose of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of this industry and exposure to credit losses arising from possible financial difficulties of borrowers might affect a bank's ability to meet its obligations under a letter of credit or guarantee. For additional information concerning variable rate instruments and Participation Interests, see Appendix A.
INVESTMENT PRACTICES. Certain of the investment practices employed for the Fund may entail certain risks. See Appendix A.
RISKS AFFECTING INVESTMENTS IN CONNECTICUT MUNICIPAL OBLIGATIONS. The Fund intends to invest a high proportion of its assets in Connecticut Municipal Obligations. Payment of interest and principal of these Municipal Obligations is dependent on the continuing ability of issuers in Connecticut and obligors of state, municipal and public authority debt obligations to meet their obligations. Investors in the Fund should consider the greater risks inherent in the Fund's concentration in these obligations when compared with the safety that comes with a less geographically concentrated investment portfolio. The Adviser believes that by maintaining the Fund's investment portfolio in liquid, short-term high quality Connecticut Municipal Obligations, including Participation Interests and other variable rate instruments that have high quality credit support from banks, insurance companies or other financial institutions, the Fund is somewhat insulated from the credit risks that may exist for long-term Connecticut Municipal Obligations.
Investors should be aware of special economic factors affecting Connecticut before investing in the Fund. While these factors are summarized below, a more detailed description is set forth in the Statement of Additional Information and the Appendix thereto (see "Investment Objectives, Policies and Restrictions -- Risk Factors Affecting Investment in Connecticut Municipal Obligations" in the Statement of Additional Information). The information below and in the Statement of Additional Information is a summary of certain information contained in official statements of issuers of Connecticut Municipal Obligations and does not purport to be complete. The Fund is not responsible for the accuracy or timeliness of this information.
Despite serious economic problems facing the State, Connecticut has essentially maintained its credit standing. General Fund surpluses in the State's 1986 and 1987 fiscal years were followed by operating deficits in its 1988, 1989, 1990 and 1991 fiscal years. As a result of the recurring budgetary problems, in 1990 S&P and Moody's downgraded the State's general obligation bonds. In 1991, S&P further downgraded the State's general obligation bonds. Effective in 1991, the State legislature enacted a comprehensive personal income tax and reduced some state sales taxes. As a result of these and other budgetary actions, the General Fund had surpluses for the State's 1992, 1993, 1994 and 1995 fiscal years. The State has adopted a balanced budget for the 1996 fiscal year; however, budgetary pressures persist. Many of the Fund's Municipal Obligations are likely to be obligations of Connecticut governmental issuers which rely in whole or in part, directly or indirectly, on real property taxes as a source of revenue.
Investors also should compare the yield available on a portfolio of single state issues with the yield of a more diversified portfolio including other state issues before making an investment decision. For a comparison of yields on Municipal Obligations and taxable securities, see Appendix C.
Net asset value per share of the Fund is determined each day the New York Stock Exchange is open for trading (a "Business Day"). This determination is made once each day as of 12:00 noon, Eastern time, by adding the market value of all of the Fund's securities and other assets, then subtracting the liabilities charged to the Fund, and then dividing the result by the number of the Fund's outstanding shares. The Fund attempts to stabilize the net asset value of its shares at $1.00 by valuing portfolio securities using the amortized cost method; however, there can be no assurance that the Fund's net asset value will always remain at $1.00 per share. The net asset value per share is effective for orders received and accepted by the Fund's Distributor.
The amortized cost method involves valuing a security at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated value of a security is higher or lower than the price the Fund would receive if the security were sold.
Shares of the Fund are offered continuously and may be purchased on any Business Day without a sales load at the shares' net asset value next determined after an order is transmitted to and accepted by the Distributor. Shares may be purchased either through a securities broker which has a sales agreement with the Distributor or through a bank or other financial institution which has an agency agreement with the Distributor. Shares of the Fund are being offered exclusively to customers of a Shareholder Servicing Agent (i.e., a financial institution, such as a federal or state-chartered bank, trust company, savings and loan association or savings bank, or a securities broker, that has entered into a shareholder servicing agreement concerning the Fund). The Fund and the Distributor reserve the right to reject any purchase order and to suspend the offering of Fund shares for a period of time.
While there is no sales load imposed on shares of the Fund, the Distributor receives fees from the Fund pursuant to a Distribution Plan. See "Management -- Distribution Arrangements."
Each shareholder's account is established and maintained by his or her Shareholder Servicing Agent, which will be the shareholder of record of the Fund. Each Shareholder Servicing Agent may offer services to its customers such as pre-authorized or automatic purchase and redemption programs and "sweep" checking programs, and may establish its own terms, conditions and charges with respect to services it offers to its customers. Charges for these services may include fixed annual fees and account maintenance fees. The effect of any of these fees will be to reduce the net return on the investment of customers of that Shareholder Servicing Agent.
Shareholder Servicing Agents will not transmit purchase orders to the Distributor until they have received the purchase price in federal or other immediately available funds. If Fund shares are purchased by check, there will be a delay (usually not longer than two business days) in transmitting the purchase order until the check is converted into federal funds.
Shares of the Fund may be exchanged for shares of the other Landmark Funds that are made available by a shareholder's Shareholder Servicing Agent, or may be acquired through an exchange of shares of those funds. No initial sales charge is imposed on shares being acquired through an exchange unless the shares being acquired are subject to a sales charge that is greater than the current sales charge of the Fund (in which case an initial sales charge will be imposed at a rate equal to the difference). Contingent deferred sales charges may apply to redemptions of some shares of other Landmark Funds disposed of or acquired through an exchange.
Shareholders must place exchange orders through their Shareholder Servicing Agents, and may do so by telephone if their account applications so permit. For more information on telephone transactions see "Redemptions." All exchanges will be effected based on the relative net asset values per share next determined after the exchange order is received by the Distributor. See "Valuation of Shares." Shares of the Fund may be exchanged only after payment in federal funds for the shares has been made.
This exchange privilege may be modified or terminated at any time, upon at least 60 days' notice when such notice is required by SEC rules, and is available only in those jurisdictions where such exchanges legally may be made. See the Statement of Additional Information for further details. Before making any exchange, shareholders should contact their Shareholder Servicing Agents to obtain more information and prospectuses of the Landmark Funds to be acquired through the exchange.
Fund shares may be redeemed at their net asset value (normally $1.00 per share) next determined after a redemption request in proper form is received by a shareholder's Shareholder Servicing Agent. Shareholders may redeem shares of the Fund only by authorizing their Shareholder Servicing Agents to redeem such shares on their behalf through the Distributor.
REDEMPTIONS BY MAIL. Shareholders may redeem Fund shares by sending written instructions in proper form (as determined by a shareholder's Shareholder Servicing Agent) to their Shareholder Servicing Agents. Shareholders are responsible for ensuring that a request for redemption is in proper form.
REDEMPTIONS BY TELEPHONE. Shareholders may redeem or exchange Fund shares by telephone, if their account applications so permit, by calling their Shareholder Servicing Agents. During periods of drastic economic or market changes or severe weather or other emergencies, shareholders may experience difficulties implementing a telephone exchange or redemption. In such an event, another method of instruction, such as a written request sent via an overnight delivery service, should be considered. The Fund and each Shareholder Servicing Agent will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures may include recording of the telephone instructions and verification of a caller's identity by asking for his or her name, address, telephone number, Social Security number, and account number. If these or other reasonable procedures are not followed, the Fund or the Shareholder Servicing Agent may be liable for any losses to a shareholder due to unauthorized or fraudulent instructions. Otherwise, the shareholder will bear all risk of loss relating to a redemption or exchange by telephone.
PAYMENT OF REDEMPTIONS. The proceeds of a redemption are paid in federal funds normally on the Business Day the redemption is effected, but in any event within seven days. If a shareholder requests redemption of shares which were purchased recently, the Fund may delay payment until it is assured that good payment has been received. In the case of purchases by check, this can take up to ten days. See "Determination of Net Asset Value" in the Statement of Additional Information regarding the Fund's right to pay the redemption price in kind with securities (instead of cash).
Questions about redemption requirements should be referred to the shareholder's Shareholder Servicing Agent. The right of any shareholder to receive payment with respect to any redemption may be suspended or the payment of the redemption price postponed during any period in which the New York Stock Exchange is closed (other than weekends or holidays) or trading on the Exchange is restricted or if an emergency exists.
The Fund's net income is determined each Business Day (and on such other days as is necessary in order to comply with the 1940 Act). This determination is made once during each such day as of 12:00 noon, Eastern time. All the Fund's net income is declared as a dividend to shareholders of record at the time of such determination. Shares begin accruing dividends on the day they are purchased, and accrue dividends up to and including the day prior to redemption. Dividends are distributed monthly on or prior to the last business day of each month. Unless a shareholder elects to receive dividends in cash (subject to the policies of the shareholder's Shareholder Servicing Agent), dividends are distributed in the form of full and fractional additional Fund shares at the rate of one share of the Fund for each one dollar of dividend income.
Since the Fund's net income is declared as a dividend each time the Fund's net income is determined, the net asset value per share of the Fund is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder's investment in the Fund, representing the reinvestment of dividend income, is reflected by an increase in the number of shares of the Fund in the shareholder's account.
Because of the short-term maturities of the portfolio investments of the Fund, the Fund does not expect to realize long-term capital gains or losses. Any net realized short-term capital gains will be declared and distributed to the Fund's shareholders annually after the close of the Fund's fiscal year. Distributions of short-term capital gains are taxable to shareholders as described in "Tax Matters". Any realized short-term capital losses will be offset against short-term capital gains or, to the extent possible, utilized as capital loss carryover. The Fund may distribute short-term capital gains more frequently than annually, reduce shares to reflect capital losses or make distributions of capital if necessary in order to maintain the Fund's net asset value of $1.00 per share.
It is expected that the Fund will have a positive net income at the time of each determination thereof. If for any reason the Fund's net income is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, the Fund would first offset the negative amount with respect to each shareholder account from the dividends declared during the month with respect to those accounts. If and to the extent that negative net income exceeds declared dividends at the end of the month, the Fund would reduce the number of outstanding Fund shares by treating each shareholder as having contributed to the capital of the Fund that number of full and fractional shares in his or her account which represents his or her share of the amount of such excess. Each shareholder would be deemed to have agreed to such contribution in these circumstances by his or her investment in the Fund.
TRUSTEES AND OFFICERS: The Fund is supervised by its own Board of Trustees. A majority of the Trustees are not affiliated with the Adviser. More information on the Trustees and officers of the Fund appears under "Management" in the Statement of Additional Information.
INVESTMENT ADVISER: CITIBANK. The Fund draws on the strength and experience of Citibank. Citibank offers a wide range of banking and investment services to customers across the United States and throughout the world, and has been managing money since 1822. Its portfolio managers are responsible for investing in money market, equity and fixed income securities. Citibank and its affiliates manage more than $73 billion in assets worldwide, including the Landmark Funds and Portfolios. Citibank is a wholly-owned subsidiary of Citicorp.
Citibank manages the assets of the Fund pursuant to an investment advisory agreement (the "Advisory Agreement"). Subject to policies set by the Fund's Trustees, Citibank makes investment decisions for the Fund.
ADVISORY FEES. For its services under the Advisory Agreement, the Adviser receives investment advisory fees, which are accrued daily and paid monthly, of 0.20% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. The Adviser has voluntarily agreed to waive all or a portion of its investment advisory fee.
For the fiscal year ended August 31, 1995, the investment advisory fees payable to Citibank from the Fund were $74,063, all of which was voluntarily waived.
BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan and other relationships with the issuers of securities purchased on behalf of the Fund, including outstanding loans to such issuers which may be repaid in whole or in part with the proceeds of securities so purchased. Citibank has informed the Fund that, in making its investment decisions, it does not obtain or use material inside information in the possession of any division or department of Citibank or in the possession of any affiliate of Citibank.
BANK REGULATORY MATTERS. The Glass-Steagall Act prohibits certain financial institutions, such as Citibank, from underwriting securities of open-end investment companies, such as the Fund. Citibank believes that its services under the Advisory Agreement and the activities performed by it or its affiliates as Shareholder Servicing Agents and sub-administrator are not underwriting and are consistent with the Glass-Steagall Act and other relevant federal and state laws. However, there is no controlling precedent regarding the performance of the combination of investment advisory, shareholder servicing and sub-administrative activities by banks. State laws on this issue may differ from applicable federal law and banks and financial institutions may be required to register as dealers pursuant to state securities laws. Changes in either federal or state statutes or regulations, or in their interpretations, could prevent Citibank or its affiliates from continuing to perform these services for the Fund. If Citibank or its affiliates were to be prevented from acting as the Adviser, sub-administrator or a Shareholder Servicing Agent, the Fund would seek alternative means for obtaining these services. The Fund does not expect that shareholders would suffer any adverse financial consequences as a result of any such occurrence.
ADMINISTRATIVE SERVICES PLAN: The Fund has an administrative services plan (the "Administrative Services Plan") which provides that the Fund may obtain the services of an administrator, a transfer agent, a custodian, a fund accountant and one or more Shareholder Servicing Agents, and may enter into agreements providing for the payment of fees for such services. Under the Administrative Services Plan, the total of the fees paid to the Fund's Administrator and Shareholder Servicing Agents and the distribution fee paid to the Distributor (other than any fee concerning electronic or other media advertising) may not exceed 0.60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. Within this overall limitation, individual fees may vary. See "Administrator," "Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund Accountant."
ADMINISTRATOR: LFBDS provides certain administrative services to the Fund under an administrative services agreement. These administrative services include providing general office facilities, supervising the overall administration of the Fund, and providing persons satisfactory to the Board of Trustees to serve as Trustees and officers of the Fund. These Trustees and officers may be directors, officers or employees of LFBDS or its affiliates.
For these services, the Administrator receives fees accrued daily and paid monthly of 0.25% of the average daily net assets of the Fund on an annualized basis for the Fund's then-current fiscal year. However, the Administrator has voluntarily agreed to waive all or a portion of the fees payable to it.
LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc. "Landmark" is a service mark of LFBDS.
SUB-ADMINISTRATOR: Pursuant to a sub-administrative services agreement, Citibank performs such sub-administrative duties for the Fund as from time to time are agreed upon by Citibank and LFBDS. Citibank's compensation as sub- administrator is paid by LFBDS.
SHAREHOLDER SERVICING AGENTS: The Fund has entered into separate shareholder servicing agreements with each Shareholder Servicing Agent pursuant to which that Shareholder Servicing Agent provides shareholder services, including answering customer inquiries, assisting in processing purchase, exchange and redemption transactions and furnishing Fund communications to shareholders. For these services, each Shareholder Servicing Agent receives a fee from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund represented by shares owned by investors for whom such Shareholder Servicing Agent maintains a servicing relationship.
Some Shareholder Servicing Agents may impose certain conditions on their customers in addition to or different from those imposed by the Fund, such as requiring a minimum initial investment or charging their customers a direct fee for their services. Each Shareholder Servicing Agent has agreed to transmit to its customers who are shareholders of the Fund appropriate prior written disclosure of any fees that it may charge them directly and to provide written notice at least 30 days prior to imposition of any transaction fees.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust Company acts as transfer agent, dividend disbursing agent and custodian for the Fund. State Street also provides fund accounting services to the Fund and calculates the daily net asset value of the Fund.
DISTRIBUTION ARRANGEMENTS: LFBDS is the Distributor of the Fund's shares and also serves as distributor for each of the other Landmark Funds and as a Shareholder Servicing Agent for certain investors. As Distributor, LFBDS bears the cost of compensating personnel involved in the sale of shares of the Fund and bears all costs of travel, office expenses (including rent and overhead) and equipment. In those states where LFBDS is not a registered broker-dealer, shares of the Fund are sold through Signature Broker-Dealer Services, Inc., as dealer.
Under a plan of distribution for the Fund (the "Plan"), the Fund pays the Distributor a fee at an annual rate not to exceed 0.10% of the average daily net assets of the Fund. The Plan also permits the Fund to pay the Distributor an additional fee (not to exceed 0.10% of the average daily net assets of the Fund) in anticipation of or as reimbursement for print or electronic media advertising expenses incurred in connection with the sale of Fund shares. However, the Distributor has agreed to waive a portion of these fees. The Plan was adopted in accordance with Rule 12b-1 under the 1940 Act.
The Fund and the Distributor provide to the Trustees quarterly a written report of amounts expended pursuant to the Plan and the purposes for which the expenditures were made.
From time to time LFBDS may make payments for distribution and/or shareholder servicing activities out of its past profits or any other sources available to it.
FEDERAL INCOME TAXES: This discussion of taxes is for general information only. Investors should consult their own tax advisers about their particular situations.
The Fund intends to meet requirements of the Internal Revenue Code applicable to regulated investment companies so that it will not be liable for any federal income or excise taxes.
The Fund expects that most of its net income will be attributable to interest on Municipal Obligations and as a result, most of the Fund's dividends to shareholders will be excludable from shareholders' gross income. However, the Fund may invest from time to time in taxable securities, and certain Fund dividends may be subject to the federal alternative minimum tax. It is also possible, but not intended, that the Fund may realize short-term or long-term capital gains or losses. Generally, distributions from the Fund's short-term capital gains will be taxed as ordinary income, and distributions of long-term net capital gains will be taxed as such regardless of how long the shares of the Fund have been held. Dividends and distributions are treated in the same manner for federal tax purposes whether they are paid in cash or as additional shares.
Fund dividends of tax-exempt income are taken into account in determining the amount of a shareholder's social security and railroad retirement benefits that may be subject to federal income tax. No deduction may be claimed for interest on indebtedness incurred or carried for the purpose of purchasing or holding Fund shares. Investors who are, or who are related to, "substantial users" of facilities financed by private activity bonds should consult their tax advisers before buying Fund shares.
Early each year, the Fund will notify its shareholders of the amount and federal tax status of distributions paid to shareholders for the preceding year.
The account application asks each new shareholder to certify that the shareholder's Social Security or taxpayer identification number is correct and that the shareholder is not subject to 31% backup withholding for failing to report income to the IRS. The Fund may be required to withhold (and pay over to the IRS for the shareholder's credit) 31% of certain distributions paid to shareholders who fail to provide this information or otherwise violate IRS regulations.
STATE AND LOCAL TAXES: Except as noted below, Fund dividends which are excludable from shareholders' gross income for federal income tax purposes may not necessarily be exempt from the income or other tax laws of any state or local taxing authority. Investors should consult their own tax advisers in this regard.
Under existing law, the Fund expects that shareholders will not be subject to the Connecticut personal income tax on exempt-interest dividends received from the Fund to the extent that such distributions are derived from interest on Connecticut Municipal Obligations. Capital-gain dividends derived from Connecticut Municipal Obligations other than obligations of U.S. territories or possessions and their political subdivisions are also free from this tax. Other distributions from the Fund, including exempt-interest dividends attributable to obligations of issuers in other states, other long-term capital gains and all short-term capital gains, will not be exempt from the Connecticut personal income tax. Moreover, distributions by the Fund derived from interest income, other than interest on Connecticut Municipal Obligations, that is treated as a preference item for federal income tax purposes may be subject to the net Connecticut minimum tax in the case of any shareholder subject to the Connecticut personal income tax and required to pay the federal alternative minimum tax.
Fund performance may be quoted in advertising, shareholder reports and other communications in terms of yield, effective yield, tax equivalent yield, total rate of return or tax equivalent total rate of return. All performance information is historical and is not intended to indicate future performance. Yields and total rates of return fluctuate in response to market conditions and other factors.
The Fund may provide its period and average annualized "total rates of return" and "tax equivalent total rates of return." The "total rate of return" refers to the change in the value of an investment in the Fund over a stated period and is compounded to include the value of any shares purchased with any dividends or capital gains declared during such period. Period total rates of return may be "annualized." An "annualized" total rate of return assumes that the period total rate of return is generated over a one-year period. The "tax equivalent total rate of return" refers to the total rate of return that a fully taxable money market fund would have to generate in order to produce an after-tax total rate of return equivalent to that of the Fund. The use of a tax equivalent total rate of return allows investors to compare the total rates of return of the Fund, the dividends from which are exempt from federal personal income taxes, with the total rates of return of funds the dividends from which are not so tax exempt.
The Fund may provide annualized "yield," "effective yield" and "tax equivalent yield" quotations. The "yield" of the Fund refers to the income generated by an investment in the Fund over a seven-day period (which period is stated in any such advertisement or communication). This income is then annualized; that is, the amount of income generated by the investment over that period is assumed to be generated each week over a 365-day period and is shown as a percentage of the investment. The "effective yield" is calculated similarly, but when annualized the income earned by the investment during that seven-day period is assumed to be reinvested. The effective yield is slightly higher than the yield because of the compounding effect of this assumed reinvestment. The "tax equivalent yield" refers to the yield that a fully taxable money market fund would have to generate in order to produce an after- tax yield equivalent to that of the Fund. The use of a tax equivalent yield allows investors to compare the yield of the Fund, the dividends from which are exempt from federal personal income tax, with yields of funds the dividends from which are not so tax exempt. The Fund may also provide yield, effective yield and tax equivalent yield quotations for longer periods.
Of course, any fees charged by a shareholder's Shareholder Servicing Agent will reduce that shareholder's net return on his or her investment. See the Statement of Additional Information for more information concerning the calculation of yield and total rate of return quotations for the Fund.
ORGANIZATION: Landmark Connecticut Tax Free Reserves is a non-diversified series of Landmark Multi-State Tax Free Funds (the "Trust"). The Trust is a Massachusetts business trust which was organized on August 30, 1985; it was known as Landmark New York Tax Free Reserves until its name was changed effective December 18, 1991. The Fund was established as a separate series of the Trust on September 13, 1993. The Trust is a non-diversified, open-end management investment company registered under the 1940 Act. There are presently two active series of the Trust in addition to the Fund.
Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for the trust's obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the trust itself was unable to meet its obligations.
VOTING AND OTHER RIGHTS: The Trust may issue an unlimited number of shares, may create new series of shares and may divide shares in each series into classes. Each share of the Trust gives the shareholder one vote in Trustee elections and other matters submitted to shareholders for vote. All shares of each series of the Trust have equal voting rights except that, in matters affecting only a particular series, only shares of that particular series are entitled to vote.
At any meeting of shareholders of the Fund, a Shareholder Servicing Agent may vote any shares of which it is the holder of record and for which it does not receive voting instructions proportionately in accordance with the instructions it receives for all other shares of which that Shareholder Servicing Agent is the holder of record.
The Trust's activities are supervised by its Board of Trustees. As a Massachusetts business trust, the Trust is not required to hold annual shareholder meetings. Shareholder approval will usually be sought only for changes in the Fund's fundamental investment restrictions and for the election of Trustees under certain circumstances. Trustees may be removed by shareholders under certain circumstances. Each share of the Fund is entitled to participate equally in dividends and other distributions and the proceeds of any liquidation of the Fund.
CERTIFICATES: The Fund's Transfer Agent maintains a share register for shareholders of record, i.e., Shareholder Servicing Agents. Share certificates are not issued.
EXPENSES: For the fiscal year ended August 31, 1995, total operating expenses of the Fund, after giving effect to fee waivers and reimbursements, were 0.22% of the Fund's average daily net assets for that fiscal year. All fee waivers and reimbursements are voluntary and may be reduced or terminated at any time.
The Statement of Additional Information dated the date hereof contains more detailed information about the Fund, including information related to (i) investment policies and restrictions, (ii) the Trustees, officers, Adviser and Administrator, (iii) securities transactions, (iv) the Fund's shares, including rights and liabilities of shareholders, (v) the methods used to calculate performance information, (vi) programs for the purchase of shares, and (vii) the determination of net asset value.
No person has been authorized to give any information or make any representations not contained in this Prospectus in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Fund or its distributor. This Prospectus does not constitute an offering by the Fund or its distributor in any jurisdiction in which such offering may not lawfully be made.
MUNICIPAL BONDS. Municipal bonds are debt obligations of states, cities, municipalities and municipal agencies and authorities which generally have a maturity at the time of issue of one year or more and which are issued to raise funds for various public purposes, such as construction of a wide range of public facilities, refunding outstanding obligations or obtaining funds for institutions and facilities. The two principal classifications of municipal bonds are "general obligation" and "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. The principal of and interest on revenue bonds are payable from the income of specific projects or authorities and generally are not supported by the issuer's general power to levy taxes. In some cases, revenues derived from specific taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of private activity bonds ("IDBs") are issued by or on behalf of public authorities to provide funding for various privately operated industrial facilities, such as warehouse, office, plant and store facilities and environmental and pollution control facilities. IDBs are, in most cases, revenue bonds. The payment of the principal and interest on IDBs usually depends solely on the ability of the user of the facilities financed by the bonds or other guarantor to meet its financial obligations and, in certain instances, the pledge of real and personal property as security for payment. Many IDBs may not be readily marketable; however, the IDBs or the participation certificates in IDBs purchased by the Fund will have liquidity because they generally will be supported by demand features to "high quality" banks, insurance companies or other financial institutions.
MUNICIPAL NOTES. There are four major varieties of state and municipal notes: Tax and Revenue Anticipation Notes ("TRANs"); Tax Anticipation Notes ("TANs"); Revenue Anticipation Notes ("RANs"); and Bond Anticipation Notes ("BANs"). TRANs, TANs and RANs are issued by states, municipalities and other tax-exempt issuers to finance short-term cash needs or, occasionally, to finance construction. Many TRANs, TANs and RANs are general obligations of the issuing entity payable from taxes or designated revenues, respectively, expected to be received within the related fiscal period. BANs are issued with the expectation that their principal and interest will be paid out of proceeds from renewal notes or bonds to be issued prior to the maturity of the BANs, BANs are issued by both general obligation and revenue bond issuers usually to finance such items as land acquisition, facility acquisition and/or construction and capital improvement projects.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS. Variable rate instruments provide for a periodic adjustment in the interest rate paid on the instrument and usually permit the holder to receive payment of principal and accrued interest upon a specified number of day's notice. Variable rate instruments in which the Fund may invest include participation interests in Municipal Obligations owned by a bank, insurance company or other financial institution or affiliated organization ("Participation Interests"). A variable rate instrument or a Participation Interest may be backed by an irrevocable letter of credit or guarantee of, or a right to put to, a bank, or an insurance policy of an insurance company. See "Stand-by Commitments." Purchase of a Participation Interest may involve the risk that the Fund will not be deemed to be the owner of the underlying Municipal Obligation for purposes of the ability to claim tax exemption of interest paid on that Municipal Obligation. If interest rates rise or fall, the rates payable on variable rate instruments will generally be readjusted. As a result variable rate instruments do not offer the same opportunity for capital appreciation or loss as fixed rate instruments.
STAND-BY COMMITMENTS. When the Fund purchases Municipal Obligations it may also acquire stand-by commitments from banks with respect to such Municipal Obligations. The Fund also reserves the right to acquire, and may acquire in the future, subject to receipt of an exemptive order pursuant to the 1940 Act, stand-by commitments from broker-dealers. There can be no assurance that such an order will be granted. Under a stand-by commitment, a bank or broker-dealer agrees to purchase at the Fund's option a specified Municipal Obligation at a specified price. A stand-by commitment is the equivalent of a "put" option with respect to a particular Municipal Obligation. The Fund intends to acquire stand-by commitments solely to facilitate liquidity. Stand-by commitments are subject to certain risks, which include the ability of the issuer of the commitment to pay for the Municipal Obligations at the time the commitment is exercised, the fact that the commitment is not marketable, and that the maturity of the underlying security will generally be different from that of the commitment.
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable securities, the Fund may purchase securities on a "when-issued" or on a "forward delivery" basis, which means that the securities would be delivered to the Fund at a future date beyond customary settlement time. Under normal circumstances, the Fund takes delivery of the securities. In general, the purchaser does not pay for the securities until received and does not start earning interest until the contractual settlement date. While awaiting delivery of the securities, the Fund establishes a segregated account consisting of cash, cash equivalents or high quality debt securities equal to the amount of the Fund's commitments to purchase "when-issued" securities. An increase in the percentage of the Fund's assets committed to the purchase of securities on a "when-issued" basis may increase the volatility of its net asset value.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. Repurchase agreements are transactions in which an institution sells the Fund a security at one price, subject to the Fund's obligation to resell and the selling institution's obligation to repurchase that security at a higher price normally within a seven day period. There may be delays and risks of loss if the seller is unable to meet its obligation to repurchase. Repurchase agreements may involve Municipal Obligations or other securities.
RESTRICTED SECURITIES. The Fund may purchase restricted securities that are not registered for sale to the general public. Provided that a dealer or institutional trading market in such securities exists, these restricted securities are not treated as illiquid securities for purposes of the Fund's investment limitations. Institutional trading in restricted securities is relatively new, and the liquidity of the Fund's investments could be impaired if trading does not develop or declines.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. The Fund may invest up to 10% of its net assets in securities for which there is no readily available market. These illiquid securities may include privately placed restricted securities for which no institutional market exists. The absence of a trading market can make it difficult to ascertain a market value for illiquid investments. Disposing of illiquid investments may involve time-consuming negotiation and legal expenses, and it may be difficult or impossible for the Fund to sell them promptly at an acceptable price.
The ratings of Moody's Investors Service, Inc., Standard & Poor's Ratings Group and Fitch Investors Service, Inc. represent their opinions as to the quality of various debt obligations. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, Municipal Obligations with the same maturity, coupon and rating may have different yields while Municipal Obligations of the same maturity and coupon with different ratings may have the same yield.
*As described by the rating agencies. Ratings are generally given to securities at the time of issuance. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST LONG-TERM DEBT RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt edged". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, or fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
Note: Those bonds in the Aa group which Moody's believes possess the strongest investment attributes are designated by the symbol Aa 1.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES:
Moody's ratings for state and municipal short-term obligations are designated Moody's Investment Grade ("MIG"). Such ratings recognize the differences between short-term credit risk and long-term risk. A short-term rating ("VMIG") may also be assigned to variable rate demand obligations. Factors affecting the liquidity of the borrower and short-term cyclical elements are critical in short-term ratings, while other factors of major importance in bond risk, long-term secular trends, for example, may be less important over the short run. Symbols used are as follows:
MIG 1/VMIG 1 -- Notes bearing this designation are of the best quality, with strong protection from established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 -- Notes bearing this designation are of high quality, with margins of protection ample although not so large as in the preceding group.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually senior short-term obligations not having an original maturity in excess of one year.
Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of senior short-term debt obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: (1) leading market positions in well established industries; (2) high rates of return on funds employed; (3) conservative capitalization structures with moderate reliance on debt and ample asset protection; (4) broad margins in earnings coverage of fixed financial charges and high internal cash generation; and (5) well established access to a range of financial markets and assured sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST LONG-TERM DEBT RATINGS:
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree.
Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus or minus sign to show relative standing within the AA rating category.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES:
A Standard & Poor's note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other maturities the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics are given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST COMMERCIAL PAPER RATINGS:
A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days.
A -- Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 -- This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation.
A-2 -- Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated A-1.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S DUAL RATINGS:
Standard & Poor's assigns "dual" ratings to all debt issues that have as part of their structure a put option or demand feature.
The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the put option or demand feature. The long-term debt rating symbols are used for bonds to denote the long-term maturity and the commercial paper rating symbols are used to denote the put option (for example, "AAA/A-1+"). For demand debt, the note rating symbols are used with the commercial paper rating symbols (for example, "SP-1+/A-1+").
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S TWO HIGHEST BOND RATINGS:
The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality.
AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+".
Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus or minus sign to show relative standing within the AA rating category.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S THREE HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES:
The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+".
F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-2+" and "F-1" ratings.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER RATINGS:
The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+".
F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-1+" and "F-1" ratings.
(RATES FOR 1995+ UNDER FEDERAL AND CONNECTICUT PERSONAL INCOME TAX LAWS)
The tables below show the approximate taxable bond yields which are equivalent to tax-exempt bond yields under 1995 federal and Connecticut personal income tax laws. SUCH YIELDS MAY DIFFER UNDER THE LAWS APPLICABLE TO SUBSEQUENT YEARS IF THE EFFECT OF ANY SUCH LAW IS TO CHANGE ANY TAX BRACKET OR THE AMOUNT OF TAXABLE INCOME WHICH IS APPLICABLE TO A TAX BRACKET. Separate calculations, showing the applicable taxable income brackets, are provided for investors who file joint returns and for investors who file individual returns. While it is expected that a substantial portion of the dividends paid to shareholders of the Fund will be exempt from federal and Connecticut personal income taxes, portions of such dividends from time to time may be subject to federal income taxes and/or Connecticut personal income taxes.
FOR CITIBANK NEW YORK RETAIL BANKING AND BUSINESS AND PROFESSIONAL CUSTOMERS: Citibank, N.A. 450 West 33rd Street, New York, NY 10001 (212) 564-3456 or (800) 846-5300
P.O. Box 5130, New York, NY 10126-5130 Call Your Citigold Executive, or in NY or CT (800) 285-1701, or for all other states (800) 285-1707
FOR CITIBANK PRIVATE BANKING CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 Call Your Citibank Private Banking Account Officer, Registered Representative or (212) 559-5959
FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043
FOR CITIBANK NORTH AMERICAN INVESTOR SERVICES CLIENTS: Citibank, N.A. 111 Wall Street, New York, NY 10043 Call Your Account Manager or (212) 657-9100
FOR CITICORP INVESTMENT SERVICES CUSTOMERS: One Court Square, Long Island City, NY 11120 Call Your Investment Consultant or (800) 846-5200 (212) 736-8170 in New York City
New York Tax Free Reserves
National Tax Free Income Fund New York Tax Free Income Fund
Emerging Asian Markets Equity Fund
C. Oscar Morong, Jr., Chairman William S. Woods, Jr.
*Affiliated Person of Administrator and Distributor
153 East 53rd Street, New York, NY 10043
The Landmark Funds Broker-Dealer Services, Inc. 6 St. James Avenue, Boston, MA 02116
State Street Bank and Trust Company 225 Franklin Street, Boston, MA 02110
125 Summer Street, Boston, MA 02110
150 Federal Street, Boston, MA 02110
CTTR/P/96/RB Printed on Recycled Paper [Recycle Symbol]
LANDMARK NEW YORK TAX FREE RESERVES (A member of the LandmarkSM Family of Funds)
Landmark New York Tax Free Reserves (the "Fund") is a separate series of Landmark Multi-State Tax Free Funds (the "Trust"). The address and telephone number of the Trust are 6 St. James Avenue, Boston, Massachusetts 02116, (617) 423-1679.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
Determination of Net Asset Value 15 Description of Shares, Voting Rights Certain Additional Tax Matters 27
This Statement of Additional Information sets forth information which may be of interest to investors but which is not necessarily included in the Fund's Prospectus, dated January 2, 1996, by which shares of the Fund are offered. This Statement of Additional Information should be read in conjunction with the Prospectus, a copy of which may be obtained by an investor without charge by contacting the Fund's Distributor (see back cover for address and phone number).
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
The Trust is a no-load, non-diversified, open-end management investment company which was organized as a business trust under the laws of the Commonwealth of Massachusetts on August 30, 1985. The Trust was known as "Landmark New York Tax Free Reserves" until its name was changes on December 18, 1991. Shares of the Trust are divided into three separate series, one of which, the Fund, is described in this Statement of Additional Information. References in this Statement of Additional Information to the Prospectus are to the Prospectus, dated January 2, 1996, of the Fund by which shares of the Fund are offered.
The Fund is a type of mutual fund commonly referred to as a "triple tax-exempt money market fund." The net asset value of each of the Fund's shares is expected to remain constant at $1.00, although there can be no assurance that this will be so on a continuing basis. (See "Determination of Net Asset Value.")
Citibank, N.A. ("Citibank" or the "Adviser") is the investment adviser to the Fund. The Adviser manages the investments of the Fund from day to day in accordance with the Fund's investment objectives and policies. The selection of investments for the Fund, and the way they are managed, depend on the conditions and trends in the economy and the financial marketplaces.
The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS" or the "Administrator"), the administrator of the Trust, supervises the overall administration of the Trust. The Board of Trustees of the Trust provides broad supervision over the affairs of the Trust. Shares of the Fund are continuously sold by LFBDS, the Fund's distributor (the "Distributor"), only to investors who are customers of a financial institution, such as a federal or state-chartered bank, trust company, savings and loan association or savings bank, or a securities broker, that has entered into a shareholder servicing agreement with the Trust (collectively, "Shareholder Servicing Agents"). Although shares of the Fund are sold without a sales load, LFBDS may receive a fee from the Fund pursuant to a Distribution Plan adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act").
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives of the Fund are to provide its shareholders with high levels of current income exempt from federal, New York State and New York City personal income taxes, preservation of capital and liquidity.
The investment objectives of the Fund may not be changed without approval by the Fund's shareholders. Of course, there can be no assurance that the Fund will achieve its investment objectives.
The Fund seeks its investment objectives by investing primarily in short-term, high quality fixed rate and variable rate obligations issued by or on behalf of the State of New York, other states, territories and possessions of the United States and their authorities, agencies, instrumentalities and political subdivisions, the interest on which is exempt from federal income taxes, including participation interests in such obligations issued by banks, insurance companies or other financial institutions. (These securities, whether or not the interest thereon is subject to the federal alternative minimum tax, are referred to herein as "Municipal Obligations").
Dividends paid by the Fund which are attributable to interest income on tax-exempt obligations of the State of New York and its political subdivisions, and of Puerto Rico, other U.S. territories and their political subdivisions ("New York Municipal Obligations"), will be exempt from federal, New York State and New York City personal income taxes. The Fund may purchase Municipal Obligations issued by other states, their agencies and instrumentalities, the interest income on which will be exempt from federal income tax but will be subject to New York State and New York City personal income taxes. In determining the tax status of interest on Municipal Obligations and New York Municipal Obligations, the Adviser relies on opinions of bond counsel who may be counsel to the issuer.
Under normal circumstances, the Fund invests at least 65% of its assets in New York Municipal Obligations, although the exact amount of the Fund's assets invested in such securities varies from time to time. Although the Fund attempts to invest 100% of its assets in Municipal Obligations, the Fund may invest up to 20% of its total assets in securities the interest income on which is subject to federal, state and local income tax or the federal alternative minimum tax. The Fund may invest more than 25% of its assets in participation interests issued by banks in industrial development bonds and other Municipal Obligations. In view of this possible "concentration" in bank participation interests, an investment in the Fund should be made with an understanding of the characteristics of the banking industry and the risks which such an investment may entail. (See "Variable Rate Instruments and Participation Interests" hereafter.) Uninvested cash reserves may be held temporarily for the Fund pending investment. The Fund's investments may include "when-issued" and "forward delivery" Municipal Obligations, stand-by commitments and taxable repurchase agreements.
The Trust's Board of Trustees has determined that the term "high quality" means Municipal Obligations which at the time of purchase are rated within the AAA or AA categories by Standard & Poor's Rating Group ("Standard & Poor's") or Fitch Investors Service, Inc. ("Fitch") or within the Aaa or Aa categories by Moody's Investors Service, Inc. ("Moody's") in the case of bonds; MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch in the case of notes; A-1+, A-1 or A-2 by Standard & Poor's or Prime-1, Prime-2 by Moody's or F-1+, F-1 or F-2 by Fitch, in the case of tax-exempt commercial paper; or which are unrated but are determined to be of comparable quality by or on behalf of the Trust's Board of Trustees on the basis of a credit evaluation of the obligor or of the bank issuing a participation interest, letter of credit or guarantee, or insurance policy issued in support of the Municipal Obligations or participation interests. (See "Variable Rate Instruments and Participation Interests" below.) Such instruments may produce a lower yield than would be available from less highly rated instruments. The Trust's Board of Trustees has determined that Municipal Obligations which are backed by the full faith and credit of the U.S. Government will be considered to have a rating equivalent to Moody's Aaa. (See "Ratings of Municipal Obligations" in Appendix B to the Prospectus.)
All of the Fund's investments mature or are deemed to mature within 397 days from the date of acquisition and the average maturity of the investments in the Fund's portfolio (on a dollar-weighted basis) is 90 days or less. The maturities of variable rate instruments held in the Fund's portfolio are deemed to be the longer of the period remaining until the next interest rate adjustment or the period until the Fund would be entitled to payment pursuant to demand rights, a letter of credit, guarantee or insurance policy or a right to tender or put the instrument, although the stated maturities may be in excess of 397 days. (See "Variable Rate Instruments and Participation Interests" below.)
As a non-diversified investment company, the Fund is not subject to any statutory restrictions under the 1940 Act with respect to limiting the investment of its assets in one or relatively few issuers. This concentration may present greater risks than in the case of a diversified company. However, the Fund intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In order so to qualify under current law, at the close of each quarter of the Fund's taxable year, at least 50% of the value of the Fund's total assets must be represented by cash, U.S. Government securities, investment company securities and other securities limited in respect of any one issuer (or related) to not more than 5% in value of the total assets of the Fund and not more than 10% of the outstanding voting securities of such issuer. In addition, and again under current law, at the close of each quarter of its taxable year, not more than 25% in value of the Fund's total assets may be invested in securities, other than U.S. Government securities, of one issuer (or related issuers).
For a general discussion of Municipal Obligations and an explanation of the ratings of Municipal Obligations by Moody's, Standard & Poor's and Fitch, see Appendix A and B to the Fund's Prospectus. For a comparison of yields on such Municipal Obligations and taxable securities, see the "Taxable Equivalent Yield Tables" in Appendix C to the Prospectus.
Except as stated below, the Fund's investment policies are not fundamental and may be changed by the Board of Trustees of the Trust without approval by the Fund's shareholders. As a fundamental policy, the Fund invests at least 80% of its assets, under normal circumstances, in:
(1) Municipal bonds with remaining maturities of one year or less that are rated at the date of purchase within the Aaa or Aa categories by Moody's or within the AAA or AA categories by Standard & Poor's or F-1+, F-1 or F-2 Fitch or, if not rated by any of these rating agencies, are of comparable quality as determined by the Adviser on the basis of the credit evaluation of the obligor on the bonds or of the bank issuing a participation interest or guarantee or of any insurance policy issued in support of the bonds or the participation interests.
(2) Municipal notes with remaining maturities of one year or less that are rated at the date of purchase MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by Standard & Poor's or F-1+,F-1 or F-2 by Fitch or, if not rated by any of these rating agencies, are of comparable quality as determined by the Adviser. The principal kinds of municipal notes are tax and revenue anticipation notes, tax anticipation notes, bond anticipation notes and revenue anticipation notes. Notes sold in anticipation of collection of taxes, a bond sale or receipt of other revenues are usually general obligations of the issuing municipality or agency. The Fund's investments may be concentrated in municipal obligations of New York issuers.
(3) Municipal commercial paper that is rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch or, if not rated by any of these rating agencies, is of comparable quality as determined by the Adviser. Issues of municipal commercial paper typically represent very short-term, unsecured, negotiable promissory notes. These obligations are often issued to meet seasonal working capital needs of municipalities or to provide interim construction financing and are paid from general revenues of municipalities or are refinanced with long-term debt. In most cases municipal commercial paper is backed by letters of credit, lending agreements, note repurchase agreements or other credit facility agreements offered by banks or other institutions which may be called upon in the event of default by the issuer of the commercial paper.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease to be rated or its rating may be reduced below the minimum required for purchase for the Fund. Neither event will require sale of such Municipal Obligation by the Fund (other than variable rate instruments which must be sold if they are not "high quality"), but the Adviser will consider such event in determining whether the Fund should continue to hold the Municipal Obligation. To the extent that the ratings given to the Municipal Obligations or other securities held by the Fund are altered due to changes in either the Moody's or Standard & Poor's ratings systems (see Appendix B to the Prospectus for an explanation of these rating systems), the Adviser will adopt such changed ratings as standards for its future investments in accordance with the investment policies contained in the Prospectus. Certain Municipal Obligations issued by instrumentalities of the U.S. Government are not backed by the full faith and credit of the U.S. Treasury but only by the creditworthiness of the instrumentality. The Trust's Board of Trustees has determined that any Municipal Obligation that depends directly, or indirectly through a government insurance program or other guarantee, on the full faith and credit of the U.S. Government will be considered to have a rating in the highest category. Where necessary to ensure that the Municipal Obligations are of "high quality" (i.e., within the two highest ratings assigned by any major rating service), or where the obligations are not freely transferable, the Fund will require that the obligation to pay the principal and accrued interest be backed by an unconditional irrevocable bank letter of credit, a guarantee, insurance policy or other comparable undertaking of an approved financial institution.
The Fund may invest 25% or more of its assets in securities that are related in such a way that an economic, business or political development or change affecting one of the securities would also affect the other securities including, for example, securities the interest upon which is paid from revenues of similar type projects, or securities the issuers of which are located in the same state.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS
Variable rate instruments that the Fund may purchase are tax-exempt Municipal Obligations (including municipal notes and municipal commercial paper) that provide for a periodic adjustment in the interest rate paid on the instrument and permit the holder to receive payment upon a specified number of days' notice of the unpaid principal balance plus accrued interest either from the issuer or by drawing on a bank letter of credit, a guarantee or an insurance policy issued with respect to such instrument or by tendering or "putting" such instrument to a third party.
The variable rate instruments in which the Fund's assets may be invested are payable upon a specified period of notice which may range from one day up to one year. The terms of the instruments provide that interest rates are adjustable at intervals ranging from daily to up to one year and the adjustments are based upon the prime rate of a bank or other appropriate interest rate adjustment index as provided in the respective instruments. The Fund will decide which variable rate instruments it will purchase in accordance with procedures prescribed by the Board of Trustees to minimize credit risks. An unrated variable rate instrument may be determined to meet the Fund's high quality criteria if it is backed by a letter of credit or guarantee or a right to tender or put the instrument to a third party or is insured by an insurer that meets the high quality criteria for the Fund discussed above or on the basis of a credit evaluation of the underlying obligor. If the credit of the obligor is of "high quality," no credit support from a bank or other financial institution will be necessary. Each unrated variable rate instrument will be evaluated on a quarterly basis to determine that it continues to meet the Fund's high quality criteria. If an instrument is ever deemed to be of less than high quality, the Fund either will sell it in the market or exercise the liquidity feature described below.
Variable rate instruments in which the Fund may invest include participation interests in variable rate, tax-exempt Municipal Obligations owned by a bank, insurance company or other financial institution or affiliated organizations. Although the rate of the underlying Municipal Obligations may be fixed, the terms of the participation interest may result in the Fund receiving a variable rate on its investment. A participation interest gives the Fund an undivided interest in the Municipal Obligation in the proportion that the Fund's participation bears to the total principal amount of the Municipal Obligation and provides the liquidity feature. Each participation may be backed by an irrevocable letter of credit or guarantee of, or a right to put to, a bank (which may be the bank issuing the participation interest, a bank issuing a confirming letter of credit to that of the issuing bank, or a bank serving as agent of the issuing bank with respect to the possible repurchase of the participation interest) or insurance policy of an insurance company that has been determined by or on behalf of the Board of Trustees of the Trust to meet the prescribed quality standards of the Fund. The Fund has the right to sell the participation interest back to the institution or draw on the letter of credit or insurance after a specified period of notice, for all or any part of the full principal amount of the Fund's participation in the security, plus accrued interest. The Fund intends to exercise the liquidity feature only (1) upon a default under the terms of the bond documents, (2) as needed to provide liquidity to the Fund in order to make redemptions of Fund shares, or (3) to maintain a high quality investment portfolio. In some cases, this liquidity feature may not be exercisable in the event of a default on the underlying Municipal Obligations; in these cases, the underlying Municipal Obligations must meet the Fund's high credit standards at the time of purchase of the participation interest. Issuers of participation interests will retain a service and letter of credit fee and a fee for providing the liquidity feature, in an amount equal to the excess of the interest paid on the instruments over the negotiated yield at which the participations were purchased by the Fund. The total fees generally range from 5% to 15% of the applicable prime rate or other interest rate index. With respect to insurance, the Fund will attempt to have the issuer of the participation interest bear the cost of the insurance, although the Fund retains the option to purchase insurance if necessary, in which case the cost of insurance will be an expense of the Fund subject to the expense limitation of 2 1/2% of the first $30 million of the Fund's average net assets, 2% of the next $70 million and 1 1/2% of the Fund's average net assets in excess of $100 million. The Adviser has been instructed by the Trust's Board of Trustees to monitor continually the pricing, quality and liquidity of the variable rate instruments held by the Fund, including the participation interests, on the basis of published financial information and reports of the rating agencies and other bank analytical services to which the Fund may subscribe. Although participation interests may be sold, the Fund intends to hold them until maturity, except under the circumstances stated above.
In view of the "concentration" of the Fund in bank participation interests in Municipal Obligations secured by bank letters of credit or guarantees, an investment in the Fund should be made with an understanding of the characteristics of the banking industry and the risks which such an investment may entail. Banks are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of this industry is largely dependent upon the availability and cost of capital funds for the purpose of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of this industry and exposure to credit losses arising from possible financial difficulties of borrowers might affect a bank's ability to meet its obligations under a letter of credit.
Periods of high inflation and periods of economic slowdown, together with the fiscal measures adopted to attempt to deal with them, have brought wide fluctuations in interest rates. When interest rates rise, the value of fixed income securities generally falls, and vice versa. While this is true for variable rate instruments generally, the variable rate nature of the underlying instruments should minimize these changes in value. Accordingly, as interest rates decrease or increase, the potential for capital appreciation and the risk of potential capital depreciation is less than would be the case with a portfolio of fixed income securities. Because the adjustment of interest rates on the variable rate instruments is made in relation to movements of various interest rate adjustment indices, the variable rate instruments are not comparable to long-term fixed rate securities. Accordingly, interest rates on the variable rate instruments may be higher or lower than current market rates for fixed rate obligations of comparable quality with similar maturities.
Because of the variable rate nature of the instruments, when prevailing interest rates decline the Fund's yield will decline and its shareholders will forego the opportunity for capital appreciation. On the other hand, during periods when prevailing interest rates increase, the Fund's yield will increase and its shareholders will have reduced risk of capital depreciation.
For purposes of determining whether a variable rate instrument held by the Fund matures within 397 days from the date of its acquisition, the maturity of the instrument will be deemed to be the longer of (1) the period required before the Fund is entitled to receive payment of the principal amount of the instrument after notice or (2) the period remaining until the instrument's next interest rate adjustment. The maturity of a variable rate instrument will be determined in the same manner for purposes of computing the Fund's dollar-weighted average portfolio maturity.
New issues of certain Municipal Obligations frequently are offered on a "when-issued" or "forward delivery" basis. The payment obligation and the interest rate that will be received on the Municipal Obligations are each fixed at the time the buyer enters into the commitment although settlement, i.e., delivery of and payment for the Municipal Obligations, takes place beyond customary settlement time (but normally within 45 days after the date of the Fund's commitment to purchase). Although the Fund will only make commitments to purchase "when-issued" or "forward delivery" Municipal Obligations with the intention of actually acquiring them, the Fund may sell these securities before the settlement date if deemed advisable by the Adviser.
Municipal Obligations purchased on a "when-issued" or "forward delivery" basis and the securities held in the Fund's portfolio are subject to changes in value based upon the public's perception of the credit-worthiness of the issuer and changes, real or anticipated, in the level of interest rates. The value of these Municipal Obligations and securities generally change in the same way, that is, both experience appreciation when interest rates decline and depreciation when interest rates rise. Purchasing Municipal Obligations on a "when-issued" or "forward delivery" basis can involve a risk that the yields available in the market on the settlement date may actually be higher or lower than those obtained in the transaction itself. A separate account of the Fund consisting of cash or liquid debt securities equal to the amount of the "when-issued" or "forward delivery" commitments will be established at the Fund's custodian bank. For the purpose of determining the adequacy of the securities in the account, the deposited securities will be valued at market value. If the market value of such securities declines, additional cash or highly liquid securities will be placed in the account daily so that the value of the account will equal the amount of the Fund's commitments. On the settlement date of the "when-issued" or "forward delivery" securities, the Fund's obligations will be met from then-available cash flow, sale of securities held in the separate account, sale of other securities or, although not normally expected, from sale of the "when-issued" or "forward delivery" securities themselves (which may have a value greater or lesser than the Fund's payment obligations). Sale of securities to meet such obligations may result in the realization of capital gains or losses, which are not exempt from federal income tax.
When the Fund purchases Municipal Obligations it may also acquire stand-by commitments from banks with respect to such Municipal Obligations. The Fund also may acquire stand-by commitments from broker-dealers. Under the stand-by commitment, a bank or broker-dealer agrees to purchase at the Fund's option a specified Municipal Obligation at a specified price. A stand-by commitment is the equivalent of a "put" option acquired by the Fund with respect to a particular Municipal Obligation held in the Fund's portfolio.
The amount payable to the Fund upon the exercise of a stand-by commitment normally would be (1) the acquisition cost of the Municipal Obligation (excluding any accrued interest paid on the acquisition), less any amortized market premium or plus any amortized market or original issue discount during the period the Fund owned the security, plus (2) all interest accrued on the security since the last interest payment date during the period the security was owned by the Fund. Absent unusual circumstances relating to a change in market value, the Fund would value the underlying Municipal Obligation at amortized cost. Accordingly, the amount payable by a bank or dealer during the time a stand-by commitment is exercisable would be substantially the same as the market value of the underlying Municipal Obligation. The Fund values stand-by commitments at zero for purposes of computing the value of its net assets.
The stand-by commitments that the Fund may enter into are subject to certain risks, which include the ability of the issuer of the commitment to pay for the securities at the time the commitment is exercised and the fact that the commitment is not marketable by the Fund and the maturity of the underlying security will generally be different from that of the commitment.
Although the Fund attempts to invest 100% of its net assets in tax-exempt Municipal Obligations, the Fund may invest up to 20% of the value of its net assets in securities of the kind described below, the interest income on which is subject to federal income tax. Circumstances in which the Fund may invest in taxable securities include the following: (a) pending investment of proceeds of sales of Fund shares or of portfolio securities; (b) pending settlement of purchases of portfolio securities; (c) to maintain liquidity for the purpose of meeting anticipated redemptions; and (d) when, in the opinion of the Fund's investment adviser, it is advisable to do so because of adverse market conditions affecting the market for Municipal Obligations. The kinds of taxable securities in which the Fund's assets may be invested are limited to the following short-term, fixed-income securities (maturing in 397 days or less from the time of purchase): (1) obligations of the U.S. Government or its agencies, instrumentalities or authorities; (2) commercial paper rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch; (3) certificates of deposit of U.S. banks with assets of $1 billion or more; and (4) repurchase agreements with respect to any Municipal Obligations or other securities which the Fund is permitted to own. The Fund's assets may also be invested in Municipal Obligations which are subject to an alternative minimum tax.
The Fund may invest assets in instruments subject to repurchase agreements only with member banks of the Federal Reserve System or "primary dealers" (as designated by the Federal Reserve Bank of New York) in U.S. Government securities. Under the terms of a typical repurchase agreement, the Fund would acquire an underlying debt instrument for a relatively short period (usually not more than one week) subject to an obligation of the seller to repurchase and the Fund to resell the instrument at a fixed price and time, thereby determining the yield during the Fund's holding period. This results in a fixed rate of return insulated from market fluctuations during such period. A repurchase agreement is subject to the risk that the seller may fail to repurchase the security. Repurchase agreements may be deemed to be loans under the 1940 Act. All repurchase agreements entered into by the Fund shall be fully collateralized at all times during the period of the agreement in that the value of the underlying security shall be at least equal to the amount of the loan, including the accrued interest thereon, and the Fund or its custodian or sub-custodian shall have possession of the collateral, which the Trust's Board of Trustees believes will give it a valid, perfected security interest in the collateral. Whether a repurchase agreement is the purchase and sale of a security or a collateralized loan has not been definitively established. This might become an issue in the event of the bankruptcy of the other party to the transaction. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the Fund but only constitute collateral for the seller's obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs in connection with the disposition of the collateral. The Trust's Board of Trustees believes that the collateral underlying repurchase agreements may be more susceptible to claims of the seller's creditors than would be the case with securities owned by the Fund. Repurchase agreements will give rise to income which will not qualify as tax-exempt income when distributed by the Fund. The Fund will not invest in a repurchase agreement maturing in more than seven days if any such investment together with illiquid securities held by the Fund exceed 10% of the Fund's total net assets. Repurchase agreements are also subject to the same risks described herein with respect to stand-by commitments.
IN NEW YORK MUNICIPAL OBLIGATIONS
The Fund intends to invest a high proportion of the its assets in Municipal Obligations of the State of New York and its political subdivisions, municipalities, agencies, instrumentalities and public authorities. Payment of interest and preservation of principal is dependent upon the continuing ability of New York issuers and/or obligors of state, municipal and public authority debt obligations to meet their obligations thereunder.
The fiscal stability of New York State is related, at least in part, to the fiscal stability of its localities and authorities. Various State agencies, authorities and localities have issued large amounts of bonds and notes either guaranteed or supported by the State through lease-purchase arrangements, other contractual arrangements or moral obligation provisions. While debt service is normally paid out of revenues generated by projects of such State agencies, authorities and localities, the State has had to provide special assistance in recent years, in some cases of a recurring nature, to enable such agencies, authorities and localities to meet their financial obligations and, in some cases, to prevent or cure defaults. To the extent State agencies and local governments require State assistance to meet their financial obligations, the ability of the State to meet its own obligations as they become due or to obtain additional financing could be adversely affected.
The Adviser believes that by maintaining the Fund's investment portfolio in liquid, short-term, high quality investments, including participation interests and other variable rate instruments that have high quality credit support from banks, insurance companies or other financial institutions, the Fund is somewhat insulated from the credit risks that may exist for long-term New York Municipal Obligations.
For further information concerning New York Municipal Obligations, see the Appendix to this Statement of Additional Information. The summary set forth above and in the Appendix is included for the purpose of providing a general description of New York State and New York City credit and financial conditions. This summary is based on information from statements of issuers of New York Municipal Obligations and does not purport to be complete. The Trust is not responsible for the accuracy or timeliness of this information.
The Trust has adopted the following policies with respect to the Fund which may not be changed without approval by a "majority of the outstanding shares" of the Fund, which as used in this Statement of Additional Information, means the vote of the lesser of (i) 67% or more of the shares of the Fund present at a meeting, if the holders of more than 50% of the outstanding "voting securities" of the Fund are present or represented by proxy, or (ii) more than 50% of the outstanding "voting securities" of the Fund. The term "voting securities" as used in this paragraph has the same meaning as in the 1940 Act. The Fund will vote the shares held by its shareholders who do not give voting instructions in the same proportion as the shares of the Fund's shareholders who do give voting instructions. Shareholders of the Fund who do not vote will have no effect on the outcome of these matters.
The Trust may not with respect to the Fund:
(1) Make investments other than as described under "Investment Policies" above or any other form of federal tax-exempt investment which meets the Fund's high quality criteria, as determined by the Board of Trustees and which is consistent with the Fund's investment objectives and policies.
(2) Borrow money. This restriction shall not apply to borrowings from banks for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests that might otherwise require the untimely disposition of securities, in an amount up to 15% of the value of the Fund's total assets (including the amount borrowed) valued at market less liabilities (not including the amount borrowed) at the time the borrowing was made. While borrowings exceed 5% of the value of the Fund's total assets, the Trust will not make any investments on behalf of the Fund. Interest paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber the Fund's assets, except in an amount up to 15% of the value of the Fund's total assets and only to secure borrowings for temporary or emergency purposes.
(4) Sell securities short or purchase securities on margin, or engage in the purchase and sale of put, call, straddle or spread options or in writing such options, except to the extent that securities subject to a demand obligation and stand-by commitments may be purchased as set forth under "Investment Policies" above.
(5) Underwrite the securities of other issuers, except insofar as the Trust may be deemed an underwriter under the Securities Act of 1933 in disposing of a portfolio security of the Fund.
(6) Purchase securities subject to restrictions on disposition under the Securities Act of 1933 ("restricted securities"). The Trust will not invest on behalf of the Fund in a repurchase agreement maturing in more than seven days if any such investment together with securities that are not readily marketable held by the Fund exceed 10% of the Fund's total net assets.
(7) Purchase or sell real estate, real estate investment trust securities, commodities or commodity contracts, or oil and gas interests, but this shall not prevent the Trust from investing in Municipal Obligations secured by real estate or interests in real estate.
(8) Make loans to others, except through the purchase of portfolio investments, including repurchase agreements, as described under "Investment Policies" above.
(9) Purchase more than 10% of all outstanding voting securities of any one issuer or invest in companies for the purpose of exercising control.
(10) Invest more than 25% of the Fund's assets in the securities of "issuers" in any single industry, provided that the Trust may invest more than 25% of the Fund's assets in bank participation interests and there shall be no limitation on the purchase of those Municipal Obligations and other obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. When the assets and revenues of an agency, authority, instrumentality or other political subdivision are separate from those of the government creating the issuing entity and a security is backed only by the assets and revenues of the entity, the entity would be deemed to be the sole issuer of the security. Similarly, in the case of a private activity bond, if that bond is backed only by the assets and revenues of the non-governmental user, then such non-governmental user would be deemed to be the sole issuer. If, however, in either case, the creating government or some other entity, such as an insurance company or other corporate obligor, guarantees a security or a bank issues a letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank.
(11) Invest in securities of other investment companies, except the Trust may purchase on behalf of the Fund unit investment trust securities (i.e., securities issued by an investment company which (i) is organized under a trust indenture or contract of custodianship or similar instrument, (ii) does not have a board of directors, and (iii) issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities) where such unit trusts meet the investment objectives and policies of the Fund and then only up to 5% of the Fund's net assets, except as they may be acquired as part of a merger, consolidation or acquisition of assets. As of the date of this Statement of Additional Information, the Trust has no intention of investing in unit investment trust securities on behalf of the Fund.
For purposes of the investment restrictions described above, the issuer of a tax-exempt security is deemed to be the entity (public or private) ultimately responsible for the payment of principal of and interest on the security. If, however, the acting government or some other entity, such as an insurance company or other corporate obligor, guarantees a security or a bank issues a Letter of Credit, such a guarantee or Letter of Credit may, in accordance with applicable Securities and Exchange Commission ("SEC") rules, be considered a separate security and treated as an issue of such government, other entity or bank.
If a percentage restriction or a rating restriction (other than a restriction as to borrowing) on investment or utilization of assets set forth above is adhered to at the time an investment is made or assets are so utilized, a later change in percentage resulting from the changes in the value of the portfolio securities or a later change in the rating of a portfolio security will not be considered a violation of such policy.
Any current yield quotation of the Fund which is used in such a manner as to be subject to the provisions of Rule 482(d) under the Securities Act of 1933, as amended, consists of an annualized historical yield, carried at least to the nearest hundredth of one percent, based on a specific seven calendar day period and is calculated by dividing the net change in the value of an account having a balance of one share at the beginning of the period by the value of the account at the beginning of the period and multiplying the quotient by 365/7. For this purpose the net change in account value would reflect the value of additional shares purchased with dividends declared on the original share and dividends declared on both the original share and any such additional shares, but would not reflect any realized gains or losses from the sale of securities or any unrealized appreciation or depreciation on portfolio securities. In addition, any effective yield quotation of the Fund so used shall be calculated by compounding the current yield quotation for such period by multiplying such quotation by 7/365, adding 1 to the product, raising the sum to a power equal to 365/7, and subtracting 1 from the result.
Any tax equivalent yield quotation of the Fund is calculated as follows: If the entire current yield quotation for such period is tax-exempt, the tax equivalent yield will be the current yield quotation divided by 1 minus a stated income tax rate or rates. If a portion of the current yield quotation is not tax-exempt, the tax equivalent yield will be the sum of (a) that portion of the yield which is tax-exempt divided by 1 minus a stated income tax rate or rates and (b) the portion of the yield which is not tax-exempt.
A total rate of return quotation for the Fund is calculated for any period by (a) dividing (i) the sum of the net asset value per share on the last day of the period and the net asset value per share on the last day of the period of shares purchasable with dividends and capital gains distributions declared during such period with respect to a share held at the beginning of such period and with respect to shares purchased with such dividends and capital gains distributions, by (ii) the public offering price on the first day of such period, and (b) subtracting 1 from the result. Any annualized total rate of return quotation is calculated by (x) adding 1 to the period total rate of return quotation calculated above, (y) raising such sum to a power which is equal to 365 divided by the number of days in such period, and (z) subtracting 1 from the result.
Any tax equivalent total rate of return quotation of the Fund is calculated as follows: If the entire current total rate of return quotation for such period is tax-exempt, the tax equivalent total rate of return will be the current total rate of return quotation divided by 1 minus a stated income tax rate or rates. If a portion of the current total rate of return quotation is not tax-exempt, the tax equivalent total rate of return will be the sum of (a) that portion of the total rate of return which is tax-exempt divided by 1 minus a stated income tax rate or rates and (b) the portion of the total rate of return which is not tax-exempt.
Set forth below is total rate of return information, assuming that dividends and capital gains distributions, if any, were reinvested, for the Fund for the periods indicated, at the beginning of which periods no sales charges were applicable to purchases of shares of the Fund (unless otherwise indicated).
The annualized yield of the Fund for the seven-day period ended August 31, 1995 was 3.13%, the effective compound annualized yield of the Fund for such period was 3.18% and the annualized tax equivalent yield of the Fund for such period was 5.60% (assuming (i) a combined New York State, New York City and federal tax bracket of 46.88% and (ii) that 95.00% of the Fund's assets were invested in New York Municipal Obligations).
4. DETERMINATION OF NET ASSET VALUE
The net asset value of each of the shares of the Fund is determined on each day on which the New York Stock Exchange is open for trading. This determination is made once during each such day as of 12:00 noon, Eastern time, by dividing the value of the Fund's net assets (i.e., the value of its assets less its liabilities, including expenses payable or accrued) by the number of shares of the Fund outstanding at the time the determination is made. As of the date of this Statement of Additional Information, the NYSE is open for trading every weekday except for the following holidays (or the days on which they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. It is anticipated that the net asset value of each share of the Fund will remain constant at $1.00 and, although no assurance can be given that it will be able to do so on a continuing basis, as described below, the Fund employs specific investment policies and procedures to accomplish this result.
The securities held by the Fund are valued at their amortized cost. Amortized cost valuation involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. If fluctuating interest rates cause the market value of the securities held by the Fund to deviate more than 1/2 of 1% from their value determined on the basis of amortized cost, the Board of Trustees of the Trust will consider whether any action should be initiated, as described in the following paragraph. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated value of an instrument is higher or lower than the price the Fund would receive if the instrument were sold.
Pursuant to the rules of the SEC, the Trust's Board of Trustees has established procedures to stabilize the value of the Fund's net assets within 1/2 of 1% of the value determined on the basis of amortized cost. These procedures include a review of the extent of any such deviation of net asset value, based on available market rates. Should that deviation exceed 1/2 of 1%, the Trust's Board of Trustees will consider whether any action should be initiated to eliminate or reduce material dilution or other unfair results to investors in the Fund. Such action may include withdrawal in kind, selling securities prior to maturity and utilizing a net asset value as determined by using available market quotations. The Fund maintains a dollar-weighted average maturity of 90 days or less, does not purchase any instrument with a remaining maturity greater than 397 days or subject to a repurchase agreement having a duration of greater than 397 days, and limits its investments, including repurchase agreements, to those U.S. dollar-denominated instruments that are determined by the Adviser to present minimal credit risks and comply with certain reporting and recordkeeping procedures. The Trust also has established procedures to ensure that securities purchased by it meet the high quality criteria described above in "Investment Policies."
Subject to compliance with applicable regulations, the Trust has reserved the right to pay the redemption price of shares of the Fund, either totally or partially, by a distribution in kind of readily marketable securities (instead of cash). The securities so distributed would be valued at the same amount as that assigned to them in calculating the net asset value for the shares or beneficial interests being sold. If a holder of shares or beneficial interests received a distribution in kind, such holder could incur brokerage or other charges in converting the securities to cash.
The Trust may suspend the right of redemption or postpone the date of payment for shares of the Fund for more than seven days during any period when (a) trading in the markets the Fund normally utilizes is restricted, or an emergency, as defined by the rules and regulations of the SEC, exists making disposal of the Fund's investments or determination of its net asset value not reasonably practicable; (b) the NYSE is closed (other than customary weekend and holiday closings); or (c) the SEC has by order permitted such suspension.
The Trustees and officers of the Trust, their ages and their principal occupations during the past five years are set forth below. Their titles may have varied during that period. Asterisks indicate that those Trustees and officers are "interested persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated below, the address of each Trustee and officer is 6 St. James Avenue, Boston, Massachusetts.
H. B. ALVORD; 73 -- Treasurer - Tax Collector, County of Los Angeles (retired, March, 1984); Trustee, The 59 Wall Street Trust and The 59 Wall Street Fund, Inc. (Registered Investment Companies). His address is P.O. Box 1812, Pebble Beach, California.
ELLIOTT J. BERV; 52 -- Chairman and Director, Catalyst, Inc. (Management Consultants) (since August, 1992); President, Chief Operating Officer and Director, Deven International, Inc. (International Consultants) (June, 1991 to July, 1992); President and Director, Elliott J. Berv & Associates (Management Consultants) (since May, 1984). His address is 15 Stornoway Drive, Cumberland Foreside, Maine.
PHILIP W. COOLIDGE; 44* -- President of the Trust; Chairman, Chief Executive Officer and President, Signature Financial Group, Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
MARK T. FINN; 52 -- President and Director, Delta Financial, Inc. (since June, 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd. (Commodity Trading Advisory Firm) (since April, 1990); Director, Vantage Consulting Group, Inc. (since October, 1988). His address is 3500 Pacific Avenue, P.O. Box 539, Virginia Beach, Virginia.
RILEY C. GILLEY; 69 -- Vice President and General Counsel, Corporate Property Investors (December, 1988 to September, 1991); Retired Partner, Breed, Abbott & Morgan (Attorneys) (Retired, December, 1987). His address is 4041 Gulf Shore Boulevard North, Naples, Florida.
DIANA R. HARRINGTON; 55 -- Professor, Babson College (since September, 1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern University (September, 1992 to September, 1993); Professor, Darden Graduate School of Business, University of Virginia (September, 1978 to September, 1993); Consultant to Kidder, Peabody & Co. Incorporated (since January, 1990). Her address is 120 Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 44 -- President, Global Research Associates, Inc. (Investment Research) (since August, 1990); Manager of Special Investments, Rockefeller & Co. (April, 1988 to August, 1990); Director of Research, Rogers, Casey & Barksdale (Investment Research and Consulting) (November, 1983 to March, 1988); Director, New York Life Insurance Company (Institutional Mutual Funds) (since December, 1990). Her address is P.O. Box 9572, New Haven, Connecticut.
C. OSCAR MORONG, JR.; 60 -- Chairman of the Board of Trustees of the Trust; Managing Director, Morong Capital Management (since February, 1993); Senior Vice President and Investment Manager, CREF Investments, Teachers Insurance & Annuity Association (retired January, 1993). His address is 1385 Outlook Drive West, Mountainside, New Jersey.
WALTER E. ROBB, III; 69 -- President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since 1989); Trustee of certain registered investment companies in the MFS Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN; 61 -- Professor of Management, Graduate School of Business, Columbia University (since 1987). His address is Columbia University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR.; 75 -- Vice President - Investments, Sun Company (retired, April, 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey.
PHILIP W. COOLIDGE; 44* -- President of the Trust; Chairman, Chief Executive Officer and President, Signature Financial Group, Inc., and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
DAVID G. DANIELSON; 30* -- Assistant Treasurer of the Trust; Assistant Manager, Signature Financial Group, Inc. since May 1991; Graduate Student, Northeastern University from April 1990 to March 1991.
JOHN R. ELDER; 47* -- Treasurer of the Trust; Vice President, Signature Financial Group, Inc. (since April 1995); Treasurer, Phoenix Family of Mutual Funds (Phoenix Home Life Mutual Insurance Company) (from 1983 to March 1995).
LINDA T. GIBSON; 30* -- Assistant Secretary of the Trust; Legal Counsel, Signature Financial Group, Inc. (since June 1991); law student, Boston University School of Law (from September 1989 to May 1992); Product Manager, Signature Financial Group, Inc. (January 1989 to September 1989).
JAMES S. LELKO; 30* -- Assistant Treasurer of the Trust; Assistant Manager, Signature Financial Group, Inc. since January 1993; Senior Tax Compliance Accountant, Putnam Companies since prior to Deccember 1992.
THOMAS M. LENZ; 37* -- Secretary of the Trust; Vice President and Associate General Counsel, Signature Financial Group, Inc. (since November 1989); Attorney, Ropes & Gray (September 1984 to November 1989).
MOLLY S. MUGLER; 44* -- Assistant Secretary of the Trust; Legal Counsel and Assistant Secretary, Signature Financial Group, Inc. (since December, 1988); Assistant Secretary, The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
BARBARA M. O'DETTE; 36* -- Assistant Treasurer of the Trust; Assistant Treasurer, Signature Financial Group, Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
ANDRES E. SALDANA; 33* -- Assistant Secretary of the Trust; Legal Counsel and Assistant Secretary Signature Financial Group, Inc. since November 1992; Attorney, Ropes & Gray from September 1990 to November 1992.
DANIEL E. SHEA; 33* -- Assistant Treasurer of the Trust; Assistant Manager of Fund Administration, Signature Financial Group, Inc. since November 1993; Supervisor and Senior Technical Advisor, Putnam Investments since prior to 1990.
The Trustees and officers of the Trust also hold comparable positions with certain other funds for which LFBDS or an affiliate serves as the distributor or administrator.
As of December 15, 1995, all Trustees and officers as a group owned less than 1% of the Fund's outstanding shares. As of the same date, more than 95% of the outstanding shares of the Fund were held of record by Citibank, N.A. or an affiliate, as a Shareholder Servicing Agent of the Fund, for the accounts of their respective clients.
The Declaration of Trust of the Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust unless, as to liability to the Trust or its investors, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices, or unless with respect to any other matter it is finally adjudicated that they did not act in good faith in the reasonable belief that their actions were in the best interests of the Trust. In the case of settlement, such indemnification will not be provided unless it has been determined by a court or other body approving the settlement or other disposition, or by a reasonable determination, based upon a review of readily available facts, by vote of a majority of disinterested Trustees of the Trust, or in a written opinion of independent counsel, that such officers or Trustees have not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Citibank manages the assets of the Trust pursuant to an investment advisory agreement (the "Advisory Agreement"). Subject to such policies as the Board of Trustees of the Trust may determine, the Adviser manages the securities of the Fund and makes investment decisions for the Fund. The Adviser furnishes at its own expense all services, facilities and personnel necessary in connection with managing the Fund's investments and effecting securities transactions for the Fund. The Advisory Agreement will continue in effect as long as its continuance is specifically approved at least annually by the Board of Trustees of the Trust or by a vote of a majority of the outstanding voting securities of the Fund, and, in either case, by a majority of the Trustees of the Trust who are not parties to the Advisory Agreement or interested persons of any such party, at a meeting called for the purpose of voting on the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render services to others. The Advisory Agreement is terminable without penalty on not more than 60 days' nor less than 30 days' written notice by the Trust when authorized either by a vote of a majority of the outstanding voting securities of the Fund or by a vote of a majority of the Board of Trustees of the Trust, or by the Adviser on not more than 60 days' nor less than 30 days' written notice, and will automatically terminate in the event of its assignment. The Advisory Agreement provides that neither the Adviser nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions for the Fund, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties under the Advisory Agreement.
The Prospectus contains a description of the fees payable to the Adviser for services under the Advisory Agreement. The Adviser has voluntarily agreed to waive a portion of the fees payable to it under the Advisory Agreement on a month-to-month basis. For the fiscal years ended August 31, 1993, August 31, 1994 and August 31, 1995, the fees payable to Citibank under the Advisory Agreement were $1,303,774, $1,265,739 and $1,405,747 (of which Citibank voluntarily waived $260,734, $255,742 and $242,164).
Pursuant to an Administrative Services Agreement (the "Administrative Services Agreement"), LFBDS provides the Trust with general office facilities and supervises the overall administration of the Trust, including, among other responsibilities, the negotiation of contracts and fees with, and the monitoring of performance and billings of, the independent contractors and agents of the Trust; the preparation and filing of all documents required for compliance by the Trust with applicable laws and regulations; and arranging for the maintenance of books and records of the Trust. The Administrator provides persons satisfactory to the Board of Trustees of the Trust to serve as Trustees and officers of the Trust. Such Trustees and officers may be directors, officers or employees of LFBDS or its affiliates.
The Prospectus contains a description of the fees payable to the Administrator under the Administrative Services Agreement.
For the fiscal years ended August 31, 1993, August 31, 1994 and August 31, 1995, the fees payable to LFBDS from the Fund under the Administrative Services Agreement and a prior administrative services agreement were $977,831, $949,304 and $1,054,310 (of which LFBDS voluntarily waived $3,763, $21,230 and $61,120).
The Administrative Services Agreement with the Trust acknowledges that the names "Landmark" and "Landmark Funds" are the property of the Administrator and provides that if LFBDS ceases to serve as the Administrator of the Trust, the Trust and the Fund will change their respective names so as to delete the word "Landmark" or the words "Landmark Funds." The Administrative Services Agreement with the Trust also provides that LFBDS may render administrative services to others and may permit other investment companies in addition to the Trust to use the word "Landmark" or the words "Landmark Funds" in their names.
The Administrative Services Agreement with the Trust continues in effect if such continuance is specifically approved at least annually by the Trust's Board of Trustees or by a vote of a majority of the outstanding voting securities of the Trust and, in either case, by a majority of the Trustees of the Trust who are not interested parties of the Trust or the Administrator. The Administrative Services Agreement with the Trust terminates automatically if it is assigned and may be terminated as to the Fund by the Trust without penalty by vote of a majority of the outstanding voting securities of the Fund or by either party on not more than 60 days' nor less than 30 days' written notice. The Administrative Services Agreement with the Trust also provides that neither the Administrator nor its personnel shall be liable for any error of judgment or mistake of law or for any act or omission in the administration or management of the Trust, except for willful misfeasance, bad faith or gross negligence in the performance of its or their duties or by reason of reckless disregard of its or their obligations and duties under the Administrative Services Agreement.
The Administrator has agreed to reimburse the Fund for its operating expenses (exclusive of interest, taxes, brokerage, and extraordinary expenses) which in any year exceed the limits prescribed by any state in which the Fund's shares are qualified for sale. The expenses incurred by the Fund for distribution purposes pursuant to the Trust's Distribution Plan are included within such operating expenses only to the extent required by any state in which the Fund's shares are qualified for sale. The Trust may elect not to qualify the Fund's shares for sale in every state. The Trust believes that currently the most restrictive expense ratio limitation imposed by any state is 2 1/2% of the first $30 million of the Fund's average net assets for its then-current fiscal year, 2% of the next $70 million of such assets, and 1 1/2% of such assets in excess of $100 million. For the purpose of this obligation to reimburse expenses, the Fund's annual expenses are estimated and accrued daily, and any appropriate estimated payments will be made by the Administrator. Subject to the obligation of the Administrator to reimburse the Fund for its excess expenses as described above, the Trust has, under its Administrative Services Agreement, confirmed its obligation for payment of all other expenses of the Fund.
LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc.
Pursuant to a Sub-Administrative Services Agreement (the "Sub-Administrative Agreement"), Citibank performs such sub-administrative duties for the Trust as are from time to time agreed upon by Citibank and LFBDS. Citibank's sub-administrative duties may include providing equipment and clerical personnel necessary for maintaining the organization of the Trust, participation in preparation of documents required for compliance by the Trust with applicable laws and regulations, preparation of certain documents in connection with meetings of Trustees and shareholders of the Trust, and other functions which would otherwise be performed by the Administrator as set forth above. For performing such sub-administrative services, Citibank receives such compensation as is from time to time agreed upon by LFBDS and Citibank, not in excess of the amount paid to the Administrator for its services under the Administrative Services Agreement. All such compensation is paid by LFBDS.
The Trust, on behalf of the Fund, has adopted a Distribution Plan (the "Distribution Plan") in accordance with Rule 12b-1 under the 1940 Act after having concluded that there is a reasonable likelihood that the Distribution Plan will benefit the Fund and its shareholders. The Distribution Plan provides that the Trust shall pay a distribution fee to the Distributor at an annual rate not to exceed 0.10% of the Fund's average daily net assets for distribution of the Fund's shares (exclusive of any advertising expenses incurred by the Distributor in connection with the sale of shares of the Fund). The Distributor may use all or any portion of such fee to pay for Fund expenses of printing prospectuses and reports used for sales purposes, expenses of the preparation and printing of sales literature and other distribution-related expenses.
The Trust is also permitted to pay the Distributor an additional fee not to exceed 0.10% per annum of the Fund's average daily net assets in anticipation of, or as reimbursement for, print or electronic media advertising expenses incurred in connection with the sale of shares of the Fund. No payments under the Distribution Plan are made to Shareholder Servicing Agents although Shareholder Servicing Agents receive payments under the Administrative Services Plan referred to below.
The Distribution Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Trust's Trustees and a majority of the Trust's Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreement related to the Plan ("Qualified Trustees"). The Distribution Plan requires that the Trust and the Distributor shall provide to the Board of Trustees, and the Board of Trustees shall review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Distribution Plan. The Distribution Plan further provides that the selection and nomination of the Qualified Trustees is committed to the discretion of the disinterested Trustees (as defined in the 1940 Act) then in office. The Distribution Plan may be terminated with respect to the Fund at any time by a vote of a majority of the Trust's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Fund. The Distribution Plan may not be amended to increase materially the amount of the Fund's permitted expenses thereunder without the approval of a majority of the outstanding voting securities of the Fund and may not be materially amended in any case without a vote of the majority of both the Trustees and the Qualified Trustees. The Distributor will preserve copies of any plan, agreement or report made pursuant to the Distribution Plan for a period of not less than six years from the date of the Plan, and for the first two years the Distributor will preserve such copies in an easily accessible place.
As contemplated by the Distribution Plan, LFBDS acts as the agent of the Fund in connection with the offering of shares of the Fund pursuant to a Distribution Agreement (the "Distribution Agreement"). After the prospectus and periodic reports have been prepared, set in type and mailed to existing shareholders, the Distributor pays for the printing and distribution of copies of the prospectuses and periodic reports which are used in connection with the offering of shares of the Fund to prospective investors. The Prospectus contains a description of fees payable to the Distributor under the Distribution Agreement. The Distributor has voluntarily agreed to waive a portion of the fees payable to it on a month-to-month basis. For the fiscal years ended August 31, 1993, August 31, 1994 and August 31, 1995, the fees payable to the Distributor from the Fund under the Distribution Agreement were $325,944, $316,435 and $351,437 (of which the Distributor voluntarily waived $256,970, $251,008 and $181,044). From the commencement of operations through August 31, 1995, no portion of such fees was applicable to print or electronic media advertising.
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
The Trust has adopted an Administrative Services Plan (the "Administrative Plan") which provides that the Trust may obtain the services of an administrator, a transfer agent, a custodian and one or more Shareholder Servicing Agents, and may enter into agreements providing for the payment of fees for such services. Under the Administrative Plan, the aggregate of the fee paid to the Administrator from the Fund, the fees paid to the Shareholder Servicing Agents from the Fund and the distribution fee paid from the Fund to the Distributor under the Distribution Plan may not exceed 0.60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. The Administrative Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Trust's Trustees and a majority of the Trust's Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Administrative Plan or in any agreement related to such Plan ("Qualified Trustees"). The Administrative Plan requires that the Trust provide to the Trust's Board of Trustees and the Trust's Board of Trustees review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Administrative Plan. The Administrative Plan may be terminated at any time with respect to the Fund by a vote of a majority of the Trust's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Fund. The Administrative Plan may not be amended to increase materially the amount of permitted expenses thereunder without the approval of a majority of the outstanding voting securities of the Fund and may not be materially amended in any case without a vote of the majority of both the Trust's Trustees and the Qualified Trustees.
The Trust has entered into a shareholder servicing agreement (a "Servicing Agreement") with each Shareholder Servicing Agent and a Transfer Agency and Service Agreement and a Custodian Agreement with State Street Bank and Trust Company ("State Street") pursuant to which State Street acts as transfer agent and custodian and performs fund accounting services for the Trust. For additional information, including a description of fees paid to the Shareholder Servicing Agents under the Servicing Agreements, see "Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund Accountant" in the Prospectus. For the fiscal year ended August 31, 1995, the aggregate fees payable by the Fund to Shareholder Servicing Agents under the Administrative Services Plan were $2,811,494 (of which $1,054,310 was voluntarily waived).
The Fund's purchases and sales of its portfolio securities usually are principal transactions. Portfolio securities are normally purchased directly from the issuer or from an underwriter or market maker for the securities. There usually are no brokerage commissions paid for such purchases. The Fund does not anticipate paying brokerage commissions. Any transaction for which the Fund pays a brokerage commission will be effected at the best price and execution available. Purchases from underwriters of portfolio securities include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market makers include the spread between the bid and asked price.
Allocation of transactions, including their frequency, to various dealers is determined by the Adviser in its best judgment and in a manner deemed to be in the best interest of investors in the Fund rather than by any formula. The primary consideration is prompt execution of orders in an effective manner at the most favorable price.
Investment decisions for the Fund will be made independently from those for any other account, series or investment company that is or may in the future become managed by the Adviser or its affiliates. If, however, the Fund and other investment companies, series or accounts managed by the Adviser are contemporaneously engaged in the purchase or sale of the same security, the transactions may be averaged as to price and allocated equitably to each account. In some cases, this policy might adversely affect the price paid or received by the Fund or the size of the position obtainable for the Fund. In addition, when purchases or sales of the same security for the Fund and for other investment companies or series managed by the Adviser occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantages available to large denomination purchases or sales.
No portfolio transactions are executed with the Adviser, or with any affiliate of the Adviser, acting either as principal or as broker.
7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trust's Board of Trustees to issue an unlimited number of full and fractional Shares of Beneficial Interest (without par value) and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in that series. Each share of the series represents an equal proportionate interest in the series with each other share. Upon liquidation or dissolution of the Fund, the Fund's shareholders are entitled to share pro rata in the Fund's net assets available for distribution to its shareholders. The Trust reserves the right to create and issue additional series of shares, in which case the shares of each series would participate pro rata in the earnings, dividends and distribution of net assets of the particular series upon the liquidation or dissolution of the series. Shares of each series would be entitled to vote separately to approve advisory agreements or changes in investment policy, but shares of all series could vote together in the election or selection of Trustees and accountants for the Fund.
Shareholders are entitled to one vote for each share held on matters on which they are entitled to vote. Shareholders in the Trust do not have cumulative voting rights, and shareholders owning more than 50% of the outstanding shares of the Trust may elect all of the Trustees of the Trust if they choose to do so and in such event the other shareholders in the Trust would not be able to elect any Trustee. The Trust is not required to and has no current intention to hold annual meetings of shareholders but the Trust will hold special meetings of shareholders when in the judgment of the Trust's Trustees it is necessary or desirable to submit matters for a shareholder vote. Shareholders have under certain circumstances (e.g., upon application and submission of certain specified documents to the Trustees by a specified number of shareholders) the right to communicate with other shareholders in connection with requesting a meeting of shareholders for the purpose of removing one or more Trustees. Shareholders also have the right to remove one or more Trustees without a meeting by a declaration in writing by a specified number of shareholders. No material amendment may be made to the Trust's Declaration of Trust without the affirmative vote of the holders of a majority of its outstanding shares.
The Trust's Declaration of Trust provides that, at any meeting of shareholders of the Trust or of any series of the Trust, a Shareholder Servicing Agent may vote any shares of which it is the holder of record and for which it does not receive voting instructions proportionately in accordance with the instructions it receives for all other shares of which it is the holder of record. Shares have no preference, pre-emptive or conversion or similar rights. Shares, when issued, are fully paid and non-assessable, except as set forth below.
The Trust may enter into a merger or consolidation, or sell all or substantially all of its assets, if approved by the vote of the holders of two-thirds of its outstanding shares voting as a single class, except that if the Trustees of the Trust recommend such sale of assets, merger or consolidation, the approval by a vote of the holders of a majority of the Trust's outstanding voting securities would be sufficient. The Trust may be terminated (i) by a vote of a majority of the outstanding voting securities of the Trust or (ii) by the Trustees by written notice to the shareholders of the Trust. If not so terminated, the Trust will continue indefinitely.
Share certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust and provides for indemnification and reimbursement of expenses out of the Trust property for any shareholder held personally liable for the obligations of the Trust. The Declaration of Trust also provides that the Trust shall maintain appropriate insurance (e.g., fidelity bonding and errors and omissions insurance) for the protection of the Trust, its shareholders, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of the Trust are not binding upon the Trust's Trustees individually but only upon the property of the Trust and that the Trust's Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office.
8. CERTAIN ADDITIONAL TAX MATTERS
The Fund has elected to be treated and intends to qualify each year as a "regulated investment company" under Subchapter M of the Code, by meeting all applicable requirements of Subchapter M, including requirements as to the nature of the Fund's gross income, the amount of Fund distributions (as a percentage of both the Fund's overall income and its tax-exempt income), and the composition and holding period of the Fund's portfolio assets. Provided all such requirements are met and all of the Fund's net investment income and realized capital gains are distributed to shareholders in accordance with the timing requirements imposed by the Code, no federal income or excise taxes will be required to be paid by the Fund. If the Fund should fail to qualify as a regulated investment company for any year, the Fund would incur a regular corporate federal income tax upon its taxable income and Fund distributions would generally be taxable as ordinary dividend income to shareholders.
The portion of the Fund's distributions of net investment income that is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as an item of tax preference for shareholders under the federal alternative minimum tax, and all exempt-interest dividends may increase a corporate shareholder's alternative minimum tax. Unless the Fund provides shareholders with actual monthly percentage breakdowns, the percentage of income designated as tax exempt will be applied uniformly to all distributions by the Fund of net investment income made during each fiscal year of the Fund and may differ from the percentage of distributions consisting of tax-exempt interest in any particular month. Shareholders are required to report exempt-interest dividends received from the Fund on their federal income tax returns.
Because the Fund expects to earn primarily interest income, it is expected that no Fund distributions will qualify for the dividends-received deduction for corporations.
9. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the independent certified public accountants for the Fund, providing audit services and assistance and consultation with respect to the preparation of filings with the SEC.
The audited financial statements of the Fund (Portfolio of Investments at August 31, 1995, Statement of Assets and Liabilities at August 31, 1995, Statement of Operations for the year ended August 31, 1995, Statement of Changes in Net Assets for each of the years ended August 31, 1995 and 1994, Financial Highlights for each of the years in the five-year period ended August 31, 1995, Notes to Financial Statements and Independent Auditor's Report), which are included in the Annual Report to Shareholders of the Fund, are incorporated by reference into this Statement of Additional Information and have been so incorporated in reliance upon the report of Deloitte & Touche LLP.
A copy of the Annual Report accompanies this Statement of Additional Information.
The following information is a summary of special factors affecting investments in New York Municipal Obligations. The sources of payment for such obligations and the marketability thereof may be affected by financial or other difficulties experienced by New York State (the "State") and certain of its municipalities and public authorities. This information does not purport to be a complete description and is based on information from official statements relating to securities offerings of New York issuers. Landmark New York Tax Free Reserves is not responsible for the accuracy or timeliness of this information.
The factors affecting New York State's financial condition are complex and the following description constitutes only a summary.
The national economy began the current expansion in 1991 and has added over 7 million jobs since early 1992. However, the recession lasted longer in the State and the State's economic recovery has lagged behind the nation's. Although the State has added approximately 185,000 jobs since November 1992, employment growth in the State has been hindered during recent years by significant cutbacks in the computer and instrument manufacturing, utility, defense, and banking industries.
The State Financial Plan is based on a projection by the State Division of the Budget ("DOB") of national and State economic activity. DOB forecasts that national economic growth will weaken, but not turn negative, during the course of 1995 before beginning to rebound by the end of the year. The overall rate of growth of the national economy during calendar year 1995 will be slightly below the "consensus" of a widely-followed survey of national economic forecasters. Growth in the real gross domestic product during 1995 is projected to be moderate (3.0 percent), with declines in defense spending and net exports more than offset by increases in consumption and investment. Continuing efforts by business and government to reduce costs are expected to exert a drag on economic growth. Inflation, as measured by the Consumer Price Index, is projected to remain about 3 percent due to moderate wage growth and foreign competition. Personal income and wages are projected to increase by about 6 percent or more.
New York's economy is expected to continue to expand modestly during 1995, but it is anticipated that there will be a pronounced slow-down during the course of the year. Although industries that export goods and services abroad are expected to benefit from the lower dollar, growth will be slowed by government cutbacks at all levels. On an average annual basis, employment growth will be about the same as 1994. Both personal income and wages are expected to record moderate gains in 1995. Bonus payments in the securities industry are expected to increase from last year's depressed level.
New York State's financial operations have improved during recent fiscal years. During the period 1989-90 through 1991-92, the State incurred General Fund operating deficits that were closed with receipts from the issuance of tax and revenue anticipation notes ("TRANs"). First, the national recession, and then the lingering economic slowdown in the New York and regional economy, resulted in repeated shortfalls in receipts and three budget deficits. For its 1992-93, 1993-94 and 1994-95 fiscal years, the State recorded balanced budgets on a cash basis, with substantial fund balances in 1992-93 and 1993-94, and a smaller fund balance in 1994-95 as described below.
The State issued the first of the three required quarterly updates (the "Financial Plan Update") to the 1995-96 cash-basis State Financial Plan on July 23, 1995. The Financial Plan Update reflects an analysis of actual receipts and disbursements in the first quarter of the fiscal year, and contains revised estimates of receipts and disbursements for the current fiscal year.
The Financial Plan Update projects continued balance in the State's 1995-96 Financial Plan. The Financial Plan Update incorporates few revisions to the initial Financial Plan formulated on June 20, 1995, which reflected the enactment of the State's 1995-96 budget. General Fund receipts are projected to total $32.859 billion and General Fund disbursements are projected to total $32.804 billion.
New York State ended its 1994-95 fiscal year with the General Fund in balance. The closing fund balance of $158 million reflects $157 million in the Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund ("CRF"). The CRF was established in State Fiscal year 1993-94, funded partly with surplus moneys, to assist the State in financing the 1994-95 fiscal year costs of extraordinary litigation known or anticipated at that time; the opening fund balance in State fiscal year 1994-95 was $265 million. The $241 million change in the fund balance reflects the use of $264 million in the CRF as planned, as well as the required deposit of $23 million to the Tax Stabilization Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve account. $250 million of which was deposited at the end of the State's 1994-95 fiscal year to continue the process of restructuring the State's cash flow as part of the Local Government Assistance Corporation ("LGAC") program.
Compared to the State Financial Plan for 1994-95 as formulated on June 16, 1994, reported receipts fell short of original projections by $1.163 billion, primarily in the categories of personal income and business taxes. Of this amount, the personal income tax accounts for $800 million, reflecting weak estimated tax collections and lower withholding due to reduced wage and salary growth, more severe reductions in brokerage industry bonuses than projected earlier, and deferral of capital gains realizations in anticipation of potential Federal tax changes. Business taxes fell short by $373 million. primarily reflecting lower payments from banks as substantial overpayments of 1993 liability depressed net collections in the 1994-95 fiscal year. These shortfalls were offset by better performance in the remaining taxes, particularly the user taxes and fees, which exceeded projections by $210 million. Of this amount, $227 million was attributable to certain restatements for accounting treatment purposes pertaining to the CRF and LGAC; these restatements had no impact on balance in the General Fund.
Disbursements were also reduced from original projections by $848 million. After adjusting for the net impact of restatements relating to the CRF and LGAC which raised disbursements by $38 million, the variance is $886 million. Well over two-thirds of this variance is in the category of grants to local governments, primarily reflecting the conservative nature of the original estimates of projected costs for social services and other programs. Lower education costs are attributable to the availability of $110 million in additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated in January 1995 by the Governor to reduce spending to avert a potential gap in the 1994-95 State Financial Plan. These actions included savings from a hiring freeze, halting the development of certain services, and the suspension of non-essential capital projects. These actions, together with $71 million in other measures comprised the Governor's $259 million gap-closing plan, submitted to the Legislature in connection with the 1995-96 Executive Budget.
The State ended its 1993-94 fiscal year with a balance of $l.140 billion in the tax refund reserve account, $265 million in the CRF and $134 million in its Tax Stabilization Reserve Fund. These fund balances were primarily the result of an improving national economy, State employment growth, tax collections that exceeded earlier projections and disbursements that were below expectations. Deposits to the personal income tax refund reserve have the effect of reducing reported personal income tax receipts in the fiscal year when made and withdrawals from such reserve increase receipts in the fiscal year when made. The balance in the tax refund reserve account was used to pay taxpayer refunds.
Of the $1.140 billion deposited in the tax refund reserve account, $l.026 billion was available for budgetary planning purposes in the 1994-95 fiscal year. The remaining $114 million was redeposited in the tax refund reserve account at the end of the State's 1994-95 fiscal year to continue the process of restructuring the State's cash flow as part of the LGAC program. The balance in the CRF was reserved to meet the cost of litigation facing the State in its 1994-95 fiscal year.
Before the deposit of $1.l40 billion in the tax refund reserve account, General Fund receipts in 1993-94 exceeded those originally projected when the State Financial Plan for that year was formulated on April 16, 1993 by $1.002 billion. Greater-than-expected receipts in the personal income tax, the bank tax, the corporation franchise tax and the estate tax accounted for most of this variance, and more than offset weaker-than-projected collections from the sales and use tax and miscellaneous receipts. Collections from individual taxes were affected by various factors including changes in Federal business laws, sustained profitability of banks, strong performance of securities firms, and higher-than-expected consumption of tobacco products following price cuts.
The higher receipts resulted, in part, because the New York economy performed better than forecasted. Employment growth started in the first quarter of the State's 1993-94 fiscal year, and, although this lagged behind the national economic recovery, the growth in New York began earlier than forecasted. The New York economy exhibited signs of strength in the service sector, in construction, and in trade. Long Island and the Mid-Hudson Valley continued to lag behind the rest of the State in economic growth. The DOB believes that approximately 100,000 jobs were added during the 1993-94 fiscal year.
Disbursements and transfers from the General Fund were $303 million below the level projected in April 1993, an amount that would have been $423 million had the State not accelerated the payment of Medicaid billings, which in the April 1993 State Financial Plan were planned to be deferred into the 1994-95 fiscal year. Compared to the estimates included in the State Financial Plan formulated in April 1993, lower disbursements resulted from lower spending for Medicaid, capital projects, and debt service (due to refundings) and $114 million used to restructure the State's cash flow as part of the LGAC program. Disbursements were higher than expected for general support for public schools, the State share of income maintenance, overtime for prison guards, and highway snow and ice removal. The State also made the first of six required payments to the State of Delaware related to the settlement of Delaware's litigation against the State regarding the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded the CRF as a way to assist the State in financing the cost of litigation affecting the State. The CRF was initially funded with a transfer of $100 million attributable to the positive margin recorded in the 1992-93 fiscal year. In addition, the State augmented this initial deposit with $132 million in debt service savings attributable to the refinancing of State and public authority bonds during 1993-94. A year-end transfer of $36 million was also made to the CRF, which, after a disbursement for authorized fund purposes, brought the CRF balance at the end of 1993-94 to $265 million. This amount was $165 million higher than the amount originally targeted for this reserve fund.
During the prior ten years, State-supported debt service increased by 5.8 percent annually to $2.239 billion by 1993-94 as available revenues increased by 5.1 percent annually. The relative comparable growth in revenues and debt service resulted in modest increases of 2.7 percent annually in the ratio of debt service to revenues from 1984-85 to 1993-94. The ratio is estimated to increase to over 6 percent as a result of the enacted budget.
Principal and interest payments on general obligation bonds and interest payments on bond anticipation notes and on TRANSs were $782.5 million for the 1993-94 fiscal year, and are estimated to be $786.3 million for 1994-95. These figures do not include interest payable on State General Obligation Refunding Bonds issued in July 1992 ("Refunding Bonds") to the extent that such interest was paid from an escrow fund established with the proceeds of such Refunding Bonds. Principal and interest payments on fixed rate and variable rate bonds issued by LGAC were $239.9 million for 1994-95. State lease-purchase rental and contractual-obligation payments for 1993-94 (Other Financing Obligations), including State installment payments relate to certificates of participation, were $1.495 billion in 1994-95.
Total outstanding State-related debt increased from $22.9 billion at the end of the 1984-85 fiscal year to $34.8 billion at the end of the 1993-94 fiscal year, an average annual increase of 4.26%. State-supported debt increased from $9.4 billion at the end of the 1984-85 fiscal year to $26.4 billion at the end of the 1993-94 fiscal year, an average annual increase of 10.86%. During the same ten year period, annual personal income in the State rose from $270.7 billion to $448.1 billion, as average annual increase of 5.17%. Thus, State-supported debt grew at a faster rate than personal income while State-related obligations grew at a slower rate. Expressed in other terms, the total amount of State-supported debt grew from 3.48% of personal income in the 1984-85 fiscal year to 5.9% for the 1993-94 fiscal year while State-related debt outstanding declined from 8.46% to 7.76% for the same period.
The State has never defaulted on any of its general obligation indebtedness or its obligations under lease-purchase or contractual-obligation financing arrangements and has never been called upon to make any direct payments pursuant to its guarantees. There has never been a default on any moral obligation debt of any State public authority.
Rating Agencies Actions: As of October 1, 1995, Moody's and S&P assigned their municipal bond ratings of A and A-, respectively, to the State's general obligation bonds. Each such rating reflects only the views of the respective rating agency, and an explanation of the significance of such rating may be obtained from such rating agency. There is no assurance that such ratings will continue for any given period of time or that they will not be revised or withdrawn entirely by such rating agency if, in the judgment of such rating agency, circumstances so warrant. A downward revision or withdrawal of any such rating may have an adverse effect on the market price of the State's general obligation bonds.
The fiscal stability of the State is related, in part, to the fiscal stability of its public authorities, meaning public benefit corporations created pursuant to State law, other than local authorities. Public authorities are not subject to the constitutional restrictions on the incurrence of debt which apply to the State itself and may issue bonds and notes within the amounts, and as otherwise restricted by, their legislative authorization. The State's access to the public credit markets could be impaired, and the market price of its outstanding debt may be materially adversely affected, if any of its public authorities were to default on their respective obligations, particularly those using the financing techniques referred to as State-supported or State-related debt. As of September 30, 1994, the date of the latest data available, there were 18 public authorities that had outstanding debt of $100 million or more, and the aggregate outstanding debt, including refunding bonds, of these 18 public authorities was $70.3 billion. As of March 31, 1995, aggregate public authority debt outstanding as State-supported debt was $27.9 billion and as State-related debt was $36.1 billion.
There are numerous public authorities, with various responsibilities, including those which finance, construct and/or operate revenue producing public facilities. Public authority operating expenses and debt service costs are generally paid by revenues generated by the projects financed or operated, such as tolls charged for the use of highways, bridges or tunnels, rentals charged for housing units, and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques for public authorities. Also, there are statutory arrangements providing for State local assistance payments, otherwise payable to localities, to be made under certain circumstances to public authorities. Although the State has no obligation to provide additional assistance to localities whose local assistance payments have been paid to public authorities under these arrangements if local assistance payments are so diverted, the affected localities could seek additional State assistance.
Some authorities also receive money from State appropriations to pay for the operating costs of certain of their programs. As described below, the MTA receives the bulk of this money in order to carry out mass transit and commuter services.
The MTA oversees the operation of subway and bus lines in New York City by its affiliates, the New York City Transit Authority and the Manhattan and Bronx Surface Transit Operating Authority (collectively, the "TA"). The MTA operates certain commuter rail and bus lines in the New York Metropolitan area through MTA's subsidiaries the Long Island Rail Road Company, the Metro-North Commuter Railroad Company and the Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid Transit Operating Authority, an MTA subsidiary, operates a rapid transit line on Staten Island. Through its affiliated agency, the Triborough Bridge and Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll bridges and tunnels. Because fare revenues are not sufficient to finance the mass transit portion of these operations the MTA has depended, and will continue to depend, for operating support upon a system of State, local government and TBTA support, and, to the extent available, Federal operating assistance, including loans, grants and subsidies. If current revenue projections are not realized and/or operating expenses exceed current projections, the TA or commuter railroads may be required to seek additional State assistance, raise fares or take other actions.
Since 1980, the State has enacted several taxes, including a surcharge on the profits of banks, insurance corporations and general business corporations doing business in the 12-county Metropolitan Transportation Region served by the MTA and a special one-quarter of 1 percent regional sales and use tax-that provide revenues for mass transit purposes, including assistance to the MTA. In addition, since 1987, State law has required that the proceeds of a one-quarter of 1 percent mortgage recording tax paid on certain mortgages in the Metropolitan Transportation Region be deposited in a special MTA fund for operating or capital expenses. Further, in 1993, the State dedicated a portion of certain additional State petroleum business tax receipts to fund operating or capital assistance to the MTA. For the 1995-96 State fiscal year, total State assistance to the MTA is estimated at approximately $ 1.1 billion.
In 1993, State legislation authorized the funding of a five-year $9.56 billion MTA capital plan for the five-year period, 1992 through 1996 (the "1992-96 Capital Program"). The MTA has received approval of the 1992-96 Capital Program based on this legislation from the MTA Capital Program Review Board, as State law requires. This is the third five-year plan since the Legislature authorized procedures for the adoption, approval and amendment of a five-year plan in 1981 for a capital program designed to upgrade the performance of the MTA's transportation systems and to supplement, replace and rehabilitate facilities and equipment. The MTA, the TBTA and the TA are collectively authorized to issue an aggregate of $3.1 billion of bonds (net of certain statutory exclusions) to finance a portion of the 1992-96 Capital Program. The 1992-96 Capital Program was expected to be financed in significant part through dedication of the State petroleum business tax receipts referred to above. However, in December 1994 the proposed bond resolution based on such tax receipts was not approved by the MTA Capital Program Review Board. Further consideration of the resolution was deferred until 1995.
There can be no assurance that all the necessary governmental actions for the 1992-96 Capital Program or future capital programs will be taken, that funding sources currently identified will not be decreased or eliminated, or that the 1992-96 Capital Program, or parts thereof, will not be delayed or reduced. If the Capital Program is delayed or reduced, ridership and fare revenues may decline, which could, among other things, impair the MTA's ability to meet its operating expenses without additional State assistance.
THE CITY OF NEW YORK
The fiscal health of the State may also be affected by the fiscal health of the City, which has required and continues to require significant financial assistance from the State. The City depends on State aid both to enable the City to balance its budget and to meet its cash requirements. The City's has achieved balanced operating results for each of its fiscal years since 1981 as reported in accordance with the then-applicable GAAP standards.
In response to the City's fiscal crisis in 1975, the State took action to assist the City in returning to fiscal stability. Among those actions, the State established the Municipal Assistance Corporation For The City of New York ("MAC") to provide financing assistance to the City; the New York State Financial Control Board (the "Control Board") to oversee the City's financial affairs; the Office of the State Deputy Comptroller for the City of New York ("OSDC") to assist the Control Board in exercising its powers and, responsibilities; and a "Control Period" which existed from 19'5 to 1986 during which the City was subject to certain statutorily-prescribed fiscal controls. Although the Control Board terminated the Control Period in 1986 when certain statutory conditions were met, thus suspending certain Control Board powers, the Control Board, MAC and OSDC continue to exercise various fiscal monitoring functions over the City, and upon the occurrence or "substantial likelihood and imminence" of the occurrence of certain events, including, but not limited to, a City operating budget deficit of more than $100 million, the Control Board is required by law to reimpose a Control Period. Currently, the City and its Covered Organizations (i.e., those which receive or may receive money from the City directly, indirectly or contingently) operate under a four-year financial plan (the "Financial Plan") which the City prepares annually and periodically updates. The City's Financial Plan includes its capital, revenue and expense projections and outlines proposed gap-closing programs for years with projected budget gaps.
The City's projections set forth in the Financial Plan are based on various assumptions and contingencies, some of which are uncertain and may not materialize. Unforeseen developments and changes in major assumptions could significantly affect the City's ability to balance its budget as required by State law and to meet its annual cash flow and financing requirements.
The State could be affected by the ability of the City and certain Covered Organizations to market their securities successfully in the public credit markets. Future developments concerning the City or certain of the Covered Organizations, and public discussion of such developments, as well as prevailing market conditions and securities credit ratings, may affect the ability or cost to sell securities issued by the City or such Covered Organizations and may also affect the market for their outstanding securities.
The staffs of OSDC, the Control Board and the City Comptroller issue periodic reports on the City's Financial Plans, as modified, analyzing forecasts of revenues and expenditures, cash flow, and debt service requirements, as well as compliance with the Financial Plan, as modified, by the City and its Covered Organizations. OSDC staff reports issued during the mid-1980's noted that the City's budgets benefited from a rapid rise in the City's economy, which boosted the City's collection of property, business and income taxes. These resources were used to increase the City's workforce and the scope of discretionary and mandated City services. Subsequent OSDC staff reports, including its periodic economic reports, examined the 1987 stock market crash and the 1989-92 recession, which affected the New York City region more severely than the nation, and these reports attributed an erosion of City revenues and increasing strain on City expenditures to that recession. According to a recent OSDC economic report, the City's economy was slow to recover from the recession and is expected to experience a weak employment situation, and moderate wage and income growth, during the 1995-96 period. Also, Financial Plan reports of OSDC, the Control Board, and the City Comptroller have variously indicated that many of the City's balanced budgets have been accomplished, in part, through the use of non-recurring resources, tax and fee increases, personnel reductions and additional State assistance; that the City has not yet brought its long-term expenditures in line with recurring revenues; that the City's proposed gap closing programs if implemented, would narrow future budget gaps; that these programs tend to rely heavily on actions outside the direct control of the City; and that the City is therefore likely to continue to face future projected budget gaps requiring the City to reduce expenditures and/or increase revenues. According to the most recent staff reports of OSDC, the Control Board and the City Comptroller during the four-year period covered by the current Financial Plan, the City is relying on obtaining substantial resources from initiatives needing approval and cooperation of its municipal labor unions, Covered Organizations, and City Council, as well as the State and Federal governments, among others, and there can be no assurance that such approval can be obtained. Copies of the most recent OSDC, Control Board and City Comptroller staff reports are available by contacting OSDC at 270 Broadway, 22nd Floor, New York, New York 10007, Attention: Deputy Comptroller; Control Board at 270 Broadway, 21st Floor, New York, New York, 10007, Attention: Executive Director, and the City Comptroller at Municipal Building, Room 517, One Centre Street, New York, NY 10007, Attention: Deputy Comptroller, Finance.
Certain localities in addition to the City could have financial problems leading to requests for additional State assistance during the State's 1995-96 fiscal years and thereafter. The potential impact on the State of such requests by localities is not included in the projections of the State's receipts and disbursements for the State's 1995-96 fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the re-establishment of the Financial Control Board for the City of Yonkers by the State in 1984. That Board is charged with oversight of the fiscal affairs of Yonkers. Future actions taken by the State to assist Yonkers could result in allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and long-term borrowings. In 1993, the total indebtedness of all localities in the State other than New York City was approximately $17.7 billion. A small portion (approximately $105 million) of that indebtedness represented borrowing to finance budgetary deficits and was issued pursuant to State enabling legislation. State law requires the Comptroller to review and make recommendations concerning the budgets of those local government units other than New York City authorized by State law to issue debt to finance deficits during the period that such deficit financing is outstanding. Fifteen localities had outstanding indebtedness for deficit financing at the close of their fiscal year ending in 1993.
From time to time, Federal expenditure reductions could reduce, or in some cases eliminate, Federal funding of some local programs and accordingly might impose substantial increased expenditure requirements on affected localities. If the State, the City or any of the public authorities were to suffer serious financial difficulties jeopardizing their respective access to the public credit markets, the marketability of notes and bonds issued by localities within the State could be adversely affected. Localities also face anticipated and potential problems resulting from certain pending litigation, judicial decisions and long-range economic trends. Long-range potential problems of declining urban population, increasing expenditures and other economic trends could adversely affect localities and require increasing State assistance in the future.
The legal proceedings noted below involve State finances, State programs and miscellaneous tort, real property and contract claims in which the State is a defendant and the monetary damages sought are substantial. These proceedings could affect adversely the financial condition of the State in the 1995-96 fiscal year or thereafter.
Adverse developments in these proceedings or the initiation of new proceedings could affect the ability of the State to maintain a balanced 1995-96 State Financial Plan. The State believes that the 1995-96 State Financial Plan includes sufficient reserves for the payment of judgments that may be required during the 1995-96 fiscal year. There can be no assurance, however, that an adverse decision in any of these proceedings would not exceed the amount of the 1995-96 State Financial Plan reserves for the payment of judgments and, therefore, could affect the ability of the State to maintain a balanced 1995-96 State Financial Plan. In its General Purpose Financial Statements, the State reports its estimated liability in subsequent fiscal years for awarded and anticipated unfavorable judgments.
Although other litigation is pending against the State, except as described below, no current litigation involves the State's authority, as a matter of law, to contract indebtedness, issue its obligations. or pay such indebtedness when it matures, or affects the State's power or ability, as a matter of law, to impose or collect significant amounts of taxes and revenues.
In addition to the proceedings noted below, the State is party to other claims and litigation which its legal counsel has advised are not probable of adverse court decisions. Although the amounts of potential losses, if any, are not presently determinable, it is the State's opinion that its ultimate liability in these cases is not expected to have a material adverse effect on the State's financial position in the 1995-96 fiscal year or thereafter.
Two cases challenge provisions of Section 2807-c of the Public Health Law, which impose a 13 percent surcharge on inpatient hospital bills paid by commercial insurers and employee welfare benefit plans, and portions of Chapter 55 of the Laws of 1992 which require hospitals to impose and remit to the State an 11 percent surcharge on hospital bills paid by commercial insurers and which require health maintenance organizations to remit to the State a surcharge of up to 9 percent. In The Travelers Insurance Company v. Cuomo, et al., commenced June 2, 1992, and The Health Insurance Association of America, et al. v. Chassin, et al., commenced July 20, 1992, both in the United States District Court for the Southern District of New York and consolidated, plaintiffs allege that the surcharges are preempted by Federal law. By decision dated April 26, 1995, the United States Supreme Court upheld the surcharges as not preempted by Federal law.
In Trustees of and The Pension, Hospitalization Benefit Plan of the Electrical Industry, et al. v. Cuomo, et al., commenced November 25, 1992 in the United States District Court for the Eastern District of New York, plaintiff employee welfare benefit plans seek a declaratory judgment nullifying on the ground of Federal preemption provisions of Section 2807-c of the Public Health Law and implementing regulations which impose a bad debt and charity care allowance on all hospital bills and a 13 percent surcharge on inpatient bills paid by employee welfare benefit plans.
Aspects of petroleum business taxes are the subject of administrative claims and litigation (e.g., Tug Buster Bouchard, et al. v. Wetzler, Supreme Court, Albany County, commenced November 13, 1992). In Tug Buster Bouchard, petitioner corporations. which purchase fuel out of State and consume such fuel within the State, contend that the assessment of the petroleum business tax pursuant to Tax Law ss.301 to such fuel violates the Commerce Clause of the United States Constitution. Petitioners contend that the application of Section 301 to the interstate transaction but not to purchasers who purchase and consume fuel within the State discriminates against interstate commerce.
Several cases challenge the rationality and the retroactive application of State regulations recalibrating nursing home Medicaid rates. Following invalidation of such previous regulations by the Court of Appeals, the State Department of Health in 1991 promulgated new recalibration regulations. 10 NYCRR ss.86-2.31(a) and (b), for 1989-1991 and 1992 and subsequent rate years. respectively. In Matter of New York Association of Homes and Services for the Aging, Inc. v. Commissioner (Supreme Court, Albany County; Index No. 4885-92), by decision dated June 30, 1994, the Court of Appeals held invalid the Department's retroactive application to rate years 1989 through 1991 of the nursing home Medicaid reimbursement rate recalibration adjustment set forth in 10 NYCRR ss.86-2.31(a). Matter of New York Association of Homes and Services for the Aging, Inc. v. Commissioner (Supreme Court Albany County; Index No. 4370-92), challenges the new recalibration regulations for rate years commencing 1992, and is pending.
In Matter of New York State Health Facilities Association, Inc., et al. v. Axelrod, Supreme Court, Albany County, commenced 1990, petitioner nursing homes challenge regulations of the State Department of Health, 10 NYCRR ss.86-2.10 (c) and (d), which reduce base prices for the direct and indirect components of Medicaid reimbursement for rate years commencing 1989.
In a consolidated action commenced in 1992, Medicaid recipients and home health care providers and organizations challenge promulgation by the State Department of Social Services ("DSS") in June 1992 of a home assessment resource review instrument ("HARRI"), which is to be used by DSS to determine eligibility for and the nature of home care services for Medicaid recipients, and challenge the policy of DSS of limiting reimbursable hours of service until a patient is assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County).
Office of Mental Health Patient-Care Costs
Two actions, Balzi, et al. v. Surles, et al., commenced in November 1985 in the United States District Court for the Southern District of New York, and Brogan, et al. v. Sullivan, et al., commenced in May 1990 in the United States District Court for the Western District of New York, now consolidated, challenge the practice of using patients' Social Security benefits for the costs of care of patients of State Office of Mental Health facilities.
In an action commenced in March 1987 against State and New York City officials (Jiggetts, et al. v. Bane, et al.). plaintiffs allege that the shelter allowance granted to recipients of public assistance is not adequate for proper housing.
In Inter-Power of New York, Inc. v. State of New York, commenced November 16, 1994 in the Court of Claims, plaintiff alleges that by reason of the failure of the State's Department of Environmental Conservation to provide in a timely manner accurate and complete data, plaintiff was unable to complete by the projected completion date a cogeneration facility, and thereby suffered damages.
In an action commenced in 1985 (United States, et al. v. Yonkers Board of Education. et al.), the United States District Court for the Southern District of New York found that Yonkers and its public schools were intentionally segregated. Yonkers enacted an "education improvement plan" which was adopted in 1986. Plaintiffs allege that defendants have not fulfilled their responsibility to alleviate the segregation. On January 19, 1989 the State Education Department and the New York State Urban Development Corporation were added as defendants.
On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of Oneida, the United States Supreme Court affirmed a judgment of the United States Court of Appeals for the Second Circuit holding that the Oneida Indians have a common-law right of action against Madison and Oneida Counties for wrongful possession of 872 acres of land illegally sold to the State in 1795. At the same time, however, the Court reversed the Second Circuit by holding that a third-party claim by the counties against the State for indemnification was not properly before the Federal courts. The case was remanded to the District Court for an assessment of damages, which action is still pending. The counties may still seek indemnification in the State courts.
Several other actions involving Indian claims to land in upstate New York are also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et al., and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New York, et al., both in the United States District Court for the Northern District of New York. The Supreme Court's holding in Oneida Indian Nation of New York may impair or eliminate certain of the State's defenses to these actions but may enhance others.
In McCall. et al. v. State of New York. et al., commenced July 5, 1995 (Supreme Court, Albany County), an action for a declaratory judgment and injunctive relief, plaintiffs (including the State Comptroller) contend that certain provisions of Ch. 119 L. 1995 are unconstitutional. Ch. 119 L. 1995 provides enhanced supplemental pension allowances for members of the State and local retirement systems. Plaintiffs contend that Section 13 of Ch. 119 L. 1995, which provides that money in a Supplemental Reserve Fund shall be used as a credit in the State's 1995-96 fiscal year against prior State and local pension contributions, violates Article V ss.7 of the State Constitution. The constitutional provision bars the diminishment or impairment of benefits of membership in the retirement systems.
FOR CITIBANK NEW YORK RETAIL BANKING AND BUSINESS AND PROFESSIONAL CUSTOMERS: Citibank, N.A. 450 West 33rd Street, New York, NY 10001 (212) 564-3456 or (800) 846-5300
P.O. Box 5130, New York, NY 10126-5130 Call Your Citigold Executive or, in NY or CT (800) 285-1701, or for all other states, (800) 285-1707
FOR CITIBANK PRIVATE BANKING CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 Call Your Citibank Private Banking Account Officer, Registered Representative or (212) 559-5959
FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043
FOR CITIBANK NORTH AMERICAN INVESTOR SERVICES CLIENTS: Citibank, N.A. 111 Wall Street, New York, NY 10043 Call Your Account Manager or (212) 657-9100
FOR CITICORP INVESTMENT SERVICES CUSTOMERS: One Court Square, Long Island City, NY 11120 Call Your Investment Consultant or (800) 846-5200 (212) 736-8170 in New York City
LANDMARK NEW YORK TAX FREE RESERVES
C. Oscar Morong, Jr., Chairman William S. Woods, Jr.
*Affiliated Person of Administrator and Distributor
153 East 53rd Street, New York, NY 10043
The Landmark Funds Broker-Dealer Services, Inc. 6 St. James Avenue, Boston, MA 02116
State Street Bank and Trust Company 225 Franklin
125 Summer Street, Boston, MA 02110
150 Federal Street, Boston, MA 02110
LANDMARK CONNECTICUT TAX FREE RESERVES (A member of the LandmarkSM Family of Funds)
Landmark Connecticut Tax Free Reserves (the "Fund") is a separate series of Landmark Multi-State Tax Free Funds (the "Trust"). The address and telephone number of the Trust are 6 St. James Avenue, Boston, Massachusetts 02116, (617) 423-1679.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
Determination of Net Asset Value 15 Description of Shares, Voting Rights Certain Additional Tax Matters 26
This Statement of Additional Information sets forth information which may be of interest to investors but which is not necessarily included in the Fund's Prospectus, dated January 2, 1996, by which shares of the Fund are offered. This Statement of Additional Information should be read in conjunction with the Prospectus, a copy of which may be obtained by an investor without charge by contacting the Fund's Distributor (see back cover for address and phone number).
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
The Trust is a no-load, non-diversified, open-end management investment company which was organized as a business trust under the laws of the Commonwealth of Massachusetts on August 30, 1985. The Trust was known as "Landmark New York Tax Free Reserves" until its name was changed on December 18, 1991. Shares of the Trust are divided into three separate series, one of which, the Fund, is described in this Statement of Additional Information. References in this Statement of Additional Information to the Prospectus are to the Prospectus, dated January 2, 1996, of the Fund by which shares of the Fund are offered.
The Fund is a type of mutual fund commonly referred to as a "double tax-exempt money market fund." The net asset value of each of the Fund's shares is expected to remain constant at $1.00, although there can be no assurance that this will be so on a continuing basis. (See "Determination of Net Asset Value.")
Citibank, N.A. ("Citibank" or the "Adviser") is the investment adviser to the Fund. The Adviser manages the investments of the Fund from day to day in accordance with the Fund's investment objectives and policies. The selection of investments for the Fund, and the way they are managed, depend on the conditions and trends in the economy and the financial marketplaces.
The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS" or the "Administrator"), the administrator of the Trust, supervises the overall administration of the Trust. The Board of Trustees of the Trust provides broad supervision over the affairs of the Trust. Shares of the Fund are continuously sold by LFBDS, the Fund's distributor (the "Distributor"), only to investors who are customers of a financial institution, such as a federal or state-chartered bank, trust company, savings and loan association or savings bank, or a securities broker, that has entered into a shareholder servicing agreement with the Trust (collectively, "Shareholder Servicing Agents"). Although shares of the Fund are sold without a sales load, LFBDS may receive a fee from the Fund pursuant to a Distribution Plan adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act").
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives of the Fund are to provide its shareholders with high levels of current income exempt from federal and Connecticut personal income taxes, preservation of capital and liquidity.
The investment objectives of the Fund may not be changed without approval by the Fund's shareholders. Of course, there can be no assurance that the Fund will achieve its investment objectives.
The Fund seeks its investment objectives by investing primarily in short-term, high quality fixed rate and variable rate obligations issued by or on behalf of the State of Connecticut and other states, territories and possessions of the United States and their authorities, agencies, instrumentalities and political subdivisions, the interest on which is exempt from federal income taxes, including participation interests in such obligations issued by banks, insurance companies or other financial institutions. (These securities, whether or not the interest thereon is subject to the federal alternative minimum tax, are referred to herein as "Municipal Obligations").
Dividends paid by the Fund which are treated as exempt-interest dividends for federal income tax purposes, to the extent derived from interest income on tax-exempt obligations issued by or on behalf of the State of Connecticut, its political subdivisions, or public instrumentalities, state or local authorities, districts or similar public entities created under Connecticut law, and obligations of Puerto Rico, other U.S. territories and their political subdivisions ("Connecticut Municipal Obligations"), will be exempt from federal and Connecticut personal income taxes. To the extent acceptable Connecticut Municipal Obligations are not available for investment, the Fund may purchase Municipal Obligations issued by other states, their agencies and instrumentalities, the interest income on which will be exempt from federal income tax but will be subject to Connecticut personal income taxes.
In determining the tax status of interest on Municipal Obligations and Connecticut Municipal Obligations, the Adviser relies on opinions of bond counsel who may be counsel to the issuer.
Under normal circumstances, the Fund invests at least 65% of its assets in Connecticut Municipal Obligations, although the exact amount of the Fund's assets invested in such securities varies from time to time. Although the Fund attempts to invest 100% of its assets in Municipal Obligations, the Fund may invest up to 20% of its total assets in securities the interest income on which is subject to federal, state and local income tax or the federal alternative minimum tax. The Fund may invest more than 25% of its assets in participation interests issued by banks in industrial development bonds and other Municipal Obligations. In view of this possible "concentration" in bank participation interests, an investment in the Fund should be made with an understanding of the characteristics of the banking industry and the risks which such an investment may entail. (See "Variable Rate Instruments and Participation Interests" hereafter.) Uninvested cash reserves may be held temporarily for the Fund pending investment. The Fund's investments may include "when-issued" or "forward delivery" Municipal Obligations, stand-by commitments and taxable repurchase agreements.
The Trust's Board of Trustees has determined that the term "high quality" means Municipal Obligations which at the time of purchase are rated within the AAA or AA categories by Standard & Poor's Rating Group ("Standard & Poor's") or Fitch Investors Service, Inc. ("Fitch") or within the Aaa or Aa categories by Moody's Investors Service, Inc. ("Moody's") in the case of bonds; MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch in the case of notes; A-1+, A-1 or A-2 by Standard & Poor's or Prime-1, Prime-2 by Moody's or F-1+, F-1 or F-2 by Fitch, in the case of tax-exempt commercial paper; or which are unrated but are determined to be of comparable quality by or on behalf of the Trust's Board of Trustees on the basis of a credit evaluation of the obligor or of the bank issuing a participation interest, letter of credit or guarantee, or insurance policy issued in support of the Municipal Obligations or participation interests. (See "Variable Rate Instruments and Participation Interests" below.) Such instruments may produce a lower yield than would be available from less highly rated instruments. The Trust's Board of Trustees has determined that Municipal Obligations which are backed by the full faith and credit of the U.S. Government will be considered to have a rating equivalent to Moody's Aaa. (See "Ratings of Municipal Obligations" in Appendix B to the Prospectus.)
All of the Fund's investments mature or are deemed to mature within 397 days from the date of acquisition and the average maturity of the investments in the Fund's portfolio (on a dollar-weighted basis) is 90 days or less. The maturities of variable rate instruments held in the Fund's portfolio are deemed to be the longer of the period remaining until the next interest rate adjustment or the period until the Fund would be entitled to payment pursuant to demand rights, a letter of credit, guarantee or insurance policy or a right to tender or put the instrument, although the stated maturities may be in excess of 397 days. (See "Variable Rate Instruments and Participation Interests" below.)
As a non-diversified investment company, the Fund is not subject to any statutory restrictions under the 1940 Act with respect to limiting the investment of its assets in one or relatively few issuers. This concentration may present greater risks than in the case of a diversified company. However, the Fund intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code. In order so to qualify under current law, at the close of each quarter of the Fund's taxable year, at least 50% of the value of the Fund's total assets must be represented by cash, U.S. Government securities, investment company securities and other securities limited in respect of any one issuer (or two or more issuers which the Fund controls and which are determined to be engaged in the same or similar trades or businesses or related businesses) to not more than 5% in value of the total assets of the Fund and not more than 10% of the outstanding voting securities of such issuer. In addition, and again under current law, at the close of each quarter of its taxable year, not more than 25% in value of the Fund's total assets may be invested in securities of one issuer other than U.S. Government securities.
For a general discussion of Municipal Obligations and an explanation of the ratings of Municipal Obligations by Moody's, Standard & Poor's and Fitch, see Appendix A and B to the Fund's Prospectus. For a comparison of yields on such Municipal Obligations and taxable securities, see the "Taxable Equivalent Yield Tables" in Appendix C to the Prospectus.
Except as stated below, the Fund's investment policies are not fundamental and may be changed by the Board of Trustees of the Trust without approval by the Fund's shareholders. As a fundamental policy, the Fund invests at least 80% of its assets, under normal circumstances, in:
(1) Municipal bonds with remaining maturities of 397 days or less that are rated at the date of purchase within the Aaa or Aa categories by Moody's or within the AAA or AA categories by Standard & Poor's or Fitch and present a minimal credit risk as determined by the Board of Trustees or the Adviser on its behalf or, if not rated by any of these rating agencies, are of comparable quality as determined by the Adviser on the basis of the credit evaluation of the obligor on the bonds or of the bank issuing a participation interest or guarantee or of any insurance policy issued in support of the bonds or the participation interests.
(2) Municipal notes with remaining maturities of 397 days or less that are rated at the date of purchase MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by Standard & Poor's or F-1+,F-1 or F-2 by Fitch and present a minimal credit risk as determined by the Board of Trustees or the Adviser on its behalf or, if not rated by any of these rating agencies, are of comparable quality as determined by the Adviser. The principal kinds of municipal notes are tax and revenue anticipation notes, tax anticipation notes, bond anticipation notes and revenue anticipation notes. Notes sold in anticipation of collection of taxes, a bond sale or receipt of other revenues are usually general obligations of the issuing municipality or agency. The Fund's investments may be concentrated in municipal obligations of Connecticut issuers.
(3) Municipal commercial paper that is rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch and presents a minimal credit risk as determined by the Board of Trustees or the Adviser on its behalf or, if not rated by any of these rating agencies, is of comparable quality as determined by the Adviser. Issues of municipal commercial paper typically represent very short-term, unsecured, negotiable promissory notes. These obligations are often issued to meet seasonal working capital needs of municipalities or to provide interim construction financing and are paid from general revenues of municipalities or are refinanced with long-term debt. In most cases municipal commercial paper is backed by letters of credit, lending agreements, note repurchase agreements or other credit facility agreements offered by banks or other institutions which may be called upon in the event of default by the issuer of the commercial paper.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease to be rated or its rating may be reduced below the minimum required for purchase for the Fund. Neither event will require sale of such Municipal Obligation by the Fund (other than variable rate instruments which must be sold if they are not "high quality"), but the Adviser will consider such event in determining whether the Fund should continue to hold the Municipal Obligation. To the extent that the ratings given to the Municipal Obligations or other securities held by the Fund are altered due to changes in either the Moody's or Standard & Poor's rating systems (see Appendix B to the Prospectus for an explanation of these ratings systems), the Adviser will adopt such changed ratings as standards for its future investments in accordance with the investment policies contained in the Prospectus. Certain Municipal Obligations issued by instrumentalities of the U.S. Government are not backed by the full faith and credit of the U.S. Treasury but only by the creditworthiness of the instrumentality. The Trust's Board of Trustees has determined that any Municipal Obligation that depends directly, or indirectly through a government insurance program or other guarantee, on the full faith and credit of the U.S. Government will be considered to have a rating in the highest category. Where necessary to ensure that the Municipal Obligations are of "high quality" (i.e., within the two highest ratings assigned by any major rating service), or where the obligations are not freely transferable, the Fund will require that the obligation to pay the principal and accrued interest be backed by an unconditional irrevocable bank letter of credit, a guarantee, insurance policy or other comparable undertaking of an approved financial institution.
The Fund may invest 25% or more of its assets in securities that are related in such a way that an economic, business or political development or change affecting one of the securities would also affect the other securities including, for example, securities the interest upon which is paid from revenues of similar type projects, or securities the issuers of which are located in the same state.
VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS
Variable rate instruments that the Fund may purchase are tax-exempt Municipal Obligations (including municipal notes and municipal commercial paper) that provide for a periodic adjustment in the interest rate paid on the instrument and permit the holder to receive payment upon a specified number of days' notice of the unpaid principal balance plus accrued interest either from the issuer or by drawing on a bank letter of credit, a guarantee or an insurance policy issued with respect to such instrument or by tendering or "putting" such instrument to a third party.
The variable rate instruments in which the Fund's assets may be invested are payable upon a specified period of notice which may range from one day up to one year. The terms of the instruments provide that interest rates are adjustable at intervals ranging from daily to up to one year and the adjustments are based upon the prime rate of a bank or other appropriate interest rate adjustment index as provided in the respective instruments. The Fund will decide which variable rate instruments it will purchase in accordance with procedures prescribed by the Board of Trustees to minimize credit risks. An unrated variable rate instrument may be determined to meet the Fund's high quality criteria if it is backed by a letter of credit or guarantee or a right to tender or put the instrument to a third party or is insured by an insurer that meets the high quality criteria for the Fund discussed above or on the basis of a credit evaluation of the underlying obligor. If the credit of the obligor is of "high quality," no credit support from a bank or other financial institution will be necessary. Each unrated variable rate instrument will be evaluated on a quarterly basis to determine that it continues to meet the Fund's high quality criteria. If an instrument is ever deemed to be of less than high quality, the Fund either will sell it in the market or exercise the liquidity feature described below.
Variable rate instruments in which the Fund may invest its assets may include participation interests in variable rate, Municipal Obligations owned by a bank, insurance company or other financial institution or affiliated organizations. Although the rate of the underlying Municipal Obligations may be fixed, the terms of the participation interest may result in the Fund receiving a variable rate on its investment. A participation interest gives the Fund an undivided interest in the Municipal Obligation in the proportion that the Fund's participation bears to the total principal amount of the Municipal Obligation and provides the liquidity feature. Each participation may be backed by an irrevocable letter of credit or guarantee of, or a right to put to, a bank (which may be the bank issuing the participation interest, a bank issuing a confirming letter of credit to that of the issuing bank, or a bank serving as agent of the issuing bank with respect to the possible repurchase of the participation interest) or insurance policy of an insurance company that has been determined by or on behalf of the Board of Trustees of the Trust to meet the prescribed quality standards of the Fund. The Fund has the right to sell the participation interest back to the institution or draw on the letter of credit or insurance after a specified period of notice, for all or any part of the full principal amount of the Fund's participation in the security, plus accrued interest. The Fund intends to exercise the liquidity feature only (1) upon a default under the terms of the bond documents, (2) as needed to provide liquidity to the Fund in order to make redemptions of Fund shares, or (3) to maintain a high quality investment portfolio. In some cases, this liquidity feature may not be exercisable in the event of a default on the underlying Municipal Obligations; in these cases, the underlying Municipal Obligations must meet the Fund's high credit standards at the time of purchase of the participation interest. Issuers of participation interests will retain a service and letter of credit fee and a fee for providing the liquidity feature, in an amount equal to the excess of the interest paid on the instruments over the negotiated yield at which the participations were purchased by the Fund. The total fees generally range from 5% to 15% of the applicable prime rate or other interest rate index. With respect to insurance, the Fund will attempt to have the issuer of the participation interest bear the cost of the insurance, although the Fund retains the option to purchase insurance if necessary, in which case the cost of insurance will be an expense of the Fund subject to the expense limitation of 2 1/2% of the first $30 million of the Fund's average net assets, 2% of the next $70 million and 1 1/2% of the Fund's average net assets in excess of $100 million. The Adviser has been instructed by the Trust's Board of Trustees to monitor continually the pricing, quality and liquidity of the variable rate instruments held by the Fund, including the participation interests, on the basis of published financial information and reports of the rating agencies and other bank analytical services to which the Fund may subscribe. Although participation interests may be sold, the Fund intends to hold them until maturity, except under the circumstances stated above.
In view of the "concentration" of the Fund in bank participation interests in Municipal Obligations secured by bank letters of credit or guarantees, an investment in the Fund should be made with an understanding of the characteristics of the banking industry and the risks which such an investment may entail. Banks are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of this industry is largely dependent upon the availability and cost of capital funds for the purpose of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of this industry and exposure to credit losses arising from possible financial difficulties of borrowers might affect a bank's ability to meet its obligations under a letter of credit.
Periods of high inflation and periods of economic slowdown, together with the fiscal measures adopted to attempt to deal with them, have brought wide fluctuations in interest rates. When interest rates rise, the value of fixed income securities generally falls, and vice versa. While this is true for variable rate instruments generally, the variable rate nature of the underlying instruments should minimize these changes in value. Accordingly, as interest rates decrease or increase, the potential for capital appreciation and the risk of potential capital depreciation is less than would be the case with a portfolio of fixed income securities. Because the adjustment of interest rates on the variable rate instruments is made in relation to movements of various interest rate adjustment indices, the variable rate instruments are not comparable to long-term fixed rate securities. Accordingly, interest rates on the variable rate instruments may be higher or lower than current market rates for fixed rate obligations of comparable quality with similar maturities.
Because of the variable rate nature of the instruments, when prevailing interest rates decline the Fund's yield will decline and its shareholders will forego the opportunity for capital appreciation. On the other hand, during periods when prevailing interest rates increase, the Fund's yield will increase and its shareholders will have reduced risk of capital depreciation.
For purposes of determining whether a variable rate instrument held by the Fund matures within 397 days from the date of its acquisition, the maturity of the instrument will be deemed to be the longer of (1) the period required before the Fund is entitled to receive payment of the principal amount of the instrument after notice or (2) the period remaining until the instrument's next interest rate adjustment, except that an instrument issued or guaranteed by the U.S. Government or any agency thereof shall be deemed to have a maturity equal to the period remaining until the next adjustment of the interest rate. The maturity of a variable rate instrument will be determined in the same manner for purposes of computing the Fund's dollar-weighted average portfolio maturity.
New issues of certain Municipal Obligations frequently are offered on a "when-issued" or "forward delivery" basis. The payment obligation and the interest rate that will be received on the Municipal Obligations are each fixed at the time the buyer enters into the commitment although settlement, i.e., delivery of and payment for the Municipal Obligations, takes place beyond customary settlement time (but normally within 45 days after the date of the Fund's commitment to purchase). Although the Fund will only make commitments to purchase "when-issued" or "forward delivery" Municipal Obligations with the intention of actually acquiring them, the Fund may sell these securities before the settlement date if deemed advisable by the Adviser.
Municipal Obligations purchased on a "when-issued" or "forward delivery" basis and the securities held in the Fund's portfolio are subject to changes in value based upon the public's perception of the credit-worthiness of the issuer and changes, real or anticipated, in the level of interest rates. The value of these Municipal Obligations and securities generally change in the same way, that is, both experience appreciation when interest rates decline and depreciation when interest rates rise. Purchasing Municipal Obligations on a "when-issued" or "forward delivery" basis can involve a risk that the yields available in the market on the settlement date may actually be higher or lower than those obtained in the transaction itself. A separate account of the Fund consisting of cash or liquid debt securities equal to the amount of the "when-issued" or "forward delivery" commitments will be established at the Fund's custodian bank. For the purpose of determining the adequacy of the securities in the account, the deposited securities will be valued at market value. If the market value of such securities declines, additional cash or highly liquid securities will be placed in the account daily so that the value of the account will equal the amount of the Fund's commitments. On the settlement date of the "when-issued" or "forward delivery" securities, the Fund's obligations will be met from then-available cash flow, sale of securities held in the separate account, sale of other securities or, although not normally expected, from sale of the "when-issued" or "forward delivery" securities themselves (which may have a value greater or lesser than the Fund's payment obligations). Sale of securities to meet such obligations may result in the realization of capital gains or losses, which are not exempt from federal income tax.
When the Fund purchases Municipal Obligations it may also acquire stand-by commitments from banks with respect to such Municipal Obligations. The Fund also may acquire stand-by commitments from broker-dealers. Under the stand-by commitment, a bank or broker-dealer agrees to purchase at the Fund's option a specified Municipal Obligation at a specified price. A stand-by commitment is the equivalent of a "put" option acquired by the Fund with respect to a particular Municipal Obligation held in the Fund's portfolio.
The amount payable to the Fund upon the exercise of a stand-by commitment normally would be (1) the acquisition cost of the Municipal Obligation (excluding any accrued interest paid on the acquisition), less any amortized market premium or plus any amortized market or original issue discount during the period the Fund owned the security, plus (2) all interest accrued on the security since the last interest payment date during the period the security was owned by the Fund. Absent unusual circumstances relating to a change in market value, the Fund would value the underlying Municipal Obligation at amortized cost. Accordingly, the amount payable by a bank or dealer during the time a stand-by commitment is exercisable would be substantially the same as the market value of the underlying Municipal Obligation. The Fund values stand-by commitments at zero for purposes of computing the value of its net assets.
The stand-by commitments that the Fund may enter into are subject to certain risks, which include the ability of the issuer of the commitment to pay for the securities at the time the commitment is exercised and the fact that the commitment is not marketable by the Fund and the maturity of the underlying security will generally be different from that of the commitment.
Although the Fund attempts to invest 100% of its net assets in tax-exempt Municipal Obligations, the Fund may invest up to 20% of the value of its net assets in securities of the kind described below, the interest income on which is subject to federal income tax. Circumstances in which the Fund may invest in taxable securities include the following: (a) pending investment of proceeds of sales of Fund shares or of portfolio securities; (b) pending settlement of purchases of portfolio securities; (c) to maintain liquidity for the purpose of meeting anticipated redemptions; and (d) when, in the opinion of the Fund's investment adviser, it is advisable to do so because of adverse market conditions affecting the market for Municipal Obligations. The kinds of taxable securities in which the Fund's assets may be invested are limited to the following short-term, fixed-income securities (maturing in 397 days or less from the time of purchase): (1) obligations of the U.S. Government or its agencies, instrumentalities or authorities; (2) commercial paper rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch; (3) certificates of deposit of U.S. banks with assets of $1 billion or more; and (4) repurchase agreements with respect to any Municipal Obligations or other securities which the Fund is permitted to own. The Fund's assets may also be invested in Municipal Obligations which are subject to an alternative minimum tax.
The Fund may invest assets in instruments subject to repurchase agreements only with member banks of the Federal Reserve System or "primary dealers" (as designated by the Federal Reserve Bank of New York) in U.S. Government securities. Under the terms of a typical repurchase agreement, the Fund would acquire an underlying debt instrument for a relatively short period (usually not more than one week) subject to an obligation of the seller to repurchase and the Fund to resell the instrument at a fixed price and time, thereby determining the yield during the Fund's holding period. This results in a fixed rate of return insulated from market fluctuations during such period. A repurchase agreement is subject to the risk that the seller may fail to repurchase the security. Repurchase agreements may be deemed to be loans under the 1940 Act. All repurchase agreements entered into by the Fund shall be fully collateralized at all times during the period of the agreement in that the value of the underlying security shall be at least equal to the amount of the loan, including the accrued interest thereon, and the Fund or its custodian or sub-custodian shall have possession of the collateral, which the Trust's Board of Trustees believes will give it a valid, perfected security interest in the collateral. Whether a repurchase agreement is the purchase and sale of a security or a collateralized loan has not been definitively established. This might become an issue in the event of the bankruptcy of the other party to the transaction. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the Fund but only constitute collateral for the seller's obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs in connection with the disposition of the collateral. The Trust's Board of Trustees believes that the collateral underlying repurchase agreements may be more susceptible to claims of the seller's creditors than would be the case with securities owned by the Fund. Repurchase agreements will give rise to income which will not qualify as tax-exempt income when distributed by the Fund. The Fund will not invest in a repurchase agreement maturing in more than seven days if any such investment together with illiquid securities held by the Fund exceed 10% of the Fund's total net assets. Repurchase agreements are also subject to the same risks described herein with respect to stand-by commitments.
The Fund intends to invest a high proportion of its assets in Connecticut Municipal Obligations. Payment of interest and preservation of principal is dependent upon the continuing ability of Connecticut issuers and/or obligors of state, municipal and public authority debt obligations to meet their obligations thereunder. For information concerning Connecticut Municipal Obligations, see the Appendix to this Statement of Additional Information.
The Adviser believes that by maintaining the Fund's investment portfolio in liquid, short-term, high quality investments, including participation interests and other variable rate instruments that have high quality credit support from banks, insurance companies or other financial institutions, the Fund is somewhat insulated from the credit risks that may exist for long-term Connecticut Municipal Obligations.
The summary set forth above and in the Appendix is included for the purpose of providing a general description of the State of Connecticut credit and financial conditions. This summary is based on information from statements of issuers of Connecticut Municipal Obligations and does not purport to be complete. The Trust is not responsible for the accuracy or timeliness of this information.
The Trust has adopted the following policies with respect to the Fund which may not be changed without approval by a "majority of the outstanding shares" of the Fund, which as used in this Statement of Additional Information, means the vote of the lesser of (i) 67% or more of the shares of the Fund present at a meeting, if the holders of more than 50% of the outstanding "voting securities" of the Fund are present or represented by proxy, or (ii) more than 50% of the outstanding "voting securities" of the Fund. The term "voting securities" as used in this paragraph has the same meaning as in the 1940 Act. The Fund will vote the shares held by its shareholders who do not give voting instructions in the same proportion as the shares of the Fund's shareholders who do give voting instructions. Shareholders of the Fund who do not vote will have no effect on the outcome of these matters.
The Trust may not with respect to the Fund:
(1) Make investments other than as described under "Investment Policies" above or any other form of federal tax-exempt investment which meets the Fund's high quality criteria, as determined by the Board of Trustees and which is consistent with the Fund's investment objectives and policies (provided, however, that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objective and policies and substantially the same investment restrictions as the Fund).
(2) Borrow money. This restriction shall not apply to borrowings from banks for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests that might otherwise require the untimely disposition of securities, in an amount up to 15% of the value of the Fund's total assets (including the amount borrowed) valued at market less liabilities (not including the amount borrowed) at the time the borrowing was made. While borrowings exceed 5% of the value of the Fund's total assets, the Trust will not make any investments on behalf of the Fund. Interest paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber the Fund's assets, except in an amount up to 15% of the value of the Fund's total assets and only to secure borrowings for temporary or emergency purposes.
(4) Sell securities short or purchase securities on margin, or engage in the purchase and sale of put, call, straddle or spread options or in writing such options, except to the extent that securities subject to a demand obligation and stand-by commitments may be purchased as set forth under "Investment Policies" above.
(5) Underwrite the securities of other issuers, except insofar as the Trust may be deemed an underwriter under the Securities Act of 1933 in disposing of a portfolio security of the Fund (provided, however, that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objective and policies and substantially the same investment restrictions as the Fund).
(6) Purchase or sell real estate, real estate investment trust securities, commodities or commodity contracts, or oil and gas interests, but this shall not prevent the Trust from investing in Municipal Obligations secured by real estate or interests in real estate.
(7) Make loans to others, except through the purchase of portfolio investments, including repurchase agreements, as described under "Investment Policies" above.
(8) Purchase more than 10% of all outstanding voting securities of any one issuer or invest in companies for the purpose of exercising control, except that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objective and policies and substantially the same investment restrictions as the Fund.
(9) Invest more than 25% of the Fund's assets in the securities of "issuers" in any single industry, provided that the Trust reserves the right to invest more than 25% of the Fund's assets in bank participation interests and there shall be no limitation on the purchase of those Municipal Obligations and other obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, except that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objective and policies and substantially the same investment restrictions as the Fund. When the assets and revenues of an agency, authority, instrumentality or other political subdivision are separate from those of the government creating the issuing entity and a security is backed only by the assets and revenues of the entity, the entity would be deemed to be the sole issuer of the security. Similarly, in the case of a private activity bond, if that bond is backed only by the assets and revenues of the non-governmental user, then such non-governmental user would be deemed to be the sole issuer. If, however, in either case, the creating government or some other entity, such as an insurance company or other corporate obligor, guarantees a security or a bank issues a letter of credit, such a guarantee or letter of credit may, in accordance with applicable Securities and Exchange Commission ("SEC") rules, be considered a separate security and could be treated as an issue of such government, other entity or bank.
(10) Invest in securities of other investment companies, except the Trust may purchase on behalf of the Fund unit investment trust securities (i.e., securities issued by an investment company which (i) is organized under a trust indenture or contract of custodianship or similar instrument, (ii) does not have a board of directors, and (iii) issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities) where such unit trusts meet the investment objectives and policies of the Fund and then only up to 5% of the Fund's net assets, except as they may be acquired as part of a merger, consolidation or acquisition of assets, except that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objectives and policies and substantially the same investment restrictions as the Fund. As of the date of this Statement of Additional Information, the Trust has no intention of investing in unit investment trust securities on behalf of the Fund.
(11) Issue any senior security (as that term is defined in the 1940 Act) if such issuance is specifically prohibited by the 1940 Act or the rules and regulations promulgated thereunder, except as appropriate to evidence a debt incurred without violating Investment Restriction (2) above.
For purposes of the investment restrictions described in (8) and (9) above, the issuer of a tax-exempt security is deemed to be the entity (public or private) ultimately responsible for the payment of principal of and interest on the security. If, however, the acting government or some other entity, such as an insurance company or other corporate obligor, guarantees a security or a bank issues a Letter of Credit, such a guarantee or Letter of Credit may, in accordance with applicable SEC rules, be considered a separate security and treated as an issue of such government, other entity or bank.
In addition, as a matter of non-fundamental policy, the Trust will not invest on behalf of the Fund in securities that are not readily marketable, such as fixed time deposits and repurchase agreements maturing in more than seven days, if such investments together with other illiquid securities held by the Fund exceed 10% of the Fund's total net assets.
If a percentage restriction or a rating restriction (other than a restriction as to borrowing) on investment or utilization of assets set forth above is adhered to at the time an investment is made or assets are so utilized, a later change in percentage resulting from the changes in the value of the portfolio securities or a later change in the rating of a portfolio security will not be considered a violation of such policy.
Any current yield quotation of the Fund which is used in such a manner as to be subject to the provisions of Rule 482(d) under the Securities Act of 1933, as amended, consists of an annualized historical yield, carried at least to the nearest hundredth of one percent, based on a specific seven calendar day period and is calculated by dividing the net change in the value of an account having a balance of one share at the beginning of the period by the value of the account at the beginning of the period and multiplying the quotient by 365/7. For this purpose the net change in account value would reflect the value of additional shares purchased with dividends declared on the original share and dividends declared on both the original share and any such additional shares, but would not reflect any realized gains or losses from the sale of securities or any unrealized appreciation or depreciation on portfolio securities. In addition, any effective yield quotation of the Fund so used shall be calculated by compounding the current yield quotation for such period by multiplying such quotation by 7/365, adding 1 to the product, raising the sum to a power equal to 365/7, and subtracting 1 from the result.
Any tax equivalent yield quotation of the Fund is calculated as follows: If the entire current yield quotation for such period is tax-exempt, the tax equivalent yield will be the current yield quotation divided by 1 minus a stated income tax rate or rates. If a portion of the current yield quotation is not tax-exempt, the tax equivalent yield will be the sum of (a) that portion of the yield which is tax-exempt divided by 1 minus a stated income tax rate or rates and (b) the portion of the yield which is not tax-exempt.
A total rate of return quotation for the Fund is calculated for any period by (a) dividing (i) the sum of the net asset value per share on the last day of the period and the net asset value per share on the last day of the period of shares purchasable with dividends and capital gains distributions declared during such period with respect to a share held at the beginning of such period and with respect to shares purchased with such dividends and capital gains distributions, by (ii) the public offering price on the first day of such period, and (b) subtracting 1 from the result. Any annualized total rate of return quotation is calculated by (x) adding 1 to the period total rate of return quotation calculated above, (y) raising such sum to a power which is equal to 365 divided by the number of days in such period, and (z) subtracting 1 from the result.
Any tax equivalent total rate of return quotation of the Fund is calculated as follows: If the entire current total rate of return quotation for such period is tax-exempt, the tax equivalent total rate of return will be the current total rate of return quotation divided by 1 minus a stated income tax rate or rates. If a portion of the current total rate of return quotation is not tax-exempt, the tax equivalent total rate of return will be the sum of (a) that portion of the total rate of return which is tax-exempt divided by 1 minus a stated income tax rate or rates and (b) the portion of the total rate of return which is not tax-exempt.
Set forth below is total rate of return information, assuming that dividends and capital gains distributions, if any, were reinvested, for the Fund for the periods indicated, at the beginning of which periods no sales charges were applicable to purchases of shares of the Fund (unless otherwise indicated).
The annualized yield of the Fund for the seven-day period ended August 31, 1995 was 3.33%, the effective compound annualized yield of the Fund for such period was 3.38% and the annualized tax equivalent yield of the Fund for such period was 5.02% (assuming (i) a combined Connecticut and federal tax bracket of 42.32% and (ii) that 87% of the Fund's assets were invested in Connecticut Municipal Obligations).
4. DETERMINATION OF NET ASSET VALUE
The net asset value of each of the shares of the Fund is determined on each day on which the New York Stock Exchange is open for trading. This determination is made once during each such day as of 12:00 noon, Eastern time, by dividing the value of the Fund's net assets (i.e., the value of its assets less its liabilities, including expenses payable or accrued) by the number of shares of the Fund outstanding at the time the determination is made. As of the date of this Statement of Additional Information, the New York Stock Exchange is open for trading every weekday except for the following holidays (or the days on which they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. It is anticipated that the net asset value of each share of the Fund will remain constant at $1.00 and, although no assurance can be given that it will be able to do so on a continuing basis, as described below, the Fund employs specific investment policies and procedures to accomplish this result.
The securities held by the Fund are valued at their amortized cost. Amortized cost valuation involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. If fluctuating interest rates cause the market value of the securities held by the Fund to deviate more than 1/2 of 1% from their value determined on the basis of amortized cost, the Board of Trustees of the Trust will consider whether any action should be initiated, as described in the following paragraph. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated value of an instrument is higher or lower than the price the Fund would receive if the instrument were sold.
Pursuant to the rules of the SEC, the Trust's Board of Trustees has established procedures to stabilize the value of the Fund's net assets within 1/2 of 1% of the value determined on the basis of amortized cost. These procedures include a review of the extent of any such deviation of net asset value, based on available market rates. Should that deviation exceed 1/2 of 1%, the Trust's Board of Trustees will consider whether any action should be initiated to eliminate or reduce material dilution or other unfair results to investors in the Fund. Such action may include withdrawal in kind, selling securities prior to maturity and utilizing a net asset value as determined by using available market quotations. The Fund maintains a dollar-weighted average maturity of 90 days or less, does not purchase any instrument with a remaining maturity greater than 397 days or subject to a repurchase agreement having a duration of greater than 397 days, and limits its investments, including repurchase agreements, to those U.S. dollar-denominated instruments that are determined by the Adviser to present minimal credit risks and comply with certain reporting and recordkeeping procedures. The Trust also has established procedures to ensure that securities purchased by it meet the high quality criteria described above in "Investment Policies."
Subject to compliance with applicable regulations, the Trust has reserved the right to pay the redemption price of shares of the Fund, either totally or partially, by a distribution in kind of readily marketable securities (instead of cash). The securities so distributed would be valued at the same amount as that assigned to them in calculating the net asset value for the shares or beneficial interests being sold. If a holder of shares or beneficial interests received a distribution in kind, such holder could incur brokerage or other charges in converting the securities to cash.
The Trust may suspend the right of redemption or postpone the date of payment for shares of the Fund for more than seven days during any period when (a) trading in the markets the Fund normally utilizes is restricted, or an emergency, as defined by the rules and regulations of the SEC, exists making disposal of the Fund's investments or determination of its net asset value not reasonably practicable; (b) the NYSE is closed (other than customary weekend and holiday closings); or (c) the SEC has by order permitted such suspension.
The Trustees and officers of the Trust, their ages and their principal occupations during the past five years are set forth below. Their titles may have varied during that period. Asterisks indicate that those Trustees and officers are "interested persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated below, the address of each Trustee and officer is 6 St. James Avenue, Boston, Massachusetts.
H. B. ALVORD; 73 -- Treasurer - Tax Collector, County of Los Angeles (retired, March, 1984); Trustee, The 59 Wall Street Trust and The 59 Wall Street Fund, Inc. (Registered Investment Companies). His address is P.O. Box 1812, Pebble Beach, California.
ELLIOTT J. BERV; 52 -- Chairman and Director, Catalyst, Inc. (Management Consultants) (since August, 1992); President, Chief Operating Officer and Director, Deven International, Inc. (International Consultants) (June, 1991 to July, 1992); President and Director, Elliott J. Berv & Associates (Management Consultants) (since May, 1984). His address is 15 Stornoway Drive, Cumberland Foreside, Maine.
PHILIP W. COOLIDGE; 44* -- President of the Trust; Chairman, Chief Executive Officer and President, Signature Financial Group, Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
MARK T. FINN; 52 -- President and Director, Delta Financial, Inc. (since June, 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd. (Commodity Trading Advisory Firm) (since April, 1990); Director, Vantage Consulting Group, Inc. (since October, 1988). His address is 3500 Pacific Avenue, P.O. Box 539, Virginia Beach, Virginia.
RILEY C. GILLEY; 69 -- Vice President and General Counsel, Corporate Property Investors (December, 1988 to September, 1991); Retired Partner, Breed, Abbott & Morgan (Attorneys) (Retired, December, 1987). His address is 4041 Gulf Shore Boulevard North, Naples, Florida.
DIANA R. HARRINGTON; 55 -- Professor, Babson College (since September, 1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern University (September, 1992 to September, 1993); Professor, Darden Graduate School of Business, University of Virginia (September, 1978 to September, 1993); Consultant to Kidder, Peabody & Co. Incorporated (since January, 1990). Her address is 120 Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY; 44 -- President, Global Research Associates, Inc. (Investment Research) (since August, 1990); Manager of Special Investments, Rockefeller & Co. (April, 1988 to August, 1990); Director of Research, Rogers, Casey & Barksdale (Investment Research and Consulting) (November, 1983 to March, 1988); Director, New York Life Insurance Company (Institutional Mutual Funds) (since December, 1990). Her address is P.O. Box 9572, New Haven, Connecticut.
C. OSCAR MORONG, JR.; 60 -- Chairman of the Board of Trustees of the Trust; Managing Director, Morong Capital Management (since February, 1993); Senior Vice President and Investment Manager, CREF Investments, Teachers Insurance & Annuity Association (retired January, 1993). His address is 1385 Outlook Drive West, Mountainside, New Jersey.
WALTER E. ROBB, III; 69 -- President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since 1989); Trustee of certain registered investment companies in the MFS Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN; 61 -- Professor of Management, Graduate School of Business, Columbia University (since 1987). His address is Columbia University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR.; 75 -- Vice President - Investments, Sun Company (retired, April, 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey.
PHILIP W. COOLIDGE; 44* -- President of the Trust; Chairman, Chief Executive Officer and President, Signature Financial Group, Inc., and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
DAVID G. DANIELSON; 30* -- Assistant Treasurer of the Trust; Assistant Manager, Signature Financial Group, Inc. since May 1991; Graduate Student, Northeastern Unversity from April 1990 to March 1991.
JOHN R. ELDER; 47* -- Treasurer of the Trust; Vice President, Signature Financial Group, Inc. (since April 1995); Treasurer, Phoenix Family of Mutual Funds (Phoenix Home Life Mutual Insurance Company) (from 1983 to March 1995).
LINDA T. GIBSON; 30* -- Assistant Secretary of the Trust; Legal Counsel, Signature Financial Group, Inc. (since June 1991); law student, Boston University School of Law (from September 1989 to May 1992); Product Manager, Signature Financial Group, Inc. (January 1989 to September 1989).
JAMES S. LELKO; 30* -- Assistant Treasurer of the Trust; Assistant Manager, Signature Financial Group, Inc. since January 1993; Senior Tax Compliance Accountant, Putnam Companies since prior to December 1992.
THOMAS M. LENZ; 37* -- Secretary of the Trust; Vice President and Associate General Counsel, Signature Financial Group, Inc. (since November 1989); Attorney, Ropes & Gray (September 1984 to November 1989).
MOLLY S. MUGLER; 44* -- Assistant Secretary of the Trust; Legal Counsel and Assistant Secretary, Signature Financial Group, Inc. (since December, 1988); Assistant Secretary, The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
BARBARA M. O'DETTE; 36* -- Assistant Treasurer of the Trust; Assistant Treasurer, Signature Financial Group, Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988).
ANDRES E. SALDANA; 33* -- Assistant Secretary of the Trust; Legal Counsel and Assistant Secretary, Signature Financial Group, Inc. since November 1992; Attorney, Ropes & Gray from September 1990 to November 1992.
DANIEL E. SHEA; 33* -- Assistant Treasurer of the Trust; Assistant Manager of Fund Administration, Signature Financial Group, Inc., since November 1993; Supervisor and Senior Technical Advisor, Putnam Investments since prior to 1990.
The Trustees and officers of the Trust also hold comparable positions with certain other funds for which LFBDS or an affiliate serves as the distributor or administrator.
As of December 15, 1995, all Trustees and officers as a group owned less than 1% of the Fund's outstanding shares. As of the same date, more than 95% of the outstanding shares of the Fund were held of record by Citibank, N.A. or an affiliate, as a Shareholder Servicing Agent of the Fund, for the accounts of their respective clients.
The Declaration of Trust of the Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust unless, as to liability to the Trust or its investors, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices, or unless with respect to any other matter it is finally adjudicated that they did not act in good faith in the reasonable belief that their actions were in the best interests of the Trust. In the case of settlement, such indemnification will not be provided unless it has been determined by a court or other body approving the settlement or other disposition, or by a reasonable determination, based upon a review of readily available facts, by vote of a majority of disinterested Trustees of the Trust, or in a written opinion of independent counsel, that such officers or Trustees have not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Citibank manages the assets of the Trust pursuant to an investment advisory agreement (the "Advisory Agreement"). Subject to such policies as the Board of Trustees of the Trust may determine, the Adviser manages the securities of the Fund and makes investment decisions for the Fund. The Adviser furnishes at its own expense all services, facilities and personnel necessary in connection with managing the Fund's investments and effecting securities transactions for the Fund. The Advisory Agreement will continue in effect until September 13, 1995 and thereafter as long as its continuance is specifically approved at least annually by the Board of Trustees of the Trust or by a vote of a majority of the outstanding voting securities of the Fund, and, in either case, by a majority of the Trustees of the Trust who are not parties to the Advisory Agreement or interested persons of any such party, at a meeting called for the purpose of voting on the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render services to others. The Advisory Agreement is terminable without penalty on not more than 60 days' nor less than 30 days' written notice by the Trust when authorized either by a vote of a majority of the outstanding voting securities of the Fund or by a vote of a majority of the Board of Trustees of the Trust, or by the Adviser on not more than 60 days' nor less than 30 days' written notice, and will automatically terminate in the event of its assignment. The Advisory Agreement provides that neither the Adviser nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions for the Fund, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties under the Advisory Agreement.
The Prospectus contains a description of the fees payable to the Adviser for services under the Advisory Agreement. For the period December 1, 1993 (commencement of operations of the Fund) to August 31, 1994 and for the fiscal year ended August 31, 1995, the fees payable to Citibank under the Advisory Agreement were $10,533 and $74,063 (all of which were voluntarily waived).
Pursuant to an Administrative Services Agreement (the "Administrative Services Agreement"), LFBDS provides the Trust with general office facilities and LFBDS supervises the overall administration of the Trust, including, among other responsibilities, the negotiation of contracts and fees with, and the monitoring of performance and billings of, the independent contractors and agents of the Trust; the preparation and filing of all documents required for compliance by the Trust with applicable laws and regulations; and arranging for the maintenance of books and records of the Trust. The Administrator provides persons satisfactory to the Board of Trustees of the Trust to serve as Trustees and officers of the Trust. Such Trustees and officers may be directors, officers or employees of LFBDS or its affiliates.
The Prospectus contains a description of the fees payable to the Administrator under the Administrative Services Agreement.
For the period from December 1, 1993 (commencement of operation) to August 31, 1994 and for the fiscal year ended August 31, 1995, the fees payable to LFBDS from the Fund under the Administrative Services Agreement were $7,900 and $55,547 (all of which were voluntarily waived).
The Administrative Services Agreement with the Trust acknowledges that the names "Landmark" and "Landmark Funds" are the property of the Administrator and provides that if LFBDS ceases to serve as the Administrator of the Trust, the Trust and the Fund will change their respective names so as to delete the word "Landmark" or the words "Landmark Funds." The Administrative Services Agreement with the Trust also provides that LFBDS may render administrative services to others and may permit other investment companies in addition to the Trust to use the word "Landmark" or the words "Landmark Funds" in their names.
The Administrative Services Agreement with the Trust continues in effect if such continuance is specifically approved at least annually by the Trust's Board of Trustees or by a vote of a majority of the outstanding voting securities of the Trust and, in either case, by a majority of the Trustees of the Trust who are not interested parties of the Trust or the Administrator. The Administrative Services Agreement with the Trust terminates automatically if it is assigned and may be terminated as to the Fund by the Trust without penalty by vote of a majority of the outstanding voting securities of the Fund or by either party on not more than 60 days' nor less than 30 days' written notice. The Administrative Services Agreement with the Trust also provides that neither the Administrator nor its personnel shall be liable for any error of judgment or mistake of law or for any act or omission in the administration or management of the Trust, except for willful misfeasance, bad faith or gross negligence in the performance of its or their duties or by reason of reckless disregard of its or their obligations and duties under the Administrative Services Agreement.
The Administrator has agreed to reimburse the Fund for its operating expenses (exclusive of interest, taxes, brokerage, and extraordinary expenses) which in any year exceed the limits prescribed by any state in which the Fund's shares are qualified for sale. The expenses incurred by the Fund for distribution purposes pursuant to the Trust's Distribution Plan are included within such operating expenses only to the extent required by any state in which the Fund's shares are qualified for sale. The Trust may elect not to qualify the Fund's shares for sale in every state. The Trust believes that currently the most restrictive expense ratio limitation imposed by any state is 2 1/2% of the first $30 million of the Fund's average net assets for its then-current fiscal year, 2% of the next $70 million of such assets, and 1 1/2% of such assets in excess of $100 million. For the purpose of this obligation to reimburse expenses, the Fund's annual expenses are estimated and accrued daily, and any appropriate estimated payments will be made by the Administrator. Subject to the obligation of the Administrator to reimburse the Fund for its excess expenses as described above, the Trust has, under its Administrative Services Agreement, confirmed its obligation for payment of all other expenses of the Fund.
LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc.
Pursuant to a Sub-Administrative Services Agreement (the "Sub-Administrative Agreement"), Citibank performs such sub-administrative duties for the Trust as are from time to time agreed upon by Citibank and LFBDS. Citibank's sub-administrative duties may include providing equipment and clerical personnel necessary for maintaining the organization of the Trust, participation in preparation of documents required for compliance by the Trust with applicable laws and regulations, preparation of certain documents in connection with meetings of Trustees and shareholders of the Trust, and other functions which would otherwise be performed by the Administrator as set forth above. For performing such sub-administrative services, Citibank receives such compensation as is from time to time agreed upon by LFBDS and Citibank, not in excess of the amount paid to the Administrator for its services under the Administrative Services Agreement. All such compensation is paid by LFBDS.
The Trust, on behalf of the Fund, has adopted a Distribution Plan (the "Distribution Plan") in accordance with Rule 12b-1 under the 1940 Act after having concluded that there is a reasonable likelihood that the Distribution Plan will benefit the Fund and its shareholders. The Distribution Plan provides that the Trust shall pay a distribution fee to the Distributor at an annual rate not to exceed 0.10% of the Fund's average daily net assets for distribution of the Fund's shares (exclusive of any advertising expenses incurred by the Distributor in connection with the sale of shares of the Fund). The Distributor may use all or any portion of such fee to pay for Fund expenses of printing prospectuses and reports used for sales purposes, expenses of the preparation and printing of sales literature and other distribution-related expenses.
The Trust is also permitted to pay the Distributor an additional fee not to exceed 0.10% per annum of the Fund's average daily net assets in anticipation of, or as reimbursement for, print or electronic media advertising expenses incurred in connection with the sale of shares of the Fund. No payments under the Distribution Plan will be made to Shareholder Servicing Agents although Shareholder Servicing Agents receive payments under the Administrative Services Plan referred to below.
The Distribution Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Trust's Trustees and a majority of the Trust's Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreement related to the Plan ("Qualified Trustees"). The Distribution Plan requires that the Trust and the Distributor shall provide to the Board of Trustees, and the Board of Trustees shall review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Distribution Plan. The Distribution Plan further provides that the selection and nomination of the Qualified Trustees is committed to the discretion of the disinterested Trustees (as defined in the 1940 Act) then in office. The Distribution Plan may be terminated with respect to the Fund at any time by a vote of a majority of the Trust's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Fund. The Distribution Plan may not be amended to increase materially the amount of the Fund's permitted expenses thereunder without the approval of a majority of the outstanding voting securities of the Fund and may not be materially amended in any case without a vote of the majority of both the Trustees and the Qualified Trustees. The Distributor will preserve copies of any plan, agreement or report made pursuant to the Distribution Plan for a period of not less than six years from the date of the Plan, and for the first two years the Distributor will preserve such copies in an easily accessible place.
As contemplated by the Distribution Plan, LFBDS acts as the agent of the Fund in connection with the offering of shares of the Fund pursuant to a Distribution Agreement (the "Distribution Agreement"). After the prospectus and periodic reports have been prepared, set in type and mailed to existing shareholders, the Distributor pays for the printing and distribution of copies of the prospectuses and periodic reports which are used in connection with the offering of shares of the Fund to prospective investors. The Prospectus contains a description of fees payable to the Distributor under the Distribution Agreement. The Distributor has voluntarily agreed to waive a portion of the fees payable to it on a month-to-month basis. For the period from December 1, 1993 (commencement of operations) to August 31, 1994 and for the fiscal year ended August 31, 1995, the fees payable to the Distributor from the Fund under the Distribution Agreement were $2,633 and $18,516 (all of which were voluntarily waived).
SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN
The Trust has adopted an Administrative Services Plan (the "Administrative Plan") which provides that the Trust may obtain the services of an administrator, a transfer agent, a custodian and one or more Shareholder Servicing Agents, and may enter into agreements providing for the payment of fees for such services. Under the Administrative Plan, the aggregate of the fee paid to the Administrator from the Fund, the fees paid to the Shareholder Servicing Agents from the Fund and the distribution fee paid from the Fund to the Distributor under the Distribution Plan may not exceed 0.60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. The Administrative Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Trust's Trustees and a majority of the Trust's Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Administrative Plan or in any agreement related to such Plan ("Qualified Trustees"). The Administrative Plan requires that the Trust provide to the Trust's Board of Trustees and the Trust's Board of Trustees review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Administrative Plan. The Administrative Plan may be terminated at any time with respect to the Fund by a vote of a majority of the Trust's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Fund. The Administrative Plan may not be amended to increase materially the amount of permitted expenses thereunder without the approval of a majority of the outstanding voting securities of the Fund and may not be materially amended in any case without a vote of the majority of both the Trust's Trustees and the Qualified Trustees.
The Trust has entered into a shareholder servicing agreement (a "Servicing Agreement") with each Shareholder Servicing Agent and a Transfer Agency and Service Agreement and a Custodian Agreement with State Street Bank and Trust Company ("State Street") pursuant to which State Street acts as transfer agent and custodian and performs fund accounting services for the Trust. For additional information, including a description of fees paid to the Shareholder Servicing Agents under the Servicing Agreements, see "Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund Accountant" in the Prospectus. For the period from December 1, 1993 (commencement of operations) to August 31, 1994 and for the fiscal year ended August 31, 1995, the aggregate fees payable by the Fund to Shareholder Servicing Agents under the Administrative Services Plan were $21,066 and $148,126 (all of which were voluntarily waived).
The Fund's purchases and sales of its portfolio securities usually are principal transactions. Portfolio securities are normally purchased directly from the issuer or from an underwriter or market maker for the securities. There usually are no brokerage commissions paid for such purchases. The Fund does not anticipate paying brokerage commissions. Any transaction for which the Fund pays a brokerage commission will be effected at the best price and execution available. Purchases from underwriters of portfolio securities include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market makers include the spread between the bid and asked price.
Allocation of transactions, including their frequency, to various dealers is determined by the Adviser in its best judgment and in a manner deemed to be in the best interest of investors in the Fund rather than by any formula. The primary consideration is prompt execution of orders in an effective manner at the most favorable price.
Investment decisions for the Fund will be made independently from those for any other account, series or investment company that is or may in the future become managed by the Adviser or its affiliates. If, however, the Fund and other investment companies, series or accounts managed by the Adviser are contemporaneously engaged in the purchase or sale of the same security, the transactions may be averaged as to price and allocated equitably to each account. In some cases, this policy might adversely affect the price paid or received by the Fund or the size of the position obtainable for the Fund. In addition, when purchases or sales of the same security for the Fund and for other investment companies or series managed by the Adviser occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantages available to large denomination purchases or sales.
No portfolio transactions are executed with the Adviser, or with any affiliate of the Adviser, acting either as principal or as broker.
7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trust's Board of Trustees to issue an unlimited number of full and fractional Shares of Beneficial Interest (without par value) and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in that series. Each share of the series represents an equal proportionate interest in the series with each other share. Upon liquidation or dissolution of the Fund, the Fund's shareholders are entitled to share pro rata in the Fund's net assets available for distribution to its shareholders. The Trust reserves the right to create and issue additional series of shares, in which case the shares of each series would participate pro rata in the earnings, dividends and distribution of net assets of the particular series upon the liquidation or dissolution of the series. Shares of each series would be entitled to vote separately to approve advisory agreements or changes in investment policy, but shares of all series could vote together in the election or selection of Trustees and accountants for the Fund.
Shareholders are entitled to one vote for each share held on matters on which they are entitled to vote. Shareholders in the Trust do not have cumulative voting rights, and shareholders owning more than 50% of the outstanding shares of the Trust may elect all of the Trustees of the Trust if they choose to do so and in such event the other shareholders in the Trust would not be able to elect any Trustee. The Trust is not required to and has no current intention to hold annual meetings of shareholders but the Trust will hold special meetings of shareholders when in the judgment of the Trust's Trustees it is necessary or desirable to submit matters for a shareholder vote. Shareholders have under certain circumstances (e.g., upon application and submission of certain specified documents to the Trustees by a specified number of shareholders) the right to communicate with other shareholders in connection with requesting a meeting of shareholders for the purpose of removing one or more Trustees. Shareholders also have the right to remove one or more Trustees without a meeting by a declaration in writing by a specified number of shareholders. No material amendment may be made to the Trust's Declaration of Trust without the affirmative vote of the holders of a majority of its outstanding shares.
The Trust's Declaration of Trust provides that, at any meeting of shareholders of the Trust or of any series of the Trust, a Shareholder Servicing Agent may vote any shares of which it is the holder of record and for which it does not receive voting instructions proportionately in accordance with the instructions it receives for all other shares of which it is the holder of record. Shares have no preference, pre-emptive or conversion or similar rights. Shares, when issued, are fully paid and non-assessable, except as set forth below.
The Trust may enter into a merger or consolidation, or sell all or substantially all of its assets, if approved by the vote of the holders of two-thirds of its outstanding shares voting as a single class, except that if the Trustees of the Trust recommend such sale of assets, merger or consolidation, the approval by a vote of the holders of a majority of the Trust's outstanding voting securities would be sufficient. The Trust may be terminated (i) by a vote of a majority of the outstanding voting securities of the Trust or (ii) by the Trustees by written notice to the shareholders of the Trust. If not so terminated, the Trust will continue indefinitely.
Share certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust and provides for indemnification and reimbursement of expenses out of the Trust property for any shareholder held personally liable for the obligations of the Trust. The Declaration of Trust also provides that the Trust shall maintain appropriate insurance (e.g., fidelity bonding and errors and omissions insurance) for the protection of the Trust, its shareholders, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of the Trust are not binding upon the Trust's Trustees individually but only upon the property of the Trust and that the Trust's Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office.
8. CERTAIN ADDITIONAL TAX MATTERS
The Fund has elected to be treated and intends to qualify each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), by meeting all applicable requirements of Subchapter M, including requirements as to the nature of the Fund's gross income, the amount of Fund distributions (as a percentage of both the Fund's overall income and its tax-exempt income), and the composition and holding period of the Fund's portfolio assets. Provided all such requirements are met and all of the Fund's net investment income and realized capital gains are distributed to shareholders in accordance with the timing requirements imposed by the Code, no federal income or excise taxes will be required to be paid by the Fund. If the Fund should fail to qualify as a regulated investment company for any year, the Fund would incur a regular corporate federal income tax upon its taxable income and Fund distributions would generally be taxable as ordinary dividend income to shareholders.
The portion of the Fund's distributions of net investment income that is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as an item of tax preference for shareholders under the federal alternative minimum tax, and all exempt-interest dividends may increase a corporate shareholder's alternative minimum tax. Unless the Fund provides shareholders with actual monthly percentage breakdowns, the percentage of income designated as tax exempt will be applied uniformly to all distributions by the Fund of net investment income made during each fiscal year of the Fund and may differ from the percentage of distributions consisting of tax-exempt interest in any particular month. Shareholders are required to report exempt-interest dividends received from the Fund on their federal income tax returns.
Because the Fund expects to earn primarily interest income, it is expected that no Fund distributions will qualify for the dividends-received deduction for corporations.
9. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the independent certified public accountants for the Fund, providing audit services and assistance and consultation with respect to the preparation of filings with the SEC.
The audited financial statements of the Fund (Portfolio of Investments at August 31, 1995, Statement of Assets and Liabilities at August 31, 1995, Statement of Operations for the fiscal year ended August 31, 1995, the Statement of Changes in Net Assets and Financial Highlights for the fiscal year ended August 31, 1995 and for the period from December 1, 1993 (commencement of operations) to August 31, 1994, Notes to Financial Statements and the Independent Auditor's Report), which are included in the Annual Report to Shareholders of the Fund, are incorporated by reference into this Statement of Additional Information and have been so incorporated in reliance upon the report of Deloitte & Touche LLP.
A copy of the Annual Report accompanies this Statement of Additional Information.
The following information is a summary of special factors affecting investments in Connecticut Municipal Obligations. The sources of payment for such obligations and the marketability thereof may be affected by financial or other difficulties experienced by Connecticut (the "State") and certain of its municipalities and public authorities. This summary does not purport to be a complete description and is based on information from statements relating to offerings of Connecticut bond issues. Landmark Connecticut Tax Free Reserves is not responsible for the accuracy or timeliness of this information.
Connecticut's economy is diverse. Manufacturing employment in the State has been on a downward trend since the mid-1980s, while non-manufacturing employment has risen significantly. Manufacturing is diversified, with transportation equipment (primarily aircraft engines, helicopters and submarines) the dominant industry. Connecticut is a leading producer of aircraft engines, along with related components, and submarines. The largest employers in these industries are United Technologies Corporation, including its Pratt and Whitney Aircraft Division, with headquarters in East Hartford, and General Dynamics Corporation's Electric Boat Division in Groton. The State is also a leading producer of military and civilian helicopters.
Over the past ten years, Connecticut's manufacturing employment peaked in 1985 at over 408,000 workers. Since that year, employment in manufacturing has been on a downward trend, declining 30.1% or a loss of 122,850 jobs by 1994 from 1985 levels. A number of factors, such as the overvalued dollar of the mid-1980s, heightened foreign competition, a sharp decrease in defense spending, and improved productivity played a significant role in affecting the overall level of manufacturing employment. In Connecticut, the rate of job loss in the manufacturing sector produced a decline of 3.0% or 8,940 jobs from 1993 to 1994.
Over the past several decades the non-manufacturing sector of the State's economy has risen in economic importance, from just over 50% of total State employment in 1950 to approximately 81.5% by 1994. This trend has decreased the State's dependence on manufacturing jobs. The State's non-manufacturing sector expanded by 1.7% in 1994 as compared to 1993, and 1.4% in 1993 as compared to 1992, following three years of decline starting in 1990. During the 1990s, Connecticut's growth in non-manufacturing employment has lagged that of the New England region and the nation as a whole.
The non-manufacturing sector is comprised of industries that typically provide a service. The four major industries in terms of employment are: trade; finance, insurance, and real estate; business and personal services; and government, which collectively comprise over 90% of employment in the non-manufacturing sector.
After enjoying an extraordinary boom during the mid-1980s, Connecticut, as well as the rest of the Northeast, experienced an economic slow down before the onset of the national recession in the latter half of 1990. Reflecting the downturn, the unemployment rate in the State rose from a low of 3% in 1988 to just above the national average of 7.4% during 1992. Since 1992, the unemployment rate has declined annually to a rate of 5.6% for 1994.
FISCAL CONDITION IN RECENT YEARS
The State finances most of its operation through its General Fund. The major components of General Fund revenues are state taxes, including the personal income tax, the sales and use tax and the corporation business tax. Miscellaneous fees, receipts, transfers and unrestricted federal grants account for most of the other General Fund revenue. A cumulative budgetary-basis deficit in the General Fund as of June 30, 1991 in the amount of $965,711,525 was funded by the issuance of General Obligation Economic Recovery Notes. For the fiscal years ended June 30, 1992, 1993 and 1994, the operating surpluses of the General Fund were $110.2, $113.5 and $19.7 million, respectively. For the fiscal year ended June 30, 1995, the operating surplus is expected to be $80.5 million. By statute, any operating surplus for the fiscal year ended June 30, 1995 will be transferred to a budget reserve fund.
The adopted budget for fiscal 1995-96 anticipates General Fund revenues of $8,837.0 million and General Fund expenditures of $8,836.8 million, resulting in a projected surplus of $0.2 million. For fiscal 1996-97, the adopted budget anticipates General Fund revenues of $9,158.0 million and, as mentioned above, General Fund expenditures of $9,157.8 million, resulting in a projected surplus of $0.2 million.
The adopted budget reflects implementation of significant tax changes aimed at increasing overall disposable income and encouraging economic expansion in the State. A phase down in the State's personal income tax rate was enacted, pursuant to which the tax rate on the first $4,500 of taxable income for joint filers is dropped 33%, from 4.5% to 3% for the income year commencing January 1, 1996. For income years commencing on or after January 1, 1997, the application of the 3% rate is further expanded to the first $9,000 of taxable income for joint filers. In addition, a new personal income tax credit, limited to no more than $100 per filer, has been added with the income years commencing on or after January 1, 1996. To improve the business climate in the State and stimulate long-term job growth, legislation was also enacted which will reduce Connecticut's corporate tax rate from its current rate of 11.25% to 7.5% by January 1, 2000.
As part of the adopted budget, approximately $241 million of the original $965.7 million in Economic Recovery Notes issued to fund the cumulative deficit of fiscal year 1990-91 will be retired in fiscal years 1996-97 through 1998-99, rather than 1995-96. The adopted budget also reflects significant reductions in expenditures from current service levels.
In November 1992, electors approved an amendment to the State constitution providing that the amount of general budget expenditures authorized for any fiscal year shall not exceed the estimated amount of revenue for such fiscal year. This amendment also provides for a cap on budget expenditures. The General Assembly is precluded from authorizing an increase in general budget expenditures for any fiscal year above the amount of general budget expenditures authorized for the previous fiscal year by a certain percentage, unless the Governor declares an emergency or the existence of extraordinary circumstances and at least three-fifths of the members of each house of the General Assembly vote to exceed such limit for the purposes of such emergency or extraordinary circumstances. The limitation on general budget expenditures does not include expenditures for the payment of bonds, notes or other evidences of indebtedness. There is no statutory or constitutional prohibition against bonding for general budget expenditures.
By statute, no bonds, notes or other evidences of indebtedness for borrowed money payable from General Fund tax receipts of the State shall be authorized by the General Assembly except as shall not cause the aggregate amount of (1) the total amount of bonds, notes or other evidences of indebtedness payable from General Fund tax receipts authorized by the General Assembly but which have not been issued and (2) the total amount of such indebtedness (excluding short-term and certain other indebtedness) which has been issued and remains outstanding, to exceed 1.6 times the total estimated General Fund tax receipts of the State for the fiscal year in which any such authorization will become effective. As a result, the State had a debt incurring margin as of September 15, 1995 of approximately $2,010.4 million. Potentially, this law could limit the amount of Connecticut Municipal Obligations available for purchase by the Fund.
The classification of Landmark Connecticut Tax Free Reserves under the Investment Company Act of 1940 as a "non-diversified" investment company allows it to invest more than 5% of its assets in the securities of any issuer, subject to satisfaction of certain tax requirements. Because of the relatively small number of issuers of Connecticut obligations, the Fund is likely to invest a greater percentage of its assets in the securities of a single issuer than is an investment company which invests in a broad range of Municipal Obligations. Therefore, the Fund would be more susceptible than a diversified fund to any single adverse economic or political occurrence or development affecting Connecticut issuers. The Fund will also be subject to an increased risk of loss if the issuer is unable to make interest or principal payments or if the market value of such securities declines. It is also possible that there will not be sufficient availability of suitable Connecticut tax-exempt obligations for the Fund to achieve its objective of providing income exempt from Connecticut taxes.
Landmark Connecticut Tax Free Reserves may invest 25% or more of its assets in Connecticut Municipal Obligations of the same type, including, without limitation, the following: general obligations of the State of Connecticut and its political subdivisions; lease rental obligations of state and local authorities; obligations of state and local housing finance authorities, municipal utilities systems or public housing authorities; or industrial development or pollution control bonds issued for hospitals, electric utility systems, steel companies, life care facilities or other purposes. This may make the Fund more susceptible to adverse economic, political, or regulatory occurrences affecting a particular category of issuers.
Connecticut Municipal Obligations also include obligations of the governments of Puerto Rico and other U.S. territories and their political subdivisions to the extent that these obligations are exempt from Connecticut State personal income taxes. Accordingly, the Fund may be adversely affected by local political and economic conditions and developments within Puerto Rico and certain other U.S. territories affecting the issuers of such obligations. The economy of Puerto Rico is dominated by the manufacturing and service sectors. Although the economy of Puerto Rico expanded significantly from fiscal 1984 through fiscal 1990, the rate of this expansion slowed during fiscal 1991. In the first eleven months of fiscal 1992, the Economic Activity Index, a composite of thirteen economic indicators prepared by the Puerto Rico Planning Board, increased 0.4% as compared to the same fiscal period for 1991, which period showed a decrease of 0.5% over the same period of fiscal 1990. This trend is similar to that in the United States. The Index may not necessarily change at the same percentage rate as the gross product of Puerto Rico. Growth in fiscal 1995 will depend on several factors, including the state of the U.S. economy and the relative stability in the price of oil, the exchange rate of the U.S. dollar and the cost of borrowing. Although the Puerto Rico unemployment rate has declined substantially since 1985, the unemployment rate for May, 1992 was approximately 16.8%.
RECENT RATINGS OF CERTAIN GENERAL OBLIGATION BONDS
Moody's Investors Service, Inc., Standard & Poor's Ratings Group and Fitch Investors Service, Inc. assigned their municipal bond ratings of Aa, AA- and AA, respectively, to the State's general obligation bonds (1995 Series B) issued in October 1995. Each such rating reflects only the views of the respective rating agency, and an explanation of the significance of such rating may be obtained from such rating agency. There is no assurance that such ratings will continue for any given period of time or that they will not be revised or withdrawn entirely by the rating agency if, in the judgment of such rating agency, circumstances so warrant. A downward revision or withdrawal of any such rating may have an adverse effect on the market price of the State's general obligation bonds.
The State, its officers and employees are defendants in numerous lawsuits. The ultimate disposition and fiscal consequences of these lawsuits are not presently determinable. The Attorney General's Office has reviewed the status of pending lawsuits and reports that it is the opinion of the Attorney General that such pending litigation will not be finally determined so as to result individually or in aggregate in a final judgment against the State whihc would materially adversely affect its financial position, except that in the cases described below the fiscal impact of an adverse decision might be insignificant but is not determinable at this time.
The Connecticut Hospital Association v. O'Neill is an action brought in 1990 in Federal District Court. The plaintiffs include thirty-three of Connecticut's general hospitals. The plaintiffs claim that the State Department of Income Maintenance violated federal law and the United States Constitution by adopting and implementing a reimbursement methodology that consistently underpays the hospitals for providing inpatient services to Medicaid patients. The plaintiffs seek relief declaring the State's Medicaid inpatient hospital methodology invalid and enjoining the State from continuing to utilize such methodology. The plaintiffs also seek an order requiring the State to reimburse the plaintiff hospitals at higher rates for inpatient hospital services provided to Medicaid patients. On March 30, 1994, the District Court ordered the State to begin reimbursing hospitals for Medicaid inpatient costs at rates computed by using the Medicare reasonable cost methodology. Since the court stated that it has not made any determination as to whether the State system substantively complies with the Federal Boren Amendment, the hospitals were ordered to post a bond to cover any repayment obligation of the hospitals if the court later determines, after trial, that the system complies with federal law, since reimbursement at the Medicare reasonable cost rate may be greater that what is required under the Boren Amendment. The State appealed the decision. On January 30, 1995 the Second Circuit Court reversed the March 30, 1994 order of the District Court, vacated the preliminary injunction against the State, and remanded the matter to the District Court for further proceedings consistent with the Court's decision. The State is now using the reimbursement methodology challenged in this action and seeking the recovery of payments inappropriately made to the Hospitals while the injunction was in effect.
Connecticut Criminal Defense Lawyers Association v. Forst is an action brought in 1989 in Federal District Court alleging a pervasive campaign by the State and various State Police officials of illegal electronic surveillance, wiretapping and bugging for a number of years at Connecticut State Police facilities. The plaintiffs seek compensatory damages, punitive damages, as well as other damages and costs and attorneys fees, as well as temporary and permanent injunctive relief. In November 1991, the court issued an order which will allow the plaintiffs to represent a class of all persons who participated in wire or oral communications to, from, or within State Police facilities between January 1, 1974 and November 9, 1989 and whose communications were intercepted, recorded and/or used by defendants in violation of the law. This class includes a sub-class of the Connecticut State Police Union, current and former Connecticut State Police officers who are not defendants in this or any consolidated case, and other persons acting on behalf of the State police who participated in oral or wire communications to, from or within State Police facilities between such dates.
Sheff v. O'Neill is a Superior Court action brought in 1989 on behalf of black and Hispanic school children in the Hartford school district. The plaintiffs seek a declaratory judgment that the public schools in the greater Hartford metropolitan area are segregated de facto by race and ethnicity and are inherently unequal to their detriment. They also seek injunctive relief against state officials to provide them with an "integrated education." In April 1995, the Superior Court entered judgment for the State. The plaintiff's appeal to the State Supreme court is pending.
In 1979, the Connecticut Supreme Court determined in Horton v. Meskill, 172 Conn. 615 (1979), that the method of financing elementary and secondary public schools in Connecticut violated the State Constitution because the statutory scheme delegated the State's responsibility for education to towns whose taxable property per pupil varies so greatly as to prevent equal access to education. The General Assembly enacted legislation in 1979 which sought to achieve equalization of educational financing. The system was further refined by the General Assembly during subsequent sessions. In 1985 the State Supreme Court held that the 1979 legislation was constitutional and that the Superior Court applied an improper standard to test the constitutionality of the post-1979 amendments to the State's educational financial plan. It remanded the case to the Superior Court for further proceedings on the post-1979 amendments. 195 Conn. 24 (1985). The case, as remanded in 1985, is still awaiting trial. Additional legislative changes have been made to the system for financing public schools since 1985, but there has been no challenge to such changes.
The Connecticut Traumatic Brain Injury Association, Inc. v. Hogan is a Federal District Court civil rights action brought in 1990 on behalf of all persons with retardation or traumatic brain injury who have been, or may be, placed in Norwich, Fairfield Hills or Connecticut Valley Hospitals. The plaintiffs claim that the treatment and training they need is unavailable in state hospitals for the mentally ill and that placement in those hospitals violates their constitutional rights. The plaintiffs seek relief which would require that the plaintiff classmembers be transferred to community residential settings with appropriate support services.
Several suits have been filed since 1977 in the Federal District Court and the Connecticut Superior Court on behalf of alleged Indian Tribes in various parts of the State, claiming monetary recovery as well as ownership to land in issue. The land involved is located generally in rural and residential areas. However, a suit was brought in 1992 involving land within the City of Bridgeport. The same plaintiff group in that suit subsequently also sued concerning land in Trumbull and Southbury and has threatened to sue regarding additional land in other towns in the State.
Nielsen v. Larson is an action brought in 1993 in Superior Court. The plaintiffs seek a declaratory judgment that the General Assembly must define, by statute, "general budget expenditures," "increase in personal income" and "increase in inflation" before it adopts or enacts a budget for the fiscal year 1994-1995, and subsequent fiscal years, or any interim appropriation, tax or other fiscal measure which levies or expends tax revenue. The plaintiffs also seek to enjoin the General Assembly from allocating and spending for "general budget expenditures" for fiscal year 1994-1995 and subsequent fiscal years more than the amount expended for "general fund expenditures" in fiscal year 1992-1993 until such definitions have been adopted. Although the ultimate outcome of this case cannot be determined at this time, the suit does not seek relief which would require an increase in State expenditures or a reduction in State revenues. Further, the constitutional provision exempts from the cap any expenditures required for debt service and the plaintiffs are not specifically challenging the payment of debt service on any of the state's obligations. On November 18, 1994 the Superior Court dismissed this case. The plaintiff has appealed that judgment to the Supreme Court.
Washington v. Meachum is a class action brought in 1994 in Superior Court by prison inmates who seek damages and other relief. The plaintiffs claim that the monitoring and recording of their telephone calls from the State's correctional institutions violates the Connecticut Wiretapping and Eavesdropping statutes as well as the federal and State constitutions. In March, 1995, the court entered a judgment which is substantially in the State's favor and denies any monetary damages to the plaintiffs except for attorney fees. The plaintiffs have appealed to the Appellate Court and the State has cross-appealed on those issues decided against it.
The Commissioner of the Department of Revenue Services received claims for tax refunds from various companies who paid corporation business taxes on interest earned on United States Treasury bonds and notes. The claims challenged the State's right to including interest on United States Treasury bonds and notes in the calculation of the corporation business tax when interest on certain State bonds was excluded. In March 1995 the Connecticut General Assembly enacted legislation taking by eminent domain the rights of holders to exclude the interest accrued on and after January 1, 1992. The State will provide compensation to the holders of the affected bonds. The legislation was intended to eliminate the basis for the tax refund claims noted above for 1992 and later years. Several cases have been filed in 1995 against the Commissioner of the Department of Revenue Services claiming refunds on the basis described above. Adverse decisions in these cases could cause the State to pay up to $97 million in refunds.
Certain plaintiffs who filed cases in 1995 against the Commissioner of the Department of Revenue Services seeking refunds of corporation business taxes have now claimed that the eminent domain legislation enacted by the Connecticut General Assembly in March 1995 is unconstitutional and does not eliminate the basis for any tax refund claims for 1992 and later years. It is not possible to estimate with any degree of precision the potential amount of tax refunds and tax revenue losses in future years, which could result, if these additional claims were to prevail, but in recent years the amount of tax revenue in question is estimated to be approximately $100 million each fiscal year.
Connecticut Hospital Association v. Pogue was an action brought in 1994 in Federal District Court challenging 1994 legislation that was successor legislation to the uncompensated care pool statutes challenged in the earlier case of New England Health Care Employees Union District 1199, SEIU AFL-CIO v. Mt. Sinai Hospital. That legislation provided a mechanism to spread the cost of uncompensated care provided by hospitals by compensating hospitals that bear a disproportionate share of such costs and to generate federal Medicaid program reimbursements. An adverse decision could have adversely impacted the State's receipt of federal reimbursements. In September 1995, the United States Second Circuit Court of Appeals upheld the State's position in these cases, based on the recent decision of the United States Supreme Court in New York Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Company, and remanded the cases to the District Court for entry of judgment in favor of the State.
FOR CITIBANK NEW YORK RETAIL BANKING AND BUSINESS AND PROFESSIONAL CUSTOMERS: Citibank, N.A. 450 West 33rd Street, New York, NY 10001 (212) 564-3456 or (800) 846-5300
P.O. Box 5130, New York, NY 10126-5130 Call Your Citigold Executive or, in NY or CT (800) 285-1701, or for all other states (800) 285-1707
FOR CITIBANK PRIVATE BANKING CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 Call Your Citibank Private Banking Account Officer, Registered Representative or (212) 559-5959
FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043
FOR CITIBANK NORTH AMERICAN INVESTOR SERVICES CLIENTS: Citibank, N.A. 111 Wall Street, New York, NY 10043 Call Your Account Manager or (212) 657-9100
FOR CITICORP INVESTMENT SERVICES CUSTOMERS: One Court Square, Long Island City, NY 11120 Call Your Investment Consultant or (800) 846-5200 (212) 736-8170 in New York City
LANDMARK CONNECTICUT TAX FREE RESERVES
C. Oscar Morong, Jr., Chairman William S. Woods, Jr.
*Affiliated Person of Administrator and Distributor
153 East 53rd Street, New York, NY 10043
The Landmark Funds Broker-Dealer Services, Inc. 6 St. James Avenue, Boston, MA 02116
State Street Bank and Trust Company 225 Franklin
125 Summer Street, Boston, MA 02110
150 Federal Street, Boston, MA 02110 | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T10:14:19 |
0000350852-96-000001 | 0000350852-96-000001_0000.txt | As filed with the Securities and Exchange Commission on January 12, 1996.
POST-EFFECTIVE AMENDMENT NO. 1 TO THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter)
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code No.) identification No.)
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Copies to:
J. DAVID SMITH, JR., ESQ. JAMES A.HUGUENARD, ESQ. Stoll, Keenon & Park, LLP Brown, Todd & Heyburn PLLC 201 East Main Street, Suite 1000 3200 Providian Center Lexington, Kentucky 40507 400 West Market Street (606) 231-3062 Louisville, Kentucky 40202 (Name, address, including zip code, (502) 568-0205 and telephone number, including area code,
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this Registration Statement becomes effective and all other conditions to the mergers of (i) United Whitley Corp. with and into Whitley Acquisition Corp. (a wholly-owned subsidiary of Registrant), and (ii) Williamsburg Interim Bank, Inc. (to be a wholly-owned subsidiary of Registrant) with and into Bank of Williamsburg, all pursuant to the terms of the Agreement and Plan of Reorganization as described in the enclosed Prospectus/Proxy Statement, have been satisfied or waived.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the
Item 1. Deregistration of Securities.
Registration Statement No. 33-61891 of the Registrant, which became effective on August 31, 1995, registered 196,886 shares of Registrant Common Stock. The transactions for which such shares were registered were consummated on November 3, 1995 and, under the formulas for the issuance of Registrant Common Stock which governed such transactions, a total of 172,189 shares of Registrant Common Stock were used to consummate the subject transactions. Accordingly, the Registrant herewith de-registers 24,697 of the shares of Registrant Common Stock registered pursuant to the aforesaid Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-Effective Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pikeville, Commonwealth of Kentucky, on January 12, 1996.
Terry N. Coleman, President and Chief
Pursuant to the requirements of the Securities Act of 1933,this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Terry N. Coleman President, January 12, 1996 Terry N. Coleman Chief Executive Officer
Burlin Coleman Chairman of the Board and January 12, 1996
Brandt Mullins Vice Chairman of the Board By: Terry N. Coleman January 12, 1996
Richard M. Levy Senior Vice President and January 12, 1996 Richard M. Levy Chief Financial Officer
By: Terry N. Coleman January 12, 1996
By: Terry N. Coleman January 12, 1996
By: Terry N. Coleman January 12, 1996
By: Terry N. Coleman January 12, 1996
By: Terry N. Coleman January 12, 1996
By: Terry N. Coleman January 12, 1996 | S-4/A | S-4/A | 1996-01-12T00:00:00 | 1996-01-12T14:08:23 |
0000950128-96-000008 | 0000950128-96-000008_0000.txt | [ X ] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
For the transition period from ______________ to _______________
(Exact name of small business issuer as specified in its charter)
(State or other jurisdiction of I.R.S. Employer incorporation or organization) Identification No.
Cherrington Corporate Center, Building 200, Coraopolis, Pennsylvania 15108 (Address of principal executive offices)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
PART I - FINANCIAL STATEMENTS
A. COMPUTER RESEARCH, INC. CONSOLIDATED BALANCE SHEET
November 30, 1995 and August 31, 1995
The accompanying notes are an integral part of these financial statements.
A. COMPUTER RESEARCH, INC. CONSOLIDATED BALANCE SHEET - CONT'D.
November 30, 1995 and August 31, 1995
The accompanying notes are an integral part of these financial statements.
B. COMPUTER RESEARCH, INC. CAPITALIZATION AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
C. COMPUTER RESEARCH, INC. STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended November 30, 1995 and 1994
The results for the period ended November 30, 1995, are not necessarily indicative of the results to be expected for the year. All known adjustments necessary for a fair presentation of the financial information of the Company have been reflected for the three months ended November 30, 1995.
The accompanying notes are an integral part of these financial statements.
D. COMPUTER RESEARCH, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the Three Months Ended November 30, 1995 and 1994
The accompanying notes are an integral part of these financial statements.
COMPUTER RESEARCH, INC. & CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED NOVEMBER 30, 1995
NOTE A - COMPANY'S ANNUAL REPORT UNDER FORM 10-KSB
The accompanying financial information should be read in conjunction with the Company's 1995 Annual Report on Form 10-KSB.
In the opinion of management, all adjustments that were made, which are necessary to a fair statement of the results for the interim periods, were of a normal and recurring nature.
1. CAPITAL RESOURCES AND LIQUIDITY
Due to the relatively stable operating costs of the data processing service business, the working capital requirements of the Company are normally predictable. Net income of approximately $278,000 during the first quarter of the current year added to cash available in support of operations. In the opinion of management, the Company's existing cash on hand, combined with revenues generated by clients of the service business, will satisfy the capital needs of the Company for the foreseeable future. In addition, the Company has an approximate $500,000 line of credit available, if needed.
The Company will install an additional Honeywell Bull mainframe computer system in January 1996 on a 24 month lease with a total commitment of approximately $60,000. During the 1997 fiscal year, the Company intends to have the software of its product line operational on IBM computer equipment. At that time, the Company will have the option to purchase computer processing time from an outside supplier or, if cost justified, to install IBM computer equipment of its own for its service business.
The Company's principal source of revenue is derived from providing computerized accounting and support services to securities brokerage firms, banks and other financial institutions. The Company's revenues are directly affected by securities trading volume and the number of transactions processed for its clients. Due to the volatile nature of the industry served, the results of operations for the period represented are not necessarily indicative of the results of operations to be expected for the full year or any specific period.
The total revenues for the first quarter of the current year exceeded the revenues for the comparable period of the previous year by approximately 35%. This is attributable to an approximate 30% monthly increase in transactions processed for the banking and brokerage clients, plus an increase in systems development revenues.
The total revenues for the first three months ending November 30, 1994, increased by approximately 5% over the previous year as a result of increased billings for data processing service.
The total costs and expenses for the first quarter of the current year increased by approximately 12% over the comparable period of the previous year. An increase in data communications costs, as well as costs associated with systems development, were partly responsible for this increase.
The total costs and expenses increased approximately 4% for the first three months of the previous year.
Net income for the first three months of the current year was $278,086 or $.07 per share.
The net income for the first three months of the previous year was $32,170 or $.01 per share.
PART II - OTHER INFORMATION
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date January 12, 1996 /s/ JAMES L. SCHULTZ | 10QSB | 10QSB | 1996-01-12T00:00:00 | 1996-01-12T14:38:54 |
0000893220-96-000029 | 0000893220-96-000029_0005.txt | The Columbia Gas System, Inc. ("Columbia"), a holding company registered under the Public Utility Holding Company Act of 1935 (the "Act"), located at 20 Montchanin Road, Wilmington, Delaware 19807, has filed an application-declaration under section 6(a), 7, 9(a), 10, 12(b) and (f), and 13(b) of the Act and rules 43, 45, 87, 90, and 91 thereunder.
Columbia requests authorization to form one or more direct or indirect subsidiaries to engage in the business of (i) providing-energy related consumer services ("Consumer Services");(1) and (ii) providing marketing and brokering services for products other than natural gas -- including petroleum, petroleum products, propane and electricity ("Energy Marketing"). To the extent these services are provided by a new subsidiary, Columbia seeks authorization to fund each of the two new ventures through the purchase of up to $5 million dollars of equity by either Columbia (in the case of a direct subsidiary) or by one of Columbia's subsidiary companies (in the case of an indirect subsidiary). To the extent that the services are provided by an indirect subsidiary, the funding by the direct subsidiary will come either from previously authorized funding or from cash on hand.
Columbia expects that its Consumer Services and Energy Marketing subsidiaries will conduct their businesses both within and outside of the states of Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. Applicants state that the Consumer Services will primarily benefit the
(1) The Consumer Services offered would include the following: (1) "Safety Inspections" (energy assessments and energy-related safety inspections); (2) "Appliance Financing" (loans supporting the purchase of energy-related appliances); (3) "Billing Insurance" (payment of consumer utility bills in the event of death, disability, or involuntary unemployment); (4) Appliance Repair Warranty" (repair service for heating and air conditioning and major appliances); (5) "Gas Line Repair Warranty" (warranty against repair of customer's gas lines); (6) "Merchandising of Energy-Related Goods" (direct sales of energy-related devices); (7) Commercial Equipment Service (warranty service for operators of commercial equipment); (8) "Bill Risk Management Products" (price protection services for gas consumers); (9) "Consulting and Fuel Management Services" (advisory and/or management services regarding energy consumption and measurement for commercial and industrial customers); (10) "Electronic Measurement Services" (enhanced measurement and billing services for commercial and industrial customers); (11) "Incidental Services" ( such services, the need for which evolves out of the provision of the services set forth above).
Columbia LDCs and their customers. The Energy Marketing services will enhance and expand services previously authorized and currently being performed by one or more Columbia subsidiaries -- namely TriStar Ventures Corporation and its subsidiaries, and Columbia Energy Services Corporation.
Columbia states that the Columbia LDCs will provide the Consumer Services subsidiary with billing, accounting, and other energy-related services. Columbia states that all services required to conduct the Consumer Services subsidiary's business that are provided by the LDCs or any other Columbia company will be billed in accordance with section 13(b) of the Act and rules 87, 90 and 91 thereunder.
The application-declaration and any amendments thereto are available for public inspection through the Commission's office of Public Reference. Interested persons wishing to comment or request a hearing should submit their views in writing by _______________________________________, 1996, to the Secretary, Securities and Exchange Commission, Washington, DC 20549, and serve a copy on the applicant-declarant at the address specified above. Proof of service (by affidavit or, in the case of an attorney-at-law, by certificate) should be filed with the request. Any request for hearing shall identify specifically the issues of fact or law that are disputed. A person who so requests will be notified of any hearing, if ordered, and will receive a copy of any notice or order issued in this matter. After said date, the application-declaration, as filed or as it may be amended, may be permitted to become effective.
For the Commission by the Division of Investment Management, pursuant to delegated authority. | U-1 | EX-99.H | 1996-01-12T00:00:00 | 1996-01-12T13:06:54 |
0000023432-96-000003 | 0000023432-96-000003_0000.txt | Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant (X) Filed by a Party other than the Registrant ( )
( ) Preliminary Proxy Statement ( ) Definitive Additional Materials ( ) Soliciting Material pursuant to Rule 14a-11(c) or Rule 14a-12
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
(X) $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a- 6(j)(2). ( ) $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). ( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class or securities to which transaction 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 Rule 0-11:_/ ............................................................... 4) Proposed maximum aggregate value of transaction: ............................................................... _/ Set forth the amount on which the filing fee is calculated and state how it was determined.
( ) 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 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.
2) Form, Schedule or Registration Statement No.:
(LOGO) CONNECTICUT NATURAL GAS CORPORATION - P.O. BOX 1500 - 100 COLUMBUS BOULEVARD - HARTFORD, CONN. 06144-1500 - (203) 727-3000
You are cordially invited to attend the Annual Meeting of Connecticut Natural Gas Corporation Shareholders, scheduled to be held on Tuesday, February 27, 1996, at the office of the Company, 100 Columbus Boulevard, Hartford, Connecticut, commencing at 10:30 a.m. Your Board of Directors and management look forward to greeting personally those shareholders able to attend. Parking will be available.
At the meeting you will be asked to elect six Directors and to ratify the appointment of the Company's independent public accountants.
You are requested to give prompt attention to these matters which are more fully described in the accompanying Proxy Statement. You are urged to read them carefully. Your Board of Directors recommends a vote "FOR" Proposals 1 and 2.
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, IT IS IMPORTANT THAT THEY BE REPRESENTED AND VOTED AT THE MEETING, WHETHER OR NOT YOU PLAN TO ATTEND. ACCORDINGLY, YOU ARE REQUESTED TO EXERCISE YOUR VOTE, SIGN, DATE AND MAIL THE ENCLOSED PROXY. A postage prepaid return envelope is provided for your convenience.
Your interest and participation in the affairs of the Company are sincerely appreciated.
BY S/ VICTOR H. FRAUENHOFER
P.O. Box 1500, 100 Columbus Boulevard, Hartford, Connecticut 06144-1500
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of CONNECTICUT NATURAL GAS CORPORATION will be held at the office of the Company, 100 Columbus Boulevard, Hartford, Connecticut, on Tuesday, February 27, 1996, at 10:30 a.m., for the following purposes:
2.To ratify the appointment of a firm of independent public accountants to audit the books and records of the Company for the fiscal year ending
3.To transact such other business as may properly come before the meeting.
The Board of Directors has fixed the close of business on January 2, 1996 as the record date for the purpose of determining shareholders who are entitled to notice of and to vote at the meeting.
Admission to the Meeting will be by Admission Ticket only. If you are a shareholder of record or an Employee Savings Plan participant and plan to attend, please detach your Proxy from your Admission Ticket and present the ticket for admission to the meeting. If your shares are not registered in your own name, please advise the shareholder of record (your bank, broker, etc.) that you wish to attend. That firm will request an Admission Ticket for you or will provide you with evidence of your ownership that will enable you to gain admittance to the Meeting.
BY S/ R. L. BABCOCK Reginald L. Babcock, Vice President,
Please fill in, sign, date and mail the accompanying proxy without delay, even if you expect to be present in person at the Meeting.
P.O. Box 1500, 100 Columbus Boulevard, Hartford, Connecticut 06144-1500
The accompanying proxy is solicited by the Board of Directors of the Company for use at the Annual Meeting of Shareholders on February 27, 1996. The proxy, when signed and received by the Secretary prior to the meeting, will be voted unless revoked. Any shareholder giving a proxy has the power to revoke it at any time prior to voting, by giving written notice of revocation to the Secretary, submitting a properly executed proxy of later date, or attending the meeting and voting in person. The proxy will be voted as specified thereon. Unless specifically directed otherwise, all properly executed proxies will be voted for the election of directors and for the ratification of the appointment of the indicated auditors.
If a shareholder participates in the Company's Dividend Reinvestment Plan, any shares held in his or her account will be voted in accordance with the proxy returned by the shareholder unless other instructions are received.
Only shareholders of record at the close of business on January 2, 1996 will be entitled to vote at the meeting. On that date there were 9,931,112 shares of Common Stock and 139,160 shares of $3.125 Par Preferred Stock issued and outstanding, the holders of which are entitled to one vote per share. There is no provision in the Company's Charter for cumulative voting.
The outstanding Common Stock and $3.125 Par Preferred Stock of the Company represented at the meeting will constitute a quorum for the transaction of business. Under Connecticut law and the governing instruments of the Company, the affirmative vote of a majority of the voting power of the shares represented at the meeting which are entitled to vote is required to elect directors and ratify the appointment of independent auditors. As a result, abstentions will have the same effect as negative votes. If a broker or other record holder or nominee indicates on a proxy that it does not have authority as to certain shares to vote on a particular matter, those shares will not be considered as present and entitled to vote with respect to that matter.
The cost of solicitation of proxies will be paid by the Company. In addition to the solicitation by use of the mail, directors, officers or regular employees of the Company may solicit proxies personally or by telephone or telegraph, and the Company may request persons holding stock for others in their names or in the names of nominees to obtain proxies from and send proxy material to their principals, and it may reimburse such persons for their expense in so doing. The Company has retained the firm of D.F. King & Co., Inc. to aid in the solicitation of proxies, for which services the Company will pay a fee not exceeding $8,500, plus out-of-pocket disbursements.
The Company's Annual Report for the fiscal year ended September 30, 1995 is being mailed together with this Proxy Statement.
The Company's Board of Directors is divided into three classes, and each class of directors is elected for a three year term. At each Annual Meeting of Shareholders, directors are elected to succeed those in the class whose terms are expiring.
The terms of the Class III directors are scheduled to expire on the date of the Annual Meeting. Mrs. Bennett, Mrs. Hamilton, Mr. Levenson, and Mr. Thomas have been nominated to succeed themselves as Class III directors. If elected, they will each fill three year terms that expire at the Annual Meeting of Shareholders to be held in 1999 or when their successors are elected and qualified. Mr. Shima, also a current Class III director, has been nominated as a Class II director in order that the directors be allocated to the three classes as evenly as possible. Mr. Shima will fill the remaining two year term of the Class II directors that expires at the Annual Meeting of Shareholders to be held in 1998.
The Board of Directors has a policy which requires an incumbent director who has reached the age of 70 to submit his or her resignation as a director effective as of the date of the Annual Meeting of Shareholders of the Company following the date of such director's 70th birthday. Mr. Angelo Tomasso, Jr. who was elected a Class II director at the Annual Meeting of Shareholders held in 1995, reached the age of 70 during the past year. Accordingly he has submitted his resignation, which will become effective as of the date of the Annual Meeting. The Board has nominated Michael W. Tomasso to serve as successor director. If elected, he will serve for the remaining term of the Class II directors, which is scheduled to expire at the Annual Meeting to be held in 1998 or when their successors are elected and qualified.
The election of directors is being presented to shareholders as a single proposal. A vote for all nominees represents a vote for the election to the Company's Board of Directors of the nominees for Class III and Class II directors.
IT IS INTENDED THAT VOTES WILL BE CAST PURSUANT TO THE ENCLOSED PROXY FOR THE ELECTION OF THE SIX NOMINEES SET FORTH BELOW UNLESS AUTHORITY TO VOTE FOR ONE OR MORE OF THE NOMINEES IS WITHHELD BY SUCH PROXY, IN WHICH CASE IT IS INTENDED THAT VOTES WILL BE CAST FOR THOSE NOMINEES, IF ANY, WITH RESPECT TO WHOM AUTHORITY HAS NOT BEEN WITHHELD. FIVE OF THE SIX NOMINEES ARE NOW MEMBERS OF THE BOARD OF DIRECTORS. MRS. BENNETT, MRS. HAMILTON, MR. LEVENSON, MR. SHIMA, AND MR. THOMAS WERE ELECTED AS DIRECTORS AT THE ANNUAL MEETING HELD JANUARY 26, 1993 FOR TERMS OF THREE YEARS. IN THE EVENT THAT ANY OF THE NOMINEES SHOULD BECOME UNABLE OR UNWILLING TO SERVE AS A DIRECTOR, A CONTINGENCY WHICH MANAGEMENT HAS NO REASON TO EXPECT, IT IS INTENDED THAT THE PROXY WILL BE VOTED, UNLESS AUTHORITY IS WITHHELD, FOR THE ELECTION OF SUCH PERSON, IF ANY, AS SHALL BE DESIGNATED BY THE BOARD OF DIRECTORS. THE PROXY CANNOT BE VOTED FOR MORE THAN SIX NOMINEES.
The biographical information which follows includes the names and photographs of the nominees for Class II and Class III directorships and of incumbent Class I and Class II directors; the principal current occupation or employment of each for the past five years, the number of shares of stock of the Company reported by each as beneficially owned, directly or indirectly, as of November 1, 1995, the year each person became a director of the Company, the age of the director, the Board Committee(s) on which each serves, and the principal directorships held by such persons and other affiliations.
The indicated shares include shares held by spouses, children and relatives sharing a director's home as to which beneficial ownership has been disclaimed and in the case of Mr. Frauenhofer, shares held for his account in the Company's Employee Savings Plan.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's executive officers and directors as well as persons who own more than 10% of a registered class of the Corporation equity securities, to file reports of ownership and changes of ownership with the Securities and Exchange Commission and the New York Stock Exchange. Based solely on the Corporation's review of the copies of such forms received or written representations from certain reporting persons that no reporting was required, the Corporation believes during fiscal year 1995 all filing requirements were met.
The Board of Directors has an Audit Committee, a Compensation Committee, an Executive Committee, and a nominating committee known as the Committee on Directors.
Audit Committee members are Mr. Levenson, Chairman, Mrs. Bennett and Messrs. English, Fonteyne and Mullane. This Committee recommends to the Board of Directors a firm of independent public accountants to audit the books and accounts of the Company. The Committee reviews the reports prepared by the independent public accountants and recommends to the Board any actions deemed appropriate in connection with the reports. The Company's manager of internal auditing reports annually to the Committee on internal auditing activities and is authorized to report directly to the Committee more frequently should the need arise. The Audit Committee held three meetings during the most recent fiscal year.
For fiscal year 1995 Compensation Committee members were Mr. A. Tomasso, Chairman, Mrs. Hamilton and Messrs. Levenson, Tanner and Thomas. The Committee establishes salaries and benefits for all officers, subject to Board approval. The Committee reviews all Company compensation and benefit programs and oversees management of the pension plans. The Compensation Committee met three times during the most recent fiscal year.
Executive Committee members are Mr. Thomas, Chairman, Messrs. Frauenhofer, Levenson, Shima and A. Tomasso. Pursuant to the Bylaws, the Executive Committee has authority with regard to all business of the Company when the Board of Directors is not in session, as well as having powers relating to the finances of the Company. The Executive Committee met two times during the most recent fiscal year.
The Committee on Directors is composed of Mr. Frauenhofer, Chairman, Mrs. Bennett and Messrs. Mullane, Shima and A. Tomasso. This Committee considers candidates for vacancies on the Board, including written stockholder recommendations, and recommends nominees to the Board when the need arises. The Committee did not meet during fiscal year 1995. (The Committee on Directors did meet early in fiscal year 1995/1996 to consider the vacancy resulting from A. Tomasso's
retirement.) The Company's Bylaws provide that in order for a stockholder to nominate a candidate for election as a director of the Company, a stockholder must provide written notice to the Secretary of the Company of such stockholder's intention to so nominate a candidate at least forty-five days prior to the Annual Meeting of Shareholders.
During the 1995 fiscal year the Board of Directors held eight meetings and there were eight committee meetings. All directors attended at least 75% of the aggregate number of meetings of the Board and committees on which they serve.
During the 1995 fiscal year, Directors received an annual retainer fee of $11,000 plus $800 for each Board or committee meeting attended. A chairperson of a committee received $850 for each committee meeting chaired in lieu of $800. A plan of deferred compensation for services as a director is made available to directors. No director who also is an employee of the Company receives any fees for service on the Board.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee's compensation program for executive officers, including the Chief Executive Officer, is designed to relate total compensation to corporate performance. Such compensation is comprised of base salary and distributions pursuant to the Annual Incentive Plan and Executive Restricted Stock Plan. As a result, a significant percentage of total compensation for the Company's executive officers is dependent upon corporate financial performance. The program offers total compensation opportunities which are competitive with other leading gas utilities and which enable the Company to compete for and recruit executive talent critical to the Company's long term success.
The first component of each executive's compensation, including the Chief Executive Officer, Mr. Frauenhofer, is base salary. To determine base salaries, the Committee chiefly relies upon data for executives in similar positions in comparable, or peer group, companies and selects as a target the average salary of this group. Base salaries are targeted to the average level of industry peers in recognition that the potential for additional compensation offered by the Annual Incentive Plan and Executive Restricted Stock Plan provides incentive to improve corporate performance and increase shareholder value. The companies which comprise the industry peer group generally used by the committee are listed below in the discussion under Corporate Performance Graph.
Under the Annual Incentive Plan, cash awards are made to participants based upon the attainment of several individual objectives for each participant, as well as the performance of the Company in the prior fiscal year. Individual target objectives include cost containment and effective operational and organizational management. Plan Participants are eligible for awards that are targeted
amounts, stated as percentages of salaries that range from 5 to 30 percent. The performance of the Company and the performance of each individual in achieving each specific goal is measured at year end on a scale from 80 to 120 percent. For awards made in 1995, corporate performance for the regulated operations for 1994 was measured using as criteria the Gross Operating Margin as a percentage of revenues, and certain Operating Efficiencies designed to measure performance against benchmarks in customer service, gas cost and sales. Using these criteria the overall corporate performance rating for regulated operations was 113.69%. For non-regulated operations the overall performance rating was 94.4% using as measurement criteria Net Income as a percentage of Consolidated Net Income. These results, and the results in meeting individual goals then are applied to each executive's targeted award to determine the actual award.
The Executive Restricted Stock Plan promotes the achievement of long term corporate goals by providing key employees an opportunity to achieve greater ownership interest in the Company. Under the Plan, 200,000 shares of the common stock of the Company have been reserved for issuance in the form of restricted stock awards to principal officers and other key personnel of the Company who are designated by the Board of Directors as being eligible to participate. The vesting of all restricted share awards under the plan is contingent upon "total return" to shareholders over multi-year periods as compared to a peer group of 19 gas companies whose identities are listed below under Corporate Performance Graph. Total return is comprised of changes in average value of the common stock plus dividends. Vesting of such awards is also contingent upon continued employment. A total of 22,146 shares were awarded to nine individuals, effective October, 1990 and another 25,520 shares were awarded to 12 individuals effective October, 1994. The vesting distribution of these 1990 awards that occurred during fiscal 1995 for the Chief Executive Officer and the four other most highly compensated officers is shown below in the "LTIP" column of the Summary Compensation Table.
Company Performance and CEO Compensation
The foregoing principles and plans were used by the Committee and the Board of Directors to determine Mr. Frauenhofer's 1995 annual compensation, as well as compensation levels of the Company's other executive officers. Accordingly, Mr. Frauenhofer's total compensation was determined with reference to compensation paid by peer companies, the Company's operational and financial performance criteria which were achieved in 1994, and the Committee's overall assessment of his individual performance.
Limitation on Deductibility of Executive Compensation
The Omnibus Budget Reconciliation Act of 1993 added new Section 162(m) to the Internal Revenue Code of 1986, as amended. Section 162(m) generally denies a publicly held corporation, such as the Company, a federal income tax deduction for compensation in excess of $1 million per year paid or accrued for each of its chief executive officer and four other most highly compensated executive officers. Certain "performance based" compensation is not subject to the limitation of deductibility provided that certain stockholder approval and independent director requirements are met.
Due to the fact that the compensation paid to each of the Company's executive officers has not exceeded $1 million per year, the Committee does not believe that the limitation on deductibility of executive compensation is currently material to the Company. The Committee will continue to review the situation in light of future events with the objective of achieving deductibility to the extent appropriate.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As set forth above, the members of the Compensation Committee for fiscal year 1995 were Messrs. A. Tomasso, Chairman, Levenson, Tanner, Thomas and Mrs. Hamilton. All five members are non-employee directors and none has any direct or indirect material interest in or relationship with the Company outside of his or her position as director.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of the Company's commercial and industrial marketing program, the Company loaned $500,000 to New Britain General Hospital in March, 1994. Laurence Tanner is the President and Chief Executive Officer of the hospital and a Company Director. The proceeds of the loan were used to purchase and install gas air conditioning equipment. The loan is to be repaid over a five year term at 7.5% interest, however a portion of the interest payment may be returned to the hospital on a quarterly basis. As of December 25, 1995 all payments have been made and the outstanding indebtedness is $314,326. The foregoing terms are substantially similar to other transactions the Company has entered into with other large gas customers.
To the Company's knowledge, there were no other interrelationships involving either members of the Compensation Committee or other directors of the Company requiring disclosure in this Proxy Statement.
The following table provides certain information relating to the compensation of the Company's Chief Executive Officer and its four other most highly compensated executive officers for fiscal years 1995, 1994 and 1993.
a) For fiscal year 1995, amounts reported in this column include amounts deferred at the election of officers as follows: for Mr. Mirabella $16,044; for Mr. Ludington $7,011 respectively.
b) Represents amount reimbursed to the officer by the Company for the payment of certain taxes.
c) For fiscal year 1995 amounts reported in this column represent the value of the distribution that vested pursuant to 1990 Restricted Stock Plan (less unvested dividends previously reported) calculated by the closing share price of $22.75 as of October 1, 1994. The number and value of aggregate unvested dividends holdings including dividends reinvested as of September 30, 1995 for each of the listed officers is as follows: Mr. Frauenhofer 10,529 shares, $232,954 value; Mr. Bolduc 3,828 shares, $84,695 value; Mr. Kraiza 4,196 shares, $92,837 value; Mr. Mirabella 3,108 shares, $68,765 value; and Mr. Ludington 3,885 shares, $85,955 value. Values are calculated based on the share price of $22.125 on September 29, 1995.
(d) For fiscal year 1995 amounts reported in this column consist of the following: for Mr. Frauenhofer $14,995 - unvested dividends earned on restricted stock, $9,000 - 401(k) Plan, $39,810 - split dollar life insurance plan, $9,045 Deferred Compensation Plan B; for Mr. Bolduc $5,441 - unvested dividends earned on restricted stock, $6,533 - 401(k) Plan, $9,100 - split dollar life insurance plan; for Mr. Kraiza $5,969 - unvested dividends earned on restricted stock, $6,050 - 401(k) Plan, $12,489 - split dollar life insurance plan; for Mr. Mirabella $4,421 - unvested dividends earned on restricted stock, $8,022 - 401(k) Plan, $7,365 - split dollar life insurance plan; for Mr. Ludington $5,526 - unvested dividends earned on restricted stock, $7,559 - 401(k) Plan, $7,877 - split dollar life insurance plan.
The split dollar life insurance plan is available to officers and other key employees in conjunction with the group term life insurance generally provided to salaried employees. Under the plan, the Company pays the entire amount of the premiums due on the policies but is generally reimbursed for the aggregate amount of all such premiums out of the proceeds of the policies if the covered executives die while the split dollar arrangements are in effect or out of the built up cash value of the policies if the arrangements terminate prior to the death of the covered executives. The amounts set forth above represent the full amount of the premium paid on behalf of the named executive officers that relates to the term life insurance portion of the policy plus the value to the executive of the remainder of the premium paid by the Company during the fiscal year, projected on an actuarial basis.
For executives who were over the age of 52 at the inception of the program, the split dollar arrangements provide that the Company will be reimbursed for the aggregate premiums only in the event of the death of the covered executive while employed. Of the named executive officers shown in the table, only Messrs. Frauenhofer, Ludington and Mirabella were over the age of 52 at the inception of their policies. The full amount of the premiums paid on behalf of Messrs. Frauenhofer, Ludington and Mirabella during fiscal 1995 was $140,836, $34,088 and $17,638 respectively.
For fiscal year 1993 amounts reported in this column have been restated to include unvested dividends earned in that year but not previously reported as follows: Mr. Frauenhofer $9,015, Mr. Bolduc $2,095, Mr. Kraiza $3,538, Mr. Mirabella $1,876, and Mr. Ludington $3,201.
The Company has entered into Change of Control Employment Agreements with its Chief Executive Officer, its four other most highly compensated officers, and two other officers. The Agreements become effective upon a Change of Control (as defined therein) and provide that for a period of
three years following a Change of Control in the event of termination of a covered executive's employment without cause by the Company or for Good Reason by the executive, the covered executive is entitled to a lump sum severance payment of between 2 and 3 times his annual salary and annual bonus, together with three years pension credit and continued welfare benefits. The Agreement also provides for an additional payment to make the executive whole for any excise taxes imposed by Section 4999 of the Internal Revenue Code on payments made to him that are contingent on a Change of Control.
No long term incentive awards were granted during fiscal 1995 to the executive officers named in the Summary Compensation Table.
The Company maintains two noncontributory defined benefit retirement plans which provide benefits for certain employees (except for employees covered by certain collective bargaining agreements) who have completed one year of continuous service and have met certain age requirements. One such plan is qualified under the applicable provisions of the Internal Revenue Code (the "Qualified Plan"), and the other is a nonqualified supplemental Officers Retirement Plan (the "Officers Plan").
Under the Qualified Plan retirement benefits are computed by multiplying the average of the employee's five highest consecutive years annual earnings, including amounts identified in the bonus category of the Summary Compensation table above, by a specified percentage accrual based on years of credited service. Benefits accrue at 2% per year of service up to 30 years of service and thereafter an additional 1% per year up to 35 for a maximum accrual of 65%. Benefits paid under the Qualified Plan are offset by a portion of the employee's social security benefits. The plan provides for several optional forms of benefit payments, including a straight life annuity, various joint and survivor options, and a continuous and certain benefit option. Employees are fully vested under the Qualified Plan after five years of continuous service with the Company.
The Officers Plan covers officers designated by the Board of Directors. It operates in conjunction with and as a supplement to the Qualified Plan. The benefits payable under the Officers Plan are calculated as continuous and certain benefits for unmarried individuals, and as joint and survivor benefits for married individuals. Benefits paid under the Officers Plan are based on the highest rate of annual salary paid to the officer at any time throughout his or her career. For purposes of the Officers Plan, the salary upon which benefits are based excludes compensation received pursuant to the Annual Incentive Plan, which amounts are reflected in the bonus category of the Summary Compensation Table above. An officer is eligible to receive 60% of salary at age 60 and for officers with more than 25 years of service there is an additional one percent accrual for each year over 25 for a maximum accrual of 65% of salary with 30 years of service. Such benefits are offset by fifty percent of social security benefits payable to each participant, except in the case of individuals who were participants on December 31, 1991 if such offset would reduce the benefit payable to such participant below the benefit that otherwise would have been paid based upon salaries in effect on December 31, 1991. Also, no officer's benefit will be less than the benefit that would be received under the Qualified Plan formula without regard to the application of any Internal Revenue Service limitations on compensation or benefits payable from a qualified plan in determining the benefit level. Any benefits under
the Officers Plan are also adjusted by (a) the benefits computed under all other defined benefit pension plans to which the officer is entitled from the Company or from previous employment and (b) in the case of any officer who has been employed by the Company for less than fifteen years at the time of retirement, the proportion that such officer's years of service are to fifteen. All of the individuals named in the Summary Compensation Table above have been designated by the Board of Directors as participants in the Officers Plan.
The credited years of service as of September 30, 1995, for the five individuals named in the Summary Compensation Table are as follows: Mr. Frauenhofer, 34 years, Mr. Bolduc, 25 years, Mr. Kraiza, 25 years, Mr. Mirabella 24 years, and Mr. Ludington 23. The estimated annual benefits payable upon retirement under the plans are as follows: Mr. Frauenhofer, $197,376; Mr. Bolduc $86,523; Mr. Kraiza, $80,783; Mr. Mirabella $79,470, and Mr. Ludington $74,615.
The following graph compares the total shareholder returns produced by the Company over the last five fiscal years to the Standard & Poor's 500 Stock Index ("S & P 500") and the Dow Jones Utility Group and for the "CNG Peer Group." The CNG Peer Group consists of the following Companies: Atmos Energy Corporation, Bay State Gas Company, Colonial Gas Company, Connecticut Energy Corporation, Energen Corporation, Indiana Energy, Inc., Laclede Gas Company, New Jersey Resources Corporation, Northwest Natural Gas Company, NUI Corporation, Piedmont Natural Gas, Inc., Providence Energy Corporation, Public Service Company of North Carolina, Inc., South Jersey Industries, Inc., Southeastern Michigan Gas Enterprises, Southern Union Company, United Cities Gas Company, Washington Energy Company and Yankee Energy Systems, Inc. Total return values for the S & P 500, Dow Jones Utility Group, the CNG Peer Group and the Company were calculated based on cumulative total return values assuming reinvestment of dividends.
The Company has included the CNG Peer Group below because the companies listed therein more closely resemble the Company in size and geographical market than the broader based Dow Jones Utility Group index used in prior years. The CNG Peer Group is the same group generally used by the Compensation Committee in its analysis and evaluation of employee compensation.
* $100 INVESTED ON 9/30/90 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING SEPTEMBER 30.
The following shows the Company's common stock beneficially owned by each of the named Executive Officers listed in the Summary Compensation Table above and the beneficial ownership of all directors and officers as a group as of November 1, 1995. No officer or director owns preferred stock.
*No officer or director owns more than one percent of any class of the Company's stock. The percentage of shares owned by all officers and directors as a group is 1.4 percent of the Company's Common $3.125 Par Value Stock.
The Company is aware of no shareholders who owned beneficially more than 5% of a class of its voting securities on November 1, 1995.
The Board of Directors has reappointed Arthur Andersen LLP as auditors for the fiscal year ending September 30, 1996, subject to shareholder ratification of such appointment at the Annual Meeting. In the event that shareholders do not ratify the appointment of Arthur Andersen LLP, the Board of Directors will consider the selection of other independent accountants.
Arthur Andersen LLP has advised the Board of Directors that neither such firm nor any member nor associate thereof has any financial interest, direct or indirect, in the Company or any of its subsidiaries or has had any connection during the past three years with the Company or any of its subsidiaries in the capacity of promoter, underwriter, voting trustee, director, officer or employee. A representative of such firm is expected to be available at the Annual Meeting to respond to appropriate questions and to be afforded the opportunity to make a statement.
1997 ANNUAL MEETING -- SHAREHOLDER PROPOSALS
Proposals of shareholders which are to be presented at the Annual Meeting to be held in 1997 must be received by the Company to be considered for inclusion in the proxy statement and form of proxy relating to that meeting no later than September 16, 1996.
The Board of Directors and management of the Company do not know of any other matters that are to be presented for action at the meeting. Should any other matter come before the meeting, however, the persons named in the enclosed proxy will have discretionary authority to vote all proxies with respect to such matter in accordance with their judgment.
BY ORDER OF THE BOARD OF DIRECTORS,
BY S/ R. L. BABCOCK REGINALD L. BABCOCK, Vice President, General Counsel & Secretary
/\FOLD AND DETACH PROXY CARD HERE/\ RETURN PROXY CARD IN ENCLOSED ENVELOPE AFTER COMPLETING, SIGNING AND DATING
CONNECTICUT NATURAL GAS CORPORATION -- PROXY FOR ANNUAL MEETING
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints V. H. Frauenhofer and D. C. Thomas or either of them, with power of substitution to each, attorneys for the undersigned to vote as designated on the reverse hereof and, in their discretion, upon such other business as may properly come before the Meeting all shares of stock of the undersigned in Connecticut Natural Gas Corporation at the Annual Meeting of Shareholders of the Company to be held at the office of the Company, 100 Columbus Boulevard, Hartford, Connecticut on the 27th day of February, 1996, at 10:30 a.m., or any adjournment thereof, with all the powers the undersigned would possess if personally present thereat.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED ON THE REVERSE SIDE HEREOF. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1 AND 2.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY
1996 Annual Meeting of Shareholders | DEF 14A | DEF 14A | 1996-01-12T00:00:00 | 1996-01-12T13:48:23 |
0000889812-96-000023 | 0000889812-96-000023_0000.txt | PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule / / Definitive Additional Materials / / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box): / / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item / / $500 per each party to the controversy pursuant to Exchange Act Rule / / 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 transaction 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 Rule 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:
/X/ 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.
(2) Form, Schedule or Registration Statement No.:
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF AMERICAN GROWTH FUND, INC. (THE 'FUND'):
Notice is hereby given that a Special Meeting (the 'Meeting') of Shareholders of the Fund will be held at the office of the Fund, 410 17th Street, Suite 800, Denver, Colorado 80202 on February 15, 1996 at 2:00 p.m. mountain standard time for the following purposes:
1. To elect 5 Directors of the Fund.
2. To approve or disapprove amendments to the Articles of Incorporation of the Fund to authorize the designation and redesignation of the Fund's shares into one or more series and/or classes of shares.
3. To approve or disapprove further separate amendments to the Articles of Incorporation of the Fund (seven separate subproposals), in each case as described in the accompanying Proxy Statement.
4. To ratify or reject the selection of KPMG Peat Marwick LLP as independent accountants for the 1996 fiscal year.
5. To transact such other business as may properly come before the Meeting or any adjournment thereof.
Only shareholders of record of the Fund at the close of business on December 26, 1995 are entitled to receive notice of and to vote at the Meeting, and at any and all adjournments thereof.
By order of the Board of Directors,
YOUR VOTE IS IMPORTANT REGARDLESS OF HOW MANY SHARES YOU OWNED ON THE RECORD DATE.
IF YOU CANNOT ATTEND THE MEETING, PLEASE FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED STATES.
410 17TH STREET, SUITE 800
This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of American Growth Fund, Inc. (the 'Fund') to be used at a Special Meeting of shareholders of the Fund and any adjournment or adjournments thereof (the 'Meeting'). The Meeting is scheduled to be held on February 15, 1996 at 2:00 p.m. mountain standard time at the offices of the Fund, 410 17th Street, Suite 800, Denver, Colorado 80202. The purpose of the Meeting and the matters to be acted upon are set forth in the accompanying Notice of Meeting and described below.
The most recent annual report of the Fund has previously been sent to shareholders and may be obtained without charge by contacting the Fund at 410 17th Street, Suite 800, Denver, Colorado 80202, telephone number (800) 525-2406.
It is expected that the Notice of Meeting, this Proxy Statement and the accompanying form of Proxy will be first mailed to shareholders on or about January 12, 1996.
The Directors have fixed the close of business on December 26, 1995 as the record date for the determination of shareholders entitled to notice of and to vote at the Meeting. As of the record date, 11,562,806 shares of capital stock of the Fund, par value $0.01 per share, were outstanding.
As of the record date, to the knowledge of the Fund, no person owned beneficially more than 5% of the Fund's shares. The number of shares of the Fund owned beneficially directly or indirectly by each of the Fund's Directors and executive officers as of the record date is set forth in Proposal No. 1. As of the record date, the Directors and the officers as a group owned beneficially directly or indirectly 311,616 or 2.7% of the Fund's outstanding shares.
Each share of the Fund is entitled to one vote on each matter; no shares have cumulative voting rights. Shares held by two or more persons (whether as joint tenants, co-fiduciaries or otherwise) will be voted as follows unless a written instrument or court order providing to the contrary has been filed with the Secretary of the Fund: (1) if only one votes, his vote will bind all; (2) if more than one votes, the vote of the majority will bind all; and (3) if more than one votes and the vote is evenly divided, the shares will be voted in accordance with the determination of a majority of such persons together with any person appointed to act by a court of competent jurisdiction, or, in the absence of such appointment, the vote will be cast proportionately.
Approval of Proposal No. 1 requires the affirmative vote of a plurality of the votes cast by shareholders on such Proposal at the Meeting. Approval of Proposal No. 2 and each subproposal of Proposal No. 3 requires the affirmative vote of a majority of the shares of the Fund outstanding and entitled to vote at the Meeting, present in person or represented by proxy. Approval of Proposal No. 4 requires the affirmative vote of a majority of the votes cast by shareholders on such Proposal at the Meeting.
A quorum for the transaction of business is constituted by the presence in person or by proxy of the holders of not less than a majority of the outstanding shares of the Fund entitled to vote at the Meeting. If, by the time scheduled for the Meeting, a quorum of shareholders of the Fund is not present or if a quorum is present but sufficient votes in favor of each of the Proposals described in this proxy statement are not received, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of proxies from shareholders of the Fund. Any such adjournment will require the affirmative vote of a majority of the shares of the Fund present in person or represented by proxy at the Meeting. The persons named as proxies will vote in favor of any such adjournment if they determine that such adjournment and additional solicitation are reasonable and in the interests of the Fund's shareholders. If such adjournment is for more than 120 days after the record date, the Fund will give notice of the adjourned Meeting to shareholders.
In tallying shareholder votes, abstentions and broker non-votes (i.e., proxies sent in by brokers and other nominees which cannot be voted on a proposal because instructions have not been received from the beneficial owners) will be counted for purposes of determining whether a quorum is present for purposes of convening the Meeting. If a proposal must be approved by a percentage of 'votes cast' on the proposal (i.e., Proposals Nos. 1 and 4), abstentions and broker non-votes will not be counted as 'votes cast' on the proposal and will have no effect on the result of the vote. If a proposal must be approved by a majority of the shares issued and outstanding (i.e., Proposal No. 2 and each subproposal of Proposal No. 3), abstentions and broker non-votes will be considered to be both present and issued and outstanding and, as a result, will have the effect of being counted as votes against the proposal.
If the accompanying form of proxy is properly executed and returned in time
to be voted at the Meeting, the shares covered thereby will be voted in accordance with the instructions marked thereon by the shareholder. Executed proxies that are unmarked will be voted FOR each proposal (or subproposal thereof) submitted to a vote of the shareholders. Any proxy may be revoked at any time prior to its exercise by providing written notice of revocation to the Fund, by delivering a duly executed proxy bearing a later date, or by attending the Meeting and voting in person. The Fund will request each bank or broker holding shares for others in its name or custody, or in the names of one or more nominees, to forward copies of the proxy materials to the persons for whom it holds such shares and to request authorization to execute the proxies. Upon request, the Fund will reimburse such banks and brokers for their out-of-pocket expenses in connection therewith.
One half of the cost of the solicitation (including the cost of the Meeting and the cost of printing, assembling and mailing of proxy materials) will be borne by the Fund, with the balance borne in approximately equal amounts by Investment Research Corporation, the investment adviser to the Fund (the 'Adviser') and American Growth Fund Sponsors, Inc., the Fund's distributor (the 'Distributor').
Directors and officers of the Fund, and officers and employees of the Adviser and the Distributor, may also solicit proxies, without compensation. Proxies may be solicited by mail, in person or by telephone. Proxies may be recorded pursuant to telephone or electronically transmitted instructions obtained pursuant to procedures reasonably designed to verify that such instructions have been authorized. Although the Fund does not currently intend to use any outside solicitation services, the Fund reserves the right to use such a service if Fund management determines it to be appropriate. The cost of using any such service, which is not expected to exceed $15,000, will be borne by the Fund, the Adviser and the Distributor in the same proportion as the other costs of the solicitation.
AMENDMENT AND RESTATEMENT OF THE ARTICLES OF INCORPORATION
In connection with the proposed amendments to the Articles of Incorporation of the Fund described in Proposals Nos. 2 and 3, the Fund has prepared a form of Articles of Amendment and Restatement, a copy of which is attached as Exhibit A to this Proxy Statement. The form of Articles of Amendment and Restatement contains all amendments of the Fund's Articles of Incorporation made to date as well as the amendments now proposed to be made.
If Proposal No. 2 and all subproposals contained in Proposal No. 3 are approved by shareholders, the Fund will file Articles of Amendment and Restatement with the Department of Assessments and Taxation of the State of Maryland in substantially the form of Exhibit A. If Proposal No. 2 is approved but all of the subproposals contained in Proposal No. 3 are not approved, the Fund will file Articles of Amendment reflecting solely the amendments contained in Article Fourth of Exhibit A and the amendments contained in the subproposals of Proposal No. 3 that are approved. If any or all of the subproposals contained
in Proposal No. 3 are approved but Proposal No. 2 is not approved, the Fund will file Articles of Amendment reflecting solely the amendments approved in such subproposals of Proposal No. 3.
At a meeting of the Board of Directors held November 22, 1995, in accordance with the Fund's Articles of Incorporation and By-Laws the Board authorized that the size of the Board be set at five persons, Thereupon, the Directors who are not interested persons of the Fund (the 'Disinterested Directors') within the meaning of the Investment Company Act of 1940, as amended (the '1940 Act'), selected and nominated, and the Board unanimously elected, Mr. Harold Rosen as a Director of the Fund. In addition, the Disinterested Directors unanimously nominated for reelection as Directors by the Fund's shareholders the 5 persons described below. Each nominee has consented to being named in this proxy statement and to serve, if elected, from the Meeting until such time as he resigns or is removed from office by the Directors or shareholders of the Fund. Should one or more nominees not be able to serve for any reason, the persons named in the proxy will vote for the substitute or substitutes, if any, selected and nominated by the Disinterested Directors.
* Mr. Brody is an 'interested person' of the Fund within the meaning of the 1940 Act.
COMPENSATION OF DIRECTORS AND OFFICERS
The Fund does not pay any direct remuneration to any officer or Director who is an interested person within the meaning of the 1940 Act. Each Disinterested Director is currently paid a fee per meeting attended of $400 and reimbursed for all expenses incurred in connection with any meeting.
During the Fund's most recently completed fiscal year, Messrs. Baum, Bush and Strauss, the only Disinterested Directors serving during that year, were each paid the following compensation by the Fund:
None of the above named persons received any retirement benefits or other form of deferred compensation from the Fund. There are no other funds that together with the Fund constitute a Fund Complex.
The number of regularly scheduled and special meetings, including telephone meetings, held by the Board of Directors during the Fund's fiscal year ended July 31, 1995 was 3. Each of the Directors then serving attended 100% of the total number of such meetings. The Board of Directors does not have any standing audit committee or nominating committee.
The following is information concerning the persons who are the executive officers of the Fund:
THE DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE 'FOR' THE NOMINEES FOR DIRECTOR IN PROPOSAL NO. 1.
APPROVAL OF AMENDMENTS TO ARTICLES OF INCORPORATION TO PERMIT MULTIPLE-CLASS DISTRIBUTION ARRANGEMENTS
The Board of Directors recommends that the shareholders of the Fund approve amendments to the Fund's Articles of Incorporation which would permit the Board, without any further shareholder approval or other action, to issue one or more additional classes of shares having such preferences or special or relative rights and privileges as the Board may determine. In addition, these amendments would also permit the issuance of Fund shares in different series, each of which series would represent interests in a different investment portfolio of the
Fund. Exhibit A is a form of Articles of Amendment and Restatement for the Fund containing, in Article Fourth, the proposed amendments discussed in this Proposal No. 2, and the discussion herein is qualified in its entirety by reference to Exhibit A. See 'Introduction--Amendment and Restatement of Articles of Incorporation' above for further information concerning the proposed filing of Articles of Amendment and Restatement.
The principal purpose of these amendments is to permit the Fund to take advantage of alternative methods of selling shares through a multiple-class distribution program. At present, the Fund's shares are sold to investors at a public offering price equal to the Fund's net asset value per share plus sales charges (or 'sales loads') that are reduced or waived on certain purchases, all as reflected in the Fund's prospectus and statement of additional information as in effect at the time of sale. Currently, the Fund does not use its assets to pay for the expenses and costs of distribution, or shareholder services related to distribution, of its shares (also frequently referred to as 'Rule 12b-1 fees').
In connection with the approval of this Proposal No. 2, the existing shares of the Fund will be designated as Class D shares. In addition, it is the current intention of the Directors to establish three additional classes of shares for the Fund in order to implement a multiple-class distribution program.
THE DIRECTORS HAVE DETERMINED THAT ALTHOUGH DISTRIBUTION-RELATED AND SHAREHOLDER SERVICING-RELATED CHARGES MAY BE PAID BY ANY NEW CLASS, THE FUND'S CURRENT SHARES (THE PROPOSED CLASS D SHARES) WILL NOT BE SUBJECT TO RULE 12B-1 FEES AT THIS TIME, WHETHER FOR DISTRIBUTION OR SHAREHOLDER SERVICING. The Fund does not currently anticipate proposing any Rule 12b-1 fees on the Class D shares in the foreseeable future, and any such proposal for the adoption of such fees would require approval by the Class D shareholders. In connection with the implementation of the multiple-class distribution program, the Fund will limit the general availability of Class D shares to the existing beneficial holders of Class D shares at the time of implementation, to the Fund's, the Adviser's and the Distributor's directors and officers and their spouses and family members, as well as registered representatives selling shares of the Fund and their spouses and family members, and to certain institutional investors, including banks, corporations and accounts managed by specified types of fiduciaries.
The creation of additional separate classes of shares will permit the Directors to allocate the ongoing costs and expenses associated with the distribution of shares of a class and distribution-related servicing of shareholders of the class to the investors who elect to purchase that particular class of shares. SHAREHOLDERS WHO CURRENTLY OWN SHARES OF THE FUND WILL NOT BEAR ANY PORTION OF SUCH COSTS.
The three proposed new classes of shares of the Fund, Class A shares, Class B shares and Class C shares, are currently contemplated to be offered with the
1. Class A shares will be sold with (i) a front-end sales charge of 5.75%, which will be reduced on purchases in excess of $50,000 and (ii) continuing Rule 12b-1 fees at an annual rate of up to .30 of 1% of the average daily net asset value of the Class A shares. Of the Rule 12b-1 fees, up to .25 of 1% of average daily net assets would be used to pay for shareholder servicing related to distribution of shares of the class (a 'service fee') and total Rule 12b-1 fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net assets of the class. The Class A shares would have characteristics identical to the characteristics of the existing shares of the Fund (the proposed Class D shares) except that the Class D shares will not have the Rule 12b-1 fees.
2. Class B shares will be sold without a front-end sales charge, but will be subject to (i) a contingent deferred sales charge ('CDSC') payable with respect to shares when they are redeemed, which charge would decline to zero over a seven year period, and (ii) a continuing Rule 12b-1 fee at an annual rate of up to 1% of the average daily net asset value of the Class B shares, of which .75 of 1% would be payments in respect of distribution services rendered (a 'distribution fee') and .25 of 1% would be a service fee. It is also proposed that individual Class B shares will automatically convert (without any charge to the shareholder) to Class A shares (with their lower Rule 12b-1 fees) shortly after the seventh anniversary of their purchase.
3. Class C shares will be sold without a front-end sales charge, but will be subject to (i) a 1% CDSC for the first year after sale and (ii) a continuing Rule 12b-1 fee at an annual rate of up to 1% of the average daily net asset value of the Class C shares, of which .75 of 1% would be a distribution fee and .25 of 1% would be a service fee. Unlike the Class B shares, the Class C shares will not convert to any other class.
In addition, the Board may in the future create other classes of shares having other characteristics pertaining to the payment of distribution-related or shareholder servicing-related costs and expenses. While the final characteristics of the Class A, Class B and Class C shares (or any future classes), including the applicable distribution-related and shareholder servicing-related charges, may vary from those described above, regardless of the final characteristics of each class no class will bear the distribution-related or shareholder servicing-related costs and expenses of any other class, and in the case that the Fund is divided into separate series, no series will bear the distribution-related or shareholder servicing-related costs and expenses of any other series.
Other than with respect to distribution-related and shareholder servicing-related matters, all classes of shares of the Fund (or classes of any future separate series) would generally participate in all respects on an equal proportionate basis with all other classes of shares of the Fund (or of such
separate series), including with respect to investment income, realized and unrealized gains and losses on portfolio investments and all other operating expenses (except for certain expenses relating solely to a particular class or series such as any incremental shareholder servicing fees and the printing of proxy statements for a meeting of shareholders of a particular class or series). All classes of shares of the Fund (or separate series) will vote together as a single class at meetings of shareholders, except that shares of a class (or series) which are affected by any matter in a materially different manner from shares of other classes (such as approval of a Rule 12b-1 plan for a class) or other series (such as investment policies of the series) will vote as a separate class or series and that holders of shares of a class or series not affected by a matter will not vote on that matter.
In connection with approving the submission of this Proposal No. 2 to shareholders of the Fund, the Directors considered that the implementation of the multiple-class distribution program would provide investors with additional methods of purchasing the Fund's shares, which could lead to increased sales of shares. This in turn could possibly minimize or prevent any adverse effects of redemptions requiring inopportune liquidation of portfolio securities and the forgoing of favorable investment opportunities, and may improve the ability of the Fund to deal in larger blocks of securities and obtain more favorable pricing on portfolio transactions. In addition, the Directors considered that an increase in asset size could enable the Fund to achieve savings where certain costs (such as legal and audit expenses and Directors' fees) unrelated to the size of the Fund are spread over a larger asset base.
Any decision as to whether the multiple-class distribution program ultimately will be implemented will be determined in light of then existing business conditions. However, the Directors recommend that the Fund's Articles of Incorporation be amended at this time in order to permit the Fund to offer Class A, Class B and Class C shares, and to enable the Fund to take advantage of such opportunities that may exist in the future to offer additional classes.
Although there is no current intention to do so, if the Directors in the future should determine to offer separate series of the Fund (for example, a Money Market Fund), the Fund could achieve certain economies of scale with respect to the Fund's fixed costs unrelated to the size of the Fund's assets. No series would bear the advisory, shareholder servicing-related or distribution-related expenses or costs of any other series. Notwithstanding the proposed amendments, the Directors will not be obligated to create any new series. In addition, there can be no assurance that any economies of scale would be realized if any new series are created.
THE DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE 'FOR' PROPOSAL NO. 2.
APPROVAL OF OTHER AMENDMENTS TO ARTICLES OF INCORPORATION (PROPOSAL NO. 3 CONTAINING SEVEN SUBPROPOSALS)
It is proposed that the shareholders of the Fund approve various additional amendments to the Fund's Articles of Incorporation which are described in each subproposal discussed below. Exhibit A contains a form of Articles of Amendment and Restatement for the Fund containing the proposed amendments discussed in this Proposal No. 3, and the discussion herein is qualified in its entirety by reference to Exhibit A. See 'Introduction--Amendment and Restatement of Articles of Incorporation' above for further information concerning the proposed filing of Articles of Amendment and Restatement.
As discussed in more detail below, most of the proposed amendments are intended to bring the Fund's Articles of Incorporation into conformity with standard terms contained in many Articles of Incorporation of Maryland corporations organized today. At the time the Fund was organized, over 37 years ago, mutual funds organized as Maryland corporations included in their Articles of Incorporation many more provisions than do such funds organized today. As explained further below, many of these provisions are redundant of restrictions or regulations otherwise applicable to the Fund pursuant to the 1940 Act or the rules thereunder or Maryland corporate law, or appear to be intended to prevent certain potential abuses that may have been a threat to the operations of a mutual fund in 1958 but generally are no longer viewed as such today due to subsequent amendments to the 1940 Act or the promulgation of certain of the rules thereunder.
In addition to the following specified amendments, the Board of Directors proposes to make certain technical amendments for the purposes of including conforming provisions to reflect facts existing at the time of the filing of Articles of Amendment and Restatement or to conform to the specific amendments contained in Proposal No. 2 and this Proposal No. 3. While the specific conforming amendments are not described herein, the approval by shareholders of this Proposal No. 3 will be considered to be approval of any technical amendments required to conform the Articles of Incorporation, as amended, or Articles of Amendment and Restatement, as the case may be, to the amendments approved at the Meeting and otherwise to bring the Fund's Articles of Incorporation, as amended or amended and restated, up to date.
THE DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE 'FOR' EACH SUBPROPOSAL CONTAINED IN THIS PROPOSAL NO. 3.
(A) Elimination of Investment Restrictions Contained in Article Second.
It is proposed that shareholders approve the elimination of the investment restrictions contained in Paragraph 1 of Article Second of the Articles of Incorporation (the 'charter restrictions'). THE BOARD OF DIRECTORS AND FUND MANAGEMENT BELIEVE THAT THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE CHARTER RESTRICTIONS AND THE FUND'S CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS, WHICH
ARE SET FORTH IN THE FUND'S PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. ACCORDINGLY, APPROVAL OF THE ELIMINATION OF THE CHARTER RESTRICTIONS WILL NOT CHANGE THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS. However, this approval will enable the Fund to make such changes in the future in the manner and to the extent permitted by the 1940 Act. The Board of Directors believes that this added flexibility is in the best interests of the Fund and its shareholders. While the 1940 Act requires a shareholder vote to approve any such changes, the vote required by the 1940 Act is smaller than that required for charter amendments under Maryland law.
The 1940 Act requires all mutual funds to adopt and disclose, in their prospectus and/or statement of additional information, certain 'fundamental' investment restrictions that cannot be changed without the vote of a 'majority of the outstanding voting securities' of the fund (a '1940 Act majority'). 'Majority of outstanding voting securities' is defined for purposes of the 1940 Act as the lesser of (a) more than 50% of the outstanding shares of a fund or (b) 67% of the shares represented at a meeting of shareholders at which more outstanding shares of the fund are present in person or represented by proxy. In contrast, an amendment to the Fund's Articles of Incorporation requires approval by more than 50% of the Fund's outstanding shares, which is a more burdensome requirement than simply obtaining a 1940 Act majority.
The Board understands that few mutual funds organized today include investment restrictions in their Articles of Incorporation. Moreover, the Board believes that the requirement of a 1940 Act majority vote to approve any change to a fundamental policy adequately protects shareholders against unexpected or undesired future changes in fundamental investment policies and restrictions while avoiding unnecessarily burdensome additional requirements for any such change.
The charter restrictions proposed to be eliminated are as follows:
(a) purchase any securities on margin;
(b) participate on a joint or joint and several basis in any trading account in any securities;
(c) contract to sell any security except to the extent that the same shall be owned by the [Fund];
(d) purchase the securities of any person, firm, association, corporation, syndicate, combination, organization, government (other than the United States of America) or any subdivision thereof, if, upon such purchase, more than 5% of its total assets, determined in such manner as may be approved by the Board of Directors of the [Fund] and applied on a consistent basis, would consist of the securities of such person, firm, association, corporation, syndicate, combination, organization, government or subdivision;
(e) borrow any money, except as a temporary measure for extraordinary or emergency purposes and then only in amounts not in excess of 10% of its total assets taken at cost;
(f) mortgage or pledge any of its property, real or personal;
(g) lend any of its funds or other assets other than through the purchase of bonds, debentures, notes and other evidences of
(h) purchase the securities of any person, firm, association, corporation, syndicate, combination, organization, government or any subdivision thereof, if, upon such purchase, the [Fund] would own more than 10% of any class of the outstanding securities of such person, firm, association, corporation, syndicate, combination, organization, government or subdivision. For the purposes of this restriction, all kinds of securities of a company representing debt shall be deemed to constitute a single class, regardless of relative priorities, maturities, conversion rights and other differences, and all kinds of stock of a company preferred over the common stock as to dividends or in liquidation shall be deemed to constitute a single class regardless of relative priorities, series designations, conversion rights and other differences;
(i) purchase the securities of any investment company or investment trust (as such items may reasonably be understood by the [Fund]), other than the [Fund], except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission or except when such purchase though not made in the open market is part of a plan of merger or consolidation;
(j) Purchase the securities of any person, firm, association, corporation, syndicate, combination or organization, the business of which has been in continuous operation for less than three years, such period to include the period of operation of any predecessor if the issuer whose securities are proposed to be acquired has come into existence as the result of a merger, consolidation, reorganization or the purchase of substantially all of the assets of such predecessor
if the purchase by the [Fund] of any such securities at the time thereof would cause more than 5% of the total assets of the [Fund] to be invested in securities of the type described in this paragraph (j); provided that any purchases of securities of any such person, firm, association, corporation, syndicate, combination or organization shall be limited to those the business of which at the time of purchase is that of (1) a public utility subject to supervision or regulation as to its rates or charges by a commission or board or officer of the United States or of any state or territory thereof, or of the Government of Canada or of any province of Canada or (2) operating pipe or transmission lines for the transmission of oil, gas or electric energy or like products;
(k) underwrite the sale of, or participate in any underwriting or selling group in connection with the public distribution of, any securities (other than the capital stock of the [Fund]), provided, however, that this provision shall not be construed to prevent or limit in any manner the right of the [Fund] to purchase securities for investment purposes.
As stated above, the Board of Directors believes that these restrictions do not differ materially from the fundamental investment restrictions set forth in the Fund's prospectus and statement of additional information.
Based on the foregoing, the Board of Directors believes that the proposed amendment is in the best interest of shareholders of the Fund.
(B) Elimination of Reporting Requirements in Connection with, and Restrictions on, Sales of Shares to Certain Persons.
Paragraph 2 of Article Second of the Fund's Articles of Incorporation prohibits sales of shares by the Fund's Distributor to the Adviser, the Distributor, or to the Fund's, Adviser's or Distributor's officers, directors and employees unless (i) the sale is made at a price not less than the public offering price, and (ii) the purchaser advises that Fund that the purchase is made for investment purposes and agrees to advise the Fund of any sale of shares of the Fund within two months of such purchase. The Board of Directors has determined that in view of developments in the law in the 37 years since the Fund was organized, these provisions are no longer necessary or appropriate. In addition, the Board has noted that these types of restrictions are not generally contained in the charters of newer mutual funds.
In the first instance, the 1940 Act and rules thereunder require that all sales of the Fund's shares be at the net asset value of the Fund plus any applicable sales charges. All variations in sales charges or waivers of sales charges must be disclosed in the Fund's prospectus and statement of additional
information. The Board of Directors believes that these disclosure requirements, which became law after the Fund was organized, have eliminated the need for the restriction contained in the Articles of Incorporation that sales to insiders be made 'at a price not less than the price then available to the public.'
In the second instance, the Fund's transfer agent maintains current records of all shareholder accounts on computer, which permits it to monitor any trading activity by Fund insiders in shares of the Fund. These records could be considered to more accurate and reliable than any reporting by the individuals involved, and should generally serve as the preferred way to monitor any potential abuses arising from insiders trading in Fund shares. Moreover, if this Proposal No. 3 is approved, the Board of Directors intends to adopt internal procedures to replace the reporting requirement contained in the Articles. The Board believes that internal procedures will provide satisfactory protection against a broad range of potential abuses by insiders in this area as well as other areas of trading practices. In addition, Fund management has indicated that during the last 37 years, no instance has been encountered where the existing procedures have led to the need for action by the Fund.
Based upon the foregoing, the Board of Directors believes that the proposed amendment is in the best interest of shareholders of the Fund.
(C) Elimination of Provisions Dealing with Transactions with Fund Insiders.
Paragraph 7 of Article Sixth of the Fund's Articles of Incorporation prohibits securities transactions, loans and Fund brokerage transactions between the Fund and certain persons affiliated with the Fund (or certain persons affiliated with such persons). In addition, this paragraph imposes certain restrictions and conditions upon any permitted transactions between the Fund and its directors, officers or employees or companies in which such persons have any interest.
The Board of Directors believes that the prohibitions contained in this paragraph of the Articles of Incorporation are redundant of, and in some case more restrictive than, prohibitions on related party transactions that are now contained in the 1940 Act and the rules thereunder and in Maryland law. Moreover, these types of specific restrictions are generally not found in mutual fund charters today.
While the Board recognizes that the elimination of these provisions as proposed might in the future allow the Fund to engage in certain transactions that otherwise are currently prohibited, the Board believes that the protections of the 1940 Act and the rules thereunder as well as the conditions imposed by Maryland law will serve as sufficient protection to the Fund against any potential abuses that could arise in such transactions. Furthermore, although Fund management has indicated that it does not currently foresee any instances where the Fund would enter into transactions now prohibited by the Articles of
Incorporation, the Board of Directors believes that the flexibility gained by eliminating these provisions may be beneficial to the Fund in the future. Accordingly, the Board believes that this proposed amendment is in the best interests of the Fund and its shareholders.
(D) Amendment of Provisions Relating to the Determination of the Fund's Share Price.
Paragraph 8 of Article Sixth of the Fund's Articles of Incorporation contains, in addition to a general authorization to the Board of Directors to issue shares of the Fund, detailed procedures for determining the Fund's net asset value.
However, the 1940 Act and the rules thereunder provide the general procedures for the determination of a Fund's offering price and the valuation of its assets (which includes requirements that the Board of Directors establish procedures for valuing certain types of assets). In addition, the Fund must comply with the accounting pronouncements made from time to time by the Securities and Exchange Commission (the 'Commission').
The proposed language of amended Paragraph 8 makes clear that the issuance of shares will be subject to the 1940 Act and rules thereunder, Maryland law, and any limitations otherwise contained in the Articles and the Fund's By-Laws. This provides maximum flexibility for the Fund to conform to any future changes in the 1940 Act and rules or in Maryland law. Accordingly, the Board of Directors believes that the proposed amendment is in the best interests of the Fund and its shareholders.
(E) Amendments to Liability and Indemnification Provisions.
The Board of Directors recommends the amendment of the provisions of Paragraph 7 of Article Sixth to provide that directors and officers of the Fund shall not be liable to the Fund or its shareholders for money damages. The amendments would provide further that no future amendment to the Articles of Incorporation or repeal of the limitation of liability or indemnification provisions would limit or eliminate any benefits provided by such provisions with respect to acts or omissions occurring prior to such future amendments. However, the amendments would also make explicit that the indemnification and limitation of liability provisions are subject to the 1940 Act limitations upon exculpation and indemnification. Accordingly, the Articles will state that no Director or officer will be protected from any liability to the Fund and its shareholders that arises from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
The Fund's Articles of Incorporation currently contain a provision granting the Fund's directors, officers, agents and employees indemnification to the full extent permitted by applicable law. While these provisions offer certain comfort to Directors and potential candidates considering serving as
Directors of the Fund, the Board believes that the proposed amendments are desirable for several reasons. For example, by making clear that generally the directors and officers are not liable to the Fund or shareholders for money damages, if a suit were instituted against one or more of the Fund's Directors on behalf of the Fund or its shareholders, this provision may enable the earlier dismissal of claims that are without merit, thus possibly avoiding certain situations where the Fund would have to provide costly indemnification to the Directors.
Based on the foregoing, the Board of Directors believes that the proposed amendments to the limitation of liability and indemnification provisions are in the best interests of the Fund and its shareholders.
(F) Amendments to Redemption Provisions.
Article Sixth of the Fund's Articles of Incorporation is proposed to be amended to add as Paragraph 9 three new provisions governing redemptions.
Proposed Paragraph 9 of Article Sixth replaces and modifies similar provisions currently contained in Article Fourth of the Fund's current Articles. The modifications to those provisions are primarily intended to restate and simplify the conditions regarding redemption of the Fund's shares. However, Proposed Paragraph 9 also adds a provision allowing the Board of Directors to order the redemption of all shares of the Fund. This provision provides a mechanism for the Directors to liquidate the Fund (or any series or class of the Fund) in the event that they determine that the Fund (or such series or class) is no longer viable, and its continuation is no longer in the best interests of its shareholders. In the absence of this provision, a shareholder vote, with its accompanying expense to the Fund, would be necessary.
The Board of Directors believes that the foregoing proposed amendments are in the best interests of the Fund and its shareholders.
(G) Amendment Governing Binding Effect of Determinations as to Financial Matters.
Article Sixth of the Fund's Articles of Incorporation is also proposed to be amended to add as Paragraph 10 a provision regarding the binding effect of certain determinations as to the valuation of Fund assets and liabilities and other financial matters.
Proposed Paragraph 10 is intended to make clear under the Fund's charter documents that determinations as to valuations of assets and liabilities as well as other financial matters affecting the Fund, made in good faith, and with respect to accounting matters, in accordance with accepted accounting practice, by or under the direction of the Board of Directors will be final, conclusive and binding on the Fund and all of its shareholders. This provision is intended to protect the Fund and its shareholders from potentially expensive challenges to good faith decisions regarding these matters.
The Board of Directors believes that the foregoing proposed amendment is in the best interests of the Fund and its shareholders.
Subject to ratification by the shareholders at the Meeting, the Board of Directors (including a majority of the Disinterested Directors), at a special meeting of the Board held January 5, 1996, determined to replace Smith, Brock & Gwinn as the Fund's independent accountants. Thereupon, the Board received and accepted the resignation of Smith, Brock & Gwinn, and approved the selection of KPMG Peat Marwick LLP as the Fund's independent accountants for the fiscal year ending July 31, 1996.
During the past two fiscal years ended July 31, 1995 and 1994, Smith, Brock & Gwinn served as the Fund's independent accountants. During that period, Smith, Brock & Gwinn did not render an adverse opinion or disclaimer of opinion on the financial statements of the Fund, nor was any opinion qualified or modified as to uncertainty, audit scope, or accounting principles. During such past two fiscal years and the period from August 1, 1995 through January 5, 1996 (the acceptance of the resignation of Smith, Brock & Gwinn), there were no disagreements with Smith, Brock & Gwinn on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
None of KPMG Peat Marwick LLP or any of its members have any direct or indirect material financial interest in or connection with the Fund in any capacity other than as independent accountants. Management of the Fund will arrange to have a representative of KPMG Peat Marwick LLP available to answer questions or make a statement at the Meeting if requested to do so by any shareholder at least three business days prior to the Meeting date.
THE DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE 'FOR' PROPOSAL NO. 4.
The Board of Directors knows of no other business to be brought before the Meeting, but should any other matters requiring the vote of shareholders arise, the persons named in the enclosed Proxy will vote thereon according to their best judgment in the interests of the Fund.
The Fund generally is not required to hold annual meetings of shareholders, and does not intend to hold periodic or special meetings of shareholders except as required by the 1940 Act. The next meeting of the shareholders of the Fund will be held at such time as the Board of Directors may determine or at such time as may be legally required. Any shareholder proposal intended to be presented at such meeting must be received by the Fund at its office a
reasonable time prior to the meeting, as determined by the Board of Directors, to be included in the Fund's proxy statement and form of proxy relating to such meeting, and must satisfy all other legal requirements.
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED STAMPED PRE-ADDRESSED ENVELOPE.
By order of the Board of Directors
PROPOSED NEW TEXT IS MARKED WITH UNDERSCORE; TEXT TO BE DELETED IS MARKED WITH [BRACKETS AND STRIKETHROUGH].
ARTICLES OF [INCORPORATION]AMENDMENT AND RESTATEMENT AMERICAN GROWTH FUND, INC.
[This is to Certify:]AMERICAN GROWTH FUND, INC., a Maryland corporation (the 'Corporation'), HEREBY CERTIFIES:
[We, the subscribers, James L. Watson, Thomas J. Bracken and Audrey F. Tranberg the post office address of all of whom is No. 10 Light Street, Baltimore, 2, Maryland all being of full legal age, do, under and by virtue of the General Laws of the State of Maryland authorizing the formation of corporations, associate ourselves with the intention of forming a corporation.]
1. The name of the Corporation is AMERICAN GROWTH FUND, INC. The Corporation desires to amend and restate its charter (the 'Charter') as currently in effect. The original Articles of Incorporation were approved and received by the State Tax Commission of Maryland on July 16, 1958.
2. Pursuant to Section 2-609 of the Maryland Corporations and Associations Code, these Articles of Amendment and Restatement restate and integrate and further amend the provisions of the Articles of Incorporation of the Corporation.
3. The text of the Charter of the Corporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows:
AMENDED AND RESTATED ARTICLES OF INCORPORATION AMERICAN GROWTH FUND, INC.
The name of the corporation (hereinafter called the Corporation) is American Growth Fund, Inc.
The purpose or purposes for which the Corporation is formed and the business or objects to be transacted, carried on and promoted by it, are as follows:
(1) To hold, invest and reinvest its funds, and in connection therewith to hold part or all of its funds in cash, and to purchase or otherwise acquire, hold for investment or otherwise, sell, assign, negotiate, transfer, exchange or otherwise dispose of or turn to account or realize upon, securities (which term 'securities' shall for the purposes of this Article, without limitation of the generality thereof, be deemed to include any stocks, shares, bonds, debentures, notes, mortgages or other
obligations, and any certificates, receipts, warrants or other instruments representing rights to receive, purchase or subscribe for the same, or evidencing or representing any other rights or interests therein, or in any property or assets) created or issued by any persons, firms, associations, corporations, syndicates, combinations, organizations, governments, or subdivisions thereof; and to exercise, as owner or holder of any securities, all rights, powers and privileges in respect thereof; and to do any and all acts and things for the preservation, protection, improvement and enhancement in value of any and all such securities.
[; provided, however, that the Corporation shall not
(a) purchase any securities on margin;
(b) participate on a joint or joint and several basis in any trading
(c) contract to sell any security to the extent that the same shall be
[(d) purchase the securities of any person, firm, association, corporation, syndicate, combination, organization, government (other than the United States of America) or any subdivision thereof, if, upon such purchase,more than 5% of its total assets, determined in such manner as may be approved by the Board of Directors of the Corporation and applied on a consistent basis, would consist of the securities of such person, firm, association, corporation, syndicate, combination, organization, government
(e) borrow any money, except as a temporary measure for extraordinary or emergency purposes and then only in amounts not in excess of 10% of its total assets taken at cost;
(f) mortgage or pledge any of its property, real or personal;
(g) lend any of its funds or other assets other than through the purchase of bonds, debentures, notes and other evidences of indebtedness as
(h) purchase the secutities of any person, firm, association, corporation, syndicate, combination, organization, government or any subdivision thereof, if, upon such purchase, the Corporation would own more than 10% of any class of the outstanding securities of such person, firm, association, corporation, syndicate, combination, organization, government or subdivision. For the purposes of this restriction, all kinds of securities of a company representing debt shall be deemed to constitute a single class, regardless of relative priorities, maturities, conversion rights and other differences, and all kinds of stock of a company preferred over the common stock as to dividends or in liquidation shall be deemed to constitute a single class regardless of relative priorities, series designations, conversion rights and other differences;
(i) purchase the securities of any investment company or investment trust (as such items may reasonably be understood by the Corporation),
other than the Corporation, except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission or except when such purchase though not made in the open market is part of a plan of merger or
(j) Purchase the securities of any person, firm, association, corporation, syndicate, combination or organization, the business of which has been in continuous operation for less than three years, such period to include the period of operation of any predecessor if the issuer whose securities are proposed to be acquired has come into existence as the result of a merger, consolidation, reorganization or the purchase of substantially all of the assets of such predecessor if the purchase by the Corporation of any such securities at the time thereof would cause more than 5% of the total assets of the Corporation to be invested in securities of the type described in this paragraph (j); provided that any purchases of securities of any such person, firm, association, corporation, syndicate, combination or organization shall be limited to these the business of which at the time of purchase is that of (1) a public utility subject to supervision or regulation as to its rates or charges by a commission or board or officer of the United States or of any state or territory thereof, or of the Government of Canada or of any province of Canada or (2) operating pipe or transmission lines for the transmission of oil, gas or electric energy or like products;
(k) underwrite the sale of, or participate in any underwriting or selling group in connection with the public distribution of, any securities (other than the capital stock of the Corporation), provided, however, that this provision shall not be construed to prevent or limit in any manner the right of the Corporation to purchase securities for investment purposes;]
(2) To issue and sell shares of its own capital stock in such amounts and on such terms and conditions, for such purposes and for such amount or kind of consideration (including, without limitation thereto, securities) now or hereafter permitted by the laws of Maryland and by these Articles of Incorporation, as its Board of Directors may determine; provided, however, that the consideration per share to be received by the
Corporation upon the sale of any shares of its capital stock shall not be less than the net asset value per share of such capital stock outstanding at the time as of which the computation of such net asset value shall be made.
[;and further provided, that the Corporation shall not, and shall not permit any distributor of the shares of its capital stock to, sell any shares of its capital stock (i) to any officer, director or employee of the Corporation; (ii) to any person or organization furnishing managerial, supervisory or distributing services to the Corporation; or (iii) to any officer, director, partner, trustee or employee of, or person owning of record any of the stock of, any person or organization furnishing managerial, supervisory or distributing services to the Corporation, unless the sale is made at a price not less than the price then available to the
public and the Corporation is advised that the purchase is being made for investment and that the purchaser will advise the Corporation of any sale of shares of the capital stock of the Corporation made by the purchaser less than two months after the date of any purchase by him or it of shares of the capital stock of the Corporation].
(3) To purchase or otherwise acquire, hold, dispose of, resell, transfer, reissue or cancel (all without the vote or consent of the stockholders of the Corporation) shares of its capital stock, in any manner and to the extent now or hereafter permitted by the laws of [said State] Maryland and by these Articles of Incorporation.
(4) To conduct its business in all of its branches at one or more offices in Maryland and elsewhere in any part of the world, without restriction or limit as to extent.
(5) To carry out all or any of the foregoing objects and purposes as principal or agent, and alone or with associates or, to the extent now or hereafter permitted by the laws of Maryland, as a member of, or as the owner or holder of any stock of, or shares of interest in, any firm, association, corporation, trust or syndicate; and in connection therewith to make or enter into such deeds or contracts with any persons, firms, associations, corporations, syndicates, governments or subdivisions thereof, and to do such acts and things and to exercise such powers, as a natural person could lawfully make, enter into, do or exercise.
(6) To do any and all such further acts and things and to exercise any and all such further powers as may be necessary, incidental, relative, conducive, appropriate or desirable for the accomplishment, carrying out or attainment of all or any of the foregoing purposes or objects.
The foregoing objects and purposes shall, except as otherwise expressly provided, be in no way limited or restricted by reference to, or inference from, the terms of any other clause of this or any other Article of these Articles of Incorporation, and shall each be regarded as independent, and construed as powers as well as objects and purposes, and the enumeration of specific purposes, objects and powers shall not be construed to limit or restrict in any manner the meaning of general terms or the general powers of the Corporation now or hereafter conferred by the laws of the State of Maryland, nor shall the expression of one thing be deemed to exclude another, though it be of like nature, not expressed; provided, however, that the Corporation shall not have the power to carry on within the State of Maryland any business whatsoever the carrying on to which would preclude it from being classified as an ordinary business corporation under the laws of said State; nor shall it carry on any business, or exercise any powers, in any other state, territory, district or country except to the extent that the same may lawfully be carried on or exercised under the laws thereof.
The post office address of the place at which the principal office of the Corporation in the State of Maryland will be located is [10 Light] 32 South Street, Baltimore [2], Maryland 21202.
The Corporation's resident agent is The Corporation Trust Incorporated, whose post office address is [10 Light] 32 South Street, Baltimore [2], Maryland 21202. Said resident agent is a corporation of the State of Maryland.
(1) The total [amount of authorized capital stock of the Corporation and the number and par value of its shares is $500,000, consisting of 50,000,000 shares of the par value of one cent each, all of one class. (2) At all meetings of stockholders each stockholder of the Corporation shall be entitled to one vote for each share of stock standing in his name on the books of the Corporation on the date, fixed in accordance with the By-Laws, for determination of stockholders entitled to vote at such meeting. Any factional share shall carry proportionately all the rights of a whole share, including the right to vote and the right to receive dividends.] number of shares which the Corporation has authority to issue is fifty million (50,000,000) shares of capital stock of the par value of one cent ($0.01) each, having an aggregate par value of five hundred thousand dollars ($500,000). Until its name may be changed pursuant to Paragraph 3 of this Article Fourth or any of such shares are reclassified pursuant to Paragraph 2 hereof, all such shares shall be of one series which shall bear the same name as that of the Fund. Until the Board of Directors may reclassify any of such shares pursuant to Paragraph 2 of this Article Fourth, all shares of the Corporation's common stock shall be of one class, designated 'Class D Common Stock.'
(2) The Board of Directors may classify and reclassify any unissued shares of capital stock (whether or not such shares have been previously classified) into one or more additional or other classes or series as may be established from time to time by setting or changing in any one or more respects the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of or rights to require redemption of such shares of capital stock and pursuant to such classification or reclassification to increase or decrease the number of authorized shares of any existing class or series.
(3) The Board of Directors may change the name or other designation of any series or class of shares of capital stock whether or not shares of such series or class are issued and outstanding, provided that such change in name or other designation does not change the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares of stock.
(4) Each series of stock of the Corporation shall relate to a separate portfolio of investments. All shares of stock within each series shall be identical except that there may be variations among the different series, including, without limitation, as to the purchase price, determination of net asset value, designations, preferences, conversion or other rights, voting powers, restrictions, allocations of expenses, special and relative rights and limitations as to dividends and on liquidation, qualifications
or terms or conditions of or rights to require redemption of such shares of stock.
(a) Except as the Board of Directors otherwise may provide when classifying or reclassifying any shares of stock into separate series, all consideration received by the Corporation for the issue or sale of shares of stock of a particular series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds received thereon, including any proceeds derived from the sale, exchange or liquidation of such assets, any funds or payments derived from any reinvestment of such proceeds, and any assets, income, earnings, profits, and proceeds thereof, funds or payments that are not readily identifiable as belonging to any particular series ('General Assets') allocated to a series, shall constitute assets of that series, in contrast to other series (subject only to the rights of creditors) and are herein referred to as assets 'belonging to' that series. Except as herein expressly provided, any General Assets shall be allocated by or under the supervision of the Board of Directors to and among any one or more of the series established and designated from time to time, in such manner and on such basis as the Board of Directors, in its sole discretion, deems fair and equitable. Such decisions by the Board of Directors shall be final and conclusive.
(b) The assets belonging to each series of stock shall be charged with the liabilities of the Corporation in respect of that series and with all expenses, costs, charges, and reserves attributable to
that series. Such liabilities, expenses, costs, charges, and reserves, together with any liabilities, expenses, costs, charges, or reserves of the Corporation that are not readily identifiable as belonging to any particular series ('General Liabilities') allocated to that series, shall constitute the liabilities of that series, in contrast to other series, and are herein referred to as 'belonging to' that series. Except as herein expressly provided, any General Liabilities shall be allocated by or under the supervision of the Board of Directors to and among any one or more of the series established and designated from time to time, in such manner and on such basis as the Board of Directors, in its sole discretion, deems fair and equitable. Such decisions by the Board of Directors shall be final and conclusive.
(5) Expenses related to the distribution of, and other identified expenses that should properly be allocated to, the shares of a particular class or series of capital stock may be charged to and borne solely by such class or series and the bearing of expenses solely by a class or series of capital stock may be appropriately reflected (in a manner determined by the Board of Directors) and cause differences in the net asset value attributable to, and the dividend, redemption and liquidation rights of, the shares of each class or series of capital stock.
(6) Unless otherwise expressly provided in the charter of the Corporation, including any Articles Supplementary thereto, the holders of
each class or series of capital stock shall be entitled to dividends and distributions in such amounts and at such times as may be determined by the Board of Directors, and the dividends and distributions paid with respect to the various classes or series of capital stock may vary among such classes and series. Dividends and distributions with respect to a series may be declared or paid only out of the net assets belonging to that series. Dividends on a class or series may be declared or paid only out of the net assets of that class or series.
(7) Unless otherwise expressly provided in the charter of the Corporation, including any Articles Supplementary thereto, on each matter submitted to a vote of stockholders, each holder of a share of capital stock of the Corporation shall be entitled to one vote for each share standing in such holder's name on the books of the Corporation, irrespective of the class or series thereof, and all shares of all classes and series shall vote together as a single class; provided, however, that (a) as to any matter with respect to which a separate vote of any class or series is required by the Investment Company Act of 1940, or any rules, regulations or orders issued thereunder, or by the Maryland General Corporation Law, such requirements as to a separate vote by that class or series shall apply in lieu of a general vote of all classes and series as described above, (b) in the event that the separate vote requirements referred to in (a) above apply with respect to one or more classes or series, then, subject to clause (c) below, the shares of all other classes and series not entitled to a separate class vote as a single class, and (c) as to any matter which does not affect the interests of a particular class or series, such class or series shall not be entitled to any vote and only the holders of shares of the affected classes or series, if any, shall be entitled to vote.
(8) The presence in person or by proxy of the holders of a majority of the shares of capital stock of the Corporation outstanding and entitled to vote thereat shall constitute a quorum at any meeting of the shareholders. If at any meeting of the shareholders there shall be less than a quorum present, the shareholders present at such meeting may, without further notice, adjourn the same from time to time until a quorum shall attend, but no business shall be transacted at any such adjourned meeting except such as might have been lawfully transacted had the meeting not been adjourned. Cumulative voting shall not be allowed at any meeting of the stockholders of this Corporation.
[(3) That for a period of six months from and after the public offering of the stock of this Corporation, this Corporation shall be a closed-end investment company, and at the expiration of said six-months period shall automatically become an open-end investment company; however the Board of Directors of this Corporation shall have the power to declare this Corporation an open-end investment company at any time prior thereto by resolution specifying the date and time when this Corporation shall be
(a) Each holder of the capital stock of the Corporation, upon request to the Corporation accompanied by surrender of the appropriate
stock certificate or certificates in proper form for transfer, shall be entitled to require the Corporation to redeem all or any part of the shares of capital stock standing in the name of such holder on the books of the Corporation, at the net asset value of such shares. The method of such net asset value, the time as of which such net asset value shall be computed and the time within which the Corporation shall make payment therefor shall be determined as hereinafter provided in Article SIXTH of these Articles of Incorporation. Notwithstanding the foregoing, the Board of Directors of the Corporation may suspend the right of the holders of the capital stock of the Corporation to require the Corporation to redeem shares of such capital stock to require the Corporation to redeem shares of such capital stock (i) for any period (A) during which the New York Stock Exchange is closed other than the customary week-end and holiday closings, or (B) during which trading on the New York Stock Exchange is restricted; (ii) for any period during which an emergency, as defined by rules of the Securities and Exchange Commission or any successor thereto, exists as a result of which (A) disposal of the Corporation of securities owned by it is not reasonably practicable, or (B) it is not reasonably practicable for the Corporation fairly to determine the value of its net assets; or (iii) for such other periods as the Securities and Exchange Commission or any successor thereto may by order permit for the protection of security holders of the Corporation.
(b) On and after such time all shares of the capital stock of the Corporation now or hereafter authorized shall be subject to redemption and redeemable, in the sense used in the General Laws of the State of Maryland authorizing the formation of corporations, at the redemption price for any such shares, determined in the manner set out in these Articles of Incorporation or in any amendment thereto. In the absence of any specification as to the purposes for which shares of the capital stock of the Corporation are redeemed or repurchased by it, all shares so redeemed or repurchased shall be deemed to be acquired for retirement in the sense contemplated by the laws of the State of Maryland and the number of the authorized shares of the capital stock of the Corporation shall not be reduced by the number of any shares redeemed or repurchased
(9) Unless otherwise expressly provided in the charter of the Corporation, including any Articles Supplementary thereto, subject to compliance with the requirements of the Investment Company Act, the Board of Directors shall have the authority to provide that holders of shares of any class or series shall have the right to convert or exchange said shares into shares of one or more other classes or series of shares in accordance with such requirements and procedures as may be established by the Board of Directors.
(10) Notwithstanding any provisions of the Maryland General Corporation Law requiring a greater proportion than a majority of the votes of all classes or series of capital stock of the Corporation (or any class or series entitled to vote thereon as a separate class or series) to take or authorize any action, the Corporation is hereby authorized (subject to the requirements of the Investment Company Act of 1940, or any rules, regulations and orders issued thereunder) to take such action upon the
concurrence of a majority of the aggregate number of shares of capital stock of the Corporation entitled to vote thereon (or a majority of the aggregate number of shares of a class or series entitled to vote thereon as a separate class or series).
(11) Unless otherwise expressly provided in the charter of the Corporation, including any Articles Supplementary creating any class or series of capital stock, in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of all classes and series of capital stock of the Corporation shall be entitled, after payment or provision for payment of the debts and other liabilities of the Corporation, to share ratably in the remaining net assets of the Corporation; provided, however, that in the event the capital stock of the Corporation shall be classified or reclassified into series, holders of any shares of capital stock within such series shall be entitled to share ratably (after taking into account are expenses attributable to any separate clauses of such series) out of the assets belonging to such series.
(4) Notwithstanding any provision of law requiring any action to be taken or authorized by the affirmative vote of the holders of a majority or other designated proportion of the shares, or to be otherwise taken or authorized by a vote of the stockholders, such action shall be effective and valid if taken or authorized by the affirmative vote of the holders of a majority of the total number of shares outstanding and entitled to vote thereon pursuant to the provisions of these Articles of Incorporation.
(12)[(5)] No holder of stock of the Corporation shall, as such holder, have any right to purchase or subscribe for any shares of the capital stock of the Corporation of any class which it may issue or sell (whether out of the number of shares authorized by these Articles of Incorporation, or out of any shares of the capital stock of the Corporation acquired by it after the issue thereof, or otherwise) other than such right, if any, as the Board of Directors, in its discretion, may determine.
(13) Any fractional share shall carry proportionately all the rights of a whole share, including the right to vote and the right to receive dividends.
(14)[(6)] All persons who shall acquire stock in the Corporation shall acquire the same subject to the provisions of these Articles of Incorporation.
(15) Any reference to 'shares,' 'stock' or 'shares of stock' in these Articles of Incorporation shall be deemed to refer, unless the context otherwise requires, to the shares of each separate class and/or series. As used in the charter of the Corporation, the terms 'charter' and 'Articles of Incorporation' shall mean and include these Articles of Incorporation as amended, supplemented and restated from time to time whether by Articles of Amendment, Articles Supplementary, Articles of Restatement or otherwise.
The number of Directors of the Corporation shall be [three] five, and the names of those who shall act as such [until the first annual meeting or] until their successors are duly chosen and qualified are as follows:
[Harry A. Feder] Michael J. Baum, Jr. [Arnold J. Cohodas] Eddie R. Bush
However, the By-Laws of the Corporation may fix the number of Directors at a number greater or less than that named in these Articles of Incorporation, provided that in no case shall the number of Directors be less than three, and may authorize the Board of Directors, by the vote of a majority of the entire Board of Directors, to increase or decrease the number of Directors fixed by these Articles of Incorporation or by the By-Laws within a limit specified in the By-Laws and to fill the vacancies created by any such increase in the number of Directors. Unless otherwise provided by the By-Laws of the Corporation, the Directors of the Corporation need not be stockholders therein.
The following provisions are hereby adopted for the purpose of defining, limiting and regulating the powers of the Corporation and of the Directors and stockholders.
(1) The By-Laws of the Corporation may divide the Directors of the Corporation into classes and prescribe the tenure of office of the several classes, but no class shall be elected for a period shorter than that from the time of the election following the division into classes until the next annual meeting and thereafter for a period shorter than the interval between annual meetings or for a longer period than five years, and the term of office of at least one class shall expire each year. Notwithstanding the foregoing, no such division into classes shall be made prior to the first annual meeting of stockholders of the Corporation.
(2) The holders of shares of the capital stock of the Corporation shall have the right to inspect the records, documents, accounts and books of the Corporation, subject to reasonable regulations of the Board of Directors, not contrary to Maryland law, as to whether and to what extent, and at what times and places, and under what conditions and regulations, such right shall be exercised.
(3) Any Director, or any officer elected or appointed by the Board of Directors or by any committee of said Board or by the stockholders or otherwise, may be removed at any time, with or without cause, in such lawful manner as may be provided in the By-Laws of the Corporation.
(4) If the By-Laws so provide, the Board of Directors of the Corporation shall have the power to hold their meetings, to have an office or offices and, subject to the provisions of the laws of Maryland, to keep
the books of the Corporation outside of said State at such places as may from to time be designated by them.
(5) In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the Board of Directors may exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the express provisions of the laws of Maryland, of these Articles of Incorporation and of the By-Laws of the Corporation.
(6) Shares of stock in other corporations shall be voted by the President or a Vice-President, or such officer or officers of the Corporation as the Board of Directors shall designate for the purpose, or by a proxy or proxies thereunto duly authorized by the Board of Directors, except as otherwise ordered by vote of the holders of a majority of the shares of the capital stock of the Corporation outstanding and entitled to vote in respect thereto.
[7(a) The Corporation shall not purchase from or sell to (i) any officer, director or employee of the Corporation, (ii) any partnership of which any officer, director or employee of the Corporation is a member, (iii) any corporation or association of which any officer, director or employee of the Corporation is an officer, director or trustee, (iv) any person or organization furnishing managerial, supervisory or distributing services to the Corporation (v) any officer, director, partner, trustee or employee of, or person owning or record any of the stock of, any person or organization furnishing managerial, supervisory or distributing services, (vi) any partnership of which any officer, director, partner, trustee or employee of, or person owning of record any of the stock of, any person or organization furnishing such managerial, supervisory or distributing services, is a member, or (vii) any corporation or association of which any officer, director, partner or trustee of, or person owning of record any of the stock of, any person or organization furnishing such managerial, supervisory or distributing services, is an officer, director or trustee, as principals, any securities (other than stock which may be issued by the Corporation), nor shall the Corporation make any loan to any officer, director or employee of the Corporation, to any partnership of which any officer, director or employee of the Corporation is a member, to any corporation or association of which any officer, director or employee of the Corporation is an officer, director or trustee, to any person or organization furnishing managerial, supervisory or distributing services to the Corporation, or to any officer, director, partner,
trustee or employee of, or person owning of record any of the stock of, any person or organization furnishing such managerial, supervisory or distributing services, nor shall any person, partnership, association or corporation with which the Corporation may have any management or distributing contract, or any officer, director or employee of the Corporation, either directly or through a partnership, association or corporation, be paid any brokerage commissions in the purchase and/or sale of securities for the account of the Corporation, provided any such person or entity may act as broker in connection with the sale of securities to or
by the Corporation in accordance with Section 17(e)(2) of the Investment Company Act of 1940 and the rules and regulations promulgated by the Securities and Exchange Commission thereunder or any successor statute and rules and regulations promulgated by the Securities and Exchange Commission under such successor statute and any officer, director, employee or stockholder of the Corporation, either directly or through a partnership association, or corporation, may act as distributor or underwriter in connection with the sale of stock which may be issued by the Corporation.
(b) Subject only to the provisions of subdivision (a) of this paragraph (7) and the provisions of the Investment Company Act of 1940, any director, officer or employee individually, or any partnership of which any director, officer or employee may be a member, or any corporation or association of which any director, officer or employee may be an officer, director, trustee, employee or stockholder, may be a party to, or may be pecuniarily or otherwise interested in, any contract or transaction of the Corporation, and in the absence of fraud no contract or other transaction shall be thereby affected or invalidated; provided that in case a director, or a partnership, corporation or association of which a director is a member, officer, director, trustee, employee or stockholder is so interested, such fact shall be disclosed or shall have been known to the Board of Directors or a majority thereof; and any director of the Corporation who is so interested, or who is also a director, officer, trustee, employee or stockholder of such other corporation or association or a member of such partnership which is so interested, may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which shall authorize any such contract or transaction, and may vote thereat to authorize any such contract or transaction, with like force and effect as if he were not such director, officer, trustee, employee or stockholder of such other corporation or association or not so interested or a member of a partnership so interested.
(a) A director and an officer, agent or employee of the Corporation shall be indemnified by the Corporation to the fullest extent allowed by the Maryland General Corporation Law (the 'Maryland Law') as it now exists and to such increased or expanded indemnification as may be allowed, required or permitted by any future amendment to the Maryland Law; and each director and officer, agent or employee shall also be entitled to the fullest indemnification which is now or hereafter permitted under any applicable law, rule, regulation, contract, bylaw or otherwise; and such rights to indemnification shall, except as otherwise provided in the Maryland law, not be deemed exclusive of any other rights to which each director, officer, agent or employee may be entitled apart from Maryland Law. The bylaws may also limit or restrict the indemnification to which any director, officer, agent or employee may be entitled.
[(d) Specifically, but without limitation of the foregoing, the Corporation may enter into a management contract and other contracts, and may otherwise do business with the firm of Maurice S. Brody Investment Research Corporation as investment advisors and counselors.
(8) The Board of Directors is hereby empowered to authorize the issuance and sale, from time to time, of shares of the capital stock of the Corporation, whether for cash at not less than the par value thereof or for such other consideration including securities as the Board of Directors may deem advisable, in the manner and to the extent now or hereafter permitted by the laws of Maryland; provided, however, that the consideration per share to be received by the Corporation upon the sale of any shares of its
shall not be less than the net asset value per share of such capital stock outstanding at the time as of which the computation of such net asset value shall be made. For purposes of the computation of net asset value, as in these Articles of Incorporation referred to, the following rules shall apply:
(a) The net asset value of each share of capital stock of the Corporation surrendered to the Corporation for redemption pursuant to the provisions of paragraph (3)(a) of Article Fourth of these Articles of Incorporation shall be determined as of the close of business on the first full business day on which the New York Stock Exchange is open next succeeding the date on which such capital stock is so surrendered.
(b) The net asset value of each share of the capital stock of the Corporation for the purpose of the issue of such capital stock at its net asset value shall be determined either as of the close of business on the last business day on which the New York Stock Exchange was open next preceding the date on which a subscription to such stock was accepted, or in accordance with any provisions of the Investment Company Act of 1940, any rule or regulation thereunder, or any rule or regulation made or adopted by any securities association registered under the Securities Exchange Act of 1934.
(c) The net asset value of each share of the capital stock of the Corporation, as of the close of business on any day, shall be the quotient obtained by dividing the value, as at such close, of the net assets of the Corporation (i.e., the value of the assets of the Corporation less its liabilities exclusive of capital stock and surplus) by the total number of shares of capital stock outstanding at such close, all determined and computed as follows:
(i) The assets of the Corporation shall be deemed to include (A) all cash on hand, on deposit, or on call, (B) all bills and notes and accounts receivable, (C) all shares of stock and subscription rights and subscription rights and other securities owned or contracted for by the Corporation, other its own capital stock, (D) all interest accrued on any interest bearing securities owned by the Corporation and (E) all other property of every kind and nature including prepaid expenses; the value of such assets to be determined as follows:
In determining the value of the assets of the Corporation for the purpose of obtaining the net asset value, each security listed on
the New York Stock Exchange shall be valued on the basis of the closing sale thereof on the New York Stock Exchange on the business day as of which such value is being determined. If there be no sale on such day then the security shall be valued on the basis of the mean between closing bid and asked prices on such day. If no bid and asked prices are quoted for such day, then the security shall be valued by such method as the Board of Directors shall deem to reflect its fair market value. Securities not listed on the New York Stock Exchange shall be valued in like manner on the basis of quotations on any other stock exchange which the Board of Directors may from time to time approve for that purpose, or by such other method as the Board of Directors shall deem to reflect their fair market value, and all other assets of the Corporation shall be valued by such method as they shall deem to reflect their fair market value. At such time as the Board of Directors shall determine that quotations on the New York Stock Exchange or other approved exchanges are not readily available to management of the Fund, the Board of Directors may authorize the substitution, for New York Stock Exchange or other exchange quotations, of recognized composite quotations, from any source approved by the Board, for purposes of valuation in the manner set forth in this Section. Such composite quotations shall thereafter substitute for such valuation in lieu of stock exchange quotations as long as recognized composite quotations are available for the security to be valued.
(ii) The liabilities of the Corporation shall be deemed to include (A) all bills and notes and accounts payable, (B) all administrative expenses payable and/or accrued (including management fees), (C) all contractual obligations for the payment of money or
of any unpaid dividend declared upon the Corporation's stock and payable to stockholders of record on or before the day as of which the value of the Corporation's stock is being determined, (D) all reserves, if any, authorized or approved by the Board of Directors for taxes, including reserves for taxes at current rates based on any unrealized appreciation in the value of the assets of the Corporation and (E) all other liabilities of the Corporation of whatsoever kind and nature except liabilities represented by outstanding capital stock and surplus of the Corporation.
(iii) For the purposes hereof (A) Capital stock subscribed for shall be deemed to be outstanding as of the time of acceptance of any subscription and the entry thereof on the books of the Corporation and the net price thereof shall be deemed to be an asset of the Corporation; and (B) Capital stock surrendered for redemption by the Corporation pursuant to the provisions of paragraph (3)(a) of Article FOURTH of these Articles of Incorporation shall be deemed to be outstanding until the close of business on the date as of which such value is being determined as provided in paragraph (8)(a) of this Article SIXTH and thereupon and until paid the price thereof shall be deemed to be a liability of the Corporation.
(d) The net asset value of each share of the capital stock of the Corporation, as of any time other than the close of business on any day, may be determined by applying to the net asset value as of the close of business on the preceding business day, computed as provided in paragraph (8)(c) of this Article SIXTH such adjustments as are authorized by or pursuant to the direction of the Board of Directors and designed reasonably to reflect any material changes in the market value of securities and other assets held and any other material changes in the assets or liabilities of the Corporation and in the number of its outstanding shares which shall have taken place since the close of business on such preceding business day.
(e) In addition to the foregoing, the Board of Directors is empowered, in its absolute discretion, to establish other bases or times, or both, for determining the net asset value of each share of the capital stock of the Corporation.
(f) Payment of the net asset value of capital stock of the Corporation surrendered to it for redemption pursuant to the provisions of paragraph (3)(a) of Article FOURTH of these Articles of Incorporation shall be made by the Corporation within seven days after surrender of such stock to the Corporation for such purpose, to the extent that the Corporation shall have any surplus available for such purpose as aforesaid, and out of such surplus. Any such payment may be made in portfolio securities of the Corporation and/or in cash, as the Board of Directors shall deem advisable, and no shareholder shall have a right, other than as determined by the Board of Directors, to have his shares redeemed in kind. For the purpose of determining the amount of any payment to be made, pursuant to paragraph (3)(a) of said Article FOURTH, in portfolio securities, such securities shall be valued as provided in subdivision (c)(i) of paragraph (8) of this Article SIXTH.
(g) In the case of shares of stock of the Corporation issued in whole or in part in exchange for securities, there may, at the discretion of the Board of Directors of the Corporation, be included in the value of said securities, for the purpose of determining the number of shares of stock of the Corporation issuable in exchange therefor, the amount, if any, of brokerage commissions (not exceeding an amount equal to the rates payable in connection with the purchase of comparable securities on the New York Stock Exchange) or other similar costs of acquisition of such securities paid by the holder of said securities in acquiring the same.]
(b) Subject to any limitation imposed by the Investment Company Act, to the maximum extent permitted by the General Laws of the State of Maryland from time to time in effect, no director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages.
(c) Neither the amendment of these Articles of Incorporation nor the repeal of any provision hereof, shall limit or eliminate the benefits provided to directors and
officers under the foregoing provisions in connection with any act or omission that occurred prior to such amendment or repeal.
(d) Nothing in these Articles of Incorporation shall be construed to protect any director or officer of the Corporation against any liability to the Corporation or its shareholders to which such director or officer would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
(8) The Board of Directors of the Corporation is hereby empowered to authorize, without shareholder approval, the issuance and sale from time to time of shares of stock of the Corporation of any class or series, whether now or hereafter authorized, in each case upon such terms and conditions and for such consideration as such Board of Directors may deem advisable, subject to such limitations as are contained in these Articles of Incorporation, the by-laws of the Corporation, the laws of the State of Maryland, and the Investment Company Act and the rules thereunder.
(a) Each holder of shares of stock of the Corporation shall be entitled to require the Corporation to redeem all or any part of the shares of stock of the Corporation standing in the name of such holder on the books of the Corporation, and all shares of stock issued by the Corporation shall be subject to redemption by the Corporation, at the redemption price of such shares as in effect from time to time as may be determined by the Board of Directors of the Corporation in accordance with the provisions hereof, subject to the right of the Board of Directors of the Corporation to suspend the right of redemption of shares of stock of the Corporation or postpone the date of payment of such redemption price in accordance with the provisions of applicable law.
(b) All shares of stock of the Corporation shall be redeemable at the option of the Corporation. The Board of Directors may by resolution from time to time authorize the Corporation to require the redemption of all or any part of the outstanding shares of any class or series upon such terms and conditions as the Board of Directors, in its discretion, shall deem advisable, and upon the sending of written notice thereof to each holder whose shares are to be redeemed.
(c) The redemption price of shares of stock of the Corporation shall be the net asset value thereof as determined by the Board of Directors of the Corporation or under its direction from time to time in accordance with the provisions of applicable law, less such redemption or other charge, if any, as may be fixed by the Board of Directors of the Corporation. Payment of the redemption price shall be made by the Corporation at such time and in such manner as may be determined from time to time by the Board of Directors of the Corporation in accordance with the provisions of applicable law.
(10) Any determination made in good faith and, so far as accounting matters are involved, in accordance with accepted accounting practice by or
pursuant to the direction of the Board of Directors, as to the amount of the assets, debts, obligations or liabilities of the Corporation (or of any class or series thereof), as to the amount of net income from dividends and interest for any period or amounts at any time legally available for the payment of dividends, as to the amount of any reserves or charges set up and the propriety thereof, as to the time of or purpose for creating such reserves or charges, as to the use, alteration or cancellation of any reserves or charges (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged or shall be then or thereafter required to be paid or discharged), as to the price of any security or other asset owned or held by the Corporation (or any series thereof), as to the number of shares of the Corporation (or any class or series thereof) outstanding, as to the estimated expense to the Corporation (or any class or series thereof) in
of its shares, as to the ability to liquidate securities in an orderly fashion, or as to any other matters, including, but not limited to those relating to the issue, sale, purchase and/or other acquisition or disposition of securities or shares of the Corporation (or any class or series thereof) shall be final and conclusive, and shall be binding upon the Corporation and all holders of its shares, past, present and future, and shares of the Corporation (and any class or series thereof) are issued and sold on the condition and understanding, evidenced by acceptance of certificates for such shares by, or confirmation of such shares being held for the account of, any shareholder, that any and all determinations shall be binding as aforesaid.
The term of existence of this Corporation shall be perpetual.
From time to time any of the provisions of these Articles of Incorporation may be amended, altered or repealed (including amendments altering contract rights and any amendment which changes the terms of any of the outstanding stock by classification, reclassification or otherwise), upon the vote of the holders of a majority of the shares of capital stock of the Corporation at the time outstanding and entitled to vote, and other provisions which might under the statutes of the State of Maryland at the time in force be lawfully contained in articles of incorporation, may be added or inserted upon the vote of the holders of a majority of the shares of capital stock of the Corporation at the time outstanding and entitled to vote, and all rights at any time conferred upon the stockholders of the Corporation by these Articles of Incorporation are granted subject to the provisions of this Article EIGHTH. The Corporation shall notify the stockholders in its next subsequent regular report to the stockholders of any amendment to these Articles of Incorporation.
1. The foregoing Articles of Amendment and Restatement have been effected in the manner and by the vote required by the Corporation's Charter and the laws of the State of Maryland. Pursuant to Section 2-604 of the Maryland Corporations
and Associations Code, these Articles of Amendment and Restatement were advised and approved by a majority of the entire Board of Directors of the Corporation and approved by the stockholders.
2. The current address of the principal office of the Corporation and the name and address of the Corporation's current resident agent are as set forth in Article THIRD of the Corporation's Charter as [The term 'these Articles of Incorporation' as used herein and in the By-Laws of the Corporation shall be deemed to mean these Articles of Incorporation as from time] amended and restated by these Articles of Amendment and Restatement.
3. The number of directors of the Corporation and the names of those currently in office are as set forth in Article FIFTH of the Corporation's Charter as amended and restated by the Articles of Amendment and Restatement.
The undersigned President acknowledges these Articles of Amendment and Restatement to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
IN WITNESS WHEREOF, [we have signed these ARTICLES OF INCORPORATION on this day of July, 1958.] the Corporation has caused these Articles to be signed in its name and on its behalf by its President and attested to by its Secretary on this day of February, 1996.
[Witness:] Attest: AMERICAN GROWTH FUND, INC.
410 17th Street, Suite 800, Denver, Colorado 80202
This Proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Timothy E. Taggart and D. Leann Baird as proxies, each with the power to appoint his or her substitute, and hereby authorizes each of them acting singly or jointly to represent and to vote, as designated on the reverse side hereof, all shares of American Growth Fund, Inc. (the "Fund") held of record by the undersigned on December 26, 1995 at the Special meeting of shareholders to be held on February 15, 1996, or any adjournment thereof.
This proxy when properly executed will be voted in the manner directed by the undersigned Shareholder. If no direction is made, this proxy will be voted for Proposals Nos. 2, 3 (including each of the sub-proposals thereof) and 4 and for each of the nominees for Directors named in Proposal No. 1.
By signing and dating this card you authorize the proxies to vote the proposals as marked or, if not marked, to vote "FOR" the proposals, and to use their discretion to vote any other matters as may properly come before the meeting. If you do not intend to personally attend the meeting, please complete and return this card at once in the enclosed envelope.
PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR AS EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
FOR WITHHOLD FOR ALL EXCEPT
Robert Brody, Michael J. Baum, Jr., Eddie R. Bush, Don S. Strauss and Harold
INSTRUCTION: To withhold authority for any individual nominee, mark the "For All Except" box and strike a line through the nominee's name in the list above.
To approve or disapprove amendments to the Articles of Incorporation of the Fund to authorize the designation and redesignation of the Fund's shares into one or more series and/or classes of shares.
3. To approve or disapprove further amendments to the Articles of Incorporation of the Fund as follows:
a. Elimination of Investment Restrictions Contained in Article Second.
b. Elimination of Reporting Requirements in Connection with, and Restrictions on, Sales of Fund shares to Certain Persons.
c. Elimination of Provisions Dealing with Transactions with Fund Insiders.
d. Elimination of Provisions Relating to the Determination of the Fund's Share Price.
e. Amendments to Liability and Indemnification Provisions.
f. Amendments to Redemption Provisions.
g. Amendment Governing Binding Effect of Determinations as to Financial Matters.
4. To ratify the selection of KPMG Peat Marwick LLP as independent auditors.
Please be sure to sign and date this Proxy. Date _______________________
Shareholder sign here Co-owner sign here | DEFS14A | DEFS14A | 1996-01-12T00:00:00 | 1996-01-12T16:01:29 |
0000950134-96-000094 | 0000950134-96-000094_0000.txt | SUPPLEMENT DATED JANUARY 2, 1996 TO THE PROSPECTUS DATED JUNE 28, 1995 AND THE STATEMENT OF ADDITIONAL INFORMATION
Effective January 1, 1996, BZW Barclays Global Fund Advisors ("BGFA") replaced Wells Fargo Bank, N.A. ("Wells Fargo") as investment adviser to the Growth Stock Master Series and the Short-Intermediate Term Master Series (the "Master Series") of Managed Series Investment Trust. BGFA was created by the reorganization of Wells Fargo Nikko Investment Advisors, a former affiliate of Wells Fargo, with and into an affiliate of Wells Fargo Institutional Trust Company, N.A.("WFITC"). Pursuant to an Investment Advisory Contract with each Master Series, BGFA provides investment guidance and policy direction in connection with the management of each Master Series' assets. BGFA is entitled to receive monthly fees at the annual rate of 0.60% and 0.45% of the average daily net assets of the Growth Stock Master Series and Short-Intermediate Term Master Series, respectively, as compensation for its advisory services. BGFA is an indirect subsidiary of Barclays Bank PLC and is located at 45 Fremont Street, San Francisco, CA 94105. As of January 1, 1996, BGFA and its affiliates provide investment advisory services for over $220 billion of assets.
Effective January 1, 1996, Wells Fargo serves as sub-adviser to each Master Series. Pursuant to a Sub-Advisory Contract with each Master Series and BGFA, Wells Fargo is responsible for the day-to-day portfolio management of each Master Series. The same Wells Fargo investment professionals that previously managed the investment portfolio of each Master Series will continue, subject to the overall supervision of BGFA, to manage each Master Series' investment portfolio. Wells Fargo is entitled to receive from BGFA an amount equal to 0.15% and 0.10% of the average daily net assets of the Growth Stock and Short-Intermediate Term Master Series, respectively, as compensation for its sub-advisory services. As of January 1, 1996, Wells Fargo provides investment advisory services for approximately $33 billion of assets under management.
Effective January 1, 1996, WFITC, due to a change in control of its outstanding voting securities, became a wholly owned subsidiary of BZW Barclays Global Investors Holdings Inc. (formerly, The Nikko Building U.S.A., Inc.) and was renamed BZW Barclays Global Investors, N.A. ("BGI"). Effective January 1, 1996, and subject to the completion of the transfer of custodial functions to BGI, BGI replaces Wells Fargo as custodian to each Fund and each Master Series. BGFA is a subsidiary of BGI. BGI will not be entitled to receive compensation for its custodial services to each Fund and Master Series so long as BGFA is entitled to receive fees for providing investment advisory services to the Master Series. The principal business address of BZW Global Investors is 45 Fremont Street, San Francisco, California 94105.
Effective on or about February 16, 1996, the corporate name of Stagecoach Inc. is changed to "MasterWorks Funds, Inc."
Each Fund's Prospectus and Statement of Additional Information are hereby amended accordingly.
S & P 500 STOCK FUND
SUPPLEMENT DATED JANUARY 2, 1996 TO THE PROSPECTUS DATED JUNE 28, 1995 AND THE STATEMENT OF ADDITIONAL INFORMATION
Effective January 1, 1996, BZW Barclays Global Fund Advisors ("BGFA") replaced Wells Fargo Bank, N.A. ("Wells Fargo") as investment adviser to each of the Asset Allocation, Bond Index, S & P 500 Index and U.S. Treasury Allocation Master Series (the "Master Series") of Master Investment Portfolio. BGFA was created by the reorganization of Wells Fargo Nikko Investment Advisors ("WFNIA"), the former sub-adviser to each Master Series, with and into an affiliate of Wells Fargo Institutional Trust Company, N.A. ("WFITC"). Pursuant to an Investment Advisory Contract with each Master Series, BGFA provides investment guidance and policy direction in connection with the management of each Master Series' assets. The same WFNIA investment professionals that were previously responsible for the day-to-day management of each Master Series' investment portfolio will continue to manage each Master Series' investment portfolio using the approach developed by WFNIA. BGFA is entitled to receive 0.35%, 0.08%, 0.05% and 0.30% of the average daily net assets of the Asset Allocation, Bond Index, S & P 500 Index and U.S. Treasury Allocation Master Series, respectively, as compensation for its advisory services to such Master Series. Effective January 1, 1996, each Master Series no longer retains a sub- investment adviser. BGFA is an indirect subsidiary of Barclays Bank PLC and is located at 45 Fremont Street, San Francisco, CA 94105. As of January 1, 1996, BGFA and its affiliates provide investment advisory services for over $220 billion of assets.
Effective January 1, 1996, WFITC, due to a change in control of its outstanding voting securities, became a wholly owned subsidiary of BZW Barclays Global Investors Holdings Inc. (formerly, The Nikko Building U.S.A., Inc.) and was renamed BZW Barclays Global Investors, N.A. ("BGI"). BGI currently acts as custodian to each Master Series. Effective January 1, 1996, and subject to the completion of the transfer of custodial functions to BGI, BGI replaces Wells Fargo as custodian to each Fund. BGFA is a subsidiary of BGI. BGI will not be entitled to receive compensation for its custodial services so long as BGFA is entitled to receive fees for providing investment advisory services to the Master Series. The principal business address of BGI is 45 Fremont Street, San
Effective on or about February 16, 1996, the corporate name of Stagecoach Inc. is changed to "MasterWorks Funds, Inc."
Each Fund's Prospectus and Statement of Additional Information are hereby amended accordingly.
SUPPLEMENT DATED JANUARY 2, 1996 TO THE PROSPECTUS DATED JUNE 28, 1995 AND THE STATEMENT OF ADDITIONAL INFORMATION
Effective January 1, 1996, BZW Barclays Global Fund Advisors ("BGFA") replaced Wells Fargo Bank, N.A. ("Wells Fargo") as investment adviser to the Money Market Fund (the "Fund"). BZW Fund Advisors was created by the reorganization of Wells Fargo Nikko Investment Advisors, a former affiliate of Wells Fargo, with and into an affiliate of Wells Fargo Institutional Trust Company, N.A. ("WFITC"). Pursuant to an Investment Advisory Contract with the Fund, BGFA provides investment guidance and policy direction in connection with the management of the Fund's assets. BGFA is entitled to receive a monthly fee at the annual rate of 0.35% of the average daily net assets of the Fund as compensation for its advisory services. BGFA is an indirect subsidiary of Barclays Bank PLC and is located at 45 Fremont Street, San Francisco, CA 94105. As of January 1, 1996, BGFA and its affiliates provide investment advisory services for over $220 billion of assets.
Effective January 1, 1996, Wells Fargo serves as sub-adviser to the Fund. Pursuant to a Sub-Advisory Contract with the Fund and BGFA, Wells Fargo is responsible for the day-to-day portfolio management of the Fund. The same Wells Fargo investment professionals that previously managed the investment portfolio of the Fund will continue, subject to the overall supervision of BGFA, to invest the Fund's assets and manage the Fund's investment portfolio. Wells Fargo is entitled to receive from BGFA an amount equal to 0.05% of the average daily net assets of the Fund as compensation for its sub-advisory services. As of January 1, 1996, Wells Fargo provides investment advisory services for approximately $33 billion of assets.
Effective January 1, 1996, WFITC, due to a change in control of its outstanding voting securities, became a wholly owned subsidiary of BZW Barclays Global Investors Holdings Inc. (formerly, The Nikko Building U.S.A., Inc.) and was renamed BZW Barclays Global Investors, N.A. ("BGI"). Effective January 1, 1996, subject to the completion of the transfer of custodial functions to BGI, BGI replaces Wells Fargo Bank as the Fund's custodian. BGFA is a subsidiary of BGI. BGI will not be entitled to receive compensation for its custodial services so long as BGFA is entitled to receive fees for providing investment advisory services to the Fund. The principal business address of BGI is 45 Fremont Street, San Francisco, California 94105.
Effective on or about February 16, 1996, the corporate name of Stagecoach Inc. is changed to "MasterWorks Funds, Inc."
The Prospectus and Statement of Additional Information for the Fund are hereby amended accordingly. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T13:19:47 |
0000897101-96-000008 | 0000897101-96-000008_0001.txt | I am pleased to inform you Norwest Bank Minnesota, National Association (the "Bank") has approved for Grist Mill, Inc. (the "Company") a $4,000,000 conditional revolving credit facility on the following terms and conditions.
Option to Terminate: The Bank will make a separate decision each time the Company requests an advance and is not obligated to make an advance under the facility. The Bank may terminate the facility at anytime at its own discretion. However, the Bank must give the Company 90 days written notice of its intent to terminate the facility in the event any advances are outstanding at the time the Bank exercises its option to terminate.
Interest Rate: Borrowing rate options include:
(A) Bank's Base Rate less 1/2 percent p.a., or
(B) 3 month CD rate (adjusted for reserves and other regulatory fees, including FDIC insurance) plus 1.50 percent p.a.,
(C) 3 month LIBOR (Adjusted for reserves and other regulatory fees, including FDIC insurance) plus 1.50 percent p.a.
Repayment: Interest on the advances will be payable on the first day of each month and payment will be made by debiting the Company's checking account # 1094483 on the day the payment is due.
Financial Covenants: This facility is cross defaulted with the Note Purchase Agreement dated October 15, 1989 between the Company and various insurance company lenders. A default under said agreement will be considered a default under the Bank's facility to the Company and will trigger repayment, on demand, of all balances outstanding.
Other Conditions: The Company must maintain all its bank accounts with the Bank. The company agrees to provide financial information to the Bank as follows:
(a) Within one hundred twenty (120) days following the end of its fiscal year, the Company will provide the Bank a copy of its annual audited report, with the unqualified opinion of an satisfactory to the Bank.
(b) Within forty-five (45) days following each quarter end, the Company will provide the Bank a copy of its interim statement.
(c) The Company agrees to supply the Bank with any additional information it may, from time to time, reasonably request.
Dan, as always, we are pleased to provide this extension of your facility with Norwest and look forward to a growing relationship with Grist Mill. Please sign and return this letter to my attention to signify your agreement with its terms.
Dennis W. Johnson for Laura S. Oberst
Accepted by_____________________________this_______day of _________, 1995. Grist Mill Co. | 10-Q | EX-4 | 1996-01-12T00:00:00 | 1996-01-12T13:44:52 |
0000912057-96-000462 | 0000912057-96-000462_0000.txt | PURSUANT TO SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
(Name of Person(s) Filing Statement)
Common Stock, no par value (Title of Class of Securities)
(CUSIP Number of Class of Securities)
16818 Via Del Campo Court (Name, address and telephone number of person authorized to receive notice and communications on behalf of the person(s) filing statement)
The Schedule 14D-9 filed with the Securities and Exchange Commission on November 29, 1995 (as amended by Amendments No. 1 and No. 2 thereto, the "Schedule 14D-9") by PSICOR, Inc., a Pennsylvania corporation, is hereby amended as set forth herein. Capitalized terms not defined herein have the meanings assigned to them in the Schedule 14D-9.
Item 8. ADDITIONAL INFORMATION TO BE FURNISHED.
On January 12, 1996, Parent and the Company issued a press release, a copy of which is attached hereto as Exhibit 9 and is incorporated herein by reference, relating to the Reiss Action.
Item 9. MATERIALS TO BE FILED AS EXHIBITS.
Exhibit 9 Text of Press Release, dated January 12, 1996, issued by Baxter Healthcare Corporation and PSICOR, Inc.
After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Amendment No. 3 to Schedule 14D-9 is true, complete and correct.
9 Text of Press Release, dated January 12, 1996, issued by Baxter Healthcare Corporation and PSICOR, Inc. | SC 14D9/A | SC 14D9/A | 1996-01-12T00:00:00 | 1996-01-12T17:24:46 |
0000950168-96-000038 | 0000950168-96-000038_0000.txt | <DESCRIPTION>COLLINS & AIKMAN PRODUCTS CO.
Under the Securities Exchange Act of 1934 (Amendment No. 1)
Common Stock, no par value
(Title of Class of Securities)
Executive Vice President - Law Collins & Aikman Products Co.
(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communication)
(Date of Event which Requires filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b) (3) or (4), check the following box [ ].
Check the following box if a fee is being paid with this statement [ ]. (A fee is not required only if the reporting person: (1) has a previous statement on file reporting beneficial ownership of more than five percent of the class of securities described in Item 1; and (2) has filed no amendment subsequent thereto reporting beneficial ownership of less than five percent of such class. See Rule 13d-7.)
Index of Exhibits appears on Page 4
Collins & Aikman Products Co. hereby amends and supplements its Statement on Schedule 13D originally filed on October 6, 1995 (the "Original 13D"). Unless otherwise indicated, each capitalized term used but not defined herein shall have the meaning assigned to such term in the Original Schedule 13D.
Item 4. Purpose of Transaction
The response to this Item is amended to add the following:
On January 3, 1996 (the "Closing Date"), the Merger was consummated and the Company became a wholly owned subsidiary of the Reporting Person. On the Closing Date, Merger Sub was merged into the Company and Merger Sub's common stock was converted into 1000 shares of the Company's Common Stock, all of which are owned by the Reporting Person. In connection therewith, the Option was terminated unexercised. The Company's Common Stock has been delisted from the American Stock Exchange and application to terminate registration of the Company's Common Stock under the Securities Exchange Act of 1934 has been made.
The information contained in the Press Release dated January 3, 1996, a copy of which is attached hereto as Exhibit 4, is incorporated herein by reference.
Item 5. Interest in Securities of the Issuer.
The response to this Item is amended to add the following:
On the Closing Date, the Merger was consummated and the Company became a wholly owned subsidiary of the Reporting Person. On the Closing Date, Merger Sub was merged into the Company and Merger Sub's common stock was converted into 1000 shares of the Company's Common Stock, all of which are owned by the Reporting Person. In connection therewith, the Option was terminated unexercised. The Company's Common Stock has been delisted from the American Stock Exchange and application to terminate registration of the Company's Common Stock under the Securities Exchange Act of 1934 has been made.
The information contained in the Press Release dated January 3, 1996, a copy of which is attached hereto as Exhibit 4, is incorporated herein by reference.
Item 7. Material to be Filed as Exhibits.
Item 7 is hereby amended by the addition of the following Exhibit thereto:
Exhibit 4 Press Release dated January 3, 1996
After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.
Signature: /s/ Thomas E. Hannah
Name/Title: Thomas E. Hannah/Chief Executive Officer
4 Press Release dated January 3, 1996. | SC 13D/A | SC 13D/A | 1996-01-12T00:00:00 | 1996-01-11T17:34:38 |
0000950005-96-000010 | 0000950005-96-000010_0000.txt | X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities ----- Exchange Act of 1934
For the quarterly period ended November 30, 1995 or
----- Transition Report Pursuant to Section 13 or 15(d) of the Securities
For the transition period from to
HARDING LAWSON ASSOCIATES GROUP, INC. (Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 892-0821
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
At January 3, 1996 the registrant had issued and outstanding an aggregate of 4,845,090 shares of its common stock.
HARDING LAWSON ASSOCIATES GROUP, INC.
Condensed Consolidated Balance Sheets - November 30, 1995 (Unaudited) and
Condensed Consolidated Statements of Income - Three and Six Months Ended November 30, 1995 and November 30, 1994 (Unaudited)........................... 4
Condensed Consolidated Statements of Cash Flows - Six Months Ended November 30, 1995 and
Notes to Condensed Consolidated Financial Statements November 30, 1995 (Unaudited)........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 7-9
Item 4. Submission of Matters to a Vote of Security Holders..... 10
Item 6. Exhibits and Reports on Form 8-K........................ 11
HARDING LAWSON ASSOCIATES GROUP, INC. (In thousands, except share data)
November 30, 1995 May 31, 1995 Current assets: Cash and cash equivalents $13,831 $12,648 Unbilled work in progress 5,359 6,935 Less allowances for receivables and Deferred income taxes 1,165 2,235 Total current assets 51,931 49,533 Less accumulated depreciation (17,387) (16,766) Deposits and other assets 6,766 6,813 Current liabilities: Income taxes payable 326 621 Total current liabilities 15,604 16,164 Commitments and Contingencies -- -- Minority interest in subsidiary 288 224 Shareholders' equity: and 4,719,320 at November 30, 1995 and May 31, 1995, respectively 48 47 Additional paid-in capital 18,142 17,424 Total shareholders' equity 45,298 42,685
The accompanying notes are an integral part of these financial statements.
HARDING LAWSON ASSOCIATES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Three Months Ended Six Months Ended
Gross revenue $35,554 $34,445 $67,302 $67,825 Less: Cost of outside services 12,853 10,346 21,893 20,715
Net revenue 22,701 24,099 45,409 47,110
Payroll and benefits 15,044 16,400 30,354 31,792 General expenses 6,282 6,249 12,324 12,416
Total costs and expenses 21,326 22,649 42,678 44,208
Operating income 1,375 1,450 2,731 2,902 Interest income, net 194 51 370 70
Income before provision for income taxes and minority interest 1,569 1,501 3,101 2,972
Provision for income taxes 621 593 1,223 1,174
Minority interest (11) -- (16) --
Net income $ 959 $ 908 $ 1,894 $ 1,798
Net income per common share $ .20 $ .19 $ .39 $ .37
Shares used in per share calculation 4,871 4,793 4,837 4,809
The accompanying notes are an integral part of these financial statements.
HARDING LAWSON ASSOCIATES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended November 30,
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,236 1,646 Net increase in current assets (1,215) (2,037) Net increase in current liabilities 158 74 Other increase (decrease) 153 (58)
Net purchase of equipment (1,043) (600) Investment in acquisition (net of acquired cash) -- (1,683)
Repayment of debt -- (2,015) Proceeds from sale of common stock -- 116
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,183 (2,759)
Cash and cash equivalents at beginning of period 2,648 8,896
AT END OF PERIOD $13,831 $6,137 The accompanying notes are an integral part of these financial statements.
HARDING LAWSON ASSOCIATES GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared without audit by Harding Lawson Associates Group, Inc., formerly Harding Associates, Inc., (the "Company") in accordance with generally accepted accounting principles for interim financial statements and pursuant to the rules of the Securities and Exchange Commission for Form 10-Q. Certain information and footnotes required by generally accepted accounting principles for complete financial statements have been omitted. It is the opinion of management that all adjustments considered necessary for a fair presentation have been included, and that all such adjustments are of a normal and recurring nature. For further information, refer to the audited financial statements and footnotes included in the Company's Annual Report on Form 10-K dated May 31, 1995. Reclassification of certain balances for the fiscal year ended May 31, 1995 have been made to conform to the November 30, 1995 presentation.
NOTE 2: COMMITMENTS AND CONTINGENCIES
On May 19, 1995, the Company filed a lawsuit in Texas State Court, Harris County, Texas, entitled Harding Lawson Associates, Inc., a wholly owned subsidiary of Harding Associates, Inc., vs. Bailey Site Settlors Committee, an unincorporated association, seeking collection of approximately $1.0 million in fees billed for engineering services performed. On June 21, 1995, a lawsuit was filed against the Company in Federal District Court, Jefferson County, Texas, and in Texas State Court, Orange County, Texas, entitled Bailey Site Settlors Committee vs. Harding Lawson Associates. The suit seeks monetary damages in the amount of $7.9 million for alleged breach of contract and negligence in the performance of certain engineering services. The Company believes it has meritorious defenses to this suit. The Company is currently subject to certain other claims and lawsuits arising in the ordinary course of its business. In the opinion of management, adequate provision has been made for all known liabilities that are currently expected to result from these claims and lawsuits, and in the aggregate such claims are not expected to have a material effect on the financial position of the Company.
HARDING LAWSON ASSOCIATES GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Second Quarter Comparison for Fiscal Years 1996 and 1995
Gross revenue includes, as an adjunct to the Company's labor services, the revenue on services subcontracted to third parties that will be reimbursed under terms of the Company's contracts, and revenue from the utilization of certain company owned equipment. The contribution to net revenue derived from the sale of subcontracted services and company owned equipment was essentially unchanged at 6.7 percent of net revenue in the second quarter of fiscal 1996 and 6.6 percent in fiscal 1995. Net revenue, which is a more accurate measure of revenue earned for services provided directly by the Company, is recorded by deducting from gross revenue the costs of services contracted to third parties. Outside services revenue as a percent of total gross revenue was 37.5 percent and 31.4 percent for the second quarter of fiscal 1996 and 1995, respectively.
Net revenue for the fiscal quarter ended November 30, 1995 totaled $22,701, a decrease of six percent from net revenue of $24,099 for the second quarter of the prior fiscal year. The decrease in net revenue was primarily due to the impact of an additional week's activity in the second quarter of the prior year. After adjusting for this impact, net revenue was essentially unchanged from fiscal 1995. In domestic operations, the Company experienced lower demand for its services, partially offset by slightly improved pricing compared to the second quarter of fiscal 1995. The lower demand was in the public sector and was attributed primarily to a slowdown in federal funding for environmental contracts and reduced infrastructure spending in the California, Hawaii and Washington markets. On a comparable basis to the prior year, net revenue from such public sector clients decreased by approximately 14 percent from the same period in the prior year. Overall, net revenue from public sector clients accounted for 48 percent of total net revenue compared to 56 percent in the prior year. Net revenue from industrial sector clients continued to show improvement with an increase of approximately nine percent over the prior year. International operations accounted for five percent of net revenue in the second fiscal quarter of 1996. There were no international sales reported in the second quarter of the prior year.
Operating income amounted to $1,375, a decrease of 5.2 percent from $1,450 for the same period in fiscal 1995. Operating margin was unchanged at 6.0 percent of net revenue compared to the same period in the prior fiscal year. The lower operating income was primarily due to the lower net revenue discussed above, partially offset by lower labor related expenses. The lower labor expenses reflect both staff reductions and reduced incentive compensation expenses. As in the first quarter, operating margins in the fiscal 1996 second quarter also benefited from the favorable performance of several firm fixed price contracts in both private and public sectors. There can be no assurance that such contracts will continue to be available to the Company in the future or that the performance of such contracts will have a favorable outcome.
Interest income for the second quarter of fiscal 1996 was $222 before interest expense of $28 and was higher compared to interest income of $63 before interest expense of $12 for the second quarter of the prior fiscal year. Net interest income was higher due to the Company's increased cash position that resulted in higher balances of invested cash, and to a lesser extent, improved interest rates.
The effective tax rate was 39.5 percent for the second quarter of both fiscal 1996 and 1995.
Net income for the quarter was $959 compared with $908 in the second quarter of 1995, an increase of 5.6 percent. Earnings per share were $0.20 on 4,871,000 weighted average shares outstanding compared to $0.19 per share on 4,793,000 weighted average shares outstanding in the same period last year.
Six Month Comparison for Fiscal Years 1996 and 1995
Net revenue for the six months ended November 30, 1995 (26 weeks) amounted to $45,409 a decrease of 3.6 percent from net revenue of $47,110 for the six months ended November 30, 1994 (27 weeks). The decrease in net revenue was due primarily to lower public sector work and, to a lesser extent, the impact of the additional week in the prior fiscal year. On a comparable basis with the prior year, the Company experienced lower demand for its services that was partially offset by slightly improved pricing for those services.
Operating income amounted to $2,731, a decrease of 5.9 percent from operating income of $2,902 for the first six months of the prior year. The operating margin decreased to 6.0 percent from 6.2 percent a year ago. While the Company continued to lower its operating costs, such reductions were not sufficient to offset the effect of lower revenue discussed above.
Interest income for the six months was $399 before interest expense of $29, up from $108 before interest expense of $38 in the same period in the prior year. The increase in net interest income was due primarily to the Company's increased cash position that resulted in higher balances of invested cash and improved interest rates.
The effective tax rate for the six months ended November 30, 1995 was 39.4 percent and for the six months ended November 30, 1994 was 39.5 percent.
Net income for the six months was $1,894, up from net income of $1,798 for the six month period in the prior year, an increase of 5.3 percent. Earnings per share were $0.39 on 4,837,000 weighted average shares outstanding compared to $0.37 per share on 4,809,000 weighted average shares outstanding in the first six month period of the prior year.
Due to seasonal factors, operating results for the six month period ending November 30, 1995 are not necessarily indicative of the results that may be expected for the entire fiscal year ending May 31, 1996.
For the six months ended November 30, 1995, net cash provided by operations was $2,226 compared with net cash provided by operations of $1,423 for the same period last year. The increase in cash provided by operations was primarily due to lower payments related to the settlement of legal claims compared to the prior year, and to a lesser extent, improved accounts receivable balances. Accounts receivable in the prior year were adversely affected by delays in invoicing certain public sector projects.
The Company made net capital expenditures of $1,043 in the first six months of fiscal 1996 compared to net capital expenditures of $600 in the first six months of the prior year. The Company anticipates that its capital expenditures, excluding investments in acquisitions, for the current fiscal year will be at slightly higher levels than those incurred in the prior fiscal year.
The Company is a consulting engineering services firm engaged in providing environmental, infrastructure and geotechnical related services, and encounters potential liability including claims for errors and omissions resulting from construction defects, construction cost overruns or environmental or other damage in the normal course of business. The Company is party to lawsuits and is aware of potential exposure related to certain claims. In the opinion of management, adequate provision has been made for all known liabilities that are currently expected to result from these matters and, in the aggregate, such claims are not expected to have a material adverse impact on the financial position and liquidity of the Company. Prior to May 1994, the Company was provided a professional liability insurance policy through a wholly owned subsidiary of the Company, and as such, was self insured for the liabilities covered by that policy. Currently, the Company is provided a $5 million professional liability insurance policy through an unrelated, rated carrier.
At November 30, 1995, the Company had cash on hand and cash equivalents of $13,831. The Company has a $20 million revolving credit line agreement which expires in October 1997. At November 30, 1995, the Company had no borrowings outstanding under its line of credit leaving $20 million available to the Company. Borrowings were available to the Company at 6.0 percent at November 30, 1995, and at 6.1 percent at May 31, 1995. The Company is in compliance with all covenants pertaining to the credit line agreement.
The Company believes that its available cash and cash equivalents, as well as cash generated from operations and its available credit line, will be sufficient to meet the Company's cash requirements for the balance of the fiscal year. The Company intends to actively continue its search for acquisitions to expand its geographical representation and to enhance its technical capabilities. The Company expects to utilize a portion of its liquidity over the next 12 to 18 months for capital expenditures, including investments in acquisitions.
Except for the historical information contained herein, certain of the matters discussed in this report are forward-looking statements that involve risks and uncertainties, including the demand for the Company's services and the strength of the economy domestically and internationally, and such risks and uncertainties as are described in the registration statement, reports and other documents filed by the Company from time to time with the Securities and Exchange Commission.
HARDING LAWSON ASSOCIATES GROUP, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Registrant was held on November 1, 1995 and five proposals were presented to security holders for a vote; election of one director, approval of an amendment to the Restated Certificate of Incorporation, approval of the Company's 1995 Executive Stock Incentive Plan, approval of an amendment to the 1991 Employee Stock Purchase Plan, and ratification of independent auditors.
The five-member Board of Directors is divided into three classes. Each year one of the classes stands for election to a term of three years. The class standing for election at the 1995 annual meeting was Class II, consisting of one incumbent director: Richard D. Puntillo. The terms for Class III Directors, Richard S. Harding and Donald L. Schreuder, expire in 1996 and the terms of Class I Directors, Retired Rear Admiral Stuart F. Platt and Barton W. Shackelford expire in 1997.
The following table lists the votes cast:
Richard D. Puntillo 3,581,477 54,280
Approval of an Amendment to the changing the name of the corporation from Harding Associates, Inc. to Harding Lawson Associates Group, Inc. 3,572,437 49,192 14,128 --
Approval of the Company's 1995 Executive Stock Incentive Plan 2,074,017 777,921 15,983 767,836
Approval of an Amendment to the 1991 Employee Stock Purchase Plan increasing the shares under the plan from 150,000 to 250,000. 2,757,803 74,971 14,610 788,373
Ratification of Ernst & Young, LLP Independent Auditors 3,602,933 19,501 13,323 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are furnished along with this Form 10-Q Quarterly Report for the period ended November 30, 1995:
Exhibit No. 3.1 Restated Certificate of Incorporation
Exhibit No. 3.2 Amendment to Restated Certificate of Incorporation
Exhibit No. 10.1 1995 Executive Stock Plan
Exhibit No. 11 Computation of Per Share Earnings
Exhibit No. 27 Financial Data Schedule (Electronic Filing Only)
b. Reports on Form 8-K
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HARDING LAWSON ASSOCIATES GROUP, INC.
Date: /s/ Donald L. Schreuder President and Chief Executive Officer
Date: /s/ Gregory A. Thornton Vice President and Chief Financial Officer
HARDING LAWSON ASSOCIATES GROUP, INC.
3.1 Restated Certificate of Incorporation
3.2 Amendment to Restated Certificate of Incorporation
10.1 1995 Executive Stock Plan
11 Computation of Per Share Earnings
27 Financial Data Schedule (Electronic Filing Only) | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T14:47:51 |
0000882377-96-000004 | 0000882377-96-000004_0001.txt | <DESCRIPTION>POOLING AND SERVICING AGREEMENT SERIES QE11
Dated as of December 1, 1995
This Pooling and Servicing Agreement, dated and effective as of December 1, 1995, among DLJ Mortgage Acceptance Corp., as Depositor (the "Depositor"), Temple-Inland Mortgage Corporation, as Master Servicer (the "Master Servicer"), and Bankers Trust Company, as Trustee (the "Trustee").
The Depositor intends to sell mortgage pass-through certificates (collectively, the "Certificates"), to be issued hereunder in multiple classes, which in the aggregate will evidence the entire beneficial ownership interest in the Mortgage Loans (as defined herein). As provided herein, the Trustee will cause an election to be made to treat the entire segregated pool of assets subject to this Agreement (including the Mortgage Loans) as a real estate mortgage investment conduit (a "REMIC") for federal income tax purposes and such segregated pool of assets will be designated as the "Trust Fund." The Class SA Certificates, the Class A-1 Certificates, the Class A-2 Certificates the Class B Certificates and the Class SB Certificates, will be the "regular interests" in the Trust Fund, and the Class R Certificates will be the "residual interests" in the Trust Fund, for purposes of the REMIC Provisions (as defined herein) under federal income tax law.
The following table sets forth the designation, initial Pass-Through Rate, aggregate approximate Initial Certificate Principal Balance (as defined herein), and the initial percentage for each Class of Certificates comprising the certificated interests in the Trust Fund created hereunder.
DESIGNATION TYPE RATE BALANCE PERCENTAGE
Class SA Senior 5.007% N/A N/A Class A-1 Senior 7.342% $24,202,795.00 83.75% Class A-2 Senior 7.342% $2,528,650.00 8.75% Class B Subordinate 7.342% $2,167,415.12 7.50% Class SB Subordinate 1.250% N/A N/A Class R Residual 7.342% $0.00 0.00%
As of the Cut-off Date, the Mortgage Loans have an aggregate Stated Principal Balance equal to $28,898,860.12.
In consideration of the mutual agreements herein contained, the Depositor, the Master Servicer and the Trustee agree as follows:
Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the meanings specified in this Article.
"Accretion Termination Date": With respect to the Class SB Certificates, the Distribution Date on which the aggregate Class SB Accrual Amount distributed to the Class A-1 Certificates, the Class A-2 Certificates and the Class B Certificates on such Distribution Date and all preceding Distribution Dates equals 3.25% times the aggregate Certificate Principal Balance of all Classes of the Certificates as of the Cut-off Date. With respect to the Class R Certificates, the Distribution Date on which the Certificate Principal Balance of the Class B Certificates is reduced to zero.
"Accrued Certificate Interest": With respect to each Distribution Date, as to any Class A-1 Certificate, Class A-2 Certificate, Class B Certificate or Class R Certificate, one month's interest accrued at the then applicable Pass-Through Rate on the Certificate Principal Balance thereof immediately prior to such Distribution Date. With respect to each Distribution Date, as to the Class SA Certificates and the Class SB Certificates, one month's interest accrued at the then applicable Pass-Through Rate on the Notional Amount immediately prior to such Distribution Date. Accrued Certificate Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months. In each case Accrued Certificate Interest on any such Class of Certificates will be reduced by the amount of (i) Prepayment Interest Shortfalls, if any, which are not covered by payments by the Master Servicer pursuant to Section 3.23 with respect to such Distribution Date, (ii) the interest portion (adjusted to the Net Mortgage Rate) of Realized Losses (including Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses and Extraordinary Losses) not allocated solely to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates or the Class R Certificates pursuant to Section 4.04, (iii) the interest portion of Advances previously made with respect to a Mortgage Loan or REO Property which remained unreimbursed following the Cash Liquidation or REO Disposition of such Mortgage Loan or REO Property that were made with respect to delinquencies that ultimately constituted Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, and (iv) any other interest shortfalls not covered by the subordination provided by the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates and the Class R Certificates, including interest that is not collectible from the Mortgagor pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, or similar legislation or regulations as in effect from time to time, with all such reductions allocated among all of the Certificates on a pro rata basis in proportion to their respective amounts of Accrued Certificate Interest which would have resulted absent such reductions. In addition to that portion of the reductions described in the preceding sentence that are allocated to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates or the Class R Certificates, Accrued Certificate Interest on the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates or the Class R Certificates, as applicable, will be reduced by the interest portion
(adjusted to the Net Mortgage Rate) of the portion of Realized Losses that are allocated solely to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates or the Class R Certificates, as applicable, pursuant to Section 4.04. Furthermore, Accrued Certificate Interest on the Class R Certificates will be further reduced by any payments made to the Certificateholders pursuant to Sections 4.01(b)(x), (xi) and (xii).
"Adjustment Date": With respect to each Mortgage Loan, the date set forth in the related Mortgage Note on which the Mortgage Rate may change and each semi-annual anniversary of such date. The first Adjustment Date as to each Mortgage Loan is set forth in the Mortgage Loan Schedule.
"Advance": As to any Mortgage Loan, any advance made by the Master Servicer on any Distribution Date pursuant to Section 4.03.
"Agreement": This Pooling and Servicing Agreement and all amendments hereof.
"Anniversary": Each anniversary of December 1, 1995.
"Assignment": An assignment of Mortgage, notice of transfer or equivalent instrument, in recordable form, which is sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect of record the sale of the Mortgage.
"Assignment Agreement": The assignment agreement dated the Closing Date between DLJMCI and the Depositor.
"Available Distribution Amount": With respect to any Distribution Date, an amount equal to (a) the sum of (i) the balance on deposit in the Custodial Account as of the close of business on the related Determination Date and (ii) the aggregate amount of any Advances made, all required transfers pursuant to Section 3.22 and all amounts required to be paid by the Master Servicer pursuant to Sections 3.13 and 3.23 by deposits into the Certificate Account on the immediately preceding Certificate Account Deposit Date, reduced by (b) the sum, as of the close of business on the related Determination Date, of (i) Monthly Payments collected but due during a Due Period subsequent to the Due Period ending on the first day of the month of the related Distribution Date, (ii) all interest or other income earned on deposits in the Custodial Account, (iii) any other amounts reimbursable or payable to the Depositor, the Trustee, the Master Servicer or any SubServicer pursuant to Section 3.11, and (iv) Insurance Proceeds, Liquidation Proceeds, Principal Prepayments, REO Proceeds and the proceeds of Mortgage Loan purchases made pursuant to Section 2.02, 2.04 or 3.22, in each case received or made in the month of such Distribution Date.
"Bankruptcy Amount": As of any date of determination prior to December 1, 1996, an amount, equal to the excess, if any, of (A) $100,000.00 (the initial "Bankruptcy Amount"), over (B) the aggregate amount of Bankruptcy Losses allocated solely to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates or the Class R Certificates in accordance with Section 4.04. As of any date of determination on or after December 1, 1996, an amount equal to the excess, if any, of (1) the lesser of (a) the Bankruptcy Amount as of the close of business on the Business Day immediately preceding the most recent Anniversary (for purposes of this definition, the "Relevant Anniversary") and (b) the greater of (i) 0.15% times the aggregate principal balance of the Mortgage Loans as of the Relevant Anniversary; and (ii) $100,000.00 over (2) the aggregate amount of Bankruptcy Losses allocated solely to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates or the Class R Certificates, in accordance with Section 4.04 since the Relevant Anniversary.
The Bankruptcy Amount may be further reduced by the Depositor (including accelerating the manner in which such coverage is reduced) provided that prior to any such reduction, the Depositor shall obtain written confirmation from the Rating Agency that such reduction shall not adversely affect the then-current rating assigned to the Certificates by the Rating Agency and shall provide a copy of such written confirmation to the Trustee.
"Bankruptcy Code": The Bankruptcy Code of 1978, as amended.
"Bankruptcy Loss": With respect to any Mortgage Loan, a Realized Loss resulting from a Deficient Valuation or Debt Service Reduction.
"Book-Entry Certificate": Any Certificate registered in the name of the Depository or its nominee.
"Business Day": Any day other than a Saturday, a Sunday or a day on which banking institutions in California, New York or Texas (and such other state or states in which the Custodial Account or the Certificate Account are at the time located) or in the city in which the Corporate Trust Office of the Trustee is located are authorized or obligated by law or executive order to close.
"Cash Liquidation": As to any defaulted Mortgage Loan other than a Mortgage Loan as to which an REO Acquisition occurred, the final receipt by or on behalf of the Master Servicer of all Insurance Proceeds, Liquidation Proceeds and other payments or cash recoveries which the Master Servicer reasonably and in good faith expects to be finally recoverable with respect to such Mortgage Loan.
"Certificate": Any Class SA, Class A-1, Class A-2, Class B, Class SB or Class R Certificate.
"Certificate Account": The trust account or accounts created and maintained pursuant to Section 4.01, which shall be entitled "Bankers Trust Company, in trust for registered holders of Mortgage Pass-Through Certificates, Series 1995-QE11", and which account or accounts must each be an Eligible Account.
"Certificate Account Deposit Date": As to any Distribution Date, the Business Day prior thereto.
"Certificateholder" or "Holder": The Person in whose name a Certificate is registered in the Certificate Register, except that, neither a Disqualified Organization nor a non-
United States Person shall be a Holder of a Class R Certificate for any purposes hereof and, solely for the purposes of giving any consent pursuant to this Agreement, any Certificate registered in the name of the Depositor or the Master Servicer or any affiliate thereof shall be deemed not to be outstanding and the Voting Rights to which it is entitled shall not be taken into account in determining whether the requisite percentage of Voting Rights necessary to effect any such consent has been obtained, except as otherwise provided in Section 11.01. The Trustee shall be entitled to rely upon a certification of the Depositor or the Master Servicer in determining if any Certificates are registered in the name of a respective affiliate. All references herein to "Holders" or "Certificateholders" shall reflect the rights of Certificate Owners as they may indirectly exercise such rights through the Depository and participating members thereof, except as otherwise specified herein; provided, however, that the Trustee shall be required to recognize as a "Holder" or "Certificateholder" only the person in whose name the Certificate is registered in the Certificate Register.
"Certificate Owner": With respect to a Book-Entry Certificate, the Person who is the beneficial owner of such Certificate, as reflected on the books of an indirect participating brokerage firm for which a Depository Participant acts as agent, if any, and otherwise on the books of a Depository Participant, if any, and otherwise on the books of the Depository.
"Certificate Principal Balance": With respect to each Class A-1 Certificate or Class A-2 Certificate, on any date of determination, an amount equal to (i) the Initial Certificate Principal Balance of such Certificate as specified on the face thereof, minus (ii) the sum of (a) the aggregate of all amounts previously distributed with respect to such Certificates (or any predecessor Certificate) and applied to reduce the Certificate Principal Balance thereof pursuant to Section 4.01(b), and (b) the aggregate of all reductions in Certificate Principal Balance deemed to have occurred in connection with Realized Losses which were previously allocated to such Certificate (or any predecessor Certificate) pursuant to Section 4.04; provided, that if the Certificate Principal Balances of the Class B Certificates and the Class R Certificates have been reduced to zero, the Certificate Principal Balance of each Class A-2 Certificate, at any given time, shall thereafter be an amount equal to (i) the Percentage Interest evidenced by such Certificate times (ii) the excess, if any of (a) the then aggregate Stated Principal Balance of the Mortgage Loans (or related REO Properties) over (b) the aggregate Certificate Principal Balance of the Class A-1 Certificates. With respect to each Class B Certificate, on any date of determination, an amount equal to (i) the initial Certificate Principal Balance of such Class B Certificate, as specified on the face thereof, minus (ii) the sum of (a) the aggregate of all amounts previously distributed with respect to such Certificate (or any predecessor Certificate) and applied to reduce the Certificate Principal Balance thereof pursuant to Section 4.01(b), and (b) the aggregate of all reductions in Certificate Principal Balance deemed to have occurred in connection with Realized Losses which were previously allocated to such Certificate (or any predecessor Certificate) pursuant to Section 4.04; provided that if the Certificate Principal Balance of the Class R Certificates has been reduced to zero, the Certificate Principal Balance of each Class B Certificate, at any given time, shall thereafter be an amount equal to (i) the Percentage Interest evidenced by such Certificate times (ii) the excess, if any, of (a) the then aggregate Stated Principal Balance of the Mortgage Loans (or related REO Properties) over (b) the sum of the then aggregate Certificate Principal Balance of all of the Class A-1 Certificates and Class A-2 Certificates. With respect to each Class R Certificate, on any date of determination, an amount equal to the Percentage Interest evidenced thereby multiplied by the excess, if any, of (x) the then aggregate Stated Principal Balance of the Mortgage Loans over (y) the then aggregate Certificate Principal Balances of the Senior Certificates and the Class B Certificates. The Class SA Certificates and the Class SB Certificates have no principal balances.
"Certificate Register": The register maintained pursuant to Section 5.02(a).
"Class": Collectively, all of the Certificates bearing the same designation.
"Class A-1 Certificate": Any one of the Class A-1 Certificates executed, authenticated and delivered by the Trustee substantially in the form annexed hereto as Exhibit A, senior with respect to distributions and the allocation of Realized Losses as set forth in Section 4.04, and evidencing an interest designated as a "regular interest" in the REMIC for purposes of the REMIC Provisions.
"Class A-1 Percentage": With respect to any Distribution Date, the lesser of 100% and a fraction, expressed as a percentage, the numerator of which is the aggregate Certificate Principal Balance of the Class A-1 Certificates immediately prior to such Distribution Date and the denominator of which is the aggregate Stated Principal Balance of all of the Mortgage Loans (or related REO Properties) immediately prior to such Distribution Date.
"Class A-2 Certificate": Any one of the Class A-2 Certificates executed, authenticated and delivered by the Trustee substantially in the form annexed hereto as Exhibit A, subordinate to the Class SA Certificates and Class A-1 Certificates with respect to distributions and the allocation of Realized Losses as set forth in Section 4.04, and evidencing an interest designated as a "regular interest" in the REMIC for purposes of the REMIC Provisions.
"Class A-2 Percentage": With respect to any Distribution Date, the lesser of 100% and a fraction, expressed as a percentage, the numerator of which is the aggregate Certificate Principal Balance of the Class A-2 Certificates immediately prior to such Distribution Date and the denominator of which is the aggregate Stated Principal Balance of all of the Mortgage Loans (or related REO Properties) immediately prior to such Distribution Date; provided, that if the Certificate Principal Balances of the Class B Certificates and Class R Certificates are reduced to zero, then thereafter the Class A-2 Percentage as of any date of determination shall be 100% minus the then applicable Class A-1 Percentage.
"Class B Certificate": Any one of the Class B Certificates executed, authenticated and delivered by the Trustee substantially in the form annexed hereto as Exhibit B- 1, subordinate to the Senior Certificates with respect to distributions and the allocation of Realized Losses as set forth in Section 4.04, and evidencing an interest designated as a "regular interest" in the REMIC for purposes of the REMIC Provisions.
"Class B Percentage": With respect to any Distribution Date, the lesser of 100% and a fraction, expressed as a percentage, the numerator of which is the aggregate Certificate Principal Balance of the Class B Certificates immediately prior to such Distribution Date and the denominator of which is the aggregate Stated Principal Balance of all of the Mortgage Loans (or related REO Properties) immediately prior to such Distribution Date; provided, that if the Certificate Principal Balance of the Class R Certificates is zero on such Distribution Date, then the Class B Percentage as of such date of determination shall be 100% minus the then applicable Senior Percentage.
"Class B Prepayment Percentage": With respect to any Distribution Date, 100% minus the Senior Prepayment Percentage for such Distribution Date.
"Class R Accrual Amount": With respect to each Distribution Date on or before the related Accretion Termination Date, the amount of Accrued Certificate Interest on the Class R Certificates on such Distribution Date, to the extent such interest was not distributed to the Class R Certificates on such Distribution Date.
"Class R Certificate": Any one of the Class R Certificates, executed, authenticated and delivered hereunder by the Trustee substantially in the form annexed hereto as Exhibit B-3, as further described in the recitals hereto, evidencing an interest designated as a "residual interest" in the REMIC for purposes of the REMIC Provisions.
"Class R Percentage": With respect to any Distribution Date, a percentage equal to 100% minus the sum of the then applicable Senior Percentage and the then applicable Class B Percentage
"Class SA Certificate": Any one of the Class SA Certificates executed, authenticated and delivered by the Trustee substantially in the form annexed hereto as Exhibit A, senior with respect to distributions and to the allocation of Realized Losses as set forth in Section 4.04, and evidencing an interest designated as a "regular interest" in the REMIC for purposes of the REMIC Provisions.
"Class SB Accrual Amount": With respect to each Distribution Date on or before the related Accretion Termination Date, the amount of Accrued Certificate Interest on the Class SB Certificates on such Distribution Date, to the extent such interest was not distributed to the Class SB Certificates on such Distribution Date.
"Class SB Certificate": Any one of the Class SB Certificates executed, authenticated and delivered by the Trustee substantially in the form annexed hereto as Exhibit B-2, subordinate to the Senior Certificates and the Class B Certificates with respect to distributions and the allocation of Realized Losses as set forth in Section 4.04, and evidencing an interest designated as a "regular interest" in the REMIC for purposes of the REMIC Provisions.
"Closing Date": December 28, 1995.
"Code": The Internal Revenue Code of 1986.
"Collateral Value": The appraised value of a Mortgaged Property based upon the lesser of (i) the appraisal (as reviewed and approved by the Seller) made at the time of the origination of the related Mortgage Loan, or (ii) the sales price of such Mortgaged Property at such time of origination. With respect to a Mortgage Loan the proceeds of which were used to refinance an existing mortgage loan, the appraised (as reviewed and approved by the Seller) value of the Mortgaged Property based upon the appraisal (as reviewed and approved by the Seller) obtained at the time of refinancing.
"Corporate Trust Office": The principal corporate trust office of the Trustee at which at any particular time its corporate trust business related to this Agreement shall be administered, which office at the date of the execution of this Agreement is located at Four Albany Street, New York, New York 10006, Attention: DLJ/Quality 1995-QE11.
"Custodial Account": The custodial account or accounts created and maintained pursuant to Section 3.10 in the name of a depository institution, as custodian for the holders of the Certificates, for the holders of certain other interests in mortgage loans serviced or sold by the Master Servicer and for the Master Servicer, into which the amounts set forth in Section 3.10 shall be deposited directly. Any such account or accounts shall be an Eligible Account.
"Cut-off Date": December 1, 1995.
"Debt Service Reduction": With respect to any Mortgage Loan, a reduction in the scheduled Monthly Payment for such Mortgage Loan by a court of competent jurisdiction in a proceeding under the Bankruptcy Code, except such a reduction constituting a Deficient Valuation or any reduction that results in a permanent forgiveness of principal.
"Deficient Valuation": With respect to any Mortgage Loan, a valuation by a court of competent jurisdiction of the Mortgaged Property in an amount less than the then outstanding indebtedness under the Mortgage Loan, which valuation results from a proceeding initiated by the Mortgagor under the Bankruptcy Code.
"Definitive Certificate": Any definitive, fully registered Certificate.
"Depositor": DLJ Mortgage Acceptance Corp., or its successor in interest.
"Depository": The Depository Trust Company, or any successor Depository hereafter named. The nominee of the initial Depository for purposes of registering those Certificates that are to be Book-Entry Certificates is Cede & Co. The Depository shall at all times be a "clearing corporation" as defined in Section 8-102(3) of the Uniform Commercial Code of the State of New York and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
"Depository Participant": A broker, dealer, bank or other financial institutions or other Person for whom from time to time a Depository effects book-entry transfers and pledges of securities deposited with the Depository.
"Determination Date": The 15th day (or if such 15th day is not a Business Day, the Business Day immediately preceding such 15th day) of the month of the related Distribution Date.
"Disqualified Organization": Any of (i) the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing (other than an instrumentality which is a corporation if all of its activities are subject to tax and, except for the FHLMC, a majority of its board of directors is not selected by such governmental unit), (ii) any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, (iii) any organization (other than certain farmers' cooperatives described in Section 521 of the Code) which is exempt from the tax imposed by Chapter 1 of the Code (unless such organization is subject to the tax imposed by Section 511 of the Code on unrelated business taxable income), or rural electric and telephone cooperatives described in Section 1381(a)(2)(C) of the Code and (iv) any other Person so designated by the Trustee based upon an Opinion of Counsel provided to the Trustee that the holding of an ownership interest in a Residual Certificate by such Person may cause the Trust Fund or any Person having an ownership interest in any Class of Certificates (other than such Person) to incur liability for any federal tax imposed under the Code that would not otherwise be imposed but for the transfer of an ownership interest in the Residual Certificate to such Person. The terms "United States", "State" and "international organization" shall have the meanings set forth in Section 7701 of the Code.
"Distribution Date": The 25th day of any month, or if such 25th day is not a Business Day, the Business Day immediately following such 25th day, commencing on January 25, 1996.
"DLJMCI": DLJ Mortgage Capital, Inc., a Delaware corporation.
"Due Date": The first day of the month of the related Distribution Date.
"Due Period": With respect to any Distribution Date, the period commencing on the second day of the month preceding the month of such Distribution Date (or, with respect to the first Due Period, the day following the Cut-off Date) and ending on the related Due Date.
"Eligible Account": An account maintained with a federal or state chartered depository institution (i) the short-term obligations of which are rated by the Rating Agency in its highest rating at the time of any deposit therein, or (ii) insured by the FDIC (to the limits established by such Corporation), the uninsured deposits in which account are otherwise secured such that, as evidenced by an Opinion of Counsel (obtained by the Person requesting that the account be held pursuant to this clause (ii)) delivered to the Trustee prior to the establishment of such account, the Certificateholders will have a claim with respect to the funds in such account and a perfected first priority security interest against any collateral (which shall be limited to Permitted Instruments, each of which shall mature not later than the Business Day immediately preceding the Distribution Date next following the date of investment in such collateral or the Distribution Date if such Permitted Instrument is an obligation of the institution that maintains the Certificate Account or Custodial Account) securing such funds that is superior to claims of any other depositors or general creditors of the depository institution with which such account is maintained or (iii) a trust account or accounts maintained with a federal or state chartered depository institution or trust company with trust powers acting in its fiduciary capacity or (iv) an account or accounts of a depository institution acceptable to the Rating Agency (as evidenced in writing by the Rating Agency that use of any such account as the Custodial Account, the Excess Proceeds Account or the Certificate Account will not have an adverse effect on the then-current ratings assigned to the Classes of the Certificates then rated by the Rating Agency). Eligible Accounts may bear interest.
"Event of Default": One or more of the events described in Section 7.01.
"Excess Bankruptcy Loss": Any Bankruptcy Loss, or portion thereof, which exceeds the then applicable Bankruptcy Amount.
"Excess Fraud Loss": Any Fraud Loss, or portion thereof, which exceeds the then applicable Fraud Loss Amount.
"Excess Proceeds": With respect to each Mortgage Loan as to which an REO Disposition has occurred, the proceeds that are specified as being "Excess Proceeds" in Section 3.22.
"Excess Proceeds Account": The separate account or accounts created and maintained pursuant to Section 3.25, which shall be entitled "Bankers Trust Company, in trust for registered holders of Mortgage Pass-Through Certificates, Series 1995-QE11, Excess Proceeds Account," and which account or accounts shall be an Eligible Account.
"Excess Special Hazard Loss": Any Special Hazard Loss, or portion thereof, that exceeds the then applicable Special Hazard Amount.
"Extraordinary Events": Any of the following conditions with respect to a Mortgaged Property or Mortgage Loan causing or resulting in a loss which causes the liquidation of such Mortgage Loan:
(a) losses which are of a type that would be covered by the fidelity bond and the errors and omissions insurance policy required to be maintained pursuant to Section 3.18, but are in excess of the coverage
(b) nuclear reaction or nuclear radiation or radioactive contamination, all whether controlled or uncontrolled, or remote or be in whole or in part caused by, contributed to or aggravated by a peril covered by the definition of the term "Special Hazard Loss";
(c) hostile or warlike action in time of peace or war, including action in hindering, combatting or defending against an actual, impending
1. by any government or sovereign power, de jure or de facto, or by any authority maintaining or using military, naval or air forces;
2. by military, naval or air forces; or
3. by an agent of any such government, power, authority or
(d) any weapon of war employing atomic fission or radioactive force whether in time of peace or war; or
(e) insurrection, rebellion, revolution, civil war, usurped power or action taken by governmental authority in hindering, combatting or defending against such an occurrence, seizure or destruction under quarantine or customs regulations, confiscation by order of any government or public authority; or risks of contraband or illegal transportation or trade.
"Extraordinary Losses": Any Realized Loss incurred on a Mortgage Loan caused by or resulting from an Extraordinary Event.
"FDIC": Federal Deposit Insurance Corporation or any successor.
"FHLMC": Federal Home Loan Mortgage Corporation or any successor.
"Fixed Strip Rate": 1.250% per annum.
"FNMA": Federal National Mortgage Association or any successor.
"Fraud Loss Amount": With respect to any date of determination after the Cut-off Date, an amount equal to: (X) prior to the first Anniversary, an amount equal to 3.00% of the aggregate outstanding principal balance of all of the Mortgage Loans as of the Cut-off Date minus the aggregate amount of Fraud Losses allocated solely to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates or the Class R Certificates in accordance with Section 4.04 since the Cut-off Date, (Y) from and including the first Anniversary to but not including the second Anniversary, an amount equal to (1) the lesser of (a) the Fraud Loss Amount as of the day immediately preceding the first Anniversary and (b) 2.00% of the aggregate outstanding principal balance of all of the Mortgage Loans as of the first Anniversary minus (2) the Fraud Losses allocated solely to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates and the Class R Certificates, in accordance with Section 4.04 since the first Anniversary, and (Z) from and including the second Anniversary to but not including the fifth Anniversary, an amount equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent Anniversary and (b) 1.00% of the aggregate outstanding principal balance of all of the Mortgage Loans, as of the most recent Anniversary minus (2) the Fraud Losses allocated solely to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates and the Class R Certificates, in accordance with Section 4.04 since the most recent Anniversary. On and after the fifth Anniversary the Fraud Loss Amount shall be zero.
"Fraud Losses": Realized Losses on Mortgage Loans as to which there was fraud in the origination of such Mortgage Loan.
"Funding Date": With respect to each Mortgage Loan, the date on which funds were advanced by or on behalf of the Seller and interest began to accrue thereunder.
"Gross Margin": With respect to each Mortgage Loan, the fixed rate set forth in the related Mortgage Note to be added to the Index on each Adjustment Date in accordance with the terms of the related Mortgage Note used to determine the Mortgage Rate for such Mortgage Loan. The Gross Margin as to each Mortgage Loan is set forth on the Mortgage Loan Schedule.
"High Cost Loan": The Mortgage Loans that are subject to special rules, disclosure requirements and other provisions that were added to the Federal Truth in Lending Act by the Home Ownership and Equity Protection Act of 1994.
"Index": The average of the interbank offered rates for six months United States dollar deposits in the London market based on quotations of major banks, as published in the Western Edition of THE WALL STREET JOURNAL, as most recently available as of the date 45 days prior to any Adjustment Date. If such Index is not so published or is otherwise unavailable, the Master Servicer shall select an alternate index for mortgage loans on single family residential properties that is calculated and published or otherwise made available by an independent third party.
"Initial Certificate Principal Balance": With respect to each Class of Certificates, the Certificate Principal Balance of such Class of Certificates as of the Cut-off Date as set forth in the Preliminary Statement hereto.
"Initial Class A-1 Percentage": As set forth in the Preliminary Statement hereto.
"Initial Class A-2 Percentage": As set forth in the Preliminary Statement hereto.
"Initial Class B Percentage": As set forth in the Preliminary Statement hereto.
"Initial Class R Percentage": As set forth in the Preliminary Statement hereto.
"Initial Subordinate Percentage": 10.75%, which is the sum of the Initial Class B Percentage and 3.25%.
"Insurance Policy": With respect to any Mortgage Loan, any insurance policy which is required to be maintained from time to time under this Agreement in respect of such Mortgage Loan.
"Insurance Proceeds": Proceeds paid in respect of the Mortgage Loans pursuant to any Primary Hazard Insurance Policy, any title insurance policy or any other insurance policy covering a Mortgage Loan, to the extent such proceeds are not applied to the restoration of the related Mortgaged Property or released to the Mortgagor in accordance with the procedures that the Master Servicer would follow in servicing mortgage loans held for its own account.
"Late Collections": With respect to any Mortgage Loan, all amounts received during any Due Period, whether as late payments of Monthly Payments or as Insurance Proceeds, Liquidation Proceeds or otherwise, which represent late payments or collections of Monthly Payments due but delinquent for a previous Due Period and not previously recovered.
"Liquidation Proceeds": Amounts (other than Insurance Proceeds) received by the Master Servicer in connection with the taking of an entire Mortgaged Property by exercise of the power of eminent domain or condemnation or in connection with the liquidation of a defaulted Mortgage Loan through trustee's sale, foreclosure sale or otherwise, other than amounts received in respect of any REO Property.
"Loan-to-Value Ratio": As of any date, the fraction, expressed as a percentage, the numerator of which is the current principal balance of the related Mortgage Loan at the date of determination and the denominator of which is the Collateral Value of the related Mortgaged Property.
"Master Servicer": Temple-Inland Mortgage Corporation, or any successor master servicer appointed as herein provided.
"Maximum Rate": With respect to each Mortgage Loan, the amount set forth in the Mortgage Note as the maximum Mortgage Rate thereunder.
"Minimum Rate": With respect to each Mortgage Loan, the amount set forth in the Mortgage Note as the minimum Mortgage Rate thereunder.
"Monthly Payment": With respect to any Mortgage Loan, the scheduled monthly payment of principal and interest on such Mortgage Loan which is payable by a Mortgagor from time to time under the related Mortgage Note as originally executed (after adjustment, if any, for Principal Prepayments and for Deficient Valuations occurring prior to such Due Date, and after any adjustment by reason of any bankruptcy or similar proceeding or any moratorium or similar waiver or grace period).
"Moody's": Moody's Investors Service, Inc. or its successor in interest.
"Mortgage": The mortgage, deed of trust or any other instrument securing the Mortgage Loan.
"Mortgage File": The mortgage documents listed in Section 2.01 pertaining to a particular Mortgage Loan and any additional documents required to be added to the Mortgage File pursuant to this Agreement; provided, that whenever the term "Mortgage File" is used to refer to documents actually received by the Trustee, such term shall not be deemed to include such additional documents required to be added unless they are actually so added.
"Mortgage Loan": Each of the mortgage loans, transferred and assigned to the Trustee pursuant to Section 2.01 or Section 2.03 and from time to time held in the Trust Fund, the Mortgage Loans originally so transferred, assigned and held being identified in the Mortgage Loan Schedule. As used herein, the term "Mortgage Loan" includes the related Mortgage Note and Mortgage.
"Mortgage Loan Purchase Agreement": With respect to any Mortgage Loan the mortgage loan purchase agreement between the Seller and DLJMCI pursuant to which the Seller sold such Mortgage Loan to DLJMCI and DLJMCI purchased such Mortgage Loan from the Seller.
"Mortgage Loan Schedule": As of any date of determination, the schedule of Mortgage Loans included in the Trust Fund. The initial schedule of Mortgage Loans with accompanying information transferred on the Closing Date to the Trustee as part of the Trust Fund for the Certificates, attached hereto as Exhibit I (and, for purposes of the Trustee's review of the Mortgage Files pursuant to Section 2.02, in computer-readable form as delivered to the Trustee), which list shall set forth the following information with respect to each Mortgage Loan:
(i) the loan number and name of the Mortgagor;
(ii) the street address, city, state and zip code of the Mortgaged
(iii) the initial Mortgage Rate;
(v) the original principal balance;
(vi) the first payment date;
(vii) the type of Mortgaged Property;
(viii) the Monthly Payment in effect as of the Cut-off Date;
(ix) the principal balance as of the Cut-off Date;
(xi) the next Adjustment Date;
(xii) the Periodic Rate Cap;
(xiii) the Adjustment Date frequency;
(xiv) the Mortgage Rate as of the Cut-off Date;
(xvi) the purpose of the Mortgage Loan;
(xvii) the Collateral Value of the Mortgaged Property;
(xviii) the original term to maturity;
(xix) whether or not the Mortgage Loan provides for a Principal
(xx) the first Adjustment Date;
(xxi) the Minimum Rate and Maximum Rate;
(xxii) the paid-through date of the Mortgage Loan;
(xxiii) the credit grade of the Mortgagor;
(xxiv) the number of units in the Mortgaged Property; and
(xxv) whether or not the Mortgage Loan is a High Cost Loan.
The Mortgage Loan Schedule shall also set forth the total of the amounts described under (ix) above for all of the Mortgage Loans. The Mortgage Loan Schedule may be in the form of more than one schedule, collectively setting forth all of the information required.
"Mortgage Note": The note or other evidence of the indebtedness of a Mortgagor under a Mortgage Loan.
"Mortgage Rate": With respect to any Mortgage Loan, the annual rate at which interest accrues on such Mortgage Loan, as adjusted from time to time in accordance with the provisions of the Mortgage Note.
"Mortgaged Property": The underlying property securing a Mortgage Loan.
"Mortgagor": The obligor or obligors on a Mortgage Note.
"Net Mortgage Rate": As to each Mortgage Loan, a per annum rate of interest equal to the Mortgage Rate as in effect from time to time minus the Servicing Fee Rate.
"Nonrecoverable Advance": Any Advance previously made or proposed to be made in respect of a Mortgage Loan which, in the good faith judgment of the Master Servicer, will not or, in the case of a proposed Advance, would not be ultimately recoverable from related Late Collections, Insurance Proceeds, Liquidation Proceeds, REO Proceeds or amounts reimbursable to the Master Servicer pursuant to Section 4.01(b). The determination by the Master Servicer that it has made a Nonrecoverable Advance or that any proposed Advance would constitute a Nonrecoverable Advance, shall be evidenced by an Officers' Certificate delivered to the Depositor and the Trustee.
"Non-United States Person": Any Person other than a United States Person.
"Notional Amount": As of any Distribution Date, the aggregate Certificate Principal Balance of all Classes of Certificates immediately prior to such date except that the initial Notional Amount shall be rounded down to the nearest multiple of $1.00.
"Officers' Certificate": A certificate signed by the Chairman of the Board, the Vice Chairman of the Board, the President or a vice president and by the Treasurer, the Secretary, or one of the assistant treasurers or assistant secretaries of the Master Servicer or of the Sub-Servicer and delivered to the Depositor and Trustee.
"Opinion of Counsel ": A written opinion of counsel, who may be counsel for the Depositor or the Master Servicer, reasonably acceptable to the Trustee; except that any opinion of counsel relating to (a) the qualification of any account required to be maintained pursuant to this Agreement as an Eligible Account, (b) qualification of the Trust Fund as a REMIC, (c) compliance with the REMIC Provisions or (d) resignation of the Master Servicer pursuant to Section 6.04 must be an opinion of counsel who (i) is in fact independent of the Depositor and the Master Servicer, (ii) does not have any direct financial interest or any material indirect financial interest in the Depositor or the Master Servicer or in an affiliate of either and (iii) is not connected with the Depositor or the Master Servicer as an officer, employee, director or person performing similar functions.
"Original Senior Percentage": 92.50%, which is the fraction, expressed as a percentage, the numerator of which is the aggregate Certificate Principal Balance of the Class A-1 Certificates and the Class A-2 Certificates as of the Closing Date and the denominator of which is the aggregate Stated Principal Balance of all of the Mortgage Loans as of the Closing Date.
"OTS": Office of Thrift Supervision or any successor.
"Outstanding Class SB Unpaid Interest Amount": As of any Distribution Date, an amount equal to (i) the aggregate of the Class SB Accrual Amounts for all preceding Distribution Dates minus (ii) the aggregate amount of all previous distributions to the Class SB Certificateholders pursuant to Section 4.01(b)(xix).
"Outstanding Mortgage Loan": As to any Due Date, a Mortgage Loan (including an REO Property) which was not the subject of a Principal Prepayment in full, Cash Liquidation or REO Disposition and which was not purchased prior to such Due Date pursuant to Sections 2.02, 2.03 or 2.04.
"Ownership Interest": As to any Certificate, any ownership or security interest in such Certificate, including any interest in such Certificate as the Holder thereof and any other interest therein, whether direct or indirect, legal or beneficial, as owner or as pledgee.
"Pass-Through Rate": With respect to each of the Class A-1 Certificates, the Class A-2 Certificates and the Class B Certificates and the Class R Certificates, on each Distribution Date, a rate equal to the weighted average, expressed as a percentage, of the Net Mortgage Rates minus the related Pool Strip Rate and the Fixed Strip Rate of all Mortgage Loans included in the Trust Fund as of the Due Date in the month next preceding the month in which such Distribution Date occurs, weighted on the basis of the respective Stated Principal Balances of such Mortgage Loans, which Stated Principal Balances shall be the Stated Principal Balances of such Mortgage Loans at the close of business on the immediately preceding Distribution Date after giving effect to distributions thereon allocable to principal (or, in the case of the Pass-Through Rate for the initial Distribution Date, at the close of business on the Cut-off Date). With respect to the Class SA Certificates and any Distribution Date, a rate equal to the weighted average, expressed as a percentage, of the Pool Strip Rates of all Mortgage Loans included in the Trust Fund as of the Due Date in the month immediately preceding the month in which such Distribution Date occurs, weighted on the basis of the respective Stated Principal Balances of such Mortgage Loans, which Stated Principal Balances shall be the Stated Principal Balances of such Mortgage Loans at the close of business on the immediately preceding Distribution Date after giving effect to distributions thereon allocable to principal (or, in the case of the Pass-Through Rate for the initial Distribution Date, at the close of business on the Cut-off Date). With respect to the Class SB Certificates, the Fixed Strip Rate.
"Percentage Interest": With respect to any Certificate (other than a Residual Certificate), the undivided beneficial ownership interest in the related Class evidenced by such Certificate, which as to each such Certificate shall be equal to the initial Certificate Principal Balance (or Notional Amount, as applicable) thereof divided by the aggregate initial Certificate Principal Balance (or initial Notional Amount, as applicable)of all of the Certificates of the same Class, expressed as a percentage carried to four decimal places. With respect to a Residual Certificate, the interest in distributions to be made with respect to such Class evidenced thereby, expressed as a percentage carried to four decimal places, as stated on the face of such Certificate.
"Periodic Rate Cap": The provision in each Mortgage Note that limits permissible increases and decreases in the Mortgage Rate on any Adjustment Date to not more than 1%.
"Permitted Instruments": Any one or more of the following:
(i) direct obligations of, or obligations fully guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof, provided such obligations are backed by the full faith and credit of the United States;
(ii) repurchase obligations (the collateral for which is held by a third party or the Trustee) with respect to any security described in clause (i) above, provided that the long-term unsecured obligations of the party agreeing to repurchase such obligations are
at the time rated by the Rating Agency in one of its two highest long-term
(iii) certificates of deposit, time deposits, demand deposits and bankers' acceptances of any bank or trust company incorporated under the laws of the United States or any state thereof or the District of Columbia, provided that the short-term commercial paper of such bank or trust company (or, in the case of the principal depository institution in a depository institution holding company, the long-term unsecured debt obligations of the depository institution holding company) at the date of acquisition thereof has been rated by the Rating Agency in its highest short-term
(iv) mutual funds organized under the Investment Company Act of 1940 rated not less than "AAAm" by Standard & Poor's and not less than "P-1" by
(v) commercial paper (having original maturities of not more than nine months) of any corporation incorporated under the laws of the United States or any state thereof or the District of Columbia which on the date of acquisition has been rated by the Rating Agency in its highest short-term
(vi) any other obligation or security acceptable to the Rating Agency (as certified by a letter from the Rating Agency to the Trustee) in respect of mortgage pass-through certificates rated in one of its two highest
provided, that no such instrument shall be a Permitted Instrument if such instrument evidences either (a) the right to receive interest only payments with respect to the obligations underlying such instrument or (b) both principal and interest payments derived from obligations underlying such instrument where the principal and interest payments with respect to such instrument provide a yield to maturity exceeding 120% of the yield to maturity at par of such underlying obligation.
"Permitted Transferee": Any transferee of a Class R Certificate other than a Non- United States Person or Disqualified Organization.
"Person": Any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
"Pool Strip Rate": With respect to each Mortgage Loan, a fixed percentage equal to the greater of (i) the related Gross Margin minus 4.50% and (ii) 0.00%.
"Prepayment Assumption": A constant prepayment rate ("CPR") of 27% per annum, used solely for determining the rate of accrual of original issue discount, market discount and amortizable premium on the Certificates for federal income tax purposes. A CPR represents an annualized constant assumed rate of prepayment each month of a pool of mortgage loans relative to its then outstanding principal balance for the life of such mortgage loans.
"Prepayment Interest Shortfall": With respect to any Distribution Date, for each Mortgage Loan that was the subject of a partial Principal Prepayment or a Principal Prepayment in full during the related Prepayment Period, an amount equal to the amount of interest that would have accrued at the applicable Net Mortgage Rate on the principal balance of such Mortgage Loan immediately prior to such prepayment, or in the case of a partial Principal Prepayment on the amount of such prepayment, during the period commencing on the date of prepayment, or in the case of a Principal Prepayment in full the date as of which the prepayment is applied, and ending on the last day of the month of prepayment.
"Prepayment Period": As to any Distribution Date, the calendar month preceding the month in which such Distribution Date occurs.
"Primary Hazard Insurance Policy": Each primary hazard insurance policy required to be maintained pursuant to the first or the second paragraph of Section 3.13.
"Principal Prepayment": Any payment of principal made by the Mortgagor on a Mortgage Loan which is received in advance of its scheduled Due Date and which is not accompanied by an amount of interest representing scheduled interest due on any date or dates in any month or months subsequent to the month of prepayment.
"Purchase Price": With respect to any Mortgage Loan (or REO Property) required to be purchased pursuant to Section 2.02 or 2.04 or that the Master Servicer is entitled to repurchase pursuant to Section 3.22, an amount equal to the sum of (i) 100% of the Stated Principal Balance thereof, (ii) unpaid accrued interest (or REO Imputed Interest) at the applicable Net Mortgage Rate on the Stated Principal Balance thereof outstanding during each Due Period that such interest was not paid or advanced, from the date through which interest was last paid by the Mortgagor or advanced and distributed to Certificateholders together with unpaid Servicing Fees from the date through which interest was last paid by the Mortgagor, in each case to the first day of the month in which such Purchase Price is to be distributed, plus (iii) the aggregate of all Advances made in respect thereof that were not previously reimbursed.
"Rating Agency": Moody's, however if Moody's shall no longer be in existence, "Rating Agency" shall be such nationally recognized statistical rating agency, or other comparable Person, designated by the Depositor, notice of which designation shall be given to the Trustee and Master Servicer. References herein to the two highest long term debt rating categories of the Rating Agency shall mean "Aa2" or better and references herein to the highest short-term debt rating of a Rating Agency shall mean "Prime -1" or better and in the case of any other Rating Agency such references shall mean such rating categories without regard to any plus or minus.
"Realized Loss": With respect to each Mortgage Loan or REO Property as to which a Cash Liquidation or REO Disposition has occurred, an amount (not less than zero) equal to (i) the Stated Principal Balance of the Mortgage Loan as of the date of Cash Liquidation or REO Disposition, plus (ii) interest (and REO Imputed Interest, if any) at the Net Mortgage Rate from the Due Date as to which interest was last paid or advanced to Certificateholders up to the last day of the month in which the Cash Liquidation or REO Disposition occurred on the
Principal Balance of such Mortgage Loan outstanding during each Due Period that such interest was not paid or advanced, minus (iii) the proceeds, if any, received during the month in which such Cash Liquidation or REO Disposition occurred, to the extent applied as recoveries of interest at the Net Mortgage Rate and to principal of the Mortgage Loan, net of the portion thereof reimbursable to the Master Servicer or any Sub-Servicer with respect to related Advances not previously reimbursed. With respect to each Mortgage Loan which has become the subject of a Deficient Valuation, the difference between the principal balance of the Mortgage Loan outstanding immediately prior to such Deficient Valuation and the principal balance of the Mortgage Loan as reduced by the Deficient Valuation. With respect to each Mortgage Loan which has become the subject of a Debt Service Reduction, the amount of such Debt Service Reduction.
"Record Date": The last Business Day of the month immediately preceding the month of the related Distribution Date.
"Regular Certificate": Any of the Certificates other than the Class R Certificates.
"REMIC": A "real estate mortgage investment conduit" within the meaning of Section 860D of the Code.
"REMIC Provisions": Provisions of the federal income tax law relating to real estate mortgage investment conduits, which appear at Sections 860A through 860G of Subchapter M of Chapter 1 of the Code, and related provisions, and proposed, temporary and final regulations and published rulings, notices and announcements promulgated thereunder, as the foregoing, may be in effect from time to time.
"Remittance Report": A report prepared by the Master Servicer providing the information set forth in Section 4.02.
"REO Acquisition": The acquisition by the Master Servicer on behalf of the Trustee for the benefit of the Certificateholders of any REO Property pursuant to Section 3.15.
"REO Disposition": The final receipt by or on behalf of the Master Servicer of all Insurance Proceeds, Liquidation Proceeds, REO Proceeds and other payments and recoveries (including proceeds of a final sale) which the Master Servicer expects to be finally recoverable from the sale or other disposition of the REO Property.
"REO Imputed Interest": As to any REO Property, for any period, an amount equivalent to interest (at the Mortgage Rate that would have been applicable to the related Mortgage Loan had it been outstanding) on the unpaid principal balance of the Mortgage Loan as of the date of acquisition thereof (as such balance is reduced pursuant to Section 3.15 by any income from the REO Property treated as a recovery of principal).
"REO Proceeds": Proceeds, net of directly related expenses, received in respect of any REO Property (including, without limitation, proceeds from the
Mortgaged Property and of any REO Disposition) which proceeds are required to be deposited into the Custodial Account as and when received.
"REO Property": A Mortgaged Property acquired by the Master Servicer through foreclosure or deed-in-lieu of foreclosure in connection with a defaulted Mortgage Loan.
"Request for Release": A release signed by a Servicing Officer, in the form of Exhibits F-1 or F-2 attached hereto.
"Residual Certificate": Any of the Class R Certificates.
"Responsible Officer": When used with respect to the Trustee, the Chairman or Vice Chairman of the Board of Directors or Trustees, the Chairman or Vice Chairman of the Executive or Standing Committee of the Board of Directors or Trustees, the President, the Chairman of the Committee on Trust Matters, any vice president, any assistant vice president, the Secretary, any assistant secretary, the Treasurer, any assistant treasurer, the Cashier, any assistant cashier, any trust officer, any assistant trust officer, the Controller and any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject.
"Rule 144A": Rule 144A under the Securities Act of 1933, as amended, as in effect from time to time.
"Scheduled Principal and Net Recoveries": With respect to any Distribution Date, an amount equal to the aggregate of the following:
(1) the principal portion of each Monthly Payment on the Outstanding Mortgage Loans due on the related Due Date, whether or not received on or prior to the related Determination Date, less the principal portion of related Debt Service Reductions which constitute Excess Bankruptcy Losses;
(2) the Stated Principal Balance of any Mortgage Loan repurchased during the related Prepayment Period; and
(3) the principal portion of all Insurance Proceeds, Liquidation Proceeds and REO Proceeds received during the related Prepayment Period minus the aggregate amount of expenses incurred by the Master Servicer in connection with the liquidation of the related Mortgage Loans to the extent such expenses are not otherwise recoverable from such Insurance Proceeds, Liquidation Proceeds or REO Proceeds; but only to the extent that any such amounts either (A) were not received in connection with a Cash Liquidation or REO Disposition, or (B) were received in connection with a Cash Liquidation or REO Disposition which resulted in an Excess Special Hazard Loss, Excess Bankruptcy Loss, Excess Fraud Loss or Extraordinary Loss.
"Seller": Quality Mortgage USA, Inc., and its successors and assigns.
"Seller's Warranty Certificate": The Seller's Warranty Certificate dated the Closing Date and executed by the Seller with respect to the Mortgage Loans pursuant to the related Mortgage Loan Purchase Agreements.
"Senior Certificate": Any of the Class SA Certificates, the Class A-1 Certificates or the Class A-2 Certificates.
"Senior Percentage": With respect to any Distribution Date, the sum of the then applicable Class A-1 Percentage and the then applicable Class A-2 Percentage.
"Senior Prepayment Percentage": With respect to any Distribution Date, the percentage indicated below for the time period indicated during which such Distribution Date occurs:
DISTRIBUTION DATE SENIOR PREPAYMENT PERCENTAGE
January 2006 through Senior Percentage, plus 70% of December 2006 the difference between 100%
January 2007 through Senior Percentage, plus 60% of December 2007 the difference between 100%
January 2008 through Senior Percentage, plus 40% of December 2008 the difference between 100%
January 2009 through Senior Percentage, plus 20% of December 2009 the difference between 100%
January 2010 and Senior Percentage
provided, however, that any scheduled reduction to the Senior Prepayment Percentage described above shall not occur as of any Distribution Date unless either (a)(1) the outstanding principal balance of Mortgage Loans delinquent 60 days or more averaged over the last six months, as a percentage of the aggregate outstanding principal balance of all Mortgage Loans averaged over the last six months, does not exceed 2% and (2) Realized Losses on the Mortgage Loans to date for such Distribution Date, if occurring during the eleventh, twelfth, thirteenth, fourteenth or fifteenth year (or any year thereafter) after December 1995, are less than 30%, 35%, 40%, 45% and 50%, respectively, of the sum of the Initial Certificate Principal Balance of the Class B Certificates and 3.25% of the aggregate initial Certificate Principal Balance of the Class A-1 Certificates, the Class A-2 Certificates and the Class B Certificates or (b)(1) the outstanding principal balance of the Mortgage Loans delinquent 60 days or more averaged over the last six months, as a percentage of the aggregate outstanding principal balance of all Mortgage Loans averaged over the last six months, does not exceed 4% and (2) Realized Losses on the Mortgage Loans to date for such Distribution Date are less than 10% of the sum of the Initial Certificate Principal Balance of the Class B Certificates and 3.25% of the aggregate initial Certificate Principal Balance of the Class A-1 Certificates, the Class A-2 Certificates and the Class B Certificates. For purposes of the foregoing, the percentage of the Mortgage Loans that are delinquent as of any Distribution Date shall be deemed to be such percentages as are to be specified in the report pursuant to Section 4.02 with respect to such Distribution Date. Notwithstanding the foregoing, upon the reduction of the aggregate Certificate Principal Balance of the Class A-1 Certificates and the Class A-2 Certificates to zero, the Senior Prepayment Percentage shall thereafter be 0%. In addition, with respect to any Distribution Date on which the Senior Percentage is greater than the Original Senior Percentage, the Senior Prepayment Percentage for such Distribution shall be 100%.
"Servicing Account": The account or accounts created and maintained pursuant to Section 3.09.
"Servicing Advances": All customary, reasonable and necessary "out of pocket" costs and expenses incurred in connection with a default, delinquency or other unanticipated event by the Master Servicer in the performance of its servicing obligations, including, but not limited to, the cost of (i) the preservation, restoration and protection of a Mortgaged Property, (ii) any enforcement or judicial proceedings, including foreclosures, (iii) the management and liquidation of any REO Property and (iv) compliance with the obligations under the second paragraph of Section 3.01 and Section 3.09.
"Servicing Fee": As to each Mortgage Loan, an amount, payable out of any payment of interest on the Mortgage Loan, equal to interest at the applicable Servicing Fee Rate on the Stated Principal Balance of such Mortgage Loan for the calendar month preceding the month in which the payment is due (alternatively, in the event such payment of interest accompanies a Principal Prepayment in full made by the Mortgagor, interest for the number of days covered by such payment of interest).
"Servicing Fee Rate": With respect to each Mortgage Loan, the per annum rate of 0.75%.
"Servicing Officer": Any officer of the Master Servicer involved in, or responsible for, the administration and servicing of the Mortgage Loans, whose name and specimen signature appear on a list of servicing officers furnished to the Trustee by the Master Servicer, as such list may from time to time be amended.
"Single Certificate": A Certificate of any Class evidencing an Initial Certificate Principal Balance of $1,000.
"Special Hazard Amount": As of any Distribution Date, an amount equal to $459,809.16 (the initial "Special Hazard Amount") minus the sum of (i) the aggregate amount of Special Hazard Losses allocated solely to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates and the Class R Certificates in accordance with Section 4.04 and (ii) the Adjustment Amount (as defined below) as most recently calculated. For each Anniversary, the Adjustment Amount shall be calculated and shall be equal to the amount, if any, by which the amount calculated in accordance with the preceding sentence (without giving effect to the deduction of the Adjustment Amount for such Anniversary) exceeds the greater of (A) the product of the Special Hazard Percentage for such Anniversary multiplied by the outstanding principal balance of all the Mortgage Loans on such Anniversary and (B) twice the outstanding principal balance of the Mortgage Loan in the Trust Fund which has the largest outstanding principal balance on such Anniversary.
"Special Hazard Loss": Any Realized Loss suffered by a Mortgaged Property on account of direct physical loss, but not including (i) any loss of a type covered by a hazard insurance policy or a flood insurance policy required to be maintained in respect to such Mortgaged Property pursuant to Section 3.13 to the extent of the amount of such loss covered thereby, or (ii) any Extraordinary Loss.
"Special Hazard Percentage": As of each Anniversary, the greater of (i) 1% (or, if greater than 1%, the highest percentage of Mortgage Loans, by principal balance, in any California zip code area) times the aggregate principal balance of all of the Mortgage Loans on such Anniversary and (ii) twice the principal balance of the single Mortgage Loan having the largest principal balance.
"Standard & Poor's" or "S&P": Standard & Poor's Ratings Services, or its successor in interest.
"Startup Day": The day designated as such pursuant to Article X hereof.
"Stated Principal Balance": With respect to any Mortgage Loan or related REO Property at any given time, (i) the principal balance of the Mortgage Loan outstanding as of the Cut-off Date, after application of principal payments due on or before such date, whether or not received, minus (ii) the sum of (a) the principal portion of the Monthly Payments due with respect to such Mortgage Loan or REO Property during each Due Period ending prior to the most recent Distribution Date which were distributed or with respect to which an Advance was distributed, and (b) all Principal Prepayments with respect to such Mortgage Loan or REO Property, and all Insurance Proceeds, Liquidation Proceeds and net income from a REO Property to the extent applied by the Master Servicer as recoveries of principal in accordance with Section 3.15 with respect to such Mortgage Loan or REO Property, which were distributed pursuant to Section 4.01 on any previous Distribution Date, and (c) any Realized Loss with respect thereto allocated pursuant to Section 4.04 for any previous Distribution Date.
"Sub-Servicer": Any Person with which the Master Servicer has entered into a Sub-Servicing Agreement and which meets the qualifications of a Sub-Servicer pursuant to Section 3.02.
"Sub-Servicer Remittance Date": The 18th day of each month, or if such day is not a Business Day, the immediately preceding Business Day.
"Sub-Servicing Account": An account established by a Sub-Servicer which meets the requirements set forth in Section 3.08 and is otherwise acceptable to the Master Servicer.
"Sub-Servicing Agreement": The written contract between the Master Servicer and a Sub-Servicer and any successor Sub-Servicer relating to servicing and administration of certain Mortgage Loans as provided in Section 3.02.
"Tax Returns": The federal income tax return on Internal Revenue Service Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return, including Schedule Q thereto, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation, or any successor forms, to be filed on behalf of the Trust Fund due to its classification as a REMIC under the REMIC Provisions, together with any and all other information, reports or returns that may be required to be furnished to the Certificateholders or filed with the Internal Revenue Service or any other governmental taxing authority under any applicable provisions of federal, state or local tax laws.
"Transfer": Any direct or indirect transfer, sale, pledge, hypothecation or other form of assignment of any Ownership Interest in a Certificate.
"Transferor": Any Person who is disposing by Transfer of any Ownership Interest in a Certificate.
"Trust Fund": The segregated pool of assets subject hereto, constituting the primary trust created hereby and to be administered hereunder, with respect to which a REMIC election is to be made, consisting of: (i) the Mortgage Loans (exclusive of payments of principal and interest due on or before the Cut-off Date, if any) as from time to time are subject to this Agreement and all payments under and proceeds of the Mortgage Loans (exclusive of any prepayment fees and late payment charges received on the Mortgage Loans), together with all documents included in the related Mortgage File, subject to Section 2.01; (ii) such funds or assets as from time to time are deposited in the Custodial Account, the Excess Proceeds Account or the Certificate Account; (iii) any REO Property; (iv) the Primary Hazard Insurance Policies, if any, and all other Insurance Policies with respect to the Mortgage Loans; and (v) the Depositor's interest in respect of the representations and warranties made by the Seller in each Mortgage Loan Purchase Agreement and in the Seller's Warranty Certificate, as assigned to the Trustee pursuant to Section 2.04 hereof.
"Trustee": Bankers Trust Company, or its successor in interest, or any successor trustee appointed as herein provided.
"Uninsured Cause": Any cause of damage to property subject to a Mortgage such that the complete restoration of such property is not fully reimbursable by the hazard insurance policies or flood insurance policies required to be maintained pursuant to Section 3.13.
"United States Person": A citizen or resident of the United States, a corporation, partnership or other entity created or organized in, or under the laws of, the United States or any political subdivision thereof, or an estate or trust whose income from sources without the United States is includible in gross income for United States federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States. The term "United States" shall have the meaning set forth in Section 7701 of the Code or successor provisions.
"Voting Rights": The portion of the voting rights of all of the Certificates which is allocated to any Certificate. At all times during the term of this Agreement, 97% of all of the Voting Rights shall be allocated among Holders of the Class A-1 Certificates, the Class A-2 Certificates and the Class B Certificates in proportion to the initial Certificate Principal Balances of their respective Certificates; and the Holders of the Class SA Certificates, the Class SB Certificates and the Class R Certificates shall collectively be entitled to 1%, 1% and 1% respectively, of all of the Voting Rights, allocated among the Certificates of each such Class in accordance with their respective Percentage Interests.
SECTION 2.01. Conveyance of Mortgage Loans.
The Depositor, as of the Closing Date, and concurrently with the execution and delivery hereof, does hereby assign, transfer, sell, set over and otherwise convey to the Trustee without recourse all the right, title and interest of the Depositor in and to the Mortgage Loans identified on the Mortgage Loan Schedule (exclusive of any prepayment fees and late payment charges received thereon) and all other assets included or to be included in the Trust Fund for the benefit of the Certificateholders. Such assignment includes all principal and interest received by the Master Servicer on or with respect to the Mortgage Loans (other than payment of principal and interest due on or before the Cut-off Date).
In connection with such transfer and assignment, the Depositor has requested the Seller pursuant to each Mortgage Loan Purchase Agreement to deliver to, and deposit with the Trustee, as described in the related Mortgage Loan Purchase Agreement, the following documents or instruments:
(i) the original Mortgage Note, endorsed without recourse to the order of "Bankers Trust Company, as trustee" with all intervening endorsements showing a complete chain of endorsements from the originator to the Person endorsing it to the Trustee;
(ii) the original recorded Mortgage or, if the original Mortgage has not been returned from the applicable public recording office, a copy of the Mortgage certified by the Seller to be a true and complete copy of the original Mortgage submitted to the title insurance company for recording;
(iii) a duly executed original Assignment of the Mortgage in recordable form to "Bankers Trust Company, as trustee" or to "Bankers Trust Company, as trustee for the holders of DLJ Mortgage Acceptance Corp.
(iv) the original recorded Assignment or Assignments of the Mortgage showing a complete chain of assignment from the originator thereof to the Person assigning it to the Trustee or, if any such Assignment has not been returned from the applicable public recording office, a copy of such Assignment certified by the Seller to be a true and complete copy of the original Assignment submitted to the title insurance company for recording;
(v) the original lender's title insurance policy, or, if such policy has not been issued and if the Mortgage Loan was funded through a title insurance company pursuant to escrow or closing instructions precluding the title insurance company or other
comparable escrow or closing agent from funding until it is prepared to issue the required title insurance coverage, a copy of such escrow or
(vi) the original of any assumption, modification, extension or
(vii) the original or a copy of the preliminary title report (or equivalent thereof) on the Mortgage Property;
(viii) if any of the documents or instruments referred to above was executed on behalf of the Mortgagor by another Person, the original power of attorney or other instrument that authorized and empowered such Person to sign, or a copy thereof certified by the Seller (or by an officer of the applicable title insurance or escrow company) to be a true and correct copy
(ix) with respect to any High Cost Loan, the notice to assignees that the Mortgage Loan is subject to special truth in lending rules, to the extent required by applicable law.
The Seller is obligated pursuant to each Mortgage Loan Purchase Agreement to deliver to the Trustee: (a) either the original recorded Mortgage, or in the event such original cannot be delivered by the Seller, a copy of such Mortgage certified as true and complete by the appropriate recording office, in those instances where a copy thereof certified by the Seller was delivered to the Trustee pursuant to clause (ii) above; and (b) either the original Assignment or Assignments of the Mortgage, with evidence of recording thereon, showing a complete chain of assignment from the originator to the Seller, or in the event such original cannot be delivered by the Seller, a copy of such Assignment or Assignments certified as true and complete by the appropriate recording office, in those instances where copies thereof certified by the Seller were delivered to the Trustee pursuant to clause (iv) above. Notwithstanding anything to the contrary contained in this Section 2.01, in those instances where the public recording office retains the original Mortgage after it has been recorded, the Seller shall be deemed to have satisfied its obligations hereunder upon delivery to the Trustee of a copy of such Mortgage certified by the public recording office to be a true and complete copy of the recorded original thereof.
As promptly as practicable after the Closing Date, the Seller shall cause to be delivered to the appropriate public office for recordation in the real property records the Assignment referred to in clause (iii) and to the extent necessary in clause (iv) of this Section 2.01. While such Assignment to be recorded is being recorded, the Trustee shall retain a photocopy of such Assignment. If any Assignment is lost or returned unrecorded to the Trustee because of any defect therein, the Seller is required to prepare a substitute Assignment or cure such defect, as the case may be, and the Trustee shall cause such Assignment to be recorded in accordance with this paragraph.
The Seller is required under each Mortgage Loan Purchase Agreement to exercise its best reasonable efforts to deliver or cause to be delivered to the Trustee within 120 days of the Closing Date, or such other date as is set forth in such Mortgage Loan Purchase Agreement, the original or a photocopy of the title insurance policy with respect to each of the related Mortgage Loans assigned to the Trustee pursuant to this Section 2.01.
All original documents relating to the Mortgage Loans which are not delivered to the Trustee, to the extent delivered by the Seller to the Master Servicer, are and shall be held by the Master Servicer in trust for the benefit of the Trustee on behalf of the Certificateholders.
Except as may otherwise expressly be provided herein, neither the Depositor, the Master Servicer nor the Trustee shall (and the Master Servicer shall ensure that no Sub-Servicer shall) assign, sell, dispose of or transfer any interest in the Trust Fund or any portion thereof, or permit the Trust Fund or any portion thereof to be subject to any lien, claim, mortgage, security interest, pledge or other encumbrance of, any other Person.
It is intended that the conveyance of the Mortgage Loans by the Depositor to the Trustee as provided in this Section be, and be construed as, a sale of the Mortgage Loans by the Depositor to the Trustee for the benefit of the Certificateholders. It is, further, not intended that such conveyance be deemed a pledge of the Mortgage Loans by the Depositor to the Trustee to secure a debt or other obligation of the Depositor. However, in the event that the Mortgage Loans are held to be property of the Depositor, or if for any reason this Agreement is held or deemed to create a security interest in the Mortgage Loans, then it is intended that, (a) this Agreement shall also be deemed to be a security agreement within the meaning of Articles 8 and 9 of the New York Uniform Commercial Code and the Uniform Commercial Code of any other applicable jurisdiction; (b) the conveyance provided for in this Section shall be deemed to be (1) a grant by the Depositor to the Trustee of a security interest in all of the Depositor's right (including the power to convey title thereto), title and interest, whether now owned or hereafter acquired, in and to (A) the Mortgage Loans, including the Mortgage Notes, the Mortgages, any related insurance policies and all other documents in the related Mortgage Files, (B) all amounts payable to the holders of the Mortgage Loans in accordance with the terms thereof and (C) all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, instruments, securities or other property, including without limitation all amounts from time to time held or invested in the Certificate Account or the Custodial Account, whether in the form of cash, instruments, securities or other property and (2) an assignment by the Depositor to the Trustee of any security interest in any and all of the Seller's right (including the power to convey title thereto), title and interest, whether now owned or hereafter acquired, in and to the property described in the foregoing clauses (1)(A) through (C) granted by the Seller to the Depositor pursuant to the related Mortgage Loan Purchase Agreements or granted by DLJMCI to the Depositor pursuant to the Assignment Agreement; (c) the possession by the Trustee or its agent of Mortgage Notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" or possession by a purchaser or a person designated by such secured party, for purposes of perfecting the security interest pursuant to the New York Uniform Commercial Code and the Uniform Commercial Code of any other applicable jurisdiction (including, without limitation, Sections 9-305, 8-313 or 8-321 thereof); and (d) notifications to persons holding such property, and acknowledgments, receipts or confirmations from persons holding such property, shall be deemed notifications to, or acknowledgments, receipts or confirmations from, financial intermediaries, bailees or agents (as applicable) of the Trustee for the purpose of perfecting such security interest under applicable law. The Depositor and the Trustee at the Depositor's direction shall, to the extent consistent with this Agreement, take such actions as may be necessary to ensure that, if this Agreement were deemed to create a security interest in the Mortgage Loans, such security interest would be deemed to be a perfected security interest of first priority under applicable law and will be maintained as such throughout the term of the Agreement.
SECTION 2.02. Acceptance of the Trust Fund by the Trustee.
The Trustee acknowledges receipt (subject to any exceptions noted in the Initial Certification described below) of the documents referred to in Section 2.01 above and all other assets included in the Trust Fund and declares that it holds and will hold such documents and the other documents delivered to it constituting the Mortgage Files, and that it holds or will hold such other assets included in the Trust Fund (to the extent delivered or assigned to the Trustee), in trust for the exclusive use and benefit of all present and future Certificateholders.
The Trustee agrees, for the benefit of the Certificateholders, to review each Mortgage File on or before the Closing Date to ascertain that all documents required to be delivered to it are in its possession, and the Trustee agrees to execute and deliver to the Depositor and the Master Servicer on the Closing Date an Initial Certification in the form annexed hereto as Exhibit C to the effect that, as to each Mortgage Loan listed in the Mortgage Loan Schedule (other than any Mortgage Loan paid in full or any Mortgage Loan specifically identified in such certification as not covered by such certification), (i) all documents required to be delivered to it pursuant to this Agreement with respect to such Mortgage Loan are in its possession, (ii) such documents have been reviewed by it and appear regular on their face and relate to such Mortgage Loan and (iii) based on its examination and only as to the foregoing documents, the information set forth in items (i) - (vi), (x), (xii), (xiii) and (xx) of the definition of the "Mortgage Loan Schedule" accurately reflects information set forth in the Mortgage File. Neither the Trustee nor the Master Servicer shall be under any duty to determine whether any Mortgage File should include any of the documents specified in clause (vi) of Section 2.01. Neither the Trustee nor the Master Servicer shall be under any duty or obligation to inspect, review or examine said documents, instruments, certificates or other papers to determine that the same are genuine, enforceable or appropriate for the represented purpose or that they have actually been recorded or that they are other than what they purport to be on their face.
Within 90 days of the Closing Date the Trustee shall deliver to the Depositor and the Master Servicer a Final Certification in the form annexed hereto as Exhibit D evidencing the completeness of the Mortgage Files, with any applicable exceptions noted thereon.
If in the process of reviewing the Mortgage Files and preparing the certifications referred to above the Trustee finds any document or documents constituting a part of a Mortgage File to be missing or defective in any material respect, the Trustee shall promptly notify the Seller, the Master Servicer and the Depositor. The Trustee shall promptly notify the Seller of such defect and request that the Seller cure any such defect within 60 days from the date on which the Seller was notified of such defect, and if the Seller does not cure such defect in all material respects during such period, request that the Seller purchase such Mortgage Loan from the Trust Fund on behalf of the Certificateholders at the Purchase Price within 90 days after the date on which the Seller was notified of such defect. It is understood and agreed that the obligation of the Seller to cure a material defect in, or purchase any Mortgage Loan as to which a material defect in a constituent document exists shall constitute the sole remedy respecting such defect available to Certificateholders or the Trustee on behalf of Certificateholders. The Purchase Price for the purchased Mortgage Loan shall be deposited or caused to be deposited upon receipt by the Master Servicer in the Custodial Account and, upon receipt by the Trustee of written notification of such deposit signed by a Servicing Officer, the Trustee shall release or cause to be released to the Seller the related Mortgage File and shall execute and deliver such instruments of transfer or assignment, in each case without recourse, as the Seller shall require as necessary to vest in the Seller ownership of any Mortgage Loan released pursuant hereto and at such time the Trustee shall have no further responsibility with respect to the related Mortgage File.
SECTION 2.03. Representations, Warranties and Covenants of the Master Servicer and the Depositor.
(a) The Master Servicer hereby represents and warrants to and covenants with the Depositor and the Trustee for the benefit of Certificateholders that:
(i) The Master Servicer is, and throughout the term hereof shall remain, a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada (except as otherwise permitted pursuant to Section 6.02), the Master Servicer is, and shall remain, in compliance with the laws of each state in which any Mortgaged Property is located to the extent necessary to perform its obligations under this Agreement, and the Master Servicer is, and shall remain, approved to sell mortgage loans to and service mortgage loans for FNMA and FHLMC;
(ii) The execution and delivery of this Agreement by the Master Servicer, and the performance and compliance with the terms of this Agreement by the Master Servicer, will not violate the Master Servicer's charter or bylaws or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in the breach of, any material agreement or other instrument to which it is a party or which is applicable to it or any of its assets;
(iii) The Master Servicer has the full power and authority to enter into and consummate all transactions contemplated by this Agreement, has duly authorized the execution, delivery and performance of this Agreement, and has duly executed and delivered this Agreement;
(iv) This Agreement, assuming due authorization, execution and delivery by the Depositor and the Trustee, constitutes a valid, legal and binding obligation of the Master Servicer, enforceable against the Master Servicer in accordance with the terms hereof, subject to (A) applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the enforcement of creditors'
rights generally, and (B) general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at
(v) The Master Servicer is not in violation of, and its execution and delivery of this Agreement and its performance and compliance with the terms of this Agreement will not constitute a violation of, any law, any order or decree of any court or arbiter, or any order, regulation or demand of any federal, state or local governmental or regulatory authority, which violation is likely to affect materially and adversely either the ability of the Master Servicer to perform its obligations under this Agreement or the financial condition of the
(vi) No litigation is pending or, to the best of the Master Servicer's knowledge, threatened against the Master Servicer which would prohibit its entering into this Agreement or performing its obligations under this Agreement or is likely to affect materially and adversely either the ability of the Master Servicer to perform its obligations under this Agreement or the financial condition of the
(vii) The Master Servicer will comply in all material respects in the performance of this Agreement with all reasonable rules and requirements of each insurer under each Insurance Policy;
(viii) The execution of this Agreement and the performance of the Master Servicer's obligations hereunder do not require any license, consent or approval of any state or federal court, agency, regulatory authority or other governmental body having jurisdiction over the Master Servicer, other than such as have been obtained; and
(ix) No information, certificate of an officer, statement furnished in writing or report delivered to the Depositor, any affiliate of the Depositor or the Trustee by the Master Servicer will, to the knowledge of the Master Servicer, contain any untrue statement of a material fact or omit a material fact necessary to make the information, certificate, statement or report not misleading.
It is understood and agreed that the representations, warranties and covenants set forth in this Section 2.03(a) shall survive the execution and delivery of this Agreement, and shall inure to the benefit of the Depositor, the Trustee and the Certificateholders. Upon discovery by the Depositor, the Trustee or the Master Servicer of a breach of any of the foregoing representations, warranties and covenants that materially and adversely affects the interests of the Depositor or the Trustee, the party discovering such breach shall give prompt written notice to the other parties.
(b) The Depositor hereby represents and warrants to the Master Servicer and the Trustee for the benefit of Certificateholders that as of the Closing Date (or, if otherwise specified below, as of the date so specified):
(i) Assuming that representation (v) of the Seller set forth in Exhibit J hereto is true and correct, then immediately prior to the assignment of the Mortgage Loans to the Trustee, the Depositor had good title to, and was the sole owner of, each Mortgage Loan free and clear of any pledge, lien, encumbrance or security interest (other than rights to servicing and related compensation) and such assignment validly transfers ownership of the Mortgage Loans to the Trustee free and clear of any pledge, lien, encumbrance or security interest; and
(ii) The representations and warranties of the Seller with respect to the Mortgage Loans and the remedies therefor that are contained in the related Mortgage Loan Purchase Agreements and in the Seller's Warranty Certificate are as set forth in Exhibit J hereto.
It is understood and agreed that the representations and warranties set forth in this Section 2.03(b) shall survive delivery of the respective Mortgage Files to the Trustee.
Upon discovery by either the Depositor, the Master Servicer or the Trustee of a breach of any representation or warranty set forth in this Section 2.03 which materially and adversely affects the interests of the Certificateholders in any Mortgage Loan, the party discovering such breach shall give prompt written notice to the other parties.
SECTION 2.04. Representations and Warranties of the Seller.
The Depositor hereby assigns to the Trustee for the benefit of the Certificateholders its interest in respect of the representations and warranties made by the Seller in each Mortgage Loan Purchase Agreement or the exhibits thereto and in the Seller's Warranty Certificate. Insofar as any Mortgage Loan Purchase Agreement or the Seller's Warranty Certificate relate to any such representations and warranties and any remedies provided thereunder for any breach of such representations and warranties, such right, title and interest may be enforced by the Trustee on behalf of the Certificateholders. Upon the discovery by the Depositor, the Master Servicer or the Trustee of a breach of any of the representations and warranties made in any Mortgage Loan Purchase Agreement or in the Seller's Warranty Certificate in respect of any Mortgage Loan which are set forth in Exhibit J attached hereto which materially and adversely affects the interests of the Certificateholders in such Mortgage Loan, the party discovering such breach shall give prompt written notice to the other parties. The Trustee shall promptly notify the Seller of such breach and request that such Seller shall, within 90 days from the date that the Depositor, the Master Servicer or the Trustee was notified of such breach, either (i) cure such breach in all material respects or (ii) purchase such Mortgage Loan from the Trust Fund at the Purchase Price and in the manner set forth in Section 2.02. Except as expressly set forth herein neither the Trustee nor the Master Servicer is under any obligation to discover any breach of the above mentioned representations and warranties. It is understood and agreed that the obligation of the Seller to cure such breach or purchase such Mortgage Loan as to which such a breach has occurred and is continuing shall constitute the sole remedy respecting such breach available to Certificateholders or the Trustee on behalf of Certificateholders.
SECTION 2.05. Issuance of Certificates Evidencing Interests in the Trust Fund.
The Trustee acknowledges the assignment to it of the Mortgage Loans and the delivery of the Mortgage Files to it together with the assignment to it of all other assets included in the Trust Fund, receipt of which is hereby acknowledged. Concurrently with such delivery and in exchange therefor, the Trustee, pursuant to the written request of the Depositor executed by an officer of the Depositor has executed and caused to be authenticated and delivered to, or upon the order of, the Depositor the Certificates in authorized denominations which evidence ownership of the entire Trust Fund.
SECTION 3.01. Master Servicer to Act as Master Servicer.
The Master Servicer shall service and administer the Mortgage Loans in accordance with this Agreement, the related Mortgage Notes and Mortgages and the customary and usual standards of practice of prudent mortgage lenders in the respective states in which the Mortgaged Properties are located, and shall have full power and authority, acting alone and/or through Sub-Servicers as provided in Section 3.02, to do or cause to be done any and all things in connection with such servicing and administration that it may deem necessary or desirable. Without limiting the generality of the foregoing, the Master Servicer in its own name or in the name of a Sub-Servicer is hereby authorized and empowered by the Trustee when the Master Servicer believes it appropriate in its best judgment, to (i) execute and deliver, on behalf of the Certificateholders and the Trustee or any of them, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Mortgage Loans and the Mortgaged Properties, (ii) institute foreclosure proceedings or obtain a deed-in-lieu of foreclosure so as to convert the ownership of such properties, and (iii) hold or cause to be held title to such properties, on behalf of the Trustee and Certificateholders. The Master Servicer shall service and administer the Mortgage Loans in accordance with applicable state and federal law and shall provide to the Mortgagors any reports required to be provided to them thereby. Subject to, Section 3.16, the Trustee shall execute based on the written request of the Master Servicer and furnish to the Master Servicer and any Sub-Servicer any special or limited powers of attorney and other documents necessary or appropriate to enable the Master Servicer and any Sub-Servicer to carry out their servicing and administrative duties hereunder. The Trustee shall not be liable for any action taken by the Master Servicer or any Sub-Servicer pursuant to the application of such special or limited powers of attorney.
In accordance with the standards of the preceding paragraph, the Master Servicer shall advance or cause to be advanced funds as necessary for the purpose of effecting the payment of taxes and assessments on the Mortgaged Properties, which advances shall be reimbursable in the first instance from related collections from the Mortgagors pursuant to Section 3.09, and further as provided in Section 3.11. No costs incurred by the Master Servicer or by Sub-Servicers in effecting the payment of taxes and assessments on the Mortgaged Properties shall, for the purpose of calculating distributions to Certificateholders, be added to the amount owing under the related Mortgage Loans, notwithstanding that the terms of such Mortgage Loans so permit.
It is expressly understood and agreed that in light of the underwriting criteria applicable to the Mortgage Loans, special servicing procedures are desirable in order to minimize the delinquency and loss experience of the Mortgage Loans. The Master Servicer hereby covenants that it will use reasonable efforts to prevent and to resolve delinquencies promptly and appropriately in light of the underwriting criteria applicable to the Mortgage and that it will modify its procedures from time to time in accordance with the reasonable written request of the Depositor. Notwithstanding anything in this Agreement to the contrary, the Master Servicer shall not (unless the Mortgagor is in default with respect to the Mortgage Loan or such default is, in the judgment of the Master Servicer, reasonably foreseeable) make or permit any modification, waiver or amendment of any term of any Mortgage Loan that would both (i) effect an exchange or reissuance of such Mortgage Loan under Section 1001 of the Code (or final, temporary or proposed Treasury regulations promulgated thereunder) and cause to fail to qualify as a REMIC under the Code or (ii) cause the imposition of any tax on "prohibited transactions" or "contributions" after the Startup Day under the REMIC Provisions.
The relationship of the Master Servicer (and of any successor to the Master Servicer under this Agreement) to the Trustee under this Agreement is intended by the parties to be that of an independent contractor and not that of a joint venturer, partner or agent.
SECTION 3.02. Sub-Servicing Agreements Between Master Servicer and Sub-Servicers.
(a) The Master Servicer may enter into Sub-Servicing Agreements with SubServicers for the servicing and administration of the Mortgage Loans and for the performance of any and all other activities of the Master Servicer hereunder. Each Sub-Servicer shall be either (i) an institution the accounts of which are insured by the FDIC or (ii) another entity that engages in the business of originating or servicing mortgage loans, and in either case shall be authorized to transact business in the state or states in which the related Mortgaged Properties it is to service are situated, if and to the extent required by applicable law to enable the SubServicer to perform its obligations hereunder and under the Sub-Servicing Agreement, and in either case shall be a FHLMC or FNMA approved mortgage servicer. Each Sub-Servicing Agreement must impose on the Sub-Servicer requirements conforming to the provisions set forth in Section 3.08 and provide for servicing of the Mortgage Loans consistent with the terms of this Agreement. With the consent of the Trustee, which consent shall not be unreasonably withheld, the Master Servicer and the Sub-Servicers may enter into Sub-Servicing Agreements and make amendments to the Sub-Servicing Agreements or enter into different forms of Sub-Servicing Agreements; provided, however, that any such amendments or different forms shall be consistent with and not violate the provisions of this Agreement, and that no such amendment or different form shall be made or entered into which could be reasonably expected to be materially adverse to the interests of the Certificateholders, without the consent of the Holders of Certificates entitled to at least 51% of the Voting Rights.
(b) As part of its servicing activities hereunder, the Master Servicer, for the benefit of the Trustee and the Certificateholders, shall enforce the obligations of each SubServicer under the related Sub-Servicing Agreement, including, without limitation, any obligation to make advances in respect of delinquent payments as required by a Sub-Servicing Agreement. Such enforcement, including, without limitation, the legal prosecution of claims, termination of Sub-Servicing Agreements and the pursuit of other appropriate remedies, shall be in such form and carried out to such an extent and at such time as the Master Servicer, in its good faith business judgment, would require were it the owner of the related Mortgage Loans. The Master Servicer shall pay the costs of such enforcement at its own expense, but shall be reimbursed therefor only (i) from a general recovery resulting from such enforcement only to the extent, if any, that such recovery exceeds all amounts due in respect of the related Mortgage Loans or (ii) from a specific recovery of costs, expenses or attorneys' fees against the party against whom such enforcement is directed.
The Master Servicer shall be entitled to terminate any Sub-Servicing Agreement and the rights and obligations of any Sub-Servicer pursuant to any Sub-Servicing Agreement in accordance with the terms and conditions of such Sub-Servicing Agreement. In the event of termination of any Sub-Servicer, all servicing obligations of such Sub-Servicer shall be assumed simultaneously by the Master Servicer without any act or deed on the part of such Sub-Servicer or the Master Servicer, and the Master Servicer either shall service directly the related Mortgage Loans or shall enter into a Sub-Servicing Agreement with a successor Sub-Servicer which qualifies under Section 3.02. Each Sub-Servicing Agreement, if any, shall include the provision that such agreement may be immediately terminated by any successor Master Servicer without cause and without payment of any fee or penalty in the event that the Master Servicer shall, for any reason, no longer be the Master Servicer (including by reason of an Event of Default).
SECTION 3.04. Liability of the Master Servicer.
Notwithstanding any Sub-Servicing Agreement, any of the provisions of this Agreement relating to agreements or arrangements between the Master Servicer and a SubServicer or reference to actions taken through a Sub-Servicer or otherwise, the Master Servicer shall remain obligated and primarily liable to the Trustee and Certificateholders for the servicing and administering of the Mortgage Loans in accordance with the provisions of Section 3.01 without diminution of such obligation or liability by virtue of such Sub-Servicing Agreements or arrangements or by virtue of indemnification from the Sub-Servicer and to the same extent and under the same terms and conditions as if the Master Servicer alone were servicing and administering the Mortgage Loans. For purposes of this Agreement, the Master Servicer shall be deemed to have received payments on Mortgage Loans when the Sub-Servicer has received such payments. The Master Servicer shall be entitled to enter into any agreement with a SubServicer for indemnification of the Master Servicer by such Sub-Servicer and nothing contained in this Agreement shall be deemed to limit or modify such indemnification.
SECTION 3.05. No Contractual Relationship Between Sub-Servicers and Trustee or Certificateholders.
Any Sub-Servicing Agreement that may be entered into and any transactions or services relating to the Mortgage Loans involving a Sub-Servicer in its capacity as such and not as an originator shall be deemed to be between the Sub-Servicer and the Master Servicer alone, and the Trustee and Certificateholders shall not be deemed parties thereto and shall have no claims, rights, obligations, duties or liabilities with respect to the Sub-Servicer except as set forth in Section 3.06.
SECTION 3.06. Assumption or Termination of Sub-Servicing Agreements by Trustee.
In the event the Master Servicer shall for any reason no longer be the master servicer (including by reason of an Event of Default), the Trustee or its designee shall thereupon assume all of the rights and obligations of the Master Servicer under each Sub-Servicing Agreement that the Master Servicer may have entered into, unless the Trustee is then permitted and elects to terminate any Sub-Servicing Agreement in accordance with its terms. Subject to Section 3.03, the Trustee, its designee or the successor servicer for the Trustee shall be deemed to have assumed all of the Master Servicer's interest therein and to have replaced the Master Servicer as a party to each Sub-Servicing Agreement to the same extent as if the Sub-Servicing Agreements had been assigned to the assuming party, except that the Master Servicer shall not thereby be relieved of any liability or obligations under the Sub-Servicing Agreements, and the Master Servicer shall continue to be entitled to any rights or benefits which arose prior to its termination as master servicer.
The Master Servicer at its expense shall, upon request of the Trustee, deliver to the assuming party all documents and records relating to each Sub-Servicing Agreement and the Mortgage Loans then being serviced and an accounting of amounts collected and held by it and otherwise use its best efforts to effect the orderly and efficient transfer of the Sub-Servicing Agreements to the assuming party.
SECTION 3.07. Collection of Certain Mortgage Loan Payments.
The Master Servicer shall make reasonable efforts to collect all payments called for under the terms and provisions of the Mortgage Loans, and shall, to the extent such procedures shall be consistent with this Agreement and the terms and provisions of any related Insurance Policy, follow such collection procedures as it would follow with respect to mortgage loans comparable to the Mortgage Loans and held for its own account. The Master Servicer shall not be required to institute or join in litigation with respect to collection of any payment (whether under a Mortgage, Mortgage Note, Primary Hazard Insurance Policy or otherwise or against any public or governmental authority with respect to a taking or condemnation) if it reasonably believes that it is prohibited by applicable law from enforcing the provision of the Mortgage or other instrument pursuant to which such payment is required. Notwithstanding the foregoing, the Master Servicer may not waive any late payment charge or any prepayment charge or penalty interest in connection with the prepayment of a Mortgage Loan without the express written consent of the Seller, except as otherwise required under applicable law or under the provisions of the Mortgage or Mortgage Note, and except as otherwise provided in any agreement among the Depositor, the Seller and the Master Servicer. The Master Servicer shall be responsible for preparing and distributing all information statements relating to payments on the Mortgage Loans, in accordance with all applicable federal and state tax laws and regulations.
In those cases where a Sub-Servicer is servicing a Mortgage Loan pursuant to a Sub-Servicing Agreement, the Sub-Servicer will be required to establish and maintain one or more accounts (collectively, the "Sub-Servicing Account"). The Sub-Servicing Account shall be an Eligible Account and shall otherwise be acceptable to the Master Servicer. All amounts held in a Sub-Servicing Account shall be held in trust for the Trustee for the benefit of the Certificateholders. The Sub-Servicer will be required to deposit into the Sub-Servicing Account no later than the first Business Day after receipt all proceeds of Mortgage Loans received by the Sub-Servicer, less its servicing compensation and any unreimbursed expenses and advances, to the extent permitted by the Sub-Servicing Agreement. On each Sub-Servicer Remittance Date, the Sub-Servicer will be required to remit to the Master Servicer all funds held in the SubServicing Account with respect to any Mortgage Loan as of the Sub-Subservicer Remittance Date after deducting from such remittance an amount equal to the servicing compensation and unreimbursed expenses and advances to which it is then entitled pursuant to the related Sub-Servicing Agreement, to the extent not previously paid to or retained by it. In addition, on each Sub-Servicer Remittance Date the Sub-Servicer will be required to remit to the Master Servicer any amounts required to be advanced pursuant to the related Sub-Servicing Agreement. The Sub-Servicer will also be required to remit to the Master Servicer, within one Business Day of receipt, the proceeds of any Principal Prepayment made by the Mortgagor and any Insurance Proceeds or Liquidation Proceeds.
SECTION 3.09. Collection of Taxes, Assessments and Similar Items; Servicing Accounts.
The Master Servicer and the Sub-Servicers shall establish and maintain one or more accounts (the "Servicing Accounts"), and shall deposit and retain therein all collections from the Mortgagors (or related advances from Sub-Servicers) for the payment of taxes, assessments, Primary Hazard Insurance Policy premiums, and comparable items for the account of the Mortgagors, to the extent that the Master Servicer customarily escrows for such amounts. Withdrawals of amounts so collected from a Servicing Account may be made only to (i) effect payment of taxes, assessments, Primary Hazard Insurance Policy premiums and comparable items; (ii) reimburse the Master Servicer (or a Sub-Servicer to the extent provided in the related Sub-Servicing Agreement) out of related collections for any payments made pursuant to Sections 3.01 (with respect to taxes and assessments), and 3.13 (with respect to Primary Hazard Insurance Policies); (iii) refund to Mortgagors any sums as may be determined to be overages; or (iv) clear and terminate the Servicing Account at the termination of this Agreement pursuant to Section 9.01. As part of its servicing duties, the Master Servicer or Sub-Servicers shall, if and to the extent required by law, pay to the Mortgagors interest on funds in Servicing Accounts from its or their own funds, without any reimbursement therefor.
(a) The Master Servicer shall establish and maintain one or more accounts (collectively, the "Custodial Account") in which the Master Servicer shall deposit or cause to be deposited on a daily basis, or as and when received from the Sub-Servicers, the following payments and collections received or made by or on behalf of it subsequent to the Cut-off Date, or received by it prior to the Cut-off Date but allocable to a period subsequent thereto (other than in respect of principal and interest on the Mortgage Loans due on or before the Cut-off Date):
(i) all payments on account of principal, including Principal Prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, exclusive of any portion thereof representing interest in excess of the
(iii) all Insurance Proceeds, other than proceeds that represent reimbursement of costs and expenses incurred by the Master Servicer in connection with presenting claims under the related Insurance Policies, Liquidation Proceeds and REO Proceeds;
(iv) all proceeds of any Mortgage Loan or REO Property repurchased or purchased in accordance with Sections 2.02, 2.04, 3.22 or 9.01;
(v) any amounts required to be deposited pursuant to Sections 3.12 or
(vi) all amounts transferred from the Certificate Account to the Custodial Account in accordance with Section 4.01(b).
The foregoing requirements for deposit in the Custodial Account shall be exclusive. In the event the Master Servicer shall deposit in the Custodial Account any amount not required to be deposited therein, it may withdraw such amount from the Custodial Account, any provision herein to the contrary notwithstanding. The Custodial Account shall be maintained as a segregated account, separate and apart from trust funds created for mortgage pass-through certificates of other series, and the other accounts of the Master Servicer.
(b) Funds in the Custodial Account may be invested in Permitted Instruments in accordance with the provisions set forth in Section 3.12. The Master Servicer shall give notice to the Trustee and the Depositor of the location of the Custodial Account after any change thereof.
(c) Payments in the nature of prepayment fees and late payment charges received on the Mortgage Loans shall not be deposited in the Custodial Account, but rather shall be received and held by the Master Servicer solely for the benefit of and at the direction of the Seller. Upon receipt, such amounts shall be deposited by the Master Servicer into a separate account meeting the requirements for an Eligible Account, and such amounts shall be distributed by the Master Servicer to the Seller on a monthly basis. Such amounts shall not be applied or made available by the Master Servicer for any other purpose.
SECTION 3.11. Permitted Withdrawals From the Custodial Account.
The Master Servicer may, from time to time as provided herein, make withdrawals from the Custodial Account of amounts on deposit therein pursuant to Section 3.10 that are attributable to the Mortgage Loans for the following purposes:
(i) to make deposits into the Certificate Account in the amounts and in the manner provided for in Section 4.01;
(ii) to pay to itself, the Depositor, the Seller or any other appropriate person, as the case may be, with respect to each Mortgage Loan that has previously been purchased or repurchased pursuant to Sections 2.02, 2.04 or 9.01 all amounts received thereon and not yet distributed as of the date of purchase or repurchase;
(iii) to reimburse itself or any Sub-Servicer for Advances not previously reimbursed, the Master Servicer's or any Sub-Servicer's right to reimbursement pursuant to this clause (iii) being limited to amounts received which represent Late Collections (net of the Servicing Fees) of Monthly Payments on Mortgage Loans or REO Property with respect to which such Advances were made and as further provided in Section 3.15;
(iv) to reimburse itself, the Trustee or the Depositor for expenses incurred by or reimbursable to the Master Servicer, the Trustee or the Depositor pursuant to Sections 3.22, 6.03 or 10.01(c), except as otherwise
(v) to reimburse itself or any Sub-Servicer for costs and expenses incurred by or reimbursable to it relating to the prosecution of any claims pursuant to Section 3.13 that are in excess of the amounts so recovered;
(vi) to reimburse itself or any Sub-Servicer for unpaid Servicing Fees and unreimbursed Servicing Advances, the Master Servicer's or any Sub-Servicer's right to reimbursement pursuant to this clause (vi) with respect to any Mortgage Loan being limited to late recoveries of the payments for which such advances were made pursuant to Section 3.01 or Section 3.09 and any other related Late Collections;
(vii) to pay itself as servicing compensation (in addition to the Servicing Fee), on or after each Distribution Date, any interest or investment income earned on funds deposited in the Custodial Account for the period ending on such Distribution Date, subject to Section 8.05;
(viii) to reimburse itself or any Sub-Servicer for any Advance previously made which the Master Servicer has determined to be a Nonrecoverable Advance, provided that either (a) such Advance was made with respect to a delinquency that ultimately constituted an Excess Special Hazard Loss, Excess Fraud Loss, Excess Bankruptcy Loss or Extraordinary Loss or (b) the Certificate Principal Balances of the Class A-2, Class B or Class R Certificates have been reduced to zero; and
(ix) to clear and terminate the Custodial Account at the termination of this Agreement pursuant to Section 9.01.
The Master Servicer shall keep and maintain separate accounting records on a Mortgage Loan by Mortgage Loan basis, for the purpose of justifying any withdrawal from the Custodial Account pursuant to such clauses (ii), (iii), (iv), (vi), (vii) and (viii).
In connection with clause (viii) above, the Trustee shall notify the Master Servicer if and when the Certificate Principal Balances of the Class A-2 Certificates, the Class B Certificates or the Class R Certificates have been reduced to zero.
Any institution maintaining the Custodial Account shall at the direction of the Master Servicer invest the funds in such account in Permitted Instruments, each of which shall mature not later than the Business Day immediately preceding the Certificate Account Deposit Date next following the date of such investment (except that if such Permitted Instrument is an obligation of the institution that maintains such account, then such Permitted Instrument shall mature not later than such Certificate Account Deposit Date) and shall not be sold or disposed of prior to its maturity. All income and gain realized from any such investment as well as any interest earned on deposits in the Custodial Account shall be for the benefit of the Master Servicer. The Master Servicer shall deposit in the Custodial Account (with respect to investments made hereunder of funds held therein) an amount equal to the amount of any loss incurred in respect of any such investment immediately upon realization of such loss without right of reimbursement.
SECTION 3.13. Maintenance of Primary Hazard Insurance.
(a) The Master Servicer shall cause to be maintained for each Mortgage Loan primary hazard insurance with extended coverage on the related Mortgaged Property in an amount equal to the replacement value of the improvements, as determined by the insurance company, on such Mortgaged Property. The Master Servicer shall also cause to be maintained on property acquired upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, fire insurance with extended coverage in an amount equal to the replacement value of the improvements thereon. Pursuant to Section 3.10, any amounts collected by the Master Servicer under any such policies (other than amounts to be applied to the restoration or repair of the related Mortgaged Property or property thus acquired or amounts released to the Mortgagor in accordance with the Master Servicer's normal servicing procedures) shall be deposited in the Custodial Account, subject to withdrawal pursuant to Section 3.11. Any cost incurred by the Master Servicer in maintaining any such insurance shall not, for the purpose of calculating monthly distributions to Certificateholders, be added to the amount owing under the Mortgage Loan, notwithstanding that the terms of the Mortgage Loan so permit. It is understood and agreed that no earthquake or other additional insurance is to be required of any Mortgagor or maintained on property acquired in respect of a Mortgage Loan other than pursuant to such applicable laws and regulations as shall at any time be in force and as shall require such additional insurance. Whenever the improvements securing a Mortgage Loan are located at any time during the life of such Mortgage Loan in a federally designated special flood hazard area, the Master Servicer shall cause flood insurance (to the extent available) to be maintained in respect thereof. Such flood insurance shall be in an amount equal to the lesser of (i) the replacement value of the improvements, which are part of such Mortgaged Property on a replacement cost basis and (ii) the maximum amount of such insurance available for the related Mortgaged Property under the national flood insurance program (assuming that the area in which such Mortgaged Property is located is participating in such program).
In the event that the Master Servicer shall obtain and maintain a blanket fire insurance policy with extended coverage insuring against hazard losses on all of the Mortgage Loans, it shall conclusively be deemed to have satisfied its obligations as set forth in the first two sentences of this Section 3.13, it being understood and agreed that such policy may contain a deductible clause, in which case the Master Servicer shall, in the event that there shall not have been maintained on the related Mortgaged Property a policy complying with the first two sentences of this Section 3.13 and there shall have been a loss which would have been covered by such policy, deposit in the Certificate Account the amount not otherwise payable under the blanket policy because of such deductible clause. Any such deposit by the Master Servicer shall be made on the Certificate Account Deposit Date next preceding the Distribution Date which occurs in the month following the month in which payments under any such policy would have been deposited in the Custodial Account. In connection with its activities as administrator and servicer of the Mortgage Loans, the Master Servicer agrees to present, on behalf of itself, the Trustee and Certificateholders, claims under any such blanket policy.
SECTION 3.14. Enforcement of Due-on-Sale Clauses; Assumption Agree- ments.
The Master Servicer will, to the extent it has knowledge of any conveyance or prospective conveyance by any Mortgagor of the Mortgaged Property (whether by absolute conveyance or by contract of sale, and whether or not the Mortgagor remains or is to remain liable under the Mortgage Note or the Mortgage), exercise or cause to be exercised its rights to accelerate the maturity of such Mortgage Loan under any "due-on-sale" clause applicable thereto; provided, however, that the Master Servicer shall not exercise any such rights if it reasonably believes that it is prohibited by law from doing so. If the Master Servicer is unable to enforce such "due-on-sale" clause (as provided in the previous sentence) or if no "due-on-sale" clause is applicable, the Master Servicer or the Sub-Servicer will enter into an assumption and modification agreement with the Person to whom such property has been conveyed or is proposed to be conveyed, pursuant to which such Person becomes liable under the Mortgage Note and, to the extent permitted by applicable state law, the Mortgagor remains liable thereon. The Master Servicer is also authorized to enter into a substitution of liability agreement with such Person, pursuant to which the original Mortgagor is released from liability and such Person is substituted as the Mortgagor and becomes liable under the Mortgage Note. Any fee collected by or on behalf of the Master Servicer for entering into an assumption or substitution of liability agreement will be retained by or on behalf of the Master Servicer as additional servicing compensation. In connection with any such assumption, no material term of the Mortgage Note (including but not limited to the Mortgage Rate, the amount of the Monthly Payment, the Maximum Rate, the Minimum Rate, the Gross Margin, the Periodic Rate Cap and any other term affecting the amount or timing of payment on the Mortgage Loan) may be changed. The Master Servicer shall not enter into any substitution or assumption if such substitution or assumption shall (i) both constitute a "significant modification" effecting an exchange or reissuance of such Mortgage Loan under the Code (or final, temporary or proposed Treasury Regulations promulgated thereunder) and cause the Trust Fund to fail to qualify as a REMIC under the REMIC Provisions or (ii) cause the imposition of any tax on "prohibited transactions" or "contributions" after the Startup Day under the REMIC provisions. The Master Servicer shall notify the Trustee that any such substitution or assumption agreement has been completed by forwarding to the Trustee the original copy of such substitution or assumption agreement, which copy shall be added to the related Mortgage File and shall, for all purposes, be considered a part of such Mortgage File to the same extent as all other documents and instruments constituting a part thereof.
Notwithstanding the foregoing paragraph or any other provision of this Agreement, the Master Servicer shall not be deemed to be in default, breach or any other violation of its obligations hereunder by reason of any assumption of a Mortgage Loan by operation of law or any assumption that the Master Servicer may be restricted by law from preventing, for any reason whatsoever. For purposes of this Section 3.14, the term "assumption" is deemed to also include a sale of a Mortgaged Property that is not accompanied by an assumption or substitution of liability agreement.
SECTION 3.15. Realization Upon Defaulted Mortgage Loans.
The Master Servicer shall exercise reasonable efforts, consistent with the procedures that the Master Servicer would use in servicing loans for its own account, to foreclose upon or otherwise comparably convert (which may include an REO Acquisition) the ownership of properties securing such of the Mortgage Loans as come into and continue in default and as to which no satisfactory arrangements can be made for collection of delinquent payments pursuant to Section 3.07, and which are not released from the Trust Fund pursuant to any other provision hereof. The Master Servicer shall use reasonable efforts to realize upon such defaulted Mortgage Loans in such manner as will maximize the receipt of principal and interest by Certificateholders, taking into account, among other things, the timing of foreclosure proceedings. The foregoing is subject to the provisions that, in any case in which Mortgaged Property shall have suffered damage from an Uninsured Cause, the Master Servicer shall not be required to expend its own funds toward the restoration of such property unless it shall determine in its sole discretion (i) that such restoration will increase the net proceeds of liquidation of the related Mortgage Loan to Certificateholders after reimbursement to itself for such expenses, and (ii) that such expenses will be recoverable by the Master Servicer through Insurance Proceeds or Liquidation Proceeds from the related Mortgaged Property, as contemplated in Section 3.11. The Master Servicer shall be responsible for all other costs and expenses incurred by it in any such proceedings; provided, however, that it shall be entitled to reimbursement thereof from the related property, as contemplated in Section 3.11.
The proceeds of any Cash Liquidation or REO Disposition, as well as any recovery resulting from a partial collection of Insurance Proceeds or Liquidation Proceeds or any income from an REO Property, will be applied in the following order of priority: first, to reimburse the Master Servicer or any Sub-Servicer for any related unreimbursed Servicing Advances, pursuant to Section 3.11(vi) or 3.22; second, to accrued and unpaid interest on the Mortgage Loan or REO Imputed Interest, at the Mortgage Rate, to the last day of the month in which the Cash Liquidation or REO Disposition occurred, or to the Due Date prior to the Distribution Date on which such amounts are to be distributed if not in connection with a Cash Liquidation or REO Disposition; and third, as a recovery of principal of the Mortgage Loan. If the amount of the recovery so allocated to interest is less than a full recovery thereof, that amount will be allocated as follows: first, to unpaid Servicing Fees; and second, to interest at the Net Mortgage Rate. The portion of the recovery so allocated to unpaid Servicing Fees shall be reimbursed to the Master Servicer or any Sub-Servicer pursuant to Section 3.11(vi). The portions of the recovery so allocated to interest at the Net Mortgage Rate and to principal of the Mortgage Loan shall be applied as follows: first, to reimburse the Master Servicer or any SubServicer for any related unreimbursed Advances in accordance with Section 3.11(iii) or 3.22, and second, for distribution in accordance with the provisions of Section 4.01(b), subject to Section 3.22 with respect to certain recoveries from an REO Disposition constituting Excess Proceeds.
Notwithstanding any other provision of this Agreement, no REO Property shall be acquired by the Trust Fund in such circumstances or manner or pursuant to any terms that would (i) cause such REO Property to fail to qualify as "foreclosure property" within the meaning of Section 860G(a)(8) of the Code (unless all such REO Property not treated as "foreclosure property" held by the REMIC at any given time constitutes not more than a DE MINIMIS amount of the assets of the REMIC within the meaning of Treasury regulation Section 1.860D-1(b)(3)(i) and (ii)), or (ii) subject the Trust Fund to the imposition of any federal income taxes under the Code, unless the Master Servicer has agreed to indemnify and hold harmless the Trust Fund with respect to the imposition of any such taxes.
SECTION 3.16. Trustee to Cooperate; Release of Mortgage Files.
Upon the payment in full of any Mortgage Loan, or the receipt by the Master Servicer of a notification that payment in full shall be escrowed in a manner customary for such purposes, the Master Servicer will immediately notify the Trustee by a certification (which certification shall include a statement to the effect that all amounts received or to be received in connection with such payment which are required to be deposited in the Custodial Account pursuant to Section 3.10 have been or will be so deposited) of a Servicing Officer and shall request delivery to it of the Mortgage File in the form of the Request for Release attached hereto as Exhibit F-2. Upon receipt of such certification and request, the Trustee shall promptly release the related Mortgage File to the Master Servicer. Subject to the receipt by the Master Servicer of the proceeds of such payment in full and the payment of all related fees and expenses, the Master Servicer shall arrange for the release to the Mortgagor of the original cancelled Mortgage Note. All other documents in the Mortgage File shall be retained by the Master Servicer to the extent required by applicable law. No expenses incurred in connection with any instrument of satisfaction or deed of reconveyance shall be chargeable to the Custodial Account, the Excess Proceeds Account or the Certificate Account.
From time to time and as appropriate for the servicing or foreclosure of any Mortgage Loan, including, for this purpose, collection under any insurance policy relating to the Mortgage Loan, the Trustee shall, upon request of the Master Servicer and delivery to the Trustee of a Request for Release in the form attached hereto as Exhibit F-1, release the related Mortgage File to the Master Servicer, and the Trustee shall execute such documents as the Master Servicer shall prepare and request as being necessary to the prosecution of any such proceedings. Such Request for Release shall obligate the Master Servicer to return each document previously requested from the Mortgage File to the Trustee when the need therefor by the Master Servicer no longer exists, unless the Mortgage Loan has been liquidated and the Liquidation Proceeds relating to the Mortgage Loan have been deposited in the Custodial Account or the Mortgage File or such document has been delivered to an attorney, or to a public trustee or other public official as required by law, for purposes of initiating or pursuing legal action or other proceedings for the foreclosure of the Mortgaged Property either judicially or non-judicially, and the Master Servicer has delivered to the Trustee a certificate of a Servicing Officer certifying as to the name and address of the Person to which such Mortgage File or such document was delivered and the purpose or purposes of such delivery. Upon receipt of a certification of a Servicing Officer in the form of the Request for Release attached hereto as Exhibit F-1, stating that such Mortgage Loan was liquidated and that all amounts received or to be received in connection with such liquidation which are required to be deposited into the Custodial Account have been or will be so deposited, or that such Mortgage Loan has become an REO Property, a copy of such Request for Release shall be released by the Trustee to the Master Servicer.
Upon written request of a Servicing Officer, the Trustee shall execute and deliver to the Master Servicer any court pleadings, requests for trustee's sale or other documents prepared by the Master Servicer that are necessary to the foreclosure or trustee's sale in respect of a Mortgaged Property or to any legal action brought to obtain judgment against any Mortgagor on the Mortgage Note or Mortgage or to obtain a deficiency judgment, or to enforce any other remedies or rights provided by the Mortgage Note or Mortgage or otherwise available at law or in equity. Each such request that such pleadings or documents be executed by the Trustee shall include a certification as to the reason such documents or pleadings are required and that the execution and delivery thereof by the Trustee will not invalidate or otherwise affect the lien of the Mortgage, except for the termination of such a lien upon completion of the foreclosure or trustee's sale.
As compensation for its activities hereunder, the Master Servicer shall be entitled to retain, from deposits to the Custodial Account of amounts representing payments or recoveries of interest, the Servicing Fees with respect to each Mortgage Loan (less any portion of such amounts retained by any Sub-Servicer). In addition, the Master Servicer shall be entitled to recover unpaid Servicing Fees out of related Late Collections to the extent permitted in Section 3.11.
The Master Servicer also shall be entitled pursuant to Section 3.11 to receive from the Custodial Account as additional servicing compensation interest or other income earned on deposits therein, subject to Section 3.23, as well as any assumption fees and reconveyance fees. The Master Servicer shall be required to pay all expenses incurred by it in connection with its servicing activities hereunder (including payment of the premiums for any blanket policy insuring against hazard losses pursuant to Section 3.13, servicing compensation of the SubServicers to the extent not retained by it and the fees and expenses of the Trustee), and shall not be entitled to reimbursement therefor except as specifically provided in Section 3.11. The Servicing Fee may not be transferred in whole or in part except in connection with the transfer of all of the Master Servicer's responsibilities and obligations under this Agreement.
SECTION 3.18. Maintenance of Certain Servicing Policies.
During the term of its service as Master Servicer, the Master Servicer shall maintain in force (i) a policy or policies of insurance covering errors and omissions in the performance of its obligations as servicer hereunder and (ii) a fidelity bond in respect of its officers, employees or agents. Each such policy or policies and bond shall, together, comply with the requirements from time to time of FNMA or FHLMC for persons performing servicing for mortgage loans purchased by such corporation. The Master Servicer shall prepare and present, on behalf of itself, the Trustee and Certificateholders, claims under any such errors and omissions policy or policies or fidelity bond in a timely fashion in accordance with the terms of such policy or bond, and upon the filing of any claim on any policy or bond described in this Section, the Master Servicer shall promptly notify the Trustee of any such claims and the Trustee shall notify the Rating Agency of such claim.
SECTION 3.19. Annual Statement as to Compliance.
The Master Servicer will deliver to the Trustee and the Depositor on or before April 30 of each year, beginning with April 30, 1996, an Officers' Certificate stating, as to each signatory thereof, that (i) a review of the activities of the Master Servicer during the preceding fiscal year and of its performance under this Agreement has been made under such officers' supervision, and (ii) to the best of such officers' knowledge, based on such review, the Master Servicer has fulfilled all of its obligations under this Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officers and the nature and status thereof.
SECTION 3.20. Annual Independent Public Accountants' Servicing Statement.
On or before April 30th of each year, beginning with April 30, 1996, the Master Servicer at its expense shall furnish to the Depositor, the Trustee and the Seller (i) an opinion by a firm of independent certified public accountants on the financial position of the Master Servicer at the end of its fiscal year and the results of operations and changes in financial position of the Master Servicer for such year then ended on the basis of an examination conducted in accordance with generally accepted auditing standards, and (ii) if the Master Servicer is then servicing any Mortgage Loans, a statement from such independent certified public accountants to the effect that based on an examination of certain specified documents and records relating to the servicing of the Master Servicer's mortgage loan portfolio conducted substantially in compliance with the audit program for mortgages serviced for FNMA and FHLMC, the United States Department of Housing and Urban Development Mortgage Audit Standards, or the Uniform Single Attestation Program for Mortgage Bankers (the "Applicable Accounting Standards"), such firm is of the opinion that such servicing has been conducted in compliance with the Applicable Accounting Standards except for (a) such exceptions as such firm shall believe to be immaterial and (b) such other exceptions as shall be set forth in such statement. In rendering such statement, such firm may rely, as to matters relating to direct servicing of mortgage loans by Sub-Servicers, upon comparable statements for examinations conducted substantially in compliance with the Uniform Single Attestation Program for Mortgage Bankers or the audit program for mortgages serviced for FHLMC (rendered within one year of such statement) of independent public accountants with respect to the related Sub-Servicer. Copies of such statement shall be provided by the Trustee to any Certificateholder upon request at the Master Servicer's expense, provided such statement is delivered by the Master Servicer to the Trustee.
SECTION 3.21. Access to Certain Documentation.
(a) The Master Servicer shall provide to the OTS, the FDIC and other federal banking regulatory agencies, and their respective examiners, access to the documentation regarding the Mortgage Loans required by applicable regulations of the OTS, the FDIC and such other agencies. Such access shall be afforded without charge, but only upon reasonable and prior written request and during normal business hours at the offices of the Master Servicer designated by it. Nothing in this Section shall derogate from the obligation of the Master Servicer to observe any applicable law prohibiting disclosure of information regarding the Mortgagors and the failure of the Master Servicer to provide access as provided in this Section as a result of such obligation shall not constitute a breach of this section.
(b) The Master Servicer shall afford the Depositor and the Trustee, upon reasonable notice, during normal business hours access to all records maintained by the Master Servicer in respect of its rights and obligations hereunder and access to officers of the Master Servicer responsible for such obligations. Upon request, the Master Servicer shall furnish the Depositor and the Trustee with its most recent financial statements and such other information as the Master Servicer possesses regarding its business, affairs, property and condition, financial or otherwise to the extent related to the servicing of the Mortgage Loans. The Depositor may, but is not obligated to, enforce the obligations of the Master Servicer hereunder and may, but is not obligated to, perform, or cause a designee to perform, any defaulted obligation of the Master Servicer hereunder or exercise the rights of the Master Servicer hereunder; provided that the Master Servicer shall not be relieved of any of its obligations hereunder by virtue of such performance by the Depositor or its designee. The Depositor shall not have any responsibility or liability for any action or failure to act by the Master Servicer and is not obligated to supervise the performance of the Master Servicer under this Agreement or otherwise.
SECTION 3.22. Title, Conservation and Disposition of REO Property.
This Section shall apply only to REO Properties acquired for the account of the Trust Fund, and shall not apply to any REO Property relating to a purchased or repurchased from the Trust Fund pursuant to any provision hereof. In the event that title to any such REO Property is acquired, the deed or certificate of sale shall be issued to the Trustee, or to its nominee, on behalf of the Certificateholders. The Master Servicer, on behalf of the Trust Fund, shall either sell any REO Property within two years after the Trust Fund acquires ownership of such REO Property for purposes of Section 860G(a)(8) of the Code or, at the expense of the Trust Fund, request, more than 60 days before the day on which the two-year grace period would otherwise expire, an extension of the two-year grace period, unless the Master Servicer has delivered to the Trustee an Opinion of Counsel (which Opinion of Counsel shall not be an expense of the Trustee or the Trust Fund), addressed to the Trustee and the Master Servicer, to the effect that the holding by the Trust Fund of such REO Property subsequent to two years after its acquisition will not result in the imposition on the Trust Fund of taxes on "prohibited transactions" thereof, as defined in Section 860F of the Code, or cause the Trust Fund to fail to qualify as a REMIC under the REMIC provisions or comparable provisions of the laws of the State of California at any time that any Certificates are outstanding. The Master Servicer shall manage, conserve, protect and operate each REO Property for the Certificateholders solely for the purpose of its prompt disposition and sale in a manner which does not cause such REO Property to fail to qualify as "foreclosure property" within the meaning of Section 860G(a)(8) or result in the receipt by the Trust Fund of any "income from non-permitted assets" within the meaning of Section 860F(a)(2)(B) of the Code or any "net income from foreclosure property" which is subject to taxation under the REMIC Provisions. Pursuant to its efforts to sell such REO Property, the Master Servicer shall either itself or through an agent selected by the Master Servicer protect and conserve such REO Property in the same manner and to such extent as is customary in the locality where such REO Property is located and may, incident to its conservation and protection of the interests of the Certificateholders, rent the same, or any part thereof, as the Master Servicer deems to be in the best interest of the Certificateholders for the period prior to the sale of such REO Property.
Any REO Disposition shall be for cash only (unless changes in the REMIC Provisions made subsequent to the Startup Day allow a sale for other consideration).
The Master Servicer shall segregate and hold all funds collected and received in connection with the operation of any REO Property separate and apart from its own funds and general assets. The Master Servicer shall deposit, or cause to be deposited, on a daily basis in the Custodial Account all revenues received with respect to the REO Properties, net of any directly related expenses incurred and funds withheld therefrom that are necessary for the proper operation, management and maintenance of the REO Property.
If as of the date of acquisition of title to any REO Property there remain outstanding unreimbursed Servicing Advances with respect to such REO Property or any outstanding Advances allocated thereto the Master Servicer, upon an REO Disposition, shall be entitled to reimbursement for any related unreimbursed Servicing Advances and any unreimbursed related Advances as well as any unpaid Servicing Fees from proceeds received in connection with the REO Disposition, as further provided in Section 3.15.
The REO Disposition shall be carried out by the Master Servicer at such price and upon such terms and conditions as the Master Servicer shall determine.
The Master Servicer shall deposit the proceeds from the REO Disposition, net of any payment to the Master Servicer as provided above, in the Custodial Account upon receipt thereof for distribution in accordance with Section 4.01; provided that any such net proceeds which are in excess of the applicable Stated Principal Balance plus all unpaid REO Imputed Interest thereon through the last day of the month in which the REO Disposition occurred ("Excess Proceeds") shall be deposited into the Excess Proceeds Account in accordance with the provisions of Section 3.25(a).
Notwithstanding the foregoing provisions of this Section 3.22, with respect to any Mortgage Loan as to which the Master Servicer has received notice of, or has actual knowledge of, the presence of any toxic or hazardous substance on the Mortgaged Property, the Master Servicer shall promptly request the Depositor to provide directions and instructions with respect to such Mortgage Loan and shall act in accordance with any such directions and instructions provided by the Depositor. Notwithstanding the preceding sentence of this Section 3.22, with respect to any Mortgage Loan described by such sentence, the Master Servicer shall not, on behalf of the Trustee, either (i) obtain title to the related Mortgaged Property as a result of or in lieu of foreclosure or otherwise, or (ii) otherwise acquire possession of, the related Mortgaged Property, unless (i) the Depositor and the Trustee jointly direct the Master Servicer to take such action and (ii) either (A) the Master Servicer has, at least 30 days prior to taking such action, obtained and delivered to the Depositor an environmental audit report prepared by a Person who regularly conducts environmental audits using customary industry standards or (B) the Depositor has directed the Master Servicer not to obtain an environmental audit report. If the Depositor has not provided directions and instructions to the Master Servicer in connection with any such Mortgage Loan within 30 days of a request by the Master Servicer for such directions and instructions, then the Master Servicer shall take such action as it deems to be in the best economic interest of the Trust Fund (other than proceeding against the Mortgaged Property) and is hereby authorized at such time as it deems appropriate to release such Mortgaged Property from the lien of the related Mortgage.
The cost of the environmental audit report contemplated by this Section 3.22 shall be advanced by the Master Servicer as an expense of the Trust Fund, and the Master Servicer shall be reimbursed therefor from the Custodial Account as provided in Section 3.11, any such right of reimbursement being prior to the rights of the Certificateholders to receive any amount in the Custodial Account.
If the Master Servicer determines, as described above, that it is in the best economic interest of the Trust Fund to take such actions as are necessary to bring any such Mortgaged Property in compliance with applicable environmental laws, or to take such action with respect to the containment, clean-up or remediation of hazardous substances, hazardous materials, hazardous wastes, or petroleum-based materials affecting any such Mortgaged Property, then the Master Servicer shall take such action as it deems to be in the best economic interest of the Trust Fund. The cost of any such compliance, containment, clean-up or remediation shall be advanced by the Master Servicer as an expense of the Trust Fund, and the Master Servicer shall be entitled to be reimbursed therefor from the Custodial Account as provided in Section 3.11, any such right of reimbursement being prior to the rights of the Certificateholders to receive any amount in the Custodial Account.
The Master Servicer shall have the option to purchase from the Trust Fund any Mortgage Loan that is 90 days or more delinquent (90 days or more delinquent shall mean delinquent as to 4 or more Monthly Payments) and that the Master Servicer determines in good faith will otherwise become subject to foreclosure proceedings (such determination to be evidenced by an Officer's Certificate of the Master Servicer delivered to the Trustee prior to purchase) for an amount equal to the Purchase Price. The Purchase Price for any Mortgage Loan purchased pursuant to this Section 3.22 shall be deposited in the Custodial Account, and upon receipt of written certification from the Master Servicer of such deposit, the Trustee shall release or cause to be released to the Master Servicer the related Mortgage File and shall execute and deliver such instruments of transfer or assignment, in each case without recourse, as the Master Servicer shall furnish and as shall be necessary to vest in the Master Servicer title to any Mortgage Loan released pursuant to this Section 3.22.
SECTION 3.23. Additional Obligations of the Master Servicer.
On each Certificate Account Deposit Date, the Master Servicer shall deliver to the Trustee for deposit in the Certificate Account from its own funds and without any right of reimbursement therefor, a total amount equal to the aggregate of the Prepayment Interest Shortfalls for such Distribution Date; provided that the Master Servicer's obligations under this subsection on any Distribution Date shall not be more than the total amount of its servicing compensation payable in such month.
SECTION 3.24. Additional Obligations of the Depositor.
The Depositor agrees that on or prior to the tenth day after the Closing Date, the Depositor shall provide the Trustee with a written notification, substantially in the form of Exhibit K attached hereto, relating to each Class of Certificates, setting forth (i) in the case of each Class of such Certificates, (a) if less than 10% of the aggregate Certificate Principal Balance of such Class of Certificates has been sold as of such date, the value calculated pursuant to clause (b)(iii) of Exhibit K hereto, or, (b) if 10% or more of such Class of Certificates has been sold as of such date but no single price is paid for at least 10% of the aggregate Certificate Principal Balance of such Class of Certificates, then the weighted average price at which the Certificates of such Class were sold and the aggregate percentage of Certificates of such Class sold, (c) the first single price at which at least 10% of the aggregate Certificate Principal Balance of such class of Certificates was sold, or (d) if any Certificates of each Class of Certificates are retained by the Depositor or an affiliate corporation, or are delivered to the Seller, the fair market value of such Certificates as of the Closing Date, (ii) the prepayment assumption used in pricing the Certificates, and (iii) such other information as to matters of fact as the Trustee may reasonably request to enable it to comply with its reporting requirements with respect to each Class of such Certificates to the extent such information can in the good faith judgment of the Depositor be determined by it.
SECTION 3.25 Excess Proceeds Account.
(a) The Trustee shall establish and maintain one or more accounts (collectively, the "Excess Proceeds Account") in which the Master Servicer the Trust Fund, deposit or cause to be deposited on a daily basis, or as and when received from the Sub-Servicers, the Excess Proceeds, if any, with respect to each Mortgage Loan as to which an REO Disposition occurs. The Excess Proceeds Account shall be maintained as a segregated account, separate and apart from trust funds created for mortgage pass-through certificates of other series, from funds of investors, from funds or other assets of the Trustee, and from the other accounts of the Trustee.
(b) On or before 2:00 P.M. Los Angeles time on each Certificate Account Deposit Date, the Trustee shall withdraw or cause to be withdrawn from the Excess Proceeds Account, to the extent of the amount on deposit therein at such time, and deposit or cause to be deposited in the Certificate Account, by wire transfer of immediately available funds, an amount equal to the lesser of (i) the amount, if any, on deposit in the Excess Proceeds Account as of the close of business on the related Determination Date and (ii)(A) the sum of the aggregate amount of all Realized Losses allocated among the Certificates on any previous Distribution Date pursuant to Section 4.04 and the aggregate amount of all Realized Losses to be allocated among the Certificates on the related Distribution Date pursuant to Section 4.04 minus (B) the aggregate amount of all distributions allocated among the Certificateholders on any previous Distribution Date in accordance with Section 4.01(b)(xx), (xxi), or (xxii) or in accordance with Section 4.01(f).
(c) If the amount on deposit in the Excess Proceeds Account as of the close of business on any Determination Date would exceed the product of 1.00% and the aggregate Certificate Principal Balance of all of the Certificates outstanding immediately after the close of business on the related Distribution Date, the Trustee shall, on or before 2:00 P.M. Los Angeles time on the related Certificate Account Deposit Date, withdraw or cause to be withdrawn from the Excess Proceeds Account, to the extent of the amount on deposit therein at such time, and deposit or cause to be deposited in the Certificate Account, by wire transfer of immediately available funds, the excess of such amount over such product.
(d) The Excess Proceeds Account shall be an Eligible Account in accordance with the definition of "Excess Proceeds Account" in Section 1.01. The Trustee shall, upon written request from the Master Servicer, invest or cause the institution maintaining the Excess Proceeds Account to invest the funds in the Excess Proceeds Account in one or more Permitted Instruments designated in the name of the Trustee for the benefit of the Certificateholders, each of which Permitted Instruments shall be held to maturity, unless payable on demand, and shall mature, unless payable on demand, not later than the Business Day immediately preceding the Certificate Account Deposit Date next following the date of such investment (except that if such Permitted Instrument is an obligation of the institution with which the Excess Proceeds Account is maintained, then such Permitted Instrument shall mature not later than such Certificate Account Deposit Date). All income and gain realized from any such investment as well as any interest earned on deposits in the Excess Proceeds Account shall be for the benefit of the Certificateholders and shall be held in the Excess Proceeds Account (or in Permitted Instruments in which the funds in the Excess Proceeds Account are invested) until transferred from the Excess Proceeds Account to the Certificate Account in accordance with Section 3.25(b) or (c). The amount of any loss incurred in respect of any such investment shall be borne by the Certificateholders without any right of reimbursement.
(e) As part of each Determination Date Report delivered to the Trustee in accordance with Section 4.03(a), the Master Servicer shall provide information with respect to the amount, if any, of Excess Proceeds deposited in the Excess Proceeds Account in respect of each Mortgage Loan as to which an REO Disposition occurred during the related Prepayment Period.
(f) The Trustee shall promptly provide notice to the Depositor and the Master Servicer of the initial location of the Excess Proceeds Account and shall promptly provide notice to the Depositor and the Master Servicer of the location of the Excess Proceeds Account after any change in location of the Excess Proceeds Account.
SECTION 4.01. Certificate Account; Distributions.
(a) The Trustee shall establish and maintain a Certificate Account, in which the Master Servicer shall cause to be deposited on behalf of the Trustee on or before 2:00 P.M. Los Angeles time on each Certificate Account Deposit Date by wire transfer of immediately available funds an amount equal to the sum of (i) any Advance for the immediately succeeding Distribution Date, (ii) any amount required to be deposited in the Certificate Account pursuant to Sections 3.13, 3.22 or 3.23 and (iii) all other amounts constituting the Available Distribution Amount for the immediately succeeding Distribution Date.
(b) On each Distribution Date the Trustee shall distribute to the Master Servicer, in the case of a distribution pursuant to Sections 4.01(b)(iii), (vi), (ix), (xvi) and (xx), and to each Certificateholder of record on the next preceding Record Date (other than as provided in Section 9.01 respecting the final distribution) either in immediately available funds (by wire transfer or otherwise) to the account of such Certificateholder at a bank or other entity having appropriate facilities therefor, if such Certificateholder has so notified the Trustee at least 5 Business Days prior to the related Record Date and such Certificateholder is the registered owner of Certificates the aggregate Initial Certificate Principal Balance of which is not less than $2,500,000 (or, with respect to the Class SA Certificates and the Class SB Certificates, is the registered owner of an aggregate initial Notional Amount of not less than $10,000,000 of the Class SA Certificates or the Class SB Certificates), or otherwise by check mailed to such Certificateholder at the address of such Holder appearing in the Certificate Register, such Certificateholder's share (based on the aggregate of the Percentage Interests represented by Certificates of the applicable Class held by such Holder) of the following amounts, in the following order of priority, in each case to the extent of the Available Distribution Amount:
(i) to the Class SA Certificateholders and the Class A-1 Certificateholders, on a pro rata basis, based on Accrued Certificate Interest payable thereon, Accrued Certificate Interest on such Class of Certificates for such Distribution Date, plus any Accrued Certificate Interest thereon remaining unpaid from any previous Distribution Date;
(ii) to the Class A-1 Certificateholders, the sum of the following amounts applied to reduce the Certificate Principal Balance thereof:
(A) the Class A-1 Percentage for such Distribution Date times the Scheduled Principal and Net Recoveries for such Distribution Date;
(B) an amount equal to (1) the Class A-1 Percentage for such Distribution Date divided by the Senior Percentage for such Distribution Date times (2) the Senior Prepayment Percentage for such Distribution Date times the aggregate of all Principal Prepayments received in the related
(C) with respect to each Mortgage Loan for which a Cash Liquidation or an REO Disposition occurred during the related Prepayment Period and did not result in any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, an amount equal to the lesser of (i) the then applicable Class A-1 Percentage of the Stated Principal Balance of such Mortgage Loan and (ii)(a) the Class A-1 Percentage for such Distribution Date divided by the Senior Percentage for such Distribution Date times (b) the Senior Prepayment Percentage for such Distribution Date times the related collections (including without limitation Insurance Proceeds, Liquidation Proceeds and REO Proceeds) to the extent applied by the Master Servicer as recoveries of principal of the related Mortgage Loan pursuant to Section 3.15; and
(D) any amounts described in this Section 4.01 (b)(ii), as determined for any previous Distribution Date, which remain unpaid after application of amounts previously distributed pursuant to this clause (D) to the extent that any such amounts are not attributable to Realized Losses that were allocated to the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates or the Class R Certificates;
(iii) if the Certificate Principal Balances of the Class B Certificates and the Class R Certificates have been reduced to zero and prior to the related Accretion Termination Date for the Class SB Certificates, to the Master Servicer or a Sub-Servicer, by remitting for deposit to the Custodial Account, to the extent of and in reimbursement for any Advances previously made with respect to any Mortgage Loan or REO Property which remain unreimbursed in whole or in part following the Cash Liquidation or REO Disposition of such Mortgage Loan or REO Property, minus any such Advances that were made with respect to delinquencies that ultimately constituted Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses;
(iv) to the Class A-2 Certificateholders, Accrued Certificate Interest on such Certificates for such Distribution Date, plus any Accrued Certificate Interest thereon remaining unpaid from any previous
(v) to the Class A-2 Certificateholders, the sum of the following amounts applied to reduce the Certificate Principal Balance thereof:
(A) the Class A-2 Percentage for such Distribution Date times the Scheduled Principal and Net Recoveries for such Distribution Date;
(B) an amount equal to (1) the Class A-2 Percentage for such Distribution Date divided by the Senior Percentage for such Distribution Date times (2) the Senior Prepayment Percentage for such Distribution Date times the aggregate of all Principal Prepayments received in the related
(C) with respect to each Mortgage Loan for which a Cash Liquidation or an REO Disposition occurred during the related Prepayment Period and did not result in any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, an amount equal to the lesser of (i) the then applicable Class A-2 Percentage of the Stated Principal Balance of such Mortgage Loan and (ii)(a) the Class A-2 Percentage for such Distribution Date divided by the Senior Percentage for such Distribution Date times (b) the Senior Prepayment Percentage for such Distribution Date times the related collections (including without limitation Insurance Proceeds, Liquidation Proceeds and REO Proceeds) to the extent applied by the Master Servicer as recoveries of principal of the related Mortgage Loan pursuant to Section 3.15; and
(D) any amounts described in this Section 4.01(b)(v), as determined for any previous Distribution Date, which remain unpaid after application of amounts previously distributed pursuant to this clause (D) to the extent that any such amounts are not attributable to Realized Losses that were allocated to the Class B Certificates, the Class SB Certificates and the Class R Certificates;
(vi) if the Certificate Principal Balance of the Class R Certificates has been reduced to zero and prior to the related Accretion Termination Date for the Class SB Certificates, to the Master Servicer or a Sub-Servicer, by remitting for deposit to the Custodial Account, to the extent of and in reimbursement for any Advances previously made with respect to any Mortgage Loan or REO Property which remain unreimbursed in whole or in part following the Cash Liquidation or REO Disposition of such Mortgage Loan or REO Property, minus any such Advances that were made with respect to delinquencies that ultimately constituted Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
(vii) to the Class B Certificateholders, Accrued Certificate Interest on the Class B Certificates for such Distribution Date, plus any Accrued Certificate Interest thereon remaining unpaid from any previous
(viii) to the Class B Certificateholders, the sum of the following amount applied to reduce the Certificate Principal Balance thereof:
(A) the Class B Percentage for such Distribution Date times the Scheduled Principal and Net Recoveries for such Distribution Date;
(B) an amount equal to the product of the Class B Prepayment Percentage times the aggregate of all Principal Prepayments received during
(C) such Class's pro rata share, based on the Certificate Principal Balance of the Class B Certificates and Class R Certificates, of all amounts received in connection with a Cash Liquidation or an REO Disposition (x) that occurred during the preceding calendar month and (y) that did not result in any Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, to the extent applied as recoveries of principal and to the extent not otherwise payable to the Senior Certificates; and
(D) any amounts described in this Section 4.01(b)(viii), as determined for any previous Distribution Date, which remain unpaid after application of amounts previously distributed pursuant to this clause (D) to the extent that such amounts are not attributable to Realized Losses which have been allocated to the Class SB Certificates and the Class R Certificates.
(ix) prior to the related Accretion Termination Date for the Class SB Certificates, to the Master Servicer or a Sub-Servicer, by remitting for deposit to the Custodial Account, to the extent of and in reimbursement for any Advances previously made with respect to any Mortgage Loan or REO Property which remain unreimbursed in whole or in part following the Cash Liquidation or REO Disposition of such Mortgage Loan or REO Property, minus any such Advances that were made with respect to delinquencies that ultimately constituted Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses;
(x) to the holders of the Class A-1 Certificates, the portion, if any, of the Available Distribution Amount remaining, but in no event more than the lesser of (A) the Accrued Certificate Interest otherwise payable on the Class SB Certificates, prior to the application of payments required under Sections 4.01(b)(x), (xi) and (xii) hereof and (B) the principal portion of Realized Losses previously allocated thereto and not previously reimbursed;
(xi) to the holders of the Class A-2 Certificates, the portion, if any, of the Available Distribution Amount remaining, but in no event more than the lesser of (A) the Accrued Certificate Interest otherwise payable on the Class SB Certificates, prior to the application of payments required under Sections 4.01(b)(x), (xi) and (xii) hereof and (B) the principal portion of Realized Losses previously allocated thereto and not previously
(xii) to the holders of the Class B Certificates, the portion, if any, of the Available Distribution Amount remaining, but in no event more than the lesser of (A) the Accrued Certificate Interest otherwise payable on the Class SB Certificates, prior to the application of payments required under Sections 4.01(b)(x), (xi) and (xii) hereof and (B) the principal portion of Realized Losses previously allocated thereto and not previously reimbursed;
(xiii) to the Class A-1 Certificateholders, an amount, applied to reduce the Certificate Principal Balance thereof, equal to the Class A-1 Percentage for such Distribution Date divided by the Senior Percentage for such Distribution Date times the Class SB Accrual Amount for such
(xiv) to the Class A-2 Certificateholders, an amount, applied to reduce the Certificate Principal Balance thereof, equal to the Class A-2 Percentage for such Distribution Date divided by the Senior Percentage for such Distribution Date times the Class SB Accrual Amount for such
(xv) if the Certificate Principal Balances of the Class A-1 Certificates and the Class A-2 Certificates have been reduced to zero, to the Class B Certificateholders the Class SB Accrual Amount for such Distribution Date, to the extent not distributed to the Class A-1 Certificates and Class A-2 Certificates;
(xvi) on and following the related Accretion Termination Date for the Class SB Certificates, to the Master Servicer or a Sub-Servicer, by remitting for deposit to the Custodial Account, to the extent of and in reimbursement for any Advances previously made with respect to any Mortgage Loan or REO Property which remain unreimbursed in whole or in part following the Cash Liquidation or REO Disposition of such Mortgage Loan or REO Property, minus any such Advances that were made with respect to delinquencies that ultimately constituted Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses;
(xvii) on and after the related Accretion Termination Date, to the Class SB Certificateholders, Accrued Certificate Interest thereon for such Distribution Date, except for any portion thereof applied on the related Accretion Termination Date to satisfy the applicable condition in the definition of "Accretion Termination Date," plus any such Accrued Certificate Interest remaining unpaid from any previous Distribution Date occurring on and after the related Accretion Termination Date;
(xviii) to the Class B Certificateholders, the portion, if any, of the Available Distribution Amount remaining after the foregoing distributions, applied to reduce the Certificate Principal Balance of the Class B Certificates, but in no event more than the outstanding Certificate Principal Balance of the Class B Certificates;
(xix) on and after the Accretion Termination Date for the Class R Certificates, to the Class SB Certificateholders, in reduction of the Outstanding Class SB Unpaid Interest Amount, until the Outstanding Class SB Unpaid Interest Amount has been reduced to zero;
(xx) to the Master Servicer or a Sub-Servicer, by remitting for deposit to the Custodial Account, to the extent of and in reimbursement for any Advances previously made with respect to any Mortgage Loan or REO Property which remain unreimbursed in whole or in part following the Cash Liquidation or REO Disposition of such Mortgage Loan or REO Property, minus any such Advances that were made with respect to delinquencies that ultimately constituted Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses;
(xxi) on and after the related Accretion Termination Date, to the Class R Certificateholders, Accrued Certificate Interest thereon to the extent not added to the
Certificate Principal Balance thereof on such Distribution Date in
(xxii) on and after the related Accretion Termination Date, to the Class R Certificates the portion, if any, of the Available Distribution Amount remaining after the foregoing distributions, applied to reduce the Certificate Principal Balance of the Class R Certificates, but in no event more than the outstanding Certificate Principal Balance of the Class R
(xxiii) to the Class A-1 Certificateholders, the portion, if any, of the Available Distribution Amount remaining, but in no event more than the principal portion of Realized Losses previously allocated thereto and not
(xxiv) to the Class A-2 Certificateholders, the portion, if any, of the Available Distribution Amount remaining, but in no event more than the principal portion of Realized Losses previously allocated thereto and not
(xxv) to the Class B Certificateholders, the portion, if any, of the Available Distribution Amount remaining, but in no event more than the principal portion of Realized Losses previously allocated thereto and not
(xxvi) to the Class R Certificateholders, the balance, if any, of the Available Distribution Amount.
(c) The Trustee shall, upon written request from the Master Servicer, invest or cause the institution maintaining the Certificate Account to invest the funds in the Certificate Account in Permitted Instruments designated in the name of the Trustee for the benefit of the Certificateholders, which shall mature not later than the Business Day next preceding the Distribution Date next following the date of such investment (except that (i) any investment in obligations of the institution with which the Certificate Account is maintained may mature on such Distribution Date and (ii) any other investment may mature on such Distribution Date if the Trustee shall agree to advance funds on such Distribution Date to the Certificate Account in the amount payable on such investment on such Distribution Date, pending receipt thereof to the extent necessary to make distributions on the Certificates) and shall not be sold or disposed of prior to maturity. All income and gain realized from any such investment shall be for the benefit of the Master Servicer and shall be subject to its withdrawal or order from time to time. The amount of any losses incurred in respect of any such investments shall be deposited in the Certificate Account by the Master Servicer out of its own funds immediately as realized without right of reimbursement.
(d) On each Distribution Date prior to the related Accretion Termination Date, Accrued Certificate Interest on the Class SB Certificates for such Distribution Date that would otherwise be distributed on such Certificates on such Distribution Date shall instead be added to the Outstanding Class SB Unpaid Interest Amount (which amount will have the effect of increasing the Certificate Principal Balance of the Class R Certificates, to the extent provided by operation of the definition of Certificate Principal Balance). On or
Termination Date, the entire amount of Accrued Certificate Interest on the Class SB Certificates for such Distribution Date shall be payable to the Class SB Certificateholders to the extent that any portion of such Accrued Certificate Interest is not distributed to the Senior Certificateholders, the Class B Certificateholders or the Master Servicer pursuant to Section 4.01(b).
On each Distribution Date prior to the related Accretion Termination Date, Accrued Certificate Interest on the Class R Certificates for such Distribution Date that would otherwise be distributed on such Certificates on such Distribution Date shall instead be added to the Certificate Principal Balance thereof, to the extent provided by operation of the definition of Certificate Principal Balance. After the related Accretion Termination Date, unpaid Accrued Certificate Interest, if any, on the Class R Certificates will not be added to the Certificate Principal Balance thereof. On and after the related Accretion Termination Date, the entire amount of Accrued Certificate Interest on the Class R Certificates for such Distribution Date shall be payable to the Class R Certificateholders to the extent that any portion of such Accrued Certificate Interest is not distributed to the Senior Certificateholders, the Class B Certificateholders, the Class SB Certificateholders or the Master Servicer pursuant to Section 4.01(b).
(e) Except as otherwise provided in Section 9.01, whenever the Trustee expects that the final distribution with respect to any Class of Certificates will be made on the next Distribution Date, the Trustee shall, no later than five days after the Determination Date, mail to each Holder on such date of such Class of Certificates a notice to the effect that:
(i) the Trustee expects that the final distribution with respect to such Class of Certificates will be made on such Distribution Date but only upon presentation and surrender of such Certificates at the office of the
(ii) no interest shall accrue on such Certificates from and after the end of the previous calendar month.
Any funds not distributed to any Holder or Holders of Certificates of such Class on such Distribution Date because of the failure of such Holder or Holders to tender their Certificates shall, on such date, be set aside and held in trust and credited to the account of the appropriate non-tendering Holder or Holders. If any Certificates as to which notice has been given pursuant to this Section 4.01(e) shall not have been surrendered for cancellation within six months after the time specified in such notice, the Trustee shall mail a second notice to the remaining non-tendering Certificateholders to surrender their Certificates for cancellation in order to receive the final distribution with respect thereto. If within six months after the second notice all such Certificates shall not have been surrendered for cancellation, the Trustee shall take reasonable steps as directed by the Depositor, or appoint an agent to take reasonable steps, to contact the remaining non-tendering Certificateholders concerning surrender of their Certificates. The costs and expenses of maintaining the funds in trust and of contacting such Certificateholders shall be paid out of the assets remaining in the Trust Fund. If within nine months after the second notice any such Certificates shall not have been surrendered for cancellation, the Class R Certificateholders shall be entitled to all assets which remain subject hereto. No interest shall accrue or be payable to any Certificateholder on any amount held in trust as a result of such Certificateholder's failure to surrender its Certificate(s) for final payment thereof in accordance with this Section 4.01(e).
(f) On each Distribution Date, the Trustee shall distribute to each Certificateholder of record on the next preceding Record Date (other than as provided in Section 9.01 respecting the final distribution), in the manner set forth in Section 4.01(b), such Certificateholder's share (based on the aggregate of the Percentage Interests represented by the Certificates of the applicable Class held by such Certificateholder) of the amount transferred from the Excess Proceeds Account to the Certificate Account on the related Certificate Account Deposit Date in accordance with Section 3.25(b), in the following order of priority: first, to the Holders of the Class SA Certificates and the Class A-1 Certificates on a pro rata basis, to the extent of and in proportion to the interest portion of the aggregate amount of all Realized Losses allocated to the Certificates of such Classes on such Distribution Date or any previous Distribution Date in accordance with Section 4.04 and not subsequently recovered through any distribution in accordance with this Section 4.01(f), and then second, to the Holders of the Class A-1 Certificates, third, to the Holders of the Class A-2 Certificates, and fourth, to the Holders of the Class B Certificates, in each case to the extent of the aggregate amount of all Realized Losses allocated to the Certificates of such Class on such Distribution Date or any previous Distribution Date in accordance with Section 4.04 and not subsequently recovered through any distribution in accordance with Section 4.01(b)(x), (xi), (xii), (xxiii), (xxiv) or (xxv) or in accordance with this Section 4.01(f), and fifth, to the Holders of the Class SB Certificates, and then sixth, to the Holders of the Class R Certificates. The distribution of any amount in accordance with this Section 4.01(f) shall not have the effect of reducing the Certificate Principal Balance of any Certificate to which such distribution is allocated.
(g) On each Distribution Date, the Trustee shall distribute to each Class R Certificateholder of record on the next preceding Record Date (other than as provided in Section 9.01 respecting the final distribution), in the manner set forth in Section 4.01(b), such Class R Certificateholder's share (based on the aggregate of the Percentage Interests represented by the Class R Certificates held by such Class R Certificateholder) of the amount transferred from the Excess Proceeds Account to the Certificate Account on the related Certificate Account Deposit Date in accordance with Section 3.25(c). The distribution of any amount in accordance with this Section 4.01(g) shall not have the effect of reducing the Certificate Principal Balance of any Class R Certificate to which such distribution is allocated.
SECTION 4.02. Statements to Certificateholders.
On each Distribution Date the Trustee shall forward or cause to be forwarded by mail to each Holder of a Certificate and to the Depositor and the Master Servicer a statement as to such distribution setting forth:
(i) (a) the amount of such distribution to the Certificateholders of each Class applied to reduce the Certificate Principal Balance thereof, (b) the aggregate amount included therein representing Principal Prepayments,
Prepayment Percentage and the Class B and Class R Prepayment Percentage
(ii) the amount of such distribution to the Certificateholders of each Class allocable to interest, and the Class SB Accrual Amount and Class R Accrual Amount for such Distribution Date;
(iii) the amount of related servicing compensation received by or on behalf of the Master Servicer and any Sub-Servicers with respect to such Distribution Date and such other customary information as the Master Servicer deems necessary or desirable and supplies to the Trustee, or which a Certificateholder reasonably requests, to enable Certificateholders to
(iv) the aggregate amount of Advances included in such distribution on
(v) the number and aggregate Stated Principal Balance of the Mortgage Loans at the close of business on such Distribution Date;
(vi) the Certificate Principal Balance of a Single Certificate of such Class, the aggregate Certificate Principal Balance of the Class A-1 Certificates, the Class A-2 Certificates, the Class B Certificates and the Class R Certificates, respectively, and the Senior Percentage, Class A-1 Percentage, Class A-2 Percentage, Class B Percentage and Class R Percentage, after giving effect to the amounts distributed on such Distribution Date separately identifying any reduction thereof due to Realized Losses other than pursuant to an actual distribution of principal;
(vii) the number and aggregate Stated Principal Balance of Mortgage Loans (a) delinquent 31 to 60 days, (b) delinquent 61 to 90 days, (c) delinquent 91 days or more;
(viii) the number and aggregate Stated Principal Balance of Mortgage Loans as to which foreclosure proceedings have been commenced in each case as of the related Determination Date and which are (a) delinquent 31 to 60 days, (b) delinquent 61 to 90 days, (c) delinquent 91 days or more;
(ix) the number and aggregate Stated Principal Balance of Mortgage Loans as to which bankruptcy proceedings have been commenced in each case as of the related Determination Date and which are (a) delinquent 31 to 60 days, (b) delinquent 61 to 90 days, (c) delinquent 91 days or more;
(x) with respect to any Mortgage Loan that became a REO Property during the preceding calendar month, the loan number and Stated Principal Balance of such Mortgage Loan as of the close of business on the Distribution Date in such month and the date of acquisition thereof;
(xi) the book value of any REO Property as of the close of business on the last Business Day of the calendar month preceding the Distribution
(xii) the Pass-Through Rate in effect for the preceding calendar month with respect to the Class SA Certificates, the Class A-1 Certificates, the Class A-2 Certificates, the Class B Certificates and the Class R
(xiii) the aggregate Accrued Certificate Interest remaining unpaid, if any, for each Class of Certificates, after giving effect to the distribution made on such Distribution Date;
(xiv) the Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount remaining available immediately after such Distribution Date;
(xv) the aggregate Realized Losses incurred since the Cut-off Date;
(xvi) the aggregate Realized Losses allocated on such Distribution
(xvii) the amount of any Excess Proceeds distributed to each class of Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii) above, the amounts shall also be expressed as a dollar amount per Single Certificate.
On each Distribution Date the Trustee shall prepare and forward, to each Holder of a Class R Certificate a statement setting forth the amounts actually distributed with respect to the Class R Certificates on such Distribution Date.
Within a reasonable period of time after the end of each calendar year, the Trustee shall prepare and forward, to each Person who at any time during the calendar year was a Holder of a Senior Certificate, a Class B Certificate, a Class SB Certificate or a Class R Certificate a statement containing the information set forth in subclauses (i) - (iii) above, aggregated for such calendar year or applicable portion thereof during which such person was a Certificateholder. Such obligation of the Trustee shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Trustee pursuant to any requirements of the Code and regulations thereunder as from time to time are in force.
SECTION 4.03. Remittance Reports; Advances by the Master Servicer.
(a) On the second Business Day following each Determination Date, the Master Servicer shall deliver to the Trustee a report, prepared as of the close of business on the Determination Date (the "Determination Date Report"), in the form of an electromagnetic tape or disk. The Determination Date Report and any written information supplemental thereto shall include such information with respect to the Mortgage Loans that is reasonably available to the Master Servicer and that is required by the Trustee for purposes of making the referred to in the following paragraph, as set forth in written specifications or guidelines issued by the Trustee from time to time. Not later than 10:00 A.M. Los Angeles time on the Business Day preceding each Certificate Account Deposit Date, the Trustee shall furnish by telecopy to the Master Servicer a statement (the information in such statement to be made available to Certificateholders or the Depositor by the Master Servicer on request) setting forth (i) the Available Distribution Amount and (ii) the amounts required to be withdrawn from the Custodial Account and deposited into the Certificate Account on the immediately succeeding Certificate Account Deposit Date pursuant to clause (iii) of Section 4.01(a). The Trustee shall have no obligation to recompute, recalculate or verify any information provided to it by the Master Servicer. The determination by the Trustee of such amounts shall, in the absence of obvious error, be presumptively deemed to be correct for all purposes hereunder.
(b) Prior to the close of business on the Business Day preceding each Certificate Account Deposit Date, the Trustee shall notify the Master Servicer of the aggregate amount of Advances required to be made for the related Distribution Date, which shall be in an aggregate amount equal to the aggregate amount of Monthly Payments (with each interest portion thereof adjusted to the Net Mortgage Rate), less the amount of any related Debt Service Reductions or reductions in the amount of interest collectable from the Mortgagor pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940, on the Outstanding Mortgage Loans as of the related Due Date, which Monthly Payments were delinquent as of the close of business as of the related Determination Date; provided that following the reduction of the Certificate Principal Balances of the Class A-2 Certificates, the Class B Certificates and the Class R Certificates to zero, no Advance shall be made if it would be a Nonrecoverable Advance. On or before 2:00 P.M. Los Angeles time on each Certificate Account Deposit Date, the Master Servicer shall either (i) deposit in the Certificate Account from its own funds, or funds received therefor from the Sub-Servicers, an amount equal to the Advances to be made by the Master Servicer in respect of the related Distribution Date, (ii) withdraw from amounts on deposit in the Custodial Account and deposit in the Certificate Account all or a portion of the amounts held for future distribution in discharge of any such Advance, or (iii) make advances in the form of any combination of (i) and (ii) aggregating the amount of such Advance. Any portion of the amounts held for future distribution so used shall be replaced by the Master Servicer by deposit in the Certificate Account on or before 11:00 A.M. Los Angeles time on any future Certificate Account Deposit Date to the extent that funds attributable to the Mortgage Loans that are available in the Custodial Account for deposit in the Certificate Account on such Certificate Account Deposit Date shall be less than payments to Certificateholders required to be made on the following Distribution Date. The amount of any reimbursement pursuant to any clause under Section 4.01(b), in respect of outstanding Advances on any Distribution Date shall be allocated to specific Monthly Payments due but delinquent for previous Due Periods, which allocation shall be made, to the extent practicable, to Monthly Payments which have been delinquent for the longest period of time. Such allocations shall be conclusive for purposes of reimbursement to the Master Servicer from recoveries on related Mortgage Loans pursuant to Section 3.11. The determination by the Master Servicer that it has made a Nonrecoverable Advance or that any proposed Advance, if made, would constitute a Nonrecoverable Advance, shall be evidenced by a certificate of a Servicing Officer delivered to the Seller and the Trustee. The Trustee shall deposit all funds it receives pursuant to this Section 4.03 into the Certificate Account.
(c) In the event that the Master Servicer determines as of the Business Day preceding any Certificate Account Deposit Date that it will be unable to deposit in the Certificate Account an amount equal to the Advance required to be made for the immediately succeeding Distribution Date in the amount determined by the Trustee pursuant to paragraph (b) above, it shall give notice to the Trustee of its inability to advance (such notice may be given by telecopy), not later than 3:00 P.M., Los Angeles time, on such Business Day, specifying the portion of such amount that it will be unable to deposit. Not later than 5:30 P.M., Los Angeles time, on the Certificate Account Deposit Date, unless by such time the Master Servicer shall have directly or indirectly deposited in the Certificate Account the entire amount of the Advances required to be made for the related Distribution Date, pursuant to Section 7.01, the Trustee shall (a) terminate all of the rights and obligations of the Master Servicer under this Agreement in accordance with Section 7.01 and (b) assume the rights and obligations of the Master Servicer hereunder, including the obligation to deposit in the Certificate Account an amount equal to the Advance for the immediately succeeding Distribution Date; provided, however, that the Trustee's obligation to advance such amounts shall be as of the related Distribution Date.
SECTION 4.04. Allocation of Realized Losses.
Prior to each Distribution Date, the Master Servicer shall determine the total amount of Realized Losses, if any, that resulted from any Cash Liquidation, Debt Service Reduction, Deficient Valuation or REO Disposition that occurred during the related Prepayment Period. The amount of each Realized Loss shall be evidenced by an Officers' Certificate by the Master Servicer. Realized Losses shall be allocated among the various Classes of Certificates as determined by the Trustee in accordance with the following provisions. All Realized Losses other than Excess Special Hazard Losses, Extraordinary Losses, Excess Bankruptcy Losses or Excess Fraud Losses, shall be allocated first to the Class R Certificates, then to the Class SB Certificates (to the extent of the interest portions of such Realized Losses), then to the Class B Certificates, then to the Class A-2 Certificates, in each case (other than for the Class SB Certificates) until the Certificate Principal Balance thereof has been reduced to zero, and then the principal portion thereof to the Class A-1 Certificates and the interest portion thereof to the Class SA Certificates and Class A-1 Certificates on a pro rata basis. In addition, amounts otherwise distributable on the Class SB Certificates may be applied to reimburse the principal portions of Realized Losses previously allocated to the Senior Certificates or the Class B Certificates. Any Excess Special Hazard Losses, Excess Bankruptcy Losses, Excess Fraud Losses and Extraordinary Losses will be allocated to the Class SA Certificates, the Class A-1 Certificates, the Class A-2 Certificates, the Class B Certificates, the Class SB Certificates and the Class R Certificates on a pro rata basis, as described below. As used herein, an allocation of a Realized Loss on a "pro rata basis" among two or more specified Classes of Certificates means an allocation on a pro rata basis, without priority among the various Classes so specified, to each such Class of Certificates on the basis of the then outstanding Certificate Principal Balances thereof in the case of the principal portion of a Realized Loss or based on the Accrued Certificate Interest thereon in the case of an interest portion of a Realized Loss. Any allocation of the principal portion of Realized Losses (other than Debt Service Reductions) to a Certificate (except as follows) shall be made by reducing the Certificate Principal Balance thereof by the amount so allocated, which allocation shall be deemed to have occurred at the close of business on such Distribution Date. Any allocation of the principal portion of Realized Losses (other than
Debt Service Reductions) to the most subordinate Class of Certificates outstanding, shall be made by operation of the definition of "Certificate Principal Balance," and by operation of the provisions of Section 4.01(b). Allocations of the interest portions of Realized Losses shall be made by operation of the definition of "Accrued Certificate Interest" and by operation of the provisions of Section 4.01(b). Allocations of the principal portion of Debt Service Reductions shall be made by operation of the provisions of Section 4.01(b). All Realized Losses and all other losses allocated to a Class of Certificates hereunder will be allocated among the Certificates of such Class in proportion to the Percentage Interests evidenced thereby. For purposes of the foregoing, the Trustee shall maintain records relating to the Bankruptcy Amount, Fraud Loss Amount and Special Hazard Amount as in effect from time to time.
SECTION 4.05. Information Reports to be Filed by the Master Servicer.
The Master Servicer or Sub-Servicers shall file information returns with respect to the receipt of mortgage interest received in a trade or business, reports of foreclosures and abandonments of any Mortgaged Property and cancellation of indebtedness income with respect to any Mortgaged Property as required by Sections 6050H, 6050J and 6050P of the Code, respectively, and promptly deliver upon such filing to the Trustee an Officer's Certificate stating that such reports have been filed. Such reports shall be in form and substance sufficient to meet the reporting requirements imposed by such Sections 6050H, 6050J and 6050P of the Code.
SECTION 4.06. Compliance with Withholding Requirements.
Notwithstanding any other provision of this Agreement, the Trustee shall comply with all federal withholding requirements respecting payments to Certificateholders of interest or original issue discount on the Mortgage Loans, and payments of interest or discount on amounts invested by the Trustee as agent for Certificateholders pursuant to an election made under Section 4.01 hereof, that the Trustee reasonably believes are applicable under the Code. The consent of Certificateholders shall not be required for such withholding. In the event the Trustee withholds any amount from interest or original issue discount payments or advances thereof to any Certificateholder pursuant to federal withholding requirements, the Trustee shall, together with its monthly report to such Certificateholders pursuant to Section 4.02 hereof, indicate such amount withheld.
(a) The Certificates will be substantially in the respective forms annexed hereto as Exhibits A, B-1, B-2 and B-3. The Certificates will be issuable in registered form only. Except as provided in Section 5.01(b), the Class A-1 Certificates shall be issuable in denominations evidencing initial Certificate Principal Balances of not less than $1.00 and integral multiples of $1.00 in excess thereof. The Class A-2 Certificates shall be issuable in denominations evidencing initial Certificate Principal Balances of not less than $25,000 and integral multiples of $1,000 in excess thereof, except that one Certificate of the Class A-2 may be issued in an amount evidencing the sum of the authorized minimum denomination thereof and the remainder of the aggregate initial Certificate Principal Balance of such Class. The Class B Certificates will be issuable in denominations evidencing an initial Certificate Principal Balance of not less than $250,000 and integral multiples of $1,000 in excess thereof, except that one Certificate may be issued in an amount evidencing the sum of the authorized minimum denomination thereof and the remainder of the aggregate initial Certificate Principal Balance. The Class SA Certificates will be issuable in denominations evidencing an initial Notional Amount of not less than $1.00 and integral multiples of $1.00 in excess thereof, except that one Certificate of the Class SA Certificates may be issued in an amount evidencing the sum of the authorized minimum denomination and the remainder of the aggregate initial Notional Amount of such Class. The Class SB Certificates will be issuable in denominations evidencing an initial Notional Amount of not less than $250,000 and integral multiples of $1,000 in excess thereof, except that one Certificate of the Class SB Certificates may be issued in an amount evidencing the sum of the authorized minimum denomination and the remainder of the aggregate initial Notional Amount of such Class. The Class R Certificates will each be issuable in denominations of any Percentage Interest representing 5.00% and multiples of 0.01% in excess thereof; provided, however, that one Class R Certificate may be issued to the "tax matters person" pursuant to Article X, in a minimum denomination representing a Percentage Interest of not less than 0.01%.
Upon original issue, the Certificates shall, upon the written request of the Depositor executed by an officer of the Depositor, be executed and delivered by the Trustee, authenticated by the Trustee and delivered to or upon the order of the Depositor upon receipt by the Trustee of the documents specified in Section 2.01. The Certificates shall be executed by manual or facsimile signature on behalf of the Trustee in its capacity as trustee hereunder by a Responsible Officer. Certificates bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Trustee shall bind the Trustee, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Certificates or did not hold such offices at the date of such Certificates. No Certificate shall be entitled to any benefit under this Agreement, or be valid for any purpose, unless there appears on such Certificate a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Certificate shall be conclusive evidence, and the only evidence, that such duly authenticated and delivered hereunder. All Certificates issued on the Closing Date shall be dated the Closing Date and any Certificates delivered thereafter shall be dated the date of their authentication.
(b) The Class SA Certificates and the Class A-1 Certificates shall initially be issued as one or more Certificates registered in the name of the Depository or its nominee and, except as provided below, registration of such Certificates may not be transferred by the Trustee except to another Depository that agrees to hold such Certificates for the respective Certificate Owners with Ownership Interests therein. The Certificate Owners shall hold their respective Ownership Interests in and to each of the Class SA Certificates and the Class A-1 Certificates through the book-entry facilities of the Depository and, except as provided below, shall not be entitled to Definitive Certificates in respect of such Ownership Interests. All transfers by Certificate Owners of their respective Ownership Interests in the Book-Entry Certificates shall be made in accordance with the procedures established by the Depository Participant or brokerage firm representing such Certificate Owner. Each Depository Participant shall transfer the Ownership Interests only in the Book-Entry Certificates of Certificate Owners it represents or of brokerage firms for which it acts as agent in accordance with the Depository's normal procedures.
The Trustee, the Master Servicer and the Depositor may for all purposes (including the making of payments due on the respective Classes of Book-Entry Certificates) deal with the Depository as the authorized representative of the Certificate Owners with respect to the respective Classes of Book-Entry Certificates for the purposes of exercising the rights of Certificateholders hereunder. The rights of Certificate Owners with respect to the respective Classes of Book-Entry Certificates shall be limited to those established by law and agreements between such Certificate Owners and the Depository Participants and brokerage firms representing such Certificate Owners. Multiple requests and directions from, and votes of, the Depository as Holder of any Class of Book-Entry Certificates with respect to any particular matter shall not be deemed inconsistent if they are made with respect to different Certificate Owners. The Trustee shall utilize the next available record date in connection with solicitations of consents from or voting by Certificateholders and shall give notice to the Depository of such record date.
If (i)(A) the Depositor advises the Trustee in writing that the Depository is no longer willing or able to properly discharge its responsibilities as Depository and (B) the Depositor is unable to locate a qualified successor or (ii) the Depositor at its option advises the Trustee in writing that it elects to terminate the book-entry system through the Depository, the Trustee shall notify all Certificate Owners, through the Depository, of the occurrence of any such event and of the availability of Definitive Certificates to Certificate Owners requesting the same. Upon surrender to the Trustee of the Book-Entry Certificates by the Depository, accompanied by registration instructions from the Depository for registration of transfer, the Trustee shall, at the Depositor's expense, issue the Definitive Certificates. The Definitive Certificates shall be issuable in denominations evidencing initial Certificate Principal Balances or Notional Amounts, as applicable, of $1,000 and integral multiples of $1.00 in excess thereof, except that any such Definitive Certificate that was represented by a Book-Entry Certificate evidencing an initial Certificate Principal Balance or Notional Amount of less than $1,000 immediately prior to the issuance of such Definitive Certificate shall be issued in a denomination equal to the initial Certificate Principal Balance or Notional Amount, as the case may be, evidenced by such Book-Entry Certificate. Neither the Depositor, the Master Servicer nor the Trustee shall be liable for any actions taken by the Depository or its nominee, including, without limitation, any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. Upon the issuance of Definitive Certificates, all references herein to obligations imposed upon or to be performed by the Depository in connection with the issuance of the Definitive Certificates pursuant to this Section 5.01 shall be deemed to be imposed upon and performed by the Trustee, and the Trustee and the Master Servicer shall recognize the Holders of the Definitive Certificates as Certificateholders hereunder.
SECTION 5.02. Registration of Transfer and Exchange of Certificates.
(a) The Trustee shall maintain a Certificate Register in which, subject to such reasonable regulations as it may prescribe, the Trustee shall provide for the registration of Certificates and of transfers and exchanges of Certificates as herein provided.
(b) Except as provided in Section 5.02(c), no transfer, sale, pledge or other disposition of a Class SB Certificate or a Class R Certificate shall be made unless such transfer, sale, pledge or other disposition is exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), and any applicable state securities laws or is made in accordance with said Act and laws. In the event that a transfer of a Class SB Certificate or a Class R Certificate is to be made under this Section 5.02(b), (i) the Depositor may direct the Trustee to require an Opinion of Counsel acceptable to and in form and substance satisfactory to the Trustee and the Depositor that such transfer shall be made pursuant to an exemption, describing the applicable exemption and the basis therefor, from said Act and laws or is being made pursuant to said Act and laws, which Opinion of Counsel shall not be an expense of the Trustee, the Depositor or the Master Servicer, provided that such Opinion of Counsel will not be required in connection with the initial transfer of any such Certificate by the Depositor or any affiliate thereof, to a non-affiliate of the Depositor and (ii) the Trustee shall require the transferee to execute a representation letter, substantially in the form of Exhibit G-1 hereto, and the Trustee shall require the transferor to execute a representation letter, substantially in the form of Exhibit G-2 hereto, each acceptable to and in form and substance satisfactory to the Depositor and the Trustee certifying to the Depositor and the Trustee the facts surrounding such transfer, which representation letters shall not be an expense of the Trustee, the Depositor or the Master Servicer; provided however that such representation letters will not be required in connection with any transfer of any such Certificate by the Depositor to an affiliate of the Depositor and the Trustee shall be entitled to conclusively rely upon a representation (which, upon the request of the Trustee, shall be a written representation) from the Depositor of the status of such transferee as an affiliate of the Depositor. Any such Certificateholder desiring to effect such transfer shall, and does hereby agree to, indemnify the Trustee, the Depositor and the Master Servicer against any liability that may result if the transfer is not so exempt or is not made in accordance with such applicable federal and state laws.
(c) Transfers of Certificates may be made in accordance with this Section 5.02(c) if the transferor and the prospective transferee of a Certificate provide the Trustee and the Depositor with an investment letter substantially in the form of Exhibit H attached hereto, which investment letter shall not be an expense of the Trustee, the Depositor or the Master Servicer, and which investment letter states that, among other things, such transferee is a "qualified institutional buyer" as defined under Rule 144A. Such transfers shall be deemed to have complied with the requirements of Section 5.02(b) hereof; provided, however, that no Transfer of any of the Certificates may be made pursuant to this Section 5.02(c) by the Depositor. Any such Certificateholder desiring to effect such transfer shall, and does hereby agree to, indemnify the Trustee, the Depositor and the Master Servicer against any liability that may result if the transfer is not so exempt or is not made in accordance with such applicable federal and state laws.
(d) The Trustee shall require an Opinion of Counsel from a prospective transferee prior to the transfer of any Class A-2 Certificate, Class B Certificate, Class SB Certificate or Class R Certificate to any employee benefit plan or other retirement arrangement, including individual retirement accounts and Keogh plans, that is subject to Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Section 4975 of the Code (any of the foregoing, a "Plan"), to a trustee or other Person acting on behalf of any Plan, or to any other person who is using "plan assets" of any Plan to effect such acquisition (including any insurance company using funds in its general or separate accounts that may constitute "plan assets"). Such Opinion of Counsel must establish to the satisfaction of the Depositor and the Trustee that such disposition will not violate the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Code. Neither the Depositor, the Master Servicer nor the Trustee will be required to obtain such Opinion of Counsel on behalf of any prospective transferee. In the case of any transfer of the foregoing Certificates to an insurance company, in lieu of such Opinion of Counsel, the Trustee shall require a certification in the form of Exhibit G-5 (or in such other form as shall be mutually agreed upon by the Depositor and the Trustee) substantially to the effect that all funds used by such transferee to purchase such Certificates will be funds held by it in its general account which it reasonably believes do not constitute "plan assets" of any Plan (as defined above); provided however that such certification will not be required in connection with any transfer of any such Certificate by the Depositor to an affiliate of the Depositor and the Trustee shall be entitled to conclusively rely upon a representation (which, upon the request of the Trustee, shall be a written representation) from the Depositor of the status of such transferee as an affiliate of the Depositor. The permission of any transfer in violation of the restriction on transfer set forth in this paragraph shall not constitute a default or an Event of Default.
(e) (i) Each Person who has or who acquires any Ownership Interest in a Class R Certificate shall be deemed by the acceptance or acquisition of such Ownership Interest to have agreed to be bound by the following provisions and to have irrevocably authorized the Trustee or its designee under clause (iii)(A) below to deliver payments to a Person other than such Person and to negotiate the terms of any mandatory sale under clause (iii)(B) below and to execute all instruments of transfer and to do all other things necessary in connection with any such sale. The rights of each Person acquiring any Ownership Interest in a Class R Certificate are expressly subject to the following provisions:
(A) Each Person holding or acquiring any Ownership Interest in a Class R Certificate shall be a Permitted Transferee and shall promptly notify the Trustee of any change or impending change in its status as a Permitted Transferee.
(B) In connection with any proposed Transfer of any Ownership Interest in a Class R Certificate, the Trustee shall require delivery to it, and shall not register the Transfer of any Class R Certificate until its receipt of (I) an affidavit and agreement (a "Transfer Affidavit and Agreement" in the form attached hereto as Exhibit G-3) from the proposed transferee, in form and substance satisfactory to the Master Servicer and the Trustee representing and warranting, among other things, that it is a Permitted Transferee, that it is not acquiring its Ownership Interest in the Class R Certificate that is the subject of the proposed Transfer as a nominee, trustee or agent for any Person who is not a Permitted Transferee, that for so long as it retains its Ownership Interest in a Class R Certificate, it will endeavor to remain a Permitted Transferee, and that it has reviewed the provisions of this Section 5.02 and agrees to be bound by them, and (II) a certificate, in the form attached hereto as Exhibit G-4, from the Holder wishing to transfer the Class R Certificate, in form and substance satisfactory to the Master Servicer and the Trustee representing and warranting, among other things, that no purpose of the proposed Transfer is to impede the assessment or collection of tax.
(C) Notwithstanding the delivery of a Transfer Affidavit and Agreement by a proposed Transferee under clause (B) above, if a Responsible Officer of the Trustee assigned to this transaction has actual knowledge that the proposed Transferee is not a Permitted Transferee, no Transfer of an Ownership Interest in a Class R Certificate to such proposed Transferee shall be effected.
(D) Each Person holding or acquiring any Ownership Interest in a Class R Certificate shall agree (x) to require a Transfer Affidavit and Agreement from any other Person to whom such Person attempts to transfer its Ownership Interest in a Class R Certificate and (y) not to transfer its Ownership Interest unless it provides a certificate to the Trustee in the form attached hereto as Exhibit G-4.
(E) Each Person holding or acquiring an Ownership Interest in a Class R Certificate, by purchasing an Ownership Interest in such Certificate, agrees to give the Trustee written notice that it is a "pass-through interest holder" within the meaning of Temporary Treasury Regulations Section 1.67-3T(a)(2)(i)(A) immediately upon acquiring an Ownership Interest in a Class R Certificate, if it is "a pass-through interest holder", or is holding an Ownership Interest in a Class R Certificate on behalf of a "pass-through interest holder."
(ii) The Trustee will register the Transfer of any Class R Certificate only if it shall have received the Transfer Affidavit and Agreement in the form attached hereto as Exhibit G-3, a certificate of the Holder requesting such transfer in the form attached hereto as Exhibit G-4 and all of such other documents as shall have been reasonably required by the Trustee as a condition to such registration. Transfers of the Class R Certificates to Non-United States Persons and Disqualified Organizations are prohibited.
(iii) (A) If any Disqualified Organization shall become a Holder of a Class R Certificate, then the last preceding Permitted Transferee shall be restored, to the extent permitted by law, to all rights and obligations as Holder thereof retroactive to the date of registration of such Transfer of such Class R Certificate. If a Non-United States Person shall become a Holder of a Class R Certificate, then the last preceding Permitted Transferee shall be restored, to the extent permitted by law, to all rights and obligations as Holder thereof retroactive to the date of registration of such Transfer of such Class R Certificate. If a transfer of a Class R Certificate is disregarded pursuant to the provisions of Treasury Regulations Section 1.860E-1 or Section 1.860G-3, then the last preceding Permitted Transferee shall be restored, to the extent permitted by law, to all rights and obligations as Holder thereof retroactive to the date of registration of such Transfer of such Class R Certificate. The Trustee shall be under no liability to any Person for any registration of Transfer of a Class R Certificate that is in fact not permitted by this Section 5.02 or for making any payments due on such Certificate to the holder thereof or for taking any other action with respect to such holder under the provisions of this Agreement.
(B) If any purported Transferee shall become a Holder of a Class R Certificate in violation of the restrictions in this Section 5.02 and to the extent that the retroactive restoration of the rights of the Holder of such Class R Certificate as described in clause (iii)(A) above shall be invalid, illegal or unenforceable, then the Trustee shall have the right, without notice to the holder or any prior holder of such Class R Certificate, to sell such Class R Certificate to a purchaser selected by the Trustee on such terms as the Trustee may choose. Such purported Transferee shall promptly endorse and deliver each Class R Certificate in accordance with the instructions of the Trustee. Such purchaser may be the Trustee itself. The proceeds of such sale, net of the commissions (which may include commissions payable to the Trustee), expenses and taxes due, if any, will be remitted by the Trustee to such purported Transferee. The terms and conditions of any sale under this clause (iii)(B) shall be determined in the sole discretion of the Trustee, and the Trustee shall not be liable to any Person having an Ownership Interest in a Class R Certificate as a result of its exercise of such discretion.
(iv) The Trustee shall make available to the Internal Revenue Service and those Persons specified by the REMIC Provisions, all information necessary to compute any tax imposed (A) as a result of the transfer of an ownership interest in a Class R Certificate to any Person who is a Disqualified Organization, including the information regarding "excess inclusions" of such Class R Certificates required to be provided to the Internal Revenue Service and certain Persons as described in Treasury Regulations Sections 1.860D-l(b)(5) and 1.860E-2(a)(5), and (B) as a result of any regulated investment company, real estate investment trust, common trust fund, partnership, trust, estate or organization described in Section 1381 of the Code that holds an Ownership Interest in a Class R Certificate having as among its record holders at any time any Person who is a Disqualified Organization. The Trustee may charge and shall be entitled to reasonable compensation for providing such information as may be required from those Persons which may have had a tax imposed upon them as specified in clauses (A) and (B) of this paragraph for providing such information.
(f) Subject to the preceding paragraphs, upon surrender for registration of transfer of any Certificate at the office of the Trustee maintained for such purpose, the Trustee shall execute and the Trustee or the Authenticating Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Certificates of the same Class of a like aggregate initial Certificate Principal Balance. Every Certificate surrendered for transfer shall be accompanied by notification of the account of the designated transferee or transferees for the purpose of receiving distributions pursuant to Section 4.01 by wire transfer, if any such transferee desires and is eligible for distribution by wire transfer.
(g) At the option of the Certificateholders, Certificates may be exchanged for other Certificates of authorized denominations of the same Class of a like aggregate initial Certificate Principal Balance, upon surrender of the Certificates to be exchanged at the office of the Trustee. Whenever any Certificates are so surrendered for exchange the Trustee shall execute, authenticate and deliver the Certificates which the Certificateholder making the exchange is entitled to receive. Every Certificate presented or surrendered for transfer or exchange shall (if so required by the Trustee) be duly endorsed by, or be accompanied by a written instrument of transfer in the form satisfactory to the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing.
(h) No service charge shall be made to the Certificateholders for any transfer or exchange of Certificates, but the Trustee may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Certificates.
(i) All Certificates surrendered for transfer and exchange shall be canceled and retained by the Trustee in accordance with the Trustee's standard procedures.
SECTION 5.03. Mutilated, Destroyed, Lost or Stolen Certificates.
If (i) any mutilated Certificate is surrendered to the Trustee and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Certificate, and (ii) there is delivered to the Trustee such security or indemnity as may be required by it to save it harmless, then, in the absence of notice to the Trustee that such Certificate has been acquired by a bona fide purchaser, the Trustee shall execute, authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of the same Class and initial Certificate Principal Balance. Upon the issuance of any new Certificate under this Section, the Trustee may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Any replacement Certificate issued pursuant to this Section shall constitute complete and indefeasible evidence of ownership in the Trust Fund, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time.
SECTION 5.04. Persons Deemed Owners.
The Depositor, the Master Servicer, the Trustee and any agent of any of them may treat the Person in whose name any Certificate is registered as the owner of such Certificate for the purpose of receiving distributions pursuant to Section 4.01 and for all other purposes whatsoever, and neither the Depositor, the Master Servicer, the Trustee nor any agent of any of them shall be affected by notice to the contrary.
THE DEPOSITOR AND THE MASTER SERVICER
SECTION 6.01. Liability of the Depositor and the Master Servicer.
The Depositor and the Master Servicer each shall be liable in accordance herewith only to the extent of the obligations specifically imposed upon and undertaken by the Depositor and the Master Servicer herein.
SECTION 6.02. Merger, Consolidation or Conversion of the Depositor or the Master Servicer.
The Depositor and the Master Servicer each will keep in full effect its existence, rights and franchises as a corporation under the laws of the state of its incorporation, and each will obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the Certificates or any of the Mortgage Loans and to perform its respective duties under this Agreement.
Any Person into which the Depositor may be merged, consolidated or converted, or any corporation resulting from any merger or consolidation to which the Depositor shall be a party, or any Person succeeding to the business of the Depositor, shall be the successor of the Depositor hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding.
Any Person into which the Master Servicer may be merged, consolidated or converted, or any corporation resulting from any merger or consolidation to which the Master Servicer shall be a party, or any Person succeeding to the business of the Master Servicer (including by a transfer of servicing portfolio or operations by the Master Servicer), shall be the successor of the Master Servicer hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, however, that the successor or surviving Person to the Master Servicer must meet the criteria set forth in Section 6.05 for a successor Master Servicer and shall be qualified to sell mortgage loans to and service mortgage loans for FNMA or FHLMC.
SECTION 6.03. Limitation on Liability of the Depositor, the Master Servicer and Others.
Neither the Depositor, the Master Servicer nor any of the directors, officers, employees or agents of the Depositor or the Master Servicer shall be under any liability to the Trust Fund or the Certificateholders for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Depositor or the Master Servicer (but this provision shall protect the above described persons) against any breach of warranties or representations made herein, or against any specific liability imposed on the Master Servicer pursuant to Section 3.01 or any other Section hereof; and provided further that this provision shall not protect the Depositor, the Master Servicer or any such person, against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties or by reason of reckless disregard of obligations and duties hereunder. The Depositor, the Master Servicer and any director, officer, employee or agent of the Depositor or the Master Servicer may rely in good faith on any document of any kind PRIMA FACIE properly executed and submitted by any Person respecting any matters arising hereunder. The Depositor, the Master Servicer and any director, officer, employee or agent of the Depositor or the Master Servicer shall be indemnified and held harmless by the Trust Fund against any loss, liability or expense incurred in connection with any legal action relating to this Agreement or the Certificates, other than any loss, liability or expense related to Master Servicer's servicing obligations with respect to any specific Mortgage Loan or Mortgage Loans (except as any such loss, liability or expense shall be otherwise reimbursable pursuant to this Agreement) or related to the Master Servicer's obligations under Section 3.01, or any loss, liability or expense incurred by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties hereunder. Neither the Depositor nor the Master Servicer shall be under any obligation to appear in, prosecute or defend any legal action which is not incidental to its respective duties under this Agreement and which in its opinion may involve it in any expense or liability; provided, however, that the Depositor or the Master Servicer may in its sole discretion undertake any such action which it may deem necessary or desirable with respect to this Agreement and the rights and duties of the parties hereto and the interests of the Certificateholders hereunder. In such event, the legal expenses and costs of such action and any liability resulting therefrom (except any action or liability related to the Master Servicer's obligations under Section 3.01) shall be expenses, costs and liabilities of the Trust Fund, and the Depositor and the Master Servicer shall be entitled to be reimbursed therefor from the Certificate Account as provided in Section 3.11, any such right of reimbursement being prior to the rights of Certificateholders to receive any amount in the Certificate Account.
SECTION 6.04. Limitation on Resignation of the Master Servicer.
The Master Servicer shall not resign from the obligations and duties hereby imposed on it except (a) upon appointment of a successor servicer and receipt by the Trustee of a letter from the Rating Agency that such a resignation and appointment will not, in and of itself, result in a downgrading of the Certificates or (b) upon determination that its duties hereunder are no longer permissible under applicable law. Any such determination permitting the resignation of the Master Servicer shall be evidenced by an Opinion of Counsel to such effect delivered to the Trustee. No such resignation shall become effective until the Trustee or a successor servicer shall have assumed the Master Servicer's responsibilities, duties, liabilities and obligations hereunder.
SECTION 7.01. Events of Default.
"Event of Default", wherever used herein, means any one of the following events:
(i) any failure by the Master Servicer to remit to the Trustee for distribution to the Certificateholders any payment (other than an Advance) required to be made under the terms of the Certificates or this Agreement which continues unremedied for a period of five days after the date upon which written notice of such failure, requiring the same to be remedied, shall have been given to the Master Servicer by the Depositor (with a copy to the Trustee) or the Trustee, or to the Master Servicer, the Depositor and the Trustee by the Holders of Certificates entitled to at least 25% of
(ii) any failure on the part of the Master Servicer duly to observe or perform in any material respect any other of the covenants or agreements on the part of the Master Servicer contained in the Certificates or in this Agreement (including any breach of the Master Servicer's representations and warranties pursuant to Section 2.03(a) which materially and adversely affects the interests of the Certificateholders) which continues unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Master Servicer by the Depositor (with a copy to the Trustee) or the Trustee, or to the Master Servicer, the Depositor and the Trustee by the Holders of Certificates entitled to at least 25% of the Voting Rights; or
(iii) a decree or order of a court or agency or supervisory authority having jurisdiction in an involuntary case under any present or future federal or state bankruptcy, insolvency or similar law or the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Master Servicer and such decree or order shall have remained in force undischarged or unstayed for a period of 60 consecutive days; or
(iv) the Master Servicer shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Master Servicer or of or relating to all or substantially all of its property; or
(v) the Master Servicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of or otherwise voluntarily commence a case or proceeding under any applicable bankruptcy, insolvency, reorganization or other similar statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; or
(vi) the Master Servicer shall fail to deposit in the Certificate Account on any Certificate Account Deposit Date an amount equal to any required Advance.
If an Event of Default described in clauses (i) - (v) of this Section shall occur, then, and in each and every such case, so long as such Event of Default shall not have been remedied, the Depositor or the Trustee may, and at the direction of the Holders of Certificates entitled to at least 51% of the Voting Rights, the Trustee shall, by notice to the Master Servicer (and to the Depositor if given by the Trustee or to the Trustee if given by the Depositor) terminate all of the rights and obligations of the Master Servicer under this Agreement and in and to the Trust Fund, other than its rights as a Certificateholder hereunder. If an Event of Default described in clause (vi) hereof shall occur, the Trustee shall, by notice to the Master Servicer and the Depositor, terminate all of the rights and obligations of the Master Servicer under this Agreement and in and to the Trust Fund, other than its rights as a Certificateholder hereunder; provided, however, that if the Trustee determines that the failure by the Master Servicer to make any required Advance was due to circumstances beyond its control, and the required Advance was otherwise made, the Trustee shall not terminate the Master Servicer. On or after the receipt by the Master Servicer of such notice, all authority and power of the Master Servicer under this Agreement, whether with respect to the Certificates (other than as a holder thereof) or the Mortgage Loans or otherwise, shall pass to and be vested in the Trustee pursuant to and under this Section, and, without limitation, the Trustee is hereby authorized and empowered to execute and deliver, on behalf of the Master Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement or assignment of the Mortgage Loans and related documents, or otherwise. The Master Servicer agrees to cooperate with the Trustee in effecting the termination of the Master Servicer's responsibilities and rights hereunder, including, without limitation, the transfer to the Trustee or its appointed agent for administration by it of all cash amounts which shall at the time be deposited by the Master Servicer or should have been deposited to the Custodial Account, the Excess Proceeds Account or the Certificate Account or thereafter be received with respect to the Mortgage Loans. The Trustee shall not be deemed to have breached any obligation hereunder as a result of a failure to make or delay in making any distribution as and when required hereunder caused by the failure of the Master Servicer to remit any amounts received on it or to deliver any documents held by it with respect to the Mortgage Loans. For purposes of this Section 7.01, the Trustee shall not be deemed to have knowledge of an Event of Default unless a Responsible Officer of the Trustee assigned to and working in the Trustee's Corporate Trust Division has actual knowledge thereof or unless notice of any event which is in fact such an Event of Default is received by the Trustee and such notice references the Certificates, the Trust Fund or this Agreement.
Notwithstanding any termination of the activities of Temple-Inland Mortgage Corporation ("TIMC") in its capacity as Master Servicer hereunder, TIMC shall be entitled to receive, out of any Late Collection of a Monthly Payment on a Mortgage Loan which was due prior to the notice terminating TIMC's rights and obligations as Master Servicer hereunder and received after such notice, that portion to which TIMC would have been entitled pursuant to Sections 3.11(ii), (iii), (iv), (v) and (viii) and Sections 4.01(b)(iii), (vi), (ix), (xvi) and well as its Servicing Fee in respect thereof, and any other amounts payable to TIMC hereunder the entitlement to which arose prior to the termination of its activities hereunder.
SECTION 7.02. Trustee to Act; Appointment of Successor.
On and after the time the Master Servicer receives a notice of termination pursuant to Section 7.01, the Trustee or its appointed agent shall be the successor in all respects to the Master Servicer in its capacity as Master Servicer under this Agreement and the transactions set forth or provided for herein and shall be subject thereafter to all the responsibilities, duties and liabilities relating thereto placed on the Master Servicer including the obligation to make Advances which have been or will be required to be made (except for the responsibilities, duties and liabilities contained in Section 2.03 and its obligations to deposit amounts in respect of losses pursuant to Sections 3.12 and 4.01(c)) by the terms and provisions hereof; and provided further, that any failure to perform such duties or responsibilities caused by the Master Servicer's failure to provide information required by Section 4.03 shall not be considered a default by the Trustee hereunder. As compensation therefor, the Trustee shall be entitled to all funds relating to the Mortgage Loans which the Master Servicer would have been entitled to charge to the Custodial Account and the Certificate Account if the Master Servicer had continued to act hereunder. Notwithstanding the above, the Trustee may, if it shall be unwilling to so act, or shall, if it is unable to so act (exclusive of the obligations set forth in Section 4.03) or if the Holders of Certificates entitled to at least 51% of the Voting Rights so request in writing to the Trustee, appoint, or petition a court of competent jurisdiction to appoint, any mortgage loan servicing institution (acceptable to the Rating Agencies) having a net worth of not less than $10,000,000 (or other amount acceptable to the Rating Agencies) as the successor to the Master Servicer hereunder in the assumption of all or any part of the responsibilities, duties or liabilities of the Master Servicer hereunder. Pending appointment of a successor to the Master Servicer hereunder, the Trustee shall act in such capacity as hereinabove provided. In connection with such appointment and assumption, the Trustee may make such arrangements for the compensation of such successor out of payments on Mortgage Loans as it and such successor shall agree; provided, however, that no such compensation shall be in excess of that permitted the Master Servicer hereunder. The Seller, the Trustee and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession.
Any successor, including the Trustee, to the Master Servicer shall maintain in force during its term as master servicer hereunder policies and fidelity bonds to the same extent as the Master Servicer is so required pursuant to Section 3.18.
SECTION 7.03. Notification to Certificateholders.
(a) Upon any such termination or appointment of a successor to the Master Servicer, the Trustee shall give prompt notice thereof to Certificateholders.
(b) Within 60 days after the occurrence of any Event of Default, the Trustee shall transmit by mail to all Holders of Certificates notice of each such Event of Default hereunder known to the Trustee, unless such Event of Default shall have been cured or waived.
SECTION 7.04. Waiver of Events of Default.
The Holders representing at least 66% of the Voting Rights of Certificates affected by a default or Event of Default hereunder, may waive such default or Event of Default; PROVIDED, HOWEVER, that (a) a default or Event of Default under clause (i) of Section 7.01 may be waived only by all of the Holders of Certificates affected by such default or Event of Default and (b) no waiver pursuant to this Section 7.04 shall affect the Holders of Certificates in the manner set forth in the third paragraph of Section 11.01. Upon any such waiver of a default or Event of Default by the Holders representing the requisite percentage of Voting Rights of Certificates affected by such default or Event of Default, such default or Event of Default shall cease to exist and shall be deemed to have been remedied for every purpose hereunder. No such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon except to the extent expressly so waived.
SECTION 8.01. Duties of Trustee.
The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Agreement. If an Event of Default occurs and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Agreement, and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Any permissive right of the Trustee enumerated in this Agreement shall not be construed as a duty.
The Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports, documents, orders or other instruments furnished to the Trustee which are specifically required to be furnished pursuant to any provision of this Agreement, shall examine them to determine whether they conform to the requirements of this Agreement. If any such instrument is found not to conform to the requirements of this Agreement in a material manner, the Trustee shall take action as it deems appropriate to have the instrument corrected.
The Trustee shall sign on behalf of the Trust Fund any tax return that the Trustee is required to sign pursuant to applicable federal, state or local tax laws.
The Trustee covenants and agrees that it shall perform its obligations hereunder in a manner so as to maintain the status of the Trust Fund as a REMIC under the REMIC Provisions and to prevent the imposition of any federal, state or local income, prohibited transaction, contribution or other tax on the Trust Fund to the extent that maintaining such status and avoiding such taxes are reasonably within the control of the Trustee and are reasonably within the scope of its duties under this Agreement.
The Trustee shall cooperate to the extent practicable, with the Depositor in the preparation of any information, for the Holder of any Certificate, which the Depositor in its sole discretion deems necessary and appropriate for purposes of satisfying applicable information reporting requirements under Rule 144A or otherwise.
No provision of this Agreement shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct; provided, however, that:
(i) Prior to the occurrence of an Event of Default, and after the curing of all such Events of Default which may have occurred, the duties and obligations of the Trustee shall be determined solely by the express provisions of this Agreement, the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement, no implied covenants or obligations shall be read into this Agreement against the Trustee and, in the absence of bad faith on
of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the
(ii) The Trustee shall not be personally liable for an error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts;
(iii) The Trustee shall not be personally liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of Holders of Certificates entitled to at least 25% of the Voting Rights relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Agreement.
SECTION 8.02. Certain Matters Affecting the Trustee.
Except as otherwise provided in Section 8.01:
(a) The Trustee may request and rely upon and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond or other paper or document reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties;
(b) The Trustee may consult with counsel and any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance
(c) The Trustee shall be under no obligation to exercise any of the trusts or powers vested in it by this Agreement or to make any investigation of matters arising hereunder or to institute, conduct or defend any litigation hereunder or in relation hereto at the request, order or direction of any of the Certificateholders, pursuant to the provisions of this Agreement, unless such Certificateholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (which has not been cured), to exercise such of the rights and powers vested in it by this Agreement, and to use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his
(d) The Trustee shall not be personally liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement;
(e) Prior to the occurrence of an Event of Default hereunder and after the curing of all Events of Default which may have occurred, the Trustee shall not be bound to make any investigation into the facts or matters stated in any opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing to do so by Holders of Certificates entitled to at least 25% of the Voting Rights; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Agreement, the Trustee may require reasonable indemnity against such expense or liability as a condition to taking any such action. The reasonable expense of every such reasonable examination shall be paid by the Master Servicer or, if paid by the Trustee, shall be repaid by the Master Servicer upon demand; and
(f) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys.
SECTION 8.03. Trustee Not Liable for Certificates or Mortgage Loans.
The recitals contained herein and in the Certificates, other than the signature of the Trustee on the Certificates and the certificate of authentication, shall be taken as the statements of the Depositor or the Master Servicer, as the case may be, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations or warranties as to the validity or sufficiency of this Agreement or of the Certificates or of any Mortgage Loan or related document, other than the signature of the Trustee on the Certificates and the Certificate of Authentication. The Trustee shall not be accountable for the use or application by the Depositor or the Master Servicer of any of the Certificates or of the proceeds of such Certificates, or for the use or application of any funds paid to the Seller in respect of the Mortgage Loans or deposited in or withdrawn from the Custodial Account, the Excess Proceeds Account or the Certificate Account or any other account by or on behalf of the Depositor or the Master Servicer, other than any funds held by or on behalf of the Trustee in accordance with Section 3.10.
SECTION 8.04. Trustee May Own Certificates.
The Trustee in its individual or any other capacity may become the owner or pledgee of Certificates with the same rights it would have if it were not Trustee.
SECTION 8.05. Master Servicer to Pay Trustee's Fees.
The Master Servicer covenants and agrees to pay to the Trustee or any co-trustee appointed pursuant to Section 8.10 from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee or any co-trustee of an express trust) for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder or of the Trustee or any co-trustee. Except as otherwise provided in this Agreement, the Trustee or any co-trustee and any director, officer, employee or agent of the Trustee or any co-trustee shall be indemnified by the Trust Fund and held harmless against any claim, loss, liability or expense incurred in connection with any Event of Default, any breach of this Agreement, any claim or legal action, including any pending or threatened claim or legal action relating to the acceptance or administration of its trusts hereunder or the Certificates, other than any claim, loss, liability or expense incurred in connection with a breach constituting willful misfeasance, bad faith or negligence of the Trustee or any co-trustee in the performance of its duties hereunder or by reason of reckless disregard of its obligations and duties hereunder. The provisions of this Section 8.05 shall survive the termination of this Agreement.
SECTION 8.06. Eligibility Requirements for Trustee.
The Trustee hereunder shall at all times be a corporation or a national banking association organized and doing business under the laws of any state or the United States of America or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal or state authority. In addition, the Trustee shall at all times be acceptable to the Rating Agency rating the Certificates. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 8.07. The corporation or national banking association serving as Trustee may have normal banking and trust relationships with the Seller and its affiliates or the Master Servicer and its affiliates; provided, however, that such corporation cannot be an affiliate of the Master Servicer other than the Trustee in its role as successor to the Master Servicer.
SECTION 8.07. Resignation and Removal of the Trustee.
The Trustee may at any time resign and be discharged from the trusts hereby created by giving notice thereof to the Depositor, the Master Servicer and to all Certificateholders; provided, that such resignation shall not be effective until successor trustee is appointed and accepts appointment in accordance with the following provisions. Upon receiving such notice of resignation, the Master Servicer shall promptly appoint a successor trustee who meets the eligibility requirements of Section 8.06 by written instrument, in duplicate, which instrument shall be delivered to the resigning Trustee and to the successor trustee. A copy of such instrument shall be delivered to the Certificateholders and the Master Servicer by the Depositor. If no successor trustee shall have been so appointed and have accepted appointment within 60 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee; provided, however, that the resigning Trustee shall not resign and be discharged from the trusts hereby created until such time as the Rating Agency rating the Certificates approves the successor trustee.
If at any time the Trustee shall cease to be eligible in accordance with the provisions of Section 8.06 and shall fail to resign after written request therefor by the Master Servicer, or if at any time the Trustee shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, or if the rating of the long-term debt obligations of the Trustee is not acceptable to the Rating Agency in respect of mortgage pass-through certificates having a rating equal to the then current rating on the Certificates, then the Master Servicer may remove the Trustee and appoint a successor trustee who meets the eligibility requirements of Section 8.06 by written instrument, in duplicate, which instrument shall be delivered to the Trustee so removed and to the successor trustee. A copy of such instrument shall be delivered to the Certificateholders and the Master Servicer by the Depositor.
The Holders of Certificates entitled to at least 51% of the Voting Rights may at any time remove the Trustee and appoint a successor trustee by written instrument or instruments, in triplicate, signed by such Holders or their attorneys-in-fact duly authorized, one complete set of which instruments shall be delivered to the Master Servicer, one complete set to the Trustee so removed and one complete set to the successor so appointed. A copy of such instrument shall be delivered to the Certificateholders and the Master Servicer by the Depositor.
Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section shall not become effective until acceptance of appointment by the successor trustee as provided in Section 8.08.
Any successor trustee appointed as provided in Section 8.07 shall execute, acknowledge and deliver to the Master Servicer and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and obligations of its predecessor hereunder, with the like effect as if originally named as trustee herein. The predecessor trustee shall deliver to the successor trustee all Mortgage Files and related documents and statements held by it hereunder, and the Master Servicer and the predecessor trustee shall execute and deliver such instruments and do such other things as may reasonably be required for more fully and certainly vesting and confirming in the successor trustee all such rights, powers, duties and obligations.
No successor trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor trustee shall be eligible under the provisions of Section 8.06.
Upon acceptance of appointment by a successor trustee as provided in this Section, the Master Servicer shall mail notice of the succession of such trustee hereunder to all Holders of Certificates at their addresses as shown in the Certificate Register. If the Master Servicer fails to mail such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Master Servicer.
SECTION 8.09. Merger or Consolidation of Trustee.
Any corporation into which the Trustee may be merged or converted or with which it may be consolidated or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be eligible under the provisions of Section 8.06, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding.
SECTION 8.10. Appointment of Co-Trustee or Separate Trustee.
Notwithstanding any other provisions hereof, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Trust Fund or property securing the same may at the time be located, the Depositor and the Trustee acting jointly shall have the power and shall execute and deliver all instruments to appoint one or more Persons approved by the Trustee to act as co-trustee or co-trustees, jointly with the Trustee, or separate trustee or separate trustees, of all or any part of the Trust Fund, and to vest in such Person or Persons, in such capacity, such title to the Trust Fund, or any part thereof, and, subject to the other provisions of this Section 8.10, such powers, duties, obligations, rights and trusts as the Depositor and the Trustee may consider necessary or desirable. If the Depositor shall not have joined in such appointment within 15 days after the receipt by it of a request so to do, or in case an Event of Default shall have occurred and be continuing, the Trustee alone shall have the power to make such appointment. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 8.06 hereunder and no notice to Holders of Certificates of the appointment of co-trustee(s) or separate trustee(s) shall be required under Section 8.08 hereof.
In the case of any appointment of a co-trustee or separate trustee pursuant to this Section 8.10 all rights, powers, duties and obligations conferred or imposed upon the Trustee shall be conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or co-trustee jointly, except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed (whether as Trustee hereunder or as successor to the Master Servicer hereunder), the Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust Fund or any portion thereof in any such jurisdiction) shall be exercised and performed by such separate trustee or co-trustee at the direction of the Trustee.
Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article VIII. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee or separately, as may be provided therein, subject to all the provisions of this Agreement, specifically including every provision of this Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Trustee. Every such instrument shall be filed with the Trustee.
Any separate trustee or co-trustee may, at any time, constitute the Trustee, its agent or attorney-in-fact, with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Agreement on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the appointment of a new or successor trustee.
SECTION 9.01. Termination Upon Repurchase or Liquidation of All Mortgage Loans.
Subject to Section 9.02, the respective obligations and responsibilities of the Depositor, the Master Servicer and the Trustee created hereby (other than the obligations of the Master Servicer to the Trustee pursuant to Section 8.05 and of the Master Servicer to provide for and the Trustee to make payments to Certificateholders as hereafter set forth) shall terminate upon payment to the Certificateholders of all amounts held by or on behalf of the Trustee and required to be paid to them hereunder following the earlier to occur of (i) the repurchase by the Master Servicer of all Mortgage Loans and each REO Property in respect thereof remaining in the Trust Fund at a price equal to (a) 100% of the unpaid principal balance of each Mortgage Loan (other than one as to which a REO Property was acquired) on the day of repurchase together with accrued interest on such unpaid principal balance at the Net Mortgage Rate to the first day of the month in which the proceeds of such repurchase are to be distributed, plus (b) the appraised value of any REO Property (but not more than the unpaid principal balance of the related Mortgage Loan, together with accrued interest on that balance at the Net Mortgage Rate to the first day of the month of repurchase), less the good faith estimate of the Master Servicer of liquidation expenses to be incurred in connection with its disposal thereof, such appraisal to be conducted by an appraiser mutually agreed upon by the Master Servicer and the Trustee; and (ii) the final payment or other liquidation (or any Advance with respect thereto) of the last Mortgage Loan remaining in the Trust Fund (or the disposition of all REO Property in respect thereof); provided, however, that in no event shall the trust created hereby continue beyond the expiration of 21 years from the death of the last survivor of the descendants of Joseph P. Kennedy, the late ambassador of the United States to the Court of St. James, living on the date hereof. In the case of any repurchase by the Master Servicer pursuant to clause (i), the Master Servicer shall include in such repurchase price the amount of any Advances that will be reimbursed to the Master Servicer pursuant to Section 3.11(iii) and the Master Servicer shall exercise reasonable efforts to cooperate fully with the Trustee in effecting such repurchase and the transfer of the Mortgage Loans and related Mortgage Files and related records to the Master Servicer.
The right of the Master Servicer to repurchase all Mortgage Loans pursuant to (i) above shall be conditioned upon the aggregate Stated Principal Balance of such Mortgage Loans at the time of any such repurchase aggregating an amount equal to or less than 5% of the aggregate Stated Principal Balance of the Mortgage Loans at the Cut-off Date. If such right is exercised, the Master Servicer upon such repurchase shall provide to the Trustee, the certification required by Section 3.16.
Notice of any termination, specifying the Distribution Date upon which the Certificateholders may surrender their Certificates to the Trustee for payment of the final distribution and cancellation, shall be given promptly by the Master Servicer by letter to the Trustee and the Certificateholders mailed (a) in the event such notice is given in connection with the Master Servicer's election to repurchase, not earlier than the 15th day and not later than the 25th day of the month next preceding the month of such final distribution or (b) otherwise during the month of such final distribution on or before the Determination Date in such month, in each case specifying (i) the Distribution Date upon which final payment of the Certificates will be made upon presentation and surrender of Certificates at the office of the Certificate Registrar therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Distribution Date is not applicable, payments being made only upon presentation and surrender of the Certificates at the office of the Certificate Registrar therein specified. In the event such notice is given in connection with the Master Servicer's election to repurchase, the Master Servicer shall deliver to the Trustee for deposit in the Certificate Account on the Business Day immediately preceding the Distribution Date specified in such notice an amount equal to the above-described repurchase price payable out of its own funds. Upon presentation and surrender of the Certificates by the Certificateholders, the Trustee shall distribute to the Certificateholders (i) the amount otherwise distributable on such Distribution Date, if not in connection with the Master Servicer's election to repurchase, or (ii) if the Master Servicer elected to so repurchase, an amount determined as follows: with respect to each Class A-1 Certificate, Class A-2 Certificate and Class B Certificate, the outstanding Certificate Principal Balance thereof, plus one month's interest thereon at the applicable Pass-Through Rate and any previously unpaid Accrued Certificate Interest; with respect to each Class SA Certificate and Class SB Certificate, one month's interest at the applicable Pass-Through Rate based upon the Notional Amount and any previously unpaid Accrued Certificate Interest (including the Outstanding Class SB Unpaid Interest Amount in the case of the Class SB Certificates); and with respect to each Class R Certificate, the Percentage Interest evidenced thereby multiplied by the difference, if any, between the above described repurchase price and the aggregate amount to be distributed to the Class SA Certificateholders, the Class A-1 Certificateholders, the Class A-2 Certificateholders, the Class B Certificateholders and the Class SB Certificateholders. Upon certification to the Trustee by a Servicing Officer, following such final deposit, the Trustee shall promptly release the Mortgage Files as directed by the Master Servicer for the remaining Mortgage Loans, and the Trustee shall execute all assignments, endorsements and other instruments required by the Master Servicer as being necessary to effectuate such transfer.
In the event that all of the Certificateholders shall not surrender their Certificates for cancellation within six months after the time specified in the above-mentioned notice, the Trustee shall give a second notice to the remaining Certificateholders to surrender their Certificates for cancellation and receive the final distribution with respect thereto. If within six months after the second notice all of the Certificates shall not have been surrendered for cancellation, the Trustee shall take reasonable steps as directed by the Depositor, or appoint an agent to take reasonable steps, to contact the remaining Certificateholders concerning surrender of their Certificates, and the cost thereof shall be paid out of the funds and other assets which remain subject hereto. If, within nine months after the second notice, all of the Certificates shall not have been surrendered for cancellation, the Class R Certificateholders shall be entitled to all unclaimed funds and other assets which remain subject hereto.
SECTION 9.02. Additional Termination Requirements.
(a) In the event the Master Servicer repurchases the Mortgage Loans as provided in Section 9.01, the Trust Fund shall be terminated in accordance with the following additional requirements, unless the Master Servicer, at its own expense, obtains for the Trustee an Opinion of Counsel to the effect that the failure of the Trust Fund to comply with the requirements of this Section 9.02 will not (i) result in the imposition of taxes on the net income derived from "prohibited transactions" of the Trust Fund as defined in Section 860F of the Code or (ii) cause the Trust Fund to fail to qualify as a REMIC under the REMIC Provisions at any time that any Certificates are outstanding:
(i) The Trustee shall establish a 90-day liquidation period for the Trust Fund and specify the first day of such period in a statement attached to the Trust Fund's final Tax Return pursuant to Treasury Regulation Section 1.860F-1. The Trustee shall satisfy all the requirements of a qualified liquidation under Section 860F of the Code and any regulations thereunder, as evidenced by an Opinion of Counsel obtained at the expense
(ii) During such 90-day liquidation period, and at or prior to the time of making of the final payment on the Certificates, the Trustee shall sell all of the assets of the Trust Fund for cash; and
(iii) At the time of the making of the final payment on the Certificates, the Trustee shall distribute or credit, or cause to be distributed or credited, to the Holders of the Class R Certificates all cash on hand in the Trust Fund (other than cash retained to meet claims), and the Trust Fund shall terminate at that time.
(b) By their acceptance of the Class R Certificates, the Holders thereof hereby agree to authorize the Trustee to specify the 90-day liquidation period for the Trust Fund, which authorization shall be binding upon all successor Class R Certificateholders.
(a) The Trustee shall make an election to treat the Trust Fund as a REMIC under the Code, and if necessary, under applicable state law. Such election will be made on Form 1066 or other appropriate federal tax or information return or any appropriate state return for the taxable year ending on the last day of the calendar year in which the Certificates are issued. For purposes of the REMIC election in respect of the Trust Fund, the Class SA Certificates, the Class A-1 Certificates, the Class A-2 Certificates, the Class B Certificates and the Class SB Certificates shall be designated as the "regular interests" and the Class R Certificates shall be designated as the sole Class of "residual interest" in the Trust Fund. The Trustee shall not permit the creation of any "interests" in the Trust Fund (within the meaning of Section 860G of the Code) other than the Trust Fund regular interests and the interests represented by the Certificates.
(b) The Closing Date is hereby designated as the Startup Day of the Trust Fund within the meaning of Section 860G(a)(9) of the Code.
(c) The Trustee shall pay out of its own funds, without any right of reimbursement, any and all expenses relating to any tax audit of the Trust Fund (including, but not limited to, any professional fees or any administrative or judicial proceedings with respect thereto that involved the Internal Revenue Service or state tax authorities), other than the expense of obtaining any tax related Opinion of Counsel not obtained in connection with such an audit and other than taxes, in either case except as specified herein; provided, however, that if such audit resulted from the negligence of the Master Servicer or the Depositor, then the Master Servicer or the Depositor, as the case may be, shall pay such expenses. The Trustee shall hold a Class R Certificate representing a 0.01% Percentage Interest of all Class R Certificates and shall be designated as the tax matters person of the Trust Fund in the manner provided under Treasury Regulations Section 1.860F-4(d) and Temporary Treasury Regulations Section 301.6231(a)(7)-1T. The Trustee, as tax matters person, shall (i) act on behalf of the Trust Fund in relation to any tax matter or controversy involving the Trust Fund and (ii) represent the Trust Fund in any administrative or judicial proceeding relating to an examination or audit by any governmental taxing authority with respect thereto. To the extent authorized under the Code and the regulations promulgated thereunder, each Holder of a Class R Certificate, hereby irrevocably appoints and authorizes the Trustee to be its attorney-in-fact for purposes of signing any Tax Returns required to be filed on behalf of the Trust Fund.
(d) The Trustee shall prepare or cause to be prepared, sign and file all of the Tax Returns in respect of the Trust Fund created hereunder, other than Tax Returns required to be filed by the Master Servicer pursuant to Section 4.05. The expenses of preparing and filing such returns shall be borne by the Trustee without any right of reimbursement therefor.
(e) The Trustee shall perform on behalf of the Trust Fund all reporting and other tax compliance duties that are the responsibility of the Trust Fund under the Code, REMIC Provisions or other compliance guidance issued by the Internal Revenue Service or any state or local taxing authority. Among its other duties, as required by the Code, the REMIC Provisions or other such compliance guidance, the Trustee shall provide (i) to any Transferor of a Class R Certificate such information as is necessary for the application of any tax relating to the transfer of a Class R Certificate to any Person who is not a Disqualified Organization, (ii) to Certificateholders such information or reports as are required by the Code or the REMIC Provisions including reports relating to interest, original issue discount and market discount or premium (using the Prepayment Assumption) and (iii) to the Internal Revenue Service the name, title, address and telephone number of the person who will serve as the representative of the Trust Fund. In addition, the Depositor shall provide or cause to be provided to the Trustee, within ten (10) days after the Closing Date, all information or data that the Trustee reasonably determines to be relevant for tax purposes as to the valuations and issue prices of the Certificates, including, without limitation, the price, yield, prepayment assumption and projected cash flow of the Certificates.
(f) The Trustee shall take such action and shall cause the Trust Fund created hereunder to take such action as shall be necessary to create or maintain the status thereof as a REMIC under the REMIC Provisions (and the Master Servicer shall assist it, to the extent reasonably requested by it). The Trustee shall not take any action, cause the Trust Fund to take any action or fail to take (or fail to cause to be taken) any action that, under the REMIC Provisions, if taken or not taken, as the case may be, could (i) endanger the status of the Trust Fund as a REMIC or (ii) result in the imposition of a tax upon the Trust Fund (including but not limited to the tax on prohibited transactions as defined in Section 860F(a)(2) of the Code and the tax on contributions to a REMIC set forth in Section 860G(d) of the Code) (either such event, an "Adverse REMIC Event") unless the Trustee received an Opinion of Counsel (at the expense of the party seeking to take such action but in no event shall such Opinion of Counsel be an expense of the Trustee) to the effect that the contemplated action will not, with respect to the Trust Fund created hereunder, endanger such status or result in the imposition of such a tax. The Master Servicer shall not take or fail to take any action (whether or not authorized hereunder) as to which the Trustee has advised it in writing that it has received an Opinion of Counsel (which such Opinion of Counsel shall not be an expense of the Trustee) to the effect that an Adverse REMIC Event could occur with respect to such action. In addition, prior to taking any action with respect to the Trust Fund or its assets, or causing the Trust Fund to take any action which is not expressly permitted under the terms of this Agreement, the Master Servicer will consult with the Trustee or its designee, in writing, with respect to whether such action could cause an Adverse REMIC Event to occur with respect to the Trust Fund, and the Master Servicer shall not take any such action or cause the Trust Fund to take any such action as to which the Trustee has advised it in writing that an Adverse REMIC Event could occur. The Trustee may consult with counsel to make such written advice, and the cost of same shall be borne by the party seeking to take the action not permitted by this Agreement (but in no event shall such cost be an expense of the Trustee). At all times as may be required by the Code, the Trustee will ensure that substantially all of the assets of the Trust Fund will consist of "qualified mortgages" as defined in Section 860G(a)(3) of the Code and "permitted investments" as defined in Section 860G(a)(5) of the Code.
(g) In the event that any tax is imposed on "prohibited transactions" of the Trust Fund created hereunder as defined in Section 860F(a)(2) of the Code, on "net income from foreclosure property" of the Trust Fund as defined in Section 860G(c) of the Code, on any contributions to the Trust Fund after the Startup Day therefor pursuant to Section 860G(d) of the Code, or any other tax is imposed by the Code or any applicable provisions of state or local tax laws, such tax shall be charged (i) to the Trustee pursuant to Section 10.03 hereof, if such tax arises out of or results from a breach by the Trustee of any of its obligations under this Article X, (ii) to the Master Servicer pursuant to Section 10.03 hereof, if such tax arises out of or results from a breach by the Master Servicer of any of its obligations under Article III or this Article X, or otherwise (iii) against amounts on deposit in the Certificate Account and shall be paid by withdrawal therefrom.
(h) On or before April 15 of each calendar year, commencing April 15, 1996, the Trustee shall deliver to the Master Servicer and the Rating Agency a Certificate from a Responsible Officer of the Trustee stating the Trustee's compliance with this Article X.
(i) The Master Servicer and the Trustee shall, for federal income tax purposes, maintain books and records with respect to the Trust Fund on a calendar year and on an accrual basis.
(j) Following the Startup Day, the Trustee shall not accept any contributions of assets to the Trust Fund unless it shall have received an Opinion of Counsel (which such Opinion of Counsel shall not be an expense of the Trustee) to the effect that the inclusion of such assets in the Trust Fund will not cause the Trust Fund to fail to qualify as a REMIC at any time that any Certificates are outstanding or subject the Trust Fund to any tax under the REMIC Provisions or other applicable provisions of federal, state and local law or ordinances.
(k) Neither the Trustee nor the Master Servicer shall enter into any arrangement by which the Trust Fund will receive a fee or other compensation for services nor permit the Trust Fund or the Trustee on behalf of the Trust Fund to receive any income from assets other than "qualified mortgages" as defined in Section 860G(a)(3) of the Code or "permitted investments" as defined in Section 860G(a)(5) of the Code.
(l) Solely for purposes of satisfying Section 1.860G-1(a)(4)(iii) of the Treasury Regulations, the "latest possible maturity date" by which the Certificate Principal Balances of each Class of Certificates representing a regular interest in the Trust Fund would be reduced to zero is January 25, 2026, which is the Distribution Date immediately following the latest scheduled maturity of any Mortgage Loan.
SECTION 10.02. Prohibited Transactions and Activities.
Neither the Depositor, the Master Servicer nor the Trustee shall sell, dispose of or substitute for any of the Mortgage Loans, except in connection with (i) the foreclosure of a Mortgage Loan, including but not limited to, the acquisition or sale of a Mortgaged Property acquired by deed in lieu of foreclosure, (ii) the bankruptcy of the Trust Fund, (iii) the termination of the Trust Fund pursuant to Article IX of this Agreement, or (iv) a purchase of
Mortgage Loans pursuant to Article II or III of this Agreement nor acquire any assets for the Trust Fund, nor sell or dispose of any investments in the Custodial Account[, the Excess Proceeds Account] or the Certificate Account for gain, nor accept any contributions to the Trust Fund after the Closing Date unless it has received an Opinion of Counsel (at the expense of the party seeking to cause such sale, disposition, substitution or acquisition but in no event shall such Opinion of Counsel be an expense of the Trustee) that such sale, disposition, substitution or acquisition will not (a) affect adversely the status of the Trust Fund as a REMIC or (b) cause the Trust Fund to be subject to a tax on "prohibited transactions" or "contributions" pursuant to the REMIC Provisions.
SECTION 10.03. Master Servicer and Trustee Indemnification.
(a) The Trustee agrees to indemnify the Trust Fund, the Depositor and the Master Servicer for any taxes and costs including, without limitation, any reasonable attorneys' fees imposed on or incurred by the Trust Fund, the Depositor or the Master Servicer, as a result of a breach of the Trustee's covenants set forth in this Article X.
(b) The Master Servicer agrees to indemnify the Trust Fund, the Depositor and the Trustee for any taxes and costs (including, without limitation, any reasonable attorneys' fees) imposed on or incurred by the Trust Fund, the Depositor or the Trustee, as a result of a breach of the Master Servicer's covenants set forth in this Article X or in Article III with respect to compliance with the REMIC Provisions, including without limitation, any penalties arising from the Trustee's execution of Tax Returns prepared by the Master Servicer that contain errors or omissions.
This Agreement may be amended from time to time by the Depositor, the Master Servicer and the Trustee without the consent of any of the Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement any provisions herein which may be defective or inconsistent with any other provisions herein, (iii) to amend this Agreement in any respect subject to the provisions below, or (iv) if such amendment, as evidenced by an Opinion of Counsel (provided by the Person requesting such amendment) delivered to the Trustee, is reasonably necessary to comply with any requirements imposed by the Code or any successor or amendatory statute or any temporary or final regulation, revenue ruling, revenue procedure or other written official announcement or interpretation relating to federal income tax laws or any proposed such action which, if made effective, would apply retroactively to the Trust Fund at least from the effective date of such amendment; provided that such action (except any amendment described in (iv) above) shall not, as evidenced by an Opinion of Counsel (provided by the Person requesting such amendment) delivered to the Trustee, adversely affect in any material respect the interests of any Certificateholder (other than Certificateholders who shall consent to such amendment).
This Agreement may also be amended from time to time by the Depositor, the Master Servicer and the Trustee with the consent of the Holders of Certificates entitled to at least 66-2/3% of the Voting Rights for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Holders of Certificates; provided, however, that no such amendment shall (i) reduce in any manner the amount of, or delay the timing of, payments received on Mortgage Loans which are required to be distributed on any Certificate without the consent of the Holder of such Certificate, (ii) adversely affect in any material respect the interests of the Holders of any Class of Certificates in a manner other than as described in (i), without the consent of the Holders of Certificates of such Class evidencing at least 66-2/3% of the Voting Rights of such Class, or (iii) reduce the aforesaid percentage of Certificates the Holders of which are required to consent to any such amendment, without the consent of the Holders of all Certificates then outstanding. Notwithstanding any other provision of this Agreement, for purposes of the giving or withholding of consents pursuant to this Section 11.01, Certificates registered in the name of the Seller or the Master Servicer or any affiliate thereof shall be entitled to Voting Rights with respect to matters described in (i), (ii) and (iii) of this paragraph.
Notwithstanding any contrary provision of this Agreement, the Trustee shall not consent to any amendment to this Agreement unless it shall have first received an Opinion of Counsel (provided by the Person requesting such amendment) to the effect that such amendment will not result in the imposition of any tax on the Trust Fund pursuant to the REMIC Provisions or cause the Trust Fund to fail to qualify as a REMIC at any time that any of the Certificates are outstanding.
Promptly after the execution of any such amendment the Trustee shall furnish a statement describing the amendment to each Certificateholder.
It shall not be necessary for the consent of Certificateholders under this Section 11.01 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. The manner of obtaining such consents and of evidencing the authorization of the execution thereof by Certificateholders shall be subject to such reasonable regulations as the Trustee may prescribe.
Prior to executing any amendment pursuant to this Section, the Trustee shall be entitled to receive an Opinion of Counsel (provided by the Person requesting such amendment) to the effect that such amendment is authorized or permitted by this Agreement. The cost of an Opinion of Counsel delivered pursuant to this Section 11.01 shall be an expense of the party requesting such amendment, but in any case shall not be an expense of the Trustee.
The Trustee may, but shall not be obligated to enter into any amendment pursuant to this Section that affects its rights, duties and immunities under this Agreement or otherwise.
SECTION 11.02. Recordation of Agreement; Counterparts.
To the extent permitted by applicable law, this Agreement is subject to recordation in all appropriate public offices for real property records in all the counties or other comparable jurisdictions in which any or all of the properties subject to the Mortgages are situated, and in any other appropriate public recording office or elsewhere, such recordation to be effected by the Master Servicer and at the expense of the Depositor on direction by the Trustee, but only upon direction accompanied by an Opinion of Counsel to the effect that such recordation materially and beneficially affects the interests of the Certificateholders.
For the purpose of facilitating the recordation of this Agreement as herein provided and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument.
SECTION 11.03. Limitation on Rights of Certificateholders.
The death or incapacity of any Certificateholder shall not operate to terminate this Agreement or the Trust Fund, nor entitle such Certificateholder's legal representatives or heirs to claim an accounting or to take any action or proceeding in any court for a partition or winding up of the Trust Fund, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them.
No Certificateholder shall have any right to vote (except as expressly provided for herein) or in any manner otherwise control the operation and management of the Trust Fund, or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Certificates, be construed so as to constitute the Certificateholders from time to time as partners or members of an association; nor shall any Certificateholder be under to any third party by reason of any action taken by the parties to this Agreement pursuant to any provision hereof.
No Certificateholder shall have any right by virtue of any provision of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Trustee a notice of an Event of Default, or of a default by the Seller or the Trustee in the performance of any obligation hereunder, and of the continuance thereof, as hereinbefore provided, and unless also the Holders of Certificates entitled to at least 25% of the Voting Rights shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding. It is understood and intended, and expressly covenanted by each Certificateholder with every other Certificateholder and the Trustee, that no one or more Holders of Certificates shall have any right in any manner whatever by virtue of any provision of this Agreement to affect, disturb or prejudice the rights of the Holders of any other of such Certificates, or to obtain or seek to obtain priority over or preference to any other such Holder, or to enforce any right under this Agreement, except in the manner herein provided and for the equal, ratable and common benefit of all Certificateholders. For the protection and enforcement of the provisions of this Section, each and every Certificateholder and the Trustee shall be entitled to such relief as can be given either at law or in equity.
This Agreement and the Certificates shall be construed in accordance with the laws of the State of New York and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws.
All demands, notices and direction hereunder shall be in writing and shall be deemed effective upon receipt when delivered to (a) in the case of the Depositor, 140 Broadway, 43rd Floor, New York, New York 10005, Attention: N. Dante LaRocca, or such other address as may hereafter be furnished to the Trustee and the Master Servicer in writing by the Depositor, (b) in the case of the Trustee, Four Albany Street, New York, New York 10006, Attention: DLJ/Quality Series 1995-QE11, or such other address as may hereafter be furnished to the Master Servicer and the Depositor in writing by the Trustee, (c) in the case of the Master Servicer, Temple-Inland Mortgage Corporation, 1300 Mo-Pac Expressway South, Austin, Texas 78746, Attention: Contract Manager, or such other address as may hereafter be furnished to the Depositor and the Trustee in writing and (d) in the case of the Seller, Quality Mortgage USA, Inc., 16800 Aston Street, Irvine, California 92714, Attention: President, or such other address as may hereafter be furnished to the Trustee, the Master Servicer and the Depositor in writing. Any notice required or permitted to be mailed to a Certificateholder shall be given by first class mail, postage prepaid, at the address of such Holder as shown in the Certificate
Register. Any notice so mailed within the time prescribed in this Agreement shall be conclusively presumed to have been duly given, whether or not the Certificateholder receives such notice.
SECTION 11.06. Severability of Provisions.
If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement or of the Certificates or the rights of the Holders thereof.
SECTION 11.07. Successors and Assigns; Third Party Beneficiary.
The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the parties hereto, and all such provisions shall inure to the benefit of the Trustee and the Certificateholders. The parties hereto agree that the Seller is the intended third party beneficiary of Sections 3.07, [3.10 and 3.22] hereof, and that the Seller may enforce such provisions to the same extent as if the Seller were a party to this Agreement.
SECTION 11.08. Article and Section Headings.
The article and section headings herein are for convenience of reference only, and shall not limit or otherwise affect the meaning hereof.
SECTION 11.09. Notice to Rating Agency.
The Trustee shall use its best efforts to promptly provide notice to the Rating Agency with respect to each of the following of which it has actual knowledge:
1. Any material change or amendment to this Agreement;
2. The occurrence of any Event of Default that has not been cured;
3. The resignation or termination of the Master Servicer or the
4. The repurchase of Mortgage Loans pursuant to Section 2.03;
5. The final payment to Certificateholders; and
6. Any change in the location of the Custodial Account, the Excess Proceeds Account or the Certificate Account.
In addition, the Trustee shall promptly furnish to the Rating Agency copies of the following:
1. Each report to Certificateholders described in Section 4.02; and
2. Each annual independent public accountants' servicing report described in Section 3.20.
Any such notice pursuant to this Section 11.09 shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by first class mail, postage prepaid, or by express delivery service to Moody's Investors Service, Inc., 99 Church Street, New York, New York 10007, Attention: Residential Pass-Through Monitoring, or such other address as the Rating Agency may designate in writing to the parties thereto.
IN WITNESS WHEREOF, the Depositor, the Master Servicer and the Trustee have caused their names to be signed hereto by their respective officers thereunto duly authorized all as of the day and year first above written.
STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK )
On the 28th day of December, 1995 before me, a notary public in and for said State, personally appeared Paul Najarian known to me to be a Vice President of DLJ Mortgage Acceptance Corp., a corporation that executed the within instrument, and also known to me to be the person who executed the within instrument on behalf of said corporation as a duly authorized officer of said corporation, and acknowledged to me that said corporation executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.
Notary Public, State of New York [Notarial Seal] Commission Expires Aug. 30, 1997
On the 28th day of December, 1995 before me, a notary public in and for said State, personally appeared Joe H. Farr known to me to be a EVP, CFO, Treasurer of Temple-Inland Mortgage Corporation, and also known to me to be the person who executed the within instrument as a duly authorized officer of said corporation on behalf of said corporation, and acknowledged to me that said corporation executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.
STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK )
On the 28th day of December, 1995 before me, a notary public in and for said State, personally appeared Todd A. Andrew known to me to be an Assistant Vice President of Bankers Trust Company, a corporation that executed within instrument, and also known to me to be the person who executed it on behalf of said corporation as a duly authorized officer of said corporation, and acknowledged to me that said corporation executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.
Cert Filed in New York County Commission Expires January 14, 1997
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986 (THE "CODE").
[THIS CERTIFICATE IS SUBORDINATE TO THE CLASS SA CERTIFICATES AND THE CLASS A-1 CERTIFICATES OF THE SAME SERIES TO THE EXTENT DESCRIBED HEREIN AND IN THE AGREEMENT.]
[NO TRANSFER OF THIS CERTIFICATE MAY BE MADE TO AN EMPLOYEE BENEFIT PLAN, OR PERSON USING "PLAN ASSETS" OF ANY PLAN TO EFFECT SUCH ACQUISITION (INCLUDING ANY INSURANCE COMPANY UNDER THE CIRCUMSTANCES DESCRIBED IN THE AGREEMENT),SUBJECT TO SECTION 406 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR SECTION 4975 OF THE CODE OF 1986 (THE "CODE") UNLESS THE TRANSFEREE PROVIDES AN OPINION OF COUNSEL OR CERTIFICATION OF FACTS (UNDER THE LIMITED CIRCUMSTANCES DESCRIBED IN THE AGREEMENT), SATISFACTORY TO THE DEPOSITOR AND THE TRUSTEE OR THE CERTIFICATE REGISTRAR THAT SUCH DISPOSITION WILL NOT VIOLATE THE PROHIBITED TRANSACTION PROVISIONS OF SECTION 406 OF ERISA AND SECTION 4975 OF THE CODE.]
[THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSES OF APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS CERTIFICATE. ASSUMING THAT THE MORTGAGE LOANS PREPAY AT AN ASSUMED RATE OF PREPAYMENT USED SOLELY FOR THE PURPOSES OF APPLYING THE OID RULES TO THE CERTIFICATES EQUAL TO A CONSTANT PREPAYMENT RATE OF __% PER ANNUM (THE "PREPAYMENT ASSUMPTION"), THIS CERTIFICATE HAS BEEN ISSUED WITH NO MORE THAN $______ OF OID PER [$100,000] [$1,000] OF INITIAL [NOTIONAL AMOUNT] [CERTIFICATE PRINCIPAL BALANCE], THE YIELD TO MATURITY IS ___% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE INITIAL ACCRUAL PERIOD IS NO MORE THAN $___ PER [$100,000] [$1,000] OF INITIAL [NOTIONAL AMOUNT] [CERTIFICATE PRINCIPAL BALANCE] COMPUTED USING THE EXACT METHOD. NO REPRESENTATION IS MADE THAT THE MORTGAGE LOANS WILL PREPAY AT A RATE BASED ON THE PREPAYMENT ASSUMPTION OR AT ANY OTHER RATE.]
Series 1995-QE11 Aggregate Initial [Certificate Principal Balance] [Notional Amount] of the Class ___
Class ___ Initial [Certificate Principal Balance] [Notional Amount] of this Certificate:
[Adjustable][Variable] Initial Pass-Through Rate: _____%
Date of Pooling and Servicing Percentage Interest Evidenced Agreement and Cut-off Date: by this Certificate: _________%
First Distribution Date: Issue Date: January 25, 1996 December 28, 1995
Temple-Inland Mortgage Bankers Trust Company
SERIES 1995-QE11, CLASS [SA] [A-1] [A-2]
evidencing a beneficial ownership interest in a trust fund consisting primarily of a pool of adjustable rate residential mortgage loans sold by
This certifies that _________________________ is the registered owner of the Percentage Interest specified above in that certain beneficial ownership interest evidenced by all of the Class __ Certificates in the Trust Fund (as defined herein) established under a Pooling and Servicing Agreement, dated as specified above (the "Agreement"), among DLJ Mortgage Acceptance Corp. (hereinafter called the "Depositor", which term includes any successor entity under the Agreement), Temple-Inland Mortgage Corporation (the "Master Servicer") and Bankers Trust Company (the "Trustee"), a summary of certain of the pertinent provisions of which is set forth hereafter. The Percentage Interest evidenced hereby is equal to the initial [Notional Amount] [Certificate Principal Balance] of this Certificate divided by the aggregate initial [Notional Amount] [Certificate Principal Balance] of all of the Class __ Certificates as specified above. The Certificates of the Series specified above (collectively, the "Certificates") evidence in the aggregate the entire beneficial ownership interest in a segregated pool of assets created pursuant to the Agreement comprised of conventional one- to four-family residential first mortgage loans (the "Mortgage Loans"), or interests therein, and certain other assets as described herein. To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Agreement. This Certificate is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement the Holder of this Certificate by virtue of the acceptance hereof assents and by which such Holder is bound.
The Trustee shall distribute or cause to be distributed on the 25th day of each month or, if such 25th day is not a Business Day, the Business Day immediately following (each, a "Distribution Date"), commencing on the First Distribution Date specified above, to the Person in whose name this Certificate is registered at the close of business on the last Business Day of the month immediately preceding the month of such distribution (the "Record Date"), from the Available Distribution Amount an amount equal to the product of the Percentage Interest evidenced by this Certificate and the amount required to be distributed to the Holders of Class __ Certificates on such Distribution Date pursuant to the Agreement. [The Notional Amount of the Class SA Certificates as of any date of determination will be determined pursuant to the Agreement. The Class SA Certificates have no Certificate Principal Balance.] Reference is hereby made to the further provisions of this Certificate and the Agreement set forth herein, which further provisions shall for all purposes have the same effect as though fully set forth at this place.
All distributions will be made or caused to be made by the Trustee either by check mailed to the address of the Person entitled thereto as such name and address shall appear on the Certificate Register or, at the request of the Person entitled thereto if such Person shall have so notified the Trustee in writing by 5 Business Days prior to the applicable Record Date and such Certificateholder is the registered holder of Certificates the aggregate Initial Certificate Principal Balance of which is not less than $2,500,000 (or, with respect to the Class SA Certificates and the Class SB Certificates, is the registered holder of an aggregate initial Notional Amount of not less than $10,000,000 of the Class SA Certificates or the Class SB Certificates), in immediately available funds by wire transfer to the account of such Person. Notwithstanding the above, the final distribution on this Certificate will be made after due notice by the Master Servicer of the pendency of such distribution and only upon presentation and surrender of this Certificate at the office of the Trustee. [The Certificate Principal Balance hereof will be reduced to the extent of distributions allocable to principal and the principal portions of any Realized Losses allocable hereto.]
This Certificate is one of a duly authorized issue of Certificates of the series and class specified on the face hereof. The Certificates in the aggregate represent the entire beneficial ownership interest in: (i) the Mortgage Loans (exclusive of payments of principal and interest due on or before the Cut-off Date) as from time to time are subject to the Agreement and all payments under and proceeds of the Mortgage Loans, together with all documents included in the related Mortgage File; (ii) such funds or assets as from time to time are deposited in the Custodial Account, the Excess Proceeds Account or the Certificate Account; (iii) any REO Property; (iv) the Primary Hazard Insurance Policies, if any, and all other insurance policies with respect to the Mortgage Loans required to be maintained pursuant to the Agreement; and (v) the Depositor's interest in respect of the representations and warranties made by the Seller in the Mortgage Loan Purchase Agreement (all of the foregoing being hereinafter collectively called the "Trust Fund").
The Certificates do not represent an obligation of, or an interest in, the Depositor, the Master Servicer, the Trustee or any Sub-Servicer and are not insured or guaranteed by any governmental agency or instrumentality or by any other person or entity. The Certificates are limited in right of payment to certain collections and recoveries respecting the Mortgage Loans, all as more specifically set forth herein and in the Agreement. As provided in the Agreement, withdrawals from the Custodial Account or Certificate Account may be made by the Master Servicer from time to time for purposes other than distributions to Certificateholders, such purposes including reimbursement to the Master Servicer of advances made, or certain expenses incurred, by it, by the Depositor, by the Trustee or by any Sub-Servicer.
The Agreement permits, with certain exceptions therein provided, the amendment thereof and the modification of the rights and obligations of the Depositor, the Master Servicer and the Trustee and the rights of the Certificateholders under the Agreement at any time by the Depositor, the Master Servicer, and the Trustee with the consent of the Holders of Certificates entitled to at least 66-2/3% of the Voting Rights. Any such consent by the Holder of this Certificate shall be conclusive and binding on such Holder and upon all future Holders of this Certificate and of any Certificate issued upon the transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent is made upon this Certificate. The Agreement also permits the amendment thereof, in certain limited circumstances, without the consent of the Holders of any of the Certificates.
As provided in the Agreement and subject to certain limitations therein set forth, the transfer of this Certificate is registrable in the Certificate Register upon surrender of this Certificate for registration of transfer at the Corporate Trust Office, duly endorsed by, or accompanied by an assignment in the form below or other written instrument of transfer in form satisfactory to the Trustee duly executed by, the Holder hereof or such Holder's attorney duly authorized in writing, and thereupon one or more new Certificates of the same Class in authorized denominations evidencing the same aggregate initial [Notional Amount] [Certificate Principal Balance] will be issued to the designated transferee or transferees.
[No transfer of any Class A-2 Certificate shall be made to any employee benefit plan or other retirement arrangement including individual retirement accounts and Keogh plans, that is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (any of foregoing, a "Plan"), to any Person acting on behalf of a Plan, or to any other person who is using "plan assets" to effect such acquisition (including any insurance company using funds in its general or separate accounts that may constitute "plan assets"), unless the prospective transferee of a Certificateholder desiring to transfer its Certificates provides to the Trustee or the Certificate Registrar an Opinion of Counsel (or, in the limited circumstances described in the Agreement, a certification of facts) which establishes to the satisfaction of the Depositor the Trustee or the Certificate Registrar that such disposition will not violate the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended. In the case of any transfer of the foregoing Certificates to an insurance company, in lieu of such Opinion of Counsel, the Trustee shall require a certification in the form of Exhibit G-5 to the Agreement or in such other form as shall be mutually agreed upon by the
The Certificates are issuable in fully registered form only, without coupons and in denominations specified in the Agreement. As provided in the Agreement and subject to certain limitations therein set forth, the Certificates are exchangeable for new Certificates of the same Class in authorized denominations evidencing the same aggregate initial Percentage Interest, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange, but the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Certificates.
The Depositor, the Master Servicer and the Trustee and any agent of the Depositor, the Master Servicer or the Trustee may treat the Person in whose name this Certificate is registered as the owner hereof for all purposes, and neither the Depositor, the Master Servicer, the Trustee nor any such agent shall be affected by notice to the contrary.
The obligations created by the Agreement and the Trust Fund created thereby shall terminate upon payment to the Certificateholders of all amounts held by or on behalf of the Trustee and required to be paid to them pursuant to the Agreement following the earlier of (i) the purchase by the Master Servicer of all Mortgage Loans and each REO Property in respect thereof, or (ii) the final payment on, or other liquidation (or any advance with respect thereto) of, the last Mortgage Loan remaining in the Trust Fund (or the disposition of all REO Property in respect thereof). The Agreement permits, but does not require, the Master Servicer to purchase from the Trust Fund all Mortgage Loans and all property acquired in respect of any Mortgage Loan at a price determined as provided in the Agreement. The exercise of the Master Servicer's right will effect early retirement of the Certificates; however, such right to purchase is subject to the aggregate Stated Principal Balance of the Mortgage Loans at the time of repurchase being less than or equal to 5% of the aggregate Stated Principal Balance of the Mortgage Loans at the Cut-off Date.
Unless the certificate of authentication hereon has been executed by the Trustee, by manual signature, this Certificate shall not be entitled to any benefit under the Agreement or be valid for any purpose.
The recitals contained herein shall be taken as the statements of the Depositor or the Master Servicer, as the case may be.
IN WITNESS WHEREOF, the Trustee in its capacity as trustee under the Agreement has caused this Certificate to be duly executed.
Dated: ______, 199__ BANKERS TRUST COMPANY,
This is one of the Class ______________ Certificates referred to in the within-mentioned Agreement.
FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and Social Security or other identifying number of assignee:
(Please print or typewrite name and address including postal zip code of
the beneficial interest evidenced by the within Class ___ Certificate and hereby authorizes the registration of transfer of such interest to the above-named assignee on the Certificate Register.
I (we) further direct the Trustee to issue a new Class ___ Certificate of a like initial [Certificate Principal Balance] [Notional Amount] to the above named assignee and deliver such Certificate(s) to the following address:
Signature by or on behalf of assignor
NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by a commercial bank or trust company on the continental United States or by a firm or corporation having membership in any national securities exchange or in the National Association of Securities Dealers, Inc.
The assignee should include the following for purposes of distribution:
Distributions shall be made, by wire transfer or otherwise, in immediately available funds to _________________________________________________ for the account of __________________, account number _____________________, or, if mailed by check, to______________. Applicable statements should be mailed to ______________________________. This information is provided by_______________, the assignee named above, or__________________________________, as its agent.
FORM OF CLASS B CERTIFICATE
THIS CLASS B CERTIFICATE IS SUBORDINATE TO THE CLASS A-2 CERTIFICATES, THE CLASS A-1 CERTIFICATES AND THE CLASS SA CERTIFICATES OF THE SAME SERIES TO THE EXTENT DESCRIBED HEREIN AND IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN (THE "AGREEMENT").
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986 (THE "CODE").
NO TRANSFER OF THIS CERTIFICATE MAY BE MADE TO AN EMPLOYEE BENEFIT PLAN, OR PERSON USING "PLAN ASSETS" OF ANY PLAN TO EFFECT SUCH ACQUISITION (INCLUDING ANY INSURANCE COMPANY UNDER THE CIRCUMSTANCES DESCRIBED IN THE AGREEMENT), SUBJECT TO SECTION 406 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE CODE, UNLESS THE TRANSFEREE PROVIDES AN OPINION OF COUNSEL OR CERTIFICATION OF FACTS (UNDER THE LIMITED CIRCUMSTANCES DESCRIBED IN THE AGREEMENT), SATISFACTORY TO THE DEPOSITOR AND THE TRUSTEE OR THE CERTIFICATE REGISTRAR, THAT SUCH DISPOSITION WILL NOT VIOLATE THE PROHIBITED TRANSACTION PROVISIONS OF SECTION 406 OF ERISA AND SECTION 4975 OF THE CODE.
[THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSES OF APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS CERTIFICATE. ASSUMING THAT THE MORTGAGE LOANS PREPAY AT AN ASSUMED RATE OF PREPAYMENT USED SOLELY FOR THE PURPOSES OF APPLYING THE OID RULES TO THE CERTIFICATES EQUAL TO A CONSTANT PREPAYMENT RATE OF __% PER ANNUM (THE "PREPAYMENT ASSUMPTION"), THIS CERTIFICATE HAS BEEN ISSUED WITH NO MORE THAN $______ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, THE YIELD TO MATURITY IS ___% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE INITIAL ACCRUAL PERIOD IS NO MORE THAN $___ PER $1,000 OF INITIAL CERTIFICATE PRINCIPAL BALANCE COMPUTED USING THE EXACT METHOD. NO REPRESENTATION IS MADE THAT THE MORTGAGE LOANS WILL PREPAY AT A RATE BASED ON THE PREPAYMENT ASSUMPTION OR AT ANY OTHER RATE.]
Series 1995-QE11 Aggregate Certificate Principal Balance of the Class B Certificates: $
Class B Initial Certificate Principal Balance of
Adjustable Pass-Through Rate Initial Pass-Through Rate: _______%
Date of Pooling and Servicing Percentage Interest Evidenced Agreement and Cut-off Date: by this Certificate: _________%
First Distribution Date: Issue Date: January 25, 1996 December 28, 1995
Temple-Inland Mortgage Bankers Trust Company
evidencing a beneficial ownership interest in a trust fund consisting primarily of a pool of adjustable rate residential mortgage loans sold by
This certifies that ________________ is the registered owner of the Percentage Interest specified above in that certain beneficial ownership interest evidenced by all of the Class B Certificates in the Trust Fund established under a Pooling and Servicing Agreement, dated as specified above (the "Agreement"), between DLJ Mortgage Acceptance Corp. (hereinafter called the "Depositor", which term includes any successor entity under the Agreement), Temple-Inland Mortgage Corporation (the "Master Servicer"), and Bankers Trust Company (the "Trustee"), a summary of certain of the pertinent provisions of which is set forth hereafter. The Percentage Interest evidenced hereby is equal to the initial Certificate Principal Balance of this Certificate divided by the aggregate initial Certificate Principal Balance of all of the Class B Certificates as specified above. The Certificates of the Series specified above (collectively, the "Certificates") evidence in the aggregate the entire beneficial ownership interest in a segregated pool of assets created pursuant to the Agreement comprised of conventional one- to four-family residential first mortgage loans (the "Mortgage Loans") or interests therein, and certain other assets as described herein. To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Agreement. This Certificate is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement the
Holder of this Certificate by virtue of the acceptance hereof assents and by which such Holder is bound.
The Trustee shall distribute or cause to be distributed on the 25th day of each month or, if such 25th day is not a Business Day, the Business Day immediately following (each, a "Distribution Date"), commencing on the First Distribution Date specified above, to the Person in whose name this Certificate is registered at the close of business on the last Business Day of the month immediately preceding the month of such distribution (the "Record Date"), from the Available Distribution Amount an amount equal to the product of the Percentage Interest evidenced by this Certificate and the amount required to be distributed to the Holders of Class B Certificates on such Distribution Date pursuant to the Agreement. Reference is hereby made to the further provisions of this Certificate and the Agreement set forth herein, which further provisions shall for all purposes have the same effect as though fully set forth at this place.
All distributions will be made or caused to be made by the Trustee either by check mailed to the address of the Person entitled thereto as such name and address shall appear on the Certificate Register or, at the request of the Person entitled thereto if such Person shall have so notified the Trustee in writing by 5 Business Days prior to the applicable Record Date and such Certificateholder is the registered holder of Certificates the aggregate Initial Certificate Principal Balance of which is not less than $2,500,000 (or with respect to the Class SA Certificates and the Class SB Certificates, is the registered holder of an aggregate initial Notional Amount of not less than $10,000,000 of the Class SA Certificates or the Class SB Certificates), in immediately available funds by wire transfer to the account of such Person. Notwithstanding the above, the final distribution on this Certificate will be made after due notice by the Master Servicer of the pendency of such distribution and only upon presentation and surrender of this Certificate at the office of the Trustee. The Certificate Principal Balance hereof will be reduced to the extent of distributions allocable to the principal and the principal portions of any Realized Losses allocable hereto.
This Certificate is one of a duly authorized issue of Certificates of the series and class specified on the face hereof. The Certificates in the aggregate represent the entire beneficial ownership interest in: (i) the Mortgage Loans (exclusive of payments of principal and interest due on or before the Cut-off Date) as from time to time are subject to the Agreement and all payments under and proceeds of the Mortgage Loans, together with all documents included in the related Mortgage File; (ii) such funds or assets as from time to time are deposited in the Custodial Account, the Excess Proceeds Account or the Certificate Account; (iii) any REO Property; (iv) the Primary Hazard Insurance Policies, if any, and all other insurance policies with respect to the Mortgage Loans required to be maintained pursuant to the Agreement; and (v) the Depositor's interest in respect of the representations and warranties made by the Seller in the Mortgage Loan Purchase Agreement (all of the foregoing being hereinafter collectively called the "Trust Fund").
The Certificates do not represent an obligation of, or an interest in, the Depositor, the Master Servicer, the Trustee or any Sub-Servicer and are not insured or guaranteed by any governmental agency or instrumentality or by any other person or entity. The Certificates are limited in right of payment to certain collections and recoveries respecting the Mortgage Loans, all as more specifically set forth herein and in the Agreement. As provided in the Agreement, withdrawals from the Custodial Account or Certificate Account may be made by the Master Servicer from time to time for purposes other than distributions to Certificateholders, such purposes including reimbursement to the Master Servicer of advances made, or certain expenses incurred, by it, the Depositor, by the Trustee or by any Sub-Servicer.
The Agreement permits, with certain exceptions therein provided, the amendment thereof and the modification of the rights and obligations of the Depositor, the Master Servicer and the Trustee and the rights of the Certificateholders under the Agreement at any time by the Depositor, the Master Servicer, and the Trustee with the consent of the Holders of Certificates entitled to at least 66-2/3% of the Voting Rights. Any such consent by the Holder of this Certificate shall be conclusive and binding on such Holder and upon all future Holders of this Certificate and of any Certificate issued upon the transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent is made upon this Certificate. The Agreement also permits the amendment thereof, in certain limited circumstances, without the consent of the Holders of any of the Certificates.
As provided in the Agreement and subject to certain limitations therein set forth, the transfer of this Certificate is registrable in the Certificate Register upon surrender of this Certificate for registration of transfer at the Corporate Trust Office, duly endorsed by, or accompanied by an assignment in the form below or other written instrument of transfer in form satisfactory to the Trustee duly executed by, the Holder hereof or such Holder's attorney duly authorized in writing, and thereupon one or more new Certificates of the same Class in authorized denominations evidencing the same aggregate initial Certificate Principal Balance will be issued to the designated transferee or transferees.
No transfer of any Class B Certificate shall be made to any employee benefit plan or other retirement arrangement including individual retirement accounts and Keogh plans, that is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (any of foregoing, a "Plan"), to any Person acting on behalf of a Plan, or to any other person who is using "plan assets" to effect such acquisition (including any insurance company using funds in its general or separate accounts that may constitute "plan assets"), unless the prospective transferee of a Certificateholder desiring to transfer its Certificates provides to the Trustee or the Certificate Registrar an Opinion of Counsel (or, in the limited circumstances described in the Agreement, a certification of facts) which establishes to the satisfaction of the Depositor and the Trustee or the Certificate Registrar that such disposition will not violate the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended. In the case of any transfer of the foregoing Certificates to an insurance company, in lieu of such Opinion of Counsel, the Trustee shall require a certification in the form of Exhibit G-5 to the Agreement or in such other form as shall be mutually agreed upon by the Depositor and the Trustee.
The Certificates are issuable in fully registered form only, without coupons and in denominations specified in the Agreement. As provided in the Agreement and subject to certain limitations therein set forth, the Certificates are exchangeable for new Certificates of the same Class in authorized denominations evidencing the same aggregate initial Certificate Principal Balance, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange, but the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Certificates.
The Depositor, the Master Servicer and the Trustee and any agent of the Depositor, the Master Servicer or the Trustee may treat the Person in whose name this Certificate is registered as the owner hereof for all purposes, and neither the Depositor, the Master Servicer, the Trustee nor any such agent shall be affected by notice to the contrary.
The obligations created by the Agreement and the Trust Fund created thereby shall terminate upon payment to the Certificateholders of all amounts held by or on behalf of the Trustee and required to be paid to them pursuant to the Agreement following the earlier of (i) the purchase by the Master Servicer of all Mortgage Loans and each REO Property in respect thereof, or (ii) the final payment on, or other liquidation (or any advance with respect thereto), of the last Mortgage Loan remaining in the Trust Fund (or the disposition of all REO Property in respect thereof). The Agreement permits, but does not require, the Master Servicer to purchase from the Trust Fund all Mortgage Loans and all property acquired in respect of any Mortgage Loan at a price determined as provided in the Agreement. The exercise of the Master Servicer's right will effect early retirement of the Certificates; however, such right to purchase is subject to the aggregate Stated Principal Balance of the Mortgage Loans at the time of purchase being less than or equal to 5% of the aggregate Stated Principal Balance of the Mortgage Loans at the Cut-off Date.
Unless the certificate of authentication hereon has been executed by the Trustee, by manual signature, this Certificate shall not be entitled to any benefit under the Agreement or be valid for any purpose.
The recitals contained herein shall be taken as the statements of the Depositor or the Master Servicer, as the case may be.
IN WITNESS WHEREOF, the Trustee in its capacity as trustee under the Agreement has caused this Certificate to be duly executed.
This is one of the Class B Certificates referred to in the within-mentioned Agreement.
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and Social Security or other identifying number of assignee:
(Please print or typewrite name and address including postal zip code of
the initial Certificate Principal Balance evidenced by the within Class B Certificate and hereby authorizes the registration of transfer of such interest to the above-named assignee on the Certificate Register.
I (we) further direct the Trustee to issue a new Class B Certificate of a like initial Certificate Principal Balance to the above named assignee and deliver such Certificate to the following address:______________________________
Signature by or on behalf of assignor
NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by a commercial bank or trust company on the continental United States or by a firm or corporation having membership in any national securities exchange or in the National Association of Securities Dealers, Inc.
The assignee should include the following for purposes of distribution:
Distributions shall be made, by wire transfer or otherwise, in immediately available funds to _________________________________________________ for the account of __________________, account number _____________________, or, if mailed by check, to______________. Applicable statements should be mailed to ______________________________. This information is provided by_______________, the assignee named above, or__________________________________, as its agent.
FORM OF CLASS SB CERTIFICATE
THIS CERTIFICATE IS SUBORDINATE TO THE CLASS B CERTIFICATES, THE CLASS A-2 CERTIFICATES, THE CLASS A-1 CERTIFICATES AND THE CLASS SA CERTIFICATES OF THE SAME SERIES TO THE EXTENT DESCRIBED HEREIN AND IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN (THE "AGREEMENT").
THIS CLASS SB CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE WITHOUT SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION WHICH DOES NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF THE AGREEMENT.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986 (THE "CODE").
NO TRANSFER OF THIS CERTIFICATE MAY BE MADE TO AN EMPLOYEE BENEFIT PLAN, OR PERSON USING "PLAN ASSETS" OF ANY PLAN TO EFFECT SUCH ACQUISITION (INCLUDING ANY INSURANCE COMPANY UNDER THE CIRCUMSTANCES DESCRIBED IN THE AGREEMENT),SUBJECT TO SECTION 406 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR SECTION 4975 OF THE CODE OF 1986 (THE "CODE") UNLESS THE TRANSFEREE PROVIDES AN OPINION OF COUNSEL OR CERTIFICATION OF FACTS (UNDER THE LIMITED CIRCUMSTANCES DESCRIBED IN THE AGREEMENT), SATISFACTORY TO THE DEPOSITOR AND THE TRUSTEE OR THE CERTIFICATE REGISTRAR THAT SUCH DISPOSITION WILL NOT VIOLATE THE PROHIBITED TRANSACTION PROVISIONS OF SECTION 406 OF ERISA AND SECTION 4975 OF THE CODE.
THE CLASS SB CERTIFICATES WILL NOT BE ENTITLED TO RECEIVE DISTRIBUTIONS IN RESPECT OF ACCRUED CERTIFICATE INTEREST THEREOF UNTIL THE RELATED ACCRETION TERMINATION DATE, AS DESCRIBED HEREIN AND IN THE AGREEMENT.
[THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSES OF APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS CERTIFICATE. ASSUMING THAT THE MORTGAGE LOANS PREPAY AT AN ASSUMED RATE OF PREPAYMENT USED SOLELY FOR THE PURPOSES OF APPLYING THE OID RULES TO THE CERTIFICATES EQUAL TO A CONSTANT PREPAYMENT RATE OF __% PER ANNUM (THE "PREPAYMENT
ASSUMPTION"), THIS CERTIFICATE HAS BEEN ISSUED WITH NO MORE THAN $______ OF OID PER $100,000 OF INITIAL NOTIONAL AMOUNT, THE YIELD TO MATURITY IS ___% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE INITIAL ACCRUAL PERIOD IS NO MORE THAN $___ PER $100,000 OF INITIAL NOTIONAL AMOUNT COMPUTED USING THE EXACT METHOD. NO REPRESENTATION IS MADE THAT THE MORTGAGE LOANS WILL PREPAY AT A RATE BASED ON THE PREPAYMENT ASSUMPTION OR AT ANY OTHER RATE.]
Series 1995-QE11 Aggregate Initial Notional Amount of the
Class SB Initial Notional Amount
Variable Pass-Through Rate Initial Pass-Through Rate: ______%
Date of Pooling and Servicing Percentage Interest Evidenced Agreement and Cut-off Date: by this Certificate: _________%
First Distribution Date: Issue Date: January 25, 1996 January 28, 1995
Temple-Inland Mortgage Bankers Trust Company
evidencing a beneficial ownership interest in a trust fund consisting primarily of a pool of adjustable rate residential mortgage loans sold by
This certifies that _____________________ is the registered owner of the Percentage Interest specified above in that certain beneficial ownership interest evidenced by all of the Class SB Certificates in the Trust Fund (as defined herein) established under a Pooling and Servicing Agreement, dated as specified above (the "Agreement"), among DLJ Mortgage Acceptance Corp. (hereinafter called the "Depositor", which term includes any successor entity under the Agreement), Temple-Inland Mortgage Corporation (the "Master Servicer") and Bankers Trust Company (the "Trustee"), a summary of certain of the pertinent provisions of which is set forth hereafter. The Percentage Interest evidenced hereby is equal to the initial Notional Amount of this Certificate divided by the aggregate initial Notional Amount of all of the Class SB Certificates as specified above. The Certificates of the Series specified above (collectively, the "Certificates") evidence in the aggregate the entire beneficial ownership interest in a segregated pool of assets created pursuant to the Agreement comprised of conventional oneto four-family residential first mortgage loans (the "Mortgage Loans"), or interests therein, and certain other assets as described herein. To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Agreement. This Certificate is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement the Holder of this Certificate by virtue of the acceptance hereof assents and by which such Holder is bound.
The Trustee shall distribute or cause to be distributed on the 25th day of each month or, if such 25th day is not a Business Day, the Business Day immediately following (each, a "Distribution Date"), commencing on the First Distribution Date specified above, to the Person in whose name this Certificate is registered at the close of business on the last Business Day of the month immediately preceding the month of such distribution (the "Record Date"), from the Available Distribution Amount an amount equal to the product of the Percentage Interest evidenced by this Certificate and the amount required to be distributed to the Holders of Class SB Certificates on such Distribution Date pursuant to the Agreement. The Notional Amount of the Class SB Certificates as of any date of determination will be determined pursuant to the Agreement. The Class SB Certificates have no Certificate Principal Balance. Reference is hereby made to the further provisions of this Certificate and the Agreement set forth herein, which further provisions shall for all purposes have the same effect as though fully set forth at this place.
On each Distribution Date preceding the related Accretion Termination Date and, as and to the extent provided in the Agreement, on such Accretion Termination Date, Accrued Certificate Interest on the Class SB Certificates for such Distribution Date will be added to the Outstanding Class SB Unpaid Interest Amount of the Class SB Certificates. The Notional Amount of the Class SB Certificates as of any Distribution Date is equal to the aggregate Certificate Principal Balance of all of the Certificates immediately prior to such date. The Class SB Certificates have no principal balance.
All distributions will be made or caused to be made by the Trustee either by check mailed to the address of the Person entitled thereto as such name and address shall appear on the Certificate Register or, at the request of the Person entitled thereto if such Person shall have so notified the Trustee in writing by 5 Business Days prior to the applicable Record Date and such Certificateholder is the registered holder of Certificates the aggregate Initial Certificate Principal Balance of which is not less than $2,500,000 (or, with respect to the Class SA
Certificates and the Class SB Certificates, is the registered holder of an aggregate initial Notional Amount of not less than $10,000,000 of the Class SA Certificates or the Class SB Certificates), in immediately available funds by wire transfer to the account of such Person. Notwithstanding the above, the final distribution on this Certificate will be made after due notice by the Master Servicer of the pendency of such distribution and only upon presentation and surrender of this Certificate at the office of the Trustee.
This Certificate is one of a duly authorized issue of Certificates of the series and class specified on the face hereof. The Certificates in the aggregate represent the entire beneficial ownership interest in: (i) the Mortgage Loans (exclusive of payments of principal and interest due on or before the Cut-off Date) as from time to time are subject to the Agreement and all payments under and proceeds of the Mortgage Loans, together with all documents included in the related Mortgage File; (ii) such funds or assets as from time to time are deposited in the Custodial Account, the Excess Proceeds Account or the Certificate Account; (iii) any REO Property; (iv) the Primary Hazard Insurance Policies, if any, and all other insurance policies with respect to the Mortgage Loans required to be maintained pursuant to the Agreement; and (v) the Depositor's interest in respect of the representations and warranties made by the Seller in the Mortgage Loan Purchase Agreement (all of the foregoing being hereinafter collectively called the "Trust Fund").
The Certificates do not represent an obligation of, or an interest in, the Depositor, the Master Servicer, the Trustee or any Sub-Servicer and are not insured or guaranteed by any governmental agency or instrumentality or by any other person or entity. The Certificates are limited in right of payment to certain collections and recoveries respecting the Mortgage Loans, all as more specifically set forth herein and in the Agreement. As provided in the Agreement, withdrawals from the Custodial Account or Certificate Account may be made by the Master Servicer from time to time for purposes other than distributions to Certificateholders, such purposes including reimbursement to the Master Servicer of advances made, or certain expenses incurred, by it, by the Depositor, by the Trustee or by any Sub-Servicer.
The Agreement permits, with certain exceptions therein provided, the amendment thereof and the modification of the rights and obligations of the Depositor, the Master Servicer and the Trustee and the rights of the Certificateholders under the Agreement at any time by the Depositor, the Master Servicer, and the Trustee with the consent of the Holders of Certificates entitled to at least 66-2/3% of the Voting Rights. Any such consent by the Holder of this Certificate shall be conclusive and binding on such Holder and upon all future Holders of this Certificate and of any Certificate issued upon the transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent is made upon this Certificate. The Agreement also permits the amendment thereof, in certain limited circumstances, without the consent of the Holders of any of the Certificates.
As provided in the Agreement and subject to certain limitations therein set forth, the transfer of this Certificate is registrable in the Certificate Register upon surrender of this Certificate for registration of transfer at the Corporate Trust Office, duly endorsed by, or accompanied by an assignment in the form below or other written instrument of transfer in form satisfactory to the Trustee duly executed by, the Holder hereof or such Holder's attorney duly authorized in writing, and thereupon one or more new Certificates of the same Class in authorized denominations evidencing the same aggregate initial [Notional Amount] [Certificate Principal Balance] will be issued to the designated transferee or transferees.
No transfer of any SB Certificate shall be made unless that transfer is made pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act") and effective registration or qualification under applicable state securities laws, or is made in a transaction which does not require such registration or qualification. In the event that a transfer is to be made without such registration or qualification, (a) the Trustee and the Depositor shall require the transferee to execute an investment letter in substantially the form attached as either Exhibit G-1 or Exhibit H, as applicable to the Agreement, which investment letter shall not be an expense of the Depositor, the Master Servicer or the Trustee and (b) in the event that such a transfer is not made pursuant to Rule 144A under the 1933 Act, the Depositor may direct the Trustee to require an Opinion of Counsel satisfactory to the Trustee and the Depositor that such transfer may be made without such registration or qualification, which Opinion of Counsel shall not be an expense of the Depositor, the Trustee or the Master Servicer. Neither the Depositor nor the Trustee is obligated to register or qualify any of the Class SB Certificates under the 1933 Act or any other securities law or to take any action not otherwise required under the Agreement to permit the transfer of such Certificates without registration or qualification. Any such Certificateholder desiring to effect such transfer shall, and does hereby agree to, indemnify the Trustee, the Depositor and the Master Servicer against any liability that may result if the transfer is not so exempt or is not made in accordance with such federal and state laws.
No transfer of any Class SB Certificate shall be made to any employee benefit plan or other retirement arrangement including individual retirement accounts and Keogh plans, that is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (any of foregoing, a "Plan"), to any Person acting on behalf of a Plan, or to any other person who is using "plan assets" to effect such acquisition (including any insurance company using funds in its general or separate accounts that may constitute "plan assets"), unless the prospective transferee of a Certificateholder desiring to transfer its Certificates provides to the Trustee or the Certificate Registrar an Opinion of Counsel (or, in the limited circumstances described in the Agreement, a certification of facts) which establishes to the satisfaction of the Depositor and the Trustee or the Certificate Registrar that such disposition will not violate the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended. In the case of any transfer of the foregoing Certificates to an insurance company, in lieu of such Opinion of Counsel, the Trustee shall require a certification in the form of Exhibit G-5 to the Agreement or in such other form as shall be mutually agreed upon by the Depositor and the Trustee.
The Certificates are issuable in fully registered form only, without coupons and in denominations specified in the Agreement. As provided in the certain limitations therein set forth, the Certificates are exchangeable for new Certificates of the same Class in authorized denominations evidencing the same aggregate initial Percentage Interest, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange, but the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Certificates.
The Depositor, the Master Servicer and the Trustee and any agent of the Depositor, the Master Servicer or the Trustee may treat the Person in whose name this Certificate is registered as the owner hereof for all purposes, and neither the Depositor, the Master Servicer, the Trustee nor any such agent shall be affected by notice to the contrary.
The obligations created by the Agreement and the Trust Fund created thereby shall terminate upon payment to the Certificateholders of all amounts held by or on behalf of the Trustee and required to be paid to them pursuant to the Agreement following the earlier of (i) the purchase by the Master Servicer of all Mortgage Loans and each REO Property in respect thereof, or (ii) the final payment on, or other liquidation (or any advance with respect thereto) of, the last Mortgage Loan remaining in the Trust Fund (or the disposition of all REO Property in respect thereof). The Agreement permits, but does not require, the Master Servicer to purchase from the Trust Fund all Mortgage Loans and all property acquired in respect of any Mortgage Loan at a price determined as provided in the Agreement. The exercise of the Master Servicer's right will effect early retirement of the Certificates; however, such right to purchase is subject to the aggregate Stated Principal Balance of the Mortgage Loans at the time of repurchase being less than or equal to 5% of the aggregate Stated Principal Balance of the Mortgage Loans at the Cut-off Date.
Unless the certificate of authentication hereon has been executed by the Trustee, by manual signature, this Certificate shall not be entitled to any benefit under the Agreement or be valid for any purpose.
The recitals contained herein shall be taken as the statements of the Depositor or the Master Servicer, as the case may be.
IN WITNESS WHEREOF, the Trustee in its capacity as trustee under the Agreement has caused this Certificate to be duly executed.
Dated: ______, 199__ BANKERS TRUST COMPANY,
This is one of the Class SB Certificates referred to in the within-mentioned Agreement.
FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and Social Security or other identifying number of assignee:
(Please print or typewrite name and address including postal zip code of
the beneficial interest evidenced by the within Class SB Certificate and hereby authorizes the registration of transfer of such interest to the above-named assignee on the Certificate Register.
I (we) further direct the Trustee to issue a new Class SB Certificate of a like initial Notional Amount to the above named assignee and deliver such Certificate(s) to the following address:
Signature by or on behalf of assignor
NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by a commercial bank or trust company on the continental United States or by a firm or corporation having membership in any national securities exchange or in the National Association of Securities Dealers, Inc.
The assignee should include the following for purposes of distribution:
Distributions shall be made, by wire transfer or otherwise, in immediately available funds to _________________________________________________ for the account of __________________, account number _____________________, or, if mailed by check, to______________. Applicable statements should be mailed to ______________________________. This information is provided by_______________, the assignee named above, or__________________________________, as its agent.
FORM OF CLASS R CERTIFICATE
THIS CLASS R CERTIFICATE IS SUBORDINATE TO THE CLASS SB CERTIFICATES, THE CLASS B CERTIFICATES, THE CLASS A-2 CERTIFICATES, THE CLASS A-1 CERTIFICATES AND THE CLASS SA CERTIFICATES OF THE SAME SERIES TO THE EXTENT DESCRIBED HEREIN AND IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN (THE "AGREEMENT").
THIS CLASS R CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE WITHOUT SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION WHICH DOES NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF THE AGREEMENT.
NO TRANSFER OF THIS CERTIFICATE MAY BE MADE TO AN EMPLOYEE BENEFIT PLAN, OR PERSON USING "PLAN ASSETS" OF ANY PLAN TO EFFECT SUCH ACQUISITION (INCLUDING ANY INSURANCE COMPANY UNDER THE CIRCUMSTANCES DESCRIBED IN THE AGREEMENT), SUBJECT TO SECTION 406 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE CODE, UNLESS THE TRANSFEREE PROVIDES AN OPINION OF COUNSEL OR CERTIFICATION OF FACTS (UNDER THE LIMITED CIRCUMSTANCES DESCRIBED IN THE AGREEMENT), SATISFACTORY TO THE DEPOSITOR AND THE TRUSTEE OR THE CERTIFICATE REGISTRAR, THAT SUCH DISPOSITION WILL NOT VIOLATE THE PROHIBITED TRANSACTION PROVISIONS OF SECTION 406 OF ERISA AND SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (THE "CODE").
THE CLASS R CERTIFICATES WILL NOT BE ENTITLED TO RECEIVE DISTRIBUTIONS IN RESPECT OF INTEREST OR PRINCIPAL UNTIL THE RELATED ACCRETION TERMINATION DATE, AS DESCRIBED HEREIN AND IN THE AGREEMENT.
THIS CERTIFICATE AND THE POOLING AND SERVICING AGREEMENT MAY BE AMENDED WITHOUT THE CONSENT OF THE HOLDER HEREOF, AND IN A MANNER THAT MAY ADVERSELY AFFECT THE INTERESTS OF THE HOLDER HEREOF, IF NECESSARY TO PREVENT THE DISQUALIFICATION OF THE TRUST FUND AS A REMIC.
THIS CLASS R CERTIFICATE HAS BEEN DESIGNATED BY THE DEPOSITOR REFERRED TO BELOW AS A "RESIDUAL INTEREST" IN THE REMIC CREATED BY THE AGREEMENT PURSUANT TO THE REMIC PROVISIONS OF THE CODE.
ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CLASS R CERTIFICATE MAY BE MADE ONLY IF THE PROPOSED TRANSFEREE PROVIDES AN AFFIDAVIT TO THE MASTER SERVICER AND THE TRUSTEE THAT (1) SUCH TRANSFEREE IS NOT EITHER (1) (A) THE UNITED STATES, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY POSSESSION OF THE UNITED STATES, OR ANY AGENCY OR INSTRUMENTALITY OF ANY OF THE FOREGOING (OTHER THAN AN INSTRUMENTALITY WHICH IS A CORPORATION IF ALL OF ITS ACTIVITIES ARE SUBJECT TO TAX AND, EXCEPT FOR THE FHLMC, A MAJORITY OF ITS BOARD OF DIRECTORS IS NOT SELECTED BY SUCH GOVERNMENTAL UNIT), (B) ANY FOREIGN GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, OR ANY AGENCY OR INSTRUMENTALITY OF ANY OF THE FOREGOING, (C) ANY ORGANIZATION (OTHER THAN CERTAIN FARMERS' COOPERATIVES DESCRIBED IN SECTION 521 OF THE CODE) WHICH IS EXEMPT FROM THE TAX IMPOSED BY CHAPTER 1 OF THE CODE (UNLESS SUCH ORGANIZATION IS SUBJECT TO THE TAX IMPOSED BY SECTION 511 OF THE CODE ON UNRELATED BUSINESS TAXABLE INCOME), (D) A RURAL ELECTRIC AND TELEPHONE COOPERATIVE DESCRIBED IN SECTION 1381(A)(2)(C) OF THE CODE OR (E) ANY OTHER PERSON SO DESIGNATED BY THE TRUSTEE BASED ON AN OPINION OF COUNSEL, (ANY SUCH PERSON DESCRIBED IN THE FOREGOING CLAUSES (A), (B), (C), (D) OR (E) BEING HEREINAFTER REFERRED TO AS A "DISQUALIFIED ORGANIZATION") OR (2) AN AGENT OF A DISQUALIFIED ORGANIZATION. NOTWITHSTANDING THE REGISTRATION IN THE CERTIFICATE REGISTER OR ANY TRANSFER, SALE OR OTHER DISPOSITION OF THIS CLASS R CERTIFICATE TO A DISQUALIFIED ORGANIZATION OR AN AGENT OF A DISQUALIFIED ORGANIZATION, SUCH REGISTRATION SHALL BE DEEMED TO BE OF NO LEGAL FORCE OR EFFECT WHATSOEVER AND SUCH PERSON SHALL NOT BE DEEMED TO BE A CERTIFICATEHOLDER FOR ANY PURPOSE HEREUNDER, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS CERTIFICATE. EACH HOLDER OF A CLASS R CERTIFICATE BY ACCEPTANCE OF THIS CERTIFICATE SHALL BE DEEMED TO HAVE CONSENTED TO THE PROVISIONS OF THIS PARAGRAPH.
IF ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CLASS R CERTIFICATE IS MADE TO ANY OF CERTAIN "PASS-THROUGH ENTITIES" DESCRIBED IN SECTION 860E(E)(6) OF THE CODE, AND A DISQUALIFIED ORGANIZATION IS THE RECORD HOLDER OF AN INTEREST IN SUCH ENTITY, THEN A TAX MAY BE IMPOSED ON SUCH ENTITY.
NO TRANSFER OF THE CERTIFICATE MAY BE MADE TO A NON-UNITED STATES PERSON AS DEFINED IN THE AGREEMENT.
Series 1995-QE11 Aggregate unpaid principal balance of the Mortgage Loans after deducting payments Class R due on or before the Cut-off Date:
Date of Pooling and Servicing Percentage Interest Evidenced by Agreement and Cut-off Date: December 1, this Certificate: _________%
First Distribution Date: Issue Date: December 28, 1995
Temple-Inland Mortgage Bankers Trust Company
evidencing a beneficial ownership interest in a trust fund consisting primarily of a pool of adjustable rate residential mortgage loans sold by
This certifies that ____________________________ is the registered owner of the Percentage Interest evidenced by this Certificate, as specified above, in that certain beneficial ownership interest evidenced by all of the Class R Certificates in the Trust Fund (as defined herein) established under a Pooling and Servicing Agreement, dated as specified above (the "Agreement"), between DLJ Mortgage Acceptance Corp. (hereinafter called the "Depositor", which term includes any successor entity under the Agreement), Temple-Inland Mortgage Corporation (the "Master Servicer"), and Bankers Trust Company (the "Trustee"), a summary of certain of the pertinent provisions of which is set forth hereafter. The Certificates of the Series specified above (collectively, the "Certificates") evidence in the aggregate the entire beneficial ownership interest in a segregated pool of assets created pursuant to the Agreement comprised of conventional one- to four-family residential first mortgage loans (the "Mortgage Loans") or interests therein, and certain other assets as described herein. To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Agreement.
This Certificate is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement the Holder of this Certificate by virtue of the acceptance hereof assents and by which such Holder is bound.
The Trustee shall distribute or cause to be distributed on the 25th day of each month, or if such 25th day is not a Business Day, the Business Day immediately following (each a "Distribution Date"), commencing on the First Distribution Date specified above, to the Person in whose name this Certificate is registered at the close of business on the last Business Day of the month immediately preceding the month of such distribution (the "Record Date"), from the Available Distribution Amount in an amount equal to the product of the Percentage Interest evidenced by this Certificate and the amount required to be distributed to the Holders of Class R Certificates on such Distribution Date pursuant to the Agreement. Reference is hereby made to the further provisions of this Certificate and the Agreement, which further provisions shall for all purchases have the same effect as though fully set forth at this place.
On each Distribution Date preceding the related Accretion Termination Date and, as and to the extent provided in the Agreement, on such Accretion Termination Date, Accrued Certificate Interest on the Class R Certificates for such Distribution Date and the Outstanding Class SB Unpaid Interest Amount will be added to the Certificate Principal Balance of the Class R Certificates.
All distributions will be made or caused to be made by the Trustee either by check mailed to the address of the Person entitled thereto as such name and address shall appear on the Certificate Register or, at the request of the Person entitled thereto if such Person shall have so notified the Trustee in writing by 5 Business Days prior to the applicable Record Date and such Certificateholder is the registered holder of Certificates the aggregate Initial Certificate Principal Balance of which is not less than $2,500,000 (or, with respect to the Class SA Certificates and the Class SB Certificates, is the registered holder of an aggregate initial Notional Amount of not less than $10,000,000 of the Class SA Certificates or the Class SB Certificates), in immediately available funds by wire transfer to the account of such Person. Notwithstanding the above, the final distribution on this Certificate will be made after due notice by the Master Servicer of the pendency of such distribution and only upon presentation and surrender of this Certificate at the office of the Trustee. The Certificate Principal Balance hereof will be reduced to the extent of distributions allocable to the principal and the principal portions of any Realized Losses allocable hereto.
This Certificate is one of a duly authorized issue of Certificates of the series and class specified on the face hereof. The Certificates in the aggregate represent the entire beneficial ownership interest in: (i) the Mortgage Loans (exclusive of payments of principal and interest due on or before the Cut-off Date) as from time to time are subject to the Agreement and all payments under and proceeds of the Mortgage Loans, together with all documents included in the related Mortgage File; (ii) such funds or assets as from time to time are deposited in the Custodial Account, the Excess Proceeds Account or the Certificate Account; (iii) any REO Property; (iv) the Primary Hazard Insurance Policies, if any, and all other insurance policies with respect to the Mortgage Loans required to be maintained pursuant to the Agreement; and (v) the Depositor's interest in respect of the representations and warranties made by the Seller in the Mortgage Loan Purchase Agreement (all of the foregoing being hereinafter collectively called the "Trust Fund").
The Certificates do not represent an obligation of, or an interest in, the Depositor, the Master Servicer, the Trustee or any Sub-Servicer and are not insured or guaranteed by any governmental agency or instrumentality or by any other person or entity. The Certificates are limited in right of payment to certain collections and recoveries respecting the Mortgage Loans, all as more specifically set forth herein and in the Agreement. As provided in the Agreement, withdrawals from the Custodial Account or Certificate Account may be made by the Master Servicer from time to time for purposes other than distributions to Certificateholders, such purposes including reimbursement to the Master Servicer of advances made, or certain expenses incurred, by it, the Depositor, by the Trustee or by any Sub-Servicer.
The Agreement permits, with certain exceptions therein provided, the amendment thereof and the modification of the rights and obligations of the Depositor, the Master Servicer and the Trustee and the rights of the Certificateholders under the Agreement at any time by the Depositor, the Master Servicer and the Trustee with the consent of the Holders of Certificates entitled to at least 66-2/3% of the Voting Rights. Any such consent by the Holder of this Certificate shall be conclusive and binding on such Holder and upon all future Holders of this Certificate and of any Certificate issued upon the transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent is made upon this Certificate. The Agreement also permits the amendment thereof, in certain limited circumstances, without the consent of the Holders of any of the Certificates.
As provided in the Agreement and subject to certain limitations therein set forth, the transfer of this Certificate is registrable in the Certificate Register upon surrender of this Certificate for registration of transfer at the Corporate Trust Office, duly endorsed by, or accompanied by an assignment in the form below or other written instrument of transfer in form satisfactory to the Trustee duly executed by, the Holder hereof or such Holder's attorney duly authorized in writing, and thereupon one or more new Certificates of the same Class in authorized denominations evidencing the same aggregate Percentage Interest will be issued to the designated transferee or transferees.
No transfer of any R Certificate shall be made unless that transfer is made pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act") and effective registration or qualification under applicable state securities laws, or is made in a transaction which does not require such registration or qualification. In the event that a transfer is to be made without such registration or qualification, (a) the Trustee and the Depositor shall require the transferee to execute an investment letter in substantially the form attached as either Exhibit G-1 or Exhibit H, as applicable to the Agreement, which investment letter shall not be an expense of the Depositor, the Master Servicer or the Trustee and (b) in the event that such a transfer is not made pursuant to Rule 144A under the 1933 Act, the Depositor may direct the Trustee to require an Opinion of Counsel satisfactory to the Trustee and the Depositor that such transfer may be made without such registration or qualification, which Opinion of Counsel shall not be an expense of the Depositor, the Trustee or the Master Servicer. Neither the Depositor nor the Trustee is obligated to register or qualify any of the Class R Certificates under the 1933 Act or any other securities law or to take any action not otherwise required under the Agreement to permit the transfer of such Certificates without registration or qualification. Any such Certificateholder desiring to effect such transfer shall, and does hereby agree to, indemnify the Trustee, the Depositor and the Master Servicer against any liability that may result if the transfer is not so exempt or is not made in accordance with such federal and state laws.
No transfer of any Class R Certificate shall be made to any employee benefit plan or other retirement arrangement including individual retirement accounts and Keogh plans, that is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (any of foregoing, a "Plan"), to any Person acting on behalf of a Plan, or to any other person who is using "plan assets" to effect such acquisition (including any insurance company using funds in its general or separate accounts that may constitute "plan assets"), unless the prospective transferee of a Certificateholder desiring to transfer its Certificates provides to the Trustee or the Certificate Registrar an Opinion of Counsel (or, in the limited circumstances described in the Agreement, a certification of facts) which establishes to the satisfaction of the Depositor and the Trustee or the Certificate Registrar that such disposition will not violate the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended. In the case of any transfer of the foregoing Certificates to an insurance company, in lieu of such Opinion of Counsel, the Trustee shall require a certification in the form of Exhibit G-5 to the Agreement or in such other form as shall be mutually agreed upon by the Depositor and the Trustee.
The Certificates are issuable in fully registered form only, without coupons and in denominations specified in the Agreement. As provided in the Agreement and subject to certain limitations therein set forth, the Certificates are exchangeable for new Certificates of the same Class in authorized denominations evidencing the same aggregate Percentage Interest, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange, but the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Certificates.
The Depositor, the Master Servicer and the Trustee and any agent of the Depositor, the Master Servicer or the Trustee may treat the Person in whose name this Certificate is registered as the owner hereof for all purposes, and neither the Depositor, the Master Servicer, the Trustee nor any such agent shall be affected by notice to the contrary.
The obligations created by the Agreement and the Trust Fund created thereby shall terminate upon payment to the Certificateholders of all amounts held by or on behalf of the
Trustee and required to be paid to them pursuant to the Agreement following the earlier of (i) the purchase by the Master Servicer of all Mortgage Loans and each REO Property in respect thereof or (ii) the final payment on, or other liquidation (or any advance with respect thereto) of the last Mortgage Loan remaining in the Trust Fund (or the disposition of all REO Property in respect thereof). The Agreement permits, but does not require, the Master Servicer to purchase from the Trust Fund all Mortgage Loans and all property acquired in respect of any Mortgage Loan at a price determined as provided in the Agreement. The exercise of the Master Servicer's right will effect early retirement of the Certificates; however, such right to purchase is subject to the aggregate Stated Principal Balance of the Mortgage Loans at the time of purchase being less than or equal to 5% of the aggregate Stated Principal Balance of the Mortgage Loans at the Cut-off Date.
Unless the certificate of authentication hereon has been executed by the Trustee, by manual signature, this Certificate shall not be entitled to any benefit under the Agreement or be valid for any purpose.
The recitals contained herein shall be taken as the statements of the Depositor or the Master Servicer, as the case may be.
IN WITNESS WHEREOF, the Trustee in its capacity as trustee under the Agreement has caused this Certificate to be duly executed.
This is one of the Class R Certificates referred to in the within-mentioned Agreement.
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and Social Security or other identifying number of assignee:
(Please print or typewrite name and address including postal zip code of
the Percentage Interest evidenced by the within Class R Mortgage Pass-Through Certificate and hereby authorizes the registration of transfer of such interest to the above-named assignee on the Certificate Register.
I (we) further direct the Trustee to issue a new Class R Certificate of a like Percentage Interest to the above named assignee and deliver such Certificate to the following address:
Signature by or on behalf of assignor
NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by a commercial bank or trust company on the continental United States or by a firm or corporation having membership in any national securities exchange or in the National Association of Securities Dealers, Inc.
The assignee should include the following for purposes of distribution:
Distributions shall be made, by wire transfer or otherwise, in immediately available funds to _________________________________________________ for the account of __________________, account number _____________________, or, if mailed by check, to______________. Applicable statements should be mailed to ______________________________. This information is provided by_______________, the assignee named above, or__________________________________, as its agent.
FORM OF TRUSTEE INITIAL CERTIFICATION
Re: Pooling and Servicing Agreement dated as of December 1, 1995 among DLJ Mortgage Acceptance Corp., Temple-Inland Mortgage Corporation and Bankers Trust Company, Mortgage
In accordance with Section 2.02 of the above-captioned Pooling and Servicing Agreement, the undersigned, as Trustee, hereby certifies that as to each Mortgage Loan listed in the Mortgage Loan Schedule (other than any Mortgage Loan paid in full or listed on the attachment hereto) it has reviewed the Mortgage File and the Mortgage Loan Schedule and has determined that: (i) all documents required to be included in the Mortgage File are in its possession; (ii) such documents have been reviewed by it and appear regular on their face and relate to such Mortgage Loan; and (iii) based on examination by it, and only as to such documents, the information set forth in items (i) - (vi), (x), (xii), (xiii) and (xx) of the definition or description of "Mortgage Loan Schedule" is correct.
The Trustee has made no independent examination of any documents contained in each Mortgage File beyond the review specifically required in the above-referenced Pooling and Servicing Agreement. The Trustee makes no representation that any documents specified in clause (vi) of Section 2.01 should be included in any Mortgage File. The Trustee makes no representations as to and shall not be responsible to verify: (i) the validity, legality, sufficiency, enforceability, due authorization, recordability or genuineness of any of the documents contained in each Mortgage File of any of the Mortgage Loans identified on the Mortgage Loan Schedule, (ii) the collectability, insurability, effectiveness or suitability of any such Mortgage Loan, or (iii) the existence of any assumption, modification, written assurance or substitution agreement with respect to any Mortgage File if no such documents appear in the Mortgage File delivered to the Trustee.
Capitalized words and phrases used herein shall have the respective meanings assigned to them in the above-captioned Pooling and Servicing Agreement.
FORM OF TRUSTEE FINAL CERTIFICATION
Re: Pooling and Servicing Agreement dated as of December 1, 1995 among DLJ Mortgage Acceptance Corp., Temple-Inland Mortgage Corporation and Bankers Trust Company, Mortgage Pass-Through CERTIFICATES, SERIES 1995-QE11
In accordance with Section 2.02 of the above-captioned Pooling and Servicing Agreement, the undersigned, as Trustee, hereby certifies that as to each Mortgage Loan listed in the Mortgage Loan Schedule (other than any Mortgage Loan paid in full or listed on the attachment hereto) it has received the documents set forth in Section 2.01.
The Trustee has made no independent examination of any documents contained in each Mortgage File beyond the review specifically required in the above-referenced Pooling and Servicing Agreement. The Trustee makes no representation that any documents specified in clause (vi) of Section 2.01 should be included in any Mortgage File. The Trustee makes no representations as to and shall not be responsible to verify: (i) the validity, legality, sufficiency, enforceability, due authorization, recordability or genuineness of any of the documents contained in each Mortgage File of any of the Mortgage Loans identified on the Mortgage Loan Schedule, (ii) the collectability, insurability, effectiveness or suitability of any such Mortgage Loan or (iii) the existence of any assumption, modification, written assurance or substitution agreement with respect to any Mortgage File if no such documents appear in the Mortgage File delivered to the Trustee.
Capitalized words and phrases used herein shall have the respective meanings assigned to them in the above-captioned Pooling and Servicing Agreement.
REQUEST FOR REQUESTING DOCUMENTS (check one):
(The Master Servicer hereby certifies that all proceeds of foreclosure, insurance or other liquidation have been finally received and deposited into the Custodial Account to the extent required pursuant to the Pooling and Servicing Agreement.)
2. Mortgage Loan in Foreclosure.
3. Mortgage Loan Repurchased Pursuant to Section 9.01 of the Pooling and Servicing Agreement.
4. Mortgage Loan Repurchased Pursuant to Article II of the Pooling and Servicing Agreement. (The Master Servicer hereby certifies that the repurchase price has been deposited into the Custodial Account pursuant to the Pooling and
The undersigned Master Servicer hereby acknowledges that it has received from _____________________________________, as Trustee for the Holders of Mortgage PassThrough Certificates, Series 1995-QE11, the documents referred to below (the "Documents"). All capitalized terms not otherwise defined in this Request for Release shall have the meanings given them in the Pooling and Servicing Agreement, dated as of December 1, 1995 (the "Pooling and Servicing Agreement"), between the Trustee, DLJ Mortgage Acceptance Corp. and TempleInland Mortgage Corporation.
( ) Promissory Note dated _______________, 19__, in the original principal sum of $__________, made by _____________________, payable to, or endorsed to the order of, the Trustee.
( ) Mortgage recorded on _____________________ as instrument no. ____________________ in the County Recorder's Office of the County of _________________, State of __________________ in book/reel/docket _________________ of official records at page/image _____________.
( ) Deed of Trust recorded on ___________________ as instrument no. ________________ in the County Recorder's Office of the County of _________________, State of __________________ in book/reel/docket _________________ of official records at page/image ______________.
( ) Assignment of Mortgage or Deed of Trust to the Trustee, recorded on ___________________ as instrument no. _________ in the County Recorder's Office of the County of __________, State of _______________ in book/reel/docket ____________ of official records at page/image ____________.
( ) Other documents, including any amendments, assignments or other assumptions of the Mortgage Note or Mortgage.
The undersigned Master Servicer hereby acknowledges and agrees as follows:
(1) The Master Servicer shall hold and retain possession of the Documents in trust for the benefit of the Trustee, solely for the purposes provided in the Agreement.
(2) The Master Servicer shall not cause or knowingly permit the Documents to become subject to, or encumbered by, any claim, liens, security interest, charges, writs of attachment or other impositions nor shall the Master Servicer assert or seek to assert any claims or rights of setoff to or against the Documents or any proceeds thereof.
(3) The Master Servicer shall return each and every Document previously requested from the Mortgage File to the Trustee when the need therefor no longer exists, unless the Mortgage Loan relating to the Documents has been liquidated and the proceeds thereof have been remitted to the Custodial Account and except as expressly provided in the Agreement.
(4) The Documents and any proceeds thereof, including any proceeds of proceeds, coming into the possession or control of the Master Servicer shall at all times be earmarked for the account of the Trustee, and the Master Servicer shall keep the Documents and any proceeds separate and distinct from all other property in the Master Servicer's possession, custody or control.
[Mortgage Loans Paid in Full]
OFFICER'S CERTIFICATE AND TRUST RECEIPT
______________________________________ HEREBY CERTIFIES THAT HE/SHE IS AN OFFICER OF THE MASTER SERVICER, HOLDING THE OFFICE SET FORTH BENEATH HIS/HER SIGNATURE, AND HEREBY FURTHER CERTIFIES AS FOLLOWS:
WITH RESPECT TO THE MORTGAGE LOANS, AS THE TERM IS DEFINED IN THE POOLING AND SERVICING AGREEMENT DESCRIBED IN THE ATTACHED SCHEDULE:
ALL PAYMENTS OF PRINCIPAL, PREMIUM (IF ANY), AND INTEREST HAVE BEEN MADE.
LOAN NUMBER: _______________ BORROWER'S NAME:_____________
WE HEREBY CERTIFY THAT ALL AMOUNTS RECEIVED IN CONNECTION WITH SUCH PAYMENTS, WHICH ARE REQUIRED TO BE DEPOSITED IN THE CUSTODIAL ACCOUNT PURSUANT TO SECTION 3.10 OF THE POOLING AND SERVICING AGREEMENT, HAVE BEEN OR WILL BE CREDITED.
/ / ASSISTANT VICE PRESIDENT
FORM OF INVESTOR REPRESENTATION LETTER
New York, New York 10005
New York, New York 10006
_________________ (the "Purchaser") intends to purchase from ________________ (the "Seller") $ Initial Certificate Principal Balance of Mortgage Pass-Through Certificates, Series 1995-QE11, Class ___ (the "Certificates"), issued pursuant to the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement"), dated as of December 1, 1995, among DLJ Mortgage Acceptance Corp., as seller (the "Company"), Temple-Inland Mortgage Corporation, as master servicer, and Bankers Trust Company, as trustee (the "Trustee"). All terms used herein and not otherwise defined shall have the meanings set forth in the Pooling and Servicing Agreement. The Purchaser hereby certifies, represents and warrants to, and covenants with, the Company and the Trustee that:
1. The Purchaser understands that (a) the Certificates have not been and will not be registered or qualified under the Securities Act of 1933, as amended (the "Act") or any state securities law, (b) the Company is not required to so register or qualify the Certificates, (c) the Certificates may be resold only if registered and qualified pursuant to the provisions of the Act or any state securities law, or if an exemption from such registration and qualification is available, (d) the Pooling and Servicing Agreement contains restrictions regarding the transfer of the Certificates and (e) the Certificates will bear a legend to the foregoing effect.
2. The Purchaser is acquiring the Certificates for its own account for investment only and not with a view to or for sale in connection with any distribution thereof in any manner that would violate the Act or any applicable state securities laws.
3. The Purchaser is (a) a substantial, sophisticated institutional investor having such knowledge and experience in financial and business matters, and, in particular, in such matters related to securities similar to the Certificates, such that it is capable of evaluating the merits and risks of investment in the Certificates, (b) able to bear the economic risks of such an investment and (c) an "accredited investor" within the meaning of Rule 501(a) promulgated pursuant to the Act.
4. The Purchaser has been furnished with, and has had an opportunity to review (a) [a copy of the Private Placement Memorandum, dated December 28, 1995, relating to the Certificates, (b)] a copy of the Pooling and Servicing Agreement and [(b)] [(c)] such other information concerning the Certificates, the Mortgage Loans and the Company as has been requested by the Purchaser from the Company or the Seller and is relevant to the Purchaser's decision to purchase the Certificates. The Purchaser has had any questions arising from such review answered by the Company or the Seller to the satisfaction of the Purchaser. If the Purchaser did not purchase the Certificates from the Seller in connection with the initial distribution of the Certificates and was provided with a copy of the Private Placement Memorandum (the "Memorandum") relating to the original sale (the "Original Sale") of the Certificates by the Company, the Purchaser acknowledges that such Memorandum was provided to it by the Seller, that the Memorandum was prepared by the Company solely for use in connection with the Original Sale and the Company did not participate in or facilitate in any way the purchase of the Certificates by the Purchaser from the Seller, and the Purchaser agrees that it will look solely to the Seller and not to the Company with respect to any damage, liability, claim or expense arising out of, resulting from or in connection with (a) error or omission, or alleged error or omission, contained in the Memorandum, or (b) any information, development or event arising after the date of the Memorandum.
5. The Purchaser has not and will not nor has it authorized or will it authorize any person to (a) offer, pledge, sell, dispose of or otherwise transfer any Certificate, any interest in any Certificate or any other similar security to any person in any manner, (b) solicit any offer to buy or to accept a pledge, disposition of other transfer of any Certificate, any interest in any Certificate or any other similar security from any person in any manner, (c) otherwise approach or negotiate with respect to any Certificate, any interest in any Certificate or any other similar security with any person in any manner, (d) make any general solicitation by means of general advertising or in any other manner or (e) take any other action, that (as to any of (a) through (e) above) would constitute a distribution of any Certificate under the Act, that would render the disposition of any Certificate a violation of Section 5 of the Act or any state securities law, or that would require registration or qualification
will not sell or otherwise transfer any of the Certificates, except in compliance with the provisions of the Pooling and Servicing Agreement.
[6. The Purchaser is not any employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the Internal Revenue Code of 1986, (the "Code"), nor a Person acting, directly or indirectly, on behalf of any such plan, and understands that registration of transfer of any Certificate to any such employee benefit plan, or to any person acting on behalf of such plan, will not be made unless such employee benefit plan delivers an opinion of its counsel, addressed and satisfactory to the Trustee, the Company and the Master Servicer, to the effect that the purchase and holding of a Certificate by or on behalf of such employee benefit plan would not result in the assets of the Trust Estate being deemed to be "plan assets" and subject to the fiduciary responsibility provisions of ERISA or the prohibited transaction provisions of the Code (or comparable provisions of any subsequent enactments), would not constitute or result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code, and would not subject the Company, the Master Servicer or the Trustee to any obligation or liability (including liabilities under ERISA or Section 4975 of the Code) in addition to those undertaken in the Pooling and Servicing Agreement or any other liability. The Purchaser understands that under current law such an opinion cannot be rendered.]*
* To be deleted in the case of the Class SA Certificates and the Class A-1 Certificates. In addition, in the case of a transfer of the Certificates (other than the Class SA Certificates and the Class A-1 Certificates) to an insurance company, the above paragraph 6 shall be deleted and a certification in the form of Exhibit G-5 or such other certification as is acceptable to the Depositor and the Trustee shall be executed.
Form of Transferor Representation Letter
New York, New York 10005
New York, New York 10006
In connection with the sale by ____________ (the "Seller") to__________ (the "Purchaser") of $_________ Initial Certificate Principal Balance of Mortgage Pass-Through Certificates, Series 1995-QE11, Class (the "Certificates"), issued pursuant to the Pooling and - Servicing Agreement (the "Pooling and Servicing Agreement"), dated as of December 1, 1995, among DLJ Mortgage Acceptance Corp., as seller (the "Company"), Temple-Inland Mortgage Corporation, as master servicer, and Bankers Trust Company, as trustee (the "Trustee"). The Seller hereby certifies, represents and warrants to, and covenants with, the Company and the Trustee that:
Neither the Seller nor anyone acting on its behalf has (a) offered, pledged, sold, disposed of or otherwise transferred any Certificate, any interest in any Certificate or any other similar security to any person in any manner, (b) has solicited any offer to buy or to accept a pledge, disposition or other transfer of any Certificate, any interest in any Certificate or any other similar security from any person in any manner, (c) has otherwise approached or negotiated with respect to any Certificate, any interest in any Certificate or any other similar security with any person in any manner, (d) has made any general solicitation by means of general advertising or in any other manner, or (e) has taken any other action, that (as to any of (a) through (e) above) would constitute a distribution of the Certificates under the Securities Act of 1933 (the "Act"), that would render the disposition of any Certificate a violation of Section 5 of the Act or any state securities law, or that would require registration or qualification pursuant thereto. The Seller will not act, in any manner set forth in the foregoing sentence with respect to any Certificate. The Seller has not and will not sell or otherwise transfer any of the Certificates, except in compliance with the provisions of the Pooling and Servicing Agreement.
___________________, being first duly sworn, deposes, represents and warrants:
1. That he is [Title of Officer] of [Name of Owner], a [savings institution] [corporation] duly organized and existing under the laws of [the State of ___________] [the United States], (the "Owner"), (record or beneficial owner of the Class R Certificates on behalf of which he makes this affidavit and agreement. This Class R Certificate was issued pursuant to the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement"), dated as of December 1, 1995, among DLJ Mortgage Acceptance Corp., as depositor, Temple-Inland Mortgage Corporation, as master servicer (the "Master Servicer"), and Bankers Trust Company, as trustee (the "Trustee").
2. That the Owner (i) is and will be a "Permitted Transferee" as of ________, 199__ and (ii) is acquiring the Class R Certificates for its own account or for the account of another Owner from which it has received an affidavit in substantially the same form as this affidavit. A "Permitted Transferee" is any person other than a "disqualified organization" or a Non-United States Person. For this purpose, a "disqualified organization" means any of the following: (i) the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing (other than an instrumentality which is a corporation if all of its activities are subject to tax and, except for the FHLMC, a majority of its board of directors is not selected by such governmental unit), (ii) a foreign government, any international organization, or any agency or instrumentality of any of the foregoing, (iii) any organization (other than certain farmers' cooperatives described in Section 521 of the Internal Revenue Code of 1986) (the "Code") which is exempt from the tax imposed by Chapter 1 of the Code (unless such organization is subject to the tax imposed by Section 511 of the Code on unrelated business taxable income), (iv) rural electric and telephone cooperatives described in Section 1381(a)(2)(C) of the Code and (v) any other Person so designated based upon an Opinion of Counsel that the holding of an Ownership Interest in a Class R Certificate by such Person may cause the Trust Fund or any Person having an Ownership Interest in any Class of Certificates, other than such Person, to incur a liability for any federal tax imposed under the Code that would not otherwise be imposed but for the Transfer of an Ownership Interest in a Class R Certificate to such Person. The terms "United States", "State" and "international organization" shall have the meanings set forth in Section 7701 of the Code or successor provisions.
3. That the Owner is aware (i) of the tax that would be imposed on transfers of the Class R Certificates to disqualified organizations under the Code that applies to all transfers of the Class R Certificates after March 31, 1988; (ii) that such tax would be on the transferor, or, if such transfer is through an agent (which person includes a broker, nominee or middleman) for a disqualified organization Transferee, on the agent; (iii) that the person otherwise liable for the tax shall be relieved of liability for the tax if the transferee furnishes to such person an affidavit that the transferee is not a disqualified organization and, at the time of transfer, such person does not have actual knowledge that the affidavit is false and; (iv) that the Residual Certificates may be "noneconomic residual interests" within the meaning of Treasury Regulation Section 1.860E-1(c)(2) and that the transferor of a "noneconomic residual interest" will remain liable for any taxes due with respect to the income on such residual interest, unless no significant purpose of the transfer is to enable the transferor to impede the assessment or collection of tax.
4. That the Owner is aware of the tax imposed on a "pass-through entity" holding the Class R Certificates if at any time during the taxable year of the pass-through entity a non-Permitted Transferee is the record holder of an interest in such entity. For this purpose, a "pass through entity" includes a regulated investment company, a real estate investment trust or common trust fund, a partnership, trust or estate, and certain cooperatives.
5. That the Owner is aware that the Trustee will not register the transfer of any Class R Certificates unless the transferee, or the transferee's agent, delivers to the Trustee, among other things, an affidavit in substantially the same form as this affidavit. The Owner expressly agrees that it will not consummate any such transfer if it knows or believes that any of the representations contained in such affidavit and agreement are false.
6. That the Owner consents to any additional restrictions or arrangements that shall be deemed necessary upon advice of counsel to constitute a reasonable arrangement to ensure that the Class R Certificates will only be owned, directly or indirectly, by Owners that are Permitted Transferees.
7. That the Owner's taxpayer identification number is __________.
8. That the Owner has reviewed the restrictions set forth on the face of the Class R Certificates and the provisions of Section 5.02 of the Pooling and Servicing Agreement under which the Class R Certificates were issued (and, in particular, the Owner is aware that such Section authorizes the Trustee to deliver payments to a person other than the Owner and negotiate a mandatory sale by the Trustee in the event that the Owner holds such Certificate in violation of Section 5.02); and that the Owner expressly agrees to be bound by and to comply with such restrictions and provisions.
9. That the Owner is not acquiring and will not transfer the Class R Certificates in order to impede the assessment or collection of any tax.
10. That the Owner anticipates that it will, so long as it holds the Class R Certificates, have sufficient assets to pay any taxes owed by the holder of such Class R Certificates.
11. That the Owner has no present knowledge that it may become insolvent or subject to a bankruptcy proceeding for so long as it holds the Class R Certificates.
12. That the Owner has no present knowledge or expectation that it will be unable to pay any United States taxes owed by it so long as any of the Certificates remain outstanding. In this regard, the Owner hereby represents to and for the benefit of the Person from whom it acquired the Class R Certificates that the Owner intends to pay taxes associated with holding the Class R Certificates as they become due, fully understanding that it may incur tax liabilities in excess of any cash flows generated by the Class R Certificates.
13. That the Owner is not acquiring the Class R Certificates with the intent to transfer the Class R Certificates to any person or entity that will not have sufficient assets to pay any taxes owed by the holder of such Class R Certificates, or that may become insolvent or subject to a bankruptcy proceeding, for so long as the Class R Certificates remain outstanding.
14. That Owner will, in connection with any transfer that it makes of the Class R Certificates, obtain from its transferee the representations required by Section 5.02(d) of the Pooling and Servicing Agreement under which the Class R Certificates were issued and will not consummate any such transfer if it knows, or knows facts that should lead it to believe, that any such representations are false.
15. That Owner will, in connection with any transfer that it makes of the Class R Certificates, deliver to the Trustee an affidavit, which represents and warrants that it is not transferring the Class R Certificates to impede the assessment or collection of any tax and that it has no actual knowledge that the proposed transferee: (i) has insufficient assets to pay any taxes owed by such transferee as holder of the Class R Certificates; (ii) may become insolvent or subject to a bankruptcy proceeding, for so long as the Class R Certificates remain outstanding and; (iii) is not a "Permitted Transferee".
16. That the Owner is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in, or under the laws of, the United States or any political subdivision thereof, or an estate or trust whose income from sources without the United States is includible in gross income for United States federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States.
IN WITNESS WHEREOF, the Owner has caused this instrument to be executed on its behalf, by its [Title of Officer] and its corporate seal to be hereunto attached, attested by its [Assistant] Secretary, this ____ day of ____________, 1995.
Personally appeared before me the above-named [Name of Officer], known or proved to me to be the same person who executed the foregoing instrument and to be the [Title of Officer] of the Owner, and acknowledged to me that he executed the same as his free act and deed and the free act and deed of the Owner.
Subscribed and sworn before me this ___ day of _____________, 1995.
My Commission expires the ____ day of _______, 19__.
New York, New York 10005
New York, New York 10006
Re: MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1995-QE11, CLASS R
This letter is delivered to you in connection with the sale by ___________________________ (the "Seller") to _____________________________ (the "Purchaser") of $_____________ Initial Certificate Principal Balance of Mortgage Pass-Through Certificates, Series 1995-QE11, Class R (the "Certificates"), pursuant to Section 5.02 of the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement"), dated as of December 1, 1995, among DLJ Mortgage Acceptance Corp., as seller (the "Company"), Temple-Inland Mortgage Corporation, as master servicer, and Bankers Trust Company, as trustee (the "Trustee"). All terms used herein and not otherwise defined shall have the meaning set forth in the Pooling and Servicing Agreement. The Seller hereby certifies, represents and warrants to, and covenants with, the Company and the Trustee that:
1. No purpose of the Seller relating to the sale of the Certificates by the Seller to the Purchaser is or will be to impede the assessment or collection of any tax.
2. The Seller understands that the Purchaser has delivered to the Trustee and the Master Servicer a transfer affidavit and agreement in the form attached to the Pooling and Servicing Agreement as Exhibit G-3. The Seller does not know or believe that any representation contained therein is false.
3. The Seller has at the time of the transfer conducted a reasonable investigation of the financial condition of the Purchaser as contemplated by Treasury Regulations Section 1.860E-1(c)(4)(i) and, as a result of that investigation, the Seller has determined that the Purchaser has historically paid its debt as they become due and has found no significant evidence to indicate that the Purchaser will not continue to pay its debts as they become due in the future. The Seller understands that the transfer of the Certificates may not be respected for United States income tax purposes (and the Seller may continue to be liable for United States income taxes associated therewith) unless the Seller has conducted such an investigation.
4. The Seller has no actual knowledge that the proposed Transferee is a Disqualified Organization, an agent of a Disqualified Organization or a Non-United States Person.
FORM OF INVESTOR REPRESENTATION LETTER FOR INSURANCE COMPANIES
New York, New York 10005
New York, New York 10006
_______________ (the "Purchaser") intends to purchase from __________ (the "Seller") $____________ Initial Certificate Principal Balance of Mortgage Pass-Through Certificates, Series 1995-QE11, Class __ (the "Certificate"), issued pursuant to the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement"), dated as December 1, 1995 among DLJ Mortgage Acceptance Corp., as seller (the "Company"), Temple-Inland Mortgage Corporation, as master servicer, and Bankers Trust Company, as trustee (the "Trustee"). All terms used herein and not otherwise defined shall have the meanings set forth in the Pooling and Servicing Agreement. The Purchaser hereby certifies, represents and warrants to, and covenants with, the Company and the Trustee that:
1. The Certificates purchased pursuant hereto will not be transferred to any employee benefit plan or other retirement arrangement including individual retirement accounts and Keogh plans that is subject to Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Section 4975 of the Internal Revenue Code of 1986 (the "Code") (any of the foregoing, a "Plan").
2. The Purchaser is an insurance company and the source of funds used to purchase the Certificates is an "insurance company general account" (as such term is defined in Prohibited Transaction Class Exemption 95-60 issued by the U.S. Department of Labor ("PTCE 95-60") and there is no plan with respect to which the amount of such general account's reserves and liabilities for the contract(s) held by or on behalf of such Plan and all other plans maintained by
the same employer (or affiliate thereof as defined in PTCE 95-60) or by the same employee organization, exceed 10% of the total reserves and liabilities of such general account (as such amounts are determined under PTCE 95-60) as of the date of acquisition of such Certificates.
[FORM OF RULE 144A INVESTMENT REPRESENTATION]
Description of Rule 144A Securities, including numbers:
The undersigned seller, as registered holder (the "Transferor"), intends to transfer the Rule 144A Securities described above to the undersigned buyer (the "Buyer").
1. In connection with such transfer and in accordance with the agreements pursuant to which the Rule 144A Securities were issued, the Transferor hereby certifies the following facts: Neither the Transferor nor anyone acting on its behalf has offered, transferred, pledged, sold or otherwise disposed of the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security to, or solicited any offer to buy or accept a transfer, pledge or other disposition of the Rule 144A Securities, or otherwise approached or negotiated with respect to the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security with, any person in any manner, or made any general solicitation by means of general advertising or in any other manner, or taken any other action, which would constitute a distribution of the Rule 144A Securities under the Securities Act of 1933, as amended (the "1933 Act"), or which would render the disposition of the Rule 144A Securities a violation of Section 5 of the 1933 Act or require registration pursuant thereto, and that the Transferor has not offered the Rule 144A Securities to any person other than the Buyer or another "qualified institutional buyer" as defined in Rule 144A under the 1933 Act.
2. The Buyer warrants and represents to, and covenants with, the Transferor, the Trustee and the Master Servicer pursuant to Section 5.02 of the Pooling and Servicing Agreement as follows:
a. The Buyer understands that the Rule 144A Securities have not been registered under the 1933 Act or the securities laws of any state.
b. The Buyer considers itself a substantial, sophisticated institutional investor having such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Rule 144A Securities.
c. The Buyer has been furnished with all information regarding the Rule 144A Securities that it has requested from the Transferor, the Trustee or the Master Servicer.
d. Neither the Buyer nor anyone acting on its behalf has offered, transferred, pledged, sold or otherwise disposed of the Rule 144A
in the Rule 144A Securities or any other similar security to, or solicited any offer to buy or accept a transfer, pledge or other disposition of the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security from, or otherwise approached or negotiated with respect to the Rule 144A Securities, any interest in the Rule 144A Securities or any other similar security with, any person in any manner, or made any general solicitation by means of general advertising or in any other manner, or taken any other action, that would constitute a distribution of the Rule 144A Securities under the 1933 Act or that would render the disposition of the Rule 144A Securities a violation of Section 5 of the 1933 Act or require registration pursuant thereto, nor will it act, nor has it authorized or will it authorize any person to act, in such manner with respect to the Rule 144A Securities.
e. The Buyer is a "qualified institutional buyer" as that term is defined in Rule 144A under the 1933 Act and has completed either of the forms of certification to that effect attached hereto as Annex 1 or Annex 2. The Buyer is aware that the sale to it is being made in reliance on Rule 144A. The Buyer is acquiring the Rule 144A Securities for its own account or the account of other qualified institutional buyers, understands that such Rule 144A Securities may be resold, pledged or transferred only (i) to a person reasonably believed to be a qualified institutional buyer that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A, or (ii) pursuant to another exemption from registration under the 1933 Act.
[3. The Buyer warrants and represents to, and covenants with, the Transferor, the Servicer and the Depositor that either (1) the Buyer is not an employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("Plan"), or a plan within the meaning of Section 4975(e)(1) of the Internal Revenue Code of 1986 (the "Code") (also a "Plan"), and the Buyer is not directly or indirectly purchasing the Rule 144A Securities on behalf of, as investment manager of, as named fiduciary of, as trustee of, or with assets of a Plan, or (2) the Buyer's purchase of the Rule 144A Securities will not result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.]*
[3/4]. This document may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original; such counterparts, together, shall constitute one and the same document.
* To be deleted in the case of the Class SA Certificates and the Class A-1 Certificates. In addition, in the case of a transfer of the Certificates (other than the Class A-1 Certificates) to an insurance company, the above paragraph 6 shall be deleted and a certification in the form of Exhibit G-5 or such other certification as is acceptable to the Depositor and the Trustee shall be executed.
IN WITNESS WHEREOF, each of the parties has executed this document as of the date set forth below.
Print Name of Transferor Print Name of Buyer
ANNEX 1 TO EXHIBIT H
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Buyers Other Than Registered Investment Companies]
The undersigned hereby certifies as follows in connection with the Rule 144A Investment Representation to which this Certification is attached:
1. As indicated below, the undersigned is the President, Chief Financial Officer, Senior Vice President or other executive officer of the Buyer.
2. In connection with purchases by the Buyer, the Buyer is a "qualified institutional buyer" as that term is defined in Rule 144A under the Securities Act of 1933 ("Rule 144A") because (i) the Buyer owned and/or invested on a discretionary basis $______________________1 in securities (except for the excluded securities referred to below) as of the end of the Buyer's most recent fiscal year (such amount being calculated in accordance with Rule 144A) and (ii) the Buyer satisfies the criteria in the category marked below.
___ CORPORATION, ETC. The Buyer is a corporation (other than a bank, savings and loan association or similar institution), Massachusetts or similar business trust, partnership, or charitable organization described in Section 501(c)(3) of the Internal Revenue Code.
___ BANK. The Buyer (a) is a national bank or banking institution organized under the laws of any State, territory or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official or is a foreign bank or equivalent institution, and (b) has an audited net worth of at least $25,000,000 as demonstrated in its latest annual financial statements, A COPY OF WHICH IS ATTACHED HERETO.
___ SAVINGS AND LOAN. The Buyer (a) is a savings and loan association, building and loan association, cooperative bank, homestead association or similar institution, which is supervised and examined by a State or Federal authority having supervision over any such institutions or is a foreign savings and loan association or equivalent institution and (b) has an audited net worth of at least $25,000,000 as demonstrated in its latest annual financial statements.
___ BROKER-DEALER. The Buyer is a dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934.
1 Buyer must own and/or invest on a discretionary basis at least $100,000,000 in securities unless Buyer is a dealer, and, in that case, Buyer must own and/or invest on a discretionary basis at least $10,000,000 in securities.
___ INSURANCE COMPANY. The Buyer is an insurance company whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies and which is subject to supervision by the insurance commissioner or a similar official or agency of a State, territory or the District of Columbia.
___ STATE OR LOCAL PLAN. The Buyer is a plan established and maintained by a State, its political subdivisions, or any agency or instrumentality of the State or its political subdivisions, for the benefit of its employees.
___ ERISA PLAN. The Buyer is an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974.
___ INVESTMENT ADVISER. The Buyer is an investment adviser registered under the Investment Advisers Act of 1940.
___ SBIC. The Buyer is a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958.
___ BUSINESS DEVELOPMENT COMPANY. The Buyer is a business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940.
___ TRUST FUND. The Buyer is a trust fund whose trustee is a bank or trust company and whose participants are exclusively (a) plans established and maintained by a State, its political subdivisions, or any agency or instrumentality of the State or its political subdivisions, for the benefit of its employees, or (b) employee benefit plans within the meaning of Title I of the Employee Retirement Income Security Act of 1974, but is not a trust fund that includes as participants individual retirement accounts or H.R. 10 plans.
3. The term "SECURITIES" as used herein DOES NOT INCLUDE (i) securities of issuers that are affiliated with the Buyer, (ii) securities that are part of an unsold allotment to or subscription by the Buyer, if the Buyer is a dealer, (iii) bank deposit notes and certificates of deposit, (iv) loan participations, (v) repurchase agreements, (vi) securities owned but subject to a repurchase agreement and (vii) currency, interest rate and commodity swaps.
4. For purposes of determining the aggregate amount of securities owned and/or invested on a discretionary basis by the Buyer, the Buyer used the cost of such securities to the Buyer and did not include any of the securities referred to in the preceding paragraph. Further, in determining such aggregate amount, the Buyer may have included securities owned by subsidiaries of the Buyer, but only if such subsidiaries are consolidated with the Buyer in its financial statements prepared in accordance with generally accepted accounting principles and if the investments of such subsidiaries are managed under the Buyer's direction. However, such securities were not included if the Buyer is a majority-owned, consolidated subsidiary of another enterprise and the Buyer is not itself a reporting company under the Securities Exchange Act of 1934.
5. The Buyer acknowledges that it is familiar with Rule 144A and understands that the seller to it and other parties related to the Certificates are relying and will continue to rely on the statements made herein because one or more sales to the Buyer may be in reliance on Rule 144A.
___ ___ Will the Buyer be purchasing the Rule 144A Yes No Securities only for the Buyer's own account?
6. If the answer to the foregoing question is "no", the Buyer agrees that, in connection with any purchase of securities sold to the Buyer for the account of a third party (including any separate account) in reliance on Rule 144A, the Buyer will only purchase for the account of a third party that at the time is a "qualified institutional buyer" within the meaning of Rule 144A. In addition, the Buyer agrees that the Buyer will not purchase securities for a third party unless the Buyer has obtained a current representation letter from such third party or taken other appropriate steps contemplated by Rule 144A to conclude that such third party independently meets the definition of "qualified institutional buyer" set forth in Rule 144A.
7. The Buyer will notify each of the parties to which this certification is made of any changes in the information and conclusions herein. Until such notice is given, the Buyer's purchase of Rule 144A Securities will constitute a reaffirmation of this certification as of the date of such purchase.
ANNEX 2 TO EXHIBIT H
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Buyers That Are Registered Investment Companies]
The undersigned hereby certifies as follows in connection with the Rule 144A Investment Representation to which this Certification is attached:
1. As indicated below, the undersigned is the President, Chief Financial Officer or Senior Vice President of the Buyer or, if the Buyer is a "qualified institutional buyer" as that term is defined in Rule 144A under the Securities Act of 1933 ("Rule 144A") because Buyer is part of a Family of Investment Companies (as defined below), is such an officer of the Adviser.
2. In connection with purchases by Buyer, the Buyer is a "qualified institutional buyer" as defined in SEC Rule 144A because (i) the Buyer is an investment company registered under the Investment Company Act of 1940, and (ii) as marked below, the Buyer alone, or the Buyer's Family of Investment Companies, owned at least $100,000,000 in securities (other than the excluded securities referred to below) as of the end of the Buyer's most recent fiscal year. For purposes of determining the amount of securities owned by the Buyer or the Buyer's Family of Investment Companies, the cost of such securities was used.
____ The Buyer owned $___________________ in securities (other than the excluded securities referred to below) as of the end of the Buyer's most recent fiscal year (such amount being calculated in accordance with Rule 144A).
____ The Buyer is part of a Family of Investment Companies which owned in the aggregate $______________ in securities (other than the excluded securities referred to below) as of the end of the Buyer's most recent fiscal year (such amount being calculated in accordance with Rule 144A).
3. The term "FAMILY OF INVESTMENT COMPANIES" as used herein means two or more registered investment companies (or series thereof) that have the same investment adviser or investment advisers that are affiliated (by virtue of being majority owned subsidiaries of the same parent or because one investment adviser is a majority owned subsidiary of the other).
4. The term "SECURITIES" as used herein does not include (i) securities of issuers that are affiliated with the Buyer or are part of the Buyer's Family of Investment Companies, (ii) bank deposit notes and certificates of deposit, (iii) loan participations, (iv) repurchase agreements, (v) securities owned but subject to a repurchase agreement and (vi) currency, interest rate and commodity swaps.
5. The Buyer is familiar with Rule 144A and understands that each of the parties to which this certification is made are relying and will continue to rely on the statements made herein because one or more sales to the Buyer will be in reliance on Rule 144A. In addition, the Buyer will only purchase for the Buyer's own account.
6. The undersigned will notify each of the parties to which this certification is made of any changes in the information and conclusions herein. Until such notice, the Buyer's purchase of Rule 144A Securities will constitute a reaffirmation of this certification by the undersigned as of the date of such purchase.
Seller's Representations Assigned by Depositor to Trustee
REPRESENTATIONS AND WARRANTIES. Pursuant to Section 4 of the Mortgage Loan Purchase Agreement, the Seller has made certain representations and warranties to the Depositor. The Seller shall confirm such representations and warranties and shall deliver an Officers' Certificate on the Closing Date (i) reaffirming such representations and warranties and (ii) specifically restating and reaffirming the following representations and warranties as of such date. The following representations are, pursuant to the Pooling and Servicing Agreement, assigned by the Depositor to the Trustee for the benefit of the Certificateholders, together with the related repurchase rights specified in the Mortgage Loan Purchase Agreement. Pursuant to the Mortgage Loan Purchase Agreement and a related Officer's Certificate, the Seller affirms each such representation and warranty and agrees, consents to and acknowledges the assignment thereof to the Trustee. All capitalized terms herein shall have the meanings assigned in the Pooling and Servicing Agreement.
(a) The Seller hereby represents and warrants to the Depositor and Trustee, as to each Mortgage Loan, that as of the Closing Date or as of such other date specifically provided herein:
(i) The information set forth on the Mortgage Loan Schedule with respect to each Mortgage Loan is true and correct in all material respects as of
(ii) Each Mortgage Note is directly secured by the Mortgage, and each Mortgaged Property consists of a single parcel of real estate. Each Mortgage secures the outstanding principal balance of the Mortgage Note and is a valid and enforceable first lien on the Mortgaged Property subject only to (1) the lien of nondelinquent current real property taxes and assessments, (2) covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording of such Mortgage, such exceptions appearing of record being acceptable to mortgage lending institutions generally or specifically reflected in the appraisal made in connection with the origination of the related Mortgage Loan, and (3) other matters to which like properties are commonly subject that do not materially interfere with the benefits of the security intended to be provided by such Mortgage;
(iii) All of the Mortgage Loans were originated or acquired under the
(iv) As of the Closing Date, no Mortgage Loan is sixty (60) or more days delinquent in payment of principal or interest;
(v) No Mortgage Loan had a Loan-to-Value Ratio at origination in excess of 75% and no Mortgage Loan had a combined Loan-to-Value Ratio at origination, including any second deed of trust subordinated to the lien of the Mortgage, in excess of 98%;
(vi) Immediately prior to the delivery of the Mortgage Loan to DLJMCI, the Seller had good title to, and was the sole owner of, such Mortgage Loan free and clear of any mortgage, pledge, lien, security interest, charge or other encumbrance (other than any junior lien on the Mortgaged Property encumbered by the related Mortgage) and had full right and authority, subject to no interest or participation of, or agreement with, any other party, to sell and assign the Mortgage Loan pursuant to the Purchase Agreements;
(vii) There was no delinquent tax or assessment lien against any Mortgaged Property at the time of the origination of the related Mortgage Loan;
(viii) There is no valid offset, defense or counterclaim to any Mortgage Note or Mortgage, including the obligation of the Mortgagor to pay the unpaid principal of or interest on such Mortgage Note, and any applicable right of rescission has expired as of the Closing Date;
(ix) There are no mechanics' liens or claims for work, labor or material affecting any Mortgaged Property that are or may be a lien prior to, or equal with, the lien of such Mortgage, except those that are insured against by the title insurance policy referred to in clause (xiii) below;
(x) Each Mortgaged Property is free of material damage and is in at
(xi) Each Mortgage Loan at origination complied in all respects with applicable state and federal laws, including, without limitation, usury, equal credit opportunity, real estate settlement procedures, truth-in-lending and disclosure laws, and consummation of the transactions contemplated hereby will not involve the violation of any such laws;
(xii) At the Closing Date, neither the Seller nor any prior holder of any Mortgage has, except as the Mortgage File may reflect, (1) modified the Mortgage in any material respect, (2) satisfied, canceled or subordinated such Mortgage in whole or in part, (3) released the related Mortgaged Property in whole or in part from the lien of such Mortgage or (4) executed any instrument of release, cancellation, modification or satisfaction with respect thereto;
(xiii) A lender's policy of title insurance or a commitment (binder) to issue the same was effective on the date of the origination of each Mortgage Loan, each such policy is valid and remains in full force and effect and each such policy was issued by a title insurer acceptable to the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") and in a form acceptable to FNMA or FHLMC;
(xiv) Each Mortgage Loan was originated or acquired (1) by the Seller either directly or indirectly through loan brokers or a correspondent lender specifically approved by the Seller, such that (a) the Mortgage Loan was originated in conformity with the Seller's underwriting guidelines, (b) DLJMCI approved the Mortgage Loan either prior to the funding thereof or, in the case of a Mortgage Loan originated pursuant to the Seller's delegated underwriting guidelines, approved the Mortgage Loan after the funding thereof and (c) the Seller funded the Mortgage Loan on the date of origination thereof with its own funds or with funds obtained by it or, in the case of a Mortgage Loan originated by a correspondent lender approved by the Seller and DLJMCI, the Mortgage Loan was approved by the Seller prior to origination and was purchased by the Seller from such correspondent lender within 60 days of the date of origination pursuant to a mandatory purchase commitment in effect at origination, (2) by a savings and loan association, savings bank, commercial bank, credit union, insurance company or similar institution that is supervised and examined by a federal or state authority or (3) by a mortgagee approved by the Secretary of HUD pursuant to Sections 203 and 211 of the National Housing
(xv) Each Mortgage Loan is a semi-annual adjustable rate mortgage loan having an original term to maturity from the date on which the first monthly payment is due of not less than approximately 15 years and not more than 30 years. On each Adjustment Date, the Mortgage Rate will be adjusted to equal the Index plus the Gross Margin, rounded to the nearest 0.125%, subject to the Periodic Rate Cap, the Maximum Rate and the Minimum Rate. The related Mortgage Note is payable on the first day of each month in self-amortizing monthly installments of principal and interest, with interest payable in arrears, and requires a monthly payment which is sufficient (a) to fully amortize the outstanding principal balance of the Mortgage Loan over its remaining term and to pay interest at the applicable Mortgage Rate, and (b) during the period following each Adjustment Date, to fully amortize the original principal balance as of the first day of such period over the then remaining term of such Mortgage Loan and to pay interest at the applicable Mortgage Rate. No Mortgage Loan is subject to negative amortization or is a graduated payment or is a growth equity mortgage loan. Interest on each Mortgage Loan is calculated on the basis of a 360-day year consisting of twelve 30-day months;
(xvi) All of the improvements that were included for the purpose of determining the appraised value of the Mortgaged Property are insured to lie wholly within the boundaries and building restriction lines of such property, and no improvements on adjoining properties encroach upon the Mortgaged Property, unless, in either case, an agreement permitting such encroachment is recorded in the applicable real property records and such agreement was taken into account in conducting the appraisal of the Mortgaged Property;
(xvii) No improvement considered in determining the related appraised value located on or being part of the Mortgaged Property is in violation of any applicable zoning law or regulation. All inspections, licenses and certificates required to be made or issued with respect to the use and occupancy of the Mortgaged Property, including but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities and the Mortgaged Property is lawfully occupied under applicable
(xviii) All parties that have had any interest in the Mortgage, whether as mortgagee, assignee, pledgee or otherwise, are, or, during the period in which they held and disposed of such interest, were (1) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (2)(a) organized under the laws of such state, (b) qualified to do business in such state, (c) federal savings associations or national banks having principal offices in such state or (d) not doing business in such state;
(xix) The Mortgage Note and the related Mortgage are genuine, and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms. All parties to the Mortgage Note and the Mortgage had legal capacity to execute the Mortgage Note and the Mortgage and each Mortgage Note and Mortgage has been duly and properly executed and delivered by such
(xx) The proceeds of the Mortgage Loan have been fully disbursed by the Seller, there is no requirement for future advances thereunder and any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow funds therefor (including any escrow funds held to make monthly payments pending completion of such improvements) have been complied with. All costs, fees and expenses incurred in making, closing or recording the Mortgage Loans were paid;
(xxi) The related Mortgage contains customary and enforceable provisions that render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security, including (1) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (2) otherwise by judicial foreclosure. There is no homestead or other exemption available to the Mortgagor that would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right
(xxii) With respect to each Mortgage constituting a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in such Mortgage, and no fees or expenses are or will become payable by the holder of the Mortgage Loan to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor;
(xxiii) Each Mortgaged Property is suitable for year-round occupancy;
(xxiv) There exist no deficiencies with respect to escrow deposits and payments, if such are required, for which customary arrangements for repayment thereof have not been made, and no escrow deposits or payments of other charges or payments due with respect to the Mortgage Loan (other than origination points and fees) have been capitalized under the Mortgage or the related Mortgage Note;
(xxv) The origination practices used by the Seller with respect to each Mortgage Loan have been in all respects legal, proper, prudent and customary in the mortgage origination business;
(xxvi) There is no pledged account or other security other than real estate securing the Mortgagor's obligations;
(xxvii) No Mortgage Loan has a shared appreciation feature or other
(xxviii) No Mortgage Loan is subject to any temporary buydown
(xxix) With respect to each Mortgage Loan in which the Mortgagor has a leasehold interest in the related Mortgaged Property:
(a) The leasehold created by direct lease of the freehold estate, the ground lease or memorandum thereof has been recorded, and by its terms permits the leasehold estate to be mortgaged. The ground lease grants any leasehold mortgagee standard protection necessary to protect the security of a leasehold mortgagee including the right of the leasehold mortgagee to receive notice of the lessee's default under the ground lease; the right of the leasehold mortgagee, with adequate time, to cure such default; and, in the case of incurable defaults of the lessee, the right of the leasehold mortgagee to enter into a new ground lease with the lessor on terms financially identical and otherwise substantially identical to the existing ground lease;
(b) The ground lease was at the origination of the Mortgage Loan, and is, to the best of Seller's knowledge, in full force and effect without any outstanding defaults, and was and is not subject to liens
(c) The ground lease shall be automatically renewable for at least thirty (30) years or at least ten (10) years beyond the scheduled date for the final payment on the Mortgage Loan; and
(d) The fee estate of the lessor under the ground lease is encumbered by the ground lease, and any lien of any present or future fee mortgagee is and will be subject to and subordinate to the ground lease. The foreclosure of the fee mortgage will not terminate the leasehold estate or the rights of the sub-tenants, and the fee mortgage is subject to the ground lease;
(xxx) Pursuant to the terms of the related Mortgage, all buildings or other improvements upon the Mortgaged Property are insured by a generally acceptable insurer against loss by fire, hazards of extended coverage and such other hazards as are customary in the area where the Mortgaged Property is located pursuant to insurance policies conforming to the requirements of Section 3.13 of the Pooling and Servicing Agreement. If the Mortgaged Property is in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and such flood insurance has been made available) a flood insurance policy is in effect which policy conforms to the requirements of FNMA and FHLMC;
(xxxi) An appraisal of each Mortgaged Property is on a form approved by FNMA or FHLMC with such riders as have been approved by FNMA or FHLMC, as the case may be, and each appraiser meets the minimum qualifications of FNMA or
(xxxii) The Seller has not provided financing on any Mortgaged Property that is subordinate to the lien of the related Mortgage Loan;
(xxxviii) Each Mortgage Loan contains a customary "due-on-sale"
(xxxviv) Except for the criteria for eligible Mortgagors set forth in the Seller's underwriting guidelines, the Seller knows of nothing involving any Mortgage File, Mortgaged Property or Mortgagor's credit standing that could reasonably be expected (1) to cause private institutional investors to regard the Mortgage Loan as an unacceptable investment, (2) to cause the Mortgage Loan to become delinquent or (3) to affect adversely the value or marketability of
(xxxv) The Mortgage Loans were not selected for inclusion under this Agreement from the Seller's portfolio of mortgage loans originated under its "equity lending program" on any basis which would have a material adverse effect
(xxxvi) There are no condemnation proceedings pending with respect to any Mortgaged Property, and no Mortgaged Property has been condemned either in whole or in part; and
(xxxvii) The collection practices used by the Seller with respect to each Mortgage Note and Mortgage serviced by the Seller have been in all material respects legal, proper, prudent and customary in the mortgage origination and servicing industry; and the Mortgage Loans have been serviced by the Seller in accordance with the terms of the Mortgage Loan documents, any applicable mortgage insurance contract requirements and applicable law in all material respects.
Form of Notice Under Section 3.24
Re: MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1995-QE11
Pursuant to Section 3.24 of the Pooling and Servicing Agreement, dated as of December 1, 1995, relating to the Certificates referenced above, the undersigned does hereby notify you that:
(a) The prepayment assumption used in pricing the Certificates was 27% CPR.
(b) With respect to each Class of the captioned Certificates, set forth below is (i), the first price, as a percentage of the Certificate Principal Balance of each Class of Certificates, at which 10% of the aggregate Certificate Principal Balance of each such Class of Certificates was first sold at a single price, if applicable, or (ii) if more than 10% of a Class of Certificates have been sold but no single price is paid for at least 10% of the aggregate Certificate Principal Balance of such Class of Certificates, then the weighted average price at which the Certificates of such Class were sold expressed as a percentage of the Certificate Principal Balance of such Class of Certificates, (iii) if less than 10% of the aggregate Certificate Principal Balance of a Class of Certificates has been sold, the purchase price for each such Class of Certificates paid by Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriter") expressed as a percentage of the Certificate Principal Balance of such Class of Certificates calculated by: (1) estimating the fair market value of each such Class of Certificates as of December 28, 1995; (2) adding such estimated fair market value to the aggregate purchase prices of each Class of Certificates described in clause (i) or (ii) above; (3) dividing each of the fair market values determined in clause (1) by the sum obtained in clause (2); (4) multiplying the quotient obtained for each Class of Certificates in clause (3) by the purchase price paid by the Underwriter for all the Certificates purchased by it; and (5) for each Class of Certificates, dividing the product obtained from such Class of Certificates in clause (4) by the initial Principal Balance of such Class of Certificates or (iv) the fair market value (but not less than zero) as of the Closing Date of each Certificate of each Class of Certificates retained by the Depositor or an affiliate corporation, or delivered to the seller:
The prices and values set forth above do not include accrued interest with respect to periods before the closing. | 8-K | EX-4.1 | 1996-01-12T00:00:00 | 1996-01-12T12:15:49 |
0000950134-96-000092 | 0000950134-96-000092_0000.txt | Stagecoach Funds, Inc. (the "Company") is a professionally managed, open-end series investment company. This Prospectus contains information about one of the funds in the Stagecoach Family of Funds -- the CORPORATE STOCK FUND (the "Fund").
The Fund's investment objective is to approximate to the extent practicable the total rate of return of substantially all of the common stocks comprising the Standard & Poor's 500 Composite Stock Price Index. The Fund attempts to achieve this objective by investing in most of the common stocks which comprise that index.
Please read this prospectus before investing and retain it for future reference. It is designed to provide you with important information and to help you decide if the Fund's goals match your own.
A Statement of Additional Information ("SAI"), dated May 1, 1995, for the Fund has been filed with the Securities and Exchange Commission ("SEC") and is incorporated by reference. The SAI is available free of charge by writing to Stagecoach Funds, Inc., c/o Stagecoach Shareholder Services, Wells Fargo Bank, N.A., P.O. Box 7066, San Francisco, CA 94120-7066 or by calling the Company at 800-222-8222. If you hold shares in an IRA, please call 1-800-BEST-IRA for information or assistance.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
PROSPECTUS DATED MAY 1, 1995 AS SUPPLEMENTED ON JUNE 23, 1995, AUGUST 24, 1995, OCTOBER 18, 1995 AND JANUARY 2, 1996
The Corporate Stock Fund is advised by Wells Fargo Bank, N.A. ("Wells Fargo Bank"). Wells Fargo Bank also serves as the Fund's transfer and dividend disbursing agent, and is a Shareholder Servicing Agent (as defined below) and a Selling Agent (as defined below). Stephens Inc. ("Stephens") is the Fund's sponsor and administrator and serves as the distributor of the Fund's shares.
WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUND, FOR WHICH IT IS COMPENSATED. STEPHENS, WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUND.
SUPPLEMENT DATED JANUARY 2, 1996:
Effective January 1, 1996, BZW Barclays Global Fund Advisors ("BGFA") replaced Wells Fargo Nikko Investment Advisors ("WFNIA") as sub-investment adviser to the Corporate Stock Fund (the "Fund") of Stagecoach Funds, Inc. BGFA was created by the reorganization of WFNIA with and into an affiliate of Wells Fargo Institutional Trust Company. N.A. ("WFITC"). Pursuant to a Sub-Advisory Contract with the Fund and subject to the overall supervision of Wells Fargo Bank, the investment adviser to the Fund, BGFA is responsible for the day-to-day portfolio management of the Fund. BGFA will continue to employ substantially the same personnel and will continue to use the computer-based investment model developed and previously used by WFNIA to determine the recommended mix of assets in the Fund's portfolio. BGFA is entitled to receive from Wells Fargo Bank as compensation for its sub-advisory services monthly fees at the annual rate of 0.08% of the average daily net assets of the Fund. BGFA is also entitled to receive from Wells Fargo Bank annual fees of $40,000 for its services to the Fund. BGFA is an indirect subsidiary of Barclays Bank PLC and is located at 45 Fremont Street, San Francisco, CA 94105. As of January 1, 1996, BGFA and its affiliates provide investment advisory services for more than $220 billion of assets. As of January 1, 1996, Wells Fargo Bank provides investment advisory services for approximately $33 billion of assets.
Effective January 1, 1996, WFITC, due to a change in control of its outstanding voting securities, became a wholly owned subsidiary of BZW Barclays Global Investors Holdings Inc. (formerly, The Nikko Building U.S.A. Inc.) and was renamed BZW Barclays Global Investors, N.A. ("BGI"). BGI currently acts as custodian to each Fund. BGFA is a subsidiary of BGI. BGI will not be entitled to receive compensation for its custodial services to the Fund so long as BGFA is entitled to receive fees for providing investment advisory services to the Fund. The principal business address of BGI is 45 Fremont Street, San Francisco, California 94105.
The Fund's Prospectus and Statement of Additional Information are hereby amended accordingly.
SUMMARY OF FUND EXPENSES 3
HOW THE FUND WORKS 7
THE FUND AND MANAGEMENT 9
INVESTING IN THE FUND 11
HOW TO REDEEM SHARES 17
MANAGEMENT AND SERVICING FEES 23
PROSPECTUS APPENDIX - ADDITIONAL INVESTMENT POLICIES A-1
The Fund provides you with a convenient way to invest in a portfolio of securities selected and supervised by professional management. The following provides you with summary information about the Fund. For more information, please refer specifically to the identified Prospectus sections and generally to the Prospectus and SAI.
Q. WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
A. The CORPORATE STOCK FUND'S investment objective is to approximate to the extent practicable the total rate of return of substantially all of the common stocks comprising the Standard & Poor's 500 Composite Stock Price Index. The Fund attempts to achieve this objective by investing in most of the common stocks which comprise that index. See "How the Fund Works" and "Prospectus Appendix -- Additional Investment Policies."
Q. WHO MANAGES MY INVESTMENTS?
A. Wells Fargo Bank is the Fund's investment adviser, and WFNIA serves as the sub-adviser to the Fund. Wells Fargo Bank provides the Fund with transfer agency and dividend disbursing agency services; WFITC provides the Fund with custodial services. In addition, Wells Fargo Bank is a Shareholder Servicing Agent (as defined below) and a Selling Agent (as defined below). See "The Fund and Management" and "Management and Servicing Fees."
Q. HOW DO I INVEST?
A. You may invest by purchasing Fund shares at net asset value. You may open an account by investing at least $1,000 and may add to your account by making additional investments of at least $100, although certain exceptions to these minimums may be available. Shares may be purchased by wire, by mail or by an automatic investment feature called the AutoSaver Plan on any day the New York Stock Exchange is open. See "Investing in the Fund." For more details, contact Stephens (the Fund's sponsor and distributor), a Shareholder Servicing Agent or a Selling Agent (such as Wells Fargo Bank).
Q. HOW WILL I RECEIVE DIVIDENDS AND ANY CAPITAL GAINS?
A. Dividends from net investment income are declared quarterly and automatically reinvested in additional Fund shares at net asset value without a sales charge unless you elect to receive dividends in cash. Any capital gains will be distributed at least annually in the same manner. See "Dividends" and "Additional Shareholder Services."
Q. HOW MAY I REDEEM SHARES?
A. You may redeem your shares, without charge by the Fund by telephone, by letter or by an automatic feature called the Systematic Withdrawal Plan, on any day the New York Stock Exchange is open. See "How To Redeem Shares." For more details, contact Stephens, a Shareholder Servicing Agent or a Selling Agent (such as Wells Fargo Bank).
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH THIS TYPE OF INVESTMENT?
A. An investment in the Fund is not insured against loss of principal. When the value of the securities that the Fund owns declines, so does the value of your Fund shares. Therefore, you should be prepared to accept some risk with the money you invest in the Fund. The portfolio equity securities of the Fund are subject to equity market risk. Equity market risk is the risk that common stock prices will fluctuate or decline over short or even extended periods. The U.S. stock market tends to be cyclical, with periods when stock prices generally rise and periods when prices generally decline. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. Investors should be prepared to accept that risk, as well as the risk that these Funds could underperform the Standard & Poor's 500 Composite Stock Price Index over the long-term and/or the short-term.
This expense summary is a standard format required for all mutual funds to help you understand the various costs and expenses you will bear directly or indirectly as a Fund shareholder. As shown below, you are not charged sales charges, redemption fees or exchange fees. You should consider this expense information together with the important information in this prospectus, including the Fund's investment objective and policies.
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell Fund shares. There are no shareholder transaction expenses. However, the Company reserves the right to impose a charge for wiring redemption proceeds.
ANNUAL FUND OPERATING EXPENSES are based on amounts incurred during the most recent fiscal year reflecting voluntary fee waivers and expense reimbursements. Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of their respective fees if certain Fund expenses exceed limits set by state securities laws or regulations. In addition, Wells Fargo Bank and Stephens at their sole discretion, may waive or reimburse all or a portion of their respective fees charged to, or expenses paid by, the Funds. Any waivers or reimbursements would reduce the Fund's total expenses. There can be no assurances that waivers or reimbursements will continue. Absent waivers or reimbursements, the percentages shown above under "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.45% and 1.00%, respectively. Long- term shareholders in the Fund could pay more in sales charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers ("NASD"). For more complete descriptions of the various costs and expenses you can expect to incur as an investor in the Fund, please see the prospectus sections captioned "Investing in the Fund - How To Buy Shares" and "Management and Servicing Fees."
EXAMPLE OF EXPENSES is a hypothetical example which illustrates the expenses associated with a $1,000 investment over a period of one, three, five and ten years, based on the expenses in the table above and an assumed annual rate of return of 5%. This rate of return should not be considered an indication of actual or expected Fund performance. In addition, the example should not be considered a representation of past or future expenses and actual expenses may be greater or lesser than those shown.
The following information, for each of the five years in the period ending December 31, 1994, has been derived from the Financial Highlights in the Fund's 1994 annual financial statements. The financial statements are included in the Fund's SAI. Except for periods ending prior to January 1, 1992, which were audited by other auditors whose report dated February 19, 1992, expressed an unqualified opinion on this information, the financial statements have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is included in the SAI. This information should be read in conjunction with the Fund's 1994 annual financial statements and notes thereto. The SAI has been incorporated by reference into this Prospectus.
The Fund's investment objective is to approximate to the extent practicable the total rate of return of substantially all the common stocks comprising the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index").* This investment objective is fundamental and cannot be changed without shareholder approval. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. Because the Fund invests in a number of different companies, its investments are broadly "diversified" thereby tending to reduce the effects of a few poorly performing companies on the overall portfolio.
Index funds, such as the Fund, seek to create, to the extent feasible, a portfolio which substantially replicates the total return of the securities comprising the applicable index, taking into consideration redemptions, sales of additional shares and other adjustments described below. Index funds are not managed through traditional methods of fund management, which typically involve frequent changes in a portfolio of securities on the basis of economic, financial and market analyses. Therefore, brokerage costs, transfer taxes and certain other transaction costs for index funds may be lower than those incurred by non-index, traditionally managed funds. Precise replication of the holdings of the Fund and the capitalization weighting of the securities in the S&P 500 Index is not feasible, but the Fund seeks correlation between the price and total return performance of securities comprising the S&P Index and the investment results of the Fund. The Fund will attempt to achieve, in both rising and falling markets, a correlation of at least 95% between the total return of its net assets before expenses and the total return of the S&P 500 Index. There can be no assurance that the Fund will achieve this correlation.
The Fund may invest some of its assets in high-quality money market instruments, which include U.S. Government obligations, obligations of domestic and foreign banks, repurchase agreements, commercial paper (including variable amount master demand notes) and short-term corporate debt obligations. Such investments are made on an ongoing basis to provide liquidity and, to a greater extent on a temporary basis, when there is an unexpected or abnormal level of investor purchases or redemptions of Fund shares or because of unusual market conditions which limit the Fund's ability to invest
* The S&P 500 Index is an unmanaged index of stocks comprised of 500 industrial, financial, utility and transportation companies. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500", and "500" are trademarks of McGraw-Hill, Inc. The Corporate Stock Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund.
effectively its assets in accordance with its investment strategies. In addition, the Fund may engage in securities lending to increase its income. A more complete description of the Fund's investments and investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the SAI.
The Fund's portfolio is subject to equity market risk (i.e., the possibility that common stock prices will decline over short or even extended periods). The U.S. stock market tends to be cyclical, with periods when stock prices generally rise and periods when prices generally decline.
The Fund's performance may be advertised in terms of average annual total return and yield. These performance figures are based on historical results and are not intended to indicate future performance.
The yield of the shares of the Corporate Stock Fund is calculated by dividing the Fund's net investment income per share earned during a specified period (which is identified in the advertisement) by the public offering price per share (which includes the maximum sales charge) on the last day of such period and annualizing the result. In addition to presenting a standardized yield, at times, the Fund also may present nonstandardized yields, total returns and distribution rates for purposes of sales literature. For example, the performance figures may be calculated on the basis of an investment in the Fund at the net asset value per share or at net asset value per share plus a reduced sales charge, rather than the public offering price per share. In this case, the figure might not reflect the effect of the sales charge that you may have paid (see "Investing in the Fund - How To Buy Shares").
Standardized and nonstandardized total return figures for a Fund also may be presented. Average annual total return is based on the overall dollar or percentage change in value of a hypothetical investment in the Fund and assumes that all the dividends and capital gain distributions attributable to the Fund are reinvested at net asset value in such Fund. Standardized average annual total return is calculated assuming you have paid the maximum sales charge on your hypothetical investment. Nonstandardized total return may be calculated assuming no sales charge or a reduced sales charge was paid on such investment.
Additional information about the performance of the Fund is contained in the Annual Report for the Fund. The Annual Report may be obtained free of charge by calling the Company at 800-222-8222.
The Fund is one of the funds in the Stagecoach Family of Funds. The Company was organized as a Maryland corporation on September 9, 1991, and currently offers shares of ten other series--the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Income Fund, the California Tax-Free Money Market Mutual Fund, the Diversified Income Fund, the Ginnie Mae Fund, the Growth and Income Fund, the Money Market Mutual Fund, the Short-Intermediate U.S. Government Income Fund and the U.S. Government Allocation Fund. The Board of Directors of the Company supervises the Fund's activities and monitors its contractual arrangements with various service-providers. Although the Company is not required to hold annual shareholder meetings, special meetings may be requested for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing the Fund's investment objective or fundamental investment policies. All shares of the Company have equal voting rights and will be voted in the aggregate, rather than by series, unless otherwise required by law (such as when the voting matter affects only one series). As a shareholder of the Fund, you receive one vote for each share you own and fractional votes for fractional shares owned. A more detailed description of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the SAI.
Wells Fargo Bank is the Fund's investment adviser and transfer and dividend disbursing agent. In addition, Wells Fargo Bank is a Shareholder Servicing Agent of the Fund and a Selling Agent under a Selling Agreement with the Fund's distributor. Wells Fargo Bank, one of the largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of June 30, 1995, Wells Fargo Bank provided investment advisory services for approximately $28 billion of assets of individuals, trusts, estates and institutions. As of June 30, 1995, various divisions and affiliates of Wells Fargo Bank (including WFNIA) provided investment advisory services for approximately $211 billion of assets of individuals, trusts, estates and institutions. As of June 30, 1995, WFNIA managed or advised over $183 billion in assets. Wells Fargo Bank also serves as the investment adviser to the other separately managed series of the Company, and to six other registered, open-end, management investment companies, each of which consists of several separately managed investment portfolios. Wells Fargo Bank, a wholly owned subsidiary of Wells Fargo & Company, is located at 420 Montgomery Street, San Francisco, California 94163.
WFNIA, located at 45 Fremont Street, San Francisco, California 94105, is a sub-adviser to the Fund, and its subsidiary serves as the Fund's custodian. WFNIA is a general partnership owned 50% by a wholly owned subsidiary of Wells Fargo Bank and 50% by a subsidiary of The Nikko Securities Co., Ltd., a Japanese investment firm. WFNIA also serves as the sub-adviser to some of the other separately managed series of the Company, and as investment adviser to other registered open-end management investment companies.
On June 21, 1995, Wells Fargo & Co. and The Nikko Securities Co., Ltd. signed a definitive agreement to sell their joint venture interest in Wells Fargo Nikko Investment Advisors ("WFNIA") to Barclays PLC of the U.K. The sale, which is subject to the approval of appropriate regulatory authorities, is expected to close in the fourth quarter of 1995.
Barclays is the largest clearing Bank in the U.K., with $259 billion in total assets. Barclays has announced its intention to combine WFNIA with the quantitative group of BZW Asset Management ("BZWAM"), its international asset management arm. BZWAM is the largest quantitative fund manager in Europe, with approximately $32 billion of quantitative funds under management, as of March 31, 1995. The BZW Division of Barclays, of which BZWAM forms a part, is the investment banking arm of Barclays and offers a full range of investment banking, capital markets and asset management services.
Under the Investment Company Act of 1940, this proposed change of control of WFNIA would result in assignment and termination of the current Sub-Investment Advisory Agreement between WFNIA, Wells Fargo Bank and the Fund. Subject to the approval of the Company's Board of Directors, it is contemplated that a special meeting of shareholders of the Fund will be convened to consider a new Sub-Investment Advisory Agreement with WFNIA, which will become effective only upon the change of control of WFNIA. It is not anticipated that the proposed change of control will change the investment objective or overall investment strategy of the Fund.
Stephens is the Fund's sponsor and administrator, and distributes the Fund's shares. Stephens is a full service broker/dealer and investment advisory firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments.
You can buy Fund shares in one of the several ways described below. You must complete and sign an Account Application to open an account. Additional documentation may be required from corporations, associations and certain fiduciaries. Do not mail cash. If you have any questions or need extra forms, you may call 800-222-8222.
After an application has been processed and an account has been established, subsequent purchases of different funds of the Company under the same umbrella account do not require the completion of additional applications. A separate application must be processed for each different umbrella account number (even if the registration is the same).
Call the telephone number on your confirmation statement to obtain information about what is required to change registration.
If you wish to invest in the Fund through a tax-deferred retirement plan please contact a Shareholder Servicing Agent or a Selling Agent to receive information and the required separate application. See "Tax-Deferred Retirement Plans" below. The Company or Stephens may make the Prospectus available in an electronic format. Upon receipt of a request by you or your representative, the Company or Stephens will transmit or cause to be transmitted promptly, without charge, a paper copy of the electronic Prospectus.
The value of each Fund share is its "net asset value," or NAV. The NAV is computed by adding the value of the Fund's portfolio investments plus cash and other assets, deducting liabilities and then dividing the result by the number of shares outstanding. NAV is expected to fluctuate daily.
The Fund is open for business each day the New York Stock Exchange ("NYSE") is open for trading ("Business Day"). Currently, the NYSE is closed on New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each a "Holiday"). When any Holiday falls on a weekend, the NYSE is closed on the weekday immediately before or after such Holiday. Wells Fargo Bank calculates the Fund's NAV each Business Day as of the close of regular trading on the NYSE (referred to hereafter as "the close of the NYSE"), which is currently 1:00 p.m. (Pacific time).
Except for debt obligations with remaining maturities of 60 days or less, which are valued at amortized cost, the Fund's other assets are valued at current market prices, or if such prices are not readily available, at fair value as determined in good faith by the
Company's Board of Directors. Prices used for such valuations may be provided by independent pricing services.
Fund shares are offered continuously at the NAV next determined after a purchase order is received in the form specified for the purchase method being used, as described in the following sections. Payment for shares purchased through a Selling Agent will not be due from the Selling Agent until the settlement date. The settlement date normally is three Business Days after the order is placed. It is the responsibility of the Selling Agent to forward payment for shares being purchased to the Fund promptly. Payment must accompany orders placed directly through the Transfer Agent.
Payments for Fund shares will be invested in full and fractional shares at the applicable offering price. If shares are purchased by a check which doesn't clear, the Company reserves the right to cancel the purchase and hold the investor responsible for any losses or fees incurred. In addition, the Fund may hold payment on any redemption until reasonably satisfied that your investments made by check have been collected (which may take up to 15 days). The Company reserves the right to reject any purchase order or suspend sales at any time.
The minimum initial investment is $100 by the AutoSaver Plan purchase method (described below), $250 for any tax-sheltered retirement account for which Wells Fargo Bank serves as trustee or custodian under a prototype trust approved by the Internal Revenue Service ("IRS") (a "Plan Account"), and $1,000 by all other methods or for all other investors. All subsequent investments must be at least $100. If you have questions regarding purchases of shares, please contact the Company at 800-222-8222 or a Shareholder Servicing Agent or Selling Agent.
You may buy Fund shares on any Business Day by any of the methods described below.
If you wish to purchase Fund shares by wire, please follow the instructions set forth below.
1. Complete an Account Application.
2. Instruct the wiring bank to transmit the specified amount in federal funds ($1,000 or more) to:
Wire Purchase Account Number: 4068-000587 Attention: Stagecoach Funds (Corporate Stock Fund) Account Name(s): (name(s) in which to be registered) Account Number: (if investing into an existing account)
3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened:
4. Share purchases are effected at NAV next determined after the Account Application is received and accepted.
If you wish to purchase Fund shares by mail, please follow the instructions set forth below.
1. Complete an Account Application. Indicate the services to be used.
2. Mail the Account Application and a check for $1,000 or more, payable to "Stagecoach Funds (Corporate Stock Fund)," to the address above.
3. Share purchases are effected at the NAV next determined after the Account Application is received and accepted.
The Company's AutoSaver Plan provides you with a convenient way to establish and automatically add to a Fund account on a monthly basis. To participate in the AutoSaver Plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from an account with a bank, which is designated in your Account Application and which is approved by the Transfer Agent ("Approved Bank"). Wells Fargo Bank is an Approved Bank. The Transfer Agent withdraws and uses this amount to purchase specified shares of the designated Fund on your behalf each month on or about the day that you have selected, or, if you have not selected a day, on or about the 20th day of each month. The Transfer Agent requires a minimum of ten (10) Business Days to implement your AutoSaver Plan purchases or to process your request to change the day on which the AutoSaver purchase is processed. There are no separate fees charged to you by the Fund for participating in the AutoSaver Plan.
You may change your investment amount, suspend purchases or terminate your election at any time by providing notice to the Transfer Agent at least five Business Days prior to any scheduled transaction.
You may be entitled to invest in the Fund through a Plan Account or other tax-deferred retirement plan. Contact a Shareholder Servicing Agent (such as Wells Fargo Bank) or a Selling Agent for materials describing Plan Accounts available through it, and the benefits, provisions, and fees of such Plan Accounts. The minimum initial investment amount for Fund shares acquired through a Plan Account is $250.
Pursuant to the Code, individuals who are not active participants (and who do not have a spouse who is an active participant) in certain types of retirement plans ("qualified retirement plans") may deduct contributions to an Individual Retirement Account ("IRA"), up to specified limits. Investment earnings in the IRA will be tax-deferred until withdrawn, at which time the individual may be in a lower tax bracket.
The maximum annual deductible contribution to an IRA for individuals under age 70 1/2 is 100% of includible compensation up to a maximum of (i) $2,000 for single individuals; (ii) $4,000 for a married couple when both spouses earn income; and (iii) $2,250 when one spouse earns, or elects for IRA purposes to be treated as earning, no income (together the "IRA contribution limits").
The IRA deduction is also available for single individual taxpayers and married couples who are active participants in qualified retirement plans but who have adjusted gross incomes which do not exceed certain specified limits. If their adjusted gross income exceeds these limits, the amount of the deductible contribution may be phased down and eventually eliminated.
Any individual who works may make nondeductible contributions to an IRA in addition to any deductible contributions. Total aggregate deductible and nondeductible contributions are limited to the IRA contribution limits discussed above. Nondeductible contributions in excess of the applicable IRA contribution limit are "nondeductible excess contributions". In addition, contributions made to an IRA for the year in which an individual attains the age of 70 1/2, or any year thereafter, are also nondeductible excess contributions. Nondeductible excess contributions are subject to a 6% excise tax penalty which is charged each year that the nondeductible excess contribution remains in the IRA.
An employer also may contribute to an individual's IRA by establishing a Simplified Employee Pension Plan through a Shareholder Servicing Agent or a Selling Agent, known as a SEP-IRA. Participating employers may make an annual contribution in an amount up to the lesser of 15% of earned income or $30,000, subject to certain provisions of the Code. Investment earnings will be tax-deferred until withdrawn.
The foregoing discussion regarding IRAs is based on the Code and regulations in effect as of the date of this Prospectus and summarizes only some of the important federal tax considerations generally affecting IRA contributions made by individuals or their employers. It is not intended as a substitute for careful tax planning. Investors should consult their tax advisors with respect to their specific tax situations as well as with respect to state and local taxes. Further federal tax information is contained under the heading "Taxes" in this Prospectus and in the SAI.
A Shareholder Servicing Agent or Selling Agent also may offer other types of tax-deferred or tax-advantaged plans, including a Keogh retirement plan for self-employed professional persons, sole proprietors and partnerships.
Application materials for opening a tax-deferred retirement plan can be obtained from a Shareholder Servicing Agent or a Selling Agent. Return your completed tax-deferred retirement plan application to your Shareholder Servicing Agent or a Selling Agent for approval and processing. If your tax-deferred retirement plan application is incomplete or improperly filled out, there may be a delay before the Fund account is opened. You should ask your Shareholder Servicing Agent or Selling Agent about the investment options available to your tax-deferred retirement plan, since some of the funds in the Stagecoach Family of Funds may be unavailable as options. Moreover, certain features described herein, such as the AutoSaver Plan and the Systematic Withdrawal Plan, may not be available to individuals or entities who invest through a tax-deferred retirement plan.
You may make additional purchases of $100 or more by instructing the Fund's Transfer Agent to debit an Approved Bank account designated in your Account Application, by wire by instructing the wiring bank to transmit the specified for initial purchases, or by mail with a check payable to "Stagecoach Funds (Corporate Stock Fund)" to the address set forth in "Initial Purchases by Wire." Write your Fund account number on the check and include the detachable stub from your Statement of Account or a letter providing your Fund account number.
You may place a purchase order for Fund shares through a broker/dealer or financial institution which has entered into a Selling Agreement with Stephens, as the Fund's Distributor ("Selling Agent"). If your order is placed by the close of the NYSE, the purchase order generally will be executed on the same day if the order is received by the Transfer Agent before the close of business. If your purchase order is received by a Selling Agent after the close of the NYSE or by the Transfer Agent after the close of business, then your purchase order will be executed on the next Business Day following the day your order is placed. The Selling Agent is responsible for the prompt transmission of your purchase order to the Fund. Because payment for Fund shares will not be due until settlement date, the Selling Agent might benefit from temporary use of your payment. A Selling Agent which is a financial institution may be required to register as a dealer pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein.
PURCHASES THROUGH SHAREHOLDER SERVICING AGENTS
Purchase orders for Fund shares may be transmitted to the Transfer Agent through any entity that has entered into a Shareholder Servicing Agreement with the Fund ("Shareholder Servicing Agent"), such as Wells Fargo Bank. See "Management and Servicing Fees - Shareholder Servicing Agent."
The Shareholder Servicing Agent may transmit a purchase order to the Transfer Agent, on your behalf, including a purchase order for which payment is to be transferred from an account with an Approved Bank or wired from a financial institution. If your order is transmitted by the Shareholder Servicing Agent, on your behalf, to the Transfer Agent before the close of the NYSE, the purchase order generally will be executed on the same day. If your Shareholder Servicing Agent transmits your purchase order to the Transfer Agent after the close of the NYSE, then your order will be executed on the next Business Day following the day your order is received. The Shareholder Servicing Agent is responsible for the prompt transmission of your purchase order to the Transfer Agent.
The Fund, or a Shareholder Servicing Agent on its behalf, will typically send you a statement of your account after every transaction that affects your share balance or your Fund account registration. A statement with tax information will be mailed to you by January 31 of each year, and also will be filed with the IRS. At least twice a year, you will receive financial statements.
The Fund intends to declare a quarterly dividend of substantially all of its net investment income. The Fund will distribute any capital gains at least annually. You have several options for receiving dividends and capital gain distributions. They are discussed under "Additional Shareholder Services - Dividend and Distribution Options."
Dividends and capital gain distributions will have the effect of reducing the Fund's NAV per share by the amount distributed. Although a distribution paid to you on newly issued shares shortly after your purchase would represent, in substance, a return of your capital, the distribution would consist of net investment income and, accordingly, would be taxable to you as ordinary income.
You may redeem all or a portion of your Fund shares on any Business Day without any charge by the Fund. Your shares will be redeemed at the next NAV calculated after the Fund has received your redemption request in proper form. Redemption proceeds may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. The Fund ordinarily will remit redemption proceeds within seven days after your redemption order is received in proper form, unless the SEC permits a longer period under extraordinary circumstances. Such extraordinary circumstances could include a period during which an emergency exists as a result of which (a) disposal by the Fund of securities owned by it is not reasonably practicable or (b) it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or a period during which the SEC by order permits deferral of redemptions for the protection of security holders of the Fund. In addition, the Fund may hold payment on your redemptions until reasonably satisfied that your investments made by check have been collected (which can take up to 15 days from the purchase date). To ensure acceptance of your redemption request, please follow the procedures described below. Although it is not the Fund's current intention, the Fund may make payment of redemption proceeds in securities, if conditions warrant subject to regulation by some state securities commissions. In addition, the Fund reserves the right to impose charges for wiring redemption proceeds.
Due to the high cost of maintaining Fund accounts with small balances, the Fund reserves the right to close your account and send you the proceeds if the balance falls below the applicable minimum balance because of a redemption (including a redemption of Fund shares after an investor has made only the applicable minimum initial investment). However, you will be given 30 days' notice to make an additional investment to increase your account balance to an amount equal to or greater than the applicable minimum balance. For a discussion of applicable minimum balance requirements. (see "Investing in the Funds -- How to Buy Shares."
Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you specifically decline the privileges. Telephone redemption privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Company and the Transfer Agent may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine.
You may redeem all or a portion of your Fund shares by mail. If you wish to do so, please observe the following.
1. Write a letter of instruction. Indicate the dollar amount or number of Fund shares you want to redeem. Refer to your Fund account number and give your social security or tax identification number (where applicable).
2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign.
3. Signature guarantees are not required for redemption requests unless redemption proceeds of $5,000 or more are to be paid to someone other than you at your address of record or your designated Approved Bank account, or other unusual circumstances exist which cause the Transfer Agent to determine that a signature guarantee is necessary or prudent to protect against unauthorized redemption requests. If required, a signature must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is an FDIC member, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation may be requested from corporations, administrators, executors, personal representatives, trustees or custodians.
4. If shares to be redeemed are held in certificated form, enclose the certificates with the letter. Do not sign the certificates and for protection use registered mail.
5. Mail your letter to the Transfer Agent at the mailing address set forth under "Investing in the Fund - Initial Purchases By Wire."
Unless other instructions are given in proper form, a check for your redemption proceeds will be sent to your address of record.
EXPEDITED REDEMPTIONS BY MAIL OR TELEPHONE
You may request an expedited redemption of Fund shares by letter, in which case your receipt of redemption proceeds, but not the Fund's receipt of your redemption request, would be expedited. You also may request an expedited redemption of Fund shares by telephone on any Business Day, in which case both your receipt of redemption proceeds and the Fund's receipt of your redemption request would be expedited. You may request expedited redemption by telephone only if the total value of the shares redeemed is $100 or more.
You may request expedited redemption by telephone by calling the Transfer Agent at the telephone number listed on your transaction confirmation or by calling 800-222-8222.
You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Investing in the Fund - Initial Purchases by Wire."
Upon request, proceeds of your expedited redemptions of $5,000 or more will be wired or credited to an Approved Bank account designated in your Account Application or wired to the Selling Agent designated in your Account Application. The Company reserves the right to impose a charge for wiring redemption proceeds. When proceeds of your expedited redemption are to be paid to someone else, to an address other than that of record, or to an account with an Approved Bank or Selling Agent that you have not predesignated in your Account Application, your expedited redemption request must be made by letter and the signature(s) on the letter may be required to be guaranteed, regardless of the amount of the redemption. If your expedited redemption request is received by the Transfer Agent by the close of the NYSE on a Business Day, your redemption proceeds will be transmitted to your designated account with an Approved Bank or Selling Agent on the next Business Day (assuming your investment check has cleared as described above), absent extraordinary circumstances. Such extraordinary circumstances could include those described above as potentially delaying redemptions, and also could include situations involving an unusually heavy volume of wire transfer orders on a national or regional basis or communication or transmittal delays that could cause a brief delay in the wiring or crediting of funds. A check for proceeds will be mailed to your address of record or, at your election, credited to an Approved Bank account designated in your Account Application.
During periods of drastic economic or market activity or changes, you may experience problems implementing an expedited redemption by telephone. In the event you are unable to reach the Transfer Agent by telephone, you should mail to implement an expedited redemption. The Fund reserves the right to modify or terminate the expedited telephone redemption privilege at any time.
The Company's Systematic Withdrawal Plan provides you with a convenient way to have Fund shares redeemed from your account and the proceeds distributed to you on a monthly basis. You may participate in the Systematic Withdrawal Plan only if you have a Fund account valued at $10,000 or more as of the date of your election to participate, your dividends and capital gain distributions are being reinvested automatically and you are not participating in the AutoSaver Plan at any time while participating in the Systematic Withdrawal Plan. You specify an amount ($100 or more) to be distributed by check to your address of record or deposited in your Approved Bank account designated in the Account Application. The Transfer Agent redeems sufficient shares and mails or deposits your redemption proceeds as instructed on or about the fifth Business Day prior to the end of each month. There are no separate fees charged to you by the Fund for participating in the Systematic Withdrawal Plan.
You may change your withdrawal amount, suspend withdrawals or terminate your election at any time by notifying the Transfer Agent at least ten Business Days prior to any scheduled transaction. Your participation in the Systematic Withdrawal Plan will be terminated automatically if your Fund account is closed, or, in some cases, if your Approved Bank account is closed.
If your redemption order is received by a Selling Agent before the close of the NYSE and received by the Transfer Agent before the close of business on the same day, the order will be executed at the NAV determined as of the close of the NYSE on that day. If your redemption order is received by a Selling Agent after the close of the NYSE, or not received by the Transfer Agent prior to the close of business, your order will be executed at NAV determined as of the close of the NYSE on the next Business Day. The Selling Agent is responsible for the prompt transmission of your redemption order to the Fund.
Unless you have made other arrangements with the Selling Agent, and the Transfer Agent has been informed of such arrangements, proceeds of a redemption order made by you through a Selling Agent will be credited to an account with an Approved Bank that you have designated in your Account Application. If no such account is designated, a check for the proceeds will be mailed to your address of record or, if such address is no longer valid, the proceeds will be credited to your account with the Selling Agent. You may request a check from the Selling Agent or may elect to retain the redemption proceeds in such account. The Selling Agent may charge you a service fee. In addition, it may benefit from the use of your redemption proceeds until the check it issues to you has cleared or until such proceeds have been disbursed or reinvested on your behalf.
REDEMPTIONS THROUGH SHAREHOLDER SERVICING AGENTS
You may request a redemption of Fund shares through your Shareholder Servicing Agent. Any redemption request made by telephone through your Shareholder Servicing Agent must redeem shares with a total value of $100 or more. If your redemption order is transmitted by the Shareholder Servicing Agent, on your behalf, to the Transfer Agent before the close of the NYSE, the redemption order will be executed at NAV determined as of the close of the NYSE on that day. If your Shareholder Servicing Agent transmits your redemption order to the Transfer Agent after the close of the NYSE, then your order will be executed on the next Business Day following the date your order is received. The Shareholder Servicing Agent is responsible for the prompt transmission of your redemption order to the Fund.
Unless you have made other arrangements with your Shareholder Servicing Agent, and the Transfer Agent has been informed of such arrangements, proceeds of a redemption order made by you through your Shareholder Servicing Agent will be credited to an account with the Approved Bank that you have designated in the Account Application. If no such account is designated, a check for the proceeds will be mailed to your address of record or, if such address is no longer valid, the proceeds will be credited to your account with your Shareholder Servicing Agent or to another account designated in your agreement with your Shareholder Servicing Agent.
The Company offers you a number of optional services. As noted above, you can take advantage of the AutoSaver Plan, Tax-Deferred Retirement Plans, the Systematic Withdrawal Plan, and Expedited Redemptions by Letter and Telephone. In addition, the Fund offers you three dividend and distribution payment options and an exchange privilege, which are described below.
When you fill out your Account Application, you can choose from the dividend and distribution options listed below. If you have questions about the dividend and distribution options available to you, please call 800-222-8222.
A. The Automatic Reinvestment Option provides for the reinvestment of your dividends and capital gain distributions in additional Fund shares. Dividends and distributions declared in a month generally is reinvested at NAV on the last Business Day of such month. You are assigned this option automatically if you make no choice on your Account Application.
B. The Automatic Clearing House Option permits you to have dividends and capital gain distributions deposited in your Approved Bank account designated in
Application. In the event your Approved Bank account is closed, your distribution will be held in a non-interest-bearing omnibus bank account established by the Fund's dividend disbursing agent on your behalf.
C. The Check Payment Option lets you receive a check for all dividends and/or capital gain distributions, which generally is mailed either to your designated address or your designated Approved Bank shortly following declaration. If the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, your distributions will be held in a non-interest-bearing omnibus bank account established by the Fund's dividend disbursing agent on your behalf.
The Company forwards monies to the dividend disbursing agent so that it may issue you dividend checks under the Check Payment Option. The dividend disbursing agent may benefit from the temporary use of such monies until these checks clear.
Wells Fargo Bank advises a variety of other funds, each with its own investment objective and policies. The exchange privilege is a convenient way to buy shares in the other funds of the Stagecoach Family of Funds that are registered in your state of residence in order to respond to changes in your investment and savings goals or in market conditions. Shares of the Corporate Stock Fund may be exchanged for Class A Shares of one of the Company's multi-class funds, for Retail Shares of another fund or for shares of any of the Company's single-class funds. Before you make an exchange from the Fund into another fund of the Stagecoach Family of Funds, please observe the following:
- Obtain and carefully read the prospectus of the fund into which you want to exchange.
- If you exchange into another fund with a sales charge, you must pay the difference between that fund's sales charge and any sales charge you already have paid in connection with the shares you are exchanging.
- Each exchange, in effect, represents the redemption of shares of one fund and the purchase of shares of another, which may produce a gain or loss for tax purposes. A confirmation of each exchange transaction will be sent to you.
- The dollar amount of shares you exchange must meet the minimum initial and/or subsequent investment amounts of the other fund.
- The Company reserves the right to limit the number of times shares may be exchanged between funds, to reject any telephone exchange order, or otherwise to modify or discontinue exchange privileges at any time. Under SEC rules, subject to limited exceptions, the Company ordinarily must notify you 60 days before it modifies or discontinues the exchange privilege.
The procedures applicable to Fund share redemptions also apply to Fund share exchanges.
To exchange shares, write the Transfer Agent at the mailing address under "Investing in the Fund - Initial Purchases by Wire" or call the Transfer Agent at the telephone number listed on your transaction confirmation, or contact your Shareholder Servicing Agent or Selling Agent. The procedures applicable to telephone redemptions, including the discussion regarding the responsibility for the authenticity of telephone instructions, are also applicable to telephone exchange requests. See "How To Redeem Shares - Expedited Redemptions by Letter and Telephone."
Subject to the overall supervision of the Company's Board of Directors, Wells Fargo Bank, as the Fund's investment adviser, provides investment guidance and policy direction in connection with the management of the Fund's assets. Wells Fargo Bank also furnishes the Board of Directors with periodic reports on the Fund's investment strategy and performance. For these services, Wells Fargo Bank is entitled to a monthly advisory fee at the annual rate of 0.50% of the first $250 million of the Fund's average daily net assets, 0.40% of the next $250 million, and 0.30% of the Fund's average daily net assets in excess of $500 million. Out of its fee from the Fund, Wells Fargo Bank pays WFNIA for its sub-advisory services an annual fee equal to $40,000 plus .08% of the average daily net assets of the Fund. From time to time, Wells Fargo Bank may waive its fees in whole or in part. Any such waiver will reduce the Fund's expenses and, accordingly, have a favorable impact on the Fund's total return. From time to time, the Fund, consistent with its investment objectives, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For the year ended December 31, 1994, the Company paid 0.50% of the average daily net assets of the Fund to Wells Fargo Bank for its services as investment adviser to the Fund.
Pursuant to the Sub-Advisory Agreement, Wells Fargo Bank has delegated certain advisory responsibilities to WFNIA. Nevertheless, Wells Fargo Bank has retained continuing and exclusive authority over the management of the Fund, and the investment and disposition of the Fund's assets, and Wells Fargo Bank may reject any investment recommendations or decisions for the Fund if Wells Fargo Bank determines that such recommendations or decisions are not consistent with the best interests of the Fund. For the year ended December 31, 1994, Wells Fargo Bank paid 0.096% of the average daily net assets of the Fund to WFNIA for its services as sub-adviser to the Fund.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
WFITC serves as the Fund's custodian. WFITC, located at 45 Fremont Street, San Francisco, California 94105, is a special purpose trust company that is owned 99.9% by WFNIA and 0.1% by Wells Fargo & Company.
Wells Fargo Bank also serves as the Fund's transfer and dividend disbursing agent. Wells Fargo Bank performs the transfer and dividend disbursing agency activities at 525 Market Street, San Francisco, California 94105.
The Fund has entered into a Shareholder Servicing Agreement with Wells Fargo Bank, and may enter into similar agreements with other entities. Under such agreements, Shareholder Servicing Agents (including Wells Fargo Bank) as agents for their customers, will, among other things: answer customer inquiries regarding account status and history, and the manner in which purchases, redemptions and exchanges of Fund shares may be effected; assist shareholders in designating and changing dividend options, account designations and addresses; provide necessary personnel and facilities to establish and maintain shareholder accounts and records; assist in processing purchase, redemption and exchange transactions; arrange for the wiring of money; transfer money in connection with customer orders to purchase or redeem shares; verify shareholder signatures in connection with redemption and exchange orders and transfers and changes in accounts with Approved Banks; furnish (either separately or on an integrated basis with other reports sent to a shareholder by the Shareholder Servicing Agent) monthly and year-end statements and confirmations of purchases, redemptions and exchanges; furnish, on behalf of the Fund, proxy statements, annual reports, updated prospectuses and other communications to shareholders; receive, tabulate and send to the Fund proxies executed by shareholders; and provide such other related services as the Fund or a shareholder may reasonably request. For these services, a Shareholder Servicing Agent receives a fee, which may be paid periodically, determined by a formula based upon the number of accounts serviced by the Shareholder Servicing Agent during the period for which payment is being made, the level of activity in such accounts during such period, and the expenses incurred by the Shareholder Servicing Agent. In no event will the fees, as calculated on an annualized basis for the Fund's then current fiscal year, exceed the lesser of (1) .0.30% of the average daily net assets of the Fund, represented by shares owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or, (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules including the Rules of Fair Practice of the NASD. In no event will the portion of such fees that constitutes a "service fee," as that term is used by the NASD, exceed 0.25% of the Fund's average net asset value.
A Shareholder Servicing Agent may impose certain conditions on its customers, subject to the terms of this prospectus, in addition to or different from those imposed by the Fund, such as requiring a minimum initial investment or payment of a separate fee for additional services. Each Shareholder Servicing Agent will be required to agree to disclose any fees it may directly charge its customers who are Fund shareholders and to notify them in writing at least 30 days before it imposes any transaction fees.
Subject to the overall supervision of the Company's Board of Directors, Stephens provides the Fund with administrative services, including general supervision of the Fund's operation, coordination of the other services provided to the Fund, compilation of information for reports to the SEC and the state securities commissions, preparation of proxy statements and shareholder reports, and general supervision of data compilation in connection with preparing periodic reports to the Company's Directors and officers. Stephens also furnishes office space and certain facilities to conduct the Fund's business, and compensates the Company's Directors, officers and employees who are affiliated with Stephens. For these services, Stephens is entitled to a monthly fee at the annual rate of 0.03% of the Fund's average daily net assets. From time to time, Stephens may waive its fees from the Fund in whole or in part. Any such waiver will reduce Fund expenses and, accordingly, have a favorable impact on the Fund's yield and total return.
Stephens, as the principal underwriter of the Fund within the meaning of the 1940 Act, has entered into a Distribution Agreement with the Company pursuant to which Stephens is responsible for distributing Fund shares. The Company also has adopted a Distribution Plan on behalf of the Fund under the SEC's Rule 12b-1 (the "Plan"). Under the Plan, the Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective Fund shareholders by paying on an annual basis up to 0.05% of the Fund's average daily net assets. The Plan provides only for the reimbursement of actual expenses. The Distribution Agreement provides that Stephens shall act as agent for the Fund for the sale of its shares, and may enter into Selling Agreements with Selling Agents that wish to make Fund shares available to their respective customers. The Fund may participate in joint distribution activities with any of the other funds of the Company, in which event expenses reimbursed out of the assets of the Fund may be attributable, in part, to the distribution-related activities of another fund of the Company. Generally, the expenses attributable to joint distribution activities will be allocated among the Fund and the other funds of the Company in proportion to their relative net asset sizes, although the Company's Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Fund may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise.
In addition, the Plan also contemplates that, to the extent any fees payable pursuant to a Shareholder Servicing Agreement (discussed above) are deemed to be for distribution-related services, such payments are approved and payable pursuant to the Plan, subject to any limits under applicable law, regulations or rules, including the NASD rules. Financial institutions acting as Selling Agents, Shareholder Servicing Agents, or in certain other capacities may be required to register as dealers pursuant to applicable state securities laws which may differ from federal law and any interpretations expressed herein.
From time to time, Wells Fargo Bank and Stephens may waive their respective fees in whole or in part and reimburse expenses payable to others. Any such waivers or reimbursements will reduce the Fund's expenses and, accordingly, have a favorable impact on the Fund's yield and total return. Except for the expenses borne by Wells Fargo Bank and Stephens, the Company bears all costs of its operations, including advisory, shareholder servicing, transfer agency, custody and administration fees, payments pursuant to any Plans, fees and expenses of its independent auditors and legal counsel, and any extraordinary expenses. Expenses attributable to the Fund are charged against the assets of the Fund. General expenses of the Company are allocated among all of the funds of the Company, including the Fund, in a manner proportionate to the net assets of each fund, on a transactional basis, or on such other basis as the Company's Board of Directors deems equitable.
By complying with the applicable provisions of the Code, the Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders. Dividends from the investment income (including net short-term capital gains, if any) declared and paid by the Fund will be taxable as ordinary income to Fund shareholders. Whether you take dividend payments in cash or have them automatically reinvested in additional shares, they will be taxable as ordinary income. Generally, dividends and distributions are taxable to shareholders at the time they are paid. However, dividends and distributions declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends or distributions are actually paid no later than January 31 of the following year. However, you may be eligible to defer the taxation of dividend and capital gain distributions on Fund shares which are held under a qualified tax-deferred retirement plan. See "Investing in the Fund - Tax-Deferred Retirement Plans" above. The Fund intends to pay out substantially all its net investment income and net realized capital gains (if any) for each year. Corporate shareholders of the Fund will be eligible for the dividends-received deduction on the dividends (excluding the net capital gain dividends) paid by the Fund to the extent the Fund's income is derived from certain dividends received from domestic corporations. In order to qualify for the dividends-received deduction, a corporate shareholder must hold Fund shares paying the dividends upon which a dividend-received deduction is based for at least 46 days.
The Fund, or your Shareholder Servicing Agent on its behalf, will inform you of the amount and nature of such dividends and capital gains. You should keep all statements you receive to assist in your personal recordkeeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Fund, if a shareholder has not complied with IRS regulations or if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS.
Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the SAI.
Further federal tax considerations are discussed in the SAI. All investors should consult their individual tax advisers with respect to their particular tax situations.
The Fund's investment objective requires that its portfolio replicate, to the extent practicable, the total rate of return of the stocks comprising the S&P 500 Index.
There are 500 common stocks, including Wells Fargo & Co. stock, which make up the S&P 500 Index. As of March 31, 1995, those stocks represented approximately 71% of the total market value of all publicly traded common stocks in the United States. S&P occasionally makes changes in the S&P 500 Index based on its criteria for inclusion of stocks in the S&P 500 Index. The S&P 500 Index is market-capitalization-weighted so that each stock in the S&P 500 Index represents its proportion of the total market value of all stocks in the S&P 500 Index.
In making its stock investments, the policy of the Fund is to invest its assets in substantially the same stocks, and in substantially the same percentages, as the S&P 500 Index, including Wells Fargo & Co. stock. The Fund may avoid investments in, or dispose of stocks of, companies that have become bankrupt or that otherwise exhibit extreme financial distress.
The Fund may have temporary cash balances on account of new purchases, dividends, interest and reserves for redemptions, which will generally be less than 5% of the Fund's portfolio, and which the Fund may invest in the following high-quality money market instruments: (i) short-term obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including government-sponsored enterprises ("U.S. Government obligations"); (ii) negotiable certificates of deposit, bankers' acceptances and fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC; (iii) commercial paper rated at the date of purchase "P-1" by Moody's Investors Service, Inc. ("Moody's") or "A-1+" or "A-1" by S&P, or, if unrated, of comparable quality as determined by Wells Fargo Bank, as investment adviser; (iv) non-convertible corporate debt securities (e.g., bonds and debentures) with remaining maturities at the date of purchase of no more than one year that are rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and (vi) short-term, U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that, at the time of investment: (a) have more than $10 billion, or the equivalent in other currencies, in total assets; (b) are among the 75 largest foreign banks in the world as determined on the basis of assets; (c) have branches or agencies in
United States; and (d) in the opinion of Wells Fargo Bank, as investment adviser, are of comparable quality to obligations of U.S. banks which may be purchased by the Fund.
U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market interest rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations, such as mortgage-backed securities, are subject to fluctuations in yield or value due to their structure or contract terms.
The Fund may invest in commercial paper (including variable amount master demand notes), which refers to short-term, unsecured promissory notes issued by corporations to finance short-term credit needs. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payee of such notes whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes.
The Fund also may invest in non-convertible corporate debt securities (e.g., bonds and debentures) with no more than one year remaining to maturity at the date of settlement.
The Fund will invest only in such corporate bonds and debentures that are rated at the time of purchase at least "Aa" by Moody's or "AA" by S&P.
Certain of the debt instruments that the Fund may purchase bear interest at rates that are not fixed, but vary with, for example, changes in specified market rates or indices or specified intervals. Certain of these instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The floating- and variable-rate instruments that the Fund may purchase include certificates of participation in such obligations purchased from banks. Wells Fargo Bank or WFNIA as appropriate, will monitor on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of a demand instrument to make payment when due may occur between the date the Fund elects to demand payment and the date payment is due. Such events may affect the ability of the issuer of the instrument to make payment when due, thereby affecting the Fund's ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid provided that an active secondary market exists.
The Fund may enter into repurchase agreements wherein the seller of a security to the Fund agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Fund may enter into repurchase agreements only with respect to U.S. Government obligations and other obligations that are permissible investments for the Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. The maturities of the underlying securities in a repurchase agreement transaction may be greater than one year. If the seller defaults and the value of the underlying securities has declined, the Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the Fund's disposition of the security may be delayed or limited. The Fund only will enter into repurchase agreements with registered broker/dealers and commercial banks that meet guidelines established by the Company's Board of Directors and that are not affiliated with the Fund's investment adviser. The Fund may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank.
The Fund may invest up to 25% or more of its assets in high-quality, short-term debt obligations of foreign branches of U.S. banks or U.S. branches of foreign banks that are denominated in and pay interest in U.S. dollars.
involve certain considerations that are not typically associated with investing in domestic obligations. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not subject to the same uniform accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic developments that could adversely affect investments in, the liquidity of, and the ability to enforce contractual obligations with respect to, securities of issuers located in those countries.
The Fund may lend securities from its portfolio to brokers, dealers and financial institutions (but not individuals) if cash, U.S. Government obligations or other high-quality debt instruments equal to at least 100% of the current market value of the securities loan (including accrued interest thereon) plus the interest payable to the Fund with respect to the loan is maintained with the Fund. In determining whether to lend a security to a particular broker, dealer or financial institution, the Fund's investment adviser will consider all relevant facts and circumstances, including the creditworthiness of the broker, dealer or financial institution. Any loans of portfolio securities will be fully collateralized based on values that are marked to market daily. Any securities that the Fund may receive as collateral will not become part of the Fund's portfolio at the time of the loan and, in the event of a default by the borrower, the Fund, if permitted by law, will dispose of such collateral except for such part thereof that is a security in which the Fund is permitted to invest. During the time securities are on loan, the borrower will pay the Fund any accrued income on those securities, and the Fund may invest the cash collateral and earn additional income or receive an agreed-upon fee from a borrower that has delivered cash-equivalent collateral. The Fund will not lend securities having a value that exceeds one-third of the current value of its total assets. Loans of securities by the Fund will be subject to termination at the Fund's or the borrower's option. The Fund may pay reasonable administrative and custodial fees in connection with a securities loan and may pay a negotiated portion of the interest or fee earned with respect to the collateral to the borrower or the placing broker. Borrowers and placing brokers may not be affiliated, directly or indirectly, with the Company, the investment adviser, or the Distributor.
The Fund's investment objective, as set forth in the first paragraph of the "How The Fund Works - Investment Objectives and Policies" section, is fundamental; that is, it may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. In addition, any fundamental investment policy may not be changed without such shareholder approval. If the Board of Directors determines, however, that the Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company's Board may make such change without shareholder approval and will disclose any such material changes in the then-current prospectus.
In addition, as matters of fundamental policy, the Fund may: (i) not purchase securities of any issuer (except U.S. Government obligations) if as a result more than 5% of the value of the Fund's total assets would be invested in the securities of such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer; (ii) borrow from banks up to 20% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 20% of the current value of its net assets (but investments may not be purchased while any such outstanding borrowing in excess of 5% of its net assets exists); (iii) make loans of portfolio securities in accordance with its investment policies; and (iv) not invest 25% or more of its assets (i.e., concentrate) in any particular industry, except that the Fund is permitted to concentrate its assets in any one industry for the same period as does the S&P 500 Index and except that the Fund may invest 25% or more of its assets in U.S. Government obligations. With respect to Fundamental Policy (ii) above, the Fund presently does not intend to put at risk more than 5% of its assets during the coming year. With respect to Fundamental Policy (i), it may be possible that the Company would own more than 10% of the outstanding voting securities of an issuer.
As a matter of non-fundamental policy, the Fund may not invest more than 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days or other illiquid securities.
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INVESTMENT ADVISER, TRANSFER AND DIVIDEND DISBURSING AGENT
Wells Fargo Nikko Investment Advisors
For more information about the Fund, simply call 1-800-222-8222, or write: | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T12:18:32 |
0000950130-96-000108 | 0000950130-96-000108_0017.txt | TAX SHARING AGREEMENT ("the Agreement") dated as of _____________, 1996 by and among Loral Corporation, a New York corporation (the "Company"), Loral Telecommunications Acquisition, Inc., a Delaware corporation and a wholly- owned subsidiary of the Company ("Spinco"), Lockheed Martin Corporation, a Maryland corporation ("Parent") and LAC Acquisition Corporation, a New York corporation and a wholly-owned subsidiary of Parent (the "Purchaser").
WHEREAS, in connection with the restructuring of the Company pursuant to the Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996 (the "Distribution Agreement"), the Company, Spinco and certain of the Retained Subsidiaries have agreed to certain intercompany distributions, assignments, transfers and contributions of the Spinco Assets and the assumption of certain liabilities by Spinco, as more fully described in Section 2.1 of the
WHEREAS, the Company will retain its stock in all of its subsidiaries other than the Spinco Subsidiaries (the "Retained Subsidiaries");
WHEREAS, in accordance with the terms of the Agreement and Plan of Merger dated as of January 7, 1996 (the "Merger Agreement"), the Purchaser will commence and consummate the Offer and the Company will complete the Transfer;
WHEREAS, immediately after the consummation of the Offer and the Form 10 or registration statement, as the case may be, having been declared effective by the SEC, the Company will distribute the Spinco Common Stock to the Company shareholders and the Company will retain its Spinco Preferred Stock;
WHEREAS, pursuant to the Merger Agreement, and in accordance with New York law, the Purchaser will merge with and into the Company after certain conditions are satisfied at the Effective Time (the "Merger"), whereby each share of common stock of the Company issued and outstanding immediately prior to the Effective Time will be converted into the right to receive cash and, as a result of such Merger, the Company, as the surviving corporation, will become
WHEREAS, at the end of the day on which the Distribution occurs (the "Distribution Date"), Spinco's taxable year shall close for U.S. federal income
WHEREAS, the parties hereto wish to provide for the payment of tax liabilities and entitlement to refunds, allocate responsibility and provide for cooperation in the filing of tax returns, provide for the realization and payment of tax benefits arising out of adjustments to the tax returns of the parties and provide for certain other matters;
NOW, THEREFORE, in consideration of the premises and the representations, covenants and agreements herein contained, and intending to be legally bound hereby, the Company, Spinco, Parent, and the Purchaser hereby agree as follows:
1. Certain Definitions. The following terms used herein shall have the meanings set forth below (such terms to be equally applicable to the singular and plural forms of the terms defined or referred to below):
"Aerospace" shall have the meaning set forth in the Distribution Agreement.
"Agreement" shall have the meaning set forth in the recitals to this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning set forth in the recitals to this Agreement.
"Company Group" means the Retained Subsidiaries, together with the Company.
"Consolidated Group" or "consolidated group" means an affiliated group of corporations filing a consolidated federal income tax return, as defined in Treasury Regulation Section 1.1502-1(h).
"Continental" shall have the meaning set forth in the Distribution Agreement.
"Distribution" shall have the meaning set forth in the Distribution Agreement.
"Distribution Agreement" shall have the meaning set forth in the recitals to this Agreement.
"Distribution Date" shall have the meaning set forth in the recitals to this Agreement.
"Effective Time" shall have the meaning set forth in the Merger Agreement.
"Form 10" shall have the meaning set forth in the Distribution Agreement.
"Holdings" shall have the meaning set forth in the Distribution Agreement.
"Income Taxes" means any and all taxes based upon or measured by net income (including, without limitation, any alternative minimum tax under Section 55 of the Code) imposed by or payable to the U.S., or any state, county, local or foreign government or any subdivision or agency thereof, and such term shall include any interest (whether paid or received), penalties or additions to tax attributable thereto.
"Income Tax Liabilities" means all liabilities for Income Taxes.
"Indemnified Party" means the party that is entitled to indemnification by another party pursuant to this Agreement.
"Indemnifying Party" means the party that is required to indemnify another party pursuant to this Agreement.
"Independent Accounting Firm" means a "big six" independent accounting firm, jointly selected by the parties; or, if the parties cannot agree on such accounting firm, Spinco and Parent shall each submit the name of a "big six" independent accounting firm that does not at the time and has not in the prior services to any member of the Spinco Group or the Parent Group, and the "Independent Accounting Firm" shall mean the firm selected by lot from these two firms.
"Independent Law Firm" means a nationally-recognized independent law firm, jointly selected by the parties; or, if the parties cannot agree on such law firm, Spinco and Parent shall each submit the name of a nationally-recognized independent law firm that does not at the time and has not in the prior two years provided services to any member of the Spinco Group or the Parent Group, and the "Independent Law Firm" shall mean the firm selected by lot from these two firms.
"Information Return" means any report, return, declaration or other information or filing (other than a Tax Return) required to be supplied to any taxing authority or jurisdiction.
"K&F" shall have the meaning set forth in the Distribution Agreement.
"LGP" shall have the meaning set forth in the Distribution Agreement.
"Merger" shall have the meaning set forth in the recitals to this Agreement.
"Merger Agreement" shall have the meaning set forth in the recitals to this Agreement.
"Offer" shall have the meaning set forth in the Merger Agreement.
"Old Company Group" means the consolidated group of corporations of which the Company is the "common parent" within the meaning of Section 1504 of the Code and the Treasury Regulations promulgated under Section 1502 of the Code and any Subsidiary of a member of such consolidated group.
"Other Taxes" means any and all taxes, levies or other like assessments, charges or fees, other than Income Taxes, including, without limitation, any excise, real or personal property, gains, sales, use, license, real estate or personal property transfer, net worth, stock transfer, payroll, ad valorem and tal taxes and any withholding obligation imposed by or payable to the U.S., or any state, county, local or foreign government or subdivision or agency thereof, and any interest (whether paid or received), penalties or additions to tax attributable thereto.
"Overpayment Rate" means the rate specified under Section 6621(a)(1) of the Code for overpayments of tax.
"Parent" shall have the meaning set forth in the recitals to this Agreement.
"Parent Group" means the consolidated group of which Parent or any successor is the "common parent" within the meaning of Section 1504 of the Code and the Treasury Regulations promulgated under Section 1502 of the Code and any Subsidiary of a member of such consolidated group.
"Proceeding" means any audit or other examination, judicial or administrative proceeding relating to liability for or refunds or adjustments with respect to Other Taxes or Income Taxes.
"Purchaser" shall have the meaning set forth in the recitals to this Agreement.
"Refund" means any refund of Income Taxes or Other Taxes, including any reduction in liabilities for such taxes.
"Retained Subsidiaries" shall have the meaning set forth in the recitals to this Agreement.
"SEC" means the Securities and Exchange Commission.
"Spinco" shall have the meaning set forth in the recitals to this Agreement.
"Spinco Assets" shall have the meaning set forth in the Distribution Agreement.
"Spinco Common Stock" shall have the meaning set forth in the Distribution Agreement.
"Spinco Companies" shall have the meaning set forth in the Distribution Agreement.
"Spinco Group" means the Spinco Companies, Spinco and any Subsidiary thereof (including any successors thereto).
"Spinco Preferred Stock" shall have the meaning set forth in the Distribution Agreement.
"SSL" shall have the meaning set forth in the Distribution Agreement.
"Subsidiary" or "subsidiary" shall have the meaning set forth in the Distribution Agreement.
"Tax Benefit" means, in the case of separate state, local or other Income Tax Returns, the sum of the amount by which the tax liability (after giving effect to any alternative minimum or similar tax and adjusted for the loss of any federal tax benefit) of a person to the appropriate taxing authority is reduced (including, without limitation, by deduction, entitlement to refund, credit or otherwise, whether available in the current taxable year, as an adjustment to taxable income in any other taxable year or as a carryforward or carryback, as applicable) plus any interest from such government or jurisdiction relating to such tax liability, and in the case of a consolidated federal Income Tax Return or similar state, local or other Income Tax Return, the sum of the amount by which the tax liability of the consolidated group or other relevant group of corporations to the appropriate government or jurisdiction is reduced (including, without limitation, by deduction, entitlement to refund, credit or otherwise, whether available in the current taxable year, as an adjustment to taxable income in any other taxable year or as a carryforward or carryback, as applicable) plus any interest from such government or jurisdiction relating to such tax liability, less the amount by which the tax liability to another taxing authority is increased as a result of the reduction in tax liabilities to another taxing authority (unless such increase has already been taken into account under the provisions of Section 5 hereof) and less any increase in tax liability as a result of the receipt of interest as described above.
"Tax Return" means any report, return, declaration or other information or filing required to be supplied to any taxing authority or jurisdiction with
Income Taxes or Other Taxes, including, without limitation, any documents with respect to or accompanying payments of estimated Income Taxes or Other Taxes, or with respect to or accompanying requests for the extension of time in which to file any such report, return, declaration or other document.
"Transfer" shall have the meaning set forth in the recitals to this Agreement.
"Treasury Regulation" means any final, temporary or proposed regulation promulgated under the Code.
"U.S." means the United States of America.
2. Cooperation; Maintenance and Retention of Records. Parent and Spinco shall, and shall cause the members of the Parent Group and the Spinco Group, respectively, to, provide the requesting party with such assistance and documents, without charge, as may be reasonably requested by such party in connection with (i) the preparation of any Tax Return or any Information Return, (ii) the conduct of any Proceeding (iii) any matter relating to Income Taxes, Other Taxes or Information Returns of any member of the Old Company Group, the Company Group, the Spinco Group or the Parent Group and (iv) any other matter that is a subject of this Agreement. Such cooperation and assistance shall be provided to the requesting party promptly upon its request. Parent and the Company, on the one hand, and Spinco, on the other hand, shall retain or cause to be retained all Tax Returns, Information Returns, schedules and workpapers, and all material records or other documents relating thereto, until the expiration of the statute of limitations (including any waivers or extensions thereof) of the taxable years to which such Tax Returns, Information Returns, and other documents relate or until the expiration of any additional period that any party reasonably requests, in writing, with respect to specific material records or documents. A party intending to destroy any material records or documents shall provide the other party with advance notice and the opportunity to copy or take possession of such records and documents. The parties hereto will notify each other in writing of any waivers or extensions of the applicable statute of limitations that may affect the period for which the foregoing records or other documents must be retained.
3. Timing of Distribution Date; Reporting of Certain Transactions.
(a) The parties hereby agree that, for federal income tax purposes (and, to the extent permissible under applicable law, for state, local and other tax purposes), Spinco's taxable year shall end at the close of the Distribution Date, in accordance with the rule of Treasury Regulation Section 1.1502-76(b)(1).
(b) The Parent Group hereby agrees to report each of the transactions set forth in Section 2.1 of the Distribution Agreement for all foreign, federal, state and local Income Tax purposes in a manner consistent with the form and chronology described therein, including (i) in the case of any distribution of a Spinco Asset by any member of the Old Company Group that is a corporation, as a distribution of property under Section 311(b) of the Code and any comparable provision of state or local law; (ii) in the case of any such distribution between members of the Old Company Group filing a consolidated Tax Return, as an "intercompany transaction" within the meaning of Treasury Regulations Section 1.1502-13(b) and any comparable provision of state or local law; and (iii) in the case of any transfer subject to Treasury Regulations Section 1.1502-13(d) and any comparable provision of state or local law, by applying the rules described therein. The parties hereby agree to negotiate in good faith to determine the fair market values of Spinco and the material items of the Spinco Assets for purposes of reporting the transactions described in this subsection (b) for all foreign, federal, state and local Income Tax purposes, and the parties shall report all Income Taxes in a manner consistent with such fair market values.
4. Filing of Tax Returns and Information Returns; Payment of Taxes.
(a) Old Company Group. To the extent not filed before the Distribution Date, Parent shall prepare and file or cause to be prepared and filed all Tax Returns of the Old Company Group and any member thereof, other than Tax Returns involving only the Spinco Group (or any members thereof) for which Spinco is responsible pursuant to subsection (c) hereof, and Parent shall pay or cause to be paid all Income Taxes shown to be due and payable by any member of the Old Company Group on such Tax Returns.
(b) Company Group; Parent Group. Parent shall prepare and file or shall cause to be prepared and filed all Tax Returns of the Company Group and the Parent Group and any member of either the Company Group or the Parent Group (other than Tax Returns of Spinco or any of its Subsidiaries for taxable periods beginning after the Distribution Date) and shall pay or cause to be paid all Income Taxes shown to be due and payable by any member of the Company Group or the Parent Group on such Tax Returns.
(c) Spinco Group. Spinco shall prepare and file or cause to be prepared and filed (i) all Tax Returns of the Spinco Group for all taxable periods beginning after the Distribution Date and (ii) all Tax Returns involving only one or more members of the Spinco Group for all taxable periods, and Spinco shall pay or cause to be paid all Income Taxes shown to be due and payable by any member of the Spinco Group on such Tax Returns.
(d) Information Returns. Spinco shall file all Information Returns required to be filed by any member of the Spinco Group after the Distribution Date and all Information Returns involving only the Spinco Group (or any members thereof) for all taxable periods. Except as provided in the preceding sentence, to the extent not filed before the Distribution Date, Parent shall file all Information Returns required to be filed by any member of the Old Company Group, the Parent Group or the Company Group. Any party required to file any Information Return pursuant to this Section 4 shall pay any fees or charges required in connection with such filing and shall indemnify and hold the other party harmless against any penalties, fees or other charges resulting from the failure to pay such fees or charges or the failure to file such Information Returns in a correct or timely fashion, unless such failure results from the failure of the other party to provide correct information.
(a) Spinco Group Income Taxes. The Spinco Group shall pay, and shall indemnify and hold the
Parent Group harmless against, (i) all Income Tax Liabilities of any member of the Spinco Group for all taxable periods (including taxable periods or portions thereof during which any member of the Spinco Group was a member of the Old Company Group or the Parent Group but excluding all Income Tax Liabilities arising from the Transfer and Distribution (other than amounts described in clause (iii) hereof); (ii) all Income Tax Liabilities incurred pursuant to Treasury Regulation Section 1.1502-6 or any comparable state, local or other provision providing for joint and several liability as a result of any member of the Spinco Group having been a member of any consolidated, combined, unitary or other group (other than the Old Company Group and the Parent Group); and (iii) the excess, if any, of (A) all Income Tax Liabilities arising, directly or indirectly, from the transactions set forth in Section 2.1(a) of the Distribution Agreement and the Distribution minus (B) the hypothetical amount of all Income Tax Liabilities that would have arisen, directly or indirectly, from a distribution by Aerospace to Holdings of all of the shares of capital stock owned by Aerospace in LGP and SSL, followed by a distribution by Holdings to the Company of all of the shares of capital stock owned by Holdings in LGP, SSL and Continental, followed by a transfer by the Company to Spinco of all of the shares of capital stock owned by the Company in LGP, SSL, K&F and Continental and the transfer to Spinco of the other Spinco Assets described in Section 2.1(a)(viii) of the Distribution Agreement, followed by the Distribution. For purposes of clause (i) of this subsection (a), the Income Tax Liabilities of any member or members of the Spinco Group for any taxable period during which such member or members joined with members of the Old Company Group, the Parent Group, or any other group in the filing of a consolidated, unitary, combined or other group Tax Return shall be determined as if each of such Spinco Group member or members filed its Tax Returns for such period on a stand-alone basis.
(b) Old Company Group and Parent Group Income Taxes. The Parent Group shall pay, and shall indemnify and hold the Spinco Group harmless against, (i) all Income Tax Liabilities of any member of the Old Company Group or the Parent Group (other than Income Tax Liabilities of any member of the Spinco Group for any taxable period); (ii) all Income Tax Liabilities incurred pursuant to Treasury Regulation Section 1.1502-6 or any comparable state, local or other provision providing for joint and several liability as a result of any member of the Old Company Group or the Parent Group (other than any member of the Spinco Group) having been a member of any consolidated, combined, unitary or other group; and (iii) any Income Tax Liabilities arising from the Transfer and the Distribution (other than amounts described in subsection (a)(iii) hereof), regardless of when recognized.
(c) Other Taxes. The Parent Group shall pay, and shall indemnify and hold the Spinco Group harmless against, all liabilities for all Other Taxes attributable to the income, property or activities of any member of the Old Company Group or the Parent Group (other than, in both cases, a member of the Spinco Group), including all Other Taxes, if any, arising from the Transfer and the Distribution. Except as provided in the preceding sentence, the Spinco Group shall pay, and shall indemnify and hold the Parent Group harmless against, all liabilities for all Other Taxes attributable to the income, property or activities of any member of the Spinco Group. Without limiting the generality of the foregoing, and notwithstanding any other provision of this Agreement, the Company shall prepare and file, or cause to be prepared and filed, any Tax Return required under the New York Real Property Transfer Gains Tax, the New York Real Property Transfer Tax and the New York City Real Property Transfer Tax in connection with the Offer, the Merger, or the Transfer (other than amounts described in clause (iii) of subsection (a) hereof) and the Parent Group shall timely pay and indemnify the Spinco group against any taxes due and payable on such returns; and Spinco shall prepare and file, or cause to be prepared and filed, any Tax Return required under the New York Real Property Transfer Gains Tax, the New York Real Property Transfer Tax and the New York City Real Property Transfer Tax in connection with the Distribution and the Spinco Group shall timely pay and indemnify the Parent group against any taxes due and payable on such returns.
(d) To the extent that the Indemnifying Party is required to indemnify another party pursuant to this Section 5, the Indemnifying Party shall pay to the Indemnified Party, no later than 10 days prior to the due date of the relevant Tax Return or estimated Tax Return or 10 days after the Indemnifying Party receives the Indemnified Party's calculations, whichever occurs later, the amount that the Indemnifying Party is required to pay the Indemnified Party under this Section 5. The Indemnified Party shall submit its calculations of the amount required to be paid pursuant to this Section 5, showing such calculations in sufficient detail so as to permit the Indemnifying Party to understand the calculations. If the Indemnifying Party disagrees with such calculations, it must notify the Indemnified Party of its disagreement in writing within 15 days of receiving such calculations. Any dispute regarding such calculations shall be resolved in accordance with Section 8 of this Agreement.
6. Carryovers. In the event that any member of the Spinco Group realizes any loss or credit for tax purposes for any taxable period beginning on or after the Distribution Date, such member may elect to carry back such loss or credit only with the written consent of Parent (which consent shall not be unreasonably withheld).
7. Refunds of Income Taxes or Other Taxes. The Spinco Group shall be entitled to all Refunds attributable to the Spinco Group, and the Parent Group shall be entitled to all Refunds attributable to the Company Group or the Old Company Group (other than those attributable to the Spinco Group). Notwithstanding the foregoing, the Parent Group shall be entitled to Refunds attributable to the Spinco Group that result from the carryback of a tax attribute by the Company Group, and the Spinco Group shall be entitled to Refunds attributable to the Company Group that result from the carryback of a tax attribute by the Spinco Group. A party receiving a Refund to which another party is entitled pursuant to this Agreement shall pay the amount to which such other party is entitled within ten days after the receipt of the refund. The amount of any Refund attributable to the Spinco Group shall be determined according to the principles set forth in the last sentence of Section 5(a) hereof.
8. Disputes. If the parties disagree as to the amount of any payment to be made under, or any other matter arising out of, this Agreement, the parties shall attempt in good faith to resolve such dispute, and any agreed-upon amount shall be paid to the appropriate party. If such dispute is not resolved within 15 days, the parties shall jointly retain the Independent Accoun- ting Firm to resolve the dispute. If and to the extent that the dispute presents legal issues, the Independent Accounting Firm shall have the authority to consult the Independent Law Firm. The fees of the Independent Accounting Firm and the Independent Law Firm shall be borne equally by the Spinco Group and the Parent Group, and the decision of such Independent Accounting Firm and Independent Law Firm shall be final and binding on all parties. Following the decision of the Independent Accounting Firm and/or the Independent Law Firm, the parties shall each take or cause to be taken any action that is necessary or appropriate to implement such decision of the Independent Accounting Firm and the Independent Law Firm, including, without limitation, the prompt payment of underpayments or overpayments, with interest calculated on such overpayments and underpayments at the Overpayment Rate from the date such payment was due through the date such underpayment or overpayment is paid or refunded.
9. Control of Proceedings. In the case of any Proceeding with respect to Income Taxes or Other Taxes for which a party is or may be liable pursuant to this Agreement, Parent or Spinco, as the case may be, shall promptly give notice to the other party, informing such other party of the Proceeding in reasonable detail, and Parent or Spinco, as the case may be, shall execute or cause to be executed any powers of attorney or other documents necessary to enable the party that may be so liable to take all actions desired by such party with respect to such Proceeding. Such party shall have the right to control any such Proceeding and, to initiate any claim for refund, file any amended return or take any other action that it deems appropriate with respect to such Income Taxes or Other Taxes, provided, however, that if such Proceeding relates to a Tax Return for which the other party is Responsible, the Responsible party shall have the right, within a reasonable time after such notice is given, to deny the non-Responsible party control of such Proceeding. In the event that a Responsible party denies control of a Proceeding to a non-Responsible party, the parties shall agree upon the amount of such Income Taxes of Other Taxes for which the non-Responsible party is liable pursuant to this Agreement or, if the parties cannot so agree, shall submit the amount of such liability to arbitration for resolution (in a manner consistent with the procedures set forth in Section 8 hereof), which resolution shall determine the amount of the payment to be made pursuant to this Agreement, taking into account the risks of litigation and the other practical considerations associated with the settlement of such a Proceeding, and the Responsible party shall have the sole discretion to defend, settle or take any action that it deems appropriate with respect to such Proceeding. For purposes of this Section 9, a party is Responsible for any Tax Return that it is required to file pursuant to Section 4 hereof, and Parent is Responsible for any Tax Returns of any member of the Old Company Group (excluding Tax Returns involving solely members of the Spinco Group).
(a) If an audit or other examination of any Income Tax Return of the Parent Group or a Proceeding for any period for which Parent is responsible shall result (by settlement or otherwise) in any adjustment that (A) decreases deductions, losses or tax credits or increases income, gains or recapture of tax credits for such period and (B) will permit the Spinco Group to increase deductions, losses or tax credits or decrease income, gains or recapture of tax credits that would otherwise (but for such adjustment) have been taken or reported with respect to the Spinco Group for one or more taxable periods, Parent shall notify Spinco (Parent and Spinco, for purposes of this subsection (a), shall be deemed to include, where appropriate, the affiliated, unitary, combined or other group of which such party is a member) and provide it with adequate information so that it can reflect on the Income Tax Returns of the Spinco Group such increases in deductions, losses or tax credits or decreases in income, gains, or recapture of tax credits. With respect to such increases or decreases on Income Tax Returns, Spinco shall, and shall cause the Spinco Group to, pay to Parent the amounts of any Tax Benefits that result therefrom, within ten days of the date on which such Tax Benefits are realized.
(b) If an audit or other examination of any Income Tax Return of the Spinco Group or a Proceeding for any period for which Spinco is responsible shall result (by settlement or otherwise) in any adjustment that (A) decreases deductions, losses or tax credits or increases income, gains or recapture of tax credits for such period, and (B) will permit the Parent Group to in- crease deductions, losses or tax credits or decrease income, gains or recapture of tax credits that would otherwise (but for such adjustment) have been taken or reported with respect to the Parent Group for one or more taxable periods, Spinco will notify Parent (Spinco and Parent, for purposes of this subsection (b), shall be deemed to include, where appropriate, the affiliated, unitary, combined or other group of which such party is a member) and provide it with adequate information so that it can reflect on the Income Tax Returns of the Parent Group such increases in deductions, losses or tax credits or decreases in income, gains, or recapture of tax credits. With respect to such increases or decreases on Income Tax Returns, Parent shall, and shall cause the Parent Group to, pay to Spinco the amounts of any Tax Benefits that result therefrom, within ten days of the date such Tax Benefits are realized.
(c) No later than 30 days after the date on which Spinco or Parent, as the case may be, receives notice pursuant to subsections (a) or (b) that a Tax Benefit may be available to the Spinco Group or Parent Group, respectively, Spinco or Parent, as the case may be, shall, and shall cause such members of the Parent Group or the Spinco Group or, in the case of Spinco, such members of the Old Company Group, as the case may be, to, as promptly as practicable, take such steps (including, without limitation, the filing of amended returns or claims for refunds where the amount of the Tax Benefit for any company in the aggregate exceeds $100,000) necessary or appropriate to obtain such Tax Benefit. Thereafter, Spinco or Parent, as the case may be, shall, and shall cause the Parent Group or the Spinco Group or, in the case of Spinco, the Old Company group, as the case may be, to, file all Income Tax Returns to obtain at the earliest possible time such Tax Benefit to the maximum extent available. Notwithstanding anything to the contrary in this Section 10, either party may, at its election, pay the amount of any Tax Benefit to the other party rather than filing amended returns or otherwise reflecting adjustments or taking positions on its Tax Returns. If such an election is made by a party, the party will be treated as having realized a Tax Benefit at the time such Tax Benefit would have been realized if such party had chosen to file amended returns or otherwise to reflect adjustments or to take positions on its Tax Returns; provided, however, that such party shall pay to the other party, no later than 20 days after such party receives notice from the other party that a Tax Benefit may be available, the amount of Tax Benefit that such party would have obtained if such party had filed an amended Tax Return. Notwithstanding the foregoing, a party shall not be required to take steps to obtain a Tax Benefit or to pay the other party, if, in the opinion of such party's counsel, which counsel shall be reasonably acceptable to the other party, there is not substantial authority to seek such Tax Benefit.
(d) For purposes of this Agreement, a Tax Benefit shall be deemed to have been realized at the time any refund of Taxes is received or applied against other Taxes due, or at the time of filing of an Income Tax Return (including any relating to estimated Taxes) on which a loss, deduction or credit is applied in reduction of Taxes which would otherwise be payable; provided, however, that, where a party has other losses, deductions, credits or similar items available to it, deductions, credits or items for which the other party would be entitled to a payment under this Agreement shall be treated as the last items utilized to produce a Tax Benefit. In accordance with the provisions of this subsection (d), Spinco and Parent agree that where a Tax Benefit may be realized that may result in a payment to, or reduce a payment by, the other party hereto, each party will as promptly as practicable take or cause its affiliate to take such reasonable or appropriate steps (including, without limitation, the filing of an amended return or claim for refund) to obtain at the earliest possible time any such reasonably available Tax Benefit. In the event that after payment of a Tax Benefit under this subsection (d), such Tax Benefit is reduced or eliminated because of a final decree or agreement of a taxing authority or the carryback of losses or credits, then the party to whom the Tax Benefit was paid shall pay to the other party the amount by which the Tax Benefit was reduced or eliminated plus interest on the amount returned at the Overpayment Rate from the date of payment to the date of repayment.
(a) Any payment required by this Agreement that is not made on or before the date provided hereunder shall bear interest after such date at the
Overpayment Rate. In the case of any payment required hereunder to be made "promptly," such payment shall be considered late for purposes of this Agreement if not made 20 days after notice that such payment is due is provided. All payments made pursuant to this Agreement shall be made in immediately available funds.
(b) All payments made pursuant to this Agreement shall be treated as an adjustment (increase or decrease) in the amount contributed by Parent to the Company and by the Company to Spinco, and the parties shall not file any Tax Returns or Information Returns inconsistent with this position.
12. Termination of Prior Tax Sharing Agreements. This Agreement shall take effect on the Distribution Date and shall replace all other agreements, whether or not written, in respect of any Income Taxes or Other Taxes between or among any members of the Old Company Group, or their respective predecessors or successors, other than any such agreements made exclusively between or among any members of the Spinco Group. All such replaced agreements shall be cancelled as of the Distribution Date, and any rights or obligations existing thereunder thereby shall be fully and finally settled without any payment by any party thereto.
13. Notices. All notices, requests, demands and other communications required or permitted under this Agreement will be made in the manner provided in Section 11.5 of the Distribution Agreement.
14. Construction. The provisions of this Agreement shall be construed such that no increase or decrease in Income Taxes or Other Taxes or Tax Benefit is taken into account more than once.
15. Entire Agreement; Amendments. This Agreement constitutes the entire agreement of the parties concerning the subject matter hereof and supersedes all prior agreements, whether or not written, concerning such subject matter. This Agreement may not be amended except by an agreement in writing, signed by the parties.
16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York regardless of the laws that otherwise govern under applicable New York principles of conflicts of law.
17. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which shall constitute together the same document.
18. Effective Date. This Agreement shall become effective only upon the occurrence of the Distribution Date and shall terminate and be null and void and of no force and effect upon any termination of the Merger Agreement.
19. Successors and Assigns. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. | SC 14D1 | EX-99.(C)(5) | 1996-01-12T00:00:00 | 1996-01-12T17:26:30 |
0000891836-96-000005 | 0000891836-96-000005_0000.txt | <DESCRIPTION>SC 14D1/A - AMENDMENT #19
(Amendment No. 19 -- FINAL AMENDMENT)
(Pursuant to Section 14(d)(1) of the Securities Exchange Act of 1934)
Common Stock, $2.50 par value per share (and the associated Rights) (Title of Class of Securities)
(CUSIP Number of Class of Securities)
(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Bidder)
New York, New York 10004
1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person
2. Check the Appropriate Box if a Member of a Group (a) [ ]
5. Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(e) or 2(f) [ ]
6. Citizenship or Place of Organization
7. Aggregate Amount Beneficially Owned by Each Reporting Person Indirectly through PX Acquisition Corp., its wholly-owned subsidiary: 40,942,814 shares of Common Stock (including approximately 8,131,792 shares subject to guarantee of delivery)
8. Check if the Aggregate Amount in Row (7) Excludes Certain Shares [ ]
9. Percent of Class Represented by Amount in Row (7)
10. Type of Reporting Person
1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person
2. Check the Appropriate Box if a Member of a Group (a) [ ]
5. Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(e) or 2(f) [ ]
6. Citizenship or Place of Organization
7. Aggregate Amount Beneficially Owned by Each Reporting Person Directly: 40,863,614 shares of Common Stock (including approximately 8,131,792 shares subject to guarantee of delivery)
8. Check if the Aggregate Amount in Row (7) Excludes Certain Shares [ ]
9. Percent of Class Represented by Amount in Row (7)
10. Type of Reporting Person
This Amendment No. 19--Final Amendment amends and supplements the Tender Offer Statement on Schedule 14D-1, as amended (the "Schedule 14D- 1"), originally filed by Praxair, Inc., a Delaware corporation ("Praxair"), and PX Acquisition Corp., a Delaware corporation (the "Purchaser"), on November 3, 1995 relating to the tender offer disclosed therein to purchase all of the outstanding Shares (including any associated Rights) upon the terms and subject to the conditions set forth in the Offer to Purchase, dated November 3, 1995, and the related Letter of Transmittal. Capitalized terms used and not defined herein shall have the meanings set forth in the Schedule 14D-1.
Item 6. Interest in Securities of the Subject Company.
Item 6 is hereby amended and supplemented by adding thereto the following:
(a)-(b) The Offer expired at 12:00 midnight, New York City time, on Thursday, January 11, 1996. Based on information provided by the Depositary, there were validly tendered and not withdrawn 40,863,514 Shares (including 8,131,792 Shares tendered by means of guaranteed delivery), or approximately 90% of the issued and outstanding Shares. On January 12, 1996, Praxair issued the press release attached hereto as Exhibit (a)(38).
Item 11. Material to be Filed as Exhibits.
Item 11 is hereby amended and supplemented by adding thereto the following:
(a)(38) Text of press release dated January 12, 1996.
After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.
By: /s/ David H. Chaifetz
By: /s/ David H. Chaifetz
(a)(38) Text of press release dated January 12, 1996. | SC 14D1/A | SC 14D1/A | 1996-01-12T00:00:00 | 1996-01-12T17:17:40 |
0000950152-96-000091 | 0000950152-96-000091_0000.txt | <DESCRIPTION>BENTON OIL & GAS COMPANY 8-K
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 11, 1996
BENTON OIL AND GAS COMPANY (Exact name of registrant as specified in its charter)
(State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.)
1145 Eugenia Place, Suite 200 (Address of principal executive offices, with zip code)
Registrant's telephone number, including area code: (805) 566-5600
Attached hereto as Appendix A and incorporated herein by this reference is the Company's press release related to the execution of a non-binding letter of intent related to the sale of the Company's wholly-owned subsidiary, such release disseminated on January 11, 1996.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statement of Businesses Acquired.
(b) Pro Forma Financial Information.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on this 12th day of January, 1996.
BENTON OIL AND GAS COMPANY
By: /s/ Chris C. Hickok Chris C. Hickok, Vice President-Controller
BENTON OIL AND GAS COMPANY ANNOUNCES LETTER OF INTENT TO SELL LOUISIANA OPERATIONS TO SHELL OFFSHORE INC.
FOR IMMEDIATE RELEASE: THURSDAY, JANUARY 11, 1996
CARPINTERIA, CA. - (Jan. 11, 1996) - Benton Oil and Gas Company (NASDAQ NMS: BNTN) today announced that it has signed a letter of intent to sell the stock of its wholly owned subsidiary, Benton Oil and Gas Company of Louisiana (BOGLA) to Shell Offshore Inc., an affiliate of Shell Oil Company, for $35.4 million. BOGLA owns all of Benton's significant domestic properties, consisting of the Rabbit Island, Belle Isle and West Cote Blanche Bay Fields located in the Louisiana state waters in St. Mary and Iberia Parishes, La. Benton and Shell will negotiate a definitive purchase agreement and anticipate closing during the first quarter of 1996. If the transaction is completed, Benton expects to realize an estimated pre-tax gain of approximately $10 million.
"This sale has several strategic advantages," stated A.E. Benton, Chairman of the Board and Chief Executive Officer. "First, it provides additional capital to accelerate the development of our Venezuelan operations, specifically the commencement of drilling wells and constructing production facilities in the Tucupita Field. Second, it deleverages the Company by allowing us to repay approximately $10 million in debt. Finally and most importantly, it allows the Company to focus internationally to seek additional projects."
Benton Oil and Gas Company, headquartered in Carpinteria, Calif., is an independent oil and gas exploration and production company with domestic operations in the Gulf Coast region of Louisiana and international operations in the eastern region of Venezuela and the West Siberia region of Russia. Benton's common stock is traded on the NASDAQ National Market System (symbol: BNTN).
Benton Oil and Gas Co. | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T17:19:46 |
0000950129-96-000033 | 0000950129-96-000033_0001.txt | <DESCRIPTION>OPINION OF JAMES M. SHELGER
As General Counsel and Secretary of Service Corporation International, a Texas corporation (the "Company"), I am familiar with the registration under the Securities Act of 1933, as amended, of 2,000,000 shares of the Company's common stock, $1.00 par value (the "Shares"), to be offered upon the terms and subject to the conditions set forth in the Company's 1995 Incentive Equity Plan (the "Plan").
In connection therewith, I have examined the Amended and Restated Articles of Incorporation of the Company, as amended, the By-laws of the Company, the Plan, records of relevant corporate proceedings with respect to the offering of the Shares and such other documents and instruments as I have deemed necessary or appropriate for the expression of the opinion contained herein. I have also reviewed the Company's Registration Statement on Form S-8 to be filed with the Securities and Exchange Commission with respect to the Shares (the "Registration Statement").
I have assumed the authenticity and completeness of all records, certificates and other instruments submitted to me and the correctness of all statements of fact contained therein.
Based on the foregoing and having regard for such legal considerations as I have deemed relevant, I am of the opinion that the Shares have been duly authorized and, when issued in accordance with the terms of the Plan, will be validly issued, fully paid and non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the Registration Statement. | S-8 | EX-5.1 | 1996-01-12T00:00:00 | 1996-01-12T14:40:22 |
0000820206-96-000004 | 0000820206-96-000004_0000.txt | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994. Commission File No. 0-12700
FRANKLIN REAL ESTATE INCOME FUND (Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction or incorporation or (I.R.S. Employer
P.O. Box 7777, San Mateo, CA 94403-7777 (415) 312-2000 (Address of principal and executive Office)Company's telephone number,
Securities registered pursuant to Section 12(b) of Act:*
Title of each class Name of each exchange on which registered
Common Stock Series A American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Warrants to purchase Common Stock, Series A
*On January 14, 1994, the Company registered and listed its Series A common stock on the American Stock Exchange.
Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____
At January 31, 1995, 3,986,153 shares of the Company's Series A common stock were held by non-affiliates of the Company. The aggregate market value of the voting stock held by non-affiliates of the Company, based upon the closing price of $4.875 as of January 31, 1995, is $19,432,496.
Indicate the number of shares outstanding of each of the issuer's classes of common stock at December 31, 1994. 3,999,653 shares of Series A common stock and 319,308 shares of Series B common stock and 2,861,420 warrants for Series A common stock.
Documents Incorporated by Reference - Portions of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1994, and Proxy Statement for use in connection with its Annual Meeting of Shareholders to be held on June 13, 1995, are incorporated by reference in Parts I, II, III and IV.
F R A N K L I N R E A L E S T A T E I N C O M E F U N D
R E A L E S T A T E P O R T F O L I O
As of December 31, 1994, the Company's real estate portfolio consisted of the Mira Loma Shopping Center located in Reno, Nevada; a 40% undivided interest in the Shores Office Complex located in Redwood City, California; three separate R&D buildings in the Northport Business Park located in Fremont, California, and the Glen Cove Shopping Center located in Vallejo, California. The Company has also purchased two small parcels of land located adjacent to the Mira Loma Shopping Center. An affiliated real estate investment trust, Franklin Select Real Estate Income Fund, owns the remaining 60% interest in the Shores.
With the exception of the Glen Cove Center, the Company's properties are not generally subject to any mortgage, lien or other encumbrance. The Glen Cove Center is owned subject to a loan with an outstanding balance of approximately $1,981,000. The Company currently carries earthquake insurance coverage for its properties and intends to continue to carry earthquake coverage to the extent that it is available at economically reasonable rates. However, the Company's earthquake insurance coverage is subject to substantial deductibles.
At December 31, 1994, the Company's properties contained a total of 61 leases. The following schedule lists the portfolio's lease expiration dates and the related annual base rental income as of December 31, 1994.
--------- ------------- -------------- --------------- --------------- No. of Current % of Year Expiring Sq. Ft.1 Base Rent1 Annual Rent --------- ------------- -------------- --------------- ---------------
1995 11 73,676 $723,000 19% 1996 17 77,487 794,000 21% 1997 5 4,249 73,000 2% 1998 8 14,743 245,000 7% 1999 8 22,557 409,000 11% 2000 5 13,149 252,000 7% 2001 1 2,695 41,000 1% 2002 1 23,365 177,000 5% 2005 1 36,000 274,000 7% 2010 1 50,360 528,000 14% 2012 2 2,400 123,000 3% 2013 1 15,025 109,000 3% --------- ------------- -------------- --------------- --------------- 1 Total Square Feet and Annual Base Rent reflect the Company's 40% interest in the Shores.
R E A L E S T A T E P O R T F O L I O
The Company's portfolio represents in the aggregate, 360,012 rentable square feet. For the years ended December 31, 1992, 1993 and 1994, the following table shows the number of lease agreements that the Company executed, the rentable square feet covered by the agreements, and the amount of tenant improvements and leasing commissions paid by the Company.
The reduced square footage leased in 1994 is primarily due to less space being available for lease in that year.
At December 31, 1994, the Company's properties were 93% leased, which compares to 95% leased at the end of 1993. The following tables indicate the occupancy rates for each of the Company's properties and the average rental rates at December 31 of each year that the Company has owned the properties:
--- ------------- --------------- --------------- ------------ ----------------
Mira Loma The Shores Northport Glen --- ------------- --------------- --------------- ------------ ---------------- 94,026 55,4182 144,568 66,000 360,012 Sq. Ft. Sq. Ft. Sq. Ft. Sq. Ft. Sq. Ft. --- ------------- --------------- --------------- ------------ ----------------
1990 91% 92% N/A N/A 91% 1991 90% 95% 100% N/A 96% 1992 88% 84% 61% N/A 74% 1993 95%1 90% 97% N/A 95% 1994 82%1 99% 97% 97% 93% ------ ------------- --------------- --------------- ------------ ------------- 1 Includes 16%, which is leased by a drug store tenant, who has vacated their space but remains current under the terms of the lease.
2 Reflects the Company's 40% interest in the Shores.
R E A L E S T A T E P O R T F O L I O
AVERAGE ANNUAL RENTAL RATES/SQ. FT.3
1990 $8.73 $24.20 N/A N/A 1991 $8.79 $24.77 $8.00 N/A 1992 $8.78 $21.29 $8.09 N/A 1993 $9.14 $21.94 $8.18 N/A 1994 $9.62 $21.52 $7.99 $12.60
3. The average annual rental rates represent effective base rental income, as recorded on a GAAP basis for each year, excluding the amortization of lease buy-out payments, if any, divided by the average monthly occupied square feet.
4. Average rental rate per square foot excludes income from the land lease and ATM.
Only one tenant provides 10% or more of the Company's total revenues; the grocery store anchor at Glen Cove Shopping Center. The tenant leases 50,360 square feet, and makes base rental payments totaling approximately $528,000 annually, or about 12% of the Company's 1994 revenues. In addition, the tenant is responsible for all allocable expenses of operating the property including their pro rata share of real estate taxes, common area expenses and insurance. The lease expires on January 31, 2010, and provides for four consecutive five-year renewal options.
MIRA LOMA SHOPPING CENTER RETAIL 94,026 SQ. FT. RENO, NEVADA *
In 1988, the Company purchased a fee interest in the Mira Loma Shopping Center ("Mira Loma"), a neighborhood shopping center located on the southeast corner of Mira Loma Drive and McCarran Boulevard in Reno, Nevada. Located in the southeast quadrant of Reno, Mira Loma is surrounded by single family homes as well as residential apartment complexes and city recreational facilities which includes a golf course. The number of households within Mira Loma's primary market area grew by approximately 15% during the period from 1990 to 1994. Mira Loma is in a strong competitive position in a neighborhood which has a higher than average household income compared to other parts of Reno. As the area continues to grow, Mira Loma is expected to benefit. Mira Loma is the only neighborhood shopping center in the area and, under present zoning laws, no other shopping centers may be built in Mira Loma's immediate market area.
Reno is Nevada's second largest city with a population of approximately 150,000. Its geographic proximity to California and generally favorable business climate enables Reno to attract companies wishing to benefit from Nevada's lack of corporate income, personal income and payroll taxes as well as other lower costs, while taking advantage of major California markets, including Sacramento and the San Francisco Bay Area.
R E A L E S T A T E P O R T F O L I O
While the competitive retail market in Reno is approximately 90% occupied, Mira Loma was 82% leased at December 31, 1994. While Mira Loma's occupancy rate is slightly below the market average, management believes that the occupancy will improve once a replacement tenant is found for the center's drug store as described below. The Company believes that the average effective rents payable under existing leases at Mira Loma are at current market rates for comparable space in the Reno area.
In 1993, the drug store tenant at the Mira Loma Shopping Center vacated the premises. This tenant leases approximately 16% of the rentable space at Mira Loma under a lease that expires in May, 2013. To date, the tenant has remained current on its rental obligations and management has no reason to believe that the tenant intends to default. Therefore, the Company does not expect that the store closing will have any material short-term impact on the operations of the property. The Company is engaged in negotiations with another drug store retailer to assume the existing tenant's lease under similar terms. However, no formal agreement has yet been signed.
THE SHORES OFFICE COMPLEX OFFICE 138,546 SQ. FT. REDWOOD SHORES, CA. *
On September 1, 1989, the Company purchased a 40% undivided fee interest in the Shores Office Complex (the "Shores"). An affiliated real estate investment trust, Franklin Select Real Estate Income Fund ("Select"), acquired the remaining 60% fee interest as co-owner. This office complex consists of three buildings located at 100 Marine World Parkway, 1 Twin Dolphin Drive and 3 Twin Dolphin Drive, Redwood City, San Mateo County, California. The Company and Select acquired the Shores as tenants in common and have entered into a Co-Ownership Agreement which defines their respective rights and obligations with respect to the property.
Located in the Redwood Shores community of Redwood City, California and near the midpoint of the San Francisco Peninsula approximately 25 miles south of San Francisco, the Shores is part of a 1,465 acre master-planned, mixed-use development. Approximately 250 acres are devoted to commercial development including office buildings, shopping centers, medical buildings, and hotels. The remainder of Redwood Shores comprises residential properties, a 250 acre lagoon, and 200 acres of reserved open space. The area contains other existing and planned buildings which can be considered competitive with the Shores. The Company believes that the average effective rents provided by existing leases at the Shores are at current market rates for comparable space in the Redwood Shores area.
During 1992 and continuing into 1993, the Redwood Shores office market experienced a decline in rental rates, resulting from over-building and the economic recession. These factors had a substantial impact on the Shores' cash flow. The property's operating income declined as leases and renewals were signed at lower rental rates, and while the Company incurred additional costs associated with replacing tenants. However, late in 1993 the market stabilized, and by the end of 1994 the area's vacancy rate had declined to less than 2%. As a result, effective market rental rates increased about 9% during 1994 and rent concessions have substantially ended. The Company believes that the long-term outlook for the Redwood Shores office market remains favorable. There are no competitive buildings currently under construction in the immediate vicinity, and the area continues to attract potential tenants. Rental rates are increasing and, with no speculative construction in progress, management expects this trend to continue in 1995.
R E A L E S T A T E P O R T F O L I O
NORTHPORT BUSINESS PARK INDUSTRIAL 144,568 SQ. FT. FREMONT, CA. In 1991, the Company purchased three research and development ("R&D") buildings in the Northport Business Park, located at 45875 and 45635 Northport Loop East and 4545 Cushing Parkway in Fremont, California (the "Northport Buildings"). The Northport Business Park is located in the Bayside/Northport area of Fremont, California, on the southeastern side of the San Francisco Bay in southern Alameda County. Fremont is located in the northeastern part of Silicon Valley and its lower development costs, good transportation access and affordable housing have attracted a significant portion of the recent research and development growth in Silicon Valley. The area is improved with a wide variety of industrial facilities, many of which are competitive with the light industrial nature of the Northport Buildings. Management believes that the average effective rents provided from the existing leases at the Northport Buildings are at market rates for comparable space in the Fremont area.
The vacancy rate in the Fremont R&D market has declined to approximately 11% from 18% on January 1, 1994, and 25% on January 1, 1993. As a result, market rental rates have stabilized after declining approximately 10% in 1993. If this positive absorption rate continues, rental rates may begin to increase by the end of 1995.
GLEN COVE CENTER RETAIL 66,000 SQ. FT. VALLEJO, CA. In January, 1994, the Company purchased the Glen Cove Center ("Glen Cove"), located at 100-170 Robles Drive, Vallejo, California. Vallejo has a population of approximately 116,000, and is located about 30 miles northeast of San Francisco, and twenty miles north of Oakland. Glen Cove is strategically located at the only entrance and exit to the Glen Cove neighborhood which contains over 2,500 dwelling units. Within a one mile radius surrounding the property, there are no competing neighborhood shopping centers, giving Glen Cove Center a competitive advantage in serving the neighborhood.
As of December 31, 1994, the Glen Cove Center was 97% occupied, while the competitive retail market in the vicinity was approximately 90% occupied. At the time of acquisition, in January, 1994, the property was 90% occupied. Over the past twelve months, rental rates have remained stable. The Company believes that the average effective rents payable under existing leases at Glen Cove are substantially at current market rates for comparable space in the Vallejo area.
* Market vacancy and rental rate information is based on reports from CB Commercial Real Estate Group for Mira Loma and The Shores; Colliers Parrish International, Inc. for Northport and on internal research reports prepared by management for Glen Cove.
S E L E C T E D F I N A N C I A L I N F O R M A T I O N
1Per weighted average number of shares of Series A common stock outstanding.
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes thereto.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Net income for 1994 increased $135,000, or 9%, as compared to 1993 primarily due to the acquisition of the Glen Cove Center in January, 1994, and due to improved occupancy rates at two of the Company's properties.
Rental revenue for 1994 increased $1,045,000, or 31%, primarily due to the recognition of approximately $913,000 of rental income from the Glen Cove Center, and due to improved occupancy at the Shores Office Complex and Northport Business Park properties. The average occupancy rate of net rentable square feet during the years 1994 and 1993 at the Shores Office Complex was 93% and 83%; at the Northport Buildings 97% and 87%; and at the Mira Loma Shopping Center 81% and 92%, respectively. Average occupancy during 1994 at the Glen Cove Center was 95%.
Interest and dividend income decreased $246,000, or 79%, primarily due to the sale of mortgage-backed securities and the investment of the proceeds in the Glen Cove Center. A loss of $68,000 was recorded in 1994 on the sale of the securities. In 1993, the Company sold its GNMA mortgage-backed securities in order to realize the gain on those investments in the amount of $447,000.
Total expenses increased in 1994 by $207,000, or 8%, from $2,707,000 in 1993 to $2,914,000, mostly due to the acquisition of the Glen Cove Center.
Interest expense increased $177,000 reflecting the issuance of an unsecured loan payable in January, 1994, related to the acquisition of the Glen Cove Center. This loan was converted into a secured mortgage note in June, 1994.
Depreciation and amortization increased $53,000 and operating expense increased $205,000 reflecting the acquisition of the Glen Cove Center.
Consolidation expense decreased $282,000 on a net basis in 1994, due to the termination of the proposed merger in the fourth quarter of 1993.
COMPARISON OF YEAR ENDED DECEMBER 31, 1993 TO YEAR ENDED DECEMBER 31, 1992
Net income for 1993 increased $157,000, or 12%, as compared to 1992 due primarily to the following factors: an increase in rental revenue of $69,000; a decrease in interest and dividends of $287,000; an increase in gain on the sale of mortgage-backed securities of $447,000; an increase in depreciation and amortization of $110,000; a decrease in consolidation expense of $139,000; and an increase in general and administrative expense of $86,000.
Rental revenue for 1993 increased $69,000, or 2%, primarily due to improved occupancy rates at the Company's properties. The average occupancy rate of net rentable square feet in 1993 and 1992 at Mira Loma was 92% and 90%, respectively, and at the Northport Buildings it was 87% and 83%, respectively, offsetting a decrease in the average occupancy rate at the Shores to 83% for 1993 compared to 90% for 1992.
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
Interest and dividend income decreased $287,000, or 48%, primarily due to the sale of the Company's GNMA mortgage-backed securities in January, 1993, and the subsequent reinvestment of the proceeds in FNMA and FHLMC mortgaged-backed securities, which earned a lower yield. The Company sold the mortgage-backed securities in order to realize the gain on those investments in the amount of $447,000.
Total expenses increased in 1993 by $78,000, or 3%, from $2,629,000 in 1992 to $2,707,000. The increase in total expenses is attributable to the following factors: an increase in depreciation and amortization of $110,000, or 12%; an increase in operating expenses of $17,000, or 2%; an increase in related party expenses of $4,000, or 2%; a decrease in consolidation expense, net, of $139,000, or 33%; and an increase in general and administrative expense of $86,000, or 65%.
Depreciation and amortization increased $110,000 in 1993, reflecting tenant improvements and leasing commissions, which were incurred late in 1992 and in 1993.
Consolidation expense, net, decreased $139,000 on a net basis due to the termination of the proposed merger.
General and administrative expense increased $86,000 due to the acquisition of directors and officers insurance coverage in 1993, and non-recurring costs associated with listing the Company's stock on the American Stock Exchange.
The Company's Board of Directors (including all of its Independent Directors) have determined, after review, that the compensation paid to CPMC in 1994, as well as the reimbursements made by the Company to the Advisor reflected in Note 2 to the accompanying financial statements are fair and reasonable to the Company. No advisory fee was paid to the Advisor in 1992, 1993 or 1994.
The Company's principal source of capital for the acquisition of properties was the proceeds from the initial public offering of its stock. The Company completed its property acquisition phase in 1994 and no further acquisitions are anticipated. The Company's funds from operations have been its principal source of capital for property improvements, leasing costs and the payment of quarterly dividends. At December 31, 1994, the Company's cash reserves, including mortgage-backed securities, aggregated $1,505,000. The Company's investment in mortgage-backed securities consists of GNMA, adjustable rate pass-through certificates in which payments of principal and interest are guaranteed by GNMA. However, changes in market interest rates may cause the security's market value to fluctuate, which could result in a gain or loss to the Company if the securities are sold before maturity.
During 1994, the Company borrowed $2 million in order to purchase the Glen Cove Center. Otherwise, the Company's properties are owned free of any indebtedness. Interest on the note accrues at a variable rate of 1.5% in excess of the Union Bank Reference Rate. Monthly installments of principal and interest are due beginning August 1, 1994, and continuing until maturity of the note on May 1, 1999. Principal installments are payable in the amount of $3,700 per month. The note may be prepaid in whole or in part at any time without penalty.
For the foreseeable future, management believes that the Company's current sources of capital will continue to be adequate to meet both its operating requirements and the payment of dividends.
Net cash flow provided by operating activities for the years ended December 31, 1994, 1993 and 1992 was $2,670,000, $2,023,000 and $1,837,000, respectively. The trend generally reflects FREIF's improving profitability, which is also indicated by trends in net income and Funds from Operations. Net cash flow provided by operating activities was impacted in 1992 and 1993 by consolidation expenses and greater free rent and leasing commissions compared to 1994. Also see "Results of Operations" above.
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
Funds from Operations for the years ended December 31, 1994, 1993 and 1992 were $2,688,000, $2,500,000 and $2,233,000, respectively. The primary differences between the periods relate to the changes in net income as discussed under "Results of Operations". The Company believes that Funds from Operations is helpful in understanding a property portfolio in that such calculation reflects income from operating activities and the properties' ability to support general operating expenses and interest expense before the impact of certain activities, such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations should not be considered an alternative to net income, or any other GAAP measurement of performance, as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. As defined by the National Association of Real Estate Investment Trusts, Funds from Operations is net income (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustment for unconsolidated joint ventures.
The Company's management believes that inflation may have a positive effect on the Company's property portfolio, but this effect generally will not be fully realized until such properties are sold or exchanged. On some leases, the Company collects overage rents based on increased sales and increased base rentals as a result of cost of living adjustments. The Company's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Company against increased operating costs resulting from inflation.
Dividends are declared quarterly at the discretion of the Board of Directors. The Company's present dividend policy is to at least annually evaluate the current dividend rate in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Company's other working capital requirements. After balancing these considerations, and considering the Company's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Company seeks to establish a dividend rate which:
i) provides a stable dividend which is sustainable despite short term fluctuations in property cash flows; ii) maximizes the amount of cash flow paid out as dividends consistent with the above listed objective; and iii) complies with the Internal Revenue Code requirement that a REIT annually pay out as dividends not less than 95% of its taxable income.
During the years ended December 31, 1994 and 1993, the Company declared dividends totaling $2,000,000, or $.50 per share each year.Because depreciation is a non-cash expense, cash flow will typically be greater than earnings from operations and net earnings. Therefore, quarterly distributions will consistently be higher than quarterly earnings resulting in a return of capital on a GAAP basis.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FRANKLIN REAL ESTATE INCOME FUND
Date: JANUARY 9, 1996 By: S/ DAVID P. GOSS
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company, and in the capacities and on the dates indicated.
s/David P. Goss Chief Executive Officer January 9, 1996
s/Egon H. Kraus Director1 January 9, 1996
s/Frank W. T. LaHaye Director1 January 9, 1996 | 10-K/A | 10-K | 1996-01-12T00:00:00 | 1996-01-11T20:07:12 |
0000950124-96-000224 | 0000950124-96-000224_0001.txt | AND THE SHAREHOLDERS OF ACE-TEX CORPORATION
ARTICLE 2: SALE AND PURCHASE OF THE SHARES 9 2.1. Sale and Purchase of the Shares 9 2.2. Default by Any Shareholder at the Closing 9 2.3. Payments at Closing 9 2.4. Determination of Final Purchase Price 10
ARTICLE 3: RELATED AGREEMENTS 12 3.1. Purchase of Affiliated Real Estate 12 3.3. Purchase of Affiliate Promissory Note 13
ARTICLE 5: REPRESENTATIONS AND WARRANTIES OF THE LAKERS 14 5.1. Actual Knowledge; No Survival 14 5.2. Actual Knowledge; Subject to Basket, Cap and Expiration Date 20 5.3. Subject to Basket, Cap and Expiration Date 23
ARTICLE 6: REPRESENTATIONS AND WARRANTIES OF THE BUYER 34 6.1. Organization and Standing 34 6.2. Authority and Binding Effect 34 6.3. Validity of Contemplated Transactions 34 6.4. Securities Law Considerations 35
ARTICLE 7: CONDUCT OF BUSINESS PENDING CLOSING 35 7.2. Approvals of Governmental Authorities 37 7.4. Payment of Indebtedness by Related Persons 38 7.6. Commercially Reasonable Efforts 38 7.7. Transfer of Assets 38
ARTICLE 8: INDEMNIFICATION; REMEDIES 38 8.3. Indemnification By Laker and Trust 39 8.4. Indemnification By Buyer 40 8.5. Limitations As To Amount - Lakers and Trust 40 8.6. Procedure For Indemnification - Third Party Claims 41
ARTICLE 9: SHAREHOLDER MATTERS 43
ARTICLE 10: CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER 44 10.2. Performance by the Company and the Shareholders 44
10.3. No Material Adverse Change 44 10.5. Ownership of Shares 45 10.6. No Prohibition of Transaction 45 10.8. Opinion of Counsel 45 10.10. Regulatory Compliance and Approvals 45 10.18. Consents and Approvals 46 10.20. Asset Purchase Agreement 46
ARTICLE 11: CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS 46 11.1. Buyer Representations True 46 11.2. Performance by the Buyer 47 11.5. Opinion of Counsel 47 11.6. Regulatory Compliance and Approval 47 11.8. Prohibition of Transaction 47 11.11. Asset Purchase Agreement 47
ARTICLE 12: ENVIRONMENTAL MATTERS 48
ARTICLE 13: CERTAIN ADDITIONAL COVENANTS 48 13.2. Approvals of Governmental Bodies 50 13.4. Commercially Reasonable Efforts 51 13.5. Utility Tax Adjustment 51 13.6. Certain Loss Charges 51 13.8. Asset Purchase Agreement and Real Estate Purchase Agreement 51
14.1. Payment of Expenses 51 14.2. Brokers' and Finders' Fees 52 14.4. Assignment and Binding Effect 52 14.7. Missouri Law to Govern 53 14.8. Remedies Not Exclusive 54 14.9. No Benefit to Others 54 14.10. Contents of Agreement 54 14.11. Section Headings and Gender 54 14.12. Disclosure Schedule and Exhibits 54
14.16. Representation By Counsel; Interpretation 55 14.18. Termination by Mutual Consent 55 14.19. Termination for Breach 55
Schedule 1.0 - Wiper Business Assets Schedule 5.1 - Management Employees
Exhibit A - Form Promissory Note Exhibit B - General Escrow Fund Agreement Exhibit C - Balance Sheet Escrow Fund Agreement Exhibit D - Real Estate Purchase Agreement - Flint Property Exhibit D-1 - Real Estate Purchase Agreement - Grand Rapids Property Exhibit D-2 - Real Estate Purchase Agreement - Bay City Property Exhibit E - Form Noncompetition, Nondisclosure and Nonsolicitation Exhibit F - Opinion of Shareholders' Counsel Exhibit G - Form of Release Exhibit H - Opinion of Buyer's Counsel Exhibit I - Guaranty Agreement
* All Schedules and Exhibits have been omitted from this filing. The registrant will furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
This STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of October 19, 1995, is made by and among UNITOG RENTAL SERVICES, INC., a California corporation (the "Buyer"); ACE-TEX CORPORATION, a Michigan corporation (the "Company"); IRVING LAKER and MARTIN LAKER (each, a "Laker" and collectively, the "Lakers") and IRVING LAKER, as trustee (the "Trustee - Plan") of the ACE-TEX CORPORATION SAVINGS AND PROFIT SHARING PLAN AND TRUST (the "Plan") and IRVING LAKER, as trustee of the IRVING LAKER CHARITABLE REMAINDER UNITRUST and MARTIN LAKER as Trustee of the MARTIN LAKER CHARITABLE REMAINDER UNITRUST (collectively, the Trustees are referred to as "Trustees-Trusts" and the Trusts are collectively referred to as the "Trust") (the Lakers, Trustee - Plan and Trustees - Trusts are sometimes referred to herein individually as a "Shareholder" and collectively as the "Shareholders").
WHEREAS, the Shareholders own, beneficially and of record as described on Schedule 5.4(b), all of the issued and outstanding shares of common stock of
WHEREAS, the Company is engaged in the conduct of two businesses, the supply of uniform rental services and the manufacture and distribution of
WHEREAS, the Buyer desires to purchase from the Shareholders, and the Shareholders desire to sell to the Buyer all of the Shares, all in accordance with the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the respective covenants, representations and warranties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:
For convenience and brevity, certain terms used in various parts of this Agreement are listed in alphabetical order and defined or referred to below (such terms to be equally applicable to both singular and plural forms of the terms defined).
"Acquisition" means the acquisition of all of the Shares by the Buyer and all related transactions provided for in or contemplated by this Agreement, any Exhibit or Schedule hereto, and the Transaction Documents.
"Adjusted Closing Net Book Value" means the amount as derived from the Closing Date Balance Sheet of the excess of (i) the total assets of the Company as of the Closing Date, reduced by (A) the book value of the Excluded Assets; and (B) deferred bond issuance costs if such bonds are required to be prepaid as a result of this Acquisition, over (ii) the total Liabilities of the Company as of the Closing Date, which Liabilities shall be increased to reflect (to the extent not previously reflected or to the extent the Liability is not terminated): (A) the post-retirement or post-death obligations to the Lakers, including those set forth in the Ace-Tex Corporation Salary Continuation Plan, dated December 2, 1991, (B) the unpaid stock purchase/consulting obligation to Louis Parr, including the obligations under the Consulting Agreement, dated April 1, 1989, between the Company and Louis Parr and (C) the amounts necessary to cancel and obtain the release of the Company from the consulting and chemical contracts with Al Pariser or Pariser
Industries, Inc., including the Agreement with Pariser Industries, Inc. dated July 11, 1995 and the obligations under that certain oral consulting agreement with Al Pariser. As used herein, the terms "total assets" and "total Liabilities" shall mean the aggregate amount of all assets or Liabilities, respectively, of the Company (whether classifiable in accordance with GAAP as current or long-term) on a consolidated basis determined in accordance with GAAP, but adjusted as provided above.
"Affiliate Promissory Notes" means the following promissory notes of the Company in the aggregate principal amount of $425,000: Promissory Note in the principal amount of $75,000.00 dated November 5, 1994 and payable to the Gerald Laker, D.D.S., P.C. Employees' Profit Sharing Plan and Trust; Promissory Note in the principal amount of $100,000.00 dated June 27, 1994 and payable to Sarah Laker; Promissory Note in the principal amount of $100,000.00 dated July 12, 1994 and payable to Sarah Laker; Promissory Note in the principal of $100,000.00 dated June 27, 1994 and payable to the Harry Laker Family Trust; and the Promissory Note in the remaining principal amount of $50,000.00 dated March 31, 1992 and payable to Martin Laker.
"Affiliated Real Estate" means the real estate commonly described as 2395 Lapeer Road, Flint, Michigan; 960 Ken-O-Sha Industrial Drive, Grand Rapids, Michigan; and 2605 South Euclid Avenue, Bay City, Michigan, along with all structures, fixtures, buildings and improvements located thereon.
"Agreement" means this Stock Purchase Agreement.
"Arbitrator" is defined in Section 2.4(b).
"Asset Purchase Agreement" means the Asset Purchase Agreement, dated the date hereof, between the Company and Hamilton Wiping Cloth Co., as sellers, and Ace-Tex Enterprises LLC, as buyer, with respect to the sale of the Wiper Business Assets.
"Assets" means all of the assets, properties, business, goodwill and rights of every kind and description, real and personal, tangible and intangible, of the Company and each Subsidiary, wherever situated and whether or not reflected on the Latest Year-End Balance Sheet or the Closing Date Balance Sheet.
"Balance Sheet Adjusting Schedule" is defined in Section 2.4(a).
"Balance Sheet Escrow Fund" is defined in Section 2.3(c).
"Base Purchase Price" means an amount equal to the sum of: (i) Forty-Two Million One Hunderd Thousand Dollars ($42,100,000); minus (ii) the fair market value, as determined pursuant to Section 3.1(b), of the Affiliated Real Estate.
"Business" means the existing and prospective business, operations, facilities and other Assets, financial condition, results of operations, finances, markets, products, competitive position, raw materials and other supplies, customers and customer relations and personnel of the Company and each Subsidiary and includes the Wiper Business and the Rental Business.
"Buyer" means Unitog Rental Services, Inc., a California corporation.
"Closing" and "Closing Date" are defined in Section 4.1.
"Closing Date Balance Sheet" is defined in Section 2.4(a).
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock, par value $1.00 per share, of the Company, of which there are 47,306 shares outstanding.
"Company" means Ace-Tex Corporation, a Michigan corporation.
"Consent Decree" means the Administrative Order by Consent for Response Activity and Site Development with the Michigan Department of Natural Resources, dated May 1, 1995.
"Contract" means any written or oral contract, agreement, lease, plan, instrument or other document, commitment, arrangement, undertaking, practice or authorization that is or may be binding on any person or its property under applicable Law.
"Copyrights" means registered copyrights, copyright applications and unregistered copyrights.
"Court Order" means any judgment, decree, injunction, order or ruling of any Governmental Authority that is binding on any person or its property under applicable Law.
"Default" means (i) a breach of or default under any Contract, (ii) the occurrence of an event that with the passage of time or the giving of notice or both would constitute a breach of or default under any Contract, or (iii) the occurrence of an event that with or without the passage of time or the giving of notice or both would give rise to a right of termination, renegotiation or acceleration under any Contract.
"Disclosure Schedule" means the schedule of disclosures provided in connection herewith, which is incorporated by reference herein and made a part of this Agreement.
"Disputed Matters" is defined in Section 2.4(b).
"Employee Benefit Plans" means any agreement, plan, policy, program, practice or arrangement that involves any (a) Pension Plan, as defined herein; (b) pension, retirement, profit sharing, deferred compensation, bonus, stock option, stock purchase, phantom stock, health, welfare, or incentive plan; (c) welfare or "fringe" benefits or other employee, officer, director, retiree, consultant or dependent benefits, including, without limitation, cafeteria, vacation, holiday, severance, disability, medical, hospitalization, dental, life and other insurance, tuition, company car, club dues, sick leave, maternity, paternity or family leave, or other benefits; or (d) employment, consulting, engagement, compensation or retainer agreement or arrangement, which are now or have been maintained within the past three years by the Company or any Subsidiary, or any affiliate or under which the Company or any affiliate has any obligation or liability, whether actual or contingent.
"Environment" means soil, surface or subsurface land, strata, surface waters (including navigable waters and ocean waters), groundwaters, drinking water supply, wastewater discharge stream, stream sediments, ambient air, plant and animal life and any other natural resource.
"Environmental, Health and Safety Liabilities" means any loss, cost, expense, claim, demand, fine, penalty, judgment, surcharge (including sewer surcharges), response cost, liability, obligation or other responsibility of whatever kind or otherwise, arising out of, required by or based upon Environmental Laws, or the Release or Threat of Release of Hazardous Materials into the Environment.
"Environmental Law" means any provision of past or present international, national, federal, state, local or any other governmental law, directive, statute, ordinance, rule, regulation, code, standard or other legal requirement, or common law (including, but not limited to, common law that may impose strict liability) or any judgment, order, writ, notice, decree, permit, license, authorization, approval, consent, injunction, or agreement with any Governmental Authority, relating to any environmental, health or safety matters or conditions, Hazardous Materials, pollution, protection, preservation or restoration of the Environment, including, without limitation, any sewer discharge permits or ordinances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ERISA Affiliate" is defined in Section 5.3(f).
"Escrow Agent" means NBD Bank, N.A.
"Excluded Assets" means the Receivable from Trusts and Cash Surrender Value of Life Insurance, as identified on the Latest Year-End Balance Sheet, University of Michigan football tickets and the art objects and motor vehicles listed on the Disclosure Schedule.
"Facilities" means any real property, leaseholds or other interests currently or formerly owned, operated or occupied by the Company or any Subsidiary (or any predecessor Person) and/or any buildings, plants, structures or equipment of the Company or any Subsidiary (or any predecessor Person), including, without limitation, any Affiliated Real Estate.
"Final Purchase Price" means an amount equal to the sum of: (i) the Base Purchase Price; plus (ii) the amount, if any, by which the Adjusted Closing Net Book Value is greater than Ten Million Four Hundred Thirty-One Thousand Two Hundred Forty-Six Dollars ($10,431,246); minus (iii) the amount, if any, by which the Adjusted Closing Net Book Value is less than Ten Million Four Hundred Thirty-One Thousand Two Hundred Forty-Six Dollars ($10,431,246); minus (iv) the amount, if any, by which the book value of the Wiper Business Assets (reduced by the book value of the Receivable from Trusts and cash surrender value of life insurance referred to in the definition of Excluded Assets to the extent they are included in the Closing Date Balance Sheet) as set forth on the Closing Date Balance Sheet is greater than Eleven Million Dollars ($11,000,000).
"GAAP" means generally accepted accounting principles consistently applied.
"General Escrow Fund" is defined in Section 2.3(b).
"Governmental Authority" means any federal, state, local, foreign, national, or provincial, governmental agency, body, authority, district, board, commission, court, tribunal, political subdivision or other governmental instrumentality, including, without limitation, any sewer district or similar instrumentality.
"Guarantor" means Unitog Company, a Delaware corporation.
"Hazardous Materials" means any substance which is presently listed, defined, designated or classified as, or otherwise determined to be, hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law, whether by type or by quantity, including any material containing any such substance as a component, and includes, but shall not be limited to, any hazardous substance, pollutant, contaminant, hazardous waste, infectious waste, radioactive materials, petroleum, including crude oil or any fraction thereof, and asbestos fibers.
"Intellectual Property" means Copyrights, Patents, Trademarks, technology rights and licenses, computer software (including, without limitation, any source or object codes therefore or documentation relating thereto), trade secrets, franchises, know-how and inventions and intellectual property rights.
"Interim Balance Sheet," "Interim Balance Sheet Date" and "Interim Financial Statements" are defined in Section 5.3(a).
"IRS" means the Internal Revenue Service or any successor agency.
"Latest Year-End Balance Sheet" is defined in Section 5.3(a).
"Law" means any statute, law, ordinance, regulation, decision, order or rule of any Governmental Authority.
"Liability" means any direct or indirect liability, indebtedness, obligation, expense, claim, deficiency or guaranty of or by any person (other than endorsements of notes, bills and checks presented to banks for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute, contingent, matured, unmatured or other.
"LIBOR" means the rate per annum (rounded upwards if necessary to the nearest 1/100th of one percent (1%)) announced in the Wall Street Journal on the business day prior to the issuance of the promissory notes pursuant to Section 2.3(a) as the London Interbank Offered Rates - one month.
"License" means any license, franchise, permit, easement, right, authorization, approval, consent, waiver or certification.
"Lien" means any mortgage, lien, security interest, pledge, encumbrance, restriction on transferability, defect of title, charge or claim of any nature whatsoever on any property or property interest.
"M and WC Liability" shall mean the difference between the current accruals for unpaid claims expense for the self-funded medical and workers' compensation insurance programs of the Company included in the Closing Date Balance Sheet and the eventual uninsured amounts paid for any claim under these programs for all claims arising out of events occurring prior to the Closing Date.
"Management Employee" means the employees of the Company and its Subsidiaries listed on Schedule 5.1.
"Material Contract" means any Contract: (i) not entered into in the ordinary course of Business; or (ii) entered into in the ordinary course of Business and that requires the Company or any Subsidiary to pay to any Person, or requires any Person to pay to the Company or any Subsidiary, more than
$50,000 for any purpose over the life of the Contract; or (iii) entered into with any customer of the Business generating revenues in excess of $1,000 per week; or (iv) for the lease, rental or occupancy of any Facility; or (v) which contains covenants which purport to restrict the Company's or any Subsidiary's business activity or to limit the freedom of the Company or any Subsidiary to engage in any line of business or to compete with any Person; or (vi) with any union or collective bargaining units and any written or material oral employment contracts or severance agreements; or (vii) related in any way to indebtedness for borrowed money; or (viii) involving a license or franchise arrangement and any partnership or joint venture agreements; or (ix) whereby the Company or any Subsidiary agreed to indemnify or guaranty the obligations of any Person; or (x) entered into with any supplier or vendor from whom the Company or any Subsidiary purchased in excess of $10,000 in goods or services in the most recent twelve (12) month period; (xi) with any Shareholder or any family member of any Shareholder; (xii) which is material to the Company, any Subsidiary, the Business or the Assets or that, if terminated, may reasonably be expected to have a material adverse effect on the Company, any Subsidiary, the Business or the Assets.
"Patents" means all patents and patent applications.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto.
"Pension Plans" means any Employee Benefit Plan, including, without limitation, any multiemployer plan, that is intended to qualify under Code Section 401(a) and its related trust.
"Permitted Liens" means liens for taxes not yet due and payable, other Liens which become Permitted Liens pursuant to Section 13.1 below and Liens listed on the Disclosure Schedule.
"Person" means any individual, corporation (including any non-profit corporation), general partnership, limited partnership, limited liability company or partnership, joint venture, estate, trust, cooperative, foundation, union, syndicate, league, consortium, coalition, committee, society, firm, company or other enterprise, association, organization or other entity or Governmental Authority.
"Plan" means the Ace-Tex Corporation Savings and Profit Sharing Plan and Trust.
"Plan Documents" means the documents and agreements creating or governing the Plan.
"Prime Rate" means the fluctuating rate per annum announced in the Wall Street Journal as the Prime Rate.
"Proceeding" means any lawsuit, action, arbitration, administrative or other proceeding, criminal prosecution or governmental investigation or inquiry or examination or audit involving or affecting the Company or any Subsidiary, the Business, the Assets or any Contracts to which the Company or any Subsidiary is a party or by which it or any of the Assets or the Business may be bound or affected.
"Real Estate Purchase Agreements" is defined in Section 3.1.
"Real Property" is defined in Section 5.1(b).
"Release" means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, depositing, disposing, dumping or emplacement into the Environment.
"Rental Business" means the business conducted by the Company and its subsidiaries consisting of the rental, service and supply of uniforms, mats, mops, towels, linens and other rental products.
"Shareholder's Proportionate Interest" means the percentage set forth opposite the Stockholder's name on Schedule 5.4(b).
"Shareholder Representative" is defined in Section 9.1.
"Shareholders" means all of the persons listed on Schedule 5.4(b), who are the record and beneficial owners of all of the Shares.
"Shares" means 47,306 shares of the Common Stock, which constitute all of the issued and outstanding Common Stock of the Company.
"Subsidiary" means any entity listed on the Disclosure Schedule in response to Section 5.4(a) hereof and referred to in Section 5.4(a) as a Subsidiary.
"Tax" means any tax (including any income tax, franchise tax, capital gains tax, alternative minimum tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, inventory tax, occupancy tax, withholding tax, payroll tax, gift tax, estate tax or inheritance tax and the Michigan Single Business Tax), levy, assessment, tariff, impost, imposition, toll, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty, interest, cost of bond or deposit in lieu of bond), imposed, assessed or collected by or under the authority of any Governmental Authority or payable pursuant to any tax-sharing agreement or pursuant to any other Contract relating to the sharing or payment of any such tax, levy, assessment, tariff, impost, imposition, toll, duty, deficiency or fee.
"Tax Return" means any return (including any information return), report, statement, declaration, schedule, notice, notification, form, certificate or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Authority in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Law relating to any Tax.
"Threat of Release" means a substantial likelihood of a Release which requires action in order to prevent or mitigate damage to the Environment that would result from such Release.
"Trademarks" means registered trademarks, registered service marks, trademark and service mark applications and unregistered trademarks and service marks and fictitious names and d/b/a's.
"Transaction Documents" means all agreements, certificates, instruments, and other documents referred to in this Agreement or necessary to consummate any of the transactions contemplated by this Agreement.
"Trusts" means the Martin Laker Charitable Remainder Unitrust and the Irving Laker Charitable Remainder Unitrust.
"Trust Documents" means the documents and agreements creating or governing the Trust.
"Wiper Business" means the business conducted by the Company and its subsidiaries consisting of the manufacture and sale of wiping and polishing cloths, lint free wipers and garments, rags, tack cloths and disposable paper wipers.
"Wiper Business Assets" means the Assets of the Company and its Subsidiaries which are used exclusively in the operation of the Wiper Business and which are listed on Schedule 1.0.
"Wiper Real Estate" means the real estate commonly described as follows: 7601 Central Avenue, Detroit, Michigan; 4981 Factory Drive, Fairfield, Ohio and 295, 304 and 308 Steele Street, Jamestown, New York.
ARTICLE 2: SALE AND PURCHASE OF THE SHARES
2.1. Sale and Purchase of the Shares. Subject to the terms and conditions set forth herein and on the basis of and in reliance upon the representations, warranties, obligations and agreements set forth herein, at the Closing each Shareholder shall sell to the Buyer and the Buyer shall purchase from each Shareholder all of the Shares owned by such Shareholder in exchange for the payment to such Shareholder of an amount equal to the Final Purchase Price multiplied by such Shareholder's Proportionate Interest as set forth after such Shareholder's name in Column C of Schedule 5.4(b).
2.2. Default by Any Shareholder at the Closing. Notwithstanding the provisions of Section 2.1, if any of the Shareholders shall fail or refuse to deliver any of the Shares as provided in Section 2.1, or if any of the Shareholders shall fail or refuse to consummate the transactions described in this Agreement prior to or on the Closing Date, such failure or refusal shall not relieve the other Shareholders of any obligations under this Agreement, and the Buyer, at its option and without prejudice to its rights against any such defaulting Shareholder, may either (i) acquire the remaining Shares which it is entitled to acquire hereunder, or (ii) refuse to make such acquisition and thereby terminate all of its obligations hereunder. The Shareholders acknowledge that the Shares are unique and otherwise not available and agree that in addition to any other remedies, the Buyer may invoke any equitable remedies to enforce delivery of the Shares hereunder, including, without limitation, an action or suit for specific performance.
(a) At the Closing, the Base Purchase Price, minus the amounts to be paid into escrow pursuant to Section 2.3(b) and 2.3(c), shall be paid by Buyer by wire transfer of U.S. dollars to an account to be established by the Shareholder Representative on behalf of all of the Shareholders. The Shareholder Representative shall provide wire transfer instructions for such account to the Buyer not less than five (5) days prior to the Closing Date. Buyer's transfer of funds to such account at the Closing shall constitute payment by the Buyer to each Shareholder of such Shareholder's Proportionate Interest of such amount. Notwithstanding the above, the Shareholders have the option to elect to receive an aggregate of up to Thirty-Five Million Dollars ($35,000,000) of the amount to be paid pursuant to this Section 2.3(a) in promissory notes in the form attached hereto as Exhibit A. Each note shall bear interest from and after the Closing at a fixed rate per annum equal to the LIBOR rate, minus twenty-five (25) basis points, and shall be due in full on January 15, 1996. The exercise of the right to receive promissory notes shall be effected by a written notice delivered by the Shareholder Representative to the Buyer at least ten (10) business days prior to the Closing Date setting forth the aggregate amount of the notes to be issued. Once made, the election shall be irrevocable and shall bind all the Shareholders. In the event of such election, each Shareholder shall receive at Closing a promissory note in the form attached hereto as Exhibit A in the principal amount of such Shareholder's Proportionate Interest of the aggregate amount of the promissory notes. The cash payment due at the Closing pursuant to this Section 2.3(a) shall be reduced by the principal amount of the promissory notes issued at the Closing.
(b) Buyer shall pay to the Escrow Agent the sum of Two Million Dollars ($2,000,000) (the "General Escrow Fund") pursuant to the terms of the General Escrow Fund Agreement substantially similar in substance to the form attached hereto as Exhibit B.
(c) Buyer shall pay to the Escrow Agent the sum of Five Hundred Thousand Dollars ($500,000) (the "Balance Sheet Escrow Fund"), pursuant to the terms of the Balance Sheet Escrow Fund Agreement substantially similar in substance to the form attached hereto as Exhibit C.
Buyer's transfer of funds to the Escrow Agent at the Closing pursuant to Sections 2.3(b) and 2.3(c) shall constitute payment by Buyer to each Shareholder of such Shareholder's Proportionate Interest of the amount paid to the Escrow Agent.
2.4. Determination of Final Purchase Price.
(a) Audited Consolidated Balance Sheet. Within ninety (90) days after the Closing Date, the Company shall cause to be delivered to the Buyer and the Shareholder Representative an audited consolidated balance sheet (and a supplemental consolidating balance sheet) as of the Closing Date (the "Closing Date Balance Sheet") of the Company and its Subsidiaries; and a related schedule calculating the amount of the Adjusted Closing Net Book Value and the book value of the Wiper Business Assets as of the Closing Date (the "Balance Sheet Adjusting Schedule"). The Closing Date Balance Sheet (and the supplemental consolidating balance sheet) shall be prepared in accordance with GAAP, shall reflect all transfers and transactions contemplated hereby or in the Transaction Documents (other than the sale of the Wiper Business Assets) and shall have been audited by KPMG Peat Marwick LLP and shall be accompanied by the opinion of KPMG Peat Marwick LLP addressed to Buyer and the Shareholder Representative stating that the Closing Date Balance Sheet (and the supplemental consolidating balance sheet) was prepared in accordance with GAAP and presents fairly in all material respects the consolidated and consolidating financial position of the Company as of the Closing Date. Such opinion shall also state that the amounts included on the Balance Sheet Adjusting Schedule have been determined in accordance with the terms of this Agreement.
(b) Resolution of Disputes. If the Buyer or the Shareholder Representative shall notify the other within fifteen (15) days after receipt of the Closing Date Balance Sheet that either disputes any matter with respect to such Closing Date Balance Sheet (or supplemental consolidating balance sheet) or the Balance Sheet Adjusting Schedule, then any such matters (the "Disputed Matters") shall be submitted to arbitration in St. Louis, Missouri within thirty (30) days after such notice unless the parties agree in writing to extend such thirty (30) day period in an attempt to negotiate a settlement of such Disputed Matters. The arbitrator (the "Arbitrator") shall be any one of the nationally recognized independent accounting firms which is on the date hereof among the six largest such firms (the "Big Six Accounting Firms") mutually agreed to by the Shareholder Representative and the Buyer. Any reference herein to the Big Six Accounting Firms shall be deemed to include a reference to any member or employee thereof (who is a certified public accountant) which any such firm may designate as the Arbitrator on its behalf. If within twenty (20) days following the expiration of the thirty (30) day period referred to above or any extension thereof the Shareholder Representative and the Buyer shall have failed to agree upon the selection of the Arbitrator or any such Arbitrator selected by them shall not have agreed to perform the services called for hereunder, the Arbitrator shall thereupon be selected in accordance with the rules of the American Arbitration Association, with preference being given to any one of the Big Six Accounting Firms or any member or employee thereof (who is a certified public accountant) which or who may be willing to perform such services, other than any such firm which is then or has within the prior two (2) years been employed by the Company, any Shareholder or the Buyer or the Guarantor or any subsidiary thereof. The Arbitrator shall consider only the Disputed Matters and the arbitration shall be conducted in accordance with the rules of the American Arbitration Association then in effect. The Arbitrator shall act promptly to resolve all Disputed Matters and its decision with respect to all Disputed Matters shall be final and binding upon the parties hereto and shall not be appealable to any court. The costs and expenses of the Arbitrator shall be borne by the non-prevailing party.
(c) Determination of Final Purchase Price; Payment. If based on the Closing Date Balance Sheet and the Balance Sheet Adjusting Schedule the Final Purchase Price is greater than the Base Purchase Price, the Shareholder Representative shall receive the amount in the Balance Sheet Escrow Fund (including earnings thereon from the Closing Date) and the Buyer shall pay to the Shareholder Representative the amount by which the Final Purchase Price exceeds the Base Purchase Price. If based on the Closing Date Balance Sheet the Final Purchase Price is less than the Base Purchase Price, the Buyer shall receive from the Balance Sheet Escrow Fund the amount by which the Base Purchase Price is greater than the Final Purchase Price (along with earnings thereon from the Closing Date) and the Shareholder Representative shall receive the balance, if any, in the Balance Sheet Escrow Fund. If the amount by which the Base Purchase Price exceeds the Final Purchase Price is greater than $500,000, Buyer shall receive the amount in the Balance Sheet Escrow Fund (including earnings thereon from the Closing Date) and the Shareholders, jointly and severally, shall pay to Buyer the amount by which the Base Purchase Price minus the Final Purchase Price exceeds $500,000. Within fifteen (15) days after receipt by the Shareholder Representative and the Buyer of the Closing Date Balance Sheet, the Shareholder Representative and the Buyer shall execute and deliver to the Escrow Agent, pursuant to the Balance Sheet Escrow Agreement, such documentation as shall be necessary to cause the Escrow Agent to disburse the Balance Sheet Escrow Fund in accordance with this Section 2.4. Any additional sums owing by the Buyer to the Shareholder Representative or from the Shareholders to the Buyer pursuant to this Section 2.4 shall be paid within fifteen days (15) days after the delivery to the Shareholder Representative of the Closing Date Balance Sheet. Notwithstanding the above, if there are any Disputed Matters, any payment finally determined to be due either by agreement or by arbitration shall be made to the appropriate party within ten (10) days after such determination, with interest thereon from the Closing Date at the Prime Rate.
3.1. Purchase of Affiliated Real Estate.
(a) Concurrently with the execution of this Agreement, the Shareholders shall cause LPR Partnership to enter into an agreement with the Mechanics Uniform Rental Co., a Subsidiary of the Company, on the terms set forth on the attached Exhibit D to purchase the real property and improvements commonly known as 2395 Lapeer Road, Flint, Michigan; and the Lakers shall enter into an agreement with Mechanics Uniform Rental Co. on the terms set forth on the attached Exhibit D-1 to purchase the real property and improvements commonly known as 960 Ken-O-Sha Industrial Drive, Grand Rapids, Michigan and 2605 S. Euclid Avenue, Bay City, Michigan (the "Real Estate Purchase Agreements"). Closing under the Real Estate Purchase Agreements shall occur simultaneously with the Closing under this Agreement and the purchase price for the properties shall equal the fair market value of such properties as determined pursuant to the real estate appraisals performed pursuant to Section 3.1(b). Buyer shall cause Mechanics Uniform Rental Company to fund the purchase price for such properties at Closing.
(b) The parties acknowledge that Buyer has retained the services of one or more licensed real estate appraisers each of whom is a member of the American Institute of Real Estate Appraisers, to conduct fair market value appraisals of each parcel of the Affiliated Real Estate. All such appraisals shall be completed on or before fourteen (14) days prior to Closing. Such fair market value appraisals shall be used in setting the purchase price to be paid to the owners of the Affiliated Real Estate pursuant to Section 3.1(a) and in determining the Base Purchase Price.
3.2. Employment Agreements. At the Closing, the Company and each of Irving Laker and Martin Laker shall execute and deliver a Noncompetition, Nondisclosure and Nonsolicitation Agreement in the form attached hereto as Exhibit E.
3.3. Purchase of Affiliate Promissory Notes. At the Closing the Buyer shall purchase from the holders thereof the Affiliate Promissory Notes for a purchase price equal to the principal amount thereof, plus accrued interest thereon.
4.1. Closing Date. The consummation (the "Closing") of the sale and purchase of the Shares shall take place at the offices of Bryan Cave, 1200 Main Street, 3300 One Kansas City Place, Kansas City, Missouri 64105, at 9:00 a.m. local time the later of (x) the first Friday occurring after the expiration of 5 business days after receipt of the expiration or early termination of any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement Act or (y) on November 10, 1995 or at such other time or place or on such other date as the Buyer and the Shareholder Representative may agree to in writing. The date of the Closing is hereinafter sometimes referred to as the "Closing Date."
4.2. Deliveries. At the Closing, subject to the provisions of this Agreement: (i) each Shareholder shall deliver to the Buyer, free and clear of all Liens, the certificates for all of the Laws and all Material Shares to be sold by such Shareholder in negotiable form, duly endorsed in blank, or with separate notarized stock transfer powers attached thereto and signed in blank, with all restrictive legends thereon terminated, and the Buyer shall pay to the Shareholder Representative the amount determined in accordance with Section 2.3(a) in the manner stated therein; (ii) each of the Shareholders, the Company, and the Buyer shall make all payments and deliveries required to discharge all of his, her or its obligations pursuant to Article 3 of this Agreement; (iii) the Shareholder Representative shall also deliver or cause to be delivered to the Buyer, and the Buyer shall deliver to the Shareholder Representative, the certificates, opinions and other instruments and documents referred to in Articles 10 and 11; (iv) the Shareholders shall cause to be delivered to the Buyer the written resignations of all of the directors and officers of the Company and each Subsidiary effective as of the Closing except for such directors and officers as the Buyer may have designated in writing prior to the Closing Date and shall cause to be made available to the successor directors and officers all minute books, stock record books, Tax Returns and corporate seals of the Company and the Subsidiaries and the books of account, Contracts and other documents, instruments and papers belonging to the Company and each Subsidiary; and (v) the Shareholders shall cause to be transferred and delivered, and the Company shall transfer and deliver, to the successor directors and officers of the Company and the Subsidiaries full possession and control of all of the Assets and of all other things and matters pertaining to the operation of the Business.
4.3. Termination. In the event that the Closing shall not have taken place on or before January 26, 1996, or such later date as shall be mutually agreed to in writing by the Buyer and the Shareholder Representative, all of the rights and obligations of the parties under this Agreement shall terminate without liability, except for the liability of the Company and the Shareholders to reimburse Buyer for the costs of the environmental assessments under Section 12.1(a) and except liability in the event the Closing does not occur and this Agreement terminates by reason of a default or breach by any party hereto.
ARTICLE 5: REPRESENTATIONS AND WARRANTIES OF THE LAKERS
5.1. Actual Knowledge; No Survival. Each of the Lakers hereby jointly and severally represents and warrants to the Buyer that to his actual knowledge (after due inquiry, which includes review of these representations and warranties and the Disclosure Schedule with each Management Employee to insure accuracy), except as set forth on the Disclosure Schedule attached hereto, each of which exceptions shall specifically identify the relevant subsection hereof to which it relates and shall be representations and warranties as if made hereunder:
(a) Condition and Sufficiency of Assets. All tangible assets and properties which are part of the Assets are in good operating condition and repair, are adequate to operate the Business and are useable in the ordinary course of the Business.
(b) Real Property and Leaseholds. There is listed on the Disclosure Schedule a description of each parcel of real property owned by or leased to the Company or any Subsidiary and used in the Business, including, without limitation, the Affiliated Real Estate (the "Real Property") and a description of each lease of real property used in the Business under which the Company or any Subsidiary is a lessee, lessor, sublessee or sublessor. The Disclosure Schedule also lists each parcel of real estate previously owned or occupied by the Company or any Subsidiary (or any predecessor). Except as indicated in the Disclosure Schedule:
(i) All such leases of Real Property are in good standing and are valid, binding and enforceable in accordance with their respective terms and there does not exist under any such lease of Real Property any material default or any event which with notice or lapse of time or both would constitute a material default;
(ii) The plants, buildings and structures located on the Real Property are in good operating condition and repair and have been maintained and are suitable for their present uses and, in the case of each plant, building and other structure (including without limitation, the roofs thereof), are structurally sound and all mechanical and other systems located therein are in good operating condition, subject to normal wear, and no condition exists requiring material repairs, alterations or corrections;
(iii) The Company and the Subsidiaries currently have access to public roads or valid easements over private streets or private property for such ingress to and egress from all such Real Properties as is necessary for the conduct of the Business of the Company and the Subsidiaries;
(iv) None of the structures on such Real Property or leased Real Property encroaches upon real property of another person, and no structure of any other person encroaches upon any of such Real Property or
(v) The water, electric, gas and sewer utility services and the septic tank and storm drainage facilities currently available to the Real Property are adequate for the present use of the Real Property by the Company and Subsidiaries in conducting the Business, and there is no condition which will result in the termination of the present access from the Real Property to such utility services and other facilities;
(vi) The Company has received no notices, oral or written, and has no reason to believe, that any Governmental Authority having jurisdiction over the Real Property intends to exercise the power of eminent domain or a similar power with respect to all or any part of the Real
(vii) There are no developments affecting any of such properties pending or threatened which might reasonably be expected to have an adverse effect on the condition of the Assets, properties, Rental Business or Business of the Company and the Subsidiaries, interfere with any present use of such property or adversely affect the marketability of such properties.
(i) The Disclosure Schedule sets forth a complete and accurate list of all consents or approvals required under any Material Contract (i) in the event of a change in control of the Company or any Subsidiary; or (ii) in the event of the sale of the Wiper Business Assets.
(ii) The Disclosure Schedule describes all Material Contracts to which the Company or any Subsidiary is a party.
(iii) Since March 31, 1995, the Company has received no written notice that any other party to a Material Contract intends to cancel or terminate any Material Contract or to exercise or refrain from exercising any option under any Material Contract.
(iv) All of the Material Contracts are in full force and effect, are valid, binding and enforceable in accordance with their terms, and no condition exists or event has occurred which, with notice or lapse of time or both, would constitute a Default or a basis for force majeure or other claim of excusable delay or non-performance thereunder. There are no provisions of, or developments materially affecting, any such Material Contract which might prevent the Company or any Subsidiary from realizing the benefits thereof whether before or after the completion of the Acquisition. The terms and conditions of all such Material Contracts are reasonable and customary in the industries and trades in which the Company and the Subsidiaries operate, and there are no extraordinary terms contained therein.
(v) There are no renegotiations of, or attempts to renegotiate, or outstanding rights to renegotiate, any material amounts paid or payable to the Company or any Subsidiary under current or completed Material Contracts with any Person having the contractual or statutory right to demand or require such renegotiation. No such Person has made written demand for such renegotiation.
(d) Intellectual Property. All Intellectual Property is listed on the Disclosure Schedule. The computer software listed on the Disclosure Schedule is in machine-readable form, contains all current revisions of such software and is the only software used by the Company in the conduct of its Business. The conduct of the Business as now operated and as now proposed to be operated does not and will not conflict with valid Intellectual Property rights of others; and there are no pending claims or demands by any third party to the contrary.
(e) Insurance. The Disclosure Schedule contains a true and complete description of the insurance coverage applicable to the Company, its Subsidiaries, the Business, and the Assets for the past three years, including amounts and lines of coverage, loss experience history by line of coverage for the past five years, and a description of all claims in excess of Ten Thousand Dollars ($10,000) for the past five years. All of such insurance coverage is in full force and effect, is valid, binding and enforceable in accordance with its terms. There is no Default under any such coverage. There are no outstanding unpaid premiums and no notice of cancellation or nonrenewal of any of such coverage has been received. There are no provisions in such insurance policies for retroactive or retrospective premium adjustments. There are no outstanding performance bonds covering or issued for the benefit of the Company or any Subsidiary.
(f) Transactions With Affiliates. No Shareholder, director, or officer of the Company or any Subsidiary, or any member of his or her immediate family or any other of its, his or her affiliates, owns or has an ownership interest in any corporation or other entity that is or was during the last three years a party to, or in any property which is or was during the last three years the subject of, Contracts, business arrangements or relationships of any kind with the Company or any Subsidiary. All such disclosed transactions between the Company or any Subsidiary and any Shareholder or any affiliate have been on substantially the same terms and conditions as similar transactions between non-affiliated parties.
(g) Corporate Documents. The Company has made available to the Buyer true, correct and complete copies of the Company's and each Subsidiary's Articles of Incorporation and ByLaws, the Trusts and all Material Contracts described in this Agreement or in the Disclosure Schedule.
(h) Material Transactions. Since the Latest Year-End Balance Sheet Date, the Business has been operated in the manner described in Section 7.1 and neither the Company nor any Subsidiary has taken any action that would have been prohibited by Section 7.1 had that Section been effective since the Latest Year-End Balance Sheet Date.
(i) Additional Information. The Disclosure Schedule contains accurate lists and summary descriptions of the following:
(i) All names under which the Company or any Subsidiary has conducted any Business or which it has otherwise used during the last five
(ii) Guarantees by the Company or any Subsidiary of the
(iii) The names and addresses of every bank and other financial institution in which the Company or any Subsidiary maintains an account (whether checking, savings or otherwise), lock box, or safe deposit box, and the account numbers and names of persons having signing authority or other access thereto.
(j) No Adverse Change. Since the Latest Year-End Balance Sheet Date, there has not been any actual or threatened adverse change in the Business, Rental Business, operations, properties, prospects, Assets or condition of the Company or any Subsidiary or any event, condition or contingency that may result in such an adverse change.
(k) Foreign Qualification. The Company is duly qualified to do business and is in good standing in every jurisdiction in which the Business or the character of the Assets requires such qualification, all of which jurisdictions are disclosed in the Disclosure Schedule. Each of the Subsidiaries is duly qualified to do business and is in good standing in every jurisdiction in which its business or the character of its assets requires such qualification, all of which jurisdictions are disclosed in the Disclosure Schedule.
(l) Validity of Contemplated Transactions. Neither the execution and delivery of this Agreement or the Transaction Documents by the Company, any Subsidiary or by any Shareholder nor the consummation of the transactions contemplated hereby or thereby or the sale of the Wiper Business Assets will directly or indirectly contravene, conflict with or result (with or without notice or lapse of time) in a violation or breach of any of the provisions of, or give any Person the right (with or without notice or lapse of time) to declare a Default or exercise any remedy under, or to accelerate the maturity or performance of or cancel, terminate or modify, any Material Contract to which the Company, or any Subsidiary is a party or under which the Company or any Subsidiary has any rights, or by which the Company or any Subsidiary, or any of the assets owned or used by the Company or any Subsidiary, may be bound or the Plan Documents. Except as disclosed in the Disclosure Schedule, neither the Company nor any Subsidiary is or will be required to give any notice to or obtain any consent from, and no Shareholder is or will be required to give any notice to or obtain any consent from, any Person in connection with the execution and delivery of this Agreement or the consummation or performance of the Acquisition or the sale of the Wiper Business Assets.
(m) Minute Books. The minute books of the Company and each Subsidiary are current and contain correct and complete copies of the Articles of Incorporation and Bylaws of the Company and each Subsidiary, including all amendments thereto and restatements thereof, and of all minutes of meetings, resolutions and other actions and proceedings of its shareholders and board of directors and all committees thereof, duly signed by the Secretary or an Assistant Secretary, and the stock record book of the Company and each Subsidiary is current, correct and complete and reflects the issuance of all of the Shares to the Shareholders.
(n) Affiliate Promissory Notes. The Affiliate Promissory Notes are legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms.
(i) (A) The Company and each Subsidiary is, and at all times prior to the date hereof has been, in compliance with, and has not been and is not in violation of or liable under, the Environmental Laws applicable to it or to the ownership or operation of its Assets (including any of the Facilities) or the operation of its Business, and (B) there is no basis to expect, nor has the Company, any Shareholder, Subsidiary or any manager, nor any other Person for whose conduct they are or may be held responsible, received, any order, notice, or other communication from (x) any Governmental Authority, including but not limited to those administering or enforcing any Environmental Law, or (y) any other Person, of any alleged, actual, or potential violation and/or failure to comply with any Environmental Law, or of any alleged, actual, or potential obligation to undertake or bear the cost of any Environmental, Health and Safety Liabilities with respect to any of the Facilities or any other properties or assets (real, personal and mixed, tangible and intangible) in which the Shareholders or the Company or any Subsidiary or any affiliate had an interest, or with respect to any property or facility to which Hazardous Materials generated, manufactured, refined, transferred, imported, used or processed by the Shareholders, any of the Company or any Subsidiary, or any other Person for whose conduct they are or may be held responsible, have been transported, treated, stored, handled, transferred, disposed, recycled, received or Released.
(ii) All Licenses required under any Environmental Law to lawfully own, operate, use and maintain the Facilities and other Assets of the Company and Subsidiaries to conduct their Businesses have been obtained. The Company and Subsidiaries have, at all times prior to Closing, maintained the Assets and conducted their businesses in full compliance with the terms and conditions of all Licenses issued at any time prior to the Closing by any Governmental Authority and required under any Environmental Law for the Company and any Subsidiary to lawfully own, operate, use, and maintain their Assets and to conduct their Businesses, and all required filings and all required applications with respect to and for renewal thereof have been timely made and filed. All such Licenses are in full force and effect and there are no proceedings pending or threatened that seek the revocation, cancellation, suspension, or adverse modification thereof.
(iii) Neither the Company, any Subsidiaries, nor any other Person for whose conduct they are or may be held responsible, has any Environmental, Health and Safety Liabilities with respect to the Facilities or with respect to any other properties and assets (real, personal and mixed, tangible and intangible) in which the Company or any Subsidiaries (or any predecessor) has or had an interest or any properties at which the Company's or any Subsidiary's Hazardous Materials have been treated, stored, recycled or disposed of.
(iv) Neither the Company or any Subsidiaries, nor any other Person for whose conduct they are or may be held responsible, has generated, manufactured, refined, transported, treated, stored, handled, disposed, transferred, produced, imported, used or processed any Hazardous Materials, except in full compliance with all applicable Environmental Laws.
(v) There has been no Release or Threat of Release of any Hazardous Materials at or from the Facilities or at any other locations where any Hazardous Materials were generated, manufactured, refined, transferred, produced, imported, used or processed from or by the Facilities, or from or by any other properties and Assets (real, personal and mixed, tangible and intangible) in which the Company or any Subsidiary has or had an interest, whether by the Company, any Subsidiary or by any other Person for whose conduct they are or may be held responsible.
(vi) There are no claims, Liens or any other restrictions of any nature whatsoever, resulting from any Environmental, Health and Safety Liabilities or arising under or pursuant to any Environmental Law, with respect to or affecting any of the Facilities or any other properties and Assets (real, personal and mixed, tangible and intangible) in which the Company or any Subsidiary has an interest.
(vii) The Disclosure Schedule contains accurate lists and summary descriptions of the following:
(A) Each Facility at which dry cleaning operations have
(B) Each Facility at which underground storage tanks are now or have previously been located (whether or not those tanks were ever
(C) Each Facility at which lagoons are currently located or have previously been located; and
(D) Each location at which the Company's Hazardous Materials have been treated, stored, recycled or disposed.
(viii) The Company has provided Buyer true and complete copies of all documents related to: (A) the Company's and the Subsidiary's compliance with, violation of or alleged violation of any Environmental Laws; (B) the generation, treatment, transportation, recycling, disposal or Release of any Hazardous Materials; (C) any Environmental, Health and Safety Liabilities; (D) any Environmental investigations, audits or assessments performed; and (E) all Licenses required of the Company under any Environmental Laws.
(p) Disclosure. No representation or warranty of the Lakers contained in this Section 5.1 or statement in the Disclosure Schedule as an exception to this Section 5.1 contains any untrue statement. No representation or warranty of the Lakers contained in this Section 5.1 or statement in the Disclosure Schedule as an exception to this Section 5.1 omits to state a fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading.
5.2 Actual Knowledge; Subject to Basket, Cap and Expiration Date. Each of the Lakers hereby jointly and severally represents and warrants to the Buyer that to his actual knowledge (after due inquiry which includes review of these representations and warranties and the Disclosure Schedule with each Management Employee to insure their accuracy), except as set forth on the Disclosure Schedule attached hereto, each of which exceptions shall specifically identify the relevant subsection hereof to which it relates and shall be representations and warranties as if made hereunder:
(i) No employee or former employee of the Company or any Subsidiary is in Default under any term of any employment contract, agreement or arrangement relating to any Intellectual Property or noncompetition, nonsolicitation or nondisclosure arrangement, or any other Contract or any restrictive covenant relating to the right of any such employee to be employed by the Company because of the nature of the Business conducted or to be conducted by the Company or relating to the use of any Intellectual Property of others, and the continued employment of the Company's employees does not subject the Company to any liability resulting from such a Default.
(ii) Neither the Company nor any Subsidiary has any collective bargaining agreements with any labor union or other representative of employees. No strike, slowdown, picketing or work stoppage by any union or other group of employees against the Company, any Subsidiary and no secondary boycott with respect to their products, lockout by them of any of their employees, or any other labor trouble or other occurrence, event, or condition of a similar character (including without limitation any organizational activity) is occurring or has occurred or been threatened within the five years immediately preceding the date of this Agreement.
(iii) The Disclosure Schedule contains accurate lists and summary descriptions of the following:
(A) The names of all present officers and directors of the Company and each Subsidiary;
(B) The names and current annual salary rates or current hourly wages of all present employees of the Company or any Subsidiary whose annual compensation is in excess of Fifty Thousand Dollars ($50,000), along
(C) The names of all persons authorized to borrow money or incur or guarantee indebtedness on behalf of the Company or any Subsidiary;
(D) The names of all persons holding powers of attorney from the Company or any Subsidiary and a summary statement of the terms thereof.
(i) Neither the Company nor any Subsidiary is in violation of any Law or Court Order, and the Assets have not been used or operated by the Company or any Subsidiary or any other Person or entity in violation of any Law or Court Order; all Court Orders to which the Company or any Subsidiary is a party or subject are listed in the Disclosure Schedule; no event has occurred, and no condition or circumstance exists, that might (with or without notice or lapse of time) constitute or result directly or indirectly in a violation by the Company or any Subsidiary of, or a failure on the part of the Company or any Subsidiary to comply with, any Law; and neither the Company nor any Subsidiary has received, at any time since January 1, 1993, any notice or other communication (whether oral or written) from any Governmental Authority or any other Person regarding and the Lakers have no reason to believe that there exists: (A) any actual, alleged, possible or potential violation of, or failure to comply with, any Law or (B) any actual, alleged, possible or potential obligation on the part of the Company or any Subsidiary to undertake, or to bear all or any portion of the cost of, any remedial action of any nature.
(ii) The Disclosure Schedule sets forth a complete list of all Licenses used in the operation of the Business or otherwise held by the Company or any Subsidiary. The Company and each Subsidiary own, possess or lawfully use in the operation of their Business all Licenses which are necessary to conduct the Business as now or previously conducted or to the ownership of the Assets, free and clear of all Liens. Neither the Company nor any Subsidiary is in Default, nor has it received any notice of any claim of Default, with respect to any such License. Except as otherwise governed by Law, all such Licenses are renewable by their terms or in the ordinary course of business without the need to comply with any special qualification procedures or to pay any amounts other than routine filing fees and will not be adversely affected by the completion of the Acquisition.
(c) Validity of Contemplated Transactions. Neither the execution and delivery of this Agreement or the Transaction Documents by the Company, any Subsidiary or by any Shareholder nor the consummation of the transactions contemplated hereby or thereby will directly or indirectly:
(i) Contravene, conflict with or result (with or without notice or lapse of time) in a violation of any Law or any Court Order to which the Company or any Subsidiary or any Shareholder, or any of the Assets owned or used by the Company or any Subsidiary, may be subject; or
(ii) Contravene, conflict with or result (with or without notice or lapse of time) in a violation of any of the terms or requirements of, or give any Governmental Authority the right (with or without notice or lapse of time) to revoke, withdraw, suspend, cancel, terminate or modify, any License that is held by the Company or any Subsidiary or that otherwise relates to the business of, or any of the assets owned or used by, the Company or any Subsidiary.
(d) Restrictions. Neither the Company, any Subsidiary, nor any Shareholder is a party to any Material Contract or subject to any restriction or any Court Order or Law (i) that may have a material adverse effect on the Company, any Subsidiary, the Business or the Assets; or (ii) that affects or restricts the ability of the Company, any Subsidiary, or any Shareholder to consummate the Acquisition or the sale of the Wiper Business Assets.
(e) Claims. There is no Proceeding pending or threatened against the Company, any Subsidiary, the Business or the Assets or that challenges or that would have the effect of challenging, preventing, delaying, making illegal or otherwise interfering with the Acquisition or the sale of the Wiper Business Assets. No claim has been asserted and no event has occurred that would result in a Proceeding against the Company, any Subsidiary, the Business or the Assets. None of the Proceedings identified in the Disclosure Schedule will individually or in the aggregate have an adverse effect on the Company, any Subsidiary, the Business or the Assets and all such Proceedings are fully covered by insurance, except as set forth on the Disclosure Schedule.
(f) Disclosure. No representation or warranty of the Lakers contained in this Section 5.2 or statement in the Disclosure Schedule as an exception to Section 5.2 contains any untrue statement. No representation or warranty of the Lakers contained in this Section 5.2 or statement in the Disclosure Schedule as an exception to Section 5.2 omits to state a fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading.
5.3. Subject to Basket, Cap and Expiration Date. Each of the Lakers hereby jointly and severally represents and warrants to the Buyer that, except as set forth on the Disclosure Schedule attached hereto, each of which exceptions shall specifically identify the relevant subsection hereof to which it relates and shall be representations and warranties as if made hereunder:
(a) Financial Statements. The Company and the Shareholders have delivered to the Buyer (i) the Company's consolidated year-end balance sheets at March 31, 1995 and each of the two preceding fiscal year-ends, (ii) its related consolidated statements of income and retained earnings and cash flows for the fiscal years then ended, and (iii) all related notes and schedules, each of which have been audited by Deloitte & Touche LLP. All Liabilities of the Company and each Subsidiary at March 31, 1995 required to be reflected or reserved for by GAAP are fully reflected or reserved for in the Company's consolidated balance sheet at March 31, 1995 (the "Latest Year-End Balance Sheet"). March 31, 1995 is referred to as the "Latest Year-End Balance Sheet Date" in other parts of this Agreement. The Company and the Shareholders have also delivered to the Buyer a copy of the unaudited consolidated balance sheet of the Company and the Subsidiaries at June 30, 1995 and the related unaudited consolidated statements of income and retained earnings and cash flows for the period from the Latest Year-End Balance Sheet Date to June 30, 1995 (the "Interim Financial Statements"). June 30, 1995 is referred to as the "Interim Balance Sheet Date" in other parts of this Agreement. All Liabilities of the Company and each Subsidiary as of the Interim Balance Sheet Date required to be reflected or reserved for by GAAP (other than accruals which under the Company's past practices are made at year-end) are fully reflected or reserved for in the Company's consolidated balance sheet at the Interim Balance Sheet Date (the "Interim Balance Sheet"). All of the financial statements referred to in this Section 5.3(a) were prepared in accordance with GAAP (except the Interim Financial Statements do not necessarily include accruals which under the Company's past practices are made at year-end) and fairly present the financial position and results of operations and cash flows of the Company and its Subsidiaries at the dates and for the periods covered and include all adjustments that are necessary for a fair presentation of the information shown.
(b) Books of Account. The books of account of the Company fairly reflect: (i) all transactions relating to the Company and each Subsidiary (including, without limitation, all transactions with any Shareholder or any affiliate or family member of the Shareholders) and (ii) all items of income and expense, assets and Liabilities and accruals relating to the Company and each Subsidiary and at year-end are in accordance with GAAP. Neither the Company nor any Subsidiary has engaged in any transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company.
(c) Accounts Receivable. All accounts receivable of the Business that are reflected on the Latest Year-End Balance Sheet or arising since the Latest Year-End Balance Sheet Date (referred to collectively as the "Accounts Receivable") represent or will represent valid obligations arising from sales actually made or services actually performed in the ordinary course of the Business. Unless paid prior to the Closing Date, the Accounts Receivable are or will be as of the Closing Date collectible net of the respective reserves shown on the Closing Date Balance Sheet or on the accounting records of the Company or any Subsidiary as of the Closing Date. There is no contest, claim or right of set-off, other than returns in the ordinary course of the Business, contained in any agreement with any maker of an Account Receivable relating to the amount or validity of such Account Receivable.
(d) Inventory. The inventory as set forth on the Latest Year-End Balance Sheet or arising since the Latest Year-End Balance Sheet Date was acquired and has been maintained in accordance with the regular business practices of the Company and each Subsidiary, consists of new and unused items of a quality and quantity usable or saleable in the ordinary course of Business of the Company or any Subsidiary consistent with past practice, and is valued at reasonable amounts based on the ordinary course of business of the Company at prices equal to the lower of average cost or market value. None of such inventory (net of the inventory reserve) is obsolete, unusable, slow-moving, damaged or unsalable in the ordinary course of the Company's or any Subsidiary's business consistent with past practice.
(e) Undisclosed Liabilities. Neither the Company nor any Subsidiary has any Liability except:
(i) Those Liabilities set forth or adequately reserved for on the Interim Balance Sheet and not heretofore paid or discharged;
(ii) Those Liabilities arising in the ordinary course of the Business consistent with past practice under any Contract disclosed on the Disclosure Schedule (or not required to be disclosed because of the amount
(iii) Those Liabilities incurred in the ordinary course of the Business consistent with past practice since the Interim Balance Sheet Date and not heretofore paid or discharged.
(f) Pension Plans; Employee Benefit Plans.
(i) Employee Benefit Plans and Similar Arrangements.
(A) The Disclosure Schedule lists all Employee Benefit Plans to which the Company or any Subsidiary is a party or by which any of them is bound.
(B) The Company has provided to Buyer, with respect to all Employee Benefit Plans, true and complete copies of: all documents, including plan documents, related trust agreements, annuity contracts and other funding instruments and summary plan descriptions.
(C) There are no negotiations, demands or proposals that are pending or have been made which concern matters now covered, or that would be covered, by any Employee Benefit Plan.
(D) The Company and all of the Subsidiaries are in ompliance with, and have no direct or indirect Liability under, the provisions of ERISA (as amended through the date of this Agreement), the Code and all the other Laws applicable to the Employee Benefit Plans, which has not been reserved for or is not reflected in the Company's March 31, 1995 audited financial statements. The Company and all of its Subsidiaries that are subject to the regulatory authorities of other countries with respect to Employee Benefit Plans are in compliance with the provisions of applicable Laws. The Company and all of its Subsidiaries have performed all of their obligations under all Employee Benefit Plans including, but not limited to, the full payment when due of all amounts required to be made as contributions thereto or otherwise. There is no action, suit, or claim (other than routine claims for benefits) pending against, arising out of or with respect to any Employee Benefit Plan. There are no facts which would give rise to or could give rise to any action, suit, grievance, arbitration or other manner of litigation, or claim with respect to any Employee Benefit Plan, which would give rise to a Liability of the Company or any Subsidiary.
(E) Subject to applicable Law, each of the Employee Benefit Plans can be terminated by the Company or by the relevant Subsidiary within a period of 30 days, without payment of any additional compensation or amount, and without the acceleration or, except in the case of a Pension Plan, the additional vesting of any such benefits.
(F) There has occurred no transaction prohibited by Section 406 of ERISA or "prohibited transaction" (within the meaning of Section 4975(c) of the Code) with respect to any Employee Benefit Plan.
(G) All notices required by ERISA, or the Code or any Law with respect to each Employee Benefit Plan have been appropriately given.
(H) All contributions with respect to each Employee Benefit Plan for all periods ending prior to the Closing Date (including periods from the first day of the current plan year to the Closing Date) will be made prior to the Closing Date to the extent due by the Company and all members of the controlled group in accordance with past practice and, if applicable, the recommended contribution in the applicable actuarial report.
(I) All insurance premiums (including premiums to the Pension Benefit Guaranty Corporation ("PBGC")) have been paid in full, subject only to normal retrospective adjustments in the ordinary course, with regard to the Employee Benefit Plans for policy years or other applicable policy periods ending on or before the Closing Date.
(J) Neither the Company nor any of its directors, officers, employees or any other fiduciary has any liability for failure to comply with ERISA or the Code for any action or failure to act in connection with the administration or investment of any Employee Benefit Plan.
(K) To the extent applicable, with respect to each Employee Benefit Plan, true, correct and complete copies of the most recent (1) determination letter and any outstanding request for a determination letter, including application materials; (2) Form 5500 Annual Reports filed in each of the most recent three plan years, including, but not limited to, all schedules thereto and financial statements with attached opinions of independent accountants, and related Summary Annual Reports; (3) Form 5310 and any related filings with the PBGC and with respect to the last six plan years for each Employee Benefit Plan subject to Title IV of ERISA; (4) ruling letter and any outstanding request for a ruling letter with respect to the tax-exempt status of any voluntary employees' beneficiary association ("VEBA") which is implementing such Plan; (5) general notification to employees of their rights under Code Section 4980B and form of letter(s) distributed upon the occurrence of a qualifying event described in Code Section 4980B, in the case of an Employee Benefit Plan that is a "group health plan" as defined in Code Section 5001(b)(1); and (6) statement of changes in fund balances and in financial position or the statement of changes in net assets available for benefits under each Employee Benefit Plan for the most recently ended plan year have been delivered to Buyer. Each such report, notice or letter described herein has been timely filed and distributed.
(L) All expenses and Liabilities relating to each of the Employee Benefit Plans described have been, and will on the Closing Date be, fully and properly accrued on the Company's books and records and the Company's financial statements reflect all of such Liabilities in a manner satisfying the requirements of Financial Accounting Standards 87 and 88.
(M) No Pension Plan has been the subject of a reportable event (as defined in ERISA Section 4043) as to which a notice would be required to be filed with the PBGC.
(A) The Disclosure Schedule identifies all Pension Plans.
(B) Each such Pension Plan has been duly authorized by the boards of directors of the Company and each participating Subsidiary, if any. Each such Pension Plan is qualified in form and operation under Section 401(a) of the Code and each trust under each such Pension Plan is exempt from tax under Section 501(a) of the Code. No event has occurred that will or could give rise to disqualification or loss of tax exempt status of any such Pension Plan or trust under such Code sections, and no event has occurred that will or could subject any such Pension Plan to tax under Section 511 of the Code.
(C) With respect to each Pension Plan subject to Section 412 of the Code maintained for employees of the Company, any Subsidiary, or any of their ERISA Affiliates, there has occurred no failure to meet the minimum funding standard of Section 412 of the Code (whether or not waived in accordance with Section 412(d) of the Code) or failure to make by its due date a required installment under Section 412(m) of the Code. "ERISA Affiliate," as applied to any person, means (1) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Code of which that person is a member, (2) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Code of which that person is a member, and (3) any member of an affiliated service group within the meaning of Section 414(m) and (c) of the Code of which that person, any corporation described in clause (1) above or any trade or Business described in clause (2) above is a member.
(D) The Company does not have any liability (1) for the termination of any single employer plan under ERISA e4062 or any multiple employer plan under ERISA e4063, (2) for any Lien imposed under ERISA e302(f) or Code Section 412(n), (3) for any interest payments required under ERISA e302(e) or Code Section 412(m), (4) for any excise tax imposed by Code
Sections 4971, 4972, 4977 or 4979 or (5) for any minimum funding contributions under ERISA e302(c)(11) or Code Section 412(c)(11).
(iii) Title IV Plans. The Company does not maintain any Employee Benefit Plan that is also subject to Title IV of ERISA other than the multiemployer plan identified in the Disclosure Schedule and referred to in Section 5.3(g)(iv).
(A) Except as identified on the Disclosure Schedule, the Company has not made any contributions to any multi-employer plan (as defined in Section 3(37) of ERISA or ERISA e4001(a)(3)), the Company has never been a member of a controlled group which contributed to any such plan, and the Company has never been under common control with an employer which contributed to any such plan.
(B) With respect to each such multiemployer plan in which the Company, any Subsidiary or any ERISA Affiliate participates or has participated: (1) neither the Company nor any Subsidiary nor any ERISA Affiliate has withdrawn, partially withdrawn, or received any notice of any claim or demand for withdrawal liability or partial withdrawal liability; (2) neither the Company nor any subsidiary nor any ERISA Affiliate has received any notice that any such plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, or that any such plan is or may become insolvent; (3) neither the Company nor any Subsidiary nor any ERISA Affiliate has failed to make any required contributions; (4) no Pension Plan is a party to any pending merger or asset or liability transfer; (5) there are no PBGC proceedings against or affecting any Pension Plan; and (6) neither the Company nor any Subsidiary nor any ERISA Affiliate has (or may have as a result of the transactions contemplated hereby) any withdrawal liability by reason of a sale of assets pursuant to section 4204 of ERISA.
(C) The Disclosure Schedule includes for each multiemployer plan, for each of the last six years, the amount of potential withdrawal liability of the Company, Subsidiaries and ERISA Affiliates, calculated according to the information made available pursuant to ERISA Section 4221(e), and identifies the specific obligor. Nothing has occurred or is expected to occur that would materially increase the amount of the total potential withdrawal liability of a specified obligor for any Pension Plan over the amount shown in the Disclosure Schedule.
(A) All group health plans of the Company, any Subsidiary and any ERISA Affiliate have been operated in compliance with the group health plan continuation coverage requirements of Part 6 Subtitle B of Title I of ERISA and 4980B of the Code to the extent such requirements are applicable. Except to the extent required under Section 4980B of the Code, neither the Company nor any Subsidiary provides health or welfare benefits (through the purchase of insurance or otherwise) for any retired or former employees. All Employee Benefit Plans, to the extent applicable, are in compliance with Section 1862(b)(1)(A)(i) of the Social Security Act and the Company does not have any liability for any excise tax imposed by Code Section 5000.
(B) With respect to any Employee Benefit Plan which is a welfare plan as defined in Section 3(1) of ERISA; (1) each such welfare plan which is intended to meet the requirements for tax-favored treatment under Subchapter B of Chapter 1 of the Code meets such requirements; (2) there is no disqualified benefit (as such term is defined in Code Section 4976(b)) which would subject the Company, any Subsidiary or the Buyer to a tax under Code Section 4976(a); and (3) each and every such welfare plan which is a group health plan (as such term is defined in Code Section 5001(b)(1)) complies and in each and every case has complied with the applicable requirements of Title XXII of the Public Health Service Act and the applicable provisions of the Social Security Act.
(vi) Fines and Penalties. There has been no act or omission by the Company or any Subsidiary or any ERISA Affiliate that has given rise to or will give rise to fines, penalties, taxes, or related charges under Section 502(c), (i) or (1) of ERISA, Section 4071 of ERISA or Chapter 43 of the Code.
(g) Disclosure. No representation or warranty of the Lakers contained in this Section 5.3 or statement in the Disclosure Schedule as an exception to this Section 5.3 contains any untrue statement. No representation or warranty of the Lakers contained in this Section 5.3 or statement in the Disclosure Schedule as an exception to this Section 5.3 omits to state a fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading.
5.4. No Limitations. Each of the Lakers hereby jointly and severally represents and warrants to the Buyer that, except as set forth on the Disclosure Schedule attached hereto, each of which exceptions shall specifically identify the relevant subsection hereof to which it relates and shall be representations and warranties as if made hereunder:
(a) Organization and Standing. The Company is a corporation duly organized, validly existing, and in good standing under the laws of Michigan, having full power and authority to carry on the Business as it has been and is now being conducted and to own, lease and operate the Assets. Each of the Subsidiaries is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it was organized, having full power and authority to carry on the Business as it has been and is now being conducted and to own, lease, and operate its assets. Except for the Subsidiaries listed in the Disclosure Schedule, the Company has no subsidiaries and no stock or other equity or ownership interest (whether controlling or not) in any corporation, association, partnership, joint venture or other entity.
(b) Capitalization and Share Ownership. The Company's authorized capital stock consists of 100,000 shares of Common Stock. There are 47,306 shares of the Company's Common Stock presently outstanding (the Common Stock collectively, as previously defined, the "Shares"). The Shareholders are and will be on the Closing Date the record and beneficial owners and holders of the Shares as stated on Schedule 5.4(b), free and clear of any Liens. All of the Shares have been duly authorized and validly issued, are fully paid and nonassessable, were not issued in violation of the terms of any Contract binding upon the Company, and were issued in compliance with the Articles of Incorporation of the Company and all applicable Laws, including, without limitation, all federal and state securities or "blue sky" laws and regulations. Other than the Shares, no equity securities of the Company are issued or outstanding. There are, and have been, no preemptive rights with respect to the issuance of the Shares. The Disclosure Schedule sets forth a description of all of the issued and outstanding equity securities of each of the Subsidiaries. The Company owns of record and beneficially all of the issued and outstanding capital stock of each Subsidiary free and clear of any Liens. There are: (i) no Contracts, subscriptions, options, warrants, calls, commitments or rights of any character to purchase or otherwise acquire any capital shares or other securities of the Company or any Subsidiary, whether or not presently issued or outstanding, from any Shareholder, the Company or any Subsidiary, at any time, or upon the happening of any stated event; (ii) no outstanding securities of any Subsidiary that are convertible into or exchangeable for capital shares or other securities of the Company or any Subsidiary; and (iii) no Contracts, subscriptions, options, warrants, calls, commitments or rights to purchase or otherwise acquire from any Shareholder, the Company, or any Subsidiary any such convertible or exchangeable securities.
(c) Authority and Binding Effect. Each Shareholder has the full power, authority and capacity to execute, deliver and perform this Agreement and all of the Transaction Documents to be executed by such Shareholder. The Company has the full power and authority to execute, deliver and perform this Agreement and all of the Transaction Documents to be executed by the Company. The Company and the Trustee - Plan and Trustees - Charitable Trust have taken all actions necessary to secure and will have secured on or before the Closing all approvals required in connection with the execution, delivery and performance of this Agreement and all of the Transaction Documents. This Agreement constitutes, and each of the Transaction Documents when executed and delivered pursuant hereto will constitute, the legal, valid and binding obligation of each Shareholder and of the Company and any Subsidiary, enforceable against such Shareholder and the Company in accordance with its terms.
(d) Validity of Contemplated Transactions. Neither the execution and delivery of this Agreement or the Transaction Documents by the Company, any Subsidiary or by any Shareholder nor the consummation of the transactions contemplated hereby or thereby will directly or indirectly:
(i) Contravene, conflict with or result (with or without notice or lapse of time) in violation of (A) any of the provisions of the Articles of Incorporation or Bylaws of the Company or any Subsidiary, (B) any resolution adopted by the Board of Directors or the shareholders of the Company or any Subsidiary, (C) the Plan Documents or Trust Documents, or (D) any resolutions adopted by the trustees of the Plan or the Trustees -
(ii) Result (with or without notice or lapse of time) in the imposition or creation of any Lien upon or with respect to any of the Assets owned or used by the Company or any Subsidiary.
(e) Third-Party Options. There is no existing Contract, option, commitment, or right with, to, or in any Person (other than the Buyer) to acquire the Company, any Subsidiary, any of the Assets, or any interest in any of them or in the Business.
(f) Returns and Reports; Taxes.
(i) The Company and each Subsidiary has filed or caused to be filed on a timely basis all Tax Returns that are or were required to be filed by or with respect to any of them, either separately or as a member of a group of corporations, pursuant to the Law of each Governmental Authority with taxing power over them or their assets. Shareholders have delivered or made available to Buyer copies of all such Tax Returns relating to income or franchise taxes filed since March 31, 1993. The Company and each Subsidiary has paid, or made provision for payment of, all Taxes that have or may have become due pursuant to those Tax Returns, or otherwise, or pursuant to any assessment received by the Shareholders or the Company or any Subsidiary, except such Taxes, if any, as are set forth in the Disclosure Schedule and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the books of account of the Company and the Subsidiaries. The United States federal and state income Tax Returns and the Michigan Single Business Tax Returns of each of the Company and the Subsidiaries subject to such Taxes have been audited by the IRS or relevant state tax authorities or are closed by the applicable statute of limitations for all taxable years through 1989. All deficiencies proposed as a result of such audits have been paid, reserved against, settled, or, as described in the Disclosure Schedule, are being contested in good faith by appropriate proceedings. None of the Shareholders, the Company or any Subsidiary has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of Taxes of the Company or any Subsidiary or for which the Company or any Subsidiary may be liable. The charges, accruals, receivables and reserves with respect to Taxes on the respective books of the Company and Subsidiaries are adequate and are at least equal to the Company's or that Subsidiary's Liability for Taxes as of the Closing Date. There exists no proposed tax assessment against the Company or any Subsidiary except as disclosed in the Disclosure Schedule. No consent to the application of Section 341(f)(2) of the Code has been filed with respect to any property or assets held or acquired or to be acquired by the Company or any Subsidiary. All Taxes that the Company or any Subsidiary is or was required by Law to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Authority or other Person. All Tax Returns filed by (or which include on a consolidated basis) the Company or any Subsidiary are true, correct and complete. There is no Tax sharing agreement that will require any payment by the Company or any Subsidiary after the date of this Agreement to any company outside the consolidated group. Neither the execution and delivery of this Agreement or the Transaction Documents by the Company, any Subsidiary or by any Shareholder nor the consummation of the transactions contemplated hereby or thereby will directly or indirectly: (A) cause the Company or any Subsidiary to become subject to, or to become liable for the payment of any Tax (other than any Tax resulting from the sale of the Wiper Business Assets and other than Taxes due as a result of the closing of the tax year due to the Company and its subsidiaries joining in the Buyer's consolidated return group for which adequate accruals shall be provided on the Closing Date Balance Sheet); or (B) cause any of the assets owned by the Company or Subsidiary to be reassessed or revalued by any taxing authority or other Governmental Authority, other than the Affiliated Real Estate.
(ii) Neither the Company nor any Subsidiary has been a member of any other affiliated group of corporations within the meaning of Section 1504 of the Code since 1985. For all tax periods in which a Tax Return is not due on or before the Closing Date (whether or not the taxable period ends on or after the Closing Date), the Closing Date Balance Sheet shall provide an adequate reserve for Taxes to fully pay such Taxes up to and including the Closing Date (as if the taxable period ended on the Closing Date). The Company has furnished to Buyer true and complete copies of relevant portions of Tax audit reports, statements of deficiencies, closing or other agreements received by the Company or any Subsidiary relating to the Assets from the IRS, or from any other taxing authority (sometimes collectively referred to as a "Taxing Authority"). Neither the Company nor any Subsidiary has entered into any compensatory agreements with respect to the performance of services which payment thereunder would result in a nondeductible expense to the Company or any Subsidiary pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code. Neither the Company nor any Subsidiary has taken any action or failed to take any action, the effect of which would be to cause interest on any obligation issued by a state or local governmental unit ("Section 103 Obligations") to become includable in the gross income of any person. The Acquisition will not cause interest on any Section 103 Obligations issued for the benefit of the Company or any Subsidiary to become taxable. All of the Company's and the Subsidiaries' payments to agents, consultants and others have been in payment of bona fide fees and commissions and not as illegal or improper payments. The Company or any Subsidiary have not made any payment to any person whomsoever or to any entity whatsoever with respect to which a deduction could be disallowed under Section 162(c) of the Code. Except as set forth on the Disclosure Schedule, neither the IRS nor any other Governmental Authority has initiated or threatened any investigation of any payments made by the Company or any Subsidiary alleged to have been of the type covered by this Section. Neither the Company nor any Subsidiary are liable for taxes to any foreign taxing authority. The Company does not have and has not had a permanent establishment in any foreign country, as defined in any applicable tax treaty or convention between the United States and such foreign country. Neither the Company nor any Subsidiary is required to include in income any adjustment under Section 481(a) of the Code by reason of a change in accounting method initiated by the Company or any Subsidiary and the IRS has not proposed any such adjustment or change in accounting method. None of the Assets are tax-exempt use property within the meaning of Section 168(h) of the Code. All material elections with respect to Taxes affecting the Company as of the date hereof are set forth in the Disclosure Schedule. No new elections with respect to Taxes, or any changes in current elections with respect to Taxes of the Company or any Subsidiary or affecting the Company shall be made after the date of this Agreement without the prior written consent of the Buyer. Neither the Company nor any Subsidiary has made an election under Section 338 of the Code nor has taken any action that would result in any income tax liability to the Company or any Subsidiary as a result of a deemed election within the meaning of Section 338 of the Code.
(g) Ownership of Assets. The Company or the Subsidiaries has good and marketable title to all of the Assets including, without limitation, the Assets reflected on the Interim Balance Sheet (except for such as may have been sold from inventory in the ordinary course of the Business since the Interim Balance Sheet Date), free and clear of all Liens except Permitted Liens. Except pursuant to leases described on the Disclosure Schedule, no Person other than the Company or the Subsidiaries owns any vehicles, equipment or other tangible Assets situated on the Facilities used by the Company or any Subsidiary in the Business (other than immaterial items of personal property owned by the Company's or any Subsidiary's employees) or necessary to the operation of the Business.
(h) Additional Information. Except as indicated in the Disclosure Schedule:
(i) The Company or the relevant Subsidiary, as the case may be, has good and marketable, indefeasible, fee simple title to, or in the case of the leased Real Property has valid leasehold interests in, all Real Property reflected on the Latest Year-End Balance Sheet or acquired after the
Latest Year-End Balance Sheet Date; and
(ii) None of the Real Property is subject to any Liens except Permitted Liens (and for which adequate reserves have been established on the Latest Year-End Balance Sheet).
(i) Intellectual Property. The Company owns or has a valid right to use the Intellectual Property being used to conduct the Business.
(j) Affiliate Promissory Notes. The original payees of the Affiliated Promissory Notes (as identified in the definition of the term) ave good and marketable title to the Affiliate Promissory Notes free and clear of all Liens and no term of the Affiliate Promissory Notes has changed since the issuance thereof.
(k) Disclosure. No representation or warranty of the Lakers contained in this Section 5.4 or statement in the Disclosure Schedule as an exception to Section 5.4 contains any untrue statement. No representation or warranty of the Lakers contained in this Section 5.4 or statement in the Disclosure Schedule as an exception omits to state a fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading.
ARTICLE 6: REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer hereby represents and warrants to the Shareholders as follows:
6.1. Organization and Standing. The Buyer and the Guarantor are each corporations duly organized, validly existing and in good standing under the laws of California and Delaware, respectively, having all requisite corporate power and authority to perform its obligations under this Agreement.
6.2. Authority and Binding Effect. The Buyer and the Guarantor each has the corporate power and authority to execute, deliver and perform this Agreement and all of the Transaction Documents to which they are party, and has taken all actions necessary to secure all corporate approvals required in connection therewith. The execution, delivery and performance of this Agreement and the Transaction Documents to which they are party and the consummation of the Acquisition by the Buyer have been duly authorized by all necessary corporate action and will not contravene or violate the Articles or Certificate of Incorporation or Bylaws of Buyer or Guarantor. This Agreement constitutes, and each of the Transaction Documents to which they are party when executed and delivered pursuant hereto will constitute, the legal, valid and binding obligation of the Buyer and the Guarantor, enforceable against it in accordance with its terms.
6.3. Validity of Contemplated Transactions. Neither the execution and delivery of this Agreement by the Buyer, nor the guaranty thereof by the Guarantor, nor the consummation of the transactions contemplated hereby by the Buyer or thereby by the Guarantor will contravene or violate any Law or Court Order which is applicable to either Buyer or Guarantor or the Articles or Certificate of Incorporation or Bylaws of the Buyer or Guarantor, or will result in a Default under any Contract to which the Buyer or Guarantor is a party or by which it is otherwise bound.
6.4. Securities Law Considerations. The Buyer represents that the Shares are being acquired for investment for the Buyer's own account, with no present intention of reselling or otherwise disposing of any portion of the
Shares in violation of applicable securities laws, and the Buyer acknowledges that the reliance of the Shareholders and the Company upon exemptions from registration under the Securities Act of 1933, as amended, and other applicable laws is predicated upon such investment intent.
ARTICLE 7: CONDUCT OF BUSINESS PENDING CLOSING
7.1. Specific Matters. From the date hereof until the Closing Date, except as may be approved by the Buyer in writing or as otherwise expressly provided in this Agreement, the Shareholders shall cause the Company and each Subsidiary to:
(a) Operate the Business only in the ordinary course and in a manner consistent with past practices of the Company or such Subsidiary;
(b) Not issue, repurchase or redeem or commit to issue, repurchase or redeem, any shares of its capital stock, any options, or other rights to acquire such stock, or any securities convertible into or exchangeable for
(c) Not declare or pay any dividend on, or make any other distribution with respect to, the capital stock;
(d) Not (i) incur any amount of long or short term debt for money borrowed (other than borrowings in the ordinary course of business under the Company's revolving credit line with Comerica Bank as in existence on the date hereof); (ii) guarantee or agree to guarantee the obligations of others; (iii) indemnify or agree to indemnify others; (iv) incur any Liabilities other than those incurred in the ordinary course of the Business consistent with past practice; (v) borrow any funds under any debt agreements that would require the payment of a penalty or premium in order to repay the debt at Closing; or (vi) convert the obligations with respect to the Variable Rate Demand Limited Obligation Revenue Bonds, Series 1995 from a variable rate to a fixed rate;
(e) Keep in full force and effect insurance covering the Company, any Subsidiary, the Assets and the Business comparable in amount and scope of coverage to that now maintained;
(f) Use reasonable efforts to retain the Company's and each Subsidiary's employees and maintain the Business so that such employees will remain available to the Company and each Subsidiary on and after the Closing Date (other than those associated with the Wiper Business, all of whom are being employed as of the Closing by the buyer under the Asset Purchase Agreement) and to maintain relationships with suppliers, customers and others having dealings with the Company or any Subsidiary and otherwise to preserve the goodwill of the Business so that such relationships and goodwill will be preserved on and after the Closing Date;
(g) Not amend its Articles of Incorporation or Bylaws;
(h) Not merge with or into any other corporation or sell, assign, transfer, pledge or encumber any part of the Assets (except for sales from inventory in the ordinary course of business), or agree to do any of the
(i) Not enter into or amend or modify any Material Contract;
(j) Not cancel or waive any rights of value or rights that would otherwise accrue to the Company after the Closing Date;
(k) Not increase the salaries or wages of, or establish or modify any Employee Benefit Plans for, any of the Company's directors or officers or employees or enter into or modify any employment, consulting, severance or similar Contracts with any such persons or agree to do any of the foregoing, except as required under the terms of any collective bargaining agreement as in existence on the date hereof;
(l) Continue to maintain all Employee Benefit Plans in accordance with applicable Laws, and ensure that no Employee Benefit Plan or any trust related thereto shall be amended or terminated prior to the Closing Date, except for any such amendment as may be required to comply with applicable
(m) Use commercially reasonable efforts to obtain any consents or approvals required under any Contracts (including customer contracts) or otherwise that are necessary to complete the Acquisition or to avoid a Default
(n) Not make any individual capital expenditure in excess of Ten Thousand Dollars ($10,000) or any capital expenditures in any fiscal month in excess of Fifty Thousand Dollars ($50,000), except the Company may make capital expenditures up to Two Hundred Fifty Thousand Dollars ($250,000) in any fiscal month related to the construction of the rental plant at 5111 14th (o) Maintain the tangible Assets in good condition and working order, ordinary wear and tear excepted;
(p) Collect its accounts receivable in the ordinary course of business consistent with past practice;
(q) Pay its accounts payable in the ordinary course of business consistent with past practice and not fail to pay or discharge when due any
(r) Comply with all Laws applicable to it and to the conduct of its business, the noncompliance with which would have an adverse effect on the Company, the Business or the Assets; and
(s) (i) Give to the Buyer's officers, employees, counsel, accountants and other representatives access to and the right to inspect, during normal business hours, all of the Assets, the Facilities, records, Contracts (including customer contracts) and other documents relating to the Business, and (ii) permit them to consult with the officers, employees, accountants, counsel and agents of the Company or any Subsidiary for the purpose of making such investigation of the Company, any Subsidiary, the Business, and the Assets as the Buyer shall desire to make, provided that such investigation shall not unreasonably interfere with the operations of the Company or any Subsidiary, and (iii) furnish to the Buyer all such documents and copies of documents and records and information with respect to the Business, the affairs of the Company or any Subsidiary or with respect to investigating the accuracy of any representation or warranty of the Lakers set forth herein as the Buyer shall from time to time reasonably request. During such investigation, Buyer and its representatives shall have the right to make copies of such Contracts, books and records, Tax Returns and other documents and data as it may deem advisable. The furnishing of such information to Buyer and any such investigation by Buyer shall not affect Buyer's right to rely on any of the representations and warranties made in this Agreement.
7.2. Approvals of Governmental Authorities. Between the date of this Agreement and the Closing Date, Shareholders will use commercially reasonable efforts, and will cooperate with Buyer in taking all steps necessary, promptly to (i) make any filing (including a filing under the Hart-Scott-Rodino Antitrust Improvements Act which requests early termination of the waiting period thereunder) and (ii) obtain any consent, approval or authorization of any Governmental Authority, in each case required by Law to allow the consummation of this Agreement and the Acquisition.
7.3. Notification. Between the date of this Agreement and the Closing Date, each Shareholder will promptly notify Buyer in writing if he or the Company or any Subsidiary becomes aware of any fact or condition which makes untrue any representation or breaches any warranty made by the Lakers in this Agreement or if he or the Company or any Subsidiary becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) make untrue any such representation or breach any such warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. Should any such fact or condition require any change in the Disclosure Schedule if such Schedule were dated the date of the occurrence or discovery of any such fact or condition, Shareholders shall deliver to Buyer a supplement to the Disclosure Schedule specifying such change. Delivery of such supplements shall be for information purposes only and shall not modify in any such respect any representation, warranty, covenant or condition contained herein. During the same period, each Shareholder will promptly notify Buyer of the occurrence of any breach of any covenant of Shareholders set forth in this Article 7 or of the occurrence of any event that may make the satisfaction of the conditions set forth in Article 10 impossible or unlikely.
7.4. Payment of Indebtedness by Related Persons. Shareholders shall cause all indebtedness of any Shareholder, officer or director of the Company or any Subsidiary, or any member of his or her family or any of its, hers or his affiliates, to the Company or any Subsidiary to be paid in full prior to Closing.
7.5. No Negotiation. Shareholders shall not, and shall cause each of the Company and Subsidiaries not to, solicit or entertain offers from, negotiate with, or in any manner discuss, encourage, recommend or agree to any proposal of, any other potential buyer or buyers of the Assets or stock of any of the Company or any Subsidiary.
7.6. Commercially Reasonable Efforts. Between the date of this Agreement and the Closing Date, Shareholders will use commercially reasonable efforts to cause the conditions specified in Article 10 to be satisfied.
7.7. Excluded Assets. The Shareholders shall cause the Company to transfer to the Shareholders prior to the Closing the Excluded Assets.
8.1. Survival. Except as set forth in Section 8.2 as to the survival of the representations and warranties in Section 5.1, all representations, warranties and agreements contained in this Agreement or in any certificate delivered pursuant to this Agreement shall survive the Closing notwithstanding any investigation conducted with respect thereto or any knowledge acquired as to the accuracy or inaccuracy of any such representation or warranty.
8.2. Time Limitations. The Lakers shall have no liability for indemnification with respect to any representation or warranty set forth in Section 5.1, it being the intent of the parties that in the event of a breach of a representation and warranty in Section 5.1, Buyer's sole remedy shall be to refuse to close the transaction and receive from the Lakers Buyer's expenses under Section 12.1; provided, however, notwithstanding the foregoing, the Lakers and the Trust shall be jointly and severally liable with respect to any intentional misrepresentation or intentional breach of warranty under Section 5.1(o), and such liability shall survive the Closing. If the Closing occurs, the Lakers and the Trust shall have no liability for indemnification with respect to any representation or warranty in Section 5.2 or 5.3, unless on or before the two (2) year anniversary of the Closing Date the Shareholder Representative is given notice asserting a claim with respect thereto and specifying the factual basis of that claim in reasonable detail to the extent then known by Buyer; a claim with respect to Section 5.4, or a claim for indemnification not based upon any representation or warranty, may be made at any time, subject to the applicable statute of limitations. If the Closing occurs, Buyer shall have no liability for indemnification with respect to any representation or warranty, unless on or before the two (2) year anniversary of the Closing Date Buyer is given notice of a claim with respect thereto and specifying the factual basis of that claim in reasonable detail to the extent then known by the Shareholders.
8.3. Indemnification By Lakers and Trust. Subject to Section 8.2, the Lakers and the Trust, jointly and severally, shall indemnify and hold harmless Buyer, the Company and their respective agents, representatives, employees, officers, directors, stockholders, controlling persons, subsidiaries and affiliates (collectively, the "Indemnified Persons"), and shall reimburse the Indemnified Persons for, any loss, liability, claim, damage, expense (including, but not limited to, costs of investigation and defense and reasonable attorneys' and accountant's fees) or diminution of value, whether or not involving a third-party claim (collectively, "Damages") arising from or in connection with (a) any inaccuracy in any of the representations and warranties of the Lakers in this Agreement or in any certificate delivered by any Shareholder pursuant to this Agreement or any actions, omissions or state of facts inconsistent with any such representation or warranty, (b) any failure by any Shareholder to perform or comply with any agreement or covenant in this Agreement, (c) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with any Shareholder or the Company or any Subsidiary (or any Person acting on their behalf) in connection with the Acquisition or the sale of the Wiper Business Assets, (d) any claim by any former shareholder of the Company or any Subsidiary or by any participant in or beneficiary of the Plan involving the transactions contemplated hereby or any prior transaction involving any shares of capital stock of the Company, any Subsidiary or any predecessor corporation or any distributions from the Plan as a result of transactions contemplated hereby, including, without limitation, any claim by any participant in or beneficiary of the Plan regarding the relative consideration paid or payable to each of the Shareholders or regarding the sale of the Wiper Business Assets, (e) any claim by any Governmental Authority for compensation or reimbursement arising out of the Consent Decree, including "gap" and "oversight" costs thereunder, (f) any Proceeding pending as of the Closing Date, (g) the Wiper Business and/or the Wiper Business Assets, whether arising prior to or after the Closing, including, without limitation, any Damages with respect to any Environmental, Health and Safety Liabilities involving any of the Wiper Business Assets (including the Wiper Real Estate) or any properties previously owned, occupied or utilized in connection with the Wiper Business and any Damages with respect to any Proceeding related to the Wiper Business or the Wiper Business Assets, (h) all M and WC Liability, and (i) the termination (including breach) by Buyer, the Company or any affiliate of the Agreement dated July 11, 1995, with Pariser Industries, Inc.; provided, however, if Buyer elects to intentionally breach or terminatate such Agreement, Buyer shall give the Shareholder Representative 14 days advance written notice thereof.
8.4. Indemnification By Buyer. Buyer shall indemnify and hold harmless Shareholders and shall reimburse Shareholders for, any Damages arising from or in connection with (a) any inaccuracy in any of the representations and warranties of Buyer in this Agreement or in any certificate delivered by Buyer pursuant to this Agreement, or any actions, omissions or state of facts inconsistent with any such representation or warranty, (b) any failure by Buyer to perform or comply with any agreement or covenant in this Agreement, (c) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Buyer (or any Person acting on its behalf) in connection with the Acquisition, (d) any Environmental, Health and Safety Liabilities involving the Rental Business, including any properties previously owned, occupied or utilized in connection with the Rental Business; provided, however, Buyer shall have no liability to the Shareholders if the facts and circumstances of such liability constitutes an intentional misrepresentation or intentional breach of warranty under Section 5.1(o), or (e) the operation of the Rental Business after the Closing; provided, however, Buyer shall have no liability if such liability or alleged liability arose out of any act or omission of any Shareholder.
8.5 Limitations As To Amount - Lakers and Trust. The Lakers and the Trust shall have no liability for indemnification with respect to misrepresentations under Section 5.2 and 5.3 or with respect to the Consent Decree, M and WC Liability or Proceedings pending as of the Closing Date not related to the Wiper Business or Wiper Business Assets until the total of all Damages with respect to (i) all representations and warranties, (ii) the Consent Decree; (ii) M and WC liability, and (iv) Proceedings pending as of the Closing Date not related to the Wiper Business or Wiper Business Assets, collectively exceeds Two Hundred Thousand Dollars ($200,000), in which case the Lakers and the Trust shall be jointly and severally liable for all Damages under Section 5.2 and 5.3 and with respect to the Consent Decree, M and WC Liability and Proceedings pending as of the Closing Date not related to the Wiper Business or Wiper Business Assets, including the portion less than Two Hundred Thousand Dollars ($200,000). However, this Section shall not apply to any intentional misrepresentation or intentional breach of warranty and the Lakers and the Trust shall be jointly and severally liable for all Damages with respect thereto. The total liability of the Lakers and the Trust with respect to misrepresentations under Section 5.2 and 5.3 shall not exceed Three Million Five Hundred Thousand Dollars ($3,500,000).
8.6. Procedure For Indemnification - Third Party Claims.
(a) Promptly after receipt by an indemnified party under Section 8.3 or 8.4 of notice of the commencement of any Proceeding against it, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement thereof, but the failure so to notify the indemnifying party shall not relieve it of any liability that it may have to any indemnified party except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced thereby. In case any such Proceeding shall be brought against an indemnified party and it shall give notice to the indemnifying party of the commencement thereof, the indemnifying party shall, unless the claim involves Taxes, be entitled to participate therein and, to the extent that it shall wish (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect thereto), to assume the defense thereof with counsel satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such Section for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation. If an indemnifying party assumes the defense of such Proceeding, (i) no compromise or settlement thereof may be effected by the indemnifying party without the indemnified party's consent unless (A) there is no finding or admission of any violation of Law or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnifying party and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party and (ii) the indemnifying party shall have no liability with respect to any compromise or settlement thereof effected without its consent. If notice is given to an indemnifying party of the commencement of any Proceeding and it does not, within fifteen days after the indemnified party's notice is given, give notice to the indemnified party of its election to assume the defense thereof, the indemnifying party shall be bound by any determination made in such action or any compromise or settlement thereof effected by the indemnified party. Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages, such indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise or settle such Proceeding, but the indemnifying party shall not be bound by any determination of the Proceeding so defended or any compromise or settlement thereof effected without its consent (which shall not be unreasonably withheld).
(b) Nothing herein shall be deemed to prevent any indemnified party from making a claim hereunder for potential or contingent claims or demands provided the claim notice sets forth the specific basis for any such potential or contingent claim or demand and the estimated amount thereof to the extent then feasible and the indemnified party has reasonable grounds to believe that such a claim or demand will be made.
(a) In the event that any party is required to make any payment under this Section 8, such party shall promptly pay the indemnified party the amount so determined. If there should be a dispute as to the amount or manner of determination of any indemnity obligation owed under this Section 8, the party from which indemnification is due shall nevertheless pay when due such portion, if any, of the obligation as shall not be subject to dispute. The difference, if any, between the amount of the obligation ultimately determined as properly payable under this Section 8 and the portion, if any, theretofore paid shall bear interest as provided in Section 8.7(c).
(b) Any items as to which the Buyer is entitled to payment under this Section 8 shall be paid to the Buyer from the General Escrow Fund held by the Escrow Agent, to the extent that funds held under the General Fund Escrow Agreement are sufficient to pay such items and the Shareholder Representative and the Buyer agree to execute and deliver to the Escrow Agent such documentation as necessary to effect the payment of the General Escrow Fund to Buyer. If the funds held under the General Fund Escrow Agreement are insufficient to pay any such item in full (i) the Shareholder Representative and the Buyer agree to execute and deliver to the Escrow Agent such documentation as necessary to effect the payment of the General Escrow Fund to Buyer; and (ii) the payment of such item as to which the Buyer is entitled to payment under this Section 8 and which is not able to be paid from the General Escrow Fund shall be the joint and several obligation of the Lakers and the Trust and the Lakers and the Trust shall make full and prompt payment of any and all such items to the Buyer. Neither the giving of or the failure to give notice of a claim under the General Escrow Fund Agreement shall constitute an election of remedies nor limit Buyer in any manner in the enforcement of any other remedies that may be available to it. For purposes of this Agreement, a claim shall be deemed pending if a Tax audit is then in process even if the amount of the claimed exposure has not been determined.
(c) If all or part of any indemnification obligation under this Agreement is not paid when due, then the indemnifying party or parties shall pay the indemnified party or parties interest on the unpaid amount of the obligation for each day from the date the amount became due until payment in full, payable on demand, at the Prime Rate.
(d) The indemnities provided for in this Section are not intended to provide a windfall for any party, and to the extent possible such indemnities shall be net of the effect of federal, state and local income tax benefits and the effect of any insurance proceeds (other than proceeds under any retrospective or similar policies) actually realized or received by a party as a result of such losses, damages or deficiencies.
(a) The Shareholders irrevocably make, constitute and appoint Irving Laker as their agent (the "Shareholder Representative") and authorize and empower him to fulfill the role of Shareholder Representative hereunder; and Irving Laker hereby accepts such appointment, as evidenced by his signature appended to this Agreement. If the Shareholder Representative wishes to resign, he shall appoint from among the Shareholders a successor who shall agree in writing to accept such appointment, and no resignation of a Shareholder Representative shall be effective until such a successor shall have so agreed to such appointment. If the Shareholder Representative dies or becomes incapacitated, his successor shall be appointed by the holders of a majority of the Shares from among the Shareholders within 30 days of his death or incapacity. The choice of a successor Shareholder Representative appointed in either manner permitted above shall be final and binding upon all of the Shareholders. The decisions and actions of any successor Shareholder Representative shall be, for all purposes, those of the Shareholder Representative as if originally named herein.
(b) Each Shareholder has made, constituted and appointed and by the execution of this Agreement hereby irrevocably makes, constitutes and appoints the Shareholder Representative as such persons's true and lawful attorney in fact and agent, for such person and in such person's name, (i) to acknowledge receipt of the Final Purchase Price and deliver to the Buyer at the Closing in exchange therefor the certificates described in Section 4.2; (ii) to receive all notices and communications directed to such Shareholder under this Agreement and the Transaction Documents and to take any action (or to determine to take no action) with respect thereto as he may deem appropriate as effectively as such Shareholder could act for himself, including without limitation, the settlement or compromise of any dispute or controversy; and (iii) to execute and deliver all instruments and documents of every kind incident to the foregoing to all intents and purposes and with the same effect as such Shareholder could do personally, and each such Shareholder hereby ratifies and confirms as his own act, all that the Shareholder Representative shall do or cause to be done pursuant to the provisions hereof. All notices and communications directed to Shareholders under this Agreement shall be given to the Shareholder Representative.
(c) The death or incapacity of any Shareholder shall not terminate the authority and agency of the Shareholder Representative.
(d) The Shareholders hereby agree to indemnify the Shareholder Representative and to hold him harmless against any loss, liability or expense incurred without bad faith or willful misconduct on the part of the Shareholder Representative and arising out of or in connection with his duties as Shareholder Representative, including the costs and expenses incurred by such Shareholder Representative in defending against any claim of liability in connection herewith. Any such loss, liability, or expense shall be apportioned among the Shareholders according to the proportionate interest of each.
ARTICLE 10: CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER
Subject to waiver as set forth in Section 14.5, the obligations of the Buyer under this Agreement are subject to the fulfillment prior to or at the Closing of each of the following conditions:
10.1. Representations True. The representations and warranties of the Lakers set forth in Article 5 (without giving effect to any updating or correcting information provided pursuant to Section 7.3 or otherwise) shall have been true and correct as of the date of this Agreement and as of the Closing Date with the same effect as if made at that time.
10.2. Performance by the Company and the Shareholders. The Company and the Shareholders shall have performed and satisfied all agreements, covenants and conditions required by this Agreement to be performed or complied with on or before the Closing Date.
10.3. No Material Adverse Change. During the period from the date of this Agreement to the Closing Date, there shall not have been any material adverse change in the financial condition, results of operations, business or prospects of the Company or any Subsidiary or the Business, or the Rental Business or Wiper Business, individually or taken as a whole, nor any material loss or damage to its Assets, whether or not insured, which adversely affects the ability of the Company or any Subsidiary individually or taken as a whole, to conduct the Business, the Rental Business or Wiper Business and neither the Company, any Subsidiary, the Business, the Rental Business or Wiper Business, the Facilities nor the Assets shall have been adversely affected in any way, including, without limitation, by fire, strike, casualty, act of God or otherwise. There shall be no conditions existing or threatened with respect to the Company, any Subsidiary, the Business, the Rental Business or Wiper Business or the Assets that might be expected to have a material adverse effect on any of them.
10.4. Certificates. The Buyer shall have received a certificate from he Shareholders dated the Closing Date certifying in such detail as the Buyer may reasonably request that each of the agreements and conditions described in Sections 10.1, 10.2 and 10.3 has been performed or fulfilled.
10.5. Ownership of Shares. Shareholders shall have transferred all the Shares to Buyer, free and clear of all Liens, with transfer taxes, if any, paid by Shareholders. No claim shall have been filed, made or threatened by any Person asserting that such Person is entitled to any part of the Final Purchase Price paid for the Shares.
10.6. No Prohibition of Transaction. No Proceeding or regulation or legislation shall have been instituted, threatened or proposed before, nor any Court Order issued by, any Governmental Authority to enjoin, restrain, prohibit or obtain substantial damages (a) in respect of, or which is related to, or arises out of, this Agreement or the consummation of the Acquisition, or (b) which, in the reasonable judgment of the Buyer, could have a material adverse effect on the Company, any Subsidiary, the Business, the Rental Business, Wiper Business or the Assets.
10.7. Incumbency Certificate. The Buyer shall have received a certificate of the Secretary or an Assistant Secretary of the Company dated the Closing Date certifying to the incumbency of the officers of the Company signing for it and as to the authenticity of their signatures.
10.8. Opinion of Counsel. The Buyer shall have received the written opinion dated the Closing Date of Jackier, Gould, Bean, Upfal, Eizelman & Goldman, counsel for the Company and the Shareholders, in the form attached hereto as Exhibit F.
10.9. Transaction Documents. Each person or entity other than the Buyer which is a party to any of the Transaction Documents shall have executed and delivered each of the Transaction Documents to which such person or entity is a party.
10.10. Regulatory Compliance and Approvals. All approvals required under any Laws to carry out the Acquisition shall have been obtained, the parties shall have complied with all Laws applicable to the Acquisition and any applicable waiting period or periods under the Hart-Scott-Rodino Antitrust Improvements Act shall have expired or been terminated.
10.11. Consents. On or prior to the Closing Date, Shareholders shall have furnished Buyer all consents required to be obtained in connection with the Acquisition in order to avoid a Default under any Material Contract (including any customer contract) or License to or by which the Company or any Subsidiary is a party or may be bound. Each consent must be free from burdensome restrictions and conditions not applicable to the Company or any Subsidiary prior to the date of this Agreement.
10.12. Resignations. Buyer shall have received resignations of all individuals who are officers or directors of the Company and any
Subsidiary as requested by Buyer immediately prior to the Closing.
10.13. Releases. Buyer shall have received releases in the form of Exhibit G executed by each of the Shareholders and such other officers and directors of the Company or any Subsidiary as Buyer may designate.
10.14. Records. Buyer shall have received possession of all corporate, accounting, business and tax records of the Company or any Subsidiary.
10.15. Escrow Agreements. The General Escrow Fund Agreement and Balance Sheet Escrow Agreement shall have been duly executed and delivered by all parties thereto.
10.16. Environmental Assessments. The environmental assessments to be conducted pursuant to Article 12 hereof shall have been completed and the estimated cost of addressing the matters set forth therein, plus a fifteen percent (15%) contingency, shall be less than One Million Dollars ($1,000,000).
10.17. Buyer Review. The Buyer shall have completed and be satisfied with its review of the Business, management, finances and Liabilities of the Company and each Subsidiary.
10.18. Consents and Approvals. The Shareholders and the Company shall have obtained all consents and approvals necessary to complete the Acquisition and related transactions.
10.19. Union Negotiations. The status and/or results of the negotiations currently underway between the Company and the Teamsters union concerning a new collective bargaining agreement for the Detroit route representatives shall be satisfactory to Buyer in its discretion.
10.20. Asset Purchase Agreement. The transaction set forth in the Asset Purchase Agreement shall have been consummated.
10.21. Pariser Industries, Inc. Amendment. The Agreement with Pariser Industries, Inc., dated July 11, 1995, shall be amended to limit its application to the Mechanics laundry plants in Detroit, Michigan.
ARTICLE 11: CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS
Subject to waiver as set forth in Section 14.5, the obligations of the Shareholders under this Agreement are subject to the fulfillment prior to or at the Closing of each of the following conditions:
11.1. Buyer Representations True. The representations and warranties of the Buyer set forth in Article 6 shall have been true and correct as of the date of this Agreement and as of the Closing Date with the same effect as if made at that time.
11.2. Performance by the Buyer. The Buyer shall have performed and satisfied all agreements, covenants and conditions required by this Agreement to be performed or complied with on or before the Closing Date.
11.3. Officer's Certificate. The Shareholder Representative shall have received a certificate from an appropriate officer of the Buyer dated the Closing Date certifying in such detail as the Shareholder Representative may reasonably request that each of the agreements and conditions described in Sections 11.1 and 11.2 has been performed or fulfilled.
11.4. Incumbency Certificate. The Shareholder Representative shall have received a certificate of the Secretary or an Assistant Secretary of the Buyer dated the Closing Date certifying to the incumbency of the officers of the Buyer signing for it and as to the authenticity of their signatures.
11.5. Opinion of Counsel. The Shareholder Representative shall have received the written opinion dated the Closing Date of Bryan Cave LLP, counsel for the Buyer, in the form attached hereto as Exhibit H.
11.6. Regulatory Compliance and Approval. All approvals required under any Laws to carry out the Acquisition shall have been obtained, the parties shall have complied with all Laws applicable to the Acquisition and any applicable waiting period or periods under the Hart-Scott Rodino Antitrust Improvements Act shall have expired or been terminated.
11.7. Transaction Documents. The Buyer shall have executed and delivered each of the Transaction Documents to which it is a party.
11.8. Prohibition of Transaction. No Proceeding or regulation or legislation shall have been instituted, threatened or proposed before, nor any Court Order issued by, any Governmental Authority to enjoin, restrain, prohibit or obtain substantial damages against the Shareholders in respect of, or which is related to, or arises out of, this Agreement or the consummation of the Acquisition.
11.9. Escrow Agreements. The General Escrow Fund Agreement and Balance Sheet Escrow Agreement shall have been duly executed and delivered by all parties thereto.
11.10. Guaranty. The Guarantor shall have delivered the Guaranty Agreement at the Closing in the form attached hereto as Exhibit I.
11.11. Asset Purchase Agreement. The transaction set forth in the Asset Purchase Agreement shall have been consummated.
12.1 Environmental Assessment. The parties hereto acknowledge that the Company and the Lakers have granted the Buyer or a consultant acting on Buyer's behalf the right to cause environmental assessments to be performed with respect to such of the Facilities as are selected by Buyer or any other properties where the Company's or any Subsidiary's Hazardous Materials may have been sent for treatment, storage, disposal or recycling. All such assessments shall be completed as soon as possible after the date hereof and in any event shall be completed prior to the Closing Date. The scope of the environmental assessments shall be determined by Buyer and may include, without limitation, soil gas testing, wastewater discharge testing, underground and above ground storage tank testing, soil sampling, groundwater or surface water testing, air monitoring and testing of suspected asbestos containing materials. The Shareholders shall cause the Company to cooperate with Buyer and the consultants in the conduct of the assessments and shall allow Buyer and the consultants access to the Facilities and Business. The Shareholders shall cause the Company to make available to Buyer and the consultants the Company's employees who are knowledgeable concerning the Business (and current and historical operations at the Facilities) and all documents or information requested by Buyer or the consultants relating to matters within the scope of the assessments. Buyer's consultant shall prepare a report documenting the finding of the assessments. Buyer shall provide the Shareholder Representative with a copy of such report, upon request. Provided the Acquisition closes, the cost of such assessments shall be paid by the Buyer. In the event the Acquisition is not consummated for any reason (other than a breach of this Agreement by Buyer), then the Company and the Lakers, jointly and severally, shall pay and indemnify Buyer against the entire cost of such assessments.
ARTICLE 13: CERTAIN ADDITIONAL COVENANTS
(a) Within ten (10) days after the date hereof, the Lakers shall deliver to Buyer (i) title commitments (hereinafter collectively the "Title Commitment") dated on or after the date hereof, issued by Lawyers Title Insurance Corporation (the "Title Insurer") committing to issue an ALTA 1992 Form B Owner's Policy of Title Insurance for the Real Properties owned by the Company or any Subsidiary (including, without limitation, the Affiliate Real Estate, but excluding the Wiper Real Estate) in the aggregate amount of Two Million Six Hundred Thousand Dollars ($2,600,000), allocated among the owned Real Properties as determined by Buyer, which commitment shall be subject only to the Permitted Exceptions (collectively, the "Title Policy"); and (ii) copies of all documents, whether recorded or unrecorded, referred to in the Title Commitment. The Title Commitment shall also include the Title Insurer's commitment that it will endorse the Title Policy so as to delete standard pre-printed exceptions, all such endorsements being in form and substance satisfactory to Buyer.
(b) The Title Policy shall also conform to the following specifications:
(i) The insured will be the Company and the Buyer as their
(ii) The policy will contain an affirmative statement of insurance to the effect that the knowledge of the Shareholders and the Company prior to Closing shall not be imputed to the Company or the Buyer (any additional cost for such statement shall be paid by Buyer);
(iii) If available, the policy for all Real Properties other than the Affiliated Real Estate will contain an affirmative statement of insurance to the effect that notwithstanding any other terms and provisions of the policy to the contrary, in the event of loss or damage insured against under the terms of the policy, the Title Insurer will not deny liability under the policy on the ground that the insured did not pay value for the estate or interest insured by the policy;
(iv) The policy shall contain a zoning endorsement in the form of ALTA Form 3.0; or the approved substantial equivalent thereof for the jurisdiction in which the Real Property is located showing the zoning classification of the Real Property and confirming that the current use of the Real Property is in conformance with the applicable zoning laws and use restrictions (any additional cost for such endorsement shall be paid by
The Lakers shall cause the Title Policy to be issued as of the Closing Date showing title to the owned Real Properties in the Company or a Subsidiary, as applicable, subject only to the Permitted Exceptions.
(c) Within fifteen (15) days after the date hereof, the Lakers shall cause to be delivered to Buyer surveys of each of the parcels of real estate which comprise the owned Real Properties (other than the Wiper Real Estate) performed by surveyors registered in the state in which such property is located and certified by said surveyor to have been prepared in accordance with the minimum detail requirements of the American Land Title Association land survey standards for Class A surveys as of or after the date hereof, said certificates to be certified to the Company or the Subsidiary which owns such property and the Title Insurer. The surveys will comply with any requirements of the Title Insurer as a condition to the removal of the survey exception from the standard pre-printed exceptions in the Title Commitment. In the event the surveys show any encroachments over a lot line, prohibited encroachments over any easement or any other matters which, in Buyer's reasonable opinion, does or could materially interfere with the use, operation, value or financing of any owned Real Properties or render title thereto unmarketable (other than encroachments disclosed in Part E of Disclosure Schedule 5.1 B) ("Survey Defects"), the Lakers shall prior to Closing either (i) remove or correct such encroachments or other matters or (ii) cause such encroachments or other matters to be insured over by the Title Insurer.
(d) If the Title Commitment or the surveys disclose any Liens, easements, restrictions, reservations or other defects or any other matters objectionable to the Buyer, the Buyer shall advise the Shareholder Representative of the same in writing within fifteen (15) days after receipt by the Buyer of the last of the Title Commitment, the Survey and the documents affecting title for all of the Real Property. Matters not objected to by the Buyer within said period shall be deemed to be Permitted Liens. As to any matters to which the Buyer objects, the Shareholders shall remedy such matters as are susceptible of being remedied and shall, within ten (10) days after the Buyer gives the Shareholder Representative notice of objection to such matters, have delivered to the Buyer a revised Title Commitment and/or surveys reflecting that such remedy has been effected.
(e) The Lakers shall pay the costs of the Title Commitment and the Title Policy (including all premiums for all endorsements as described herein (unless otherwise stated herein) and any special coverage as may be required to cure Survey Defects) and the surveys.
13.2. Approvals of Governmental Bodies. Between the date of this Agreement and the Closing Date, Buyer shall use its commercially reasonable efforts, and will cooperate with the Shareholders in taking all steps necessary, promptly to (i) make any filing (including a filing under the Hart-Scott-Rodino Antitrust Improvements Act which requests early termination of the waiting period thereunder) and (ii) obtain any consent, approval or authorization of any Governmental Authority, in each case required by Law to allow the consummation of this Agreement and the Acquisition.
13.3. Notification. Between the date of this Agreement and the Closing Date, Buyer will promptly notify the Shareholder Representative in writing if it becomes aware of any fact or condition which makes untrue any representation or breaches any warranty made by Buyer in this Agreement or if the Buyer becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this
Agreement) make untrue any such representation or breach any such warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. During the same period, Buyer will promptly notify the Shareholder Representative of the occurrence of any event that may make the satisfaction of the conditions set forth in Article 11 impossible or unlikely.
13.4. Commercially Reasonable Efforts. Between the date of this Agreement and the Closing Date, Buyer will use its commercially reasonable efforts to cause the conditions specified in Article 11 to be satisfied.
13.5. Utility Tax Adjustment. The parties acknowledge that as of the date hereof, the Company has reserved $200,000 to pay the City of Detroit Utility Tax assessment. If the amount of such tax is settled in writing prior to the date the Closing Date Balance Sheet is delivered pursuant to Section 2.4(a), the Closing Date Balance Sheet shall be adjusted to reflect the amount of such settlement and payment, net of Taxes.
13.6. Certain Loss Charges. The Lakers hereby represent and covenant that the Company has claimed (but not included in revenues) loss charges as follows: Detroit News: $100,000 - $150,000; Chrysler Newark: $18,000 - $20,000; and Chrysler/Jeep Toledo: $150,000. To the extent any such claims as adjusted by return garments or further negotiation are settled by the execution of an agreement prior to December 31, 1995, the revenue from such claims shall be paid to the Shareholders upon receipt, net of Taxes. Prior to the Closing Date the Lakers shall cause, and after the Closing Date, the Buyer shall cause the Company to use its reasonable efforts to collect such claims in the manner regularly pursued by Buyer in collecting its accounts receivables. In no event shall the Lakers allow the Company to and in no event shall Buyer be obligated to bring any legal action or retain attorneys or collection agencies or other third parties to attempt to collect such claims. After the Closing Date, if the Lakers desire to contact or meet with such accounts for purposes of collecting such claims, Buyer shall be informed and shall have the right for its representative to participate in such conversations or attend such meeting.
13.7. Net Income. The Lakers hereby covenant and agree that in no event shall the Company and its Subsidiaries on a consolidated basis incur a book loss for the period from March 31, 1995 through the Closing Date.
13.8. Asset Purchase Agreement and Real Estate Purchase Agreements. Each of the Lakers, jointly and severally, covenant and agree to cause the parties to the Asset Purchase Agreement and the parties to the Real Estate Purchase Agreements to consummate the transactions contemplated by such agreements when required in order to facilitate the Closing of the transaction set forth herein.
13.9. Pariser Industries, Inc.. If on the two year anniversary of the Closing, the Agreement with Pariser Industries, Inc., dated July 11, 1995, is still in force (or any Liability thereunder has not been finally settled) then Two Hundred Fifty Thousand Dollars ($250,000) shall remain in the General Escrow Fund until final termination of such agreement and payment of all Liability with respect thereto.
14.1. Payment of Expenses. Each of the Shareholders and the Buyer will pay all legal, accounting, investment banking and other fees and expenses which such party incurs in connection with this Agreement and the transactions contemplated hereby, and none of the expenses of the Shareholders or expenses related to the Acquisition shall be paid by the Company or any Subsidiary or out of any of the Assets. Buyer shall pay the Hart-Scott-Rodino filing fee. However, if this Agreement is terminated pursuant to Section 14.19 or if the failure to satisfy a condition of Closing arises out of the breach, existing at the time of the execution of this Agreement, of a representation or warranty contained in this Agreement, the party terminating this Agreement shall be entitled to receive from the breaching party or parties the expenses of the terminating party incurred between the date of this Agreement and the date of termination.
14.2. Brokers' and Finders' Fees. The Company, each of the Shareholders, and the Buyer each to the other represents and warrants that all negotiations relative to this Agreement have been carried on by them directly without the intervention of any person, firm, corporation or other entity (other than Cleary Gull Reiland & McDevitt Inc., the fees of which are acknowledged to be the obligation of Shareholders) who or which may be entitled to any brokerage fee or other commission in respect of the execution of this Agreement or the consummation of the transactions contemplated hereby, and each of them shall indemnify and hold the other or any affiliate of them harmless against any and all claims, losses, liabilities or expenses which may be asserted against any of them as a result of any dealings, arrangements or agreements by the indemnifying party with any such person, firm, corporation or other entity.
14.3. Announcements. No party to this Agreement shall make any announcement in connection with the Acquisition that has not been previously approved in writing by the Buyer and the Shareholder Representative, except Buyer may make any announcement that it reasonably deems advisable or appropriate in connection with its responsibilities as a public corporation.
14.4. Assignment and Binding Effect. This Agreement may not be assigned prior to the Closing by any party hereto without the prior written consent of the other parties, except Buyer may assign this Agreement to Unitog Company or another direct or indirect wholly-owned Subsidiary of Unitog Company, in which case the guaranty of Unitog Company as set forth herein shall remain valid. Subject to the foregoing, all of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the heirs, executors, legal representatives, successors and assigns of the Shareholders and by the successors and assigns of the Company and the Buyer. The portions of this Agreement and the other Transaction Documents related to or involving, directly or indirectly, the Wiper Business Assets (including, without limitation, the benefit of the representations and warranties and indemnification provisions) may be assigned by the Buyer to a purchaser of all or substantially all of the Wiper Business Assets (whether by purchase of assets, purchase of stock, merger or otherwise) without the consent of any other party hereto and without adversely affecting Buyer's rights with respect to such provisions.
14.5. Waiver. Any term or provision of this Agreement may be waived at any time by the party entitled to the benefit thereof by a written instrument executed by such party.
14.6. Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given only if delivered personally to the address set forth below (to the attention of the person identified below) or sent by telegram, telecopier or by registered or certified mail, postage prepaid, or by Federal Express or other express delivery service as follows:
With a required copy to:
With a required copy to:
Jackier, Gould, Bean, Upfal, Eizelman & Goldman 1533 N. Woodward Avenue, Suite 250
or to such other address as the addressee may have specified in a notice duly given to the sender and to counsel as provided herein. Such notice, request, demand, waiver, consent, approval or other communication will be deemed to have been given as of the date so delivered or telegraphed or telecopied (with receipt confirmed, provided a copy is mailed by certified mail, return receipt requested), if mailed, three business days after the date so mailed, and if sent by Federal Express or express delivery service, when received by the addressee.
14.7. Missouri Law to Govern. This Agreement shall be governed by and interpreted and enforced in accordance with the substantive laws of Missouri without regard to the conflicts of law provisions thereof.
14.8. Remedies Not Exclusive. Nothing in this Agreement shall be deemed to limit or restrict in any manner other rights or remedies that any party may have against any other party at law, in equity or otherwise.
14.9. No Benefit to Others. The representations, warranties, covenants and agreements contained in this Agreement are for the sole benefit of the parties hereto and their heirs, executors, legal representatives, successors and assigns, and they shall not be construed as conferring and are not intended to confer any rights on any other persons.
14.10. Contents of Agreement. This Agreement, together with any documents referred to herein, sets forth the entire agreement of the parties hereto with respect to transactions contemplated hereby. This Agreement may not be amended except by an instrument in writing signed by the parties hereto, and no claimed amendment, modification, termination or waiver shall be binding unless in writing and signed by the party against whom or which such claimed amendment, modification, termination or waiver is sought to be enforced.
14.11. Section Headings and Gender. All section headings and the use of a particular gender are for convenience only and shall in no way modify or restrict any of the terms or provisions hereof. Any reference in this Agreement to a Section, Exhibit or the Disclosure Schedule shall be deemed to be a reference to a Section, Exhibit or the Disclosure Schedule of this Agreement unless the context otherwise expressly requires.
14.12. Disclosure Schedule and Exhibits. All attachments, schedules, Exhibits and the Disclosure Schedule referred to herein are intended to be and hereby are specifically made a part of this Agreement. An item disclosed in the Disclosure Schedule in response to one Section or subsection of this Agreement shall not be deemed disclosed in response to any other Section or subsection unless otherwise specifically provided in this Agreement.
14.13. Cooperation. Subject to the provisions hereof, the parties hereto shall use commercially reasonable efforts to take or cause to be taken such actions to execute and deliver or cause to be delivered such additional documents and instruments, and to do or cause to be done all things necessary, proper or advisable under the provisions of this Agreement and under applicable law to consummate and make effective the transactions contemplated by this Agreement.
14.14. Severability. Any provision of this Agreement which is invalid or unenforceable in any jurisdiction shall be ineffective to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
14.15. Counterparts. This Agreement may be executed in two or more counterparts, each of which is an original and all of which together shall be deemed to be one and the same instrument. This Agreement shall become binding when one or more counterparts taken together shall have been executed and delivered by all of the parties. It shall not be necessary in making proof of his Agreement or any counterpart hereof to produce or account for any of the other counterparts.
14.16. Representation By Counsel; Interpretation. The parties hereto each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of law, or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived.
14.17. Attorney's Fees. In the event of any Proceeding under or related to this Agreement (including arbitration), the prevailing party shall be entitled to payment from the nonprevailing party of its attorneys' fees, costs and expenses incurred in connection with such Proceeding.
14.18 Termination by Mutual Consent. This Agreement may be terminated at any time on or prior to the Closing Date by mutual consent of the Shareholder Representative and the Buyer.
14.19 Termination for Breach. The Buyer may terminate its obligations under this Agreement at any time prior to the Closing Date if the Shareholders or the Company shall have breached any of their representations, warranties or other obligations under this Agreement in any material respect. The Shareholders may likewise terminate their obligations under this Agreement at any time prior to the Closing Date if the Buyer shall have breached any of its representations, warranties or other obligations under this Agreement in any material respect. Such termination may be effected by written notice from either the Buyer or the Shareholder Representative, as appropriate, citing the reasons for termination and shall not subject the terminating party to any liability for any valid termination.
14.20 Arbitration. Any dispute between any of the parties hereto or claim by a party against another party arising out of or in relation to this Agreement or in relation to any alleged breach thereof shall be finally determined by arbitration in accordance with the rules then in force of the American Arbitration Association. The arbitration proceedings shall take place in St. Louis, Missouri or such other location as the parties in dispute hereafter may agree upon. The decision rendered by the arbitrator or arbitrators shall be accompanied by a written opinion in support thereof. Such decision shall be final and binding upon the parties in dispute without right of appeal. Judgment upon any such decision may be entered into in any court having jurisdiction thereof, or application may be made to such court for a judicial acceptance of the decision and an order of enforcement.
"THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES."
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above.
Irving Laker, as Trustee of the Profit Sharing Plan and Trust
Irving Laker, as Trustee of the Irving Laker
Martin Laker, as Trustee of the Martin Laker
Article 9 of this Agreement.
FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS AMENDMENT is dated as of November 10, 1995, and is by and among Unitog Rental Services, Inc. (the "Buyer"), Ace-Tex Corporation (the "Company") and the Shareholders of Ace-Tex Corporation.
A. The parties hereto entered into a Stock Purchase Agreement, dated as of October 19, 1995 (the "Original Agreement").
B. The parties hereto now desire to amend the Original Agreement.
NOW, THEREFORE, in consideration of the respective covenants, representations and warranties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:
A. Section 4.2 of the Original Agreement is hereby amended by deleting the words "Laws and all Material" in the fourth line of Section 4.2.
B. The Original Agreement is hereby amended by deleting pages 32 and 33 of the Original Agreement and inserting in lieu thereof the new pages 32 and 33 attached hereto as Exhibit A.
C. Section 7.7 of the Original Agreement is hereby deleted in its entirety.
D. The Original Agreement contained two pages 39. The page 39 of the Original Agreement with the footer "SG 117637" is hereby deleted and the page 39 with the footer "SG 117637.02" is retained.
E. Section 8.3 of the Original Agreement is hereby amended by adding the following new provision at the end of the current Section 8.3:
Notwithstanding anything to the contrary in this Agreement, if Arrow Uniform Rental Company (or an affiliate thereof) files suit or makes a claim against any Indemnified Persons arising out of the conduct of the Business prior to the Closing Date (an "Arrow Claim"), the Lakers and the Trust, jointly and severally, shall indemnify, hold harmless and reimburse the Indemnified Persons for all Damages arising from or in connection with such claim or suit. In the event of an Arrow Claim, Buyer shall have the right to direct the defense of an Arrow Claim with counsel of its choosing. If Arrow Uniform Rental Company refiles the same causes of action relating to the same accounts which were the subject of the lawsuit that they filed on or about November 8, 1995 against the Company and Unitog Company then the Buyer shall pay the Company's and Unitog Company's attorney's fees related to the defense of such suit but the Lakers and the Trust shall jointly and severally indemnify the Buyer for all other Damages arising from or in connection with such suit.
F. Section 8.5 of the Original Agreement is hereby amended to read in its entirety as follows:
8.5 Limitations As To Amount - Lakers and Trust. The Lakers and the Trust shall have no liability for indemnification with respect to misrepresentations under Section 5.2 and 5.3 or with respect to the Consent Decree, M and WC Liability with respect to or involving employees of the Rental Business, an Arrow Claim or Proceedings pending as of the Closing Date not related to the Wiper Business or Wiper Business Assets until the total of all Damages with respect to (i) all representations and warranties, (ii) the Consent Decree; (iii) M and WC Liability with respect to or involving employees of the Rental Business, (iv) an Arrow Claim, and (v) Proceedings pending as of the Closing Date not related to the Wiper Business or Wiper Business Assets, collectively exceeds Two Hundred Thousand Dollars ($200,000) (the "Basket"), in which case the Lakers and the Trust shall be jointly and severally liable for all Damages under Section 5.2 and 5.3 and with respect to the Consent Decree, M and WC Liability with respect to or involving employees of the Rental Business, an Arrow Claim and Proceedings pending as of the Closing Date not related to the Wiper Business or Wiper Business Assets, including the portion less than Two Hundred Thousand Dollars ($200,000). However, this Section shall not apply to any intentional misrepresentation or intentional breach of warranty and the Lakers and the Trust shall be jointly and severally liable for all Damages with respect thereto. The total liability of the Lakers and the Trust with respect to misrepresentations under Section 5.2 and 5.3 shall not exceed Three Million Five Hundred Thousand Dollars ($3,500,000).
G. The Original Agreement is hereby amended to add Schedule 1.0 which is attached hereto as Exhibit B.
H. Schedule 5.4(B) to the Original Agreement is hereby amended by deleting the current Schedule 5.4(B) in its entirety and inserting in lieu thereof the new Schedule 5.4(B) which is attached hereto as Exhibit C.
I. The following is aded as a new Section 14.21 to the Stock Purchase Agreement:
If on or prior to December 31, 1996, the State of Michigan issues a refund check to Mechanics Uniform Rental ("Mechanics") refunding use tax paid by Mechanics for calendar years 1990 through 1994 (or any portion thereof) as a result of legislation adopted after this date and such refund is a windfall to Mechanics, (including, without limitation, such legislation does not require all or any portion of the refund to be remitted to customers or other persons and such legislation does not impose a sales tax or other restrictions or limitations which may adversely affect Mechanics (or any successor), or its business on a "going forward" basis), then the Company will remit to the Shareholder Representative promptly after receipt of the funds from the State 50% of the net proceeds received by Mechanics from the State (after deduction for any income taxes which may be due and owing as a result of such refund).
J. The following is aded as a new Section 14.22 to the Stock Purchase Agreement:
With respect to the remaining $125,000 in direct sales by the Company to Chrysler, Trenton, Michigan, pursuant to that certain Release Number PTFX 0017369 which revenue has been recorded on the books but not delivered or invoiced to the customer, for purposes of the calculation of the Final Purchase Price, all deliveries and customer invoices by the Company on or prior to December 15, 1995 and all expenses of any kind with respect to such release shall be deemed to have been received and incurred by the Company on November 10, 1995, except the total increase to the Final Purchase Price as a result of this provision shall not exceed $55,000.
2. Miscellaneous. Except as amended hereby the Original Agreement remains in full force and effect and unchanged. This Amendment shall be governed by and interpreted in and enforced in accordance with the substantive laws of the State of Missouri without regard to the conflicts of law provisions thereof. This Amendment may be executed in two or more counterparts, each of which is an original and all of which shall together be deemed to be one and the same instrument. This Amendment shall become binding when one or more counterparts taken together shall have been executed and delivered by all of the parties. It shall not be necessary in making proof of this Amendment or any counterpart hereof to produce or account for any of the other counterparts.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first written above.
By: /s/ J. Craig Peterson
Irving Laker, as Trustee of the Profit Sharing Plan and Trust
Irving Laker, as Trustee of the
Martin Laker, as Trustee of the franchise taxes filed since March 31, 1993. The Company and each Subsidiary has paid, or made provision for payment of, all Taxes that have or may have become due pursuant to those Tax Returns, or otherwise, or pursuant to any assessment received by the Shareholders or the Company or any Subsidiary, except such Taxes, if any, as are set forth in the Disclosure Schedule and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the books of account of the Company and the Subsidiaries. The United States federal and state income Tax Returns and the Michigan Single Business Tax Returns of each of the Company and the Subsidiaries subject to such Taxes have been audited by the IRS or relevant state tax authorities or are closed by the applicable statute of limitations for all taxable years through 1989. All deficiencies proposed as a result of such audits have been paid, reserved against, settled, or, as described in the Disclosure Schedule, are being contested in good faith by appropriate proceedings. None of the Shareholders, the Company or any Subsidiary has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of Taxes of the Company or any Subsidiary or for which the Company or any Subsidiary may be liable. The charges, accruals, receivables and reserves with respect to Taxes on the respective books of the Company and Subsidiaries are adequate and are at least equal to the Company's or that Subsidiary's Liability for Taxes as of the Closing Date. There exists no proposed tax assessment against the Company or any Subsidiary except as disclosed in the Disclosure Schedule. No consent to the application of Section 341(f)(2) of the Code has been filed with respect to any property or assets held or acquired or to be acquired by the Company or any Subsidiary. All Taxes that the Company or any Subsidiary is or was required by Law to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Authority or other Person. All Tax Returns filed by (or which include on a consolidated basis) the Company or any Subsidiary are true, correct and complete. There is no Tax sharing agreement that will require any payment by the Company or any Subsidiary after the date of this Agreement to any company outside the consolidated group. Neither the execution and delivery of this Agreement or the Transaction Documents by the Company, any Subsidiary or by any Shareholder nor the consummation of the transactions contemplated hereby or thereby will directly or indirectly: (A) cause the Company or any Subsidiary to become subject to, or to become liable for the payment of any Tax (other than any Tax resulting from the sale of the Wiper Business Assets and other than Taxes due as a result of the closing of the tax year due to the Company and its subsidiaries joining in the Buyer's consolidated return group for which adequate accruals shall be provided on the Closing Date Balance Sheet); or (B) cause any of the assets owned by the Company or Subsidiary to be reassessed or revalued by any taxing authority or other Governmental Authority, other than the Affiliated Real Estate.
(ii) Neither the Company nor any Subsidiary has been a member of any other affiliated group of corporations within the meaning of Section 1504 of the Code since 1985. For all tax periods in which a Tax Return is not due on or before the Closing Date (whether or not the taxable period ends on or after the Closing Date), the Closing Date Balance Sheet shall provide an adequate reserve for Taxes to fully pay such Taxes up to and including the Closing Date (as if the taxable period ended on the Closing Date). The Company has furnished to Buyer true and complete copies of relevant portions of Tax audit reports, statements of deficiencies, closing or other agreements received by the Company or any Subsidiary relating to the Assets from the IRS, or from any other taxing authority (sometimes collectively referred to as a "Taxing Authority"). Neither the Company nor any Subsidiary has entered into any compensatory agreements with respect to the performance of services which payment thereunder would result in a nondeductible expense to the Company or any Subsidiary pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code. Neither the Company nor any Subsidiary has taken any action or failed to take any action, the effect of which would be to cause interest on any obligation issued by a state or local governmental unit ("Section 103 Obligations") to become includable in the gross income of any person. The Acquisition will not cause interest on any Section 103 Obligations issued for the benefit of the Company or any Subsidiary to become taxable. All of the Company's and the Subsidiaries' payments to agents, consultants and others have been in payment of bona fide fees and commissions and not as illegal or improper payments. The Company or any Subsidiary have not made any payment to any person whomsoever or to any entity whatsoever with respect to which a deduction could be disallowed under Section 162(c) of the Code. Except as set forth on the Disclosure Schedule, neither the IRS nor any other Governmental Authority has initiated or threatened any investigation of any payments made by the Company or any Subsidiary alleged to have been of the type covered by this Section. Neither the Company nor any Subsidiary are liable for taxes to any foreign taxing authority. The Company does not have and has not had a permanent establishment in any foreign country, as defined in any applicable tax treaty or convention between the United States and such foreign country. Neither the Company nor any Subsidiary is required to include in income any adjustment under Section 481(a) of the Code by reason of a change in accounting method initiated by the Company or any Subsidiary and the IRS has not proposed any such adjustment or change in accounting method. None of the Assets are tax-exempt use property within the meaning of Section 168(h) of the Code. All material elections with respect to Taxes affecting the Company as of the date hereof are set forth in the Disclosure Schedule. No new elections with respect to Taxes, or any changes in current elections with respect to Taxes of the Company or any Subsidiary or affecting the Company shall be made after the date of this Agreement without the prior written consent of the Buyer. Neither the Company nor any Subsidiary has made an election under Section 338 of the Code nor has taken any action that would result in any income tax liability to the Company or any Subsidiary as a result of a deemed election within the meaning of Section 338 of the Code. | 8-K/A | EX-2 | 1996-01-12T00:00:00 | 1996-01-12T16:44:31 |
0000928385-96-000011 | 0000928385-96-000011_0000.txt | PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14a.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3).
[X] 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 transaction 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 Rule 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:
[_] 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.
(2) Form, Schedule or Registration Statement No.:
You are cordially invited to attend a Special Meeting of Stockholders (the "Meeting") of Northbay Financial Corporation ("Northbay"), the holding company for Northbay Savings Bank, F.S.B. (the "Bank"), to be held at the Petaluma Plaza North Office of the Bank located at 311 North McDowell Boulevard, Petaluma, California on _________, 1996, at __:00__.m., Petaluma, California time.
The attached Notice of Special Meeting of Stockholders and Proxy Statement describe the formal business to be transacted at the Meeting. The primary purpose of the Meeting is to consider and vote on a proposal to approve the Agreement and Plan of Merger (the "Merger Agreement") which provides for the merger of Northbay with a wholly owned subsidiary of Bank of the West ("Bank West"). In the merger, each share of Northbay common stock outstanding at the time of the merger would be converted into the right to receive $15.75 in cash, subject to potential downward adjustment, as provided in the Merger Agreement, to a floor of $15.375. Following the merger, Northbay stockholders will no longer own any stock or have any interest in Northbay, nor will they receive, as a result of the merger, any stock of Bank West. Consummation of the merger is subject to certain conditions, including the approval of all applicable regulatory authorities and the stockholders of Northbay.
The terms of the Merger Agreement were negotiated by the Board of Directors in light of various factors, including Northbay's and Bank West's recent operating results, current financial condition and future prospects. Kaplan Associates Inc., Northbay's financial advisor, has advised your Board of Directors that in its opinion the consideration to be received by Northbay stockholders in the merger is fair from a financial point of view.
At the Meeting, Northbay stockholders will consider and vote upon approval of the merger. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF NORTHBAY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER.
Northbay stockholders also will consider and vote upon a proposal to authorize adjournment of the Meeting, if necessary, to obtain sufficient votes for approval of the merger. If any other matters are properly brought before the Meeting, the persons named in the accompanying form of proxy will vote the shares represented by such proxy upon such matters as determined by a majority of the Board of Directors. You are urged to read the accompanying Proxy Statement, which provides information regarding the merger and related matters.
Your vote is important, regardless of the number of shares you own. ON BEHALF OF THE BOARD OF DIRECTORS, I URGE YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE MEETING. This will not prevent you from voting in person but will assure that your vote is counted if you do not attend the Meeting.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON ___________, 1996
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Meeting") of Northbay Financial Corporation ("Northbay"), the holding company for Northbay Savings Bank, F.S.B. ("Northbay Savings" or the "Bank"), will be held at the Petaluma Plaza North Office of the Bank located at 311 North McDowell Boulevard, Petaluma, California, on ___________, 1996, at _____ __.m., local time.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. A proposal to approve the Agreement and Plan of Merger, dated as of November 9, 1995 (the "Merger Agreement"), by and among Northbay, Bank of the West ("Bank West") and NF Acquisition Co. ("NF Acquisition"), a wholly owned subsidiary of Bank West, pursuant to which (i) Northbay will merge with NF Acquisition, with Northbay the surviving corporation to be followed by the merger of Northbay and Northbay Savings with and into Bank West, with Bank West surviving the merger, and (ii) each outstanding share of Northbay common stock would be converted into the right to receive $15.75 in cash, subject to potential downward adjustment as provided in the Merger Agreement, to a floor of $15.375, without interest, all on and subject to the terms and conditions contained in the Merger
2. A proposal to adjourn the Meeting to solicit additional proxies in the event there are not sufficient votes to approve the foregoing
3. Such other matters as may properly come before the Meeting or any adjournments or postponements thereof.
The Board of Directors is not aware of any other business to come before the Meeting.
Any action may be taken on any one of the foregoing proposals at the Meeting on the date specified above or on any date or dates to which, by original or later adjournment or postponement, the Meeting may be adjourned or postponed. Stockholders of record at the close of business on _________, 1996, are the stockholders entitled to vote at the Meeting and any adjournments or postponements thereof.
Under Delaware law, holders of Northbay common stock who dissent and do not vote in favor of the merger are entitled to appraisal rights provided that they strictly comply with certain statutory procedures explained in detail in the attached proxy statement.
You are requested to fill in and sign the enclosed form of Proxy which is solicited by the Board of Directors and to mail it promptly in the enclosed envelope. The proxy will not be used if you attend and vote at the Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE NORTHBAY THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
The following is a brief summary of certain information relating to the Merger (as hereinafter defined) contained elsewhere in this Proxy Statement. This summary is not intended to be a complete description of all material facts regarding Bank West or Northbay and the matters to be considered at the Meeting, and is qualified in all respects by the more detailed information appearing elsewhere herein and the Appendices hereto. A copy of the Merger Agreement is set forth as Appendix A to this Proxy Statement and reference is made thereto for a complete description of the terms of the Merger.
The Merger Agreement, a copy of which is attached hereto as Appendix A and hereby incorporated by reference in this Proxy Statement, provides for (i) the merger of Northbay with and into an interim subsidiary of Bank West (ii) the subsequent merger of Northbay with and into Bank West with Bank West surviving the merger and (iii) immediately thereafter, the merger of Northbay Savings with Bank West (the "Merger"). Following the Merger, Northbay will cease to exist and Bank West will succeed to all of the assets and liabilities of Northbay. For a more detailed description of the Merger, see "PROPOSAL I - THE MERGER."
At the Effective Time (as hereinafter defined) of the Merger, each of the outstanding shares of Northbay Common Stock outstanding immediately prior to the Effective Time will be converted into the right to receive $15.75 per share in cash, subject to potential downward adjustment as provided in the Merger Agreement, to a floor of $15.375, without interest (the "Merger Consideration"). As of ____________ ___, 1995, there were 2,750,522 shares of Northbay Common Stock issued and outstanding and outstanding stock options to acquire 237,183 Shares of Northbay Common Stock for an aggregate Merger Consideration on that date of approximately $47.1 million. Upon completion of the Merger, the existing stockholders of Northbay will no longer own any stock or have any interest in Northbay, nor will they receive, as a result of the Merger, any stock of Bank West.
Bank of the West is a California chartered commercial banking corporation headquartered in San Francisco, California. It is the eighth largest bank in the State of California with total assets of approximately $4.3 billion and total deposits of approximately $3.5 billion at September 30, 1995. Its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). It is a wholly-owned indirect subsidiary of Banque Nationale de Paris ("BNP") of Paris, France.
Bank of the West conducts a general commercial banking business, providing retail and corporate banking and trust services to individuals, institutions, businesses and governments through 99 branches and other commercial banking offices located primarily in the San Francisco Bay Area and elsewhere in Northern California. Bank of the West also generates indirect automobile loans and leases, recreational vehicle loans, recreational marine vessel loans, equipment leases and deeds of trust on single family residences through a network of manufacturers, dealers, representatives and brokers in various states.
Northbay was incorporated under the laws of the State of Delaware on October 5, 1988 for the purpose of becoming a savings and loan holding company. On April 10, 1989, Northbay acquired all of the outstanding stock of Northbay Savings issued in connection with Northbay Savings' conversion from a California chartered mutual to a California chartered stock institution.
Prior to the acquisition of all of the outstanding stock of Northbay Savings, Northbay had no assets or liabilities and engaged in no business activities. Subsequent to the acquisition of Northbay Savings, Northbay has engaged in no significant activity other than holding the stock of Northbay Savings and operating through Northbay Savings a savings and loan business.
Northbay Savings was organized as a federally chartered mutual savings and loan association in 1965 and converted to a California chartered mutual savings and loan association in 1972. In January, 1990, Northbay Savings amended its charter to adopt the name "Northbay Savings Bank." In January, 1990, Northbay Savings converted to a federally chartered stock savings bank with the name "Northbay Savings Bank, F.S.B." At September 30, 1995, Northbay Savings had total assets of $395.2 million, deposits of $282.9 million, and stockholders' equity of $34.7 million. Based on total assets at that date, the Bank was the second largest savings and loan institution headquartered in Sonoma County, California insured by the Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is primarily engaged in the business of attracting deposits from the general public and using those deposits, together with other funds, to originate mortgage loans for the purchase or construction of residential real estate, multi-family real estate and commercial real estate. At September 30, 1995, substantially all of the Bank's real estate loans were secured by properties located in California. To a lesser extent, the Bank also originates consumer loans and commercial business loans. The Bank has been a participant in the secondary mortgage market as both a purchaser and seller of loans. In the past, the Bank also engaged to a limited extent in real estate development activities. In March 1994, the Bank established full-service brokerage capabilities and alternative investment services within each of the Bank's branch offices pursuant to an agreement with PRIMEVEST Financial Services Inc., an independent registered broker-dealer.
Northbay Savings conducts operations through its main office in Petaluma, California, eight full service branch offices and one loan production office, all within Sonoma County. Petaluma is located approximately 40 miles north of San Francisco.
The executive offices of Northbay and the Bank are located at 1360 Redwood Way, Petaluma, California, and the telephone number at that address is (707) 792-7400.
PLACE, TIME AND DATE; PURPOSE. The Meeting of Stockholders will be held at ___:00 __.m., Petaluma, California time, on _____________ ___, 199__ at the Petaluma Plaza North Office of the Bank located at 311 North McDowell Boulevard, Petaluma, California. The purpose of the Meeting is to consider and vote on a proposal to approve the Merger Agreement.
RECORD DATE; SHARES ENTITLED TO VOTE. The presence, in person or by proxy, of the holders of at least a majority all the shares of Northbay's common stock (the "Northbay Common Stock") entitled to vote at the meeting is required for a quorum. The close of business on _______________ ___, 199___ has been fixed as the record date (the "Record Date") for the determination of persons entitled to notice of and to vote at the Meeting. As of the Record Date, there were 2,750,522 shares of Northbay Common Stock issued and outstanding and entitled to vote.
VOTE REQUIRED. Approval of the Merger Agreement will require the affirmative vote of the holders of at least a majority of the outstanding shares of Northbay Common Stock entitled to be voted at the Meeting. Approval of the proposal to adjourn the Meeting to solicit additional proxies, if required, would be subject to approval by the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Meeting. Stockholders who execute proxies retain the right to revoke them at any time prior to being voted at the Meeting. Northbay stockholders are entitled to one vote at the Meeting for each share of Northbay Common Stock held of record at the close of business on the Record Date. As of the Record Date, the directors and executive officers of Northbay, together with their affiliates, beneficially owned 473,175 shares of Northbay Common Stock, or 17.2% of the outstanding shares (excluding 182,082 shares subject to options, which are currently exercisable). The directors and executive officers of Northbay have granted to Bank West irrevocable proxies permitting Bank West to vote their respective Northbay shares in favor of the Merger at the Special Meeting. See "PROPOSAL I - THE MERGER - Certain Proxies on Northbay Shares."
If at least a majority of the votes eligible to be cast do not vote in favor of the Merger Agreement, Northbay will continue to act as a separate entity and a going concern. A failure to vote will have the same effect as a vote against approval of the Merger Agreement.
REVOCABILITY OF PROXIES. Stockholders who execute proxies retain the right to revoke them at any time. Proxies may be revoked by written notice to the Secretary of Northbay, by the filing of a later dated proxy prior to a vote being taken at the Meeting, or by attending the meeting and voting in person.
DIRECTORS' APPROVAL AND RECOMMENDATION OF THE MERGER
At the Board of Directors meeting held on November 9, 1995, after considering the terms and conditions of the Merger Agreement and obtaining the advice of its financial advisor, the Board of Directors unanimously approved the Merger Agreement. The Board of Directors believes that the consideration offered pursuant to the transaction is fair to the stockholders of Northbay and that approval of the transaction is in the best interests of the Northbay stockholders, and, accordingly, recommends that stockholders of Northbay vote "FOR" approval of the Merger Agreement. For a discussion of the circumstances surrounding the Merger and the factors considered by the Northbay Board of Directors in making its recommendation, see "PROPOSAL I - THE MERGER - Background of the Merger" and "- Reasons for the Merger and Recommendation of the Board of Directors."
Certain members of Northbay's management and Northbay's Board of Directors have certain interests in the Merger that are in addition to their interests as stockholders of Northbay generally. See "PROPOSAL I - THE MERGER - Interests of Certain Persons in the Merger."
The Board of Directors of Northbay retained the firm Kaplan Associates, Inc., located in Washington, D.C. ("Kaplan"), to assist in the negotiation of the Merger and to act as financial advisor in connection therewith. Kaplan rendered to the Board of Directors of Northbay its opinion dated November 9, 1995 to the effect that the consideration offered pursuant to the Merger Agreement is fair to Northbay's stockholders from a financial point of view. In addition, Kaplan has rendered an updated opinion to similar effect as of the date of this Proxy Statement. A copy of Kaplan's updated opinion is set forth as Appendix C and should be read by stockholders in its entirety. For further information regarding the opinion of Kaplan, see "PROPOSAL I - THE MERGER - Opinion of Financial Advisor."
The Merger will become effective at the time a certificate of merger or other appropriate documents (in any such case, the "Certificate of Merger") related to the Merger is filed as provided in the Delaware General Corporation law (the "DGCL") ("Effective Time"). Assuming the timely receipt of all regulatory approvals, the expiration of all statutory waiting periods and the satisfaction or waiver of all conditions in the Merger Agreement, it is currently anticipated that the Merger will be consummated in the first quarter of 1996. See "PROPOSAL I - THE MERGER -- Effective Time."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The directors and executive officers of Northbay, together with their affiliates, beneficially owned as of the Record Date a total of 655,257 shares of Northbay Common Stock including 182,082 shares subject to unexercised options held by such persons. Upon the Effective Time of the Merger, the directors and executive officers will receive the same consideration for their shares as the other stockholders of Northbay. Certain members of Northbay's management and the Board of Directors have certain interests in the Merger that are in addition to their interests as stockholders of Northbay generally. As described below, the Merger will result in the cash out of stock options and severance payments under employment and severance agreements, the aggregate value of which would be approximately $5.1 million.
Pursuant to the terms of the Merger Agreement, all validly issued and outstanding stock options under Northbay's 1988 Stock Option and Incentive Plan ("Stock Option Plan") will be converted into the right to receive $15.75 in cash less the exercise price for the shares. Executive officers and directors of Northbay currently hold options to purchase an aggregate of 182,082 shares. Under this arrangement such officers and directors will receive, net of the aggregate option exercise price, a total of approximately $2.0 million.
Alfred A. Alys, Executive Vice President and Chief Executive Officer, Granville I. Stark and Bertha Balfour, Senior Vice Presidents, Cathy Simondi, Assistant Vice President and Greg Jahn, Vice President and Chief Financial Officers have employment or severance agreements with Northbay and/or Northbay Savings. Pursuant to the Merger Agreement, each of the above-named individuals shall be entitled to receive from Northbay Savings, at the Effective Time, payments with respect to their change of control severance payments. Pursuant to these agreements, Bank West will make payments aggregating $1.1 million. In addition, Bank West will enter into a consulting agreement and a noncompetition agreement with Mr. Alys at the Effective Time. Pursuant to these agreements, Bank West will make a $250,000 payment to Mr. Alys at the Effective Time.
The members of the Board of Directors of Northbay have agreed pursuant to a letter agreement with Bank West to serve as a local advisory board to Bank West for an initial period of two years. The members of the Board of Directors of Northbay and Northbay Savings will enter into noncompetition agreements with Bank West upon the closing of the transactions contemplated by the Merger Agreement.
In addition, three directors of Northbay lease properties to Northbay. Pursuant to a letter agreement, these directors have agreed to amend such leases on terms satisfactory to Bank West.
After the Effective Time, Bank West shall, to the full extent permitted by law, indemnify all directors and officers of Northbay and its subsidiaries against all liabilities arising out of any claim based in whole or in part on the fact that such person is or was a director or officer of Northbay, if such claim pertains to any matter or fact arising, existing, or occurring on or prior to the Effective Time, subject to certain limitations specified in the Merger Agreement. See "PROPOSAL I - THE MERGER - Interests of Certain Persons in the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
As a result of the Merger, a stockholder of Northbay will generally recognize a gain or loss for federal income tax purposes measured by the difference between the cash received pursuant to the Merger Agreement and such stockholder's adjusted tax basis in the shares of Northbay Common Stock exchanged therefor. EACH STOCKHOLDER SHOULD CONSULT WITH HIS OR HER TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. See "PROPOSAL I - THE MERGER - Certain Federal Income Tax Consequences."
METHOD OF PAYMENT/SURRENDER OF STOCK CERTIFICATES
Promptly after consummation of the Merger, Bank West will mail instructions to each Northbay stockholder concerning the proper method of surrendering certificates formerly representing Northbay Common Stock in exchange for the Merger Consideration. DO NOT SEND STOCK CERTIFICATES AT THIS TIME. See "PROPOSAL I - THE MERGER - Surrender of Stock Certificates."
CONDITIONS TO CONSUMMATION OF THE MERGER; TERMINATION
The respective obligations of the parties to consummate the Merger are subject to, among other things: (i) approval of the Merger Agreement by Northbay stockholders holding not less than a majority of the outstanding shares of Northbay Common Stock; (ii) receipt of all applicable regulatory approvals; (iii) the absence of any order prohibiting consummation of the Merger; and (iv) the satisfaction or waiver of certain additional conditions. For more information on conditions precedent to consummation of the merger and the regulatory approvals required, see "PROPOSAL I - THE MERGER - Regulatory Approvals" and "- Conditions to Consummation; Termination."
The Merger Agreement may be terminated at any time by mutual agreement of the parties. The Merger Agreement may also be terminated by either party if (i) the Office of Thrift Supervision (the "OTS") or any other governmental agency denies approval or issues a final order prohibiting the consummation of the merger; or (ii) there is a material breach of the Merger Agreement or Stock Option Agreement uncured for 30 days; or (iii) the Merger has not been consummated on or before August 31, 1996 through no fault of either party.
The Merger Agreement may be terminated by Bank West upon written notice to Northbay if (i) a takeover proposal is communicated to Northbay by a third party other than Bank West and (a) stockholder approval is not obtained at the Meeting or (b) the Meeting does not occur prior to June 30, 1996 or (c) Northbay's Board of Directors shall have withdrawn or modified its approval or recommendation of the Merger or Merger Agreement or recommendation of the Merger or Merger Agreement or approved or recommended any takeover proposal or (ii) the FDIC does not approve the merger of Northbay Savings into Bank West or the applicable federal statute is amended to require the payment by Bank West of an "exit" or an "entrance" fee to the applicable federal deposit insurance funds for the merger of Northbay Savings into Bank West or a governmental agency denies approval of the merger of Northbay Savings into Bank West, or (iii) a material adverse effect on Northbay has or might reasonably be expected to occur and has not been remedied in 30 days or (iv) as of the Closing Date the principal balance of Northbay deposit liabilities including, accounts accessible by negotiable orders of withdrawal, demand deposits, passbook accounts, certificates of deposits, but excluding all brokered deposits and depository accounts with balances greater than $100,000, are less than $230 million. See "PROPOSAL I - THE MERGER -- Conditions to Consummation; Termination."
The Merger is subject to the approval of the FDIC and the Superintendent of Banks of the State of California (the "Superintendent") and certain aspects of the Merger will require notification to, or waivers from, the Office of Thrift Supervision (the "OTS") and the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). There can be no assurance that such regulatory approvals will be obtained, and, if obtained, there can be no assurance as to the date of any such approvals. There can also be no assurance that any such approvals will not contain a condition or requirement which causes such approvals to fail to satisfy the conditions set forth in the Merger Agreement.
STOCK OPTION AGREEMENT; EXPENSE REIMBURSEMENT
As a condition and inducement to Bank West entering into the Merger Agreement, Northbay and Bank West entered into a Stock Option Agreement (the "Stock Option Agreement") whereby Northbay granted Bank West an unconditional, irrevocable option to purchase, up to 547,354 fully paid and nonassessable shares of Northbay Common Stock at a cash purchase price of $13.25 per share, upon the occurrence of certain triggering events. Such shares constitute 19.9% of the presently outstanding shares of Northbay (without giving effect to the shares issuable upon the exercise of such options). The Stock Option Agreement is intended to make it more difficult for another party to acquire Northbay, thereby increasing the likelihood that the merger will occur. In addition, under certain circumstances, if either party terminates the Merger Agreement, the non-terminating party will pay the terminating party's expenses relating to the Merger incurred up to $250,000. See "PROPOSAL I - THE MERGER -- Stock Option Agreement."
Under Delaware law, holders of Northbay Common Stock who do not vote in favor of the Merger are entitled to appraisal rights provided that they strictly comply with certain statutory procedures. See "PROPOSAL I - THE MERGER -- Appraisal Rights" and Section 262 of the Delaware General Corporation Law attached as Appendix B for a more complete description of the appraisal rights.
The Merger will be treated as a purchase for accounting purposes. Accordingly, under generally accepted accounting principles, the assets and liabilities of Northbay will be recorded on the books of Bank West at their respective fair values at the time of consummation of the Merger.
The Common Stock of Northbay is listed and traded on the American Stock Exchange (AMEX) under the symbol "NBF." The closing price per share for the Northbay Common Stock as reported on the AMEX on November 9, 1995, the last full trading day prior to the announcement of the execution of the Merger Agreement, was $13.00. Northbay has paid dividends of $.44 and $.40 per common share for the fiscal years ended June 30, 1995 and 1994, respectively. On _________________ ___, 199__, there were approximately _______ stockholders of record. See "Market Prices and Dividends of Northbay Common Stock."
The following tables set forth certain unaudited selected consolidated financial and other data for Northbay at the dates and for the periods indicated. Information at September 30, 1995 and for the three months ended September 30, 1995 and 1994 is unaudited, but, in the opinion of management, contains all adjustments (none of which were other than normal recurring entries) necessary for a fair statement of the results at such date or for such periods. This information is qualified in its entirety by reference to the detailed information and Consolidated Financial Statements and Notes thereto which are incorporated in this Proxy Statement by reference.
/(1)/ Includes certificates of deposit, overnight federal funds, income funds, U.S. Government securities and interest-bearing cash balances.
/(2)/ See note 1 of Notes to Consolidated Financial Statements contained in Northbay's Annual Report to Stockholders for the fiscal year ended June 30, 1995, which is incorporated by reference herein.
/(3)/ See note 11 of Notes to Consolidated Financial Statements contained in Northbay's Annual Report to Stockholders for the fiscal year ended June 30, 1995, which is incorporated by reference herein.
/(4)/ Aggregate cash dividends paid during the period divided by net income.
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON ___________, 1996
This Proxy Statement is being furnished to the stockholders of Northbay Financial Corporation ("Northbay"), a Delaware corporation and the holding company for Northbay Savings Bank, F.S.B. ("Northbay Savings" or the "Bank"), in connection with the solicitation of proxies by the Board of Directors of Northbay (the "Board of Directors") from holders of outstanding shares of common stock, par value $.10 per share, of Northbay (the "Common Stock") for use at the Special Meeting of Stockholders to be held on ________, ________, 1996 at ____ _.m., local time, at the Petaluma Plaza North Office of the Bank, located at 311 North McDowell Boulevard, Petaluma, California, and at any adjournments or postponements thereof (the "Meeting"). This Proxy Statement and the related proxy card are first being mailed to stockholders on or about _________, 1996.
At the Meeting, stockholders will consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of November 9, 1995 (the "Merger Agreement"), by and among Northbay, Bank of the West ("Bank West"), a California banking corporation, and NF Acquisition Co. ("NF Acquisition"), a Delaware corporation and wholly owned subsidiary of Bank West, pursuant to which: (i) NF Acquisition will be merged with and into Northbay, with Northbay as the surviving corporation, followed by the merger of Northbay and Northbay Savings with and into Bank West, with Bank West as the surviving corporation (collectively, the "Merger"), and (ii) each outstanding share of Common Stock of Northbay outstanding at the effective time of the Merger (the "Effective Time") will be converted into the right to receive $15.75 in cash, subject to potential downward adjustment as provided in the Merger Agreement, to a floor of $15.375, without interest (the "Merger Consideration"). The Merger Agreement is included as Appendix A hereto and incorporated by reference herein. At the Meeting, stockholders also will consider and vote upon a proposal to adjourn the Meeting, if necessary, to permit further solicitation of proxies to approve the Merger proposal.
Consummation of the Merger is conditioned upon, among other things, approval and adoption of the Merger Agreement by the requisite vote of Northbay stockholders and the receipt of all requisite regulatory approvals and consents. For further information concerning the terms and conditions of the Merger, see "PROPOSAL I - THE MERGER."
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NORTHBAY OR ANY OTHER PERSON.
All information contained in this Proxy Statement relating to Bank West, NF Acquisition and their affiliates has been supplied by Bank West for inclusion herein and has not been independently verified.
The Board of Directors knows of no additional matters that will be presented for consideration at the Meeting. Execution of the accompanying proxy, however, confers on the designated proxyholders discretionary authority to vote the shares of Common Stock covered thereby in accordance with their best judgment on such other business, if any, that may properly come before the Meeting or any adjournments or postponements thereof.
The date of this Proxy Statement is ___________, 1996
This Proxy Statement is being furnished in connection with the solicitation of proxies by the Board of Directors of Northbay to be used at the Meeting to be held on ________________ ____, 1996 at ____:00 __.m., Petaluma, California time, and at any adjournment or postponement thereof. The accompanying Notice of Special Meeting of Stockholders and this Proxy Statement are first being mailed to stockholders on or about ____________________ __, 1996.
At the Meeting, stockholders will be asked to consider and vote on a proposal to approve the Merger Agreement. The Merger Agreement provides for the merger of NF Acquisition Co., a wholly-owned subsidiary of Bank West, with and into Northbay, with Northbay as the surviving company, followed by the mergers of Northbay and Northbay Savings with and into Bank West, with Bank West as the surviving corporation. Pursuant to the Merger Agreement, upon consummation of the proposed Merger, each share of Northbay Common Stock outstanding immediately prior to the Effective Time of the Merger will be canceled and converted into the right to receive $15.75 per share in cash, subject to potential downward adjustment, as provided in the Merger Agreement, to a floor of $15.375, without any interest thereon. See "PROPOSAL I - THE MERGER" and Appendix A. THE BOARD OF DIRECTORS OF NORTHBAY BELIEVES THAT THE MERGER IS IN THE BEST INTEREST OF NORTHBAY AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
Stockholders of record as of the date of the close of business on ______________ ___, 199__ are entitled to one vote for each share then held. As of the Record Date, _________________ shares of Northbay Common Stock were issued and outstanding. At that date, such shares were held of record by approximately _______ stockholders. The presence, in person or by proxy, of at least a majority of all the outstanding shares of Northbay Common Stock entitled to vote at the meeting is necessary to constitute a quorum at the Meeting.
The affirmative vote of the holders of at least a majority of the outstanding shares of Northbay Common Stock is required in order to approve the Merger Agreement. Therefore, a failure to return a properly executed proxy card or to vote in person at the Meeting will have the same effect as a vote against approval of the Merger Agreement. Approval of the proposal to adjourn the Meeting to solicit additional proxies requires the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Meeting.
Abstentions will be counted as shares present at the Meeting for purposes of determining the presence of a quorum and will have the same effect as a vote against approval of the proposals. Broker non-votes will be considered present at the Meeting for purposes of determining the presence of a quorum but will not be considered as voting at the Meeting. Broker non-votes will have the same effect as a vote against approval of the proposals.
As of the Record Date, the directors and executive officers of Northbay and their affiliates beneficially owned a total of 473,175 shares of Northbay Common Stock, or 17.2% of the outstanding shares, excluding 182,082 shares subject to unexercised options held by such persons which cannot be voted at the Meeting. The directors and executive officers of Northbay have granted to Bank West irrevocable proxies permitting Bank West to vote their respective Northbay shares in favor of the Merger at the Special Meeting. See "PROPOSAL I - THE MERGER - Certain Proxies on Northbay Shares."
As of the Record Date, the directors and executive officers of Bank West and their affiliates beneficially owned no outstanding shares of Northbay Common Stock. See "PROPOSAL I - THE MERGER - Stock Option Agreement" for information regarding an option to purchase up to 547,354 shares of Northbay Common Stock that was granted by Northbay to Bank West.
Shares of Northbay Common Stock represented by properly executed proxies will be voted in accordance with the instructions indicated on the proxies or, if no instructions are indicated, will be voted FOR approval of the Merger Agreement and the proposal to adjourn the Meeting, if necessary, to solicit additional proxies. Properly executed proxies will be voted in accordance with the determination of a majority of the Board of Directors as to any other matter which may properly come before the Meeting or any adjournment or postponement thereof, however proxies voting against approval of the Merger Agreement will not be voted by the Board of Directors in favor of adjournment of the Meeting. Stockholders who execute proxies retain the right to revoke them at any time. Proxies may be revoked by written notice to the Secretary of Northbay, by the filing of a later dated proxy prior to a vote being taken at the Meeting, or by attending the Meeting and voting in person. A proxy will not be voted if a stockholder attends the Meeting and votes in person.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Persons and groups owning in excess of five percent of Northbay's Common Stock are required to file certain reports with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon such reports, management knows of no persons or groups at ______________ ___, 199__ who owned beneficially more than 5% of the outstanding shares of Northbay's Common Stock. See "PROPOSAL I - THE MERGER - Stock Option Agreement" for information regarding an option to purchase up to 547,354 shares of Northbay Common Stock that was granted by Northbay to Bank West. The table sets forth, as of the same date, certain information as to the shares of Northbay's Common Stock beneficially owned by each of the directors of Northbay, a senior vice president of Northbay and all directors and executive officers of Northbay as a group.
/(1)/ Includes certain shares owned by businesses in which the director is an officer or major stockholder or by spouses, by immediate family members, or as a custodian or trustee for minor children, over which shares the named individual effectively exercises sole or shared voting and investment power, unless otherwise indicated. Also includes shares which directors have a right to purchase pursuant to stock options under the Stock Option Plan. Does not include 123,214 shares owned by the ESOP, over which shares the ESOP Committee, consisting of certain directors, exercises partial voting and investment power. In addition, does not include 6,985 shares owned by the Bank's Profit Sharing Plan, over which shares certain directors exercise voting and dispositive powers.
/(2)/ Includes 70,501, 8,494, 8,494, 8,494, 8,494, 8,494 and 8,494 shares which may be purchased upon the exercise of employee stock options by Messrs. Alys, Nizibian, Ramatici, Mahoney, Stinar, DeCarli and Traverso, respectively.
/(3)/ Includes 6,388 shares held by Northbay's Employee Stock Ownership Plan ("ESOP") which have been allocated to Mr. Alys.
/(4)/ Includes 1,999 shares owned directly, 2,878 shares owned through an IRA, 2,752 shares owned through his wife's IRA, 535 shares owned through Northbay's Employee Stock Purchase Plan, 3,575 shares owned by Northbay's ESOP which have been allocated to him and 26,171 shares which he has a right to purchase pursuant to the exercise of stock options under Northbay's Stock Option and Incentive Plan (the "Stock Option Plan").
/(5)/ Includes 182,082 shares which executive officers and directors as a group have a right to purchase pursuant to the exercise of stock options under Northbay's Stock Option Plan and 15,203 shares owned by Northbay's ESOP which have been allocated to executive officers, but excludes 123,214 shares owned by the ESOP over which certain directors exercise partial voting and dispositive power as members of the ESOP Committee and 6,985 shares owned by Northbay's Profit Sharing Plan over which certain directors exercise shared voting and dispositive power as trustees of such plan.
PROPOSAL I - THE MERGER
The following information concerning the Merger, insofar as it relates to matters contained in the Merger Agreement, is qualified in its entirety by reference to the Merger Agreement, which is attached hereto as Appendix A. Northbay stockholders are urged to read the Merger Agreement carefully.
Under the terms of the Merger Agreement, at the Effective Time, NF Acquisition Co., a wholly-owned first-tier subsidiary of Bank West, will be merged with and into Northbay, with Northbay as the surviving corporation. Additionally, immediately following the Effective Time,
Northbay and Northbay Savings will be merged with and into Bank West, with Bank West as the surviving corporation. As a result of the Merger, Northbay will cease to exist as a separate entity and Bank West will succeed to all of the assets and liabilities of Northbay. Upon completion of the Merger, stockholders of Northbay will no longer own any stock in Northbay and will not, as a result of the Merger, own any Bank West common stock.
Bank West may elect to modify the structure of the mergers, provided, however, that Bank West shall not have the right to make any revision to the structure of the transaction that would (a) materially and adversely affect the timing of the consummation of the transactions contemplated herein or (b) adversely affect the tax effect or economic benefits of the Merger to the holders of Northbay Common Stock.
At the Effective Time, each of the shares of Northbay Common Stock outstanding immediately prior to the Effective Time will be converted into the right to receive $15.75 per share in cash, subject to potential downward adjustment as provided in the Merger Agreement, to a floor of $15.375, without any interest thereon. The Merger Consideration shall be adjusted downward if, at the Effective Time, Northbay Net Worth shall be less than the Net Worth Floor (as such term is defined below), by an amount equal to the product of (i) the dollar amount by which Northbay Net Worth at such time is less than such amount and (ii) 1.125, divided by 2,987,705. Notwithstanding the foregoing provisions, in no event shall the Merger Consideration be adjusted downward to less than U.S.$15.375 per share of Northbay Common Stock.
The "Net Worth Floor" is defined in the Merger Agreement as follows: $35,000,000 in the event the closing of the Merger (the "Closing") occurs on or after April 30, 1996; $34,850,000 in the event the Closing occurs between March 31, 1996 and April 29, 1996 (dates inclusive); $34,700,000 in the event the Closing occurs between February 29, 1996 and March 30, 1996 (dates inclusive); $34,550,000 in the event the Closing occurs between January 31, 1996 and February 28, 1996 (dates inclusive); and $34,400,000 in the event the Closing occurs between December 31, 1995 and January 30, 1996 (dates inclusive).
If prior to the Effective time, Northbay shall declare a stock dividend or distribution upon or subdivide, split up, reclassify or combine Northbay Common Stock, or declare a dividend, or make a distribution, on Northbay Common Stock in any security convertible into Northbay Common Stock, appropriate adjustment will be made to the Merger Consideration to reflect the change in the capital stock of Northbay as a result thereof. If at the Effective Time, Northbay shall have outstanding more shares of Northbay Common Stock than are contemplated to be outstanding or subject to option pursuant to Northbay's representation and warranty in the Merger Agreement, then, the Merger Consideration shall be adjusted downward so as to reflect the total number of shares of Northbay Common Stock outstanding over the amount contemplated pursuant to Northbay's representation and warranty in the Merger Agreement.
As of the Record Date, there were 2,750,522 shares of Northbay Common Stock issued and outstanding and outstanding stock options to acquire 237,183 shares of Northbay Common Stock for an aggregate Merger Consideration on that date of approximately $47.1 million. Within 10 days after the Effective Time, Bank West will mail to holders of record of Northbay Common Stock a letter of transmittal and instructions for surrendering certificates evidencing Northbay Common Stock. Upon delivery to the paying agent to be designated in such letter of transmittal and instructions of a properly executed letter of transmittal and such receive a check for the shares of Northbay Common Stock represented by the certificates and the certificates so surrendered will be canceled. No interest will be paid or accrued on the cash amount to which the stockholder became entitled at the Effective Time. DO NOT SEND STOCK CERTIFICATES AT THIS TIME.
Delaware law provides for certain appraisal rights to the holders of Northbay Common Stock in connection with the Merger. See "-- Appraisal Rights" for more information.
On August 10, 1994, Northbay engaged Kaplan Associates, Inc. ("Kaplan") to provide financial advisory services to Northbay in connection with the desire of Northbay's Board and management to enhance shareholder value. At Northbay's request, Kaplan initiated a process of exploring various strategic options available to Northbay for enhancement of shareholder value, including implementation of certain earnings improvement objectives, initiation of common stock repurchases, acquiring or merging with other financial institutions, purchasing branch offices and deposits of other institutions, and pursuing a sale of the company. During October and November 1994, Kaplan presented analyses to Northbay management that evaluated the potential benefits related to these options.
At the November 16, 1994 regular monthly meeting of the Northbay Board, Kaplan presented its analysis of Northbay's ability to deliver value to its shareholders through various alternatives. Kaplan discussed the range of future values that could be provided through remaining independent using varying assumptions regarding expansion and earnings growth and utilizing certain assumptions regarding trading price multiples relative to earnings per share and tangible book value. In addition, the potential benefits of certain branch purchases and an acquisition of another thrift institution along with other earnings enhancement strategies were reviewed in detail and compared with a possible sale of Northbay as a means of enhancing shareholder value. The likely values achievable from a sale of Northbay were based, in part, on Northbay's financial performance trends and outlook, the increased trading price level of Northbay Common Stock reflecting acquisition speculation to some extent, acquisition values for comparable institutions headquartered in California and other Western states, and the probable interest of other parties in acquiring Northbay's retail banking franchise. The Northbay Board further discussed with its advisors the increasingly competitive banking environment in which Northbay operated, the increased competition arising from non-banking entities, and the presence in Northbay's immediate and adjacent markets of significantly larger financial institutions seeking to expand through acquisitions.
After a thorough review of this analysis and previous analyses of other methods of enhancing shareholder value, the Northbay Board determined that the possible sale of Northbay might be the approach that was in the best interest of Northbay and its shareholders. Accordingly, in order for the Northbay Board to fully assess the strategic alternatives available to enhance shareholder value and consistent with its view as to its fiduciary responsibilities to shareholders, the Northbay Board authorized management and Kaplan, in consultation with legal counsel, to seek solicitations of interest from other parties regarding a possible acquisition of Northbay.
Kaplan, in consultation with the Northbay Board and management, developed a list of twenty-four financial institutions that were considered to be potentially interested in a possible acquisition of Northbay and capable of effecting such a transaction. At the direction of the Northbay Board,
Kaplan contacted these twenty-four institutions during January and February 1995 to determine whether they would be interested in considering the acquisition of Northbay. Of these parties, seven institutions executed confidentiality agreements with Northbay and received a detailed information memorandum concerning Northbay's operations. These seven institutions each were also invited to submit a written preliminary indication of interest, including a proposed acquisition price. Three written preliminary indications of interest were received with two being submitted on March 3, 1995 and one on March 13, 1995. The lowest indication of value set forth a proposed acquisition price of $14.00 per share. A second indication of value set forth a range of $15.00 to $16.00 per share, while a third indication of value expressed an imputed value of $15.73 per share.
The two institutions that submitted the highest written indications of interest were invited to conduct limited due diligence reviews of Northbay. The third institution elected not to proceed further after being informed that, because its indication of interest was positioned below all others, due diligence privileges would be extended only if a higher indication of value was being contemplated. At the conclusion of this due diligence process in April 1995, each of the remaining two institutions was given an opportunity to submit a revised indication of interest. Both of the written revised indications were received on April 21, 1995. One institution presented a lower revised indication of value at $15.06 per share as compared to its preliminary indication, and the other institution narrowed its range to reflect a revised indication of value at $15.50 per share. Each institution's written revised indication included a provision that any negotiations to effect a definitive merger agreement would be conducted on an exclusive basis between Northbay and the acquiring party and would prohibit Northbay from soliciting further other acquisition proposals.
The Northbay Board instructed Kaplan to evaluate the two revised indications, based primarily on the value and form of consideration since the lower proposal constituted a combination of cash and stock in the acquiring institution and the higher proposal represented cash entirely. Kaplan presented to the Northbay Board on April 26, 1995 detailed information concerning the valuation terms and capital gains tax-related consequences of each offer proposal along with, where applicable, financial condition data, operating performance trends, historical stock price movement and current dividend policy. Kaplan advised the Northbay Board that the values of consideration indicated by both proposals were consistent with the range of Northbay's fundamental acquisition value. However, because of the differing forms of consideration represented by each proposal, Kaplan concluded that each institution should be given the opportunity to submit "best and final" indications of interest.
The two institutions were subsequently informed that the Northbay Board had determined that the two remaining indications of interest were extremely close to one another and that, therefore, it was in the best interests of Northbay and its shareholders to offer each institution a final opportunity to revise its proposal to acquire Northbay. The institution that previously submitted the indication of value at $15.06 per share responded that it was not prepared to revise its proposal. Bank West, which was the institution that previously submitted the indication of value at $15.50 per share, disclosed in ensuing discussions that it was willing to make an upward price revision to its most recent written proposal, subject to the negotiation of other transaction terms and conditions. At this point, Northbay indicated to Bank West that the Northbay Board had determined to commence negotiations on an exclusive basis with Bank West toward reaching a definitive merger agreement. In addition, Bank West would be allowed to continue its due diligence investigation of Northbay. On May 3, 1995, Northbay and Bank West entered into a written agreement providing for the exclusive negotiation of terms and conditions relating to a possible acquisition of Northbay. Among other stipulations, this agreement of exclusivity was subject to termination by May 31, 1995 should a definitive merger agreement for such transaction not be entered into by both parties before such date.
After several weeks of negotiating and exchanging draft definitive agreements, Northbay and Bank West were unable to reach a mutually satisfactory definitive agreement before the exclusivity termination date of May 31, 1995. During the course of such negotiations, Bank West expressed a possible willingness to enter into a transaction with Northbay with potentially greater value than the Merger, subject, however to negotiation of an agreement containing various conditions and provisions which could have reduced, pursuant to a formula, the purchase price per share for each dollar by which the net worth of Northbay at closing was less than a pre-determined amount (without limit on the amount by which the formula would reduce the purchase price) and which would have given Bank West the right to terminate the proposed transaction in certain events, including the occurrence of circumstances where the net financial effect on Northbay of changes in the future premiums and assessments of the FDIC would have exceeded certain levels. In addition, under the proposals then under discussion, Northbay could have been responsible for payment of Bank West's out-of-pocket expenses plus a termination fee upon termination of the transaction by Bank West under certain circumstances. Northbay's financial advisor and board of directors concluded that it would not be in the best interest of Northbay and its stockholders to enter into a transaction on the basis then under discussion taking into account the uncertainty regarding the value of such a transaction, the risks that the transaction might not close and the termination fee and expenses which would be payable by Northbay under certain circumstances. As a result, Northbay and Bank West discontinued negotiations in June 1995. The two other institutions that had earlier submitted written indications of interest were informed in June 1995 that the solicitation process for interest in Northbay had been extended. One of these institutions had recently announced a pending acquisition of a large financial institution and, therefore, indicated to Northbay that its interest in pursuing such an acquisition of Northbay was deferred indefinitely. The second institution, which previously did not perform a due diligence review of Northbay, confirmed its continuing interest and was invited to conduct such a due diligence review in July 1995. In August 1995, this institution indicated in final discussions that it was not prepared to revise its indication significantly from its initial proposal.
Following these events, Northbay elected to explore more intensively the feasibility of branch office and whole institution acquisitions as strategies to enhance shareholder value. Preliminary discussions to acquire another financial institution did not lead to serious negotiations. In August 1995, Northbay submitted a written offer to purchase four branch offices and related deposits situated in Sonoma County. These branches were being marketed for sale by an out-of-state institution with limited operations in the local area. Northbay did not emerge as the winning bidder for these branch offices, which are being acquired by a much larger institution. During this period, Northbay also considered the possible purchase of two branch offices from a local institution. However, the branches were subsequently withdrawn from the sale marketing process by the potential seller.
Bank West re-contacted Kaplan in October 1995 to indicate its continuing interest in a possible acquisition transaction with Northbay. The Northbay Board authorized Kaplan to resume discussions with Bank West and the other institution previously submitting the next highest written indication of value. Bank West and the second institution were informed of the improved performance trends and operating outlook at Northbay. The latter institution responded that, primarily because of its pending acquisition, it was not prepared to promptly commence a re-evaluation of its indication of value regarding Northbay. However, Bank West affirmed its interest and indicated that its final indication of value was $15.75 per share, payable in cash. On October
17, 1995, Northbay and Bank West entered into a new exclusivity agreement for the negotiation of a definitive merger agreement between the two companies.
After further negotiations between the parties, the Northbay Board determined, in reliance upon advice from Kaplan and legal counsel, to accept the proposal submitted by Bank West and reached mutual agreement with Bank West upon the terms and conditions pursuant to such transaction. The Northbay Board met at a specially convened meeting on November 9, 1995 to review the Merger Agreement. Representatives of Kaplan attended the meeting and presented to the Northbay Board its analysis of the financial terms of the proposed transaction and the ability of Bank West to consummate such an acquisition. Kaplan also informed the Northbay Board of its opinion that the proposed purchase price of $15.75 per share was fair, from a financial point of view, to the holders of Northbay Common Stock. Legal counsel reviewed the Merger Agreement with the Northbay Board and responded to various questions.
Following these presentations and after discussion, the Northbay Board unanimously voted to approve and executed the Merger Agreement. The Merger Agreement was approved by the Bank West Board on the same date. After the close of business of November 9, 1995, the Merger Agreement was announced publicly through the issuance of a press release.
REASONS FOR THE MERGER AND RECOMMENDATION OF THE BOARD OF DIRECTORS
Northbay's Board of Directors believes that the terms of the Merger Agreement, which are the product of arm's length negotiations between representatives of Bank West and Northbay, are fair and in the best interests of Northbay and its stockholders. In the course of reaching its determination, the Northbay Board of Directors consulted with legal counsel with respect to its legal duties, the terms of the Merger Agreement and the issues related thereto; with its financial advisor with respect to the financial aspects and fairness of the transaction; and with senior management regarding, among other things, operational matters.
In reaching its determination to approve the Merger Agreement, Northbay's Board of Directors considered all factors it deemed material, including the following:
(a) The Northbay Board analyzed information with respect to the financial condition, results of operations, cash flow, businesses and prospects of Northbay. In this regard, the Northbay Board analyzed the options of selling Northbay or continuing on a stand-alone basis. The range of values on a sale of control basis were determined to generally exceed the present value of Northbay shares on a stand-alone basis under business strategies which could be reasonably implemented by Northbay.
(b) The Northbay Board considered the written opinion of Kaplan that, as of November 9, 1995, the Merger Consideration to be received by holders of Northbay Common Stock pursuant to the Merger Agreement was fair to Northbay stockholders from a financial point of view. See "-- Opinion of Financial Advisor."
(c) The Northbay Board considered the current operating environment, including but not limited to, the continued consolidation and increasing competition in the banking and financial services industries, the prospect for further changes in these industries, the issues pertaining to the BIF/SAIF deposit insurance premium differential, federal regulatory agency consolidation importance of being able to capitalize on developing opportunities in these industries. This information had been periodically reviewed by the Northbay Board at its regular Board meetings and was also discussed between Northbay's Board and Northbay's various advisors.
(d) The Northbay Board considered the other terms of the Merger Agreement, including the taxable nature of the Merger Consideration.
(e) The Northbay Board considered the detailed financial analyses, pro forma and other information with respect to the financial condition, results of operations, cash flow, businesses and prospects of Northbay as well as the Board's own knowledge of Northbay, Bank West and their respective businesses. In this regard, the latest financial and other information regarding Northbay was analyzed, including a comparison of Northbay's current and anticipated future operating results to publicly-available financial and other information for other similar savings institutions.
(f) The Northbay Board considered the likelihood of the Merger being approved by the appropriate regulatory authorities, including factors such as market share analyses, Bank West's Community Reinvestment Act rating at that time and the estimated pro forma financial impact of the Merger on Bank West. See "-- Regulatory Approvals."
(g) The Northbay Board considered the ability of Bank West to pay the aggregate Merger Consideration. Northbay's Board reviewed Bank West's liquidity and capital position in evaluating the ability of Bank West to pay the aggregate Merger Consideration.
(h) The Northbay Board considered the fact that the Merger Agreement prohibits Northbay from initiating, soliciting, or encouraging discussions with third parties relating to alternative transactions and that the Stock Option Agreement grants Bank West an option to purchase up to 547,354 shares of Northbay Common Stock at a purchase price of $13.25 per share upon the occurrence of certain triggering events, and the fact that Bank West required such provisions as a condition to entering into the Merger Agreement.
The foregoing discussion of the information and factors considered by the Northbay Board is not intended to be exhaustive, but constitutes the material factors considered by the Northbay Board. In reaching its determination to approve and recommend the Merger Agreement, the Northbay Board did not assign any relative or specific weights to the foregoing factors, and individual directors may have weighed factors differently. After deliberating with respect to the Merger and the other transactions contemplated by the Merger Agreement, considering, among other things, the matters discussed above and the opinion of Kaplan referred to above, the Northbay Board unanimously approved and adopted the Merger Agreement and the transactions contemplated thereby as being in the best interests of Northbay and its stockholders.
FOR THE REASONS SET FORTH ABOVE, THE NORTHBAY BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF NORTHBAY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS OF NORTHBAY VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.
Pursuant to the terms of an engagement letter dated as of August 10, 1994, Northbay retained Kaplan as its financial advisor to generally advise the Northbay Board on financial and strategic matters relating to the enhancement of shareholder value, including the possible sale of Northbay and such other matters as requested by the Northbay Board. Kaplan is a nationally recognized financial advisory and consulting firm that specializes in the thrift, banking and mortgage industries. Kaplan is regularly engaged in the independent valuation of businesses and securities in connection with mergers and acquisitions, initial public offerings, private placements, recapitalizations and valuations for corporate, estate and other purposes. The Northbay Board selected Kaplan to serve as its financial advisor based upon Kaplan's qualifications, experience and reputation, as well as Kaplan's familiarity with Northbay's business and market area. There were no limitations imposed by Northbay on the scope of Kaplan's investigation or on the procedures followed by Kaplan in rendering its opinion.
Northbay paid Kaplan a general advisory fee of $25,000 upon the execution of the above-referenced engagement letter, and an installment progress fee of $25,000 upon the determination by the Northbay Board to solicit interest from other parties in a possible acquisition of Northbay. Following the delivery of Kaplan's fairness opinion in conjunction with Northbay's execution of the Merger Agreement, Northbay paid Kaplan a specific advisory fee of $100,000. In addition, upon the closing date of the Merger, Northbay will pay Kaplan a contingent transaction fee of approximately $263,000. Northbay also has agreed to indemnify Kaplan against certain liabilities, including liabilities under the federal securities laws, and to reimburse Kaplan for certain out-of-pocket expenses in connection with its services as financial advisor with respect to the Merger.
Representatives of Kaplan attended the special meeting of the Northbay Board held on November 9, 1995 at which the Northbay Board considered and approved the Merger Agreement. At this meeting, Kaplan rendered its written opinion to the Northbay Board that, as of such date, the Merger Consideration to be received for each share of Northbay Common Stock was fair to the stockholders of Northbay from a financial point of view. Kaplan's opinion was reconfirmed in writing as of the date of this Proxy Statement.
THE FULL TEXT OF KAPLAN'S WRITTEN OPINION AS OF THE DATE HEREOF, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY KAPLAN, IS ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. THIS OPINION IS SUBSTANTIALLY IDENTICAL TO THE OPINION RENDERED ON NOVEMBER 9, 1995, AND SHOULD BE READ IN ITS ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT. KAPLAN'S OPINION IS DIRECTED ONLY TO THE MERGER CONSIDERATION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY NORTHBAY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE NORTHBAY SPECIAL MEETING OR AS TO ANY OTHER MATTER. THE SUMMARY OF THE OPINION OF KAPLAN SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with rendering its opinions, Kaplan reviewed and analyzed material bearing upon the financial condition and operating performance of Northbay and Bank West and material prepared in connection with the Merger, including, among other things: (a) the Merger Agreement; (b) this Proxy Statement; (c) certain publicly available business and financial information filed with regulatory agencies by Northbay and by Bank West; (d) certain other publicly available financial data and other information concerning Northbay and the trading market for Northbay Common Stock; (e) certain other internal information, including projections for Northbay prepared by the management of Northbay and furnished to Kaplan for purposes of its analysis; and (f) publicly available information concerning certain other thrifts and banks, the trading markets for their securities and the nature and terms of certain other merger and acquisition transactions that Kaplan believed relevant to its inquiry. Kaplan also met with certain officers and representatives of Northbay and Bank West to discuss the foregoing as well as other matters that Kaplan believed relevant to its inquiry. Kaplan also considered such financial and other factors as it deemed appropriate under the circumstances and took into account its assessment of general economic, market, and financial conditions and its experience in other transactions, as well as its experience in securities valuations and knowledge of the thrift and banking industries generally. Kaplan's opinion was necessarily based upon conditions as they existed and could be evaluated on the date thereof and the information made available to Kaplan through the date thereof.
In conducting its review and arriving at its opinions, Kaplan relied upon and assumed the accuracy and completeness of the financial and other information provided to it or publicly available and did not attempt independently to verify the same. Kaplan has relied upon the management of Northbay as to the reasonableness and achievability of the financial forecasts (and the assumptions and bases therefor) provided to Kaplan, and assumed that such forecasts reflected the best currently available estimates and judgments of such Northbay management and that such forecasts would be realized in the amounts and time periods estimated by Northbay management. Kaplan also assumed, without independent verification, that the aggregate allowances for loan losses for Northbay and Bank West are adequate to cover such losses. Kaplan did not make or obtain any evaluations or appraisals of the assets or liabilities of Northbay.
In connection with rendering its opinions to the Northbay Board, Kaplan performed a variety of financial analyses, including those that are summarized below. The summary of the analyses performed by Kaplan in this regard as set forth herein does not purport to be a complete description of such analyses. Kaplan believes that its analyses and the summary set forth herein must be considered as a whole and that selecting portions of such analyses and the factors considered therein, without considering all factors and analyses, could create an incomplete view of the analyses and processes underlying its opinions. The preparation of a fairness opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis or summary description.
In performing its analyses, Kaplan made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of Northbay or Bank West. Such analyses were prepared solely as part of Kaplan's analysis of the fairness of the Merger Consideration to Northbay stockholders. No company or transaction utilized in Kaplan's analyses was identical to Northbay or Bank West or the Merger. Accordingly, such analyses are not based solely on arithmetic calculations; rather, they involve complex considerations and judgments concerning differences in financial and operating characteristics of the relevant companies, the timing of the relevant transactions, and prospective buyer interest, as well as other factors that could affect the public trading values of the company or companies to which they are being compared. Any estimates contained in Kaplan's analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. In addition, estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities actually sold. Furthermore, as described previously, Kaplan's opinion is just one of many factors taken into consideration by the Northbay Board.
The following is a brief summary of the analyses performed by Kaplan in connection with its opinions:
Comparable Company Analysis. In rendering its opinion, Kaplan examined the operating performance of Northbay in comparison to publicly traded thrift institutions that Kaplan deemed to be comparable to Northbay. This group of companies comprised 26 publicly traded thrift institutions based in the state of California ("Comparable Companies"). Kaplan analyzed the relative performance and outlook for Northbay by comparing certain financial performance and trading market information of Northbay with the Comparable Companies. Kaplan compared Northbay with the Comparable Companies based on selected operating fundamentals, including profitability, capital adequacy and asset quality. Using the latest available financial data as of or for the twelve months ended September 30, 1995 and market price data as of November 3, 1995, the median market price to latest twelve months earnings per share was 17.4x for the Comparable Companies and 22.8x for Northbay. The median price to stated book value was 89.8% for the Comparable Companies and 102.9% for Northbay. The median price to stated tangible book value was 90.9% for the Comparable Companies and 103.1% for Northbay. The implied trading market values for Northbay derived from such comparable company analysis utilizing the resulting valuation ratio medians ranged from approximately $9.94 to $11.48 per share. Based on financial data for Northbay as of September 30, 1995, the Merger Consideration of $15.75 per share represented 124.7% of Northbay's stated book value, 125.0% of Northbay's stated tangible book value and a multiple of 27.6x relative to Northbay's latest twelve months earnings per share.
At September 30, 1995, the median equity to assets ratio was 6.23% for the Comparable Companies and 8.79% for Northbay. The median tangible equity to assets ratio was 6.07% for the Comparable Companies and 8.78% for Northbay. The median latest twelve months return on average assets was 0.29% for the Comparable Companies and 0.43% for Northbay. The median return on average equity was 4.10% for the Comparable Companies and 4.83% for Northbay.
Comparable Transaction Analysis. Kaplan performed an analysis of certain comparable California financial institution acquisition transactions based upon the acquisition price relative to stated book value, stated tangible book value, latest twelve months earnings per share and the premium over tangible book value in relation to core deposits. The analysis included a review and comparison of the median offer premiums represented by a group of 22 pending and completed acquisitions of California thrifts and banks that were announced since January 1, 1995. The analysis yielded the following acquisition premium medians: (i) a median premium to book value of 129.3%, compared to 124.7% for the Bank West offer to acquire Northbay; (ii) a median premium to tangible book value of 132.1%, compared to 125.0% for the Bank West offer; (iii) a median multiple to latest twelve months earnings of 15.6x, compared to 27.6x for the Bank West offer; and (iv) a median core deposit premium of 4.02% in relation to tangible book value, compared to 4.45% for the Bank West offer.
Discounted Cash Flow Analysis. Kaplan prepared a discounted cash flow analysis that indicated theoretical present values for Northbay based on a range of terminal price-to-earnings multiples between 7.0x and 16.0x and discount rates from 12.0% to 15.0%. The range of values was based upon future dividend estimates, varying assumptions regarding common stock repurchases, internally projected earnings for the next three years and constant growth of 5.0% or 10.0% over the succeeding two years. Assuming a terminal price-to- earnings multiple of 15.0x, earnings growth of 5.0% in the outlying years, and no repurchases of common stock produces a theoretical present value of $14.50 per share. The results of the present value sensitivity analysis indicated a range of theoretical values for Northbay from $7.71 per share to $18.27 per share.
Kaplan also prepared a discounted cash flow analysis based upon a range of terminal price-to-book ratios between 70.0% and 160% and discount rates from 12.0% to 15.0%. Assuming a terminal price-to-book ratio multiple of 130.0%, earnings growth of 5.0% in the outlying years, and no common stock purchases produces a theoretical present value of $14.14 per share. The results of the present value sensitivity analysis indicated a range of theoretical values for Northbay from $8.42 per share to $17.71 per share. Kaplan compared these values to the Merger Consideration offered to Northbay stockholders in the Merger.
Impact Analysis. Kaplan analyzed the relative contribution of Northbay to certain balance sheet and income statement items, including total assets, deposits and net income, of the combined company on a pro forma basis. In addition, Kaplan considered the impact of the Merger on the financial condition of the combined company, based on certain estimates by Kaplan and the management of Northbay, as well as evaluation of other financial data available at the time performed.
Stock Performance Analysis. Pursuant to the Agreement, the Merger Consideration will consist of the right to receive $15.75 in cash for each share of Northbay Common Stock, subject to certain adjustments and limitations as set forth in the Agreement. Kaplan examined the trading history of Northbay Common Stock from January 1, 1990 through November 9, 1995. Kaplan also reviewed closing prices for Northbay Common Stock from January 1, 1995 to November 9, 1995. During such recent period, the daily closing price of Northbay Common Stock ranged from a low of $12.625 per share to a high of $15.00 per share. Prior to the announcement of the Merger, the closing price for Northbay Common Stock was $13.00 per share as of November 9, 1995.
As soon as practicable on the "Closing Date" (described hereinbelow), a certificate of merger or other appropriate documents (in any such case, the "Certificate of Merger") shall be duly prepared, executed, acknowledged and filed by the parties in accordance with the relevant provisions of the Delaware General Corporation Law (the "DGCL") with the Secretary of State of the State of Delaware. Unless Bank West shall specify differently, the Certificate of Merger shall be effective at 12:01 a.m., California time, on the calendar day following the Closing Date. The Closing will take place at 10:00 a.m., California time, on the first Business Day (which is defined as other than a Saturday or Sunday or day on which commercial banks in the State of California are authorized or required by law to be closed) which is the last Business Day of the month following the satisfaction or waiver of all conditions required by the Merger Agreement (the "Closing Date"), unless another time, date or place is agreed to in writing by the parties hereto. However, in the event that the Closing does not occur on or before 11:59 p.m. June 30, 1996, then the Closing shall take place within ten days after the satisfaction of the conditions referred to above. Assuming the timely receipt of all regulatory approvals, the expiration of all statutory waiting periods and the satisfaction or waiver of all conditions in the Merger Agreement, it is currently anticipated that the
Merger will be consummated in the first quarter of 1996. Either Northbay or Bank West may terminate the Merger Agreement if the Merger is not consummated by August 31, 1996 or for certain other reasons specified in the Merger Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The directors and executive officers of Northbay together with their affiliates, beneficially owned a total of 473,175 shares of Northbay Common Stock (representing 17.2% of all outstanding shares of Northbay Common Stock) on ___________ ___, 199___. In addition, such individuals were awarded 182,082 options granted pursuant to the Stock Option Plan, which have exercise prices ranging between $3.99 and $12.41 per share. The directors and executive officers will receive the same consideration for their shares, including any shares which they may acquire prior to the Effective Time pursuant to the exercise or ownership of such options, as the other stockholders of Northbay. Certain members of Northbay's management and the Board of Directors have certain interests in the Merger that are in addition to their interest as stockholders of Northbay generally. The Board of Directors was aware of these interests and considered them, among other matters, in approving the Merger Agreement and the transactions contemplated thereby.
EMPLOYMENT AGREEMENTS. Alfred A. Alys, Executive Vice President and Chief Executive Office, Granville I. Stark, Senior Vice President, Bertha Balfour, Senior Vice President, Cathy Simondi, Assistant Vice President and Greg Jahn, Vice President and Chief Financial Officers have employment or severance agreements with Northbay and/or Northbay Savings. Pursuant to the Merger Agreement, each of the above-named individuals shall be entitled to receive from Northbay or Northbay Savings, at the Effective Time, payments with respect to their change of control severance payments. Pursuant to these agreements, Bank West will make payments aggregating $1.1 million as follows: to Mr. Alys of approximately $317,000; to Mr. Stark of $294,000; to Mrs. Balfour of $196,000; to Ms. Simondi of $60,000; and to Mr. Jahn of $235,000. Mr. Alys also has a Salary Continuation Agreement with Northbay. The agreement provides for payments to be made to Mr. Alys for ten years beginning in the first year of his retirement. Pursuant to the Merger Agreement, Northbay may establish and fund a trust to make payments to Mr. Alys under the Salary Continuation Agreement. In addition, Bank West will enter into a consulting agreement and a noncompetition agreement with Mr. Alys at the Effective Time. Pursuant to these agreements, Bank West will make a $250,000 payment to Mr. Alys at the Effective Time.
DIRECTORS' AND OFFICERS' INDEMNIFICATION. For a period of six years following the Effective Time (or the period of the applicable statute of limitations, if longer), all rights to indemnification and exculpation from liability for acts or omissions occurring at or prior to the Effective Time now existing in favor of the current or former directors or officers of Northbay and its subsidiaries as provided in their respective certificate or articles of incorporation or by-laws or otherwise shall survive the Merger and shall not be amended, repealed or otherwise modified in any manner that would adversely affect the rights thereunder of any such indemnified persons. Bank West has also agreed, subject to certain conditions, to maintain for a period of six years from the Effective Time Northbay's current directors' and officers' insurance and indemnification policy to the extent that it provides coverage for events occurring prior to the Effective Time for all persons who are directors and officers of Northbay or its subsidiaries on the date of the Merger Agreement.
LOCAL ADVISORY BOARD. Bank West has agreed to have members of the Board of Directors of Northbay serve as a local advisory board to Bank West for a period of time following the closing of the transactions contemplated by the Merger Agreement. The purpose of the advisory board will be to provide advice and consultation to Bank West's management and to assist in the successful implementation of the business combination. The advisory board will have an initial term of two years, which can be renewed by agreement between Bank West and such board on terms to be agreed upon prior to the expiration of the initial term. During the first six months of the initial term, the advisory board will hold regular meetings once per month. Thereafter, during the remaining 18 months of the initial term, advisory board meetings will be held on a quarterly basis. Each member of the advisory board will be paid a retainer in the amount of $1,000 per month for the first six months of the initial term and $2,000 per quarter thereafter for the remaining 18 months of the initial term. No separate fees will be paid for attendance at any meetings of the advisory board. In addition, for a period of two years following the Closing, Bank West will provide monthly payments in respect of the health insurance premiums for medical, dental and vision care coverage for each of the directors of Northbay (and their spouses), not to exceed $3,000 in the aggregate for all directors and their spouses. At the end of such two-year period, the Northbay directors and their spouses will each be entitled to participate, at their own expense for life, in the group health plan of Bank West.
DIRECTORS' NONCOMPETITION AGREEMENT. At the Effective Time, except as a director, officer or employee of Bank West or any subsidiary thereof, the directors agree that, without the prior written consent of Bank West, they will not at any time within the Noncompetition Period (as defined below), directly or indirectly, within Sonoma, Napa or Marin Counties (the "Counties") in the State of California, whether or not for compensation, engage in, or have any material interest in, any person, firm, corporation, or business (whether as an employee, officer, director, agent, shareholder holding, directly or indirectly, 5% or more of the voting securities thereof, partner, consultant, adviser, holder of any substantial beneficial ownership interest or otherwise) that engages in any banking activity within any of the Counties which is the same as, similar to, or competitive with any activity now engaged in by Northbay or Northbay Savings or any banking activity which will be engaged in by Bank West or its subsidiaries as long as Northbay, Bank West, or any transferee of all or substantially all of the assets of Bank West, Northbay or their subsidiaries or any other successor thereof shall engage in such activity, except that nothing herein shall prohibit any of the directors from providing professional services, such as legal or accounting advice, to clients. The "Noncompetition Period" shall mean, as to each director, the period beginning immediately following the Effective Time and ending two (2) calendar years thereafter (the "Expiration Date"), provided however, that, as to each director who serves on the advisory board described above, the Noncompetition Period shall expire on the later of (i) the Expiration Date and (ii) one (1) year following the date such director ceases to be a member of the advisory board.
LEASE AGREEMENTS. Directors Victor DeCarli, Herold Mahoney and Donald P. Ramatici, and certain members of their immediate family, lease properties to Northbay. The leases will be assumed by Bank West as part of the Merger. Pursuant to a letter agreement, these directors have agreed to amend such leases so that (i) the premises shall be used and occupied only for savings and loan, bank or other financial institution purposes, or for office, retail or administrative purposes, or for any other lawful purpose, and for no other purpose or purposes without the prior express written consent of lessor, and (ii) the premises shall not be deemed vacated or abandoned if lessee continues to pay rent.
1988 STOCK OPTION AND INCENTIVE PLAN. In 1988, Northbay adopted the Stock Option Plan. Under the Stock Option Plan, options to purchase 237,183 shares of been issued to directors, officers and key employees of Northbay. Pursuant to the Merger Agreement, Northbay is required to provide for the cancellation of all outstanding options upon the Effective Time, in exchange for a cash payment equal to the Merger Consideration per share over the exercise price per share for all options outstanding, whether or not then exercisable. Executive officers and directors currently hold options to purchase an aggregate of 182,082 shares. Under this arrangement, such officers and directors will receive, net of the option exercise price per share, a total of approximately $2.0 million.
EMPLOYEE MATTERS AND IMPACT ON EMPLOYEE BENEFIT PLANS
Pursuant to the Merger Agreement, Bank West will pay employees of Northbay who are retained following completion of the Merger at their base salaries in effect at the Closing Date. Bank West has no obligation to retain any employee or to refrain from reassigning any employee as Bank West shall determine is necessary or appropriate. Employees of Northbay who are retained by Bank West will participate in the employee benefit, welfare and related plans and programs of Bank West and will (i) receive past service credit for their employment with Northbay and (ii) not be subject to any waiting period or preexisting condition exclusion in connection with medical, dental, life and disability coverage and receiving full credit for their prior copayments and deductibles.
Northbay will terminate all stock plans other than the Employee Stock Ownership Plan (the "ESOP") at the Effective Time and delete as of the Effective Time any provision in any benefit plan that provides for the issuance, transfer or grant of Northbay Common Stock to ensure that as of the Effective Time no holder of a stock option or any participant in any benefit plan shall have the right to acquire any capital stock of either Northbay or Bank West. In addition, the 401(k) and profit sharing plan may be terminated prior to the Effective Time and the account balances distributed to participants or beneficiaries, with the right of tax free rollover, to the extent permitted by law, to an individual retirement account or another tax-qualified plan that accepts such a rollover, at the election of the distributee.
Northbay adopted an ESOP in 1988 for the benefit of its employees. At September 30, 1995, the ESOP held 123,159 shares of Northbay Common stock. Northbay Common Stock held by the ESOP will be converted into cash in the amount of $15.75 per share. Northbay may prepay the liabilities of the ESOP prior to the Effective Time. All Merger Consideration received with respect to the unallocated shares of Common Stock held by the ESOP will be applied to prepay the remaining liabilities of the ESOP, and any excess merger consideration over the amount of such liabilities will be allocated to the ESOP participants as investment earnings of the ESOP to the extent permitted by Section 415 of the Internal Revenue Code of 1986, as amended. Northbay may take action prior to the Effective Date to amend the ESOP to (i) provide for full vesting of benefits by participants and (ii) elimination of any requirement for a participant to be employed on the last day of the plan year to receive an employer contribution or other annual additions or allocations.
CERTAIN PROXIES ON NORTHBAY SHARES
The following directors and officers of Northbay, pursuant to the requirements of the Merger Agreement, have granted to Bank West irrevocable proxies permitting Bank West to vote their respective Northbay shares in favor of the Merger at the Special Meeting: Alfred A. Alys, Victor R. DeCarli, Herold Mahoney, Raymond Nizibian, D.D.S., Donald P. Ramatici, Martin A. Stinar and Eugene W. Traverso. Such proxies cover an aggregate of 417,951 shares or 15.2% of the outstanding shares of Northbay.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash for Northbay Common Stock pursuant to the Merger will be a taxable transaction for federal income tax purposes to stockholders receiving such cash (and may be a taxable transaction for state, local and foreign tax purposes as well). A holder of Northbay Common Stock will recognize a gain or loss measured by the difference between such stockholder's tax basis for the Northbay Common Stock owned by him or her at the time of the Merger and the amount of cash received therefor. Such gain or loss will be a capital gain or loss if the stock is a capital asset in the hands of the stockholder.
The cash payments due the holders of Northbay Common Stock upon the exchange of such Northbay Common Stock pursuant to the Merger (other than certain exempt persons or entities) will be subject to "backup withholding" for federal income tax purposes unless certain requirements are met. Under federal law, the third-party paying agent must withhold 31% of the cash payments to holders of Northbay Common Stock to whom backup withholding applies, and the federal income tax liability of such persons will be reduced by the amount so withheld. To avoid backup withholding, a holder of Northbay Common Stock must provide the third-party exchange agent with his or her taxpayer identification number and complete a form in which he or she certifies that he or she has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of a failure to report interest and dividends. The taxpayer identification number of an individual is his or her Social Security number.
No ruling has been or will be requested from the Internal Revenue Service ("IRS") as to any of the tax effects to Northbay's stockholders of the transactions discussed in this Proxy Statement, and no opinion of counsel has been or will be rendered to Northbay's stockholders with respect to any of the tax effects of the Merger to stockholders.
THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER. THEREFORE, EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER, INCLUDING THOSE RELATING TO STATE, LOCAL AND/OR OTHER TAXES.
Promptly after the Effective Time of the Merger, Bank West will mail written transmittal material concerning the surrender of stock certificates to each record holder of shares of Northbay Common Stock outstanding at the Effective Time. The transmittal material will contain instructions with respect to the proper method of surrender of certificates formerly representing shares of Northbay Common Stock in exchange for the Merger Consideration. STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES AT THIS TIME.
Upon delivery to the exchange agent of certificates formerly representing shares of Northbay Common Stock for cancellation, together with properly completed transmittal material, a Northbay stockholder will receive a check in payment of the Merger Consideration for the shares of Northbay
Common Stock represented by such certificates. Northbay stockholders will not be entitled to receive interest on any cash to be received in the Merger.
The Merger is subject to the approval of the FDIC and the Superintendent and certain aspects of the Merger will require notification to, or waivers from the OTS and Federal Reserve Board. There can be no assurance that such regulatory approvals will be obtained, and, if obtained, there can be no assurance as to the date of any such approvals. There can also be no assurance that any such approvals will not contain a condition or requirement which causes such approvals to fail to satisfy the conditions set forth in the Merger Agreement. Specifically, under the Merger Agreement, Bank West is not obligated to effect the Merger Agreement if any such approval imposes any requirement upon Bank West or its affiliates which would result in a Material Adverse Effect on Bank West or its affiliates, or would reduce the benefits of the transactions contemplated by the Merger Agreement to Bank of the West in so significant a manner that Bank West, in its reasonable good faith judgment, would not have entered into the Merger Agreement had such condition or requirement been known at the time of its execution.
The Merger must be approved by the FDIC pursuant to the provisions of the Federal Deposit Insurance Act (the "FDIA"). This federal statute provides that no transactions may be approved which would result in a monopoly or (i) which would be in furtherance of any combination or conspiracy to monopolize , or to attempt to monopolize, the business of banking in any part of the United States, or (ii) whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any manner would be in restraint of trade, unless the FDIC finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. In conducting a review of any application for a merger, the FDIC is required to consider the financial and managerial resources and future prospects of the companies and the banks concerned and the convenience and needs of the community to be served. In addition, the FDIC is required to assess the record of Bank West and Northbay under the Community Reinvestment Act of 1977, as amended. Bank West filed an application seeking approval of the Merger with the FDIC in December 1995. The parties anticipate that the FDIC will act on and approve the application in the first quarter of 1995.
A transaction approved by the FDIC may not be consummated for at least 30 days after such approval. During such period, the United States Department of Justice may challenge the Merger under federal antitrust laws. Such period may be reduced to such shorter period of time as prescribed by the FDIC with the concurrence of the Department of Justice but in no event less than 15 days, if the Department of Justice has not commented adversely on the competitive effects of the Merger. If the Department of Justice does not commence a legal action during such period, it may not thereafter challenge the transaction except in an action commenced under the antimonopoly provisions of Section 2 of the Sherman Antitrust Act.
The FDIA and the regulations of the FDIC provide for the publication of notice and the opportunity for administrative hearings relating to an application for approval under the FDIA and authorizes the FDIC to permit interested parties to intervene in the proceedings. If an interested party is permitted to intervene, such intervention could substantially delay the regulatory approval required for consummation of the Merger.
The merger of the Bank into Bank West must also be approved by the Superintendent pursuant to the California Financial Code (the "Financial Code"). Under the Financial Code, the Merger Agreement and an application for approval of the same must be filed with the Superintendent. The Merger shall not become effective until the Merger Agreement has been approved in writing by the Superintendent. The Merger Agreement and an application were filed with the Superintendent in December 1995. The parties anticipate that the Superintendent will act on and approve the application in the first quarter of 1995.
In the Merger Agreement, Northbay and Northbay Savings, on the one hand, Bank West on the other, have made certain representations and warranties to each other. Northbay and Northbay Savings have represented and warranted, among other things, as to their organization and capitalization, their insurance coverage, their authority to enter into the Merger Agreement and to consummate the Merger, compliance with the DGCL, the accuracy of their financial statements and public reports, the absence of any prohibited activities, legal proceedings against them, their properties, contractual rights and duties, their tax returns and taxes, the absence of change in their employee benefit plans, compliance with ERISA, certain environmental conditions, compliance with all applicable laws and other matters relating to their business, assets, liabilities and operations. Bank West has represented and warranted to Northbay, among other things, as to the organization and capitalization, their authority to enter into the Merger Agreement, compliance with the Community Reinvestment Act, the absence of any litigation that would impair the ability of Bank West to perform its obligations under the Merger Agreement, the accuracy of their financial statements and the necessary capital to consummate the transactions contemplated under the Merger Agreement. Reference is made to the Merger Agreement attached as Appendix A to this Proxy Statement.
The obligations of Northbay to consummate the Merger are subject to the satisfaction or waiver of certain conditions, including: (i) approval of the Merger Agreement by Northbay's stockholders holding at least a majority of the outstanding shares of Northbay Common Stock; (ii) receipt of all required consents, approvals and waivers from third parties and governmental agencies; (iii) the accuracy and truthfulness of the representations and warranties of Bank West; (iv) the absence of any order, decree or injunction which enjoins or prohibits the consummation of the Merger; (v) the performance of all obligations of Bank West under the Merger Agreement and Stock Option Agreement; and (vi) the receipt of an opinion of Pillsbury, Madison & Sutro, counsel to Bank West, in form consistent with the requirements of the Merger Agreement.
The obligations of Bank West are subject to the satisfaction or waiver of certain conditions, including: (i) the accuracy and truthfulness of the representations and warranties made by Northbay; (ii) no material adverse change to the business, condition (financial or otherwise) capitalization or properties of Northbay or Northbay Savings; (iii) the receipt of all required consents, approvals and waivers from governmental agencies; (iv) the absence of any order, decree or injunction which enjoins or prohibits the consummation of the Merger; (v) the receipt of a comfort letter from KPMG Peat Marwick LLP, independent auditors for Northbay, (vi) the receipt of an opinion from Silver, Freedman & Taff, L.L.P., or other counsel to Northbay, in form consistent with the requirements of the Merger Agreement; (vii) the termination of all Northbay and and stock option plans and any provision in any benefit plan providing for the issuance, transfer or grant of Northbay stock common stock prior to the Effective Time; (viii) Northbay stockholder approval of the Merger Agreement; (ix) the performance of all obligations of Northbay under the Merger Agreement; (x) the absence of any Burdensome Condition, as that term is defined in the Merger Agreement, imposed by any governmental entity which would result in a material adverse effect on Bank West; (xi) the absence of certain contingent liabilities; and (xii) the execution and delivery of noncompetition agreements by the following directors and officers of Northbay: Alfred A. Alys, Victor R. DeCarli, Herold Mahoney, Raymond Nizibian, D.D.S., Donald P. Ramatici, Martin A. Stinar and Eugene W. Traverso.
The Merger Agreement may be terminated at any time prior to the Effective Time, either before or after approval by Northbay stockholders, as follows: (i) by the mutual consent of the parties; or (ii) by the Board of Directors of either Bank West or Northbay at any time after the date that (a) the stockholders of Northbay fail to approve the Merger Agreement and the Merger by an affirmative vote of at least a majority of the outstanding shares of the Northbay's Common Stock at a meeting held for such purpose; (b) any required governmental consent or approval is not obtained; (c) the other party fails to satisfy its conditions precedent; or (d) the Effective Time has not occurred prior to August 31, 1996, unless such failure to close the Merger by that time is the result of the wilful and material breach of the Merger Agreement on the part of the party wishing to terminate the Merger Agreement.
In addition, the Merger Agreement may be terminated by Bank West if; (i) a takeover proposal is made to Northbay and (a) Northbay Stockholder approval is not obtained at the Meeting, (b) the Meeting does not occur prior to June 30, 1996, or (c) the Board of Directors of Northbay withdraws, modifies or changes in any manner adverse to Bank West or executes an agreement for merger, consolidation, or other business combination with any other person or entity or an exchange or tender offer for the Northbay Common Stock; (ii) governmental approval of the merger has not been obtained; (iii) a development has occurred which has resulted in a material adverse effect on Northbay; (iv) as of the Closing Date the total of all Northbay deposit liabilities, including accounts accessible by negotiable orders of withdrawal, demand deposits, passbook accounts, certificates of deposit, but excluding all brokered deposits and depository accounts with balances greater than $100,000, are less than $230 million or (v) Northbay's net worth (as defined) as of the Closing Date is less than $34.0 million.
Pursuant to terms of the Merger Agreement, Northbay shall, and shall cause the Bank to, conduct its businesses only in the ordinary and usual course consistent with past practices and shall cause the Bank to use its best efforts to maintain and preserve its business organization and maintain in effect all licenses, permits and government approvals necessary for the conduct of its present business.
The Merger Agreement contains certain restrictions upon the conduct of Northbay and Northbay Savings's business pending consummation of the Merger. In particular, the Merger Agreement provides that, except as otherwise provided in the Merger Agreement or without the written consent of Bank West, neither Northbay, Northbay Savings or its subsidiary may, among other things: (a) issue, sell, purchase, redeem or commit to issue, sell, purchase or redeemed any shares of its capital stock or grant any options or other rights to purchase any of its or issue, sell or authorize the issuance or sale of any securities convertible into its common stock or make any dividend payment (except as discussed below); (b) amend its Articles of Incorporation, Charter, or Bylaws; (c) enter into any new material line of business; (d) except as required by regulatory authorities, change its lending, credit, investment, liability management, deposit interest rate or service charge or other material banking policy; (e) except as required by regulatory authorities, incur or commit to any capital expenditure or obligation in excess of $25,000 individually or $100,000 in the aggregate; (f) declare or pay any cash or stock dividends (except as discussed below); (g) acquire or agree to acquire any material assets or equity interests; (h) sell, lease, mortgage, encumber, or otherwise dispose of any of its assets other than in the ordinary course of business; (i) fail to notify Bank West of any material adverse effect on Northbay that would cause a breach under the Merger Agreement; (j) fail to file all required tax returns; (k) change its fiscal year or methods of accounting; (l) declare or pay any bonus or other special compensation or increase any benefit to any director, officer, or employee other than in the ordinary course of business; (m) make or become a party to any contract or commitment or modify, amend or extend an existing contrast not in the ordinary course of business; (n) discharge or satisfy any mortgage, lien, charge or encumbrance not in the ordinary course of business; (o) pay any liability or obligation not in the ordinary course of business or on the financial statements; (p) institute, settle or agree to settle any claim, other than in the ordinary course of business; (q) invest in any real estate, except for real estate owned as a result of, from foreclosure or in lieu of foreclosure; (r) enter into or amend any contract for the purchase of materials, supplies, equipment or services that cannot be terminated without cause and without payment of a penalty other than in the ordinary course of business; and (s) knowingly default in any material respect under any agreement that would result in a material, adverse impact on Northbay or Northbay Savings, as a whole. Notwithstanding the foregoing, if the Effective Time has not occurred by April 30, 1996, other than by reason of a breach or default under the Merger Agreement by Northbay, then Northbay may declare and pay a special cash dividend equal to Northbay's net income after such date subject to the requirement that Northbay shall have conducted its operations in the ordinary course consistent with prior practices and shall have so certified to Bank West.
Prior to the Effective Time, any condition of the Merger Agreement (to the extent allowed by law) may be waived by the party benefitted by the provision.
As a condition and inducement to Bank West entering into the Merger Agreement, Northbay and Bank West entered into a Stock Option Agreement (the "Stock Option Agreement") whereby Northbay granted Bank West an unconditional, irrevocable option to purchase, up to 547,354 fully paid and nonassessable shares of Northbay Common Stock at a purchase price of $13.25 per share, upon the occurrence of certain triggering events, primarily under circumstances whereby Northbay is unwilling or unable to consummate the Merger. The Stock Option Agreement is intended to make it more difficult for another party to acquire Northbay, thereby increasing the likelihood that the merger will occur. The Option Shares, if issued pursuant to the Stock Option Agreement, would represent approximately 19.9 percent of the issued and outstanding shares of Northbay Common Stock, without giving effect to the issuance of any shares pursuant to an exercise of the Stock Option. A copy of the Stock Option Agreement is attached hereto as Appendix D.
The number of shares of Northbay Common Stock subject to the Stock Option will be increased to the extent that Northbay issues additional shares of Northbay Common Stock (otherwise than pursuant to an exercise of the Stock Option) such that the number of Option Shares will continue to equal 19.9 percent of the then issued and outstanding shares of Northbay Common Stock without giving effect to the issuance of shares pursuant to an exercise of the Stock Option. The number of shares of Northbay Common Stock subject to the Stock Option, and the applicable exercise price per Option Share, also will be appropriately adjusted in the event of any stock dividend, split-up, recapitalization, combination, subdivision, conversion, exchange of shares, or similar transaction relating to Northbay.
Bank West may exercise the Stock Option, in whole or in part, at any time after both an "Initial Triggering Event" and a "Subsequent Triggering Event" (as each such term is defined in the Stock Option Agreement) occur prior to termination of the Stock Option. In certain circumstances, purchase of shares of Northbay Common Stock pursuant to the exercise of the Stock Option will be subject to approval by the OTS.
Pursuant to Delaware General Corporation Law Section 262 ("Section 262"), a copy of which is attached to this Proxy Statement as Appendix B, a stockholder of Northbay may dissent from the proposed corporate action to approve the Merger Agreement and receive the right to an appraisal of such stockholder's shares.
If the Merger is consummated, dissenting stockholders (defined below) of Northbay will have the right, if they strictly comply with the provisions of Section 262, to have the fair value of their shares judicially determined and paid to them ("appraisal rights"). Northbay is required to notify each stockholder entitled to appraisal rights under Section 262 that such rights are available, not less than 20 days prior to the Meeting, and include in such notice a copy of Section 262, which is attached to this Proxy Statement as Appendix B. Any stockholder of Northbay intending to enforce his or her appraisal rights under Section 262 must object in writing to the adoption of the Merger Agreement prior to the Meeting, or at the Meeting but before the vote on the Merger Agreement, by filing with the Secretary of Northbay a written objection to the Merger ("a notice of election to dissent"), identifying himself or herself and stating that he or she intends thereby to demand an appraisal of his or her shares. A vote against, or a direction in a proxy to vote against, the Merger Agreement will not in itself constitute a notice of election to dissent, and will not preserve the stockholder's appraisal rights. If the Merger Agreement is approved and adopted at the Meeting, Northbay must give written notice not later than ten days after the Effective Time that the Merger has become effective to each stockholder who has timely filed a notice of election to dissent and who has not voted in favor of the Merger Agreement (a "dissenting stockholder"). A stockholder's vote in favor of the Merger Agreement will constitute a waiver of his or her appraisal rights. However, a stockholder's failure to vote against the Merger Agreement will not in itself be a waiver of his or her appraisal rights if he or she has filed a timely notice of election to dissent.
A notice of election to dissent may be withdrawn by a dissenting stockholder at any time within 60 days after the Effective Time. Upon such withdrawal the dissenting stockholder will be entitled to receive the same consideration received by the other Northbay stockholders. If (i) a dissenting stockholder timely withdraws his or her notice of election to dissent, (ii) Northbay stockholders do not approve the Merger Agreement, (iii) a court of that the dissenting stockholder is not entitled to payment for his or her shares, (iv) no petition for an appraisal is filed within the time period discussed below, or (v) a dissenting stockholder otherwise loses his or her appraisal rights, then such stockholder will be reinstated to any rights other Northbay stockholders then have.
Upon consummation of the Merger, each dissenting stockholder will cease to have any rights of a stockholder except the right to be paid the fair value of his or her shares and the right to receive payments of dividends or other distributions, if any, payable to stockholders of record prior to the Effective Time and any other rights under Section 262.
Within 120 days after the Effective Time a dissenting stockholder who has perfected his or her appraisal rights may file a petition in the Delaware Court of Chancery demanding a determination of the value of the shares of all dissenting stockholders. Upon the filing of any such petition by a stockholder, service of a copy of such petition shall be made upon Northbay. In addition, such dissenting stockholder is entitled, during such time period, to request from Northbay a statement as to the number of dissenting stockholders from whom Northbay has received a demand for appraisal and the number of shares of Common Stock held by such stockholders. Northbay must furnish the statement within ten days after receipt of the request therefor. Northbay must, within 20 days after the filing with the Court of Chancery described above, file with the Register in Chancery a verified list of the names and addresses of all dissenting stockholders. The Court may then order that all of the individuals on that list be notified of the time and place of the hearing on the petition.
At the hearing on the petition, the Court will determine the stockholders who have complied with Section 262 and have become entitled to appraisal rights and will determine the value of shares of the Northbay Common Stock based on all relevant factors, exclusive of any element of value attributable to the accomplishment or expectation of the Merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. The Court may require all dissenting stockholders to submit their certificates for the Northbay Common Stock to the Register in Chancery for notation as to the pendency of the appraisal proceeding with respect to such shares. If any dissenting stockholder fails to submit his certificates, the Court may dismiss the proceedings as to such stockholder.
Upon conclusion of the proceeding, the Court will direct Northbay to pay the fair value of the shares, together with interest, if any, to the stockholders entitled thereto, upon surrender of the certificates representing their shares. Fair value, as determined by a court, may be more than, less than, or equal to the merger consideration. The costs of the proceeding may be determined by the Court and divided among the parties as the Court deems equitable.
The procedures outlined above are set forth in Section 262, attached hereto as Appendix B. Upon compliance with the requirement of such section, a dissenting stockholder will be entitled to receive payment of the fair value of his or her shares in accordance with the procedures and subject to the conditions set forth therein.
Stockholders wishing to exercise their appraisal rights should consult their own counsel.
The foregoing is only a summary of the material provisions of Delaware law relating to appraisal rights and should not be considered to be a comprehensive legal description. The statements in this Proxy Statement with respect to the terms of Section 262 are qualified in their entirety by reference to the copy of Section 262, attached hereto as Appendix B, setting forth a complete description of the rights and obligations of Northbay and of any stockholder who desires to exercise appraisal rights. The failure of a holder of Northbay Common Stock to vote against the Merger will not itself constitute a waiver of the right to receive payment for his or her shares, nor will a vote against the Merger satisfy the notice requirements referred to above.
The Merger Agreement provides that Bank West and Northbay will each pay their own expenses in connection with the Merger Agreement and the transactions contemplated thereby. In addition, under certain circumstances, if either party terminates, the non-terminating party will pay the terminating party's expenses relating to the Merger up to $250,000.
The Merger, if completed as proposed, will be treated as a purchase in accordance with generally accepted accounting principles. Accordingly, the assets and liabilities of Northbay will be recorded on the books of Bank West at their respective fair values at the time of consummation of the Merger.
PROPOSAL II - APPROVAL OF ADJOURNMENT OF THE MEETING
In the event that sufficient votes to approve the Merger Agreement are not obtained by the date of the Meeting, stockholders are being asked to consider and vote upon a proposal to adjourn the Meeting for a reasonable time to solicit additional proxies. An adjournment for that purpose will save Northbay the considerable expenses related to a resolicitation of proxies on the same matter. Approval of the proposal to adjourn the Meeting to solicit additional proxies requires the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF ADJOURNMENT OF THE MEETING TO FURTHER SOLICIT PROXIES IN THE EVENT THE REQUIRED VOTE IS NOT OBTAINED TO APPROVE THE MERGER AGREEMENT.
MARKET PRICES AND DIVIDENDS OF NORTHBAY COMMON STOCK
Northbay Common Stock initially began trading on April 11, 1989 at $3.99 per share (as adjusted for subsequent stock splits and dividends) and is quoted on the American Stock Exchange under the symbol "NBF". The table below sets forth, for each quarter during the last two fiscal years ended June 30, 1995, the high and low closing prices of Northbay Common Stock as reported on the American Stock Exchange.
Cash dividends have been paid as follows: $.10 per share on July 30, 1993; $.10 per share on October 29, 1993; $.10 per share on January 29, 1994; $.10 per share on April 29, 1994; $.11 per share on July 20, 1994; $.11 per share on October 19, 1994; $.11 per share on January 18, 1995; $.11 per share on April 19, 1995; $.11 per share on July 19, 1995; and $.11 per share on October 18, 1995. See "PROPOSAL I - THE MERGER - Business Pending Consummation" for information regarding dividend restrictions imposed upon Northbay pursuant to the Merger Agreement.
The closing price per share for the Northbay Common Stock as reported on the American Stock Exchange on November 9, 1995, the last full trading day prior to the public announcement of the execution of the Merger Agreement, was $13.00. On __________, 1996, which is the most recent date for which it was practicable to obtain market data prior to the printing of this Proxy Statement, the closing price per share of Northbay Common Stock was $_____. Holders of Northbay Common Stock are urged to obtain current market quotations. On __________, 1996, there were ____stockholders of record of the Northbay Common Stock.
INFORMATION REGARDING BANK OF THE WEST
Bank West is a California chartered commercial banking corporation headquartered in San Francisco, California. It is the eighth largest bank in the State of California with total assets of approximately $4.3 billion and total deposits of approximately $3.5 billion at September 30, 1995. Its deposits are insured by the FDIC. It is a wholly-owned indirect subsidiary of BNP.
Bank West conducts a general commercial banking business, providing retail and corporate banking and trust services to individuals, institutions, businesses and governments through 99 branches and other commercial banking offices located primarily in the San Francisco Bay Area and elsewhere in Northern California. Bank West also generates indirect automobile loans and leases, recreational vehicle loans, recreational marine vessel loans, equipment leases and deeds of trust on single family residences through a network of manufacturers, dealers, representatives and brokers in various states.
The predecessor of Bank West was chartered as a national banking association 120 years ago in San Jose, California. Until its acquisition by BNP in 1980, Bank West operated as a community bank mainly in Santa Clara County and elsewhere in the souther portions of the San Francisco Bay Area. During the 1990's, Bank West has expanded its market presence in the Northern California region through a series of acquisitions of other financial institutions and branches. Bank West intends to continue expansion of its market presence through a combination of in-market acquisitions and mergers, combined with internally generated growth.
Bank West seeks to serve a broad consumer customer base by furnishing a range of commercial banking products. In addition, Bank West provides through an arrangement with an independent marketing concern complementary fee-based products such as annuities, insurance and securities and also offers trust services through its own Trust Department. Through its branch network, Bank West seeks to generate small business loans, direct vehicle loans, consumer lines of credit and second mortgages.
Bank West's principal executive offices are located at 180 Montgomery Street, San Francisco, California 94104 and its telephone number is (415) 765- 4800.
Northbay is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such report, proxy statements and other information can be inspected and copies at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. Copies of such material can also be obtained at prescribed rates by writing to Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such reports, proxy statements and other information can be inspected at the offices of the American Stock Exchange, Inc., 88 Trinity Place, New York, New York 10006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Northbay with the Commission are incorporated into this Proxy Statement by reference:
1. Northbay's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (File No. 1-10203) filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act");
2. Northbay's Quarterly Report on Form 10-Q for the quarter ended September 30 1995 (File No. 1-10203) filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act");
3. Northbay's Current Report on Form 8-K, dated November 9, 1995 (File No. 1-10203) filed pursuant to the Securities Exchange Act of 1934, as
4. Portions of Northbay's Annual Report to Stockholders for the fiscal year ended June 30, 1995 (only page 2 (Selected Consolidated Financial Data), pages 6 through 18 (Management's Discussion and Analysis of Financial Condition and Results of Operations), pages 19 through 39 (Financial Statements) and the Stock Market Information section on page 40. Portions of the Annual Report to Stockholders which are not incorporated by reference) are the outside and inside front covers, the graphs on page 3, the Corporate Profile and Officers sections on page 4, the shareholder letter on page 5 and all the Corporate Information on page 40 (except for the Stock Market Information section on page 40).
All documents or reports subsequently filed by Northbay pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the date of the Special Meeting shall be deemed to be incorporated by reference into this Proxy Statement and to be a part of this Proxy Statement from the date of filing of such document. Any statement contained herein, or in a document all or a portion of which is incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this Proxy Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as modified or superseded, to constitute a part of this Proxy Statement.
Northbay's Annual Report to Shareholders for the year ended June 30th, 1995 and quarterly report on Form 10-Q for the 3 months ended September 30, 1995 are being delivered to Northbay Stockholders with this Proxy Statement.
Northbay will provide without charge to any person to whom this Proxy Statement is delivered, on the written or oral request of such person, a copy of any or all of the foregoing documents incorporated by reference (other than exhibits not specifically incorporated by reference into the texts of such documents). Requests for such documents should be directed to the Secretary of Northbay Financial Corporation, 1360 Redwood Way, Petaluma, California 94954 (telephone (707) 792-7400).
The consolidated financial statements of Northbay and its subsidiaries as of June 30, 1995 and 1994 and for each of the years in the three-year period ended June 30, 1995 that are included in this Proxy Statement have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP refers to and for the adoption of the provisions of the Financial Accounting Standard Board's Statements of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" in 1994.
KPMG Peat Marwick LLP serves as the Company's independent certified public accountants. A representative of KPMG Peat Marwick LLP will be at the Special Meeting to answer questions by shareholders and will have the opportunity to make a statement if so desired.
As specified in Northbay's Proxy Statement dated September 19, 1995, the deadline for stockholders to submit proposals for inclusion in the proxy statement and form of proxy for the 1996 Northbay Annual Meeting of Stockholders is May 22, 1996. All proposals should be submitted by certified mail, return receipt requested, to the Secretary, Northbay Financial Corporation, 1360 Redwood Way, Petaluma, California 94954. Any such proposals shall be subject to the requirements of the proxy rules adopted under the Exchange Act. However, if the Merger is consummated as contemplated by the Merger Agreement, Northbay will no longer exist as a separate legal entity and there will be no 1996 Annual Meeting of Stockholders.
The Board of Directors is not aware of any business to come before the Meeting other than those matters described above in this Proxy Statement. However, if any other matter should properly come before the Meeting, it is intended that holders of the proxies will act in accordance with their best judgment.
The cost of solicitation of proxies will be borne by the Company. The Company will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy materials to the beneficial owners of the Northbay Common Stock. The Company has retained __________________________ to assist in the solicitation of proxies and to send proxy materials to brokerage houses and other custodians, nominees and fiduciaries for transmittal to beneficial holders of Northbay Common Stock for a fee of $_____, plus expenses. In addition to solicitation by mail, directors, officers and regular employees of the Northbay and/or Northbay Savings may solicit proxies personally or by telegraph or telephone without additional compensation.
AGREEMENT AND PLAN OF MERGER
Dated as of November 9, 1995
EXHIBIT A Form of Stock Option Agreement EXHIBIT B Form of Trust Agreement EXHIBIT C Opinion of Company Counsel EXHIBIT D Individuals to Execute Non-Competition Agreements EXHIBIT E Opinion of Parent Counsel EXHIBIT F Individuals Furnishing Proxies EXHIBIT G Form of Merger Agreement (Parent and Surviving Corporation) EXHIBIT H Form of Merger Agreement (Parent and NSB)
AGREEMENT AND PLAN OF MERGER, dated as of November 9, 1995, among BANK OF THE WEST, a California banking corporation ("Parent"), NF ACQUISITION CO., a Delaware corporation and a wholly owned first-tier subsidiary of Parent ("Sub"), and NORTHBAY FINANCIAL CORPORATION, a Delaware corporation (the "Company").
WHEREAS, the Company is a registered savings and loan holding company under the Savings and Loan Holding Company Act of 1956, as amended (the "SLHCA");
WHEREAS, Parent is a commercial bank organized and existing under
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company have approved the merger of Sub into the Company as set forth below (the "Merger"), upon the terms and subject to the conditions set forth in this Agreement, whereby each of the 2,750,522 issued and outstanding shares of common stock, par value U.S.$.10 per share, of the Company ("Company Common Stock"), not owned directly or indirectly by Parent or the Company, will be converted into the right to receive U.S.$15.75 in cash (subject to adjustment as herein
WHEREAS, as a condition and inducement to Parent's and Sub's willingness to enter into this Agreement, Parent, Sub and the Company are entering into a Stock Option Agreement dated as of the date hereof in the form of Exhibit A hereto (the "Stock Option Agreement") pursuant to which the Company has granted to Parent an option to purchase shares of Company Common Stock constituting 19.9% of the presently outstanding shares of Company Common Stock;
WHEREAS, the Merger requires the approval by an affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock entitled to vote thereon ("Company Stockholder Approval"); and
WHEREAS, Parent, Sub and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein and in the Stock Option Agreement, the parties hereto agree as follows:
SECTION 1.01. The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Delaware General Corporation Law (the "DGCL"), Sub shall be merged with and into the Company at the Effective Time (as defined in Section 1.03). Following the Merger, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation") and shall succeed to and assume all the rights and obligations of Sub in accordance with the DGCL.
SECTION 1.02. Closing. The closing of the Merger (the "Closing") will take place at 10:00 a.m., California time, on the first Business Day (as defined in Section 8.03(c)) which is the last Business Day of the month following the satisfaction (or waiver) of all the conditions set forth in Article VI (the "Closing Date"), at the offices of Pillsbury Madison & Sutro, 235 Montgomery Street, San Francisco, California 94104, unless another time, date or place is agreed to in writing by the parties hereto; provided, however, in the event that the Closing does not occur on or before 11:59 p.m. June 30, 1996, then in that event the Closing shall take place within ten days after the satisfaction of the conditions referred to in this sentence.
SECTION 1.03. Effective Time. Subject to the provisions of this Agreement, as soon as practicable on the Closing Date, a certificate of merger or other appropriate documents (in any such case, the "Certificate of Merger") shall be duly prepared, executed, acknowledged and filed by the parties in accordance with the relevant provisions of the DGCL with the Secretary of State of the State of Delaware. Unless Parent shall specify differently, the Certificate of Merger shall provide that the Merger shall be effective at 12:01 a.m., California time, on the calendar day following the Closing Date (the time the Merger becomes effective being hereinafter referred to as the "Effective Time").
SECTION 1.04. Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in Section 259 of the DGCL.
SECTION 1.05. Certificate of Incorporation and By-laws. (a) The certificate of incorporation of the Company as in effect immediately prior to the Effective Time shall be the certificate of incorporation of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law.
(b) The by-laws of the Company as in effect immediately prior to the Effective Time shall be the by-laws of the Surviving Corporation, until thereafter changed or amended as provided therein or by applicable law.
SECTION 1.06. Directors. The directors of Sub at the Effective Time shall be the directors of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be.
SECTION 1.07. Officers. The officers of Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be.
SECTION 1.08. Absence of Control. Subject to any provisions of this Agreement, it is the intent of the parties that Parent by reason of this Agreement shall not (until consummation of the transactions contemplated hereby) control, and shall not be deemed to control, directly or indirectly, the Company or any of its Subsidiaries (as defined in Section 8.03(c)) and shall not exercise, or be deemed to exercise, directly or indirectly, a controlling influence over the management or policies of the Company or any of its Subsidiaries.
SECTION 1.09. Alternative Structure. Notwithstanding anything contained in this Agreement to the contrary, Parent may specify that, before or after the Merger, Parent, Sub, the Company, Northbay Savings Bank, F.S.B. ("NSB") and any other Subsidiary or Affiliate (as such terms are defined in Section 8.03(c)) shall enter into transactions other than those described in this Article I in order to effect the purposes of this Agreement, and the Company and Parent shall take all action necessary and appropriate to effect, or cause to be effected, such transactions, provided, however, that no such specification may (a) materially and adversely affect the timing of the consummation of the transactions contemplated herein or (b) adversely affect the tax effect or economic benefits of the Merger to the holders of Company Common Stock.
Effect of the Merger on the Capital Stock of the Constituent Corporations; Exchange of Certificates
SECTION 2.01. Effect on Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of Company Common Stock or any shares of capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of capital stock of Sub shall be converted into and become one fully paid and nonassessable share of Common Stock, par value U.S.$.01 per share, of the Surviving Corporation.
(b) Cancellation of Company and Parent Owned Stock. Each share of Company Common Stock that is owned by the Company or by any Subsidiary of the Company (which shall not include any shares owned by the Company's employee stock ownership plan and trust (the "ESOP")) and each share of Company Common Stock that is owned by Parent, Sub or any other Subsidiary of Parent (other than, in each case, shares in trust accounts, managed accounts, custodial accounts and the like that are beneficially owned by third parties (any such shares, "Trust Account Shares")) shall be automatically canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor.
(c) Conversion of Company Common Stock. Each issued and outstanding share of Company Common Stock (other than shares to be canceled in accordance with Section 2.01(b)) shall be converted into the right to receive from the Surviving Corporation in cash, without interest, U.S.$15.75, subject to adjustment as hereinafter provided in this Section (the "Merger Consideration"). As of the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate previously representing any such shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration, without interest. Notwithstanding the foregoing provisions of this Section, the Merger Consideration shall be adjusted downward if, at the Effective Time, the Company Net Worth (as defined in Section 8.03(c) and as determined in accordance with Section 5.16) shall be less than the Net Worth Floor (as defined in Section 8.03(c)), by an amount equal to the product of (i) the dollar amount by which the Company Net Worth at such time is less than such amount and (ii) 1.125, divided by 2,987,705. Notwithstanding the foregoing provisions of this Section, in no event shall the Merger Consideration be adjusted downward to less than U.S.$15.375 per share of Company Common Stock.
(d) Outstanding options. Each Company Employee Option (as defined in Section 3.01(b)) outstanding as of the Effective Time shall be treated in accordance with Section 5.06.
(e) Appraisal rights. Each outstanding share of Company Common Stock as to which a written demand for appraisal is filed in accordance with Section 262 of the DGCL at or prior to the Company Stockholders' Meeting (as defined in Section 3.01(c)) and not withdrawn at or prior to the Stockholders' Meeting and which is not voted in favor of the Merger shall not be converted into or represent a right to receive the Merger Consideration unless and until the holder shall have failed to perfect, or shall have effectively withdrawn or lost his or her right to appraisal of and payment for his or her Company Common Stock under such Section 262, at which time his or her shares shall be converted into the Merger Consideration in accordance with the terms hereof. All such shares of Company Common Stock as to which a written demand for appraisal is so filed and not withdrawn at or prior to the time of such vote and which are not voted in favor of the Merger, except any such shares of Company Common Stock the holder of which, prior to the Effective Time shall have effectively withdrawn or lost his or her right to appraisal in respect of his or her shares of Company Common Stock under Section 262, are herein called "Dissenting Shares." The Company shall give Parent prompt notice upon receipt by the Company of any demand for appraisal rights, withdrawal of such demands, and any other instruments served pursuant to Section 262 of the DGCL, and the Company shall give Parent the opportunity to direct all negotiations and proceedings with respect to such demands. The Company shall not voluntarily make any payment with respect to any demands for appraisal rights and shall not, except with the prior written consent of Parent, settle or offer to settle any such demands.
Each holder of Company Common Stock who becomes entitled, pursuant to the provisions of said Section 262, to payment for his or her shares of Company Common Stock under the provisions of said section shall receive payment therefor from the Surviving Corporation and such shares of Company Common Stock shall be canceled.
(f) Conversion of Dissenting Shares. If, prior to the Effective Time, any stockholder of the Company shall fail to perfect, or shall effectively withdraw or lose, his or her right to appraisal of and payment for his or her Dissenting Shares under section 262 of the DGCL, the Dissenting Shares of such holder shall be treated for purposes of this Article II like any other shares of outstanding Company Common Stock. If, after the Effective Time, any holder of Company Common Stock shall fail to perfect, or shall effectively withdraw or lose, his or her right to appraisal of and payment for his or her Dissenting Shares under Section 262 of the DGCL, each such Dissenting Share of such holder shall be converted into cash pursuant to this Article II and in accordance with the procedures, and subject to the conditions, set forth in this Article II and elsewhere herein.
(g) Closure of Stock Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed as to holders of Company Common Stock immediately prior to the Effective Time and no transfer of Company Common Stock by any such holder shall thereafter be made or recognized. If, after the Effective Time, Certificates (as defined in Section 2.02(c)) are properly presented in accordance with Section 2.02 to the Paying Agent (as defined in Section 2.02(a)), such Certificates shall be canceled, and exchanged for a check representing the amount of cash into which the Company Common Stock represented thereby was converted in the Merger.
(h) Adjustments for Dilution and Other Matters. If prior to the Effective Time, the Company shall declare a stock dividend or distribution upon or subdivide, split up, reclassify or combine Company Common Stock, or declare a dividend, or make a distribution, on Company Common Stock in any security convertible into Company Common Stock (provided that no such action may be taken by the Company without Parent's prior written consent as so provided in Article IV), appropriate adjustment or adjustments as reasonably determined by Parent will be made to the Merger Consideration to reflect the change in the capital stock of the Company as a result thereof. If at the Effective Time, the Company shall have outstanding more shares of Company Common Stock than are contemplated to be outstanding or subject to option pursuant to the Company's representation and warranty in Section 3.01(b), then, at Parent's election and notwithstanding other provisions hereof, and without limiting any of its other rights hereunder, the Merger Consideration shall be adjusted downward so as to reflect the total number of shares of Company Common Stock outstanding over the amount contemplated pursuant to the Company's representation and warranty in Section 3.01(b).
SECTION 2.02. Exchange of Certificates. (a) Paying Agent. The trust department of Parent is hereby designated to act as paying agent (in such capacity, the "Paying Agent") for the payment of the Merger Consideration upon surrender of certificates representing Company Common Stock.
(b) Parent To Provide Funds. Parent shall take all steps necessary to enable and cause Sub, or the Surviving Corporation, to provide to the Paying Agent on a timely basis, as and when needed on and after the Effective Time, funds necessary to pay the Merger Consideration in respect of the shares of Company Common Stock as part of the Merger pursuant to Section 2.01(c) or to pay any amount required under Section 2.01(e).
(c) Exchange Procedures. As soon as reasonably practicable (and in any event no later than 10 days) after the Effective Time, Parent shall mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates") whose shares were converted into the right to receive the Merger Consideration pursuant to Section 2.01(c) (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in such form and have such other customary provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, and such other customary documents as may be reasonably required by the Paying Agent, the holder of such Certificate shall be entitled to receive promptly in exchange therefor the amount of cash into which the shares of Company Common Stock theretofore represented by such Certificate shall have been converted pursuant to Section 2.01(c), and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the Company, payment shall be made to a person other than the person in whose name the Certificate so surrendered is registered, if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of such Certificate or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 2.02(c), each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the amount of cash, without interest, into which the shares of Company Common Stock theretofore represented by such Certificate shall have been converted pursuant to Section 2.01(c). No interest will be paid or will accrue on the cash payable upon the surrender of any Certificate under any provision of this Agreement.
(d) No Further Ownership Rights in Company Common Stock. All cash paid upon the surrender of Certificates in accordance with the terms hereof shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Company Common Stock theretofore represented by such Certificates, subject, however, to the Surviving Corporation's obligation to pay any dividends or make any other distributions with a record date prior to the Effective Time which may have been declared or made by the Company on such shares of Company Common Stock in accordance with the terms of this Agreement on or prior to the Effective Time and which remain unpaid at the Effective Time, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article II.
(e) No Liability. None of Parent, Sub, the Company or the Paying Agent shall be liable to any person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Certificates shall not have been surrendered prior to seven years after the Effective Time (or immediately prior to such earlier date on which any payment pursuant to this Article II would otherwise escheat to or become the property of any Governmental Entity (as defined in Section 3.01(c))), the cash payment in respect of such Certificate shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interests of any person previously entitled thereto.
(f) Withholding Rights. The Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts as the Paying Agent is required to deduct, hold and, if applicable, pay over to a taxing authority with respect to the making of such payment under the Internal Revenue Code of 1986, as amended (the "Code") or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Paying Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by the Paying Agent.
The Company has heretofore delivered to Parent a disclosure schedule with respect to the representations and warranties set forth below (the "Company Disclosure Schedule"). The Company Disclosure Schedule contains section and subsection references which in each case are references to sections or subsections of this Agreement. The Company Disclosure Schedule shall in each case describe the nature of the exception, if any, in reasonable detail and shall specifically refer to the section or subsection of this Agreement to which any exception set forth therein to a representation and warranty contained in this Article III applies (disclosure in any section or subsection of the Company Disclosure Schedule shall apply only to the corresponding section or subsection of this Agreement).
SECTION 3.00. Materiality. No representation or warranty of the Company or Parent contained in Section 3.01 (other than Sections 3.01(b), (c)(i), (l), (m), (q), (r), (s), (u), (x), (cc), (ff)) or 3.02, respectively, shall be deemed untrue or incorrect, and no party hereto shall be deemed to have breached any such representation or warranty, on account of the existence of any fact, circumstance or event unless, as a consequence of such fact, circumstance or event, individually or taken together with all other facts, circumstances or events inconsistent with any such paragraph of Section 3.01 or 3.02, as applicable, there is reasonably likely to occur a Material Adverse Effect as defined in Section 8.03(a).
SECTION 3.01. Representations and Warranties of the Company. Except as specified on the Company Disclosure Schedule, the Company represents and warrants to Parent and Sub as follows:
(a) Organization and Authority. The Company is a savings and loan holding company duly registered with the Office of Thrift Supervision ("OTS") under the SLHCA. NSB is a directly held wholly owned Subsidiary of the Company. Each of the Company and its Subsidiaries is a savings bank or corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary except where the failure so to qualify would not have a Material Adverse Effect (as defined in Section 8.03(a)) on the Company. The deposit accounts of NSB are insured up to applicable limits by the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC").
(b) Capital Structure. (i) The authorized capital stock of the Company consists of 4,000,000 shares of Company Common Stock and 1,000,000 shares of serial preferred stock, par value U.S.$.10 per share ("Company Preferred Stock"). At the date hereof, (A) 2,750,522 shares of Company Common Stock were outstanding, (B) 547,354 shares of Company Common Stock were reserved for issuance under the Stock Option Agreement, (C) 237,183 shares of Company Common Stock were reserved for issuance with respect to outstanding options (the "Company Employee Options") issued under the Company's stock option, stock bonus and incentive plans, including the 1988 Stock Option and Incentive Plan (the "Incentive Plan"), a list of which is set forth on the Company Disclosure Schedule, and (D) no shares of Company Preferred Stock were outstanding. Except as set forth above, at the date hereof, no shares of capital stock or other voting securities of the Company were issued, reserved for issuance or outstanding. The Company Disclosure Schedule sets forth the name of each holder of an option or other right outstanding under the Incentive Plan, a description of the exercise or purchase prices, vesting schedules, expiration dates, and the number of shares of the Company Common Stock subject to each Company Employee Option, together with a specification of all Company Employee Options which shall vest at the Effective Time as a result of the Merger. Except for the Company Employee Options listed on the Company Disclosure Schedule, there will not be outstanding at any time up to and including the Effective Time any stock options, stock appreciation rights, restricted stock grants or any other such right to acquire any shares of the Company Common Stock from the Company. Except for shares of Company Common Stock which may be issued pursuant to the exercise of Company Employee Options, there will be no increase in the outstanding shares of Company Common Stock and no issuance of any shares of Company Preferred Stock after the execution and delivery of this Agreement.
foregoing provisions of this Section 3.01(b)(i), the Company has issued no "rights" or other securities commonly referred to as "poison pill" or similar securities and there will be no issuance of any such securities after the execution and delivery of this Agreement.
(ii) No bonds, debentures, notes or other indebtedness having the right to vote (or convertible into or exchangeable for securities having the right to vote) on any matters on which stockholders may vote ("Voting Debt") of the Company are issued or outstanding.
(iii) All outstanding shares of the Company Common Stock are, and any shares of Company Common Stock which may be issued pursuant to the Stock Option Agreement or upon exercise of Company Employee Options will be, validly issued, fully paid and nonassessable and will be delivered free and clear of all claims, liens, encumbrances, charges, pledges or security interests of any kind or nature whatsoever (collectively, "Liens"), subject to repayment of the Company's ESOP loan, and not subject to preemptive rights.
(iv) Except for this Agreement, the Incentive Plan and the ESOP (the "Company Stock Plans"), the Company Employee Options and the Stock Option Agreement, there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company or any Subsidiary of the Company is a party or by which it is bound obligating the Company or any Subsidiary of the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or any Voting Debt of the Company or of any Subsidiary of the Company or obligating the Company or any Subsidiary of the Company to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking.
(v) There are no outstanding contractual obligations (A) of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries, other than the Stock Option Agreement and the purchase of shares in the market pursuant to the Employee Stock Purchase Plan and 401(k) plan, or (B) of the Company to vote or to dispose of or encumber any shares of the capital stock of any of its Subsidiaries.
(c) Authorization. (i) The Company has all requisite corporate power and authority to enter into this Agreement and the Stock Option Agreement and, subject in the case of this Agreement to the Company Stockholder Approval, to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Stock Option Agreement and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company, subject in the case of this Agreement to the Company Stockholder Approval. Without limiting the foregoing, (A) this Agreement and the Stock Option Agreement have been approved by the unanimous vote of all members of the Board of Directors of the Company, which approval includes a resolution to the effect that the Board of Directors, subject to its fiduciary duties, recommends that this Agreement and the transactions contemplated hereby and thereby be approved by the stockholders of the Company, and (B) the Company has taken all necessary corporate action to authorize and reserve for issuance that number of shares of Company Common Stock equal to the maximum number of shares of Company Common Stock issuable upon exercise of the option granted pursuant to the Stock Option Agreement. This Agreement and the Stock Option Agreement have been duly executed and delivered by the Company and each constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its respective terms, except as such enforcement may be limited by bankruptcy, insolvency and other similar laws affecting creditors' rights generally or the rights of creditors of financial institutions and to general equity principles.
(ii) The execution and delivery of this Agreement and the Stock Option Agreement do not, and the consummation of the transactions contemplated hereby and thereby will not, and compliance by the Company with any of the provisions hereof or thereof will not, (A) conflict with, or result in any breach or violation of, or default (with or without notice or lapse of time or both) under, or result in the termination of, or accelerate the performance required by, or give rise to a right of termination, cancellation or acceleration of any obligation or the loss of a material benefit under, or the creation of a Lien (any such conflict, breach, violation, default, termination, acceleration, right of termination, cancellation or acceleration, loss or creation, a "Violation") pursuant to, any provision of the certificate or articles of incorporation or
Company, NSB or any other Subsidiary of the Company or (B) subject to obtaining or making the consents, approvals, orders, authorizations, registrations, declarations and filings referred to in paragraph (iii) below and except as set forth in the Company Disclosure Schedule, result in any Violation of any loan or credit agreement, note, mortgage, indenture, lease, Company Benefit Plan (as defined in Section 3.01(j)) or other agreement, obligation, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, NSB or any other Subsidiary of the Company or their respective properties or assets, which Violation under this clause (B) could reasonably be expected to have, individually or in the aggregate with other such Violations, a Material Adverse Effect on the Company.
(iii) To the best knowledge of the Company, after consultation with counsel, no consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a "Governmental Entity"), is required by or with respect to the Company, NSB or any other Subsidiary of the Company in connection with the execution and delivery of this Agreement and the Stock Option Agreement by the Company, or the consummation by the Company of the transactions contemplated hereby and thereby, the failure to obtain such which could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company, except for (A) the filing with the Securities and Exchange Commission ("SEC") of (1) a proxy statement (as amended or supplemented from time to time, the "Proxy Statement") relating to the meeting of the Company's stockholders at which a vote is held on the Merger (the "Company Stockholders Meeting") and (2) such reports under Sections 13(a), 13(d), 13(g) and 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may be required in connection with this Agreement, the Stock Option Agreement and the transactions contemplated hereby and thereby and the obtaining from the SEC of such orders as may be required in connection therewith, (B) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, (C) the filing of such notices, applications, filings, authorizations, orders and approvals as may be required under federal and state thrift and banking laws, and with and of federal and state thrift and banking authorities and approval of same (collectively, the "Banking Approvals"), and (D) consents, authorizations, approvals, filings or exemptions in connection with compliance with the applicable provisions of the rules of the American Stock Exchange (the "Amex"), or which are required under consumer finance, mortgage banking and other similar laws.
(d) SEC Documents; Financial Statements; Reports. (i) The Company has delivered to Parent a true and complete copy of each report, schedule, registration statement and definitive proxy statement filed by the Company with the SEC (other than reports filed pursuant to Section 13(d) or 13(g) of the Exchange Act) since January 1, 1992 (the "Company SEC Documents"), which are all the documents (other than preliminary material and reports required pursuant to Section 13(d) or 13(g) of the Exchange Act) that the Company was required to file with the SEC since such date. The Company will promptly deliver to Parent a true and complete copy of each report, schedule, registration statement and definitive proxy statement filed by the Company with the SEC (other than reports filed pursuant to Section 13(d) or 13(g) of the Exchange Act) after the date of this Agreement (the "Future Company SEC Documents"). As of their respective dates, the Company SEC Documents complied in all material respects with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable thereto. As of their respective dates, the Future Company SEC Documents will comply in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable thereto. All material agreements, contracts and other documents required to be filed as exhibits to any of the Company SEC Documents have been so filed, and in respect of the Future Company SEC Documents, will be so filed. Except to the extent that information contained in any Company SEC Document has been revised or superseded by a later Company SEC Document, none of the Company SEC Documents contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the Future Company SEC Documents will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(ii) The financial statements of the Company included in the Company SEC Documents or to be included in the Future Company SEC Documents comply or will comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared or will be prepared in accordance with GAAP (as defined in Section 8.03(c)) during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present or will fairly present the consolidated financial position of the Company and its consolidated Subsidiaries at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended.
(iii) Since January 1, 1992, each of the Company and its Subsidiaries, including NSB, has filed all material reports, registrations and statements, together with any required material amendments thereto ("Company Regulatory Reports"), and has paid all fees and assessments due and payable therewith, that it was required to file with the FDIC, the OTS, all applicable state banking and other regulatory authorities and other relevant Governmental Entities or self regulatory agencies charged with the supervision or regulation of the Company or any of its Subsidiaries (collectively, "Regulatory Authorities") and with the Federal Home Loan Bank of San Francisco ("FHLBSF"). As of their respective dates, each such Company Regulatory Report complied in all material respects with all the rules and regulations promulgated by the applicable Regulatory Authority (including regulatory accounting practices) and, except as revised or superseded by a later filed Company Regulatory Report, does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company has delivered to Parent true and complete copies of the Company Regulatory Reports.
(e) Information Supplied. None of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in the Proxy Statement will, at the date of mailing to stockholders and at the time of the Company Stockholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder, except that no representation or warranty is made by the Company with respect to statements made or incorporated by reference therein based on information supplied by Parent or Sub specifically for inclusion or incorporation by reference therein. All documents that the Company is responsible for filing with any Governmental Entity in connection with the transactions contemplated hereby will comply as to form in all material respects with the provisions of applicable law, including applicable provisions of the Securities Act and Exchange Act. Without limiting any of the representations and warranties contained herein, no representation or warranty to Parent by the Company herein, and no statement by the Company or other information contained in the Company Disclosure Schedule or any document incorporated by reference therein, as the date of such document, contains or contained or will contain, any untrue statement of material fact, or, at the date thereof, omitted or shall omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which such statements are or will be made, not misleading.
(f) Compliance with Applicable Laws. (i) The Company and its Subsidiaries hold all permits, licenses, variances, exemptions, authorizations, orders and approvals of all Governmental Entities (the "Company Permits") that are required for them to own, lease or operate their properties and assets and to carry on their businesses as presently conducted, and there has occurred no default under any such Company Permit, except for the lack of Company Permits and for defaults under Company Permits which lack or default individually or in the aggregate would not have a Material Adverse Effect on the Company. Except as disclosed in the Company SEC Documents filed and publicly available prior to the date of this Agreement, the Company and its Subsidiaries are in compliance in all material respects with all applicable statutes, laws, ordinances, rules, orders and regulations of any Governmental Entity, and with their material internal policies and procedures.
(ii) Neither the Company nor any of its Subsidiaries has received any notification or communication which has not been fully and finally resolved from any Regulatory Authorities (A) asserting that any of the Company or any of its Subsidiaries is not in substantial compliance with any of the statutes, ordinances or guidelines which such Regulatory Authority enforces or administers, or the internal policies and procedures of such company, (B) threatening to revoke any material Company Permit, including such company's status as an insured depositary institution under the Federal Deposit Insurance Act ("FDIA"), (C) requiring or threatening to require the Company or any of its Subsidiaries, or indicating that the Company or any of its Subsidiaries may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement, to be subject to any directive or supervisory letter, or to adopt resolutions of its board of directors, in each case restricting or limiting or purporting to restrict or limit in any material respect the operations of the Company or any of its Subsidiaries, including any restriction on the payment of dividends, or relating to its capital adequacy, its credit policies or its management, or (D) except as set forth in the Company Disclosure Schedule, directing, restricting or limiting, or purporting to direct, restrict or limit, in any material respect the operations of the Company or any of its Subsidiaries, including any restriction on the payment of dividends, or relating to its capital adequacy, its credit policies or its management (any such notification, communication, order, agreement, memorandum of understanding, directive, supervisory letter or required board resolutions being referred to herein as a "Regulatory Agreement"). Neither the Company nor any of its Subsidiaries has received, consented to or entered into, or is subject to, any Regulatory Agreement, nor has the Company or any of its Subsidiaries been advised by any Regulatory Authority that such Regulatory Authority is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such Regulatory Agreement. The Company has advised Parent of the substance of any and all criminal referrals it has filed with the OTS.
(iii) Neither the Company nor any of its Subsidiaries is required by Section 32 of the FDIA to give prior notice to a Regulatory Authority of the proposed addition of an individual to its board of directors or the employment of an individual as a senior executive officer.
(iv) To the best knowledge of the Company, each of the Company and its Subsidiaries is, and has been, and each of the Company's former Subsidiaries, while Subsidiaries of the Company, was in compliance with all applicable Environmental Laws (as defined below), except for possible noncompliance which individually or in the aggregate would not have a Material Adverse Effect on the Company. The term "Environmental Laws" means any Federal, state, local or foreign statute, ordinance, rule, regulation, policy, permit, consent, approval, license, judgment, order, decree, injunction or other authorization relating to: (A) Releases (as defined in 42 U.S.C. Section 9601(22)) or threatened Releases of Hazardous Material (as defined below) into the environment; or (B) the generation, treatment, storage, disposal, use, handling, manufacturing, transportation or shipment of any Hazardous Material. The term "Environmental Laws" also includes any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damage to, or threatened as a result of, the presence of or exposure to any Hazardous Material. The term "Hazardous Material" means (1) hazardous substances (as defined in 42 U.S.C. Section 9601(14)), (2) petroleum, including crude oil and any fractions thereof, (3) natural gas, synthetic gas and any mixtures thereof, (4) asbestos and/or asbestos-containing material and (5) polychlorinated biphenyls ("PCBs"), or materials containing PCBs in excess of 50 ppm.
(v) To the best knowledge of the Company, during the period of ownership or operation by the Company and its Subsidiaries of any of their respective current or previously owned or leased properties (including for purposes of this paragraph any such properties acquired in foreclosures or otherwise in connection with extensions of credit), there have been no Releases of Hazardous Material in, on, under or affecting such properties or any surrounding site, and none of the Company or its Subsidiaries have disposed of any Hazardous Material or any other substance in a manner that has led, or could reasonably be anticipated to lead, to a Release, except in each case for those which individually or in the aggregate would not have a Material Adverse Effect on the Company. Prior to the period of ownership or operation by the Company and its Subsidiaries of any of their respective current or previously owned or leased properties, no Hazardous Material was generated, treated, stored, disposed of, used, handled or manufactured at, or transported, shipped or disposed of from, such current or previously owned properties, and there were no Releases of Hazardous Material in, on, under or affecting any such property or any surrounding site, except in each case for those which individually or in the aggregate would not have a Material Adverse Effect on the Company.
(vi) To the best knowledge of the Company, the Company and its Subsidiaries are not subject to any judgment, decree or order relating to compliance with any Environmental Law or to investigation or cleanup under any Environmental Law (collectively, "Environmental Enforcement Actions"), except with respect to Environmental Enforcement Actions which, individually or in the aggregate, would not have a Material Adverse Effect on the Company and which, in any event, are listed and described on the Company Disclosure Schedule. To the best knowledge of the Company, neither the Company nor any of its Subsidiaries has any contingent liabilities in connection with any Hazardous Materials, including claims of liability for cleanup of Hazardous Materials related to any of the Company, its Subsidiaries or any of the Company's former Subsidiaries that, individually or in the aggregate, would have a Material Adverse Effect on the Company.
(vii) Except as set forth in the Company Disclosure Schedule, to the best knowledge of the Company, neither the Company nor any Subsidiary participates in the management of a Loan Property or Participation Facility to an extent that it would be deemed an "owner or operator" as defined in 42 U.S.C. (S) 9601 or any similar Environmental Law. As used herein, the term "Loan Property" means any property in which the applicable party (or a subsidiary of it) holds a security interest, and, where required by the context, includes the owner or operator of such property, but only with respect to such property, and the term "Participation Facility" means any facility in which the applicable party (or a subsidiary of it) participates in the management (including all property held as trustee or in any other fiduciary capacity) and, where required by the context, includes the owner or operator of such property.
(g) Litigation. Except as disclosed in the Company SEC Documents, there is no claim, suit, action or proceeding pending or, to the knowledge of the Company, threatened, against or affecting the Company or any Subsidiary of the Company (including any such suit, action or proceeding under the Securities Act, the Exchange Act, the Community Reinvestment Act of 1977, as amended, or fair lending laws or by any stockholder or former stockholder of the Company or any Subsidiary of the Company) that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company or that could reasonably be expected to threaten, impede or delay the consummation of the Merger, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company or any Subsidiary of the Company having, or which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company or that could reasonably be expected to threaten, impede or delay the consummation of the Merger. The Company Disclosure Schedule contains a true, correct and complete list as of the date hereof of all pending suits, claims, actions, investigations or proceedings of any nature involving claims against it or any of its subsidiaries in the amount of $25,000 or more or involving claims for a specific performance or injunctive relief and suits, claims, actions and other matters that have been brought and are pending or have been threatened to be brought by or on behalf of the Company or any of its Subsidiaries, as plaintiff or other claimant in the amount of $25,000 or more (excluding loan foreclosures and similar collection actions in the ordinary course of business).
(h) Taxes. (i) (A) The Company and its Subsidiaries have filed, been included in or sent all returns, declarations and reports and information returns and statements required to be filed or sent (including in each case extensions) by or relating to any of them relating to any taxes with respect to any income, properties or operations of the Company or any such subsidiary prior to the Effective Time (collectively, "Company Returns"), (B) as of the time of filing, the Company Returns correctly reflected in all material respects the facts regarding the income, business, assets, tax bases, operations, activities and status of the Company and its Subsidiaries and any other information required to be shown therein, (C) the Company and its Subsidiaries have timely paid or made provision for all taxes that have been shown as due and payable on the Company Returns that have been filed, (D) the Company and its Subsidiaries have made or will make provision for all taxes payable for any periods ending on or before the last day of the calendar month preceding the Effective Time for which no Company Returns have yet been filed and for any periods that begin before the Effective Time and end after the Effective Time to the extent such taxes are attributable to the portion of any such period ending at the Effective Time, (E) the charges, accruals and reserves for taxes reflected on the books of the Company and its Subsidiaries do not in the aggregate materially fail to provide for the tax liabilities accruing or payable by the Company and its Subsidiaries in respect of periods prior to the date hereof, (F) except as set forth in the Company Disclosure Schedule, neither the Company nor any Subsidiaries are delinquent in the payment of any taxes or has requested any extension of time within which to file or send any Company Return, which Company Return has not since been filed or sent, (G) no deficiency for any taxes has been proposed, asserted or assessed in writing against the Company or any of its Subsidiaries other than those taxes being contested in good faith which have heretofore been advised in writing by the Company to Parent and other than taxes individually or in the aggregate which do not exceed more than $50,000 in asserted liability, (H) the Federal income tax returns of the Company or any consolidated group to which it belongs have been examined by and/or settled with the United States Internal Revenue Service (the "IRS") for all fiscal years through June 30, 1991, (I) neither the Company nor any of its Subsidiaries have granted any extension of the limitation period applicable to any tax claims (which period has not since lapsed), other than those taxes being contested in good faith, and (J) neither the Company nor any Subsidiary have any contractual obligations under any tax sharing agreement with any corporation which, as of the Effective Time, is not a member of a consolidated group of which all of and only the Company and its Subsidiaries are members.
(ii) Any amount that could be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of the Company or any of its affiliates who is a "disqualified individual" (as such term is defined in Section 280G(c) of the Code) under any employment, severance or termination agreement, other compensation arrangement or Company Benefit Plan currently in effect would not be characterized as a "parachute payment" (as such term is defined in Section 280G(b)(2) of the Code).
(iii) The disallowance of a deduction under Section 162(m) of the Code for employee remuneration will not apply to any amount paid or payable by the Company or any of its Subsidiaries of the Company under any contract, plan, program, arrangement or understanding.
(iv) For the purpose of this Agreement, the term "tax" (including, with correlative meaning, the terms "taxes" and "taxable") shall include, except where the context otherwise requires, all Federal, state, local and foreign income, profits, franchise, gross receipts, payroll, sales, employment, use, property, withholding, excise, occupancy and other taxes, duties or assessments of any nature whatsoever (including the California franchise and income tax), together with all interest, penalties and additions imposed with respect to such amounts.
(i) Absence of Changes in Benefit Plans. Except as disclosed in the Company SEC Documents or the Company Disclosure Schedule, there has not been any adoption or amendment by the Company or any of its Subsidiaries of any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, medical or other plan, arrangement or understanding (whether or not legally binding) providing benefits to any current or former employee, officer or director of the Company or any of its Subsidiaries. Except as disclosed in the Company SEC Documents or the Company Disclosure Schedule, there exists (and will not exist at any time prior to the Effective Time) no employment, bonus, consulting, severance, termination or indemnification agreements, arrangements or understandings between the Company or any of its Subsidiaries and any current or former employee, officer or director of the Company or any of its Subsidiaries. Without limiting the generality of the foregoing, (A) the aggregate salary and termination benefits payable to each of the senior officers of the Company under existing employment agreements are as detailed in the Company Disclosure Schedule, (B) the termination benefits payable to additional officers and employees under the Company's severance plan are as detailed in the Company Disclosure Schedule, and (C) no individuals other than those referred to in clauses (A) and (B) of this sentence are, or will be at the Effective Time, entitled to salary, severance, termination, bonus or other such benefits from the Company or NSB. True and correct copies of all items referred to in this Section 3.01(i) have been heretofore delivered by the Company to Parent.
(j) ERISA Compliance. (i) The Company Disclosure Schedule contains a list and brief description of each "employee pension benefit plan" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes referred to herein as a "Pension Plan"), each "employee welfare benefit plan" (as defined in Section 3(1) of ERISA) and each stock option, stock purchase, deferred compensation plan or arrangement and each other employee fringe benefit plan or arrangement maintained, contributed to or required to be maintained or contributed to by the Company, any of its subsidiaries or any other person or entity that, together with the Company, is treated as a single employer under Section 414(b), (c), (m) or (o) of the Code (each, a "Commonly Controlled Entity"), for the benefit of any current or former employees, officers, agents, directors or independent contractors of the Company or any of its subsidiaries (collectively, "Company Benefit Plans"). The Company has delivered or made available to Parent true, complete and correct copies of (A) each Company Benefit Plan (or, in the case of any unwritten Company Benefit Plans, descriptions thereof) and any related trust agreement, (B) the most recent annual report on Form 5500 filed with the IRS with respect to each Company Benefit Plan (if any such report was required) and (C) the most recent summary plan description (or similar document) for each Company Benefit Plan for which such summary plan description is required or was provided to plan participants or beneficiaries.
(ii) Each Company Benefit Plan has been administered in all material respects in accordance with its terms. The Company, its Subsidiaries and all the Company Benefit Plans are all in compliance in all material respects with the applicable provisions of ERISA and the Code. To the best knowledge of the Company, there are no investigations, proceedings or other claims involving any Company Benefit Plan that could give rise to any material liability.
(iii) All Pension Plans intended to be qualified under Section 401(a) of the Code have been the subject of determination letters from the IRS to the effect that such Pension Plans are qualified and exempt from Federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, and, to the knowledge of the Company, all such letters are valid and effective as of the date hereof.
(iv) No Pension Plan, other than any Pension Plan that is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA; collectively, the "Multiemployer Pension Plans"), had, as of the respective last annual valuation date for each such Pension Plan, an "unfunded benefit liability" (as such term is defined in Section 4001(a)(18) of ERISA), based on actuarial assumptions which have been furnished to Parent, and neither the Company nor any of its Subsidiaries is aware of any facts or circumstances that would materially change the funded status of any such Company Benefit Plans. None of the Pension Plans has an "accumulated funding deficiency" (as such term is defined in Section 302 of ERISA or Section 412 of the Code), and there has been no application for a waiver of the minimum funding standards imposed by Section 412 of the Code with respect to any Company Benefit Plan that is a Pension Plan. No Commonly Controlled Entity has incurred any material liability to a Pension Plan (other than for contributions not yet due) or to the Pension Benefit Guaranty Corporation (the "PBGC") (other than for premiums not yet due).
(v) There have been no non-exempt "prohibited transactions" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility with respect to the Company Benefit Plans that could subject the Company, any of its subsidiaries or any officer of the Company or any of its Subsidiaries to tax or penalty under ERISA, the Code or other applicable law. Neither any of such Company Benefit Plans nor any of such trusts has been terminated, nor has there been any "reportable event" (as that term is defined in Section 4043 of ERISA) with respect thereto, during the last five years.
(vi) Neither the Company nor any Commonly Controlled Entity (A) maintains or contributes to a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) or has maintained, contributed to or had an obligation to maintain or contribute to such a plan within the five full plan years of any such plan immediately prior to the date hereof, or (B) has incurred any liability to the PBGC or a Company Benefit Plan upon the termination of or withdrawal from a Company Benefit Plan, which liability remains unpaid as of the date hereof.
(vii) With respect to any Company Benefit Plan that is an employee welfare benefit plan, (A) no such Company Benefit Plan is funded through a "welfare benefit fund", as such term is defined in Section 419(e) of the Code, (B) each such Company Benefit Plan that is a "group health plan", as such term is defined in Section 5000(b)(1) of the Code, complies in all material respects with the applicable requirements of Section 4980B(f) of the Code and (C) except as set forth in the Company Disclosure Schedule, each such Company Benefit Plan (including any such Plan covering retirees or other former employees) may be amended or terminated without material liability to the Company or any of its subsidiaries on or at any time after the consummation of the Merger.
(viii) Except as disclosed in the Company Disclosure Schedule, no employee of the Company or any Subsidiary of the Company will be entitled to any additional benefits or any acceleration of the time of payment or vesting of any benefits under any Company Benefit Plan as a result of the transactions contemplated by this Agreement or by the Stock Option Agreement.
(k) Subsidiaries. The Company Disclosure Schedule sets forth all the Subsidiaries of the Company and indicates for each such Subsidiary the jurisdiction and date of incorporation. Each of the Company's subsidiaries that is a savings bank is an "insured bank" as defined in the FDIA and applicable regulations thereunder. Except as set forth on the Company Disclosure Schedule, all the shares of capital stock of each of the Subsidiaries of the Company are fully paid and nonassessable and are owned by the Company or another Subsidiary of the Company free and clear of all Liens. The Company Disclosure Schedule sets forth the equity interest of any person other than the Company or any of its Subsidiaries in any of the Subsidiaries of the Company and also sets forth the identity and address of any such person. Except for the capital stock of its Subsidiaries and as set forth in the Company Disclosure Schedule, the Company does not own, directly or indirectly, any capital stock or other ownership interest in any corporation, bank, partnership, joint venture or other entity.
(l) State Takeover Statutes. The Board of Directors of the Company has approved the Merger, this Agreement and the Stock Option Agreement and/ or has taken such other action, and such approval and/or action is sufficient, to render inapplicable to the Merger, this Agreement, the Stock Option Agreement and the transactions contemplated by this Agreement and the Stock Option Agreement the provisions of Section 203 of the DGCL. No other state takeover statute or similar statute or regulation applies or purports to apply to the Merger, this Agreement, the Stock Option Agreement and the transactions contemplated by this Agreement and the Stock Option Agreement.
(m) Vote Required. The Company Stockholder Approval is the only vote of the holders of any class or series of the Company capital stock necessary to approve this Agreement and the transactions contemplated hereby.
(n) Other Activities of the Company and its Subsidiaries. (i) Neither the Company nor any of its Subsidiaries that is not a federal savings bank directly or indirectly engages in any activity prohibited by the OTS. Without limiting the generality of the foregoing, any equity investment of the Company and each Subsidiary that is not a federal savings bank is not prohibited by the OTS. NSB engages only in activities permissible for federal savings banks under applicable OTS and FDIC regulations. Neither the Company nor any Subsidiary directly or indirectly engages in any activity not permitted to a bank holding company or its subsidiaries under the Bank Holding Company Act of 1956, as amended (the "BHCA").
(ii) Neither the Company nor any Subsidiary engages in any insurance activities other than acting as a principal, agent or broker for insurance that is directly related to an extension of credit by the Company or any Subsidiary and limited to assuring the repayment of the balance due on the extension of credit in the event of the death, disability or involuntary unemployment of the debtor. The Company Disclosure Schedule describes all licenses and approvals held by the Company and any Subsidiary (and any officer, director or employee of any of them) to conduct any insurance activities, whether as principal, agent, broker or otherwise.
(iii) Neither the Company nor any Subsidiary, in connection with its activities relating to funds transfers, (A) is in default under any agreement to which it is a party relating to the transfer of funds or settlement with respect to such transfers; or (B) has agreed to be or is liable for consequential damages for its error or delay in acting on requests for the transfer of funds. Each of the Company and its Subsidiaries, as applicable, has adopted and followed procedures reasonably adapted to avoid such errors and delay, has adopted commercially reasonable security procedures (as such term is defined in section 4A-202 of the Uniform Commercial Code) for verifying the authenticity of requests received for the transfer of funds, and is in compliance with applicable laws of Governmental Entities relating to the transfer of funds and settlement with respect thereto with the applicable operating rules of each funds transfer system of which it is a member or by which it is bound.
(o) Properties. Except as disclosed in the Company SEC Documents, the Company and its Subsidiaries (i) have good, clear and marketable title to all the properties and assets which are material to the Company's business on a consolidated basis and are reflected in the latest audited statement of condition included in the Company SEC Documents as being owned by the Company and its Subsidiaries or acquired after the date thereof (except properties sold or otherwise disposed of since the date thereof in the ordinary course of business), free and clear of all Liens except (A) statutory Liens securing payments not yet due, (B) Liens on assets of Subsidiaries of the Company incurred in the ordinary course of their business and (C) such imperfections or irregularities of title or Liens as do not affect the use of the properties or assets subject thereto or affected thereby or otherwise materially impair business operations at such properties, in either case in such a manner as to have a Material Adverse Effect on the Company, and (ii) are collectively the lessee of all leasehold estates which are material to the Company's business on a consolidated basis and are reflected in the latest audited financial statements included in the Company SEC Documents or acquired after the date thereof (except for leases that have expired by their terms or as to which the Company has agreed to terminate or convey since the date thereof) and is in possession of the properties purported to be leased thereunder, and each such lease is valid without default thereunder by the lessee or, to the Company's knowledge, the lessor, other than defaults that would not have a Material Adverse Effect on the Company. The Company Disclosure Schedule lists all of the owned or leased real property of the Company and its Subsidiaries, except for real property acquired after the date hereof as a result of foreclosures or transfers in lieu of foreclosure in the ordinary course of business. Each of the Company and its Subsidiaries enjoys peaceful and undisturbed possession under all such leases. All the Company's and its Subsidiaries' owned buildings, structures and equipment have been well maintained and are in good and serviceable condition, normal wear and tear excepted.
(p) Insurance. The Company and its Subsidiaries are presently insured, and during each of the last five years have been insured, for reasonable amounts against such risks as companies engaged in similar businesses would, in accordance with good business practice, customarily be insured. The Company Disclosure Schedule sets forth a true and complete list and brief description of all insurance policies (and fidelity or similar bonds) maintained by or for the benefit of the Company, its subsidiaries or their directors, officers, employees or agents.
(q) Material Interests of Certain Persons. Except as disclosed in the Company's Proxy Statement for its 1995 Annual Meeting of Stockholders, no executive officer or director of the Company or any "associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of any such executive officer or director has any material interest in any material contract or property, real or personal, tangible or intangible, that is used in or pertains to the business of the Company or any of its subsidiaries.
(r) Brokers and Finders; Schedule of Fees and Expenses. No broker, investment banker, financial advisor or other person, other than Kaplan Associates, Inc., the fees and expenses of which will be paid by the Company prior to the Effective Time, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The estimated fees and expenses incurred and to be incurred by the Company in connection with this Agreement and the Stock Option Agreement and the transactions contemplated by this Agreement and the Stock Option Agreement (including the fees of the Company's legal counsel) are set forth in the Company Disclosure Schedule.
(s) Opinion of Financial Advisor. The Company has received the opinion of Kaplan Associates, Inc., dated the date of this Agreement, to the effect that, as of such date, the Merger Consideration to be received by the Company's stockholders is fair to the Company's stockholders from a financial point of view, and a signed copy of such opinion has been delivered to Parent.
(t) Allowance for Loan Losses. The allowance for loan losses shown on the consolidated statement of condition of the Company and its Subsidiaries reflected in the Company's latest audited financial statements included in the Company Filed SEC Documents was, and the allowance for loan losses shown on the consolidated statements of condition of the Company and its subsidiaries reflected in the Company's financial statements as of dates subsequent to the date hereof will be, in each case as of the dates thereof, in the opinion of management, adequate to provide for losses relating to or inherent in the loan
(including accrued interest receivables) of the Company and its Subsidiaries and other extensions of credit (including letters of credit and commitments to make loans or extend credit) by the Company and its Subsidiaries.
(u) Certain Agreements. Except as disclosed in the Company Disclosure Schedule or the Company SEC Documents and except for this Agreement and the Stock Option Agreement, as of the date of this Agreement, neither the Company nor any of its Subsidiaries is a party to any written or, to the Company's knowledge, oral (i) consulting or independent contractor agreement (other than contracts entered into in the ordinary course of business) not terminable on 30 days' or less notice or involving the payment of more than $25,000 per annum, or union, guild or collective bargaining agreement, (ii) material joint venture, (iii) noncompetition or similar agreement that restricts the Company or its Subsidiaries from engaging in a line of business, (iv) agreement with any executive officer or other employee of the Company or any Subsidiary of the Company the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company or NSB of the nature contemplated by this Agreement or the Stock Option Agreement, (v) agreement with any executive officer or other employee of the Company or any Subsidiary of the Company providing for other than at-will employment, other than individuals who are treated as employed for purposes of vesting with respect to benefits under any Company Benefit Plan and who (A) have such status for not more than three years and (B) in respect to which the Company's obligation to make any payments do not exceed $25,000 per annum, (vi) agreement or plan, including any severance or "golden parachute" agreement, or any stock option plan, retirement or Pension Plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, any of the benefits of which will be payable or increased, or the vesting of the benefits of which will be accelerated, as a result of the occurrence of any of the transactions contemplated by this Agreement or the Stock Option Agreement, or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement or the Stock Option Agreement, (vii) any real property lease with annual rental payments aggregating $25,000 or more, (viii) any other contract or agreement which would be required to be disclosed as an exhibit to the Company's annual report to the SEC on Form 10-K and which has not been so disclosed, (ix) any agreement, arrangement or commitment not made in the ordinary course of business consistent with past practice (and not otherwise disclosed in the Company Disclosure Schedule) that is material to the Company on a consolidated basis, or any contract, agreement or understanding relating to the sale or disposition by the Company or any of its Subsidiaries of significant assets or businesses of the Company or any of its Subsidiaries, (x) any material agreement, indenture, credit agreement or other instrument relating to the borrowing of money by the Company or any of its Subsidiaries (other than certificates of deposit and customary savings bank funding instruments) or the guarantee by the Company or any such Subsidiary of any such obligation. Neither the Company nor any of its Subsidiaries is in default under any material agreement, commitment, arrangement, lease, insurance policy or other instrument, whether entered into in the ordinary course of business or otherwise and whether written or oral and there has not occurred any event that, with the giving of notice or the lapse of time or both, which constitutes such a default, except in all cases where such default would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Neither the Company or any of its Subsidiaries has received any notice or has any knowledge that any other party is in default in any respect under any contract, agreement, commitment, arrangement, lease, insurance policy other instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its Subsidiaries or the assets, business or operations thereof may be bound or affected or under which it or its respective assets, business or operations receives benefits, except for those defaults which have not had, or cannot reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and there has not occurred any event that with the lapse of time or the giving of notice or both would constitute such a default. True and correct copies of all such agreements referred to above in this Section 3.01(u), have been delivered or otherwise made available to Parent by the Company.
(v) Absence of Certain Changes or Events. Except as disclosed in the Company SEC Documents filed prior to the date hereof, since June 30, 1995, the Company and its Subsidiaries have not incurred any material liability, except in the ordinary course of their business consistent with their past practices, nor has there been any change, or any event involving a prospective change, in the Condition of the Company or any of its Subsidiaries which has had, or is reasonably likely to have, a Material Adverse Effect on the Company. Without limiting the generality of the foregoing, since such date, except as set forth in the Company Disclosure Schedule, there has not been any change in any of the licenses, permits or franchises of the
Company or any Subsidiary thereof that has had or can reasonably be expected to have a Material Adverse Effect on the Company individually or in the aggregate, or any damage, destruction or other casualty loss (whether or not covered by insurance) that has had or can reasonably be expected to have a Material Adverse Effect on the Company, except in the ordinary course of business, any amendment, modification or termination of any existing, or entering into any new contract, agreement, plan, lease, license, permit or franchise that is material to the Condition of the Company, any disposition by the Company or a Subsidiary thereof, of an asset that is material to the Company, except sales of properties in the ordinary course of business, or entering into any new employment agreement or bonus arrangement or Company Benefit Plan by the Company or any Subsidiary thereof, or any increase by the Company or any Subsidiary in the rate of compensation or the benefits payable or to become payable to any officer or other employee in excess of 5% per annum or to any agent or consultant in excess of the current customary practice of the Company and its Subsidiaries (except as otherwise expressly contemplated by the terms of this Agreement).
(w) Labor and Employment Matters. Except to the extent set forth in the Company Disclosure Schedule, (i) the Company and its Subsidiaries are and have been in compliance in all material respects with all applicable laws of Governmental Entities respecting employment and employment practices, terms and conditions of employment and wages and hours, including, without limitation, the Immigration Reform and Control Act ("IRCA"), the Worker Adjustment and Retraining Notification Act ("WARN"), any such laws respecting employment discrimination, disability rights or benefits, equal opportunity, plant closure issues, affirmative action, workers' compensation, employee benefits, severance payments, labor relations, employee leave issues, wage and hour standards, occupational safety and health requirements and unemployment insurance and related matters, and are not engaged in and have not engaged in any unfair labor practice; (ii) to the best knowledge of the Company, no investigation or review by or before any Governmental Entity concerning any possible conflicts with or violations of any such applicable laws is pending, nor is any such investigation threatened, nor has any such investigation occurred during the last three years, and no Governmental Entity has provided any notice to the Company or any of its Subsidiaries or otherwise asserted an intention to conduct any such investigation or review, nor is there any basis for any such investigation or review; (iii) there is no labor strike, dispute, slowdown or stoppage actually pending or threatened against or directly affecting the Company or any of its Subsidiaries; (iv) no union representation question or union organizational activity exists respecting the employees of the Company or any of its Subsidiaries; (v) no collective bargaining agreement exists which is binding on the Company or any of its Subsidiaries; (vi) neither the Company nor any of its Subsidiaries has experienced any material work stoppage or other material labor difficulty since December 31, 1991; (vii) neither the Company nor any of its Subsidiaries is delinquent in payments to any of its officers, directors, employees or agents for any wages, salaries, commissions, bonuses or other direct compensation for any services performed by them or amounts required to be reimbursed to such officers, directors, employees or agents; (viii) in the event of termination of the employment of any of said officers, directors, employees or agents for any reason, neither the Company, any of its Subsidiaries, Parent, Sub, nor any other Subsidiaries of Parent, will, pursuant to any agreement or by reason of anything done prior to the Effective Time by the Company or any of its Subsidiaries or predecessors, be liable to any of said officers, directors, employees or agents for so-called "severance pay" or any other similar payments or benefits, including, without limitation, post-employment health care (other than pursuant to COBRA) or insurance benefits; (ix) all benefits payable to current, terminated or retired employees, including, without limitation, post- employment health care or insurance benefits, may be modified or terminated by the Company at any time; (x) within the three-year period prior to the date hereof there has not been any termination of employment of any officer, director, employee or agent of the Company or any of its Subsidiaries who receives salary or compensation in excess of $60,000 per annum or any termination of any officer, director, employee or agent of the Company or its Subsidiaries that could result in a liability to Parent in excess of $60,000; and (xi) all employees of the Company and its Subsidiaries are employed at will. Except as set forth in the Company Disclosure Schedule, there are no pending or, to the Company's knowledge, threatened suits, claims, actions, charges, investigations or proceedings of any material nature respecting employment and employment practices, terms and conditions of employment and wages and hours, including without limitation (i) under or alleging violation of IRCA, NLRA, FLSA, WARN or any applicable law respecting employment discrimination, equal opportunity, labor relations, affirmative action, disability rights or benefits, employee leave issues or wage and hour standards, workers' compensation, plant closure issues, employee benefits, severance payments, occupational safety and health requirements or unemployment insurance and related matters, or (ii) relating to alleged unfair labor practices (or the equivalent thereof under any applicable law).
(x) Registration Obligations. Except as set forth in the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is under any obligation, contingent or otherwise, which will survive the Merger by reason of any agreement to register any of its securities under the Securities Act.
(i) Each of the Company and its Subsidiaries maintains records that accurately, validly and fairly reflect its transactions and dispositions of assets and maintains a system of internal accounting controls, policies and procedures sufficient to make it reasonable to expect that (A) such transactions are executed in accordance with its management's general or specific authorization, (B) such transactions are recorded in conformity with GAAP and in such a manner as to permit preparation of financial statements in accordance with GAAP and any other criteria applicable to such statements and to maintain accountability for assets, (C) access to assets is permitted only in accordance with management's general or specific authorization, (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences, and (E) except as set forth in the Company Disclosure Schedule, records of such transactions are retained, protected and duplicated in accordance with prudent banking practices and applicable regulatory requirements.
(ii) The data processing equipment, data transmission equipment, related peripheral equipment and software used by the Company and its Subsidiaries in the operation of their businesses (including any disaster recovery facility) to generate and retrieve such records (whether owned or leased by the Company or any Subsidiaries, or provided under any agreement or other arrangement with a third party for data processing services) are adequate for the needs of the Company and its Subsidiaries.
(iii) The Company has delivered to Parent true, correct and complete copies of all annual management letters and opinions, and has made available to Parent for inspection all reviews, correspondence, and other documents in the files of the Company and NSB, prepared by any certified public accounting firm and delivered to the Company or NSB since January 1, 1989.
(z) Undisclosed Liabilities. Except as disclosed in the Company Disclosure Schedule or as disclosed or provided for in the Company SEC Documents, neither the Company nor any of its Subsidiaries is subject to any liabilities of any nature (whether or not required to be accrued or disclosed under SFAS No. 5) which have had or can reasonably be expected to have a Material Adverse Effect with respect to the Company.
(aa) Investment Securities. Each of the Company and its Subsidiaries has good and marketable title to all securities held by it (except securities sold under repurchase agreements or held in any fiduciary or agency capacity), free and clear of any mortgage, lien, pledge or encumbrance, except to the extent such securities are pledged in the ordinary course of business consistent with prudent banking practice to secure obligations of the Company or any of its Subsidiaries. Such securities are valued on the books of the Company in accordance with GAAP.
(i) Except as disclosed in the Company Disclosure Schedule, (A) each outstanding loan, lease or other extension of credit or commitment to extend credit exceeding $50,000 of the Company or any of its Subsidiaries is a legal, valid and binding obligation, is in full force and effect and is enforceable in accordance with its terms except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally or equitable principles limiting the right to obtain specific performance or other similar relief; (B) each of the Company and its Subsidiaries has duly performed in all material respects all of its respective obligations thereunder to the extent that such obligations to perform have accrued; (C) all documents and agreements necessary for the Company or any Subsidiary that is a party thereto to enforce such loan, lease or other extension of credit are in existence; (D) no claims, counterclaims, set-off rights or other rights exist, nor do the grounds for any such claim, counterclaim, set-off right or other right exist, with respect to any such loans, leases or other extensions of credit which could impair the collectibility thereof; and (E) each such loan, lease and extension of credit has been, in all material respects, originated and serviced in accordance with the Company's or a Subsidiary's then applicable underwriting guidelines, the terms of the relevant credit documents and agreements and applicable laws of Governmental Entities.
(ii) The Company Disclosure Schedule lists all loan commitments exceeding $50,000 of the Company and its Subsidiaries (with single-family loan commitments and consumer commitments listed in the aggregate only) outstanding as of the date hereof. Except as set forth in the Company Disclosure Schedule (with single-family loan commitments and consumer commitments viewed in the aggregate only), as of the date hereof, (A) there are no loans, leases, other extensions of credit or commitments to extend credit of the Company or any of its Subsidiaries that have been or, to the Company's knowledge, should have been classified by the Company and its Subsidiaries as "Other Assets Especially Mentioned," "Substandard," "Doubtful," "Loss" or any comparable classification, and (B) there are no loans due to the Company or its Subsidiaries as to which any payment of principal, interest or any other amount is 30 days or more past due. The Company shall promptly after the end of any month inform Parent of any such classification arrived at any time after the date hereof. There is no material disagreement with any Regulatory Authority as to the classifications referred to in the second sentence of this Section 3.01(b)(ii). The Company has provided to Parent true, correct and complete information concerning the loan portfolios of the Company and each of its Subsidiaries, and no material information with respect to the loan portfolios has been withheld from Parent.
(iii) All loans and extensions of credit that have been made by the Company and that are subject to Section 11 of the Home Owners' Loan Act comply therewith.
(cc) Interest Rate Risk Management Instruments; Structured Notes.
(i) The Company Disclosure Schedule contains a true, correct and complete list of all interest rate swaps, caps, floors, and option agreements and other interest rate risk management arrangements to which the Company or any of its Subsidiaries is a party or by which any of their properties or assets may be bound. The Company has delivered to Parent true, correct and complete copies of all such interest rate risk management agreements and arrangements.
(ii) All interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements to which the Company or any of its Subsidiaries is a party or by which any of their properties or assets may be bound were entered into in the ordinary course of business and, to the Company's knowledge, in accordance with prudent banking practice and applicable rules, regulations and policies of the Regulatory Authorities and with counterparties believed to be financially responsible and are legal, valid and binding obligations enforceable in accordance with their terms (except as may be limited by bankruptcy, insol vency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies), and are in full force and effect. The Company and each of its Subsidiaries has duly performed in all material respects all of its obligations thereunder to the extent that such obligations to perform have accrued; and to the Company's knowledge, there are no breaches, violations or defaults or allegations or assertions of such by any party thereunder.
(iii) The Company and its Subsidiaries own no securities that are referred to generically as "structured notes," "high risk mortgage derivatives," "capped floating rate notes," or "capped floating rate mortgage derivatives" or that are likely to have changes in value as a result of interest or exchange rage changes that significantly exceed normal changes in value attributable to interest or exchange rate changes, except for those securities and other instruments legally purchased or entered into in the ordinary course of business, consistent with safe and sound banking practices, and disclosed in the Company Disclosure Schedule or disclosed in the Company SEC Documents.
(dd) Compliance with Policies. Since January 1, 1994, the Company has followed in all material respects its applicable internal credit, risk management, trust, trading, equity investing and similar policies and procedures in conducting the operations which are subject to such policies.
(ee) Community Reinvestment Act. NSB is in material compliance with the applicable provisions of the Community Reinvestment Act (the "CRA") and the regulations promulgated thereunder, and NSB currently has a CRA rating of satisfactory or better from the OTS. To the best knowledge of the Company, there is no fact or circumstance or set of facts or circumstances which would cause NSB to fail to comply with such provisions or cause the CRA rating of NSB to fall below satisfactory.
(ff) Certain Circumstances. The Company knows of no facts or circumstances that would delay, impede or otherwise adversely affect its ability to promptly secure all necessary regulatory and other approvals and consents to the Merger and the transactions contemplated by this Agreement and to promptly consummate the Merger.
SECTION 3.02. Representations and Warranties of Parent and Sub. Parent and Sub represent and warrant to the Company as follows:
(a) Organization and Authority. Each of Parent and Sub is a bank or corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or organized and has the requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of Parent and Sub and each of Parent's other subsidiaries is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary except where the failure so to qualify would not have a Material Adverse Effect on Parent. Sub is a direct wholly owned subsidiary of Parent.
(b) Authorization. (i) Parent and Sub have all requisite corporate power and authority to enter into this Agreement and the Stock Option Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Stock Option Agreement and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Parent and Sub. All of the outstanding shares of voting common stock of Parent are beneficially owned, directly or indirectly, by Banque Nationale de Paris, a banking corporation organized and existing under the laws of the Republic of France ("BNP"). No corporate action on the part of BNP is required for the consummation of the transactions contemplated by this Agreement and the Stock Option Agreement. This Agreement and the Stock Option Agreement have been duly executed and delivered by Parent and Sub and each constitutes a valid and binding obligation of Parent and Sub, enforceable against Parent and Sub in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency and other similar laws affecting creditors' rights generally or the rights of creditors of financial institutions and to general equity principles.
(ii) The execution and delivery of this Agreement and the Stock Option Agreement do not, and the consummation of the transactions contemplated hereby and thereby will not, and compliance by Parent and Sub with any of the provisions hereof or thereof will not, (A) result in any Violation pursuant to any provision of the articles or certificate of incorporation (or similar constitutive document) or by-laws of Parent, Sub or any other subsidiary of Parent or (B) subject to obtaining or making the consents, approvals, orders, authorizations, registrations, declarations and filings referred to in paragraph (iii) below, result in any Violation of any loan or credit agreement, note, mortgage, indenture, lease, benefit plan or other agreement, obligation, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent, Sub or any other subsidiary of Parent or their respective properties or assets which Violation under this clause (B) could reasonably be expected to have, individually or in the aggregate with other such Violations, a Material Adverse Effect on Parent.
(iii) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Parent, Sub or any other subsidiary of Parent or any other Affiliate (as defined in Section 8.03(c) hereof) of Parent in connection with the execution and delivery of this Agreement and the Stock Option Agreement by Parent and Sub, or the consummation by Parent and Sub of the transactions contemplated hereby and thereby, the failure to obtain which could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent, except for (A) the filing of applications with the FDIC under 12 U.S.C. (S) 1815(d)(3) (the "Oakar statute") and with the OTS under the SLHCA and the applicable regulations of the OTS and with the FDIC under the FDIA and approval of the same, (B) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which Parent is qualified to do business, (C) the Banking Approvals, (D) consents, authorizations, approvals, filings or compliance with the applicable provisions of consumer finance, mortgage banking and other similar laws, and (E) the receipt of a waiver from the Board of Governors of the Federal Reserve System (the "FRB") of the applicability of the BHCA to the transactions contemplated hereby.
(c) Information Supplied. None of the information supplied or to be supplied by Parent or Sub for inclusion or incorporation by reference in the Proxy Statement will, at the date of mailing to stockholders and at the time of the Company Stockholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder, except that no representation or warranty is made by Parent or Sub with respect to statements made or incorporated by reference therein based on information supplied by the Company specifically for inclusion or incorporation by reference therein.
(d) Ownership of Company Common Stock. Other than pursuant to the Stock Option Agreement, as of the date hereof, neither Parent nor any of its affiliates (as such term is defined under the Exchange Act), (i) beneficially owns, directly or indirectly, or (ii) is party to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, in each case, shares of capital stock of the Company, which in the aggregate represent 10% or more of the outstanding shares of Company Common Stock entitled to vote generally in the election of directors (other than Trust Account Shares).
(e) Brokers and Finders. No broker, investment banker, financial advisor or other person, other than the fees and expenses of which will be paid by Parent, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement and the Stock Option Agreement based upon arrangements made by or on behalf of Parent or Sub.
(f) Financing. Parent has available funds sufficient to consummate the Merger on the terms contemplated by this Agreement, and at the Effective Time, Parent will have available all the funds necessary to perform its obligations under this Agreement, including consummating the Merger on the terms contemplated hereby.
(g) Litigation. There is no suit, action or proceeding pending or, to the knowledge of Parent, threatened against or affecting Parent or any of its Subsidiaries that individually or in the aggregate could reasonably be expected to (i) impair the ability of Parent to perform its obligations under this Agreement or (ii) threaten, impede or delay the consummation of the Merger, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against Parent or any of its Subsidiaries having, or which is reasonably likely to have, individually or in the aggregate, any effect referred to in clause (i) or (ii) above.
(h) Community Reinvestment Act Compliance. Parent is in material compliance with the applicable provisions of the CRA and the regulations promulgated thereunder, and Parent currently has a CRA rating of satisfactory or better from the FDIC. To the best knowledge of Parent, there is no fact or circumstance or set of facts or circumstances which would cause Parent to fail to comply with such provisions or cause the CRA rating of Parent to fall below satisfactory.
(i) Certain Circumstances. Parent knows of no facts or circumstances that would delay, impede or otherwise adversely affect its ability to promptly secure all necessary regulatory and other approvals and consents to the Merger and the transactions contemplated by this Agreement and to promptly consummate the Merger.
Covenants Relating to Conduct of the Company's Business
SECTION 4.01. Covenants of the Company. During the period from the date of this Agreement until the Effective Time, the Company agrees as to itself and its Subsidiaries that (except as expressly contemplated or permitted by this Agreement or the Stock Option Agreement):
(a) Ordinary Course. The Company and its Subsidiaries shall carry on their respective businesses in the usual, regular and ordinary course consistent with sound banking and thrift industry practices and use their best efforts to preserve intact their present business organizations, maintain their rights and franchises, keep available the services of their current officers and employees and preserve their relationships with customers, suppliers and others having business dealings with them to the end that their goodwill and ongoing businesses shall not be impaired in any material respect at the Effective Time. The Company shall not, nor shall it permit any of its Subsidiaries to, (i) enter into any new material line of business; (ii) except as required by law, regulation, GAAP or regulatory policies or guidelines, change its or its Subsidiaries' lending, credit, investment, liability management, deposit interest rate or service charge and other material banking policies in any respect which is material to the Company; or (iii) except as required by any applicable Regulatory Authorities, incur or commit to any capital expenditures, or any obligations or liabilities in connection therewith, other than capital expenditures and obligations or liabilities incurred or committed to that are approved in accordance with the Company's capital expenditure approval policies and that are not (A) individually in excess of U.S.$25,000 and (B) in the aggregate in excess of U.S.$100,000. Neither the Company nor any of its Subsidiaries will form any new Subsidiaries.
(b) Dividends; Changes in Stock. The Company shall not, nor shall it permit any of its Subsidiaries to, nor shall it propose to, (i) declare, set aside or pay any dividends on or make other distributions in respect of, directly or indirectly, any of its capital stock, except (A) in the event the Effective Time has not occurred by April 30, 1996, other than by reason of any breach or default hereunder on the part of the Company, then the Company may declare and pay a special cash dividend in an amount up to but not exceeding the Company Net Income after April 30, 1996 (as defined in Section 8.03(c)), provided, however, that (x) the Company shall not have, nor shall it have permitted any of its Subsidiaries to have, conducted its operations other than in the ordinary course of business and consistent with past practices and policies, including without limitation, its practices and policies for the recognition of income and expense items, and (y) the Company shall have furnished to Parent on the date of the declaration of such dividend a certificate of the chief financial officer of the Company, in form reasonably satisfactory to Parent, and dated as of such date, to the effect that the Company has duly complied with the provisions of clause (x) of this proviso, and (B) for dividends by a direct or indirect wholly owned (other than directors' qualifying shares) Subsidiary of the Company, (ii) adjust, split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, except for the issuance of shares upon the exercise of options presently outstanding under the Incentive Plan, or (iii) repurchase, redeem or otherwise acquire, or permit any Subsidiary to purchase or otherwise acquire (except for the acquisition of Trust Account Shares and the acquisition of shares to be used to satisfy obligations under Company Stock Plans), any shares of its capital stock or any securities convertible into or exchangeable for any shares of its capital stock.
(c) Issuance of Securities. The Company shall not, nor shall it permit any of its Subsidiaries to, issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its or any of its Subsidiaries' capital stock of any class, any Voting Debt or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such shares or Voting Debt, or enter into any agreement with respect to any of the foregoing, other than (i) pursuant to the Stock Option Agreement, (ii) issuances by a direct or indirect wholly owned (other than directors' qualifying shares) Subsidiary of its capital stock to its parent, and (iii) pursuant to options or rights presently outstanding under the Incentive Plan or the Employee Stock Purchase Plan.
(d) Governing Documents. The Company shall not amend or propose to amend, nor shall it permit any of its Subsidiaries to amend, the articles or certificate of incorporation (or similar constitutive documents) or by-laws of the Company or any of its Subsidiaries.
(e) No Acquisitions. The Company shall not, nor shall it permit any of its Subsidiaries to, acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets, in each case which are material, individually or in the aggregate, to the Company and its Subsidiaries taken as a whole. Without limiting the generality of the foregoing, the Company shall not, nor shall it permit any of its Subsidiaries to, make any investment either by purchase of stock or securities, contributions to capital, property transfers or purchase of any property or assets of any other individual, corporation or other entity, except, subject to Section 4.01(p), for investments in the ordinary course of business consistent with past practice.
(f) No Dispositions. Other than (i) activities in the ordinary course of business consistent with sound banking and thrift industry practice or (ii) as set forth on the Company Disclosure Schedule, the Company shall not, nor shall it permit any of its Subsidiaries to, sell, lease, mortgage, encumber or otherwise dispose of, any of its assets (including capital stock of Subsidiaries).
(g) Indebtedness. The Company shall not, nor shall it permit any of its Subsidiaries to, incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of the Company or any of its Subsidiaries or guarantee any debt securities of others, other than in the ordinary courses of business consistent with past practice (i) short-term indebtedness incurred to refinance existing short-term indebtedness, (ii) short-term indebtedness of any Subsidiary of the Company to the Company or another Subsidiary of the Company or (iii) in the case of NSB, short-term indebtedness consistent with sound banking and thrift industry practice. Without limiting the foregoing, NSB shall not extend the maturities beyond one year or otherwise materially change the terms of its advances from the Federal Home Loan Bank of San Francisco (the "FHLB").
(h) Other Actions. The Company shall not, nor shall it permit any of its Subsidiaries to, knowingly or wilfully take any action that would, or reasonably could be expected to, result in any of its representations and warranties set forth in this Agreement that are qualified as to materiality being or becoming untrue, any of such representations and warranties that are not so qualified being or becoming untrue in any material respect, any of the conditions to the Merger set forth in Article VI not being satisfied or a material Violation of any provision of the Stock Option Agreement, or (unless such action is required by applicable law or sound banking and thrift industry practice) which could reasonably be expected to adversely affect or delay the ability of any of Parent, Sub or the Company or their Subsidiaries to obtain any of the Requisite Regulatory Approvals (as defined in Section 6.01(b)) without imposition of a condition or restriction of the type referred to in Section 6.02(c).
(i) Advice of Changes; Government Filings. The Company shall confer on a regular and frequent basis with Parent, report on operational matters and promptly advise Parent orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen, could have, individually or in the aggregate a Material Adverse Effect on the Company or which would cause or constitute a material breach of any of the representations, warranties or covenants of the Company contained herein. The Company shall file all reports required to be filed by it with the SEC or the Amex between the date of this Agreement and the Effective Time and shall deliver to Parent copies of all such reports promptly after the same are filed. The Company and each Subsidiary of the Company that is a savings bank shall file all reports, applications and other documents required to be filed with the OTS and any other Regulatory Authorities between the date hereof and the Effective Time and shall make available to Parent copies of all such reports and other items promptly after the same are filed. Except where prohibited by applicable statutes and regulations, the Company shall promptly provide Parent with copies of all other filings made by the Company with any Governmental Entity in connection with this Agreement, the Stock Option Agreement or the transactions contemplated hereby or thereby.
(j) Accounting Methods. Except as contemplated by Section 5.09, the Company shall not change its fiscal year or its methods of accounting in effect at July 1, 1995, except as required by changes in GAAP or regulatory accounting practices as concurred in by the Company's independent auditors.
(k) Compensation; Benefit Plans Employment Agreement. Except as contemplated by this Agreement, neither the Company nor any of its Subsidiaries will (i) declare or pay (or agree to declare or pay) any bonuses or other special compensation to any directors or officers, (ii) enter into, adopt, amend or terminate any Company Benefit Plan or any other employee benefit plan or any agreement, arrangement, plan or policy between such party and one or more of its directors, officers or employees, (iii) increase in any manner the compensation or fringe benefits of any of its directors, officers or employees or provide any other benefit not required by any plan and arrangement as in effect as of the date hereof (including the granting of bonuses or stock options, stock appreciation rights, restricted stock, restricted stock units or performance units or shares), except for normal salary increases in the ordinary course of business consistent with past practice, (iv) create or, except as required by law or regulation, amend any Company Stock Plan or grant any equity based award pursuant to any Company Stock Plan or otherwise, (v) enter into or renew any contract, agreement, commitment or arrangement providing for the payment to any director, officer or employee of such party of compensation or benefits contingent, or the terms of which are materially altered, upon the occurrence of any of the transactions contemplated by this Agreement or the Stock Option Agreement (except for those agreements that are set forth on the Company Disclosure Schedule, which may be renewed on the same terms and conditions as contained therein), or (vi) enter into or amend any employment agreement with any employee or director, hire any new employee at the level of Vice President or above or fill any vacancy created by the departure (for any reason) of any employee at the level of Vice President or above, in each case, without previously consulting with Parent.
(l) Tax Matters. From the date hereof until the Effective Time, (i) the Company and its Subsidiaries will file all Company Returns required to be filed with any taxing authority in accordance with all applicable laws, (ii) the Company and its Subsidiaries will timely pay all taxes shown as due and payable on the respective Company Returns that are so filed and as of the time of filing, the Company Returns will correctly reflect the facts regarding the income, business, assets, operations, activities and the status of the Company and its Subsidiaries in all material respects, and (iii) the Company and its Subsidiaries will promptly notify Parent of any action, suit, proceeding, investigation, audit or claim pending against or with respect to the Company or any Subsidiary in respect of any tax where there is a reasonable possibility of a determination or decision which would reasonably be expected to have a significant adverse effect on the Company's tax liabilities or other tax attributes. The Company shall not, nor shall it permit any of its Subsidiaries to, make any tax election or settle or compromise any income tax liability.
(m) Settlements, Etc. The Company shall not, nor shall it permit any of its Subsidiaries to, pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with sound banking and thrift industry practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) of the Company included in the Company SEC Documents or incurred since the date of such financial statements in the ordinary course of business consistent with sound banking and thrift industry practice.
(n) Material Contracts. Except in the ordinary course of business consistent with sound banking and thrift industry practice or as required by the terms of this Agreement, the Company shall not, nor shall it permit any of its Subsidiaries to, modify, amend or terminate any material contract, lease or agreement to which the Company or any Subsidiary is a party or waive, release or assign any material rights or claims thereunder. Without limiting the generality of the foregoing, without the prior written consent of Parent, the Company shall not waive any standstill provision contained in any confidentiality agreement in existence as of the date hereof between the Company and any other person. Without the prior written consent of Parent (which shall not be unreasonably withheld), the Company shall not, nor shall it permit any of its Subsidiaries to, enter into any contract, agreement or arrangement which, if entered into prior to the date hereof, would have been covered by Section 3.01(u) or Section 3.01(cc).
(o) Loans and Commitments. The Company shall not, nor shall it permit any of its Subsidiaries to, without prior consultation with Parent, make, renegotiate, renew, increase, extend or purchase any loans, advances or loan commitments (and the Company and such Subsidiaries shall not make any loans, advances or commitments to which Parent has reasonably objected), except loans, advances or commitments of less than U.S.$1,000,000 made in the ordinary course of business.
(p) Investments. The Company shall not, nor shall it permit any of its Subsidiaries to, without prior consultation of Parent, make or purchase any investment of any kind (and the Company and such Subsidiaries shall not make or purchase any investments to which Parent has reasonably objected), except investments of less than U.S.$1,000,000 made in the ordinary course of business.
(q) No Change in Rates. The Company shall not, nor shall it permit any of its Subsidiaries to, without the prior consent of Parent, offer interest rates or terms on any category of deposits at any of its branches which are not consistent with recent practice as disclosed by the Company to Parent, except as may be necessary in the good faith judgment of the Company in response to competitive market developments.
(r) General. The Company shall not, nor shall it permit any of its Subsidiaries to, authorize any of, or commit or agree to take any of, the foregoing actions described in this Section 4.01.
SECTION 4.02. No Solicitation. (a) The Company agrees that neither it nor any of its Subsidiaries nor any of the respective officers and directors of the Company or any of its Subsidiaries shall, and the Company shall direct and cause its employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, initiate, solicit, encourage or otherwise facilitate any inquiries or the making of any proposal or offer (including, without limitation, any proposal or offer to stockholders of the Company) with respect to a merger, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets, deposits or any equity securities of, the Company or any of its Subsidiaries (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or, except to the extent legally required for the discharge by the Company's board of directors of its fiduciary duties as advised by such board's counsel with respect to an unsolicited offer from a third party, engage in any negotiations concerning or provide any information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal. The Company will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties (other than the Parent) conducted heretofore with respect to any of the foregoing. The Company will take the necessary steps to inform promptly the appropriate individuals or entities referred to in the first sentence hereof of the obligations undertaken in this Section 4.02(a). The Company agrees that it will notify the Parent immediately if any such inquiries, proposals or offers are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with the Company or any of its Subsidiaries. The Company also agrees that it promptly shall request each other person (other than the Parent) that has heretofore executed a confidentiality agreement in connection with its consideration of acquiring the Company or any of its Subsidiaries to return all confidential information heretofore furnished to such person by or on behalf of the Company or any of Subsidiaries.
(b) Except to the extent legally required for the discharge by the Company's board of directors of its fiduciary duties as advised by such board's counsel, neither the Board of Directors of the Company nor any committee thereof shall (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Parent or Sub, the approval or recommendation by such Board of Directors of this Agreement or the Merger, (ii) approve or recommend, or propose to approve or recommend, any takeover proposal or (iii) enter into any agreement with respect to any takeover proposal.
(c) In addition to the obligations of the Company set forth in Section 4.02(b), the Company promptly shall advise Parent orally and in writing of any request for information or of any takeover proposal, or any inquiry with respect to or which could lead to any takeover proposal, the material terms and conditions of such request, takeover proposal or inquiry and the identity of the person making any such request, takeover proposal or inquiry. The Company will keep Parent fully informed of the status and details (including amendments or proposed amendments) of any such request, takeover proposal or inquiry.
(d) Nothing contained in this Section 4.02 shall prohibit the Company from taking and disclosing to its stockholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Company's stockholders if, in the good faith judgment of the Board of Directors of the Company based on the written opinion of independent counsel, failure to do so would be inconsistent with applicable laws; provided that the Company does not, withdraw or modify, its position with respect to the Merger or approve or recommend, or propose to approve or recommend, a takeover proposal, except as permitted by the last sentence of Section 5.03.
SECTION 5.01. Preparation of the Proxy Statement. The Company will use all reasonable efforts to prepare and file promptly a preliminary Proxy Statement with the SEC and will use all reasonable efforts to respond to any comments of the SEC or its staff and to cause the Proxy Statement to be mailed to the Company's stockholders as promptly as practicable after responding to all such comments to the satisfaction of the SEC or its staff. The Company will notify Parent promptly of the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff for amendments or supplements to the Proxy Statement or for additional information and will supply Parent with copies of all correspondence between the Company or any of its representatives, on the one hand, and the SEC or its staff, on the other hand, with respect to the Proxy Statement or the Merger. If at any time prior to the Company Stockholders Meeting there shall occur any event that should be set forth in an amendment or supplement to the Proxy Statement, the Company will promptly prepare and mail to its stockholders such an amendment or supplement. The Company will not mail any Proxy Statement, or any amendment or supplement thereto, to which Parent reasonably objects.
SECTION 5.02. Access to Information. The Company shall, and shall cause each of its Subsidiaries to, afford to Parent and to the officers, employees, accountants, counsel and other representatives and advisors of Parent, reasonable access, during normal business hours during the period prior to the Effective Time, to all their respective properties, books, contracts, commitments, personnel and records and, during such period, the Company shall, and shall cause each of its Subsidiaries to, furnish promptly to Parent (a) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of Federal or state securities laws or Federal or state banking or thrift laws (other than reports or documents which the Company or subsidiary is not permitted to disclose under applicable law) and (b) all other information concerning its business, properties and personnel as Parent may reasonably request. Parent will, and will cause its advisors and representatives to, hold any such information which is nonpublic in confidence to the extent required by, and in accordance with, the terms of the Confidentiality Agreement dated as of January 17, 1995, between the Company and Parent (the "Confidentiality Agreement"). No investigation by either Parent or Sub shall affect the representations and warranties of the Company, and each such representation and warranty shall survive such investigation. During the period from the date of this Agreement to the Effective Time, the Company shall promptly furnish to Parent as the same become available and shall cause one or more of its designated representatives with appropriate knowledge of the details reflected in or underlying such financial statements and budgets to confer on a regular and frequent basis with Parent: (w) copies of all monthly and quarterly interim financial statements (including budgets and variances from budgets), (x) detailed information regarding monthly deposit flow and FHLB funding, (y) copies of monthly loan production reports, and (z) copies of monthly reports regarding sales of securities products. The Company shall promptly notify Parent of any material change in its business or operations and of any complaints, investigations or hearings (or communications indicating that the same may be contemplated) by any Governmental Entity, or the institution of the threat of material litigation involving the Company or its Subsidiaries, and shall keep Parent fully informed of all such events.
SECTION 5.03. Company Stockholders Meeting. The Company shall duly call, give notice of, convene and hold the Company Stockholders Meeting for the purpose of obtaining the Company Stockholder Approval as soon as practicable after the date on which the definitive Proxy Statement has been mailed to the Company's stockholders. In any event, the Company will use all reasonable efforts to promptly cause the Stockholders Meeting to be held. The Company will, through its Board of Directors, recommend to its stockholders that they grant the Company Stockholder Approval, unless, as a result of an unsolicited Acquisition Proposal, the board of directors determines in good faith after consultation with independent counsel and Kaplan Associates, Inc. or an investment banking firm of recognized standing, that to so recommend would constitute a breach of the fiduciary obligations of the board of directors of the Company to the stockholders of the Company.
SECTION 5.04. Legal Conditions to Merger. Subject to the terms and conditions of this Agreement, each of the Company and Parent shall, and shall cause its Subsidiaries to, use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including (a) the obtaining of any necessary consent, authorization, order or approval of, or any exemption by, any Governmental Entity and/or any other public or private third party which is required to be obtained by such party or any of its Subsidiaries in connection with the Merger and the other transactions contemplated by this Agreement (including any subsequent merger or other combination of the Company and NSB with and into Parent) and the Stock Option Agreement and the making or obtaining of all necessary filings and registrations with respect thereto, (b) the defending of any lawsuits or other legal proceedings, whether judicial, administrative or regulatory, challenging this Agreement or the Stock Option Agreement, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed, and (c) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement and the Stock Option Agreement; provided, however, that a party shall not be obligated to take any action pursuant to the foregoing if the taking of such action or such compliance or the obtaining of such consent, authorization, order, approval or exemption would, in such party's reasonable opinion, (A) be materially burdensome to such party and its Subsidiaries taken as a whole in the context of the transactions contemplated by this Agreement or impact in such a materially adverse manner the economic or business benefits of the transactions contemplated by this Agreement as to render inadvisable the consummation of the Merger or (B) result in the imposition of a condition or restriction on such party or on the Surviving Corporation of the type referred to in Section 6.02(c). Each of the Company and Parent will promptly cooperate with and furnish information to the other in connection with any such burden suffered by, or requirement imposed upon, any of them or any of their Subsidiaries in connection with the foregoing. The Company will use all commercially reasonable efforts to operate the Company and the Subsidiaries and their respective businesses in a manner designed to achieve satisfaction of all of the conditions precedent set forth in Sections 6.01 and 6.02. In connection with and without limiting the foregoing, the Company and its Board of Directors shall (x) take all action necessary to ensure that any state takeover statute or similar statute or regulation (including Section 203 of the DGCL) is not applicable to the Merger, this Agreement, the Stock Option Agreement or any of the other transactions contemplated by this Agreement or the Stock Option Agreement and (y) if any state takeover statute or similar statute or regulation becomes applicable to the Merger, this Agreement, the Stock Option Agreement or any of the other transactions contemplated by this Agreement or the Stock Option Agreement, take all action necessary to ensure that the Merger and the other transactions contemplated by this Agreement and the Stock Option Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise to minimize the effect of such statute or regulation on the Merger, this Agreement, the Stock Option Agreement or any of the other transactions contemplated by this Agreement or the Stock Option Agreement.
SECTION 5.05. Employee Matters. (a) Parent shall honor in accordance with their terms the employment, salary continuation, severance and other contracts to which employees of the Company are a party that are set forth on the Company Disclosure Schedule and shall also honor the terms and provisions of the Company's severance policy for its employees as heretofore furnished to Parent, and shall honor all provisions for vested benefits and rights existing as of the Effective Time under the Company Benefit Plans. Notwithstanding the foregoing, Parent shall be obligated at the Effective Time to make payments with respect to the separation from employment in connection with a change of control of the Company under employment and severance contracts to the following employees only in the respective amounts set forth in the Company Disclosure Schedule -- Granville Stark, Greg Jahn, Bertha Balfour and Cathy Simondi. In addition, notwithstanding the foregoing, Parent shall be obligated at the Effective Time to make payments to Alfred Alys with respect to his consulting and non- competition agreement and employment agreements only in the amount set forth in the Company Disclosure Schedule. At the Effective Time, Parent shall enter into a Consulting Agreement with Alfred Alys in substantially the form heretofore agreed upon by the parties. Concurrently with the execution and delivery of this Agreement, the Company has delivered to Parent the written agreement of each of the individuals specified in the preceding sentence that their maximum entitlement under such contracts is as specified in the Company Disclosure Schedule.
(b) Parent agrees to pay former employees of the Company and its Subsidiaries who are retained following completion of the Merger by Parent ("Continuing Employees") at their base salaries (excluding bonus plans) in effect on the Closing Date, subject to Parent's regular performance review process applicable to Parent's employees generally. Nothing herein shall create any obligation on the part of Parent to retain any such employees or to refrain from reassigning any such employee as Parent shall determine is necessary or appropriate.
(c) Continuing Employees will participate in the employee benefit, welfare and related plans and programs of Parent and its Subsidiaries on the same basis as other similarly situated employees of Parent and its Subsidiaries with the Continuing Employees (i) receiving past service credit for their employment with the Company and its Subsidiaries (and predecessors thereto) for eligibility, participation and vesting in the plans, programs and arrangements of Parent and its Subsidiaries including, but not limited to, qualified retirement plans, vacation, sick time and leave, with past service credit applicable to eligibility and vesting excluded from consideration for purposes of benefit determination, and (ii) not being subject to any waiting period or preexisting condition exclusion in connection with medical, dental, life and disability coverage and receiving full credit for their prior co-payments and deductibles.
(d) Notwithstanding any other provisions contained in this Agreement, the Company may effect repayment prior to the Effective Time, in full or in part, of the ESOP Debt, provided, however, that to the extent any ESOP Debt is outstanding and not so repaid at the Effective Time, cash received by the ESOP Trustee as a result of the Merger with respect to unallocated shares of Company shall be applied by the trustee to the repayment of ESOP Debt and the balance of the cash received by the ESOP Trustee as a result of the Merger with respect to unallocated shares of Company shall be allocated to the accounts of all participants and beneficiaries in the ESOP who have accounts under the ESOP in proportion to the account balances of such participants and beneficiaries as they existed as of the Effective Time. Prior to the Effective Time, the ESOP may be amended to provide for (i) full vesting of benefits by participants and (ii) elimination of any requirement for a participant to be employed on the last day of the Plan Year to receive an employer contribution or other annual additions or allocations. Upon the making of all allocations herein, the ESOP shall be terminated and the account balances therein will be distributed to participants or their beneficiaries, with the right of tax-free rollover, to the extent permitted by law, to an individual retirement account or another tax-qualified plan of Parent that accepts such a rollover, at the election of the distributee.
(e) Prior to the Effective Time, the Company may establish and fund for the benefit of Alfred Alys a rabbi trust sufficient to fund fully the Company's obligations under the Salary Continuation Agreement for Alfred Alys. Such trust shall be established pursuant to the execution and delivery of a trust agreement substantially in the form of Exhibit B hereto. Mr. Alys may designate the trustee and depository for such trust.
SECTION 5.06. Stock Options and the ESOP; Profit Sharing Plan. (a) As soon as practicable following the date of this Agreement, the Board of Directors of the Company (or, if appropriate, any committee administering the Company Stock Plans) shall adopt such resolutions or take such other actions as are required to provide for the cancellation of all outstanding Company Employee Options upon the Effective Time, in exchange for a cash payment by the Company of an amount equal to (i) the excess, if any, of (x) the Merger Consideration per share over (y) the exercise price per share of Company Common Stock subject to such Company Employee Option, multiplied by (ii) the number of shares of Company Common Stock subject to such Company Employee Option for which such Company Employee Option shall not theretofore have been exercised, whether or not then exercisable.
(b) All amounts payable pursuant to this Section 5.06 shall be subject to any required withholding of taxes and shall be paid without interest.
(c) The Board of Directors of the Company (or, if appropriate, any committee administering the Company Stock Plans) shall adopt such resolutions or take such actions as are required to terminate the Company Stock Plans other than the ESOP as of the Effective Time, to delete as of the Effective Time the provision in any other Company Benefit Plan providing for the issuance, transfer or grant of any capital stock of the Company or any interest in respect of any capital stock of the Company and to ensure that following the Effective Time no holder of a Company Stock Option or any participant in any Company Stock Plan or other Company Benefit Plan shall have any right thereunder to acquire any capital stock of the Company or the Surviving Corporation.
(d) In addition, the 401(k) and profit sharing plan may be terminated prior to the Effective Time and the account balances therein may be distributed to participants or their beneficiaries, with the right of tax free rollover, to the extent permitted by law, to an individual retirement account or another tax- qualified plan of Parent that accepts such a rollover, at the election of the distributee.
SECTION 5.07. Fees and Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement, the Stock Option Agreement and the transactions contemplated hereby and thereby shall be paid by the party incurring such expense, except that in the case of a termination pursuant to Section 7.01(b)(ii), 7.01(c)(iv) or 7.01(c)(v), the non- terminating party shall pay on demand to the terminating party in immediately available funds all of the terminating party's out of pocket expenses incurred in connection with the transactions contemplated by this Agreement up to but not exceeding $250,000.
SECTION 5.08. Indemnification, Exculpation and Insurance. (a) Parent and Sub agree that, for a period of six years (or the period of the applicable statute of limitations, if longer) from the Effective Time, all rights to indemnification and exculpation from liability for acts or omissions occurring at or prior to the Effective Time now existing in favor of the current or former directors or officers of the Company and its subsidiaries (such persons, "Indemnified Persons") as provided in their respective certificate or articles of incorporation (or similar constitutive documents) or by-laws or otherwise shall survive the Merger and shall not be amended, repealed or otherwise modified in any manner that would adversely affect the rights thereunder of any such Indemnified Persons. Parent will cause to be maintained for a period of six years from the Effective Time the Company's current directors' and officers' insurance and indemnification policy (a copy of which has heretofore been delivered to Parent) to the extent that it provides coverage for events occurring prior to the Effective Time (the "D&O Insurance") for all persons who are directors and officers of the Company or its Subsidiaries on the date of this Agreement, so long as the aggregate premium therefor would not exceed $75,000 over said six year period (the "Maximum Aggregate Premium") provided, however, that Parent may, in lieu of maintaining such existing D&O Insurance as provided above, cause comparable coverage to be provided under any policy maintained for the benefit of Parent or any of its subsidiaries, so long as the material terms thereof are no less advantageous than the existing D&O Insurance. If the existing D&O Insurance expires, is terminated or canceled during such six-year period, Parent will use all commercially reasonable efforts to cause to be obtained as much D&O Insurance as can be obtained for the remainder of such period for an annualized premium not in excess of the Maximum Aggregate Premium, on terms and conditions no less advantageous than the existing D&O Insurance.
(b) The provisions of this Section 5.08 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and each Indemnified Party's heirs and representatives.
SECTION 5.09. Company Accruals and Reserves. Prior to the Closing Date, at the request of Parent, the Company shall review and, to the extent consistent with GAAP and the accounting rules, regulations and interpretations of the SEC and its staff, modify and change its loan, accrual and reserve policies and practices (including loan classifications and levels of reserves and accruals) to (a) reflect the Surviving Corporation's and Parent's plans with respect to the conduct of the Company's business following the Merger and (b) make adequate provision for the costs and expenses relating thereto. Notwithstanding the foregoing, the Company shall not be obligated to take in any respect any such action pursuant to this Section 5.09 unless and until Parent acknowledges that all conditions to its obligation to consummate the Merger have been satisfied.
SECTION 5.10. Letters of Accountants to the Company. The Company shall use all reasonable efforts to cause to be delivered to Parent letters of KPMG Peat Marwick LLP ("PM"), the Company's independent auditors, dated a date within two business days (as defined in Section 8.03(c)) before the date on which the Proxy Statement relating to the Company Stockholders Meeting is mailed to the stockholders of the Company and two business days before the Closing Date, and addressed to Parent, in form and substance reasonably satisfactory to Parent, and in scope and substance consistent with applicable professional standards for letters delivered by independent public accountants in connection with proxy statements similar to the Proxy Statement sent to the Company's stockholders in connection with the transactions contemplated hereby.
SECTION 5.11. Additional Agreements. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either of the Company or Parent, the proper officers and directors of each party to this Agreement shall take all such necessary action.
SECTION 5.12. Parent Covenants; Other Actions. Parent shall not, nor shall it permit any of its Subsidiaries to, take any action that would, or reasonably could be expected to, result in any of its representations and warranties set forth in this Agreement that are qualified as to materiality being or becoming untrue, any of such representations and warranties that are not so qualified being or becoming untrue in any material respect, any of the conditions to the Merger set forth in Article VI not being satisfied or a material Violation of any provision of the Stock Option Agreement, or (unless such action is required by applicable law or sound banking or thrift industry practice) which could reasonably be expected to adversely affect or delay the ability of any of Parent, Sub or the Company or their Subsidiaries to obtain any of the Requisite Regulatory Approvals without imposition of a condition or restriction of the type referred to in Section 6.02(c).
SECTION 5.13 Joint Implementation Team. Promptly following the execution of this Agreement, Parent and the Company shall each identify a selected group of their respective personnel that shall constitute a "Joint Implementation Team" who shall be available to Parent and the Company, respectively, at reasonable times (limited to normal operating hours) to provide information and assistance in connection with Parent's investigation of matters relating to the Company and the Subsidiaries, as well as consultation regarding the combined operations of the parties following the Closing.
SECTION 5.14 Employee Training. Not later than 30 days prior to the Closing Date, the Company shall permit Parent to train and conduct orientation sessions for the employees of the Company and the Subsidiaries in respect of Parent's systems, policies and procedures and the Company shall, as scheduled by Parent for reasonable periods of time and subject to the Company's reasonable approval, such that the Company's ongoing operations shall not be materially disrupted, excuse such employees from their duties for the purpose of training and orientation by Parent.
SECTION 5.15 Environmental, ADA and Seismic Investigations. Promptly following the execution of this Agreement, the Company shall (a) provide Parent and Parent's consultants with access to each of the properties of the Company and the Subsidiaries, including all real property and the improvements thereon (the "Properties") and to pertinent information, records or documents within the possession, custody or control of the Company or the Subsidiaries, at times reasonably satisfactory to the Company, (b) permit Parent's consultants to investigate the Properties in order to prepare Preliminary Environmental Assessment Reports of a scope reasonably satisfactory to Parent (and such additional environmental reports as Parent may reasonably request in light of the findings in the Preliminary Environmental Assessment Reports) regarding each of the Properties owned by the Company or the Subsidiaries, (b) permit Parent and its consultants to conduct an investigation of each of the Properties as to the compliance thereof with the Americans With Disabilities Act of 1990 and applicable regulations promulgated in accordance therewith (the "ADA"), and (c) permit Parent and its consultants to conduct an investigation of each of the Properties as to the compliance thereof with applicable seismic guidelines, standards, laws and regulations. The first $20,000 of the cost of the investigations and reports contemplated by this Section 5.15 shall be borne equally by the Company and Parent, with the excess over $20,000 being borne solely by Parent. Parent will provide the Company with copies of any reports it receives pursuant to this Section.
SECTION 5.16. Certificates re Financial Data. The Company shall deliver to Parent, no later than 15 days after the end of the month to which each such certificate relates, certificates in form, substance and detail reasonably satisfactory to Parent, dated as of the last day of each month after the date hereof to the Effective Time (and, for delivery on the Closing Date, a certificate dated as of the Closing Date), each signed on behalf of the Company by its Chairman or Chief Executive Officer and its Chief Financial Officer or other executive officer performing duties equivalent to those of a "chief financial officer" certifying reasonably and in good faith as of such dates (i) the Company Net Worth (as defined in Section 8.03(c)(v)) and (ii) the Deposit Balance (as defined in Section 7.01(c)(iv)).
SECTION 6.01. Conditions to Each Party's Obligation To Effect the Merger. The respective obligations of each party to effect the Merger and the other transactions contemplated hereby shall be subject to the satisfaction or waiver at or prior to the Effective Time of the following conditions:
(a) Company Stockholder Approval. The Company Stockholder Approval shall have been obtained.
(b) Other Approvals. Other than the filing provided for by Section 1.03, all authorizations, consents, orders or approvals of, or declarations or filings with, and all expirations of waiting periods imposed by, any Governmental Entity (all the foregoing, "Consents") which are necessary for the consummation of the Merger, other than Consents the failure to obtain which would not, individually or in the aggregate, have a Material Adverse Effect on the Surviving Corporation or Parent or which would not, individually or in the aggregate, materially adversely affect the consummation of the transactions contemplated hereby, shall have been filed, occurred or been obtained (all such Consents and the lapse of all such waiting periods being referred to as the "Requisite Regulatory Approvals"), and all such Requisite Regulatory Approvals shall be in full force and effect.
(c) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect; provided, however, that each of the parties shall have used reasonable efforts to prevent the entry of any such injunction or other order or restraint and to appeal as promptly as possible any injunction or other order or restraint that may be entered. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal.
SECTION 6.02. Conditions to Obligations of Parent. The obligations of Parent and Sub to effect the Merger are subject to the satisfaction of the following conditions unless waived by Parent and Sub:
(a) Representations and Warranties. The representations and warranties of the Company set forth in this Agreement shall be true and correct (subject to Section 3.00) in all material respects both as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and Parent shall have received a certificate signed on behalf of the Company by its Chairman or Chief Executive Officer and its Chief Financial Officer or other executive officer performing duties equivalent to those of a "chief financial officer" to such effect.
(b) Performance of Obligations of the Company. The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Parent shall have received a certificate signed on behalf of the Company by its Chairman or Chief Executive Officer and its Chief Financial Officer or other executive officer performing duties equivalent to these of a "chief financial officer" to such effect.
(c) Burdensome Condition. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, by any Governmental Entity which, in connection with the grant of a Requisite Regulatory Approval, imposes any requirement upon Parent, the Company or the Surviving Corporation or their Affiliates which, individually or in the aggregate, would (i) result in a Material Adverse Effect on Parent, the Surviving Corporation or their Affiliates, or (ii) would reduce the benefits of the transactions contemplated by this Agreement to Parent in so significant a manner that Parent, in its reasonable good faith judgment, would not have entered into this Agreement had such condition or requirement been known at the time hereof.
(d) Company Stock Options and Company Stock Plans. The Company shall have duly effected, as of the Effective Time, the cancellation of all outstanding Company Stock Options, whether vested or not, the termination of the Company Stock Plans and the deletion of any provision in any other Company Benefit Plan providing for the issuance, transfer or grant of any capital stock of the Company or any subsidiary of the Company or any interest in respect of any capital stock of the Company or any Subsidiary of the Company.
(e) Letter of the Company's Independent Accountants; Results of Audit. Parent shall have received in accordance with the terms hereof the duly executed letters of PM, prepared pursuant to the provisions of Section 5.10.
(f) Opinion of Counsel. Parent shall have received the duly executed opinion of Silver, Freedman & Taff, or other counsel to the Company, dated the Closing Date, covering the matters set forth in Exhibit C hereto and reasonably satisfactory to Parent and such other customary closing documents for transactions of this type as Parent shall reasonably request.
(g) Litigation, Etc. There shall be no pending or threatened material actions or proceedings by any person against the Parent, the Sub, the Company, or any Subsidiary of the Company, or any director, officer or employee of any of the foregoing challenging or in any way or in any manner seeking to restrict or prohibit the transactions contemplated hereby or seeking to obtain any damages against any person as a result of the transactions contemplated hereby.
(h) No Material Adverse Effect. Since the date of this Agreement, there shall have occurred no Material Adverse Effect with respect to the Company.
(i) Certain Expense Reports. At least two business days prior to the Effective Time, all attorneys, accountants, investment bankers and other advisors and agents of the Company and its Subsidiaries shall have submitted to the Company (with a copy to the Parent) estimates of their fees and expense for all services rendered in any respect in connection with the transactions contemplated hereby to the extent not already paid, and based on such estimates, the Company shall have prepared and submitted to Parent a summary of such fees and expenses with respect to the transactions contemplated hereby. At the Effective Time, such advisors shall have submitted their final bills for such fees and expenses to the Company and its Subsidiaries for services rendered, with a copy delivered to Parent, and based on such summary, the Company shall have prepared and submitted to Parent a final calculation of such fees and expenses.
(j) Contingent Liabilities. Except for matters described in the Company Disclosure Schedule (and as to such matters only to the extent of facts made available to Parent on or prior to the date of this Agreement), the Company, at the time of the Closing, shall not be subject to any suit, action or proceeding, or any investigation or inquiry by any Government Entity (such suits, actions or proceedings, or any such investigations or inquiries, being collectively referred to herein as "proceedings"), which shall be pending or, to the knowledge of the Company, threatened, against or affecting the Company or any Subsidiary of the Company, nor shall there by any potential unasserted claim or liability not heretofore disclosed in the Company Disclosure Schedule (whether or not such claim or liability is required to be accrued or disclosed under SFAS Nos. 5) unless Parent shall have determined, in the exercise of its reasonable business judgment, that each proceeding, claim or liability likely would not have either individually or in the aggregate with all other such proceedings, claims or liabilities, a Material Adverse Effect on the Company.
(k) Certain Other Approvals. Parent shall have received the approval of the FDIC under 12 U.S.C. (S) 1815(d)(3), or under any successor provision, (the "Oakar" statute) so that the "exit fee" provided for therein shall not be applicable to the transactions contemplated hereby or to any subsequent merger or other combination of NSB with and into Parent and shall also have received all requisite approvals from the California State Banking Department, the FDIC and the OTS and any other Governmental Entities having jurisdiction for the merger or other combination of the Company and NSB with and into Parent promptly following the Effective Time.
(l) Non-Competition Agreements. Parent shall have received duly executed non-competition agreements, in substantially the form heretofore agreed to between Parent and the Company, from those individuals listed on Exhibit D hereto.
(m) Consents Under Agreements. The consent, approval or waiver of each person (other than Governmental Entities) whose consent or approval shall be required in order to permit the succession by Parent and the Surviving Corporation in connection with the Merger (and any subsequent merger or other combination of NSB with and into Parent) to any material obligation, right or interest of the Company and its Subsidiaries under any material loan or credit agreement, note, mortgage, indenture, lease (and all branch leases shall be deemed to be material for purposes of this Section), license or other agreement or instrument shall have been obtained.
(n) Headquarters and Administrative Offices. The existing leases of the Company's properties at (i) 20 Petaluma Boulevard South, Petaluma, California, (ii) 450 Center Street, Healdsburg, California, and (iii) 6301 State Farm Drive, Rohnert Park, California shall be amended on terms satisfactory to Parent to implement the modifications set forth in the letter agreement of even date herewith between the Company and the lessors of such properties.
(o) Certificates re Financial Data. Parent shall have received certificates dated as of the last day of each month after the date hereof to the Effective Time and a certificate, dated as of the Closing Date, signed on behalf of the Company by its Chairman or Chief Executive Officer and its Chief Financial Officer or other executive officer performing duties equivalent to those of a "chief financial officer" certifying as of such dates (i) the Company Net Worth (as defined in Section 8.03(c)(v)) and (ii) the Deposit Balance (as defined in Section 7.01(c)(iv)). The monthly certificates shall be received no later than 10 days after the end of the month to which each such certificate relates.
SECTION 6.03. Conditions to Obligations of the Company. The obligations of the Company to effect the Merger are subject to the satisfaction of the following conditions unless waived by the Company:
(a) Representations and Warranties. The representations and warranties of Parent and Sub set forth in this Agreement that are qualified as to materiality shall be true and correct (subject to Section 3.00) in all material respects, both as of the date of this Agreement and (except to the extent such representations speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and the Company shall have received a certificate signed on behalf of Parent and Sub by their respective Chairman or Chief Executive Officers and their respective Chief Financial Officers or other executive officers performing duties equivalent to these of a "chief financial officer" to such effect.
(b) Performance of Obligations of Parent and Sub. Parent and Sub shall have performed in all material respects all obligations required to be performed by them under this Agreement and the Stock Option Agreement at or prior to the Closing Date, and the Company shall have received a certificate signed on behalf of Parent and Sub by their respective Chairman or Chief Executive Officers and their respective Chief Financial Officers or other executive officers performing duties equivalent to these of a "chief financial officer" to such effect.
(c) Opinion of Counsel. The Company shall have received the duly executed opinion of Pillsbury Madison & Sutro, counsel to Parent, dated the Closing Date, substantially in the form of Exhibit E hereto.
SECTION 7.01. Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after the Company Stockholder Approval is received:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company upon written notice to the other party:
(i) if (1) the OTS, or any other Governmental Entity the approval of which is required to permit consummation of the Merger or the other transactions contemplated hereby shall have issued an order denying approval of the Merger or such other transactions or (2) any Governmental Entity of competent jurisdiction shall have issued a final permanent order enjoining or otherwise prohibiting the consummation of the Merger or the other transactions contemplated hereby and in any such case under either clause (1) or (2) the time for appeal or petition for reconsideration of such order shall have expired without such appeal or petition being
(ii) if the Company, on the one hand, or Parent or Sub, on the other hand, materially breaches any of its covenants and obligations or representations and warranties hereunder or under the Stock Option Agreement and such breach is not cured after 30 days' written notice thereof is given to the party committing such breach by the other party; provided, however, that neither party shall have the right to terminate this Agreement pursuant to this Section 7.01(b)(ii) unless the breach of covenant, obligation, representation or warranty, together with all other such breaches, would entitle the party other than the party bound by such covenant or obligation not to consummate the transactions contemplated hereby or the party receiving such representation or warranty not to consummate the transactions contemplated hereby under Section 6.02(a) (in the case of a breach of representation or warranty by the Company) or Section 6.03(a) (in the case of a breach of representation or warranty by
(iii) if the Merger shall not have been consummated on or before August 31, 1996, unless the failure to consummate the Merger is the result of a willful and material breach of this Agreement by the party seeking to
(iv) if, upon a vote at a duly held Company Stockholders Meeting, the Company Stockholder Approval shall not have been obtained;
(c) by either Parent or Sub upon written notice to the Company:
(i) if, prior to the Company Stockholders Meeting, a takeover proposal is commenced, publicly proposed, publicly disclosed or communicated to the Company (or the willingness of any person to make a takeover proposal is publicly disclosed or communicated to the Company) and (A) the Company Stockholder Approval is not obtained at the Company Stockholders Meeting, (B) the Company Stockholders Meeting does not occur prior to June 30, 1996 or (C) the Board of Directors of the Company shall have withdrawn or modified its approval or recommendation of the Merger or this Agreement, or approved or recommended any takeover proposal;
(ii) if (A) the FDIC shall have issued an order denying approval of the application of Parent for an order under the Oakar statute with respect to any subsequent merger or other combination of NSB with and into Parent, (B) any repeal or change to the Oakar statute occurs which has the effect of making the exit fee provided therein or any comparable fee applicable to the transactions contemplated hereby or to any subsequent
combination of NSB with and into Parent, (C) the California State Banking Department or the OTS or the FDIC or any other Governmental Entity having jurisdiction shall have issued an order under any other applicable statute or regulation denying approval of any such merger or other combination of NSB with and into Parent promptly following consummation of the transactions contemplated hereby, or (D) the FRB shall have refused to grant the waiver contemplated by Section 3.02(b)(iii)(G);
(iii) if, after the date hereof, there has occurred any Material Adverse Effect (or any development or circumstance that might reasonably be expected to result in a Material Adverse Effect) with respect to the Company, provided that Parent shall have given 30 days' written notice of such termination to the Company and the Company shall not have remedied such event by the end of such 30 day period;
(iv) if, as of the Closing Date the principal balance of all deposit liabilities, including, accounts accessible by negotiable orders of withdrawal, demand deposits, passbook accounts, certificates of deposit, but excluding all brokered deposits and depository accounts with balances greater than U.S.$100,000, of the Company and its Subsidiaries ("Deposit Balance") shall be less than U.S.$230,000,000; or
(v) if, as of the Closing Date, Company Net Worth shall be less than U.S.$34,000,000.
SECTION 7.02. Effect of Termination. In the event of termination of this Agreement by either the Company or Parent as provided in Section 7.01, this Agreement shall forthwith become void and have no effect, and there shall be no liability or obligation on the part of Parent, Sub, the Company or their respective officers or directors, except that any such termination shall be without prejudice to the rights of any party hereto arising out of the willful breach by any other party of any covenant or obligation or willful breach of any warranty or representation contained in this Agreement, and except (a) with respect to Section 3.01(r), Section 3.02(e), Section 5.07, this Section 7.02 and Section 8.05, and (b) with respect to the representations and warranties contained in Sections 3.01 and 3.02 insofar as such representations and warranties relate to the Stock Option Agreement (but only until the termination of the Stock Option Agreement).
SECTION 7.03. Amendment. This Agreement may be amended by the parties hereto at any time before or after the Company Stockholder Approval is received, but, after receipt of the Company Stockholder Approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto; provided, however, that, notwithstanding anything to the contrary contained in this Section 7.03, Parent may from time to time without the consent of the Company increase the amount (but not change the nature) of the Merger Consideration, and any provisions inconsistent with such right herein or in any agreement referred to herein are hereby deemed superseded to the extent of such inconsistency.
SECTION 7.04. Extension; Waiver. At any time prior to the Effective Time, the parties hereto may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) subject to the proviso of Section 7.03, waive compliance with any of the covenants, agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights.
SECTION 7.05. Procedure for Termination, Amendment, Extension or Waiver. A termination of this Agreement pursuant to Section 7.01, an amendment of this Agreement pursuant to Section 7.03 or an extension or waiver pursuant to Section 7.04 shall, in order to be effective, require, in the case of Parent, Sub or the Company, action by its Board of Directors or the duly authorized designee of its Board of Directors.
SECTION 8.01. Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 8.01 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time.
SECTION 8.02. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
(b) if to the Company, to:
Attention: Mr. Alfred A. Alys President and Chief Executive Officer
Silver, Freedman & Taff, L.L.P. 1100 New York Avenue, N.W.
SECTION 8.03. Definitions; Interpretation. (a) As used in this Agreement, (i) any reference to any event, change or effect being "material" with respect to any entity means an event, change or effect which is material in relation to the businesses, assets, properties, liabilities, results of operations, financial condition or prospects of such entity and its Subsidiaries, taken as a whole, (ii) the term "Material Adverse Effect" means, with respect to the Company, Parent or Sub, a material adverse effect (whether or not required to be accrued or disclosed under SFAS No. 5) on the Condition of such party and its Subsidiaries, taken as a whole, or on the ability of such party to perform its obligations hereunder or to consummate the transactions hereby contemplated by June 30, 1996 or, except for purposes of determining satisfaction of the conditions set forth in Section 6.02, under the other agreements contemplated hereby (provided that in determining whether a Material Adverse Effect shall have occurred, (A) the Transaction Costs and the Company Accruals and Reserves (each as defined in Section 8.03(c)) shall be disregarded and (B) there shall be excluded any effect the cause of which may result or shall have resulted from changes to laws and regulations, generally accepted accounting principles or regulatory accounting principles or changes in interest rates or economic conditions applicable to depository institutions generally, or costs and expenses relating to the transactions contemplated by this Agreement, the impact on the Company's financial statements of the change in control, severance, salary continuation and other benefits specified in Section 5.05 and set forth in the Company Disclosure Schedule, any recapture of the Company's tax bad debt reserve, any special assessment imposed on SAIF-insured institutions after the date hereof), and (iii) the term "person" means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.
(b) When a reference is made in this Agreement to Articles, Sections, Exhibits or Schedules, such reference shall be to an Article, Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined herein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a person are also to its permitted successors and assigns.
(c) As used elsewhere in this Agreement, the following terms shall have the meaning set forth below:
(i) "Affiliate" shall mean, with respect to any person, any person that, directly or indirectly, controls or is controlled by or is under common control with such person.
(ii) "Business Day" shall mean any day, other than Saturday or Sunday or any other day on which commercial banks in the State of California are authorized or required by law to be closed.
(iii) "Company Accruals and Reserves" shall mean any accruals and reserves adopted by the Company pursuant to the request of Parent under the terms of Section 5.09 or otherwise relating to the Merger or required pursuant to this Agreement.
(iv) "Company Net Income after April 30, 1996" shall mean the consolidated net income of the Company earned after April 30, 1996 and up to the day next preceding the Effective Time as appearing on the financial statements of the Company after April 30, 1996, determined in accordance with GAAP, provided that in determining the amount of such net income, the amount of the Transaction Costs, any special assessment imposed on SAIF-insured institutions, any recapture of NSB's tax bad debt reserve, any costs or expenses relating to the change in control, severance, salary continuation and other benefits specified in Section 5.05 and any Company Accruals and Reserves shall be disregarded.
(v) "Company Net Worth" shall mean the sum of the Company Common Stock, paid-in capital and retained earnings accounts as such accounts would appear on a balance sheet of the Company prepared in accordance with GAAP, provided that in determining the amount of such net worth, the amount of the Transaction Costs, any special assessment imposed on SAIF-insured institutions, any bad debt reserve, any costs or expenses relating to the change in control, severance, salary continuation and other benefits specified by Section 5.05 and any Company Accruals and Reserves shall be disregarded.
(vi) "Condition" shall mean the financial condition, assets, businesses, results of operations or prospects of any party hereto.
(vii) "GAAP" shall mean generally accepted accounting principles in the United States.
(viii) "Net Worth Floor" shall mean:
U.S.$35,000,000 in the event the Closing occurs on or after
U.S.$34,850,000 in the event the Closing occurs between March 31, 1996 and April 29, 1996 (dates
U.S.$34,700,000 in the event the Closing occurs between February 29, 1996 and March 30, 1996 (dates
U.S.$34,550,000 in the event the Closing occurs between January 31, 1996 and February 28, 1996 (dates
U.S.$34,400,000 in the event the Closing occurs between December 31, 1995 and January 30, 1996 (dates inclusive).
(ix) "Subsidiary" shall mean, in the case of either Parent or the Company, any corporation, association or other entity in which it owns or controls, directly or indirectly, 25% or more of the outstanding voting securities or 25% or more of the total equity interest.
(x) "Transaction Costs" shall mean the amount of the out-of-pocket expenses incurred by the Company and its Subsidiaries in connection with the transactions hereby contemplated (but not to exceed, for purposes of this
SECTION 8.04. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.
SECTION 8.05. Entire Agreement; No Third-Party Beneficiaries; Rights of Ownership. Except for the Confidentiality Agreement and the letter agreement dated October 17, 1995 between Parent and the Company, this Agreement (including the documents and the instruments referred to herein, including the Stock Option Agreement, the Confidentiality Agreement, and any other agreement among the parties entered into contemporaneously herewith) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and of the Confidentiality Agreement, provided that the Confidentiality Agreement shall survive the execution and delivery of this Agreement, and, except to the extent specified in Sections 5.05, 5.06, 5.08 and 8.12, is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. The parties hereby acknowledge that, except as otherwise specifically provided in the Stock Option Agreement or as hereinafter agreed to in writing, neither Parent nor Sub shall have the right to acquire or shall be deemed to have acquired shares of Company Common Stock pursuant to the Merger until consummation thereof.
SECTION 8.06. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of California, without regard to any applicable principles of conflicts of law, except that the Merger and the effect thereof shall be governed by the DGCL.
SECTION 8.07. Limitations on Remedies. Each party agrees that, should any court or other competent authority hold any provision of this Agreement or the Stock Option Agreement or part hereof or thereof to be null, void or unenforceable, or order any party to take any action inconsistent herewith or take any action required herein, the other party shall not be entitled to specific performance of such provision or part hereof or thereof or to any other remedy, including money damages, for breach hereof or thereof or of any other provision of this Agreement or the Stock Option Agreement or part hereof or thereof as a result of such holding or order. This provision is not intended to render null or unenforceable any obligation hereunder that would be valid and enforceable if this provision were not in this Agreement.
SECTION 8.08. Publicity. Except as otherwise required by law or the rules of the American Stock Exchange, so long as this Agreement is in effect, neither the Company nor Parent shall, or shall permit any of its subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement or the Stock Option Agreement without the consent of the other party, which consent shall not be unreasonably withheld. The parties agree that the initial press release to be issued with respect to the transactions contemplated by this Agreement shall be in the form heretofore agreed to by the parties.
SECTION 8.09. Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, in whole or in part, by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, and any such assignment that is not so consented to shall be null and void. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.
SECTION 8.10. Enforcement. Subject to Section 8.07, the parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that, subject to Section 8.07, the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any Federal court located in the State of California or in any California state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any Federal court located in the State of California or any California state court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement and (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court.
SECTION 8.11. Certain Proxies. Concurrently with the execution and delivery of this Agreement, Parent has received irrevocable proxies from the directors and executive officers of the Company listed on Exhibit F hereto authorizing the voting by Parent or its designee of their shares of common stock of the Company at the Company Stockholders' Meeting in favor of the transactions contemplated hereby.
SECTION 8.12. Director Health Coverage. Parent and Sub agree that, for a period of two years following the Effective Time, Parent will make or cause to be made monthly payments in respect of the health insurance premiums for medical, dental and vision care coverage for each of the directors of the Company (and their spouses) in office at the time this Agreement is executed and delivered, provided, however, that the maximum amount required to be paid by Parent for all such directors and their spouses in any month during such two-year period shall not exceed $3,000. At the end of such two year period, such directors and their spouses will each be entitled to participate, at their own expense for life, in the group health plan of Parent.
SECTION 8.13. Employee Retention. To the extent practicable, Parent will give consideration to the retention after the Closing of employees of the Company and its Subsidiaries in their current or comparable positions within the Surviving Corporation, provided however, that, notwithstanding the foregoing or any other provision hereof, it shall have no legal obligation to retain or offer new employment to any such employees.
SECTION 8.14. Subsequent Mergers. The parties contemplate that, immediately following the merger of Sub with and into the Company at the Effective Time as contemplated by Section 1.01, the Surviving Corporation shall be merged with and into the Parent, followed immediately by the merger of NSB with and into the Parent. In each case, the Parent shall succeed to and assume all the rights and obligations of the Surviving Corporation and NSB, respectively, in accordance with merger agreements substantially in the forms attached as Exhibits G and H hereto, respectively.
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first above written.
Title: President and Chief Operating Officer
Title: President and Chief Executive Officer
(a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to (S) 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation.
(b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to (S) 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock which, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 stockholders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to (S) (S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such merger or consolidation;
b. Shares of stock of any other corporation which at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by
c. Cash in lieu of fractional shares of the corporations described in the foregoing subparagraphs a. and b. of
d. Any combination of the shares of stock and cash in lieu of fractional shares described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under (S) 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (3) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become
(2) If the merger or consolidation was approved pursuant to (S) 228 or 253 of this title, the surviving or resulting corporation, either before the effective date of the merger or consolidation or within 10 days thereafter, shall notify each of the stockholders entitled to appraisal rights of the effective date of the merger or consolidation and that appraisal rights are available for any or all of the shares of the constituent corporation, and shall include in such notice a copy of this section. The notice shall be sent by certified or registered mail, return receipt requested, addressed to the stockholder at his address as it appears on the records of the corporation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of the notice, demand in writing from the surviving or resulting corporation the appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation.
You have requested our opinion as to the fairness, from a financial point of view, to the shareholders of Northbay Financial Corporation ("Northbay") of the merger consideration ("Merger Consideration") to be received for the issued and outstanding shares of common stock, par value $0.10 per share, of Northbay ("Northbay Common Stock") pursuant to the Agreement and Plan of Merger dated as of November 9, 1995 (the "Agreement"), among Bank of the West, NF Acquisition Co., a wholly owned subsidiary of Bank of the West ("Sub"), and Northbay providing for the merger of Sub into Northbay (the "Merger").
Pursuant to the Agreement, the Merger Consideration will consist of the right to receive cash equal to $15.75 for each share of Northbay Common Stock, subject to the conditions set forth in the Agreement. Each issued and outstanding option to purchase shares of Northbay Common Stock will be cancelled for a cash payment equal to the excess, if any, of the Merger Consideration over the exercise price of such option.
As a condition to Bank of the West's entering into the Agreement and in consideration thereof, Northbay and Bank of the West have entered into a Stock Option Agreement (the "Option Agreement") pursuant to which Northbay has granted to Bank of the West, on the terms and conditions set forth in the Option Agreement, an option entitling Bank of the West to purchase up to 547,354 authorized but unissued shares of Northbay Common Stock at a cash purchase price of $13.25 per share.
Kaplan Associates, Inc. ("KAI") is a financial advisory and consulting firm that specializes in the commercial banking, thrift and mortgage banking industries. As part of our financial advisory and consulting services, we are regularly engaged in the independent valuation of businesses and securities in connection with merger and acquisition transactions, initial public offerings, private placements, and recapitalizations. KAI is familiar with Northbay, having acted as financial advisor to Northbay's Board of Directors in connection with, and having participated in, the negotiations leading to the Agreement, and will receive a fee from Northbay for our services.
In arriving at the opinion set forth below, we have, among other things:
1. Reviewed Northbay's Annual Reports, Forms 10-K and related financial information for the three fiscal years ended June 30, 1995 and Northbay's Form 10-Q and related unaudited financial information for the quarter ended September 30, 1995;
2. Reviewed Bank of the West's Annual Reports and related financial information for the three fiscal years ended December 31, 1994 and Bank of the West's unaudited financial information for the quarter ended
3. Reviewed certain other public and internal information prepared by Northbay including, but not limited to, quarterly reports filed on Forms 10-Q, nonperforming asset reports, interest rate risk exposure reports and financial forecasts and the assumptions thereto relating to the business, assets, deposits, earnings and future prospects of
4. Conducted discussions with members of senior management of Northbay and Bank of the West concerning their respective financial conditions, businesses, assets, financial forecasts and future prospects;
5. Reviewed the historical market prices and trading activity for Northbay Common Stock and compared them with those of certain publicly traded companies that we deemed relevant;
6. Compared the results of operations of Northbay and Bank of the West with those of certain other companies that we deemed relevant;
7. Analyzed the relative contribution of Northbay to certain financial attributes of Bank of the West, including, among other things, its assets, liabilities, equity and net income;
8. Reviewed the Agreement and compared the proposed financial terms of the transaction contemplated by the Agreement with the financial terms of certain other transactions that we deemed to be relevant;
9. Reviewed and evaluated other solicitations of interest in Northbay;
10. Reviewed such other financial studies and analyses, performed such other investigations and took into account such other matters as we deemed necessary to the rendering of this opinion.
In rendering this opinion, we have, with your consent, assumed and relied, without independent verification, upon the accuracy and completeness, in all material respects, of the financial and other information and the representations provided to us by Northbay and Bank of the West or publicly available and have relied upon the accuracy and completeness of the representations and warranties of Northbay and Bank of the West contained in the Agreement. We have also relied upon the management of Northbay as to the reasonableness and achievability of the financial and operating forecasts (and the assumptions and bases therefor) provided to us. With respect to financial forecasts, including without limitation, projections regarding net interest margin, underperforming and nonperforming assets, net charge-offs and the adequacy of reserves, we have, with your consent, assumed that they reflect the best currently available estimates and judgments of Northbay's management at the time of preparation as to the future financial performance of Northbay and that such projections and forecasts will be realized in the amounts and in the time periods currently estimated by the management of Northbay. We have also assumed that the conditions to the Merger as set forth in the Agreement would be satisfied and that the Merger would be consummated on a timely basis in the manner contemplated by the Agreement.
In addition, with your consent, we have not made an independent evaluation or appraisal of the assets of Northbay or Bank of the West or any of their respective subsidiaries, nor have we been furnished with any such evaluations or appraisals. We have also assumed that there has been no material change in Northbay's or Bank of the West's assets, financial condition, results of operations, business or prospects since the date of the last financial statements made available to us by Northbay and Bank of the West, respectively. We have relied on advice of counsel to Northbay as to all legal matters with respect to Northbay, Northbay's Board of Directors, the Merger, the Agreement and the Option Agreement. This opinion is necessarily based upon economic, market, monetary and other conditions as they exist and can be evaluated as of the date hereof and the information made available to us through the date hereof.
As compensation for the financial advisory services provided to Northbay in connection with the Merger, including providing this opinion, Northbay agreed to pay KAI the professional fees and reimburse the expenses set forth in the engagement letter dated July 5, 1994 between Northbay and KAI. This opinion is furnished pursuant to such engagement letter. It is understood that this opinion may be included in its entirety in any communication by Northbay or Northbay's Board of Directors to the shareholders of Northbay. This opinion may not, however, be summarized, excerpted from or otherwise publicly referred to for any other purpose without our prior written consent.
Based upon and subject to the foregoing, and based upon such other matters as we considered relevant, we are of the opinion that, as of the date hereof, the Merger Consideration to be paid by Bank of the West pursuant to the terms of the Agreement is fair, from a financial point of view, to the shareholders of Northbay.
STOCK OPTION AGREEMENT dated as of November 9, 1995, among BANK OF THE WEST, a California banking corporation ("Grantee"), NF ACQUISITION CO., a Delaware corporation and a wholly owned subsidiary of Grantee ("Sub"), and NORTHBAY FINANCIAL CORPORATION, a Delaware corporation ("Issuer").
WHEREAS, Issuer is a registered savings and loan holding company under the Savings and Loan Holding Company Act, as amended (the "SLHC Act");
WHEREAS, Grantee is a commercial bank organized and existing under
WHEREAS, Grantee, Sub and Issuer propose to enter into an Agreement and Plan of Merger dated as of the date hereof (the "Merger Agreement");
WHEREAS, as a condition and inducement to Grantee's and Sub's willingness to enter into the Merger Agreement, Grantee and Sub have required that Issuer grant to Grantee the Option (as defined in Section 2); and
WHEREAS, the Board of Directors of Issuer, believing it to be in the best interests of Issuer, has approved this Agreement and the grant by Issuer of the Option.
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows:
1. Definitions; Interpretation. Capitalized terms used but not defined herein shall have the meanings set forth in the Merger Agreement, which also contains in Section 8.03(b) thereof certain rules of construction and interpretation that shall be applicable hereto as if set forth herein.
2. Grant of Option. Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 547,354 fully paid and nonassessable shares (such amount, as may be adjusted from time to time as set forth herein, the "Option Shares") of Common Stock, par value $0.10 per share ("Issuer Common Stock"), of the Issuer at a purchase price of U.S. $13.25 per Option Share (such price, as may be adjusted from time to time as set forth herein, the "Option Price"). The number of Option Shares that may be received upon the exercise of the Option and the Option Price are subject to adjustment as set forth in Section 6.
3. Exercise of Option. (a) Grantee may exercise the Option, in whole or part, at any time and from time to time on or after the date hereof if, but only if, both an Initial Triggering Event (as defined below) and a Subsequent Triggering Event (as defined below) shall have occurred prior to the occurrence of an Exercise Termination Event (as defined below). Each of the following shall be an Exercise Termination Event: the earliest to occur of (i) the Effective Time of the Merger, (ii) termination of the Merger Agreement pursuant to Section 7.01 thereof (other than for any of the reasons described in clause (iii) of this Section 3(a)), and (iii) the later of (A) 18 months after termination of the Merger Agreement (x) by either Grantee or Sub under Section 7.01(c)(i) thereof, (y) by Grantee under Section 7.01(b)(ii) thereof as a result of a willful breach of any covenant or obligation or willful breach of any of Issuer's representations, or warranties contained in the Merger Agreement, provided, however, that such breach need not be willful if such termination occurs after the occurrence of an Initial Triggering Event, or (z) by Issuer under Section 7.01(b)(iv) under circumstances where Grantee or Sub could effect termination pursuant to Section 7.01(c)(i), and (B) the passage of 18 months after the occurrence of the first Initial Triggering Event; provided, however, and purchase of Option Shares shall be subject to compliance with applicable laws, including the SLHC Act. The rights set forth in Sections 8, 9 and 10 shall not terminate when the right to exercise the Option terminates as set forth herein, but shall extend to such time as is provided in such Sections 8, 9 and 10. Notwithstanding the termination of the Option, Grantee shall be entitled to purchase those Option Shares with respect to which it has exercised the Option in accordance with the terms hereof prior to the termination of the Option.
(b) (i) An "Initial Triggering Event" means the occurrence with respect to the Issuer of any of the following events or circumstances after the date hereof:
(A) Issuer or any of its Subsidiaries (each an "Issuer Subsidiary") without having received Grantee's prior written consent, shall have entered into an agreement to engage in an Acquisition Transaction (as defined below) with any person (the term "person" for purposes of this Agreement having the meaning assigned thereto in Sections 3(A)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"), and the rules and regulations thereunder) other than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of Issuer shall have recommended that the stockholders of Issuer approve or accept any Acquisition Transaction with any person other than Grantee or any Grantee Subsidiary. For purposes of this Agreement, "Acquisition Transaction" shall mean (x) a merger or consolidation, or any similar transaction, involving Issuer or any of Issuer's subsidiaries, (y) a purchase, lease or other acquisition of all or substantially all of the assets of Issuer or any subsidiary or (z) a purchase or other acquisition (including by way of merger, consolidation, share exchange or otherwise) of securities representing 10% or more of the voting power of Issuer or any subsidiary; provided that the term "Acquisition Transaction" does not include any internal merger or consolidation involving only Issuer and/or Issuer Subsidiaries;
(B) Any person (other than Grantee or any Grantee Subsidiary) shall have acquired beneficial ownership or the right to acquire beneficial ownership of 10% or more of the outstanding shares of Issuer Common Stock (the term "beneficial ownership" for purposes of this Agreement having the meaning assigned thereto in Section 13(d) of the Securities Exchange Act, and the rules and regulations thereunder);
(C) Any person other than Grantee or any Grantee Subsidiary shall have made a bona fide proposal to Issuer or its stockholders, by public announcement or written communication that is or becomes the subject of public disclosure, to engage in an Acquisition Transaction (including, without limitation, any situation in which any person other than Grantee or any Grantee Subsidiary shall have commenced (as such term is defined in Rule 14d-2 under the Securities Exchange Act) or shall have filed a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to, a tender offer or exchange offer to purchase any shares of Issuer Common Stock such that, upon consummation of such offer, such person would own or control 10% or more of the then outstanding shares of Issuer Common Stock (such an offer being referred to herein as a "Tender Offer" or an "Exchange Offer," respectively));
(D) After a proposal is made by a third party to Issuer or its stockholders to engage in an Acquisition Transaction, Issuer shall have breached any covenant or obligation contained in the Merger Agreement and such breach would entitle Grantee to terminate the Agreement, the holders of Issuer Common Stock shall not have approved the Merger Agreement at the meeting of such stockholders held for the purpose of voting thereon, such meeting shall not have been held or shall have been cancelled prior to termination of the Merger Agreement or Issuer's Board of Directors shall have withdrawn or modified in a manner adverse to Grantee the recommendation of Issuer's Board of Directors with respect to the Merger
(E) Any person other than Grantee or any Subsidiary thereof, other than in connection with a transaction to which Grantee has given its prior written consent, shall have filed an application or notice with the Office of Thrift Supervision ("OTS") or other federal or state bank regulatory authority for approval to engage in an Acquisition Transaction with respect to Issuer; or
(F) Issuer shall have breached any covenant or obligation contained in that certain letter agreement dated October 17, 1995 between Grantee and Issuer.
(ii) The term "Subsequent Triggering Event" shall mean the occurrence with respect to Issuer of either of the following events or circumstances after the date hereof:
(A) The acquisition by any person other than Grantee or any Grantee Subsidiary of beneficial ownership of 25% or more of the then outstanding Common Stock; o r
(B) The occurrence of an Initial Triggering Event described in Section 3(b)(i)(A) except that the percentage referred to in clause (z) shall be 25%.
(c) Issuer shall notify Grantee promptly in writing of the occurrence of any Initial Triggering Event or Subsequent Triggering Event (together, a "Triggering Event"); provided that it is understood that the giving of such notice by Issuer shall not be a condition to the right of Grantee to exercise the Option.
(d) In the event Grantee is entitled to and wishes to exercise the Option, it shall send to Issuer a written notice (the date of which being referred to herein as the "Notice Date") specifying (i) the total number of Option Shares it will purchase pursuant to such exercise and (ii) a place and date not earlier than three business days nor later than 60 business days from the Notice Date for the closing of such purchase (a "Closing Date"); provided that if prior notification to or approval of the OTS or any other Governmental Entity is required in connection with such purchase, Grantee shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which, as the case may be, (A) any required notification periods have expired or been terminated or (B) such approvals have been obtained and any requisite waiting period or periods shall have passed.
(e) Notwithstanding Section 3(d), in no event shall any Closing Date be more than 18 months after the related Notice Date, and if the Closing Date shall not have occurred within 18 months after the related Notice Date due to the failure to obtain any such required approval, the exercise of the Option effected on the Notice Date shall be deemed to have expired. In the event (i) Grantee receives official notice that an approval of the OTS or any other Governmental Entity required for the purchase of the Option Shares would not be issued or granted or (ii) a Closing Date shall not have occurred within 18 months after the related Notice Date due to the failure to obtain any such required approval, Grantee shall nevertheless be entitled to exercise its right as set forth in Section 8 or to exercise the Option in connection with the resale of Issuer Common Stock or other securities pursuant to a registration statement as provided in Section 10. The provisions of this Section 3 and Section 4 shall apply with appropriate adjustments to any such exercise.
4. Payment and Delivery of Certificates. (a) On each Closing Date referred to in Section 3(d), Grantee shall pay to Issuer in immediately available funds by a wire transfer to a bank account designated by Issuer an amount equal to the Option Price multiplied by the number of Option Shares to be purchased on such Closing Date.
(b) On each Closing Date, simultaneously with the delivery of immediately available funds as provided in Section 4(a), Issuer shall deliver to Grantee a certificate or certificates representing the Option Shares to be purchased on such Closing Date. If the Option should be exercised in part only, a new Option evidencing the rights of Grantee to purchase the balance of the Option Shares purchasable hereunder shall be issued to Grantee, and Grantee shall deliver to Issuer a copy of this Agreement and a letter agreeing that Grantee will not offer to sell or otherwise dispose of such Option Shares in violation of applicable law or the provisions of this Agreement.
(c) Certificates for Issuer Common Stock delivered on a Closing Date hereunder shall be endorsed with a restrictive legend that shall read substantially as follows:
THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RESALE RESTRICTIONS ARISING UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF NOVEMBER 9, 1995, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF ISSUER. A COPY OF SUCH AGREEMENT WILL BE MAILED TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY ISSUER OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that: (i) the reference to the resale restrictions of the Securities Act of 1933, as amended (the "Securities Act"), in the above legend shall be removed by delivery of substitute certificate(s) without such reference if Grantee shall have delivered to Issuer a copy of a letter from the staff of the Securities and Exchange Commission, or an opinion of counsel, in form and substance satisfactory to Issuer, to the effect that such legend is not required for purposes of the Securities Act; (ii) the reference to the provisions of this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the Option Shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law.
(d) Upon the giving by Grantee to Issuer of the written notice of exercise of the Option provided for under Section 3(d), the tender of the applicable purchase price in immediately available funds and the tender of a copy of this Agreement to Issuer, Grantee shall be deemed to be the holder of record of the Option Shares issuable upon such exercise, notwithstanding that the stock transfer books of Issuer shall then be closed or that certificates representing such Option Shares shall not then be actually delivered to Grantee. Issuer shall pay all expenses and any and all federal, state and local taxes and other charges that may be payable in connection with the preparation, issue and delivery of stock certificates under this Section 4 in the name of Grantee or its assignee, transferee or designee.
(e) If, at the time of issuance of any Option Shares pursuant to an exercise of all or a portion of the Option hereunder, Issuer shall have created a "poison pill" or similar security and issued any "rights" or similar securities pursuant thereto ("Rights"), then each Option Share issued pursuant to such exercise shall also represent Rights or new rights with terms substantially identical to and at least as favorable to Grantee as are provided under the Rights Agreement or any similar agreement then in effect.
5. Authorizations, etc. Issuer agrees (i) that it shall at all times maintain, free from preemptive rights or Liens, sufficient authorized but unissued shares of Issuer Common Stock (and other securities issuable pursuant to Section 6) so that the Option may be exercised without additional authorization of Issuer Common Stock after giving effect to all other options, warrants, convertible securities and other rights to purchase Issuer Common Stock, (ii) that it will not, by charter amendment or through reorganization, recapitalization, reclassification, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by Issuer, (iii) promptly to take all action as may from time to time be required (including, in the event, under the SLHC Act, or a state banking law, prior approval of or notice to the OTS or to any state regulatory authority is necessary before the Option may be exercised, cooperating fully with Grantee in preparing such applications or notices and providing such information to the OTS or such state regulatory authority as they may require) in order to permit Grantee to exercise the Option and so that the Option Shares, when issued, shall be duly authorized, validly issued, fully paid and nonassessable and free and clear of all Liens and not subject to any preemptive rights; and (iv) promptly to take all action provided herein to protect the rights of Grantee against dilution.
6. Adjustments. (a) In the event that any additional shares of Issuer Common Stock are issued or otherwise become outstanding after the date of this Agreement (other than pursuant to an exercise of the Option or an event described in Section 6(b)), including pursuant to stock option plans and in connection with acquisitions and other transactions permitted by the Merger Agreement, the number of Option Shares shall be increased so that, after such issuance, it equals 19.9% of the number of shares of Issuer Common Stock then issued and outstanding (without giving pro forma effect to the issuance of the Option Shares). Nothing contained in this Section 6(a) or elsewhere in this Agreement shall be deemed to authorize Issuer to issue shares of Issuer Common Stock in breach of, or otherwise breach any of, the provisions of the Merger Agreement.
(b) In the event of any change in Issuer Common Stock by reason of a stock dividend, split-up, recapitalization, combination, subdivision, conversion, exchange of shares or similar transaction, the type and number of Option Shares shall be appropriately adjusted and proper provision shall be made in the agreements governing any such transaction, so that Grantee shall receive upon exercise of the Option the number and class of shares, other securities, property or cash that Grantee would have received in respect of Issuer Common Stock if the Option had been exercised in full and the Option Shares had been issued to Grantee immediately prior to such event or the record date therefor, as applicable. Whenever the number of Option Shares is adjusted as provided in this Section 6(b), the Option Price shall be adjusted by multiplying the Option Price by a fraction, the numerator of which is equal to the number of Option Shares purchasable prior to the adjustment and the denominator of which is equal to the number of Option Shares purchasable after the adjustment.
7. Replacement Options. (a) In the event that, prior to an Exercise Termination Event, Issuer shall enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or one of its subsidiaries, and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or one of its subsidiaries, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Issuer Common Stock shall be changed into or exchanged for stock or other securities of Issuer or any other person or cash or any other property or the then outstanding shares of Issuer Common Stock shall after such merger represent less than 50% of the outstanding shares and share equivalents of the merged company or (iii) to sell or otherwise transfer all or substantially all its assets to any person, other than Grantee or one of its subsidiaries, then, and in each such case, the agreement governing such transaction shall make proper provision so that the Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of Grantee, of either (A) the Acquiring Corporation (as defined below) or (B) any person that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (A) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (B) Issuer in a merger in which Issuer is the continuing or surviving person or (C) the transferee of all or substantially all of Issuer's assets.
(ii) "Substitute Common Stock" shall mean the common stock issued by the issuer of the Substitute Option upon exercise of the Substitute Option.
(iii) "Average Price" shall mean the average closing price of a share of the Substitute Common Stock for the one year immediately preceding the consolidation, merger or sale in question, but in no event higher than the closing price of the shares of the Substitute Common Stock on the day preceding such consolidation, merger or sale; provided that, if Issuer is the issuer of the Substitute Option, the Average Price shall be computed with respect to a share of common stock issued by the person merging into Issuer or by any company which controls or is controlled by such person, as Grantee may elect .
(c) The Substitute Option shall have the same terms as the Option, provided that, if the terms of the Substitute Option cannot, for legal reasons, be the same as the Option, such terms shall be as similar as possible and in no event less advantageous to Grantee. The issuer of the Substitute Option (the "Substitute Option Issuer") shall also enter into an agreement with Grantee in substantially the same form as this Agreement, which shall be applicable to the Substitute Option. Without limiting the generality of the foregoing, the provisions of Sections 8, 9, 10, 11 and 12 shall apply with respect to the Substitute Option and any securities for which the Substitute Option becomes exercisable with the same effect as if all references to "Issuer" in such Sections were references to "Substitute Option Issuer", all references to "Issuer Common Stock" were references to "Substitute Common Stock", all references to the "Option" were references to the "Substitute Option" and all references to "Option Shares" were references to "Substitute Option Shares".
(d) The Substitute Option shall be exercisable for such number of shares of Substitute Common Stock as is equal to the then-current Applicable Price (as defined in Section 8(c)) multiplied by the number of shares of Issuer Common Stock for which the Option is then exercisable, divided by the then-current Average Price. The exercise price of the Substitute Option per share of Substitute Common Stock shall then be equal to the Option Price multiplied by a fraction in which the numerator is the number of shares of Issuer Common Stock for which the Option is then exercisable and the denominator is the number of shares of the Substitute Common Stock for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than 19.9% of the shares of Substitute Common Stock outstanding prior to the exercise of the Substitute Option. In the event that the Substitute Option would be exercisable for more than 19.9% of the shares of Substitute Common Stock outstanding prior to such exercise but for the limitation in this paragraph (e), the Substitute Option Issuer shall make a cash payment to Grantee equal to the excess of (i) the value of the Substitute Option without giving effect to the limitation in this paragraph (e) over (ii) the value of the Substitute Option after giving effect to the limitation in this paragraph (e). This difference in value shall be determined by a nationally recognized investment banking firm selected by Grantee.
(f) Issuer shall not enter into any transaction described in Section 7(a) unless the Acquiring Corporation and any person that controls the Acquiring Corporation assume in writing all the obligations of Issuer hereunder.
8. Repurchase at the Option of Grantee. (a) At the request of Grantee at any time during (i) the period during which the Option is exercisable pursuant to Section 3 or (ii) the period of 30 business days immediately following the occurrence of either of the events set forth in clauses (i) and (ii) of the second sentence of Section 3(e) (but solely as to the shares of Issuer Common Stock with respect to which the required approval was not received) (either such period being referred to herein as the "Repurchase Period"), Issuer (or any successor entity thereof) shall repurchase from Grantee (A) the Option (or, in the circumstances set forth in clause (ii) above, that portion thereof relating to shares of Issuer Common Stock with respect to which required approvals were not received) unless the Option has expired or been terminated in accordance with the terms hereof and (B) all Option Shares purchased by Grantee pursuant hereto with respect to which Grantee then has beneficial ownership. The date on which Grantee exercises its rights under this Section 8 is referred to as the "Request Date". Such repurchase shall be at an aggregate price (the "Section 8 Repurchase Consideration") equal to the sum of:
(1) the aggregate exercise price paid by Grantee for any Option Shares acquired with respect to which Grantee then has beneficial
(2) the excess, if any, of (x) the Applicable Price for shares of Issuer Common Stock over (y) the Option Price, with such excess multiplied by the number of Option Shares with respect to which the Option has not
(3) the excess, if any, of (x) the Applicable Price over (y) the Option Price paid (or, in the case of Option Shares with respect to which the Option has been exercised but the Closing Date has not occurred, payable) by Grantee for each Option Share with respect to which the Option has been exercised, with such excess multiplied by the number of such Option Shares.
(b) If Grantee exercises its rights under this Section 8, Issuer shall, within 10 business days after the Request Date, pay the Section 8 Repurchase Consideration to Grantee in immediately available funds, and Grantee shall surrender to Issuer the Option and the certificates evidencing the shares of Issuer Common Stock purchased thereunder with respect to which Grantee then has beneficial ownership, and Grantee shall warrant that it has sole record and beneficial ownership of such shares and that the same are then free and clear of all Liens. Notwithstanding the foregoing, to the extent that prior notification to or approval of the OTS or other Governmental Entity is required in connection with the payment of all or any portion of the Section 8 Repurchase Consideration, Issuer shall deliver from time to time that portion of the Section 8 Repurchase Consideration that it is not then so prohibited from paying and shall promptly file the required notice or application for approval and shall expeditiously process the same (and Grantee shall cooperate with Issuer in the filing of any such notice or application and the obtaining of any such approval), and the period of time that otherwise would run pursuant to the preceding sentence for the payment of the portion of the Section 8 Repurchase Consideration requiring such notification or approval shall run instead from the date on which, as the case may be, (i) any required notification period has expired or been terminated or (ii) such approval has been obtained and, in either event, any requisite waiting period shall have passed. If the OTS or any other Governmental Entity disapproves of any part of Issuer's proposed repurchase pursuant to this Section 8, Issuer shall promptly give notice of such fact to Grantee and redeliver to Grantee the Option Shares it is then prohibited from repurchasing, and Grantee shall have the right to exercise the Option as to the number of Option Shares for which the Option was exercisable at the Request Date less the number of shares as to which payment has been made pursuant to Section 8(a)(2); provided that if the Option shall have terminated prior to the date of such notice or shall be scheduled to terminate prior to the date of such notice or shall be scheduled to terminate at any time before the expiration of a period ending on the 30th business day after such date, Grantee shall nonetheless have the right so to exercise the Option or exercise its rights under Section 10 until the expiration of such period of 30 business days. Notwithstanding anything herein to the contrary, Grantee shall be entitled to exercise its right under this Section 8 on only one occasion.
(c) For purposes of this Agreement, the "Applicable Price" means the highest of (i) the highest price per share at which a tender offer or exchange offer has been made for shares of Issuer Common Stock after the date hereof and on or prior to the Request Date (or any other applicable determination date), (ii) the price per share to be paid by any third party for shares of Issuer Common Stock or the consideration per share to be received by holders of Issuer Common Stock, in each case pursuant to an agreement with Issuer for a merger or other business combination entered into on or prior to the Request Date (or any other applicable determination date), (iii) the highest price per share paid by any third party to acquire from a stockholder of Issuer, in one transaction or in a series of related transactions, an aggregate amount of Issuer Common Stock of 10% or more of the outstanding Issuer Common Stock or (iv) the highest bid price per share of Issuer Common Stock as quoted on the American Stock Exchange or, if not so quoted, on the principal trading market on which such shares are traded as reported by a recognized source during the 60 business days preceding the Request Date (or any other applicable determination date). If the consideration to be offered, paid or received pursuant to a transaction described in either clause (i) or (ii) above shall be other than cash, the value of such consideration shall be determined in good faith by an independent nationally recognized investment banking firm selected by Grantee and reasonably acceptable to Issuer, which determination shall be conclusive for all purposes of this Agreement.
9. Repurchase at the Option of Issuer. (a) Except to the extent that Grantee shall have previously exercised its rights under Section 8, at the request of Issuer during the six-month period commencing 15 months following the first occurrence of a Subsequent Triggering Event, Issuer may repurchase from Grantee, and Grantee shall sell to Issuer, all (but not less than all) the shares of Issuer Common Stock acquired by Grantee pursuant hereto and with respect to which Grantee has beneficial ownership at the time of such repurchase at a price equal to the greater of (i) 110% of the Current Market Price (as defined below) or (ii) the sum of (A) the Option Price in respect of the shares so acquired and (B) Grantee's pre-tax per share carrying cost (as defined below), multiplied in the case of either clause (i) or (ii) above by the number of shares so acquired (the "Section 9 Repurchase Consideration"); provided that Grantee, within 30 days following Issuer's notice of its intention to purchase shares pursuant to this Section 9, may deliver an Offeror's Notice (as defined in Section 11) pursuant to Section 11, in which case the provisions of Section 11 and not those of this Section 9 shall control; and provided further that Issuer's rights under this Section 9 shall be suspended (with any such rights being extended accordingly) during any period when the exercise of such rights would subject Grantee to liability pursuant to Section 16(b) of the Exchange Act by reason of Grantee's purchase of shares of Issuer Common Stock pursuant to this Agreement.
(b) If Issuer exercises its rights under this Section 9 and Grantee does not deliver an Offeror's Notice or Grantee does not sell the shares to a third party pursuant thereto, Issuer shall, within 10 business days after the expiration of the 30-day period referred to in paragraph (a) above or, if applicable, upon abandonment of the transaction covered by the Offeror's Notice, pay the Section 9 Repurchase Consideration in immediately available funds, and Grantee shall surrender to Issuer the certificates evidencing the shares of Issuer Common Stock purchased hereunder with respect to which Grantee then has beneficial ownership, and Grantee shall warrant that it has sole record and beneficial ownership of such shares and that the same are then free and clear of all Liens.
(c) As used herein, (i) "Current Market Price" means the average closing bid price per share of Issuer Common Stock as quoted on the American Stock Exchange or, if not so quoted, on the principal trading market on which such shares are traded as reported by a recognized source for the 10 business days preceding the date of the Issuer's request for repurchase pursuant to this Section 9 and (ii) "Grantee's pretax per share carrying cost" shall be the amount equal to the interest on the aggregate Option Price paid for the shares of Issuer Common Stock purchased from the date of purchase to the date of repurchase at the rate of interest announced by Parent as its prime or base lending or reference rate during such period, less any dividends received on the shares so purchased, divided by the number of shares so purchased.
10. Registration Rights; Listing. (a) Issuer shall, if requested by Grantee at any time and from time to time (i) within three years of the first exercise of the Option or (ii) for 30 business days following the occurrence of either of the events set forth in clauses (i) and (ii) of the second sentence of Section 3(e) or receipt by Grantee of official notice that an approval of the OTS or any other Governmental Entity required for a repurchase as contemplated by Section 8(b) would not be issued or granted (but solely as to the shares of Issuer Common Stock or portion of the Option with respect to which the required approval was not received), as expeditiously as practicable prepare and file up to two registration statements under the Securities Act if necessary in order to permit the sale or other disposition of the shares of Issuer Common Stock or other securities that have been acquired by or are issuable to Grantee upon exercise of the Option in accordance with the intended method of sale or other disposition stated by Grantee, including a "shelf" registration statement under Rule 415 under the Securities Act or any successor provision. Issuer shall use its best efforts to cause each such registration statement to become effective and to remain effective for such period not in excess of 180 days from the day such registration statement first becomes effective as may be reasonably necessary to effect such sale or other disposition. Issuer shall also use its best efforts to qualify such shares or other securities under any applicable state securities laws. Grantee agrees to use all reasonable efforts to cause, and to cause any underwriters or agents of any sale or other disposition to cause, any sale or other disposition pursuant to such registration statement to be effected on a widely distributed basis so that upon consummation thereof no purchaser or transferee shall own beneficially more than 2% of the then outstanding voting power of Issuer. In the event that Grantee requests Issuer to file a registration statement following the failure to obtain a required approval for an exercise of the Option as described in Section 3(e), the closing of the sale or other disposition of Issuer Common Stock or other securities pursuant to such registration statement shall occur substantially simultaneously with the exercise of the Option, and Grantee shall be entitled to cause the Option Shares to be issued directly to the underwriters or agents named in such registration statement. The obligations of Issuer hereunder to file a registration statement and to maintain its effectiveness may be suspended for one or more periods of time that do not exceed 60 days in the aggregate for all such periods if the Board of Directors of Issuer shall have determined that the filing of such registration statement or the maintenance of its effectiveness would require disclosure of nonpublic information that would materially and adversely affect Issuer. Any registration effected under this Section 10 shall be at Issuer's expense, except for underwriting discounts or commissions, brokers' fees and the fees and disbursements of Grantee's counsel related thereto. Grantee shall provide all information reasonably requested by Issuer for inclusion in any registration statement to be filed hereunder. If requested by Grantee in connection with any such registration, Issuer shall become a party to any underwriting agreement relating to the sale of such shares or other securities, but only to the extent of obligating itself in respect of representations, warranties, covenants, indemnities, contribution and other agreements customarily included in such underwriting agreements for the issuer. If, during the time periods referred to in the first sentence of this Section 10, Issuer effects a registration under the Securities Act of Issuer Common Stock for its own account or for any other stockholders of Issuer (other than on Form S-4 or S-8, or any successor form), it shall allow Grantee the right to participate in such registration, and such participation shall not affect the obligation of Issuer to effect two registration statements for Grantee under this Section 10; provided that, if the managing underwriters of such offering advise Issuer in writing that in their opinion the number of shares of Issuer Common Stock requested to be included in such registration exceeds the number which can be sold in such offering, Issuer shall include the shares requested to be included therein by Grantee pro rata with the shares intended to be included therein by Issuer or other stockholders, taken as a single group.
(b) If Issuer Common Stock or any other securities to be acquired upon exercise of the Option are then listed on a national or regional securities exchange or quoted on a national or regional quotation system, Issuer, upon request of Grantee, shall use its best efforts to make any filings and obtain any approvals necessary in order to cause the Option Shares or other securities acquired upon exercise of the Option to be so listed or quoted.
11. First Refusal. At any time after the first occurrence of a Subsequent Triggering Event and prior to the later of (a) expiration of 24 months immediately following the first purchase of shares of Issuer Common Stock pursuant to the Option and (b) the termination of the Option pursuant to Section 3(a), if Grantee shall desire to sell, assign, transfer or otherwise dispose of all or any of the shares of Issuer Common Stock or other securities acquired by it pursuant to the Option, it shall give Issuer written notice of the proposed transaction (an "Offeror's Notice"), identifying the proposed transferee, accompanied by a copy of a binding offer to purchase such shares or other securities from such transferee and setting forth the terms of the proposed transaction. An Offeror's Notice shall be deemed an offer by Grantee to Issuer, which may be accepted within 10 business days of the receipt of such Offeror's Notice, on the same terms and conditions and at the same price at which Grantee is proposing to transfer such shares or other securities to such transferee. The purchase of any such shares or other securities by Issuer shall be settled within 10 business days of the date of the acceptance of the offer and the purchase price shall be paid to Grantee in immediately available funds; provided that, if prior notification to or approval of the OTS or any other Governmental Entity is required in connection with such purchase, Issuer shall promptly file the required notice or application for approval and shall expeditiously process the same (and Grantee shall cooperate with Issuer in the filing of any such notice or application and the obtaining of any such approval) and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which, as the case may be, (i) any required notification period has expired or been terminated or (ii) such approval has been obtained and, in either event, any requisite waiting period shall have passed. In the event of the failure or refusal of Issuer to purchase all the shares or other securities covered by an Offeror's Notice or if the OTS or any other Governmental Entity disapproves Issuer's proposed purchase of such shares or other securities, Grantee may, within 60 days from the date of the Offeror's notice (subject to any necessary extension for regulatory notification, approval or waiting periods), sell all, but not less than all, of such shares or other securities to the proposed transferee at no less than the price specified, and on terms no more favorable than those specified, in the Offeror's Notice. The requirements of this Section 11 shall not apply to (A) any disposition as a result of which the proposed transferee would own beneficially not more than 2% of the outstanding voting power of Issuer, (B) any disposition of Issuer Common Stock or other securities by a person to whom Grantee has assigned its rights under the Option with the consent of Issuer, (C) any sale by means of a public offering registered under the Securities Act in which steps are taken to reasonably assure that no purchaser will acquire securities representing more than 2% of the outstanding voting power of Issuer or (D) any transfer to Sub or to any other wholly owned subsidiary of Parent that agrees in writing to be bound by the terms hereof.
12. Division of Option. This Agreement (and the Option granted hereby) are exchangeable, without expense, at the option of Grantee, upon presentation and surrender of this Agreement at the principal office of Issuer, for other Agreements providing for Options of different denominations entitling the holder thereof to purchase in the aggregate the same number of shares of Issuer Common Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any Stock Option Agreements and related Options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft, or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. Any such new Agreement executed and delivered shall constitute an additional contractual obligation on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed, or mutilated shall at any time be enforceable by anyone.
13. Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement or the Option shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Grantee may assign in whole or in part its rights and obligations hereunder to Sub or to any other direct or indirect wholly owned subsidiary of
Grantee without the consent of Issuer. Subject to the preceding sentence, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns.
14. Further Assurances. Each party hereto will use its best efforts to make all filings with, and to obtain consent of, all third parties and governmental authorities necessary or advisable to the consummation of the transactions contemplated by this Agreement, including applying to the OTS under the SLHC Act for approval to acquire the shares issuable hereunder. In the event of any exercise of the Option by Grantee, Issuer, Grantee and Sub shall execute and deliver all other documents and instruments and take all other action that may be reasonably necessary or advisable in order to consummate the transactions provided for by such exercise.
15. Specific Performance. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through specific performance, injunctive relief or other equitable relief. This provision is without prejudice to any other rights that the parties hereto may have for any failure to perform this Agreement.
16. Severability. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a Federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions contained in this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that Grantee is not permitted to acquire, or Issuer is not permitted to repurchase pursuant to Section 8, the full number of Option Shares provided in Section 1(a) hereof (as adjusted pursuant to Section 6), it is the express intention of Issuer to allow Grantee to acquire or to require Issuer to repurchase such lesser number of Option Shares as may be permissible without any amendment or modification hereof.
17. Notices. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in the manner and to the addresses specified in accordance with Section 8.02 of the Merger Agreement.
18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to any applicable principles of conflicts of laws.
19. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.
20. Expenses. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel.
21. Waiver and Amendment. Any provision of this Agreement may be waived at any time by the party that is entitled to the benefits of such provision. This Agreement may not be modified, amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the parties hereto.
22. Entire Agreement; No Third-Party Beneficiaries. Except as otherwise expressly provided herein or in the Merger Agreement, this Agreement (and the Merger Agreement and the other documents and instruments referred to herein and therein) contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written.
Title: President and Chief Operating
Title: President and Chief Executive
The undersigned hereby appoints the Board of Directors of Northbay Financial Corporation ("Northbay"), with full powers of substitution, to act as attorneys and proxies for the undersigned to vote all shares of Common Stock of Northbay which the undersigned is entitled to vote at the Special Meeting of Stockholders (the "Meeting") to be held at the Petaluma Plaza North office of Northbay Savings Bank, F.S.B. located at 311 North McDowell Boulevard, Petaluma, California on ________ __, 1996 at __:00 .m., Petaluma, California time, and at any and all adjournments and postponements thereof, as follows:.
1. A proposal to approve the Agreement and Plan of Merger, dated November 9, 1995 (the "Merger Agreement"), pursuant to which (i) Northbay will be merged with and into Bank of the West ("Bank West"), and (ii) each outstanding share of Northbay Common Stock would be converted into the right to receive $15.75 in cash, subject to potential downward adjustment, as provided in the Merger Agreement, to a floor of $15.375 in cash, without interest, all on and subject to the terms and conditions contained in the Merger Agreement.
[ ] FOR [ ] AGAINST [ ] VOTE WITHHELD
2. A proposal to adjourn the Meeting to solicit additional proxies in the event there are not sufficient votes to approve the foregoing proposal.
[ ] FOR [ ] AGAINST [ ] VOTE WITHHELD
In their discretion, the proxies are authorized to vote on any other business that may properly come before the Meeting or any adjournment or postponement thereof.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSALS ABOVE. IF ANY OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSALS.
(Continued and to be SIGNED on Reverse Side)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Should the undersigned be present and choose to vote at the Meeting or at any adjournments or postponements thereof, and after notification to the Secretary of Northbay at the Meeting of the stockholder's decision to terminate this proxy, then the power of such attorneys or proxies shall be deemed terminated and of no further force and effect. This proxy may also be revoked by filing a written notice of revocation with the Secretary of Northbay or by duly executing a proxy bearing a later date.
The undersigned acknowledges receipt from Northbay, prior to the execution of this proxy, of Notice of the Meeting and the Proxy Statement.
Please sign exactly as your name(s) appear(s) to the left. When signing as trustee or guardian, please give your full title. If shares are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
' Includes certificates of deposit, overnight federal funds, income funds, U.S. Government securities and interest-bearing cash balances. 2 See note 1 of Notes to Consolidated Financial Statements. 3 See note 11 of Notes to Consolidated Financial Statements. 4 Aggregate cash dividends paid during the fiscal year divided by net income
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY Management's Discussion and Analysis of Financial Condition and Results of Operations
Northbaby Financial Corporation (the "Company") is the holding company for Northbay Savings Bank, F.S.B (The "Bank), its wholly owned subsidiary. Virtually all financial activity of the Company is conducted through the Bank, which is the sole asset of the Company.
The operations of the Bank, which consist primarily of managing financial assets and liabilities are dictated to a large extent by the changing nature of the financial markets in general, and the changing interest rate environment in particular. The Bank's primary source of acquiring financial assets and liabilities is its access to the retail market, attracting deposits from the general public through its branch network and utilizing those funds to provide financing for local housing in the form of mortgage, construction, and commercial real estate loans.
The Bank's profitability depends primarily on its net interest income, which is the difference between the interest income it receives from the Bank's investment and loan portfolios and its cost of funds, consisting primarily of the interest paid on deposits and borrowings. Net interest income is affected by the volume of interest-earning assets, interest-bearing liabilities, yields on interest-earning assets and rates paid on interest-bearing liabilities (see Rate/Volume Analysis). When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
During a year of extreme volatility in interest rates, the Bank has been challenged to maintain its historically high interest rate spread. After a year of generally rising interest rates which ended March 31, 1995, a period viewed by many as carrying a high degree of inflationary risk as evidenced by the actions of the Federal Reserve Board (FRB) which increased the Federal Funds Rate on seven separate occasions, we began to experience a significant decline in interest rates. The FRB, implemented the final of seven increases of the Federal Funds Rates, moving the rate up from 5.50% to 6.00% on February 2, 1995. This upward movement, combined with more economic data supporting an apparent slowing in the economy, led to the market decline in interest rates on maturities beyond six months. For example, while the rate on the one year treasury had increased from 3.35% at its low point in October of 1993 to 7.17% at its peak in December of 1994 (an increase of 3.82%) during the six months ended June 30, 1995, this same rate declined to 5.72%. On July 2, 1995 the FRB signaled a change in its outlook for inflation, implementing the first drop in the Federal Funds rate in more than 2 years.
Despite the welcome relief in terms of generally lower interest rates, the impact of this positive event in the financial markets is not readily apparent in the operating results of the Bank during the six months ended June 30, 1995 and as with all rate changes in such a large portfolio of financial assets and liabilities, will take time to work through the portfolios. The lingering effects of a year rising interest rates continue to be reflected through a lower level of net interest income for the year ended June 30, 1995. During a period of a flattening yield curve in which short-term rates are rising more rapidly than long-term rates, such as we experienced, the Bank will feel the negative effect of a shrinking net interest rate spread. The Bank suffered a negative impact as a result of the continued increase in interest rates on its shorter- term retail deposits and borrowings that could not be matched by the adjustment taking place on the adjustable rate loan portfolio.
During a period of stable to falling interest rates, the Bank should now begin to experience the benefits of the lagging nature of the 11th District Cost of Funds Index (COFI) to which such a large volume of the Bank's financial assets are tied. While the Bank's large portfolio of adjustable rate loans indexed to the COFI continues to reprice upward due to the lagging nature of the index, the Bank's cost of funding these assets with short-term liabilities should diminish. Despite erosion of the net interest rate spread from 3.04% for the quarter ended March 31, 1995, it is significant to note that after seven consecutive quarters of decline the margin hit a low of 2.45% in January, stabilizing at that spread for the remainder of the quarter before increasing to 2.55% for the quarter ended June 30, 1995.
To a lesser extent, the Bank's profitability is also affected by the level of noninterest income and expense. Noninterest income consists primarily of service fee income relating to both loans and transaction accounts. During the few years preceding the fiscal year ending June 30, 1995, the Bank had relied more heavily on loan sales in the secondary markets as a means of generating funds to originate new loans and to transfer the interest risk associated with carrying longer-term fixed rate loans. This increased volume of loan sales in previous years was reflected in noninterest income under the category of gains on sale of loans and mortgage-backed securities. With the sharp increase in interest rates which occurred between October of 1993 and December of 1994, the consumer demand for fixed rate loans, which are typically sold in the secondary markets, has been extremely limited. With such a small volume of fixed rate product being originated the Bank's ability to continue to generate noninterest income from this source of business has and will continue to be hampered. Noninterest expense consists of compensation and benefits, occupancy related expenses, deposit insurance premiums and other operating expenses.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which became effective on August 8, 1989 has had a significant impact on the thrift industry. The Bank, like the rest of the thrift industry, has been affected by FIRREA through more stringent capital requirements. The requirements include a leverage ratio of core capital to adjusted total assets of 3%, a tangible capital ratio of 1.5% and a risk-based capital standard currently set at 8% of risk-weighted assets. The Bank exceeds all of the regulatory capital standards with ratios of core, tangible, and risk-based capital to assets of 8.60%, 8.58% and 14.56%, respectively.
Under FIRREA, the capital standards for savings associations must be no less stringent than the capital standards applicable to national banks. On September 17, 1990, the Office of the Comptroller of the Currency (OCC) announced the adoption, effective December 31, 1990, of regulations implementing more stringent core capital requirements for national banks. The OCC regulations establish a new minimum core capital ratio of 3% for the most highly rated banks,with an additional 100 to 200 basis point "cushion" amount of additional capital required on a case-by-case basis, considering the quality of risk management systems and the overall risk in individual banks. On April 22, 1991, the Office of Thrift Supervision (OTS) proposed to amend its core capital requirement to reflect the OCC's amendments to the core capital requirement for national banks. The OTS proposal would establish a 3% core capital ratio for savings institutions in the strongest financial and managerial condition. For all other savings institutions, the minimum core capital ratio would be 3% plus at least an additional 100 to 200 basis points. In determining the amount of additional capital, the OTS would assess both the quality of risk management systems and the level of overall risk in each individual savings institution through the supervisory process on a case-by-case basis. At June 30, 1995 the Bank had core capital of approximately $33.6 million, or 8.60% of ket value of its assets. A savings institution with a greater than normal interest rate risk will be required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the interest rate risk component "IRR") equal to one half the difference between the institutions measured interest rate risk and the normal level of interest rate risk, multiplied by the economic value of its total assets.
The OTS will calculate the sensitivity of a savings institution's net portfolio value based on data submitted by the institution in a sched- adjusted total assets. Management, therefore, does not expect the proposed amendment to cause the Bank to fall below its regulatory capital requirements.
The OTS published a final regulation incorporating the interest rate risk component in the risk-based capital rule on August 31, 1993. The rule took effect January 1, 1994 and requires savings institutions with more than a "normal" level of interest rate risk to maintain additional total capital. A savings Institution's Interest rate risk will be measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. Net portfolio value is defined, generally, as the present value of expected cash inflows from existing assets and off-balance-sheet contracts less the present value of expected cash outflows from existing liabilities. A savings institution is considered to have a "normal" level of interest rate risk if the decline in the market value of its portfolio equity after an immediate 200 basis point increase or decrease in market interest rates (whichever loads to the greater decline) is less than two percent of the current estimated marule included in its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the IRR component, if any, to be deducted from a savings institution's risk-based capital. The IRR component is to be computed quarterly, and the capital requirement for the IRR will have an effective lag of two calendar quarters. The first quarter to be measured has once again been postponed indefinetly until questions regarding a review procedure for institutions challenging the results of the OTS model have been resolved. Institutions that do not have sufficient capital to comply with the IRR component will be required to submit a capital plan to achieve compliance. Based upon the Bank's current level of adjustable rate, shorter-term assets and regulatory capital, management does not expect the Bank's interest rate risk component to have a material impact on the Bank's regulatory capital level or its compliance with the regulatory capital requirements.
Components of the Bank's regulatory capital at June 30, 1995 are summarized as follows:
' Adjusted total assets are a savings association's total assets as determined under generally accepted accounting principles. 2 Total risk-based assets as calculated for OTS requirements were $245 million at June 30, 1995. 3 Premium paid on the purchase of core deposits of $74 thousand at June 30, 1995 is excluded from tangible capital.
The Bank's assessment for deposit insurance premiums (expressed in terms of percentage of total savings accounts) is 23 basis points. The minimum rate may be decreased to not less than 18 basis points for the period ending December 31, 1997, declining further to 15 basis points thereafter. However, the Federal Deposit Insurance Corporation (FDIC) may increase the assessment rate to 32.5 basis points if certain reserve fund ratios are not met. Although the FDIC insures both commercial banks as well as savings and loans, the reserve funds have been segregated to the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The FDIC voted on August 8, 1995 to reduce the premiums for most BIF members while keeping existing assessment rates intact for savings associations. While the SAIF members will continue paying premiums on a risk-based basis ranging from 23 cents to 31 cents per $ 100 of domestic deposits, the assessment rate charged to BIF-insured members will be reduced to an average of 4.4 cents for every $100 down from 23 cents. SAIF-insured institutions will pay a higher rate than BIF-insured institutions because the SAIF remains seriously undercapitalized. As of March 31, 1995, the SAIF had a balance of $2.2 billion or only .31 percent of insured deposits. At the current pace, the SAIF is unlikely to reach the minimum reserve ratio of 1.25% until the year 2002.
The BIF on the other hand achieved a reserve ratio of 1.22% of BIF-insured deposits, or approximately $23.2 billion as of March 31, 1995. It is believed that the reserve ratio of 1.25% was achieved during the quarter ended June 30, 1995. A primary reason the SAIF is undercapitalized is that SAIF premiums have been diverted to uses other than rebuilding the fund. As described in a recent report by the General Accounting Office, since 1989 $7.4 billion, approximately three-quarters of SAIF assessments have been used to pay off obligations arising from the governments' efforts to resolve the thrift failures of the 1980's. SAIF assessments were diverted to fund the Resolution Funding Corporation, the Federal Savings and Loan Insurance Corporation Resolution Fund and FICO. FICO was established by congress in 1987 in an attempt to recapitalize the Federal Savings and Loan Insurance Fund (FSLIC). From 1987 to 1989 the FICO issued approximately $8.2 billion in bonds, proceeds of which were channeled to the FSLIC. Approximately $4.3 billion of SAIF assessments have been utilized to service the debt on these FICO obligations. Currently approximately 45% of all SAIF assessments are utilized to pay interest on the FICO debt rather than to replenish the fund. Without these diversions it has been estimated that the SAIF icy is to manage interest rate risk so as to maximize net interest income over time in changing interest rate environments.
In order to achieve this goal, over the years the Bank has concentrated on shortening the loan portfolio's average maturity and increasing its sensitivity to changes in interest rates. This has been accomplished by originating adjustable rate mortgage loans to include in the Bank's portfolio and by emphasizing the origination of short-term construction, land, and commercial real estate loans. The balance of construction, land and commercial real estate loans (gross) at June 30, 1995 was approximately $75 million, or 21% of the Bank's total gross loan portfolio. The Bank's portfolio of adjustable rate mortgage secured by residential housing has increased from approximately $136 million or 45% of the gross loan portfolio at June 30, 1993 to approximately $258 million or 72% of the gross loan portfolio at June 30, 1995. For the purpose of transferring the interest rate risk associated with holding to maturity 30-year fixed rate mortgage loans, over the course of many years the Bank has elected to sell the majority of such loans in the secondary markets. As a result of the Bank's general would have reached its designated reserve ratio of 1.25% at some point in 1994.
There is currently a proposal within congress to eliminate duplicate charters which separate BIF-insured members from SAIF-insured members. The single charter would be part of comprehensive legislation designed to resolve the looming disparity between deposit insurance premiums paid by BIF and SAIF members. The Wall Street Journal reported that as the proposal is being developed, SAIF members would be required to pay a one-time assessment of approximately 85 basis points of total retail savings liabilities to replenish the fund and reduce future deposit premiums to 5 basis points. After the replenishment of the SAIF fund the two funds, SAIF and BIF, would be merged and the FICO debt obligation would be shared by all members.
Effective January 1, 1993, a transitional risk-based methodology was implemented. Under the transitional risk-based system, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC based upon the institution's level of capitalization and the FDIC's judgement of the risk posed by the institution. Each institution is assigned to one of three groups ("well-capitalized," "adequately-capitalized" or "under-capitalized") based on its capital ratios. A well-capitalized institution is one that has at least a 10% total risk-based capital ratio, and a 6% core capital to risk-based assets. An adequately- capitalized institution is one that has an 8% total risk-based capital ratio, a 4% core capital to risk-based assets ratio and a 4% leverage capital ratio. An under-capitalized institution is one that does not meet either of the above definitions. The FDIC also assigns each institution to one of three subgroups based upon reviews by the institution's primary federal or state supervisory agency, statistical analysis of financial statements and other information relevent to gauging the risk posed by the institution. The assessment for well- capitalized, healthy institutions is three basis points less than the average assessment rate for insured depository institutions. Well-capitalized institutions that present supervisory concern pay the average assessment rate. All other institutions pay an assessment rate of two basis points over the average assessment rate. The assessment rate for insured depository institutions ranges from 23 basis points to 31 basis points.
The Bank's exposure to interest rate risk results from the differences in maturities and repricing of its interest-earning assets and interest-bearing liabilities. The goal of the Bank's asset, liability pol-trend of divesting itself of such noninterest rate sensitive assets, the Bank's exposure to such 30-year fixed rate loans is approximately $14 million or 3.9% of the total loan portfolio. The Bank originates relatively small commercial loans, (average principal balance of under $250 thousand per loan at June 30, 1995), and at the same time has enhanced its asset/liability position by adding higher-margined adjustable rate loans. Many of the commercial loans as of June 30, 1995 were initiated as short-term construction loans and borrowers subsequently elected permanent financing with the Bank.
The Bank's asset/liability management strategies have helped to decrease the exposure of its earnings to future interest rate increases. This significant volume of shorter-term and adjustable rate loans have also allowed the Bank to fund those assets with shorter-term lower rate paying retail deposits. The Bank's portfolio of passbook, money market and transaction accounts, all of which are assumed to reprice within a 0-6 month time frame, totaled $99.6 million or 35% of total retail savings liabilities at June 30, 1995. Unlike many financial institutions, which for repricing purposes assume that passbook, money market and transaction accounts are a non-rate sensitive liability, the Bank believes that a more accurate depiction of these liabilities as the Bank's experience would support, is one of a rate sensitive instrument. These liabilities will reprice frequently to match the current rate environment. For this reason, the Bank does not follow a straight erosion theory in its analysis of the interest rate risk.
The Bank's cumulative one-year Gap (i.e., interest-earning assets which reprice or mature in one year or less minus interest-bearing liabilities which reprice or mature in one year or less) was approximately +2% of total assets at June 30, 1995, compared to approximately +5% of total assets at June 30, 1994. Despite the fact that the Gap report would indicate the volumes of assets repricing over a one year horizon out-paces the liabilities repricing over a similar time frame, the Gap report fails to provide a description as to the level of repricing.
The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 1995, which are expected to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets or liabilities which reprice or mature during a particular period were determined in accordance with contractual terms of the asset or liability. Fixed rate loans and mortgage-backed securities are assumed to prepay at speeds ranging from approximately 9% to 24% annually according to the underlying coupon. Passbook, money market and NOW accounts are assumed to be interest sensitive and will reprice immediately in step with market rates. Adjustable rate loans are assumed to reprice at contractual repricing intervals.
l Does not include reductions for loan loss allowances and unearned fees. 2 Does not include adjustments for unrealized gain or losses under FAS 115.
This table does not necessarily indicate the impact of general interest is subject to competitive and other pressures. As a result, various rate movements
Bank's net interest yield because the repric- of assets and liabilities is
assets and liabilities indicated as repricing within the same period ing of various categories may in fact reprice at different time and at different rate levels.
Because the Gap analysis falls to provide an adequate measure of the interest rate sensitivity of assets and liabilities repricing, during recent years the Bank has relied upon a market value approach to manage the relationship between interest rates and the effect on the Bank's Net Portfolio Value (NPV). Under a methodology similar to that incorporated by the OTS to arrive at the additional capital the Bank must hold as the interest rate risk component of risk-based capital, the Bank calculates the difference between the present value of expected cash flows from assets and the present value or expected cash flows from liabilites as well as cash flows from off-balance sheet contracts. Managements of the Bank's assets and liabilities is done in the context of the marketplace, but also within limits established by the Board of Directors on the amount of change in NPV which is acceptable given interest rate changes.
Presented below, as of June 30, 1995, is an analysis of the Bank's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point (100 basis points equals 1%) increments up and down 400 basis points and compared to policy limits set by the Board of Directors and in accordance with OTS regulations. Such limits have been established with consideration of the dollar impact of various rate changes and the Bank's capital position.
In the above table the first column on the left presents the basis point increments of yield curve shifts. The second column presents the board policy limits of each 100 basis point increment for the Bank's percent change in NPV. For example, the Board's policy limit for a 100 basis point upward shift in the yield curve indicates that NPV should not decrease by more than 15%. The remaining columns present the Bank's actual position in dollar change and percent change in NPV at each basis point increment at the date indicated. Based on the June 30, 1995 interest rate risk exposure report, the Bank's required deduction from total risk-based capital available would have been $211 thousand. If the Bank would have been subject to the IRR capital component at June 30, 1995, as described previously, the Bank's total risk-based capital ratio would have declined from 14.56% to 14.48%.
As with any method of measuring interest rate risk, certain short comings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or period to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table.
The ability to reprice assets to the same level as liabilities is especially relevant to the Bank because of the volume of adjustable rate products that are tied to the 11th District COFI. Because this is a lagging index and does not rise as rapidly as current indices such as those based on U.S. Treasury rates, the Bank's net interest income is vulnerable over a time frame that allows the COFI to move up to current interest rate ranges. For example, while other rates, such as the yield on a one year treasury, increased from 3.61% at January 1, 1993 to 7.17% at December 31, 1994 an increase of 356 basis points, the COFI increased much more slowly from 3.82% at January 1, 1993 to 4.37% at December 31, 1994. Adding further to this issue of level of repricing, has been the Bank's reliance on short-term advances and reverse repurchase agreements from the FHLB of San Francisco. As of June 30, 1995, the Bank held $61.4 million in fixed rate FHLB advances and reverse repurchase agreements which are scheduled to mature in one year or less. Because all fixed rate FHLB advances are tied to current treasury rates this source of funding has and will continue to reprice more quickly than the COFI. Despite the level of repricing mismatch that the Bank will experience over the next year, the Bank's decision to hold in portfolio a significant volume of adjustable rate loans will help protect the Bank from rising interest rates over the longer term.
During the period of October 1, 1993 through March 31, 1995, a period of substantial rise in interest rates in which we witnessed seven increases by the Federal Reserve Bank, raising the Federal Funds rate from 3% to 6%, the Bank's net interest rate spread declined from 4.22% to 2.88%. It has become evident that COFI indexed assets alone have not and will not provide an adequate level of protection to the Bank's net interest margin during these periods of rapidly increasing interest rates. The reality of an extremely volatile interest rate environment has caused the Bank to re-evaluate its strategies aimed at controlling interest rate risk. Under this new phase of interest rate risk management the Bank will focus on another restructuring of the balance sheet to diversify indexes upon which assets will reprice to achieve a portfolio of assets which in aggregate will more closely correlate to the rate sensitivity of the liabilities funding those assets. The Bank has, on an incremental basis, been carrying out strategies aimed at limiting exposure to rising rates over the shorter term. As a result, the Bank has on its books as of June 30, 1995, approximately $17.6 million of assets which reprice to "current" indices such as prime and the one-year treasury rate. Further, the Bank has over the years been attempting to build a portfolio of more rate sensitive COFI based products such as those that adjust on monthly, rather than semi-annual basis. As a result of this strategy the Bank held in portfolio approximately $18 million of such loans and investments. Finally, the Bank has followed a strategy of enhancing the profitability of the Bank's originated COFI products by systematically increasing the margins, life-time caps and initial discount rates on such products.
The earnings of Northbay Savings Bank depend primarily upon the level of net interest income generated from the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on interest-bearing liabilities. Net interest income is a function of the interest rate spread, which is the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest- bearing liabilities as well as the average balance of interest-earning assets as compared to interest-bearing liabilities.
The following table sets forth certain information relating to the Bank's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material difference in the information presented. For purposes of this analysis, nonaccrual loans have been included in the average loan balance of interest-earning assets. The lack of interest income generated from these assets is reflected in a lower interest income which translates to a lower average yield earned on the related assets.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by old rate); (ii) changes in rates (change in rate multiplied by the change in volume).
COMPARISON OF YEAR ENDED JUNE 30, 1995 TO THE YEAR ENDED JUNE 30, 1994
General. For the year ended June 30, 1995, the Bank had net income of $1.9 million which represented a .50% return on average assets and a 5.6% return on average equity. For the year ended June 30, 1994, the Bank had net income of $3.3 million which represented a 1.00% return on average assets or a 9.95% return on average equity.
The following table is a summary of unaudited selected quarterly results of operations for the years ended June 30, 1995 and 1994:
Severe volatility in interest rate was the key factor to the Bank's decline in profitability. During the first six months of the year ended June 30, 1995, the Bank continued to witness a flattening of the yield curve (the differential between short-term rates and longer-term rates narrowed as a result of further increases in the short-term rates without corresponding increases in longer-term rates). While the offering rate on the 30-year fixed rate loans increased form 7.2% at December, 31, 1993, to 9.125% at December 31, 1994, an increase of 193 basis points, the rate on one year treasury notes increased from 3.68% at December 31, 1993, to 7.17% at December 31, 1994, an increase of 349 basis points. The Bank's inability to match the upward repricing, which occurred in its large volume of shorter-term retail deposits and Federal Home Loan Bank (FHLB) advances with similar increases in its loan and investment portfolios, resulted in a reduced interest rate spread.
During the next six month period ended June 30, 1995, inflationary pressures seemed to ease as a result of the previous interest rate increases, creating a significant downward shift in the entire yield curve. While the one-year treasury rate decreased form 7.17% at December 31, 1994 to 5.72% at June 30, 1995, the Bank's offering rate on the 30-year fixed rate loan decreased from 9.125% to 7.625% over the similar time frame. The net effect of this near 150 basis point parallel decline in the yield curve over this six month period was a stabilization and finally gradual improvement in the Bank's net interest rate spread. The resulting net interest rate spread decreased form 4.14% for the year ended June 30, 1994, to 2.88% for the year ended June 30, 1995.
The Bank's rather slow growth of retail deposits is a function of two factors. First, the Bank continued its policy of conservative pricing on savings rates. The strategy aimed at achieving a flow of funds from the most efficient source of retail savings funds versus wholesale funds in the form of Advances and Reverse Repurchase Agreements from the FHLB of San Francisco. The result of such a strategy has been to maintain an overall cost of funds considerably below the 11th District Cost of Funds thus enhancing the net interest rate spread. The moderate growth in retail deposits as well as the net growth of $24.5 million in the loan and investment portfolios for the year ended June 30, 1995, was supported by increases in FHLB of San Francisco advances and reverse repurchase agreements of approximately $20.1 million.
The last quarter ended June 30, 1994, and the remainder of the fiscal year ended June 30, 1995, marked a reversal of a generally declining interest rate environment in which the volume of loans being refinanced to lower paying fixed rate loans was tremendous. Principal payments received on longer term loans, which consist primarily of loans being refinanced, decreased from approximately $107 million in 1994 to approximately $82 million in 1995. This volume of refinancing had contributed to the Bank's yield on interest earning assets through the recognition of net deferred loan origination continue into 1996. First, exacerbating the lagging nature of the COFI index was the fact that the Bank was quite aggressive in its pricing of the COFI ARM product, offering discounted start rates of up to 200 basis points below the fully indexed rate. Deep discounted loans with a six month reset period and a 1% six month rate cap created an asset that continues to fall behind current market rates in a rapidly rising interest rate environment. From January 1, 1994 through September 30, 1994 the Bank originated approximately $80 million in loans at a discounted rate with a weighted average estimated at 4.5%. As of June 30, 1995 this pool of discounted COFI ARMS had a weighted average rate of approximately 5.90%, fully indexed these loans would be yielding approximately 7.70%. Should rates remain completely static from this point forward over the next twelve month period this portfolio of discounted loans would still reprice upward by approximately 180 basis points based upon the COFI index of 5.14% at June 30, 1995.
Although the discounted ARMS negatively affected the Bank's interest rate spread, the Bank was successful in achieving three of its strategic goals in generating this volume of discounted ARMS. First, the Bank was successful in further leveraging its capital, reducing equity as a percentage of assets from 9.24% at June 30, 1994 to 8.82% at June 30, 1995. Equity, while still far in excess of regulatory requirements , has now been put to work generating a greater volume of interest earning assets which are now beginning to achieve positive returns for the Bank. Second, the Bank was successful in leveraging its operations. The Bank was able to decrease operating expenses as a percentage of average assets for the year ended June 30, 1995 to 2.36% from 2.78% in 1994. The Bank achieved this leverage in operating expenses by growth in operating expenses at less than 1%. Third and finally, the Bank took advantage of an opportunity to meet a consumer demand for adjustable rate mortgage financing while at the same time adding a high quality interest earning asset that met the requirements of the Bank as a portfolio lender. The structure of the Bank's loan port- fees. These loan origination fees are normally deferred at the time of origination and amortized as a yield adjustment over the life of the associated loans. Loan fees recognized into income as a yield adjustment remained in a relatively high range between the years of heavy refinance from 1992 through 1994. Deferred fees of approximately $1.46 million were recorded during the year ended June 30, 1994, compared to $1.17 million for the year ended June 30, 1995, a year that was absent of a significant volume of loans being refinanced.
The reduction in fees as a result of declining refinance activity is masked somewhat by the increased volumes of discount adjustable rate loans originated late in fiscal year 1994 and early in 1995. When adjustable rate loans are booked at a discount the Bank follows a policy of recognizing loan fees is a level yield based upon the fully indexed note rate. Under this methodology deferred fees on such discounted loans are usually recognized into income over a period of a few months rather than the life of the loan. As the Bank's volume of new origination discounted ARM loans slowed the yield adjustment from this source quickly disappeared. The Bank estimates that approximately $285 thousand of such loan fees were recognized during the first six months of the fiscal year ended June 30, 1995.
Despite the decline in the Bank's net interest margin for the fiscal year ended June 30, 1995, to 2.88% from 4.14% for 1994, after experiencing seven consecutive quarters of decline in its net interest margin, that decline stabilized during the third quarter of 1995 and the margin widened during the fourth quarter of fiscal 1995. There were a number of factors contributing to the decline in the net interest spread during the fiscal year ended 1995 and a number of reasons why management believes the current trend of a widening spread will folio remains heavily weighted with adjustable rate loans. At June 30, 1995, the Bank held in portfolio approximately $283 million or 82% of the total portfolio in adjustable rate loans. Despite the fact that the majority of each adjustable rate loans adjust in six month intervals and are indexed to the FHLB 11th District COFI, an index which lags more current indices, these loans will continue to gradually reprice upward even after other indices remain static. While the one year treasury rate declined from 7.17% at December 31, 1994 to 5.72% at June 30, 1995, the COFI has continued to increase during this same period of time from 4.37% to 5.14%.
Interest Income. Net interest income before provision for loan losses was approximately $11.7 million for the year ended June 30, 1995, a decrease of $2 million or 14.6%, from $13.7 million recorded in 1994. The decline in net interest income can be attributed in large part to a year of volatile shifts in the direction of interest rates. First, during a period of generally rapidly rising interest rates, the Bank was unable to match the upward repricing of its short-term liabilities with similar increases in its loan and investment portfolios. This inability to reprice assets to the degree of liabilities relates to two specific characteristics of the adjustable rate loan portfolios. First, as has already been documented, interest rate increases were inhibited due to the lagging nature of the COFI to which the majority of the Bank's assets are tied. Second, the small increases that were taking place in the ARM portfolio were inhibited by both six-month adjustment periods, and periodic caps of 1%. With a 1% periodic cap, assuming COFI matched treasury increases (which it did not), while the one-year treasury note increased 350 basis points over a one year period, the Bank's ARM portfolio inhibited by the periodic rate caps would have increased by only 200 basis points or less than 60% of the current market rate change.
The result of the rising interest rate environment and the inability of the Bank's assets to reprice in concert with other "current" market rates was a decline in the net interest rate spread from 4.14% during the fiscal year ended June 30, 1994 to 2.88% for the fiscal year ended June 30, 1995. The average rate on interest bearing liabilities for the year ended June 30, 1995 increased almost 100 basis points from 3.15% to 4.13% for the year ended June 30, 1995, while the average yield on interest-earning assets declined from 7.29% in 1994 to 7.01% in 1995. The increase in total interest income for the year ended June 30, 1995 of approximately $3.2 million, can be attributed to the large volumes of discounted adjustable rate single family loans originated in late fiscal 1993 and early fiscal 1994. The increase in the average volume of the loan portfolio of $50 million over 1994 was at substantially reduced rates which failed to keep pace with the rising market interest rates paid on liabilities to support those assets. While total interest income increased by $3.2 million total, the corresponding increase in interest expense generated from liabilities to support these assets increased by $5.2 million.
Although the Bank's overall cost of interest bearing liabilities increased at a much greater rate than the interest earning assets, the Bank's cost of retail deposits as anticipated did in fact move in concert with the 11th District COFI. While the 11th District COFI increased from 3.73% at June 30, 1994 to 5.14% at June 30, 1995, an increase of 141 basis points, the Bank's cost of retail deposits increased from 3.10% to 4.40% or 130 basis points during this same period of time. However there was a definite cost associated with the ability to maintain a low cost of retail savings funds. The cost of maintaining a low cost retail deposit base was realized in the form of higher interest expense and greater exposure to rising interest rates that resulted by supplementing lack of growth in retail savings with short-term borrowings which repriced with current treasury rates. The average volume of borrowed funds which consisted of advances and reverse repurchase agreements with the FHLB of San Francisco increased from $29.5 million with a weighted average rate of 3.54% during the year ended June 30, 1994, to an average volume of $73 million with a weighted average rate of 5.63% during the similar year ended June 30, 1995.
Provision for Losses on Loans. During the year ended June 30, 1995, the Bank recognized $412 thousand in provision for possible loan losses, compared with $725 thousand in 1994. The decrease in provision for loan loss reserves can be attributed to two factors which positively impacted the assessment of the Bank's credit risk on its loan portfolio. First, the Bank experienced a significant decline in nonperforming assets from approximately $4.5 million or 1.23% of total assets at June 30, 1994, to $2.9 million or .74% of total assets as of June 30, 1995. Second, the Bank experienced a decline in the portfolio of more risk-oriented construction, commercial, and concentration of loans to a single borrower. For example, total gross construction, land and commercial real estate loans declined from $103.3 million at June 30, 1994 to $74.8 million at June 30, 1995, a decline of $28.5 million or 28%. The charge-offs of $266 thousand during the fiscal year ended June 30, 1995 are reflective of the Bank's policy of analyzing all troubled assets and recording a write down to the value of those assets to the estimated fair value at the time the Bank becomes aware of any deterioration in the value. The Bank adheres to a stringent internal modeling policy that dictates the level of general valuation allowances. Among several of the portfolio criteria that are evaluated are, concentration of risk weighted portfolio assets, concentration of credit to a single borrower, and level of adversely internally classified assets. The provision of $412 thousand for the year ended June 30, 1995, is reflective of a decline in concentration of risk weighted assets, and concentration to a single borrower. Virtually all of the growth within the Bank's loan portfolio during the year ended June 30, 1995, was in the less risk oriented category of mortgage loans secured by the borrowers' primary residence.
Management believes that the current level of loan loss reserves, which stands at $2.2 million or .64% of the total loan portfolio, provides the Bank with a pool of reserves to adequately reflect the unforseen credit losses within the portfolio. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for losses on loans and real estate owned. Such agencies may require the Bank to recognize additions to the allowance based on their judgement or information available to them at the time of their examination.
Noninterest income. Despite a decline in noninterest income of $337 thousand or 26%, from $1.29 million for the year ended June 30,[PICTURE] 1994 to $949 thousand for the same period in 1995, the decline is concentrated in the categories of nonrecurring income such as gains or loss on the sales of loans, investment securities, and association premises. Due to a year of generally rising interest rates and the corresponding lack of consumer demand for fixed rate mortgage financing, the Bank's ability to generate and sell such long-term fixed rate loans in the secondary market has been eliminated. As a result, the Bank completed no sales of such loans or mortgage-backed securities in the secondary markets during the year ended June 30, 1995, compared to sales of approximately $25 million and corresponding gains of $161 thousand in 1994. The decline of $251 thousand in gains on sales of investment securities relates primarily to the sale of stock of the Federal Home Mortgage Corporation (FHLMC). The Bank sold 9,000 shares of FHLMC, recognizing gains of $403 thousand during the year ended June 30, 1994, compared to the sale of the final block of stock being held by the Bank of 3,000 shares in 1995, upon which the Bank recognized a gain of $116 thousand. Finally, during the fiscal year ended June 30, 1995, the Bank recorded a loss of $51 thousand on the disposal of a property located in downtown Santa Rosa which the Bank had acquired previously with the intention of constructing a Bank Branch thereon.
Conversely, noninterest income from recurring core business operations under the categories of service charges and "other" income increased in aggregate from $924 thousand in 1994 to $1.02 million for 1995, an increase of $98 thousand or 10.6%. A decline in service fees associated with loan servicing of $36 thousand as a result of less problem loans was more than offset by an increase of $63 thousand in fees relating to deposit account services. The increase in service fees on retail savings represents the initial results of an increased pricing policy implemented late in fiscal 1995 to more accurately reflect the cost of services provided. An increase of $71 thousand in the category of "other" income represents increased fees from a third party vendor in compensation for sale of official check products. This category was further enhanced by rental income generated from the rent of foreclosure properties which the Bank owns. The final significant enhancement to this line item is the increased volume of sales of alternative investment products. Through its contractual agreement with Primevest Financial Services, an independent broker-dealer the Bank offers full-service brokerage capabilities at each of its branch offices.
Adding positively to noninterest income, is the decline in the write down of deferred servicing premiums of $27 thousand for the fiscal year ended June 30, 1995 compared to 1994. This write down decreased from $31 thousand for the year ended June 30, 1994 to $4 thousand for the year ended June 30, 1995. When loans are sold and the right to service those loans is retained, the gain or loss recognized is based upon the net present value of expected cash flows to be received resulting from the difference between the contractual interest rates received from the borrower and the rates paid to the buyer. The related deferred charge (deferred premium on loans sold) is amortized to operations over the estimated remaining life of the loan as a yield adjustment. The decline in the write down of this asset in 1995 can be attributed to the fact that more severe write downs had been taken in the previous periods when interest rates were declining and the underlying loans were prepaying at a more rapid rate. In the current market of rising interest rates, the assumption as to the estimated life of the loans sold is adjusted, on a quarterly basis, to reflect the most recent market expectation of the life and value of the expected cash flows to be received from this asset. At June 30, 1995, the remaining value of the asset is only $51 thousand.
The Bank recognized net losses of $134 thousand for the year ended June 30, 1995 compared to a net loss of $137 thousand for the year ended June 30, 1994, on the resolution of properties acquired through foreclosure. During the year ended June 30, 1995, the Bank completed the disposal of five properties acquired as a result of foreclosure on which losses upon liquidation totaled $61 thousand. The Bank additionally recorded permanent valuation write downs on five properties being held to reflect the fair market value of those properties in a market in which real estate sales remain slow.
Noninterest Expense. The Bank's attention to the control of operating expenses is evident in the nominal increase in noninterest expense of $46 thousand or .5% over the similar year ended June 30, 1994. Compensation and employee benefits, the largest component of noninterest expense, increased to $4.30 million for the year ended June 30, 1995 from $4.28 million for the comparable year ended June 30, 1994, an increase of .5%. Contributing to the control of compensation and benefits has been the elimination of officer bonus incentives which are based upon the Bank's ability to achieve various levels of operating results, as well as reductions in the loan origination area as a result of reduced loan origination volumes.
The increase in data processing expense from $546 thousand for the year ended June 30, 1994 to $591 thousand for the similar year ended June 30, 1995, can be attributed to an increase volume of data being processed as well as scheduled increases in the cost of data services provided by an independent service bureau.
The decrease in advertising and supplies of $103 thousand or 25% can be attributed equally to cutbacks in stationary, printing and supplies, and advertising expense. These declines are reflective of the Bank's efforts throughout the year to be more selective in targeting its advertising efforts.
Other operating expense which includes such expenditures as other insurance premiums, legal, accounting, telephone, postage, and miscellaneous loan origination expense, increased from $1.66 million for the year ended June 30, 1993 to $1.68 million for the similar year ended June 30, 1995. Declines in other operating expenses spread over a broad range of expenditures as including telephone, postage, employee expenses were more than offset by increased consultant and legal expenses relating to strategic planning and new regulatory issues.
Income Taxes. On February 10, 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 109, entitled Accounting for Income Taxes. This statement which supersedes SFAS 96 and changed the criteria for recognition and measurement of deferred tax assets and various other requirements of SFAS 96 and reduces its complexity. Under SFAS 109 deferred tax liabilities are recognized on all taxable temporary differences, and deferred tax assets are recognized on all deductible temporary differences, operating loss and tax credit carry-forwards. Valuation allowances are recognized to reduce deferred tax assets if it is determined to be "more likely than not" that all or some portion of the potential deferred tax assets will not be realized. Other significant changes made by SFAS 109 include: (1) the comprehensive scheduling of temporary differences required by SFAS 96 will not be required; (2) a deferred tax asset may be recognized for the financial statement general valuation allowance for loans and real estate owned, while a deferred tax liability must be recognized for the portion of the tax bad debt reserve exceeding the "base year" reserves; (3) tax-planning strategies must be prudent and feasible, and; (4) tax benefits recognized as a result of all tax planning strategies should be net of any expense or losses.
The cumulative effect to July 1, 1993 of adopting SFAS 109, which resulted in a cumulative tax benefit of $220 thousand to the Company, has been shown as a separate item in the accompanying statement of operations for the year ended June 30, 1994. The adoption of this accounting method did not have a material impact on income tax expense and net income before the cumulative effect of adopting SFAS 109 for 1994 over the amount that would have been recorded under SFAS 96.
The Bank provided $1.3 million for income taxes for the year ended June 30, 1995, compared to $2.07 million for the year ended June 30, 1994. The effective tax rate decreased to 36.8% in 1995, from 40.3% in 1994. The decreased effective tax rate in 1995 can be attributed primarily to an increased tax benefits derived from investments in low income housing tax credits in relation to a smaller pre-taxable income base.
COMPARISON OF YEAR ENDED JUNE 30, 1994 TO THE YEAR ENDED JUNE 30, 1993
General. For the year ended June 30, 1994, the Bank had a net income of $3.3 million which represented a 1.00% return on average assets and a 9.95% return on average equity. For the year ended June 30, 1993, the Bank had net income of $3.7 million which represented a 1.24% return on average assets or a 12.45% return on average equity.
Severe volatility in the direction of interest rates was the key fac- the quarter ended March 31, 1994, we began to see a significant decline in the volume of loans being refinanced.
The Bank's net interest margin for the fiscal year ended June 30, 1994 had declined to 4.14% from 4.87% for 1993. The pressure on interest margins was coming from two sources. First, the Bank had previously repriced down its short-term retail deposits and had no latitude for further downward adjustments even though longer-term rates continued down. Second, the Bank continued to experience refinancing of its higher rate fixed rate loans as well as downward tor to the Bank's decline in profitability. During the first six months of the year ended June 30, 1994, the Bank witnessed a flattening of the yield curve (the differential between short-term rates and longer-term rates narrowed as a result of further declines in the long-term rates without corresponding declines in shorter-term rates). While the interest rate on the 30-year fixed rate loans declined from 8.10% at December 31, 1992 to 7.2% at December 31, 1993, a decline of 90 basis points, the weighted average rate earned on overnight Federal funds sold actually increased marginally from 2.42% for the month ended December 31, 1992 to 2.53% for the month ended December 31, 1993. The Bank's inability to match the downward repricing which occurred in its loan and investment portfolios with a similar downward repricing on its large volume of shorter-term retail deposits resulted in a reduced interest rate spread.
During the next six-month period ended June 30, 1994, inflationary fears created a strong upward shift in the entire yield curve. While the two-year treasury rate increased from 4% in January 1994 to approximately 6% by June 30, 1994, the Bank's interest rate on the 30-year fixed rate loan increased from 7.2% to 8.75% over the similar time frame. The net effect of this near 200 basis point parallel rise in the yield curve over that six-month period was a further decline in the net interest margin due to the Bank's inability to match the upward repricing of liabilities with assets. The resulting net interest rate spread decreased from 4.87% for the year ended June 30, 1993 to 4.14% for the year ended June 30, 1994.
It is noteworthy that in 1994, a year of generally low interest rates, in which the thrift and banking industry in general had been shrinking in terms of volume of retail deposits, the Bank was successful in increasing its retail savings deposit base by approximately $21.8 million or 8.5% over the deposit base at June 30, 1993. Further, in an effort to enhance the retail branch network, and continue to provide quality banking services and affordable home financing within its market area, the Bank opened a new full-service branch office in downtown Santa Rosa. The Bank believed the benefits of expanding the branch network in the Santa Rosa market outweighed the costs of opening a new branch on a de novo basis.
The Bank continued to follow a strategy of protecting its interest margins as opposed to pursuing growth with higher rate paying retail deposits. This Strategy had contributed to the Bank's ability to maintain a low cost of funds. The moderate growth in retail deposits as well as the net growth of $47 million in the net loan portfolio for the year ended June 30, 1994, was supported by increases in FHLB of San Francisco advances of approximately $28.5 million.
During the first nine months of the fiscal year ended June 30, 1994, the Bank continued to experience a tremendous volume of loans being refinanced. This trend was a continuation of the previous two years of generally declining interest rates. This volume of refinancing had contributed to the Bank's yield on interest-earning assets through the recognition of net deferred loan origination fees. Principal payments received on longer-term loans which consist primarily of loans being refinanced remained at a very high level increasing from $103 million in 1993, to $107 million in 1994. With the upward movement in interest rates experienced near the end of borrowing, which consisted mainly of FHLB advances, grew from $16 million during the year June 30, 1993 to $29.5 million for the similar year ended June 30, 1994. Due to the fact that most of those short-term borrowings are indexed to current treasury yields, when rates shifted upward, a source of funding repriced fully to current market conditions. While the yield on retail savings had declined by 50 basis points for the year ended June 30, 1994 the average yield on other borrowing increased by 8 basis points.
Provision for Losses on Loans. During the year ended June 30, 1994, the Bank recognized $725 thousand in provision for possible loan losses, compared with $722 thousand in 1993. The similar provision for loan loss reserves represented the Bank's calculation of the credit risk of the loan portfolio as well as charge-offs of approximately $475 thousand in specific problem assets. The provision of $725 thousand as well as charge-offs of $475 thousand during the fiscal year ended June 30, 1994, were representative of a real estate market which had remained somewhat soft during the first nine months of the fiscal year adjustments on its adjustable rate portfolio.
The Bank made significant progress toward attaining goals of leveraging both capital and operations. Despite the addition of a new full-service retail savings branch office, a facility to consolidate and house loan administration and origination functions, and a full fiscal year's operation in a new administration facility, the Bank was able to decrease operating expenses as a percentage of average assets for the year ended June 30, 1994 to 2,78% from 2.88% in 1993. The Bank was successful in leveraging operating expenses by growth in terms of assets by 17% while only expanding operating expenses by 5.4%. Similarly, the Bank was successful in leveraging capital through growth of financial assets and liabilities at a positive spread, earning incremental revenues for the shareholders. Equity, while in excess of regulatory requirements was reduced as a percentage of assets at June 30, 1994, to 9.24%, compared to 10.03% at June 30, 1993.
During yet another period of slow economic growth in which unemployment levels had remained high and consumer confidence low, the Bank resolved to increase its commitment to the community to help provide affordable housing. During the year ended June 30, 1994, the Bank committed approximately $5 million in loans with favorable rates to finance low-income housing projects in its market area.
Interest Income. Net interest income before provision for loan losses was approximately $13.7 million for the year ended June 30 1994, a decrease of $950 thousand or 6.5%, from $14.6 million recorded in 1993. The decline in net interest income was attributed in large part to a year of volatile shifts in the direction of interest rates. During this period of generally declining interest rates and a period of historically low interest rates, the Bank was unable to price downward short-term liabilities to match the further declines in the rates earned on longer-term interest-earning assets. The average rate on interest- bearing liabilities for the year ended June 30, 1994 declined to 3.15% from 3.60% for the year ended June 30, 1993, while the average yield on interest- earning assets due to refinancing and downward adjustments on adjustable rate products declined more rapidly from 8.47% in 1993 to 7.29% in 1994. Further exacerbating the decline in yield on interest-earning assets was the volume of lower rate adjustable rate loans originated in the quarter ended June 30, 1994. With the increase in interest rates late in the quarter ended March 31, 1994, there was an abrupt change in consumer demand from fixed rate loans to lower rate adjustable loans indexed to the 11th District COFI. The Bank added approximately $36 million in such adjustable rate loans with a weighted average yield of approximately 6.20%. Total interest income for the year ended June 30, 1994 had declined by approximately $1.3 million or 5.5% to $22.9 million. The increase of $28.1 million, or 9.8%, in the average balance of interest-earning assets for the year ended June 30, 1994, as compared to the year ended June 30, 1993, was offset somewhat by the decline in yield of 118 basis points to 7.29%.
The significant decrease in interest expense on retail savings of $878 thousand due to the decline in yield of 50 basis points below the similar yield in 1993, was offset in large part by the Bank's use of FHLB advances to fund loan growth. The average balance of other held for sale and write downs to record various mutual funds held in the Bank's investment portfolio as held for sale and accounted for at fair market value of $33 thousand. That compared to a $77 thousand gain recorded on the sale of an intermediate term bond fund recognized during the year ended June 30, 1993.
Second, the Bank's recognition of gains on the sale of loans and mortgage-backed securities had declined from $427 thousand for the year ended June 30, 1993 to $161 thousand for the similar year ended June 30, 1994. Although the volume of loans sold during 1994 was down to $25 million from $34.6 million in 1993, the gains recognized from sales combined with recognition of deferred fees on those loans was consistent at $464 thousand in 1994 and $427 thousand in 1993. However, the gains of $464 thousand recorded in 1994 were offset by write downs of $303 thousand to record loans held for sale at the lower of cost or market value. The majority of this market valuation adjustment occurred during the quarter ended March 31, 1994. That adjustment was due to a dramatic increase in long-term interest rates which had caused some loans originated and held for ended June 30 1994. The local real estate market seemed to have bottomed out in 1993 and was reflected in the ratio of nonperforming assets to total assets of 1.71% at March 31, 1994. In the quarter ended June 30, 1994, the Bank made significant progress in reducing the volume of troubled assets and the ratio of nonperforming assets to total assets declined to 1.23%. The charge-offs of $475 thousand during the fiscal year ended June 30, 1994 was reflective of the Bank's policy of analyzing all troubled assets and recording a write down to the value of those assets to the estimated fair value at the time the Bank becomes aware of any deterioration in the value. In establishing the level of reserves, several criteria are reviewed. Among the portfolio criteria that are evaluated are: concentration of risk-weighted portfolio assets, concentration of credit to a single borrower, and level of adversely internally classified assets. Despite an increase in troubled assets, the provision of $725 thousand for the year ended June 30 1994, was reflective of a decline in concentration of risk- weighted assets, and concentration to a single borrower. Virtually all of the growth within the Bank's loan portfolio during the year ended June 30, 1994 was in the less risk oriented category of mortgage loans secured by the borrower's primary residence.
Management believes that the level of loan loss reserves, which stood at $2.1 million or .65% of the total loan portfolio, provided the Bank with a pool of reserves to adequately address the inherent credit losses within the portfolio. While management used available information to recognize losses on loans and real estate owned, additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for losses on loans and real estate owned. Such agencies may require the Bank to recognize additions to the allowance based on their judgement of information available to them at the time of their examination.
Noninterest income. Despite the relatively small change in noninterest income which had decreased by $49 thousand or just 3.7%, from $1.34 million for the year ended June 30, 1993 to $1.29 million for the same period in 1994, the sources of that noninterest income had changed significantly.
First, the Bank had taken advantage of historically high valuations with the equity markets, electing to realize a gain in the price of its stock held for sale in the Federal Home Loan Mortgage Corporation (FHLMC). The Bank sold 8,000 shares of FHLMC stock, recognizing gains of $403 thousand. That gain was offset somewhat by a loss of $8 thousand recorded on the sale of a fixed income mutual fund in interest rates to decline in market value at March 31, 1994. During the quarter ended June 30, 1994, the Bank had elected to reclassify all permanent loans held for sale, totaling $6 million, to be held for investment. At the same time the Bank altered its policy regarding the classification of current production of all mortgage loan products. The current and revised policy states that current production of all permanent mortgage loans will be held to maturity. The Bank may at some future period determine that the economic benefits of originating such loans for sale in the secondary markets will benefit shareholder value, therefore this policy remains subject to change. The Bank had taken this action for the following reasons: (1) having written down the value of those assets to the lower of cost or market at March 31, 1994, during a period of rapidly rising rates, the Bank believed there was a greater economic value in holding those loans to maturity rather than selling the assets at a substantial discount into a market that may be overreacting to inflationary threats; and (2) upon review of the Bank's concentration of assets and a favorable exposure to a long-term rising interest rate environment, the addition of those predominantly fixed rate loans provided an acceptable diversification on to the volume of adjustable rate loans within the portfolio. Gains on sales of loans and mortgage-backed securities may not be available to the Bank as a source of revenue under the current policy.
Third, a significant variation in noninterest income appeared in the write down of deferred servicing premiums. The write down decreased from $178 thousand for the year ended June 30, 1993 to $31 thousand for the year ended June 30, 1994, a decrease of $147 thousand. When loans are sold and the right to service those loans is retained, the gain or loss recognized is based upon the then difference between the contractual interest rates received from the borrower and the rates paid to the buyer. The related deferred charge (deferred premium on loans sold) is amortized to operations over the estimated remaining life of the loan as a yield adjustment. The decline in the write down of this asset in 1994 can be attributed to the fact when interest rates were declining more rapidly. In a market of rising interest rates the assumption as to the estimated life of the loans sold is adjusted on a quarterly basis to reflect the most recent market expectation of the life and value of the expected cash flows to be received from this asset. At June 30, 1994 the remaining value of the asset was only $58 thousand.
Fourth, the Bank recognized net losses of $137 thousand for the year ended June 30, 1994, compared to a net gain of $2 thousand for the year ended June 30, 1993, on the disposition of properties acquired through foreclosure. During the year ended June 30, 1994, the Bank completed the disposal of three properties acquired as a result of foreclosure. The majority of that loss was concentrated within one subdivision land loan which experienced the greatest effect of the declining value of land in a soft real estate environment.
Fifth, and finally, the gain on sale of premises had dropped from $117 thousand for the year ended June 30, 1993 to $0 during the similar year ended June 30, 1994. As a result of the Bank's consolidation of administration functions into a newly leased facility in the year ended June 30, 1993, the Bank elected to sell a facility previously utilized to house various administrative divisions. The sale of this facility resulted in a nonrecurring gain during the year ended June 30, 1993.
Noninterest Expense. Noninterest expense had increased by approximately $470 thousand or 5.4%, to $9.1 million for the year ended June 30, 1994, compared to $8.7 million in 1993. Compensation and employee benefits, the largest component of noninterest expense, increased to $4.3 million for the year ended June 30, 1994 from $3.9 million for the comparable year ended June 30, 1993, an increase of 8.4%. The Bank had experienced a similar increase in occupancy related expenses, which increased by $92 thousand or 8.4% during the year ended June 30, 1994, compared with the similar period in 1993. The increases in compensation and other employee benefits as well as occupancy and depreciation, were due in part to the addition of the new retail savings branch in the city of Santa Rosa, California, added in February of 1994, a full year's operation of a new branch administration facility opened in December of 1992, and the opening of a new loan administration office in Santa Rosa, California, in to the tax benefits derived from investments in low income housing tax credits in relation to a smaller pretaxable income base. Further reductions in the provision for income tax was attributed to the implementation of SFAS 109, which allowed recognition of deferred tax assets for financial statement general valuation allowance.
Under current OTS regulations, the Bank is required to maintain liquid assets as 5% or more of its net withdrawable deposits plus short-term borrowings. The Bank has at all times maintained liquidity levels in excess of that required by regulation. At June 30, 1995, the Bank's liquidity ratio was 6.41%.
The principal sources of liquidity are deposit accounts, short-term borrowings, principal and interest payments on loans, proceeds from the sale of loans and mortgage-backed securities, and interest and dividends on investments. The Bank uses its capital resources principally to fund real estate and consumer loans, purchases of mortgage-backed and investment securities, repay maturing borrowings, fund maturing savings certificates and to provide for maintenance of its liquidity.
Deposits were approximately $283.9 million at June 30, 1995, a net increase of approximately $7 million from 1994. The Bank's net (decrease) increase in deposits (including interest credited) for the years ended June 30, 1993, 1994 and 1995 was approximately, ($263) thousand, $9.9 million, and $7 million respectively. The liquidity ratio over the past two fiscal years has been
September 1993. Further increases in compensation and other employee benefits were due to the additional staffing of experienced personnel to strengthen the Bank's loan divisions. Additional increases in depreciation on which had increased from $376 thousand for the year ended June 30, 1993 to $454 thousand for the similar year ended June 30, 1994, were attributed to the Bank's capital expenditures undertaken during the previous fiscal year to position the Bank for growth in future periods. Those capital expenditures included leasehold improvements on the newly acquired facilities as well as depreciation of furniture and fixture necessary to carry out operations in those facilities.
The increase in data processing expense from $515 thousand for the year ended June 30, 1993 to $546 thousand for the similar year ended June 30, 1994, was attributed to an increased volume of data being processed as well as scheduled increases in the cost of data services provided by an independent service bureau.
Other operating expense which includes such items as other insurance premiums, legal, accounting, telephone, postage, and miscellaneous loan origination expense, declined from $1.75 million for the year ended June 30, 1993 to $1.66 million for the similar year ended June 30, 1994. The decline in other operating expense was spread over a broad range of expenditures as indicated above and relates to some more favorable contracts negotiated with vendors as well as the orchestrated effort at cutting operating expense.
Income Taxes. The Bank provided $2.07 million for income taxes for the year ended June 30, 1994, compared to $2.86 million for the year ended June 30, 1993. The effective tax rate had decreased to 40.3% in 1994, from 43.3% in 1993. The decrease in 1994 was attributed in part relatively low level, decreasing slightly from 6.85% at June 30, 1994 to 6.41% at June 30, 1995.
Principal payments on loans and mortgage-backed securities decreased to $82.9 million for the year ended June 30, 1995 from $111 million for the year ended June 30, 1994, and $106 million for the year ended June 30, 1993.
Net loans receivable increased to $343.9 million at June 30, 1995 from $324.7 million at June 30, 1994, and $277.7 million at June 30, 1993. The Bank originated $101.6 million in loans for the year ended June 30, 1995, compared to $166.6 million in loans for the year ended June 30, 1994, and $160.7 million for the year ended June 30, 1993. As of June 30, 1995, the Bank had commitments to originate and purchase loans totaling approximately $29.9 million.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the bank's assets and liabilities are critical to the maintenance of acceptable performance levels.
The Board of Directors and Stockholders Northbay Financial Corporation:
We have audited the accompanying consolidated statements of financial condition of Northbay Financial Corporation (the "Company") and Subsidiary as of June 30, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northbay Financial Corporation and Subsidiary as of June 30, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1995, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 10 to the Consolidated Financial Statement, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in 1994.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
See accompanying notes to consolidated financial statements.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY YEARS ENDED JUNE 30, 1995, 1994 AND 1993
See accompanying notes to consolidated financial statements.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1995, 1994 AND 1993
See accompanying notes to consolidated financial statements.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1995, 1994 AND 1993
See accompanying notes to consolidated financial statements. NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following items set forth the significant accounting policies not disclosed elsewhere in the notes to the consolidated financial statements, which Northbay Financial Corporation and Subsidiary (the "Company") follow in preparing and presenting its consolidated financial statements.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Northbay Savings Bank, F.S.B. (the "Bank"). All intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles.
(B) INVESTMENT SECURITIES, MORTGAGE-BACKED SECURITIES AND INVESTMENTS IN
In accordance with the Office of Thrift Supervision (OTS) regulations, the Company maintains an amount at least equal to a specified percentage of average daily withdrawable savings accounts plus short-term borrowing in U.S. Government and other approved securities that are readily convertible to cash.
In May 1993, Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS 115, institutions are required to classify investments in debt securities and equity securities as "held to maturity," "trading," or "available-for-sale." SFAS 115 modifies the current accounting treatment for debt and equity securities by replacing the "held-for-sale" categorization (with lower-of-cost or market accounting treatment) with an "available-for-sale" categorization (with fair value accounting treatment). Further, it imposes strict criteria over securities accounted for as "held-to-maturity." The Bank elected to adopt SFAS 115 on June 30, 1994. Upon the adoption of SFAS 115, debt securities that may not be held until maturity and marketable equity securities are considered available-for-sale and as such are classified as securities carried at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of stockholders' equity. Declines in the value of debt securities and marketable equity securities that are considered other than temporary are recorded in noninterest income as loss on investment securities. The market value of securities were determined by quotes from primary securities dealers, whenever available, or by other estimates.
Prior to June 30, 1994, securities were classified as held-for-sale or held-for-investment, based upon management's intent and ability at the time of purchase. Assets held for investment purposes, other than marketable equity securities were accounted for at cost, net of any unamortized premiums or discounts. Marketable equity securities were carried at the lower of cost or market. Securities that did not meet the reporting criteria for investment were designated as held-for-sale and are accounted for at the lower of cost or market.
Interest and dividends on investment securities includes interest earned on investment securities, related amortization of premiums and discounts, and dividends earned on stock of the Federal Home Loan Bank of San Francisco and stock of the Federal Home Loan Mortgage Corporation. Gains or losses on sales of securities are recognized at the time of sale using the specific identification method.
Interest on loans is credited to income when earned. Interest is reserved on loans that are 90 days or more delinquent, or considered to be uncollectible or are in the process of foreclosure.
(D) OFFICE PROPERTY, EQUIPMENT AND LEASEHOLD
Depreciation and amortization of office property, equipment, and leasehold improvements are computed using the straight-line method over the estimated useful lives of the various classes of assets or lease life, whichever is shorter. Maintenance and repairs are charged to expense and improvements are capitalized. Gains and losses on dispositions are credited or charged to operations.
(E) INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank of San Francisco and, as required, owned 32,914 shares and 23,154 shares at June 30, 1995 and 1994, respectively, of its $100 par value capital stock. The Bank is required to own capital stock in the FHLB of San Francisco in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid single family mortgage loans and similar obligations at the end of each calendar year or 5% of its advances (borrowings) from the FHLB of San Francisco. The Bank was in compliance with this requirement at June 30, 1995.
The Bank changed its method of accounting for income taxes in 1994 to the asset and liability method to conform with SFAS 109, "Accounting for Income Taxes." The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting bases and the tax bases of assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Under SFAS 109, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards, and then a valuation allowance is established to reduce that deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized.
The Company recognized loan origination fees as an adjustment of the loan's yield over the life of the loan using a method which approximates the interest method, which results in a constant rate or return. Certain direct costs of originating the loan are deferred and recognized over the life of the loan as a reduction of the yield.
(H) VALUATION OF LOANS AND REAL ESTATE OWNED (REO)
Provisions for estimated losses on loans and real estate owned are charged to operations when, in the opinion of man-
(I) IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for impaired loans. In June 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.114, agement, such losses are expected to be incurred. Management evaluates the carrying value of such assets regularly and the allowances are adjusted accordingly. The Bank currently utilizes a modeling technique that analyzes several factors identified as posing additional credit risk to the Bank's loan portfolio. Such factors include concentration of risk-weighted assets in the portfolio, historical loss experience, concentration of loans to a single borrower, and assets with an adverse internal classification.
Management believes that the allowance for losses on loans and REO are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for losses on loans and real estate owned. Such agencies may require the Bank to recognize additions to the allowance based on their examination.
Real estate owned is comprised of properties acquired through settlement of loans. At time of foreclosure, real estate owned is accounted for at the lower of the recorded investment or fair market value. Subsequent to foreclosure, real estate owned is accounted for at the lower of the new cost basis or fair market value less estimated selling costs. Costs relating to maintenance of the properties are expensed as incurred. Valuations are performed periodically by management and losses are established by a charge to operations if the carrying value exceeds its estimated disposition value.
(i) SALES OF LOAN PARTICIPATION AND MORTGAGE-BACKED
Gains or losses resulting from sales of mortgage-backed securities and loans or interests in loans are recorded at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the assets sold. When the right to service the loans is retained, the gain or loss recognized is based upon the net present value of expected amounts to be received or paid resulting from the difference between the contractual interest rates received from the borrowers and the rate paid to the buyer plus a normal servicing fee. The related deferred charge (i.e., premium on loans sold) or credit is amortized to operations over the estimated remaining life of the loan using a method that approximates the interest method. Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income.
(j) STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers cash on hand, cash in banks, interest-earning deposits and Federal funds sold (with original maturities of three months or less) as cash and cash equivalents.
Certain of the 1994 and 1993 financial statement amount have been reclassified to conform to the 1995 presentations. "Accounting by Creditors for Impairment of a Loan." SFAS 114 required that expected loss of interest income on nonperforming loans be taken into account when calculating loan loss reserves.SFAS 114 required that specified impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. SFAS 114 did not apply to large groups of small balance, homogeneous loans that are collectively evaluated for impairment. SFAS 114 was amended during 1994 by SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS 118 amends Statement 114 to allow a creditor to use existing methods for recognizing interest income on impaired loans. SFAS 118 also amended the disclosure requirements in Statement 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. Both SFAS 114 and 118 are effective for financial statements for fiscal years beginning after December 15, 1994 and the two statements are not expected to have a material effect on the Bank's financial condition or results of operation.
In October of 1994 the FASB issued Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." SFAS 119 requires disclosures about derivative financial instruments such as futures, option contracts and other financial instruments with similar characteristics. SFAS 119 also amends SFAS 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," and SFAS 107, "Disclosures about Fair Value of Financial Instruments." This statement is effective for fiscal years ending after December 15, 1994 and is not expected to have a material impact on the financial condition or operating results of the Bank.
In May of 1995, the FASB issued Statement of Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights." SFAS 122 amends SFAS 65, Accounting for Certain Mortgage Banking Activities," to require that an institution recognize, as separate assets, rights to service mortgage loans for others. An institution that acquires mortgage servicing rights through purchase or origination of mortgage loans and sells those loans with servicing rights retained, should allocate the total cost of the mortgage loans to the mortgage servicing rights and loans based on their relative fair values. SFAS 122 requires the institution to assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights with the impairment recognized through a valuation allowance. SFAS 122 is effective for fiscal years beginning after December 15, 1995 and applies prospectively to retained servicing rights, including purchases prior to the adoption of the statement. SFAS 122 is not expected to have a material impact on the financial condition or operating results of the Bank.
The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities, on June 30, 1994. SFAS 115 addresses the accounting and reporting for certain investments in debt and marketable equity securities.
SFAS 115 establishes three classifications of securities, each of which receives different accounting treatment. Held-to-maturity investment securities are reported at cost. Available-for-sale investment securities are reported at fair value, with unrealized gains and losses, after applicable taxes, reported as a separate component of stockholders' equity. Trading securities are reported at fair value, with unrealized gains and losses included in earnings. The estimated fair value of investments is determined based on current quotations, where available. Where current quotations are not available, the estimated fair value is determined based primarily on the present value of future cash flows, adjusted for the quality rating of the securities, pre-payment assumptions and other factors. The Company had no trading securities in 1995 or 1994.
Investment securities at June 30, 1995 are summarized as follows:
Mortgage-backed securities are categorized as debt securities under the definition of SFAS 115, and are therefore classified into one of the three categories subject to the same accounting treatment as investment securities. (Please refer to Note 2, Investment Securities.)
Mortgage-backed securities at June 30, 1995 are summarized as follows:
Loans receivable at June 30, are summarized as follows:
Changes in the allowance for losses for the years ended June 30, are summarized as follows:
At June 30, 1995 and 1994, nonaccrual loans were $1.35 and $2.80 million, respectively. Approximately $53 thousand and $256 thousand, respectively, of accrued interest on nonaccrual loans had been reserved for as a reduction of interest receivable. The majority of this nonperforming loan portfolio are loans secured by single family residential properties within the Bank's market area.
The following table represents a breakdown of the Bank's allocation of loan loss reserves for the years ended June 30, 1995, 1994 and 1993, respectively.
Allocation of loan loss reserves at June 30, are summarized as follows:
The Bank serviced approximately $55 million, $61.1 million and $63.5 million of loans, sold to third parties, at June 30,1995,1994 and 1993, respectively.
The Bank is party to financial instruments with off-balance-sheet risk. Such instruments are entered into in the normal course of business to meet the financing needs of its customers and/or to facilitate the sale of loans. The Bank uses the same credit policies in entering into off-balance-sheet financial instruments as it does for on-balance-sheet items.
Loans receivable include mortgage loans due from officers and directors. Activity related to these loans, which bear interest at rates ranging from 3.68% to 5.56%, is summarized as follows:
Following are the components of gains on sale of loans and mortgage-backed securities and an analysis of the deferred premium, resulting from such sales for the years ended June 30:
(5) OFFICE PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Office property, equipment and leasehold improvements at June 30, are summarized as follows:
(6) REAL ESTATE HELD FOR SALE Real estate held for sale by the Company at June 30, is summarized as follows:
Changes in the allowance for losses on real estate owned for the years ended June 30, are summarized as follows:
Comparative details of savings accounts by stated interest rate is as follows:
The savings accounts summarized by type are as follows at June 30:
A summary of certificate accounts by maturity as of June 30, is summarized as follows:
Interest expense on savings accounts for the years ended June 30, is summarized as follows:
Accrued interest on deposits at June 30, 1995 and 1994, was $113 thousand and $49 thousand, respectively.
Included in deposits above are certain accounts in excess of $100 thousand which totaled approximately $32.2 million and $30.7 million at June 30, 1995 and 1994, respectively.
(8) ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from Federal Home Loan Bank at June 30, 1995 and 1994 consisted of the following:
The advances are collateralized by the pledge of loans receivable and securities of approximately $126 million as of June 30, 1995 (note 3).
The Bank recognized $3.97 million, $1 million and $548 thousand of interest expense on FHLB advances for the years ended June 30, 1995, 1994 and 1993, respectively.
The Bank recognized $137 thousand and $42 thousand of interest expense on other borrowings for the years ended June 30, 1995 and 1994, respectively.
Other borrowings at June 30, are summarized as follows:
' The Bank enters into sales of U.S. Government securities and mortgage- backed securities under agreements to repurchase (reverse repurchase agreements). Reverse repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the consolidated statements of financial condition. The dollar amount of securities underlying the agree-ments remains in the asset accounts. The carrying amount of securities sold with an agreement to repurchase was $9 million with a market value of $9.2 million and accrued interest of $51 thousand at June 30, 1995.
2 Other consists of retail repurchase agreements which are secured by FHLMC and FNMA mortgage-backed securities held to maturity of approximately $1 million as of June 30, 1995. (note 3)
The following is a summary of securities sold under agreements to repurchase at June 30, 1995:
Securities sold under agreements to repurchase had the following maturities at June 30, 1995:
The provision (benefit) for income taxes in the consolidated statements of operations for the years ended June 30, is comprised of the following components:
Under the Internal Revenue Code, the Company is allowed a Federal bad debt deduction based on the greater of amounts computed on the percentage of taxable income method or the percentage of eligible loans method. The percentage of taxable income method has been used for financial statement purposes for all periods presented. An alternative minimum tax is applicable to corporations to the extent that the alternative minimum tax exceeds the corporate tax. For the years ended June 30, 1995, 1994, and 1993, the Company's corporate tax exceeded the alternative minimum tax. Savings and Loan associations that meet certain definitions and other conditions prescribed by the Internal Revenue Code are allowed to deduct, within limitations, earnings appropriated to tax bad debt reserves in arriving at Federal taxable income. Approximately $2.4 million of the Company's retained income at June 30, 1995 rep-resents current or future appropriations to tax bad debt reserves of earnings for which no provision for Federal income taxes has been made. If in the future, these amounts are used for any purpose other than to absorb losses from bad debts, Federal income taxes will be imposed at the then-applicable rates.
The differences between the Federal statutory income tax rate and the effective rate of the Company's tax provision are as follows:
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that gave rise to significant portions of the deferred tax liability at June 30, 1995 and June 30, 1994 relate to the following:
Primary and fully diluted earnings per share are calculated by dividing earnings by the weighted average number of common shares and common stock equivalents outstanding for the year. Stock options are regarded as common stock equivalents and are therefore con-sidered in both primary and fully diluted earnings per share calculations. Common stock equivalents are computed using the treasury stock method. Shares outstanding and the common stock equivalents of stock options have been adjusted in all periods to reflect all stock dividends. Following are average shares outstanding at June 30, for computation of earnings per share:
In December 1985, the Company sold its Headquarters building and two other branches to certain members of the Company's Board of Directors and entered into agreements to lease the buildings. Sales proceeds amounted to $3,050,271. The combined book value of the buildings at the time of sale was $2,166,504, resulting in a gain on sale of $883,767. The balance of the remaining deferred gain was $560,651 and $594,663 at June 30, 1995 and June 30, 1994, respectively. As required under generally accepted accounting principles, the gain has been deferred for financial statement purposes and is being amortized over the terms of the leases. The Company has long-term lease commitments related to these buildings (note 14). The Company utilizes brokerage services of a member of the Board of Directors to purchase its insurance coverage. The net amount of commission is insignificant to the Company.
In December 1992, the Company sold its administrative office building located at 101 4th Street, Petaluma, California, to a member of the Board of Directors. The sales price was at fair market value and the financing was provided by a third party financial institution. Sales proceeds were $600,000. The book value of the building at the time of sale was $483,482 resulting in a gain of $116,519.
(13) RETAINED EARNINGS AND REGULATORY MATTERS
The Bank is subject to the regulations of the Office of Thrift Supervision (OTS) and the Savings Association Insurance Fund (SAIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). Under the current laws, the Bank is subject to minimum capital requirements. The OTS requirements include a leverage ratio of core capital to adjusted total assets of 3%, a tangible capital standard expressed as 1.5% of total adjusted assets and a risk-based capital standard of 8% of risk-weighted assets. The risk-based capital standard requires the Bank to classify its assets into one of four levels of perceived risk. Based upon the perceived risk of those assets, the Bank is required to maintain capital on ranges of 0 to 100% of those assets at a rate of 8%.
The OTS published a revision to its capital regulations requiring savings institutions to maintain additional capital based on the amount of their exposure to losses from changes in market interest rates (the "interest rate risk component"). The amount of such capital will equal 50% of the estimated decline in the market value of the institution's portfolio equity after an immediate 200 basis point increase or decrease (whichever yields the larger decline) in market interest rates. The market value of portfolio equity is equal the net present value of the cash flows from an institution's assets, liabilities and off-balance sheet items. Under the regulation, the Interest Rate Risk (IRR) component is computed quarterly by the OTS based upon data provided by the Bank in its quarterly Thrift Financial Report. The capital requirement for IRR will have an effective lag of two calendar quarters. The first quarter to be measured has once again been postponed indefinitely until questions regarding a review procedure for institutions challenging the results of the OTS model have been resolved. Based upon the Bank's current capital levels, current interest rate risk exposure and upon analysis of a similar cash flow methodology, management does not expect the Bank's interest rate risk component to have a material effect on the Bank's regulatory capital requirements.
The Company has a noncontributory Profit Sharing Plan (the "Plan") covering substantially all employees. The Plan is administered by the Company through a committee of trustees, for the benefit of eligible employees. The aggregate amount of the contribution to the Plan to be allocated to employees is determined annually by the Board of Directors and is based upon current profits of the Company. Profit Sharing Plan expense recorded by the Company for the years ended June 30,1995,1994, and 1993 amounted to $25,476, $25,121, and $20,361, respectively. The Incentive Compensation Plan for officers provides for incentive compensation based on attainment of a targeted level of performance by the Company. The target bonuses are calculated by applying various percentages to eligible employees' salaries as of July 1 of the current fiscal year. Incentive compensation bonuses for the years ended June 30, 1995, 1994, and 1993 amounted to $0, $60,136, and $116,620, respectively.
The Company established an Employee Stock Ownership Plan (ESOP) for the benefit of participating employees. The ESOP borrowed $500,000 from a third party lender to purchase 104,362 shares of the Company's common stock. The loan is secured by the common stock purchased and will be repaid by the ESOP with funds from the Company's contributions and earnings on ESOP assets. Accordingly, the unpaid balance of the loan has been reflected in other borrowing in the Company's consolidated balance sheet, and an equal amount has been recorded as a deduction from stockholders' equity. The Company's contributions to the ESOP are charged to expense. Such contributions amounted to $68,930, $66,077 and $70,540 for the years ended June 30, 1995, 1994 and 1993, respectively.
In June 1986, the Company established a deferred compensation program for its Chief Executive Officer. The program provides for payments to be made to the Chief Executive Officer for ten years beginning in the first year of his retirement. The payments will be made in exchange for consulting services. The program has been funded through the purchase of a key-man universal life insurance policy pertaining to the Chief Executive Officer, which names the Company as beneficiary and currently provides coverage of approximately $1.1 million. Other assets as of June 30, 1995 includes $718,241 representing the net cash surrender value of the insurance policy. The estimated present value amount of anticipated future payments to the Chief Executive Officer is included in other liabilities and accrued expenses.
In connection with the Conversion (note 16), the Company adopted the 1988 Stock Option and Incentive Plan (the "Option Plan") which provides for the issuance of options to directors, officers and key employees of the Company and its subsidiary. Additionally, the Option Plan provides for the granting of Stock Appreciation Rights and Restricted Stock. The Option Plan Committee of the Board of Directors selects the options and determines the number of shares to be granted. A total of 273,638 shares of common stock (adjusted for a three-for-two stock split, 15%, two 10%, and 20% stock dividends) had been reserved for issuance under the Option Plan. The option price may not be less than 100% of the fair market value of the shares on the date of the grant and options generally shall not be exercisable after the expiration of ten years from the date granted. In the case of an employee who owns more than 10% of the outstanding Common Stock at the date of the grant, the option price may not be less than 110% of the fair market value of the shares on the date of the grant and the option shall not be exercisable after the expiration of five years from the date it is granted. Options may be exercised by payment in cash, shares of Common Stock, or a combination of both. As of June 30, 1995 employees have exercised options to purchase 13,220 shares of common stock.
As of June 30,1995 there are 205,309 options outstanding at $3.99 per share, 24,700 outstanding at $ 11.55 per share and 7,174 options at $12.41 per share. Options and shares have been adjusted in all periods to reflect the three-for-two stock split effective November 18, 1991, a 15% stock dividend effective July 31, 1992, a 10% stock dividend effective January 29, 1993, a 10% stock dividend effective June 24, 1994 and a 20% stock dividend on October 28, 1994.
As of June 30, 1995 the Bank had commitments to originate loans totaling approximately $29.9 million. Of this total, approximately $10.1 million pertained to one year fixed rate construction and land loans; $16.5 million adjustable rate construction and land loans; $2.1 million to longer-term fixed rate mortgage loans; the remaining $1.2 million pertained to long- term variable rate loans. Interest rates pertaining to fixed rate loan origination commitments at June 30,1995 ranged from 6.65% to 9.0%. As of June 30, 1995, the Bank had commitments to purchase construction loans totaling approximately $779 thousand.
At June 30,1995, the minimum rental commitments under operating leases with initial or remaining terms of more than one year were as follows:
Rental expense for operating leases totaled approximately $761,889, $724,114 and $620,025, for the years ended June 30, 1995, 1994 and 1993, respectively.
(16) CONVERSION AND SALE OF COMMON STOCK
Northbay Financial Corporation (the "Corporation") was incorporated under the laws of the State of Delaware on October 5,1988 for the purpose of becoming a savings and loan holding company. On April 10, 1989, the Corporation acquired all of the outstanding stock of Northbay Savings and Loan Association (the "Association") issued in connection with its conversion from a California chartered mutual to a California chartered stock institution. At the time of conversion, the Bank established a liquidation account in an amount equal to the Bank's retained earnings of $8,680,644. The liquidation account is maintained for the benefit of eligible account holders who continue to maintain their deposits in the Bank after the conversion. In the unlikely event of a liquidation of the Bank (and only in such an event), each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account, in the proportionate amount of the then current adjusted balance for deposits reflected in such account, before any liquidation distribution may be made with respect to the stockholders. Except for the payment of dividends by the Bank, the existence of the liquidation account will not restrict the use or application of such retained earnings. The Bank is able to pay dividends of up to 100% of cumulative net income, less dividends paid for the previous eight quarters if the Bank meets its "fully phased-in capital requirement." If the Bank does not meet its fully phased-in capital requirements, its dividends to the Company would be limited to 50% of net income, less dividends paid for the previous eight quarters. Under the regulations of the OTS, the Bank will not be permitted to pay dividends on its capital stock if its regulatory capital would thereby be reduced below the applicable regulatory capital requirement or the amount required for the liquidation account.
(17) PARENT COMPANY FINANCIAL INFORMATION
The Company and its subsidiary file a consolidated Federal income tax return in which the taxable income or loss of the Company is combined with that of its subsidiary. The Company's share of income tax expense is based on the amount which would be payable if separate returns were filed. Accordingly, the Company's equity in net income of its subsidiary is excluded from the computation of the provision for income taxes for financial statement purposes.
STATEMENTS OF FINANCIAL CONDITION AS OF JUNE 30, 1995 AND 1994
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures About Fair Value of Financial Instruments," requires disclosure of estimated fair values for financial instruments. Such estimates are subjective in nature and significant judge-ment is needed regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. Major assumptions, methods, and fair value estimates for the company's financial instruments are set forth below.
(A) CASH AND SHORT-TERM INVESTMENTS
The carrying amount is a reasonable estimate of fair value.
(B) INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The fair value of mutual funds, U.S. Government and Federal Agency securities, and investment in preferred stock of the Federal Home Loan Mortgage Corporation, have been estimated based upon quotes from primary securities dealers. The fair value of certificates of deposit invested with other financial institutions is estimated by discounting future cash flows at current market rates for similar instruments with similar remaining maturities.
Fair values for loans are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as single family mortgage, multi-family mortgage, commercial, and consumer. Each loan category is further segmented into fixed and adjustable rate categories. The fair values for the segmented loan portfolio is calculated by discounting the scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based upon current dealer published projected prepayment speeds on mortgage securities with similar characteristics whenever available. The prepayment speeds utilized on other loans where dealer projected speeds are not applicable are based upon the Company's historical experience modified by current market conditions.
(D) FEDERAL HOME LOAN BANK STOCK
The fair value of Federal Home Loan Bank stock is estimated to approximate its face value $3,291,400 and $2,315,400 at June 30, 1995 and June 30, 1994, respectively. The amount of dividend payments to be received is uncertain and no free market exists for this asset which is required to be held by the Bank in order to have access to service provided by the Federal Home Loan Bank.
(E) OTHER FINANCIAL INSTRUMENT ASSETS
Other financial assets at June 30, 1995 are comprised of the net cash surrender value of $718,241, representing a key-man universal life insurance policy pertaining to the Chief Executive Officer and accrued interest receivable of $2,403,994, and $51,048 representing the value of the retained servicing spread on loans sold. The carrying amount is a reasonable estimate of fair value for these assets.
Other financial assets at June 30, 1994 were comprised of the net cash surrender value of $681,767, representing a key-man universal life insurance policy pertaining to the Chief Executive Officer and accrued interest receivable of $2,023,363, and $58,553 representing the value of the retained servicing spread on loans sold. The carrying amount was a reasonable estimate of fair value for these assets.
Deposits with no stated maturity date are included at the amount payable on demand. The fair value of time deposits (certificates of deposit) is estimated by discounting future cash flows at current yields of similar maturity U.S. treasury notes less estimated cost of approximately 40 basis points representing the incremental cost of servicing those retail liabilities.
(G) FEDERAL HOME LOAN BANK ADVANCES
The fair value of Federal Home Loan Bank Advances is estimated by discounting the future cash flows of these instruments at a rate which approximates the current offering rate of an FHLB advance with a similar remaining average life as the current weighted average life of the current portfolio at June 30, 1995 and 1994.
Other borrowings at June 30, 1995 consist of $741,890 in a short-term banking disbursement overdraft arrangement, a ten year adjustable rate loan incurred by the Employee Stock Ownership Plan ($187,500), and $602,596 representing retail repurchase arrangements secured by FHLMC and FNMA mortgage- backed securities. Due to the fact that each of these liabilities reprice immediately to current market rates, the carrying amount is a reasonable estimate of fair value for these liabilities. The final component of other borrowings is $7,800,000 representing securities sold under agreements to repurchase identical securities at a specified future date is estimated by discounting the future cash flows from the instruments at a rate which approximates the current offering rate of similar borrowings with a similar remaining term to maturity.
Other borrowings at June 30, 1994 consisted of $2,138,297 in a short-term banking disbursement overdraft arrangement, a ten year adjustable rate loan incurred by the Employee Stock Ownership Plan ($237,500), and $742,333 representing retail repurchase arrangements secured by FHLMC and FNMA mortgage- backed securities. Due to the fact that each of those liabilities repriced immediately to current market rates, the carrying amount was a reasonable estimate of fair value for those liabilities.
(I) OTHER FINANCIAL INSTRUMENT LIABILITIES
Consists of accrued interest payable. The carrying amount is a reasonable estimate of fair value for this liability.
(J) COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit relate primarily to the purchase or construction of residential mortgage loans. The fair value of such commitments is estimated using current market rates for loans with similar characteristics versus committed rates.
Estimated fair values of financial instruments at June 30, 1995 and 1994, are as follows:
The sixth Annual Meeting of Stockholders of Northbay Financial Corporation will be held at the Petaluma Plaza North Office of Northbay Savings Bank, 311 North McDowell Boulevard, Petaluma, California on Wednesday, October 189 1995 at 2:00 p.m., local time.
Northbay Financial Corporation common stock is listed on the American Stock Exchange (AMEX). Ticker Symbol is NBF.
The number of record holders of common stock of Northbay Financial Corporation as of the record date, August 23, 1995, was approximately 832 including those shares registered in names of various investment brokers held in account for their customers.
The common stock initially began trading on April 11, 1989. The following table sets forth the range of closing common stock prices as reported by AMEX, adjusted for a 10% stock dividend on June 24, 1994 and a 20% stock dividend on October 28,1994, for each quarter during the last two fiscal years ended June 30, 1995 and 1994, as follows:
Cash dividends have been paid as follows: $ .10 per share on July 30, 1993; $ .10 per share on October 29, 1993; $. 10 per share on January 29, 1994; $. 10 per share on April 29, 1994; $ .11 per share on July 20, 1994; $ .11 per share on October 19, 1994; $ .11 per share on January 18, 1995; and $ .11 per share on April 19, 1995. On June 21, 1995, the Board of Directors declared an $ .11 per share cash dividend to shareholders of record as of July 5, 1995, to be paid July 19, 1995. | PREM14A | PREM14A | 1996-01-12T00:00:00 | 1996-01-11T20:55:13 |
0000950138-96-000010 | 0000950138-96-000010_0000.txt | Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
January 12, 1996 (December 29, 1995)
(Exact name of Registrant as specified in charter)
(State of (Commission (IRS Employer Incorporation) File Number) Identification Number)
101 South Hanley Road, St. Louis, Missouri 63105 (Address of principal executive offices)
Item 2. Acquisition of Assets
(a) On December 29, 1995, the Company purchased from a subsidiary of Armstrong World Industries, Inc. all of the issued and outstanding common stock of Thomasville Furniture Industries, Inc., a Pennsylvania corporation ("Thomasville"), in exchange for approximately $331 million in cash at closing. The Company also assumed $8 million in long-term debt of Thomasville.
In connection with the acquisition, the Company entered into a new senior secured credit agreement with a syndicate of financial institutions led by Bankers Trust Company, Credit Lyonnais New York Branch and NationsBank, N.A. The credit agreement consists of three term loan facilities totaling $450 million and a $180 million revolving credit facility. In addition, the Company's existing receivables securitization facility with Credit Lyonnais has been increased from $150 million to $225 million. Proceeds from the new term loan facilities, an initial funding of $71 million from the revolving credit facility and an additional $55 million from the receivables securitization facility have been used to finance the purchase of Thomasville and to repay the balance under the Company's previous $285 million secured credit agreement.
b) Thomasville, based in Thomasville, North Carolina, manufactures and markets residential wood and upholstered furniture under the Thomasville name as well as a separate line of promotional and ready-to-assemble furniture. The Company intends that Thomasville will continue its furniture business.
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired
It is impracticable to provide the required financial statements on the date this report is filed. The Company intends to file such financial statements as soon as practicable, but in any event within 60 days after this report is filed.
(b) Pro forma financial information
It is impracticable to provide the required pro forma financial information on the date this report is filed. The Company intends to file such pro forma financial information as soon as practicable, but in any event within 60 days after this report is filed.
(c) 2 Stock Purchase Agreement by and among Armstrong World Industries, Inc., Armstrong Enterprises, Inc. and the Company, dated as of November 18, 1995.
99 (a) Credit Agreement among the Company, Broyhill Furniture Industries, Inc., The Lane Company, Incorporated, Thomasville Furniture Industries, Inc., Various Banks, Credit Lyonnais New York Branch, as Documentation Agent, Nationsbank, N.A., as Syndication Agent, and Bankers Trust Company, as Administration Agent, dated as of November 17, 1994 and amended and restated as of December 29, 1995.
99(b) Receivables Purchase Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995, among Interco Receivables Corp., as the Seller, and Atlantic Asset Securitization Corp., as an Investor, and Credit Lyonnais New York Branch, as the Agent.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T16:18:53 |
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